Weiheng: Hello, I’m Chen Weiheng, Global Investment Strategist and I am joined by Alex Wolf, our Asia Head of Investment Strategy. Today we will present our Mid-year Outlook in 5 questions. The title of our outlook is ‘A strong economy in a fragile world’. We see steady economic fundamentals amid moderating growth and inflation, and we remain constructive on investments overall. However, this is also a year of geopolitics, with uncertainty around elections and escalating trade tensions. This means that even as investors want to participate in markets, they need to take an active approach to capitalizing on structural opportunities and hedging risks. With that, let’s get started – Alex.
Weiheng: U.S. growth remains strong. So why are we confident the Fed can start cutting rates?
Alex: Consumption is moderating but not collapsing due to continued household income growth. A lot of the growth in this cycle is not driven by leverage – meaning that household and corporate balance sheets look quite healthy. This means the economy can avoid a more pronounced slowdown despite higher rates. Inflation was a bit high in the first quarter, but we are confident that it will resume its downward trajectory, even if the path remains bumpy.
This leads us to global central banks – the tide has turned away from tightening towards loosening, with the Fed likely to follow towards the end of the year. Even if the Fed cycle is delayed, the next move remains a cut, and this easing bias can continue to support risk assets.
Weiheng: Now to an economy at a very different part of the cycle – China. Policymakers have been dialing up support recently. Can they stabilize the economy?
Alex: Recent policy announcements such as lowering mortgage rates and a government property purchase facility may help stabilize China’s housing bust. The three-year-long housing decline has dented business and household confidence. If policymakers can support housing while helping other growth drivers such as new manufacturing industries, it can support domestic demand which has been a weak point in the economy.
However, the policies alone are unlikely to turn the housing market around, and we don’t see any major upside to growth in 2024. Plenty of focus is on the Third Plenum in July where more policy reforms may be announced. If we see more stimulus policies or genuine reform introduced in the coming months, there could be a moderately positive impact on growth for 2025 and beyond. In terms of markets, onshore A-shares are more sensitive to additional policy easing, and we see better value there compared to offshore equities where we think the tactical rally is over for now.
Alex: Selectivity is key when it comes to Chinese markets. Looking around the world, however, many other equity markets are near all-time highs, from the U.S. to Europe to Japan. Now I turn to you - Weiheng – can they keep rallying?
Weiheng: In a word, yes. We continue to see upside for equities based on strong earnings growth. Valuations are full, but there are compelling reasons for that. When adjusting for growth expectations, valuations for the broad market and large-cap tech names do not look overly demanding due to strong relative earnings growth. Furthermore, the market is delivering near-record profit margins and are paying out those earnings to shareholders at near-record levels through dividends and buybacks. Those factors could justify a higher multiple.
We also continue to see tailwinds supporting Japan’s transition from deflation to reflation, presenting multi-year investment opportunities in Japanese equities. There is a virtuous cycle of rising wages, stronger consumption, and higher nominal growth. Corporate reform continues to gather pace. Supply chain shifts and A.I. also benefit Japan, which has a uniquely strong position in certain segments of semiconductor production. Meanwhile the government has implemented effective fiscal incentives to capitalize on global investment interest. Japan is also seeing increased export competitiveness due to a weak yen, but we advise investors to hedge FX exposure when investing in this market.
Alex: A key driver of equities has been the excitement around artificial intelligence. Is the AI rally more hype or reality? Have we missed the opportunity?
Weiheng: We think AI is just getting started, but investors need to be selective at this point. The first round of winners were closely linked to semiconductor manufacturing and cloud computing – the digital and physical infrastructure that powers AI. However, investors are starting to appreciate that this infrastructure buildout could be broader because 1) adoption will likely increase and 2) because AI requires substantially more energy than traditional computing. So far in 2024, companies that provide heating, cooling, electrical equipment and real estate for data centers have outperformed.
Beyond the beneficiaries of the digital and physical infrastructure build-out, we are focused on companies that could benefit from a boost to productivity (such as consumer goods, financials, transportation and energy), a boost to revenue (software, robotics and applications) or both (manufacturing and healthcare).
Weiheng: What we discussed all point towards a “strong economy” – let’s get to “fragile world”. What are the geopolitical risks you are most concerned about, and what can we do about them?
Alex: The first concern on most investors’ minds is the U.S. elections. Elections do not drive market returns over the long-run, but volatility tends to increase in the lead-up to elections as investors digest polling data and the policy positions of each candidate. And there are sector impacts, Biden and Trump will likely enact very different policies in areas such as taxes, tariffs, energy, healthcare and regulation.
For global investors, the key focus is trade tensions. The recently-announced U.S. tariffs will likely have a varied impact depending how China-dependent different sectors are, but by and large were fairly targeted are aren’t expected to have a macro impact on either side. The key concern is whether trade tensions turn global, which we’re already starting to see with Europe. Unlike the U.S., Europe is a significant source of bilateral trade with China, leaving ample room for escalation and negative economic effects.
For portfolios, investing into the beneficiaries of security concerns such as defense and infrastructure is an active way to capitalize on structural opportunities. In terms of tactical hedges, derivatives and structured notes can provide protection if volatility picks up. For diversification, gold is experiencing structural central bank demand and it can rally around geopolitical risk events. Diversified hedge funds can provide a useful source of uncorrelated returns and diversification within portfolios.
Weiheng: Thank you Alex, and thank you for watching. That’s our Mid-year Outlook in 5 questions.
Sources: J.P. Morgan Private Bank. Data as of June 2024.
Weiheng: Hello, I’m Chen Weiheng, Global Investment Strategist and I am joined by Alex Wolf, our Asia Head of Investment Strategy. Today we will present our Mid-year Outlook in 5 questions. The title of our outlook is ‘A strong economy in a fragile world’. We see steady economic fundamentals amid moderating growth and inflation, and we remain constructive on investments overall. However, this is also a year of geopolitics, with uncertainty around elections and escalating trade tensions. This means that even as investors want to participate in markets, they need to take an active approach to capitalizing on structural opportunities and hedging risks. With that, let’s get started – Alex.
Weiheng: U.S. growth remains strong. So why are we confident the Fed can start cutting rates?
Alex: Consumption is moderating but not collapsing due to continued household income growth. A lot of the growth in this cycle is not driven by leverage – meaning that household and corporate balance sheets look quite healthy. This means the economy can avoid a more pronounced slowdown despite higher rates. Inflation was a bit high in the first quarter, but we are confident that it will resume its downward trajectory, even if the path remains bumpy.
This leads us to global central banks – the tide has turned away from tightening towards loosening, with the Fed likely to follow towards the end of the year. Even if the Fed cycle is delayed, the next move remains a cut, and this easing bias can continue to support risk assets.
Weiheng: Now to an economy at a very different part of the cycle – China. Policymakers have been dialing up support recently. Can they stabilize the economy?
Alex: Recent policy announcements such as lowering mortgage rates and a government property purchase facility may help stabilize China’s housing bust. The three-year-long housing decline has dented business and household confidence. If policymakers can support housing while helping other growth drivers such as new manufacturing industries, it can support domestic demand which has been a weak point in the economy.
However, the policies alone are unlikely to turn the housing market around, and we don’t see any major upside to growth in 2024. Plenty of focus is on the Third Plenum in July where more policy reforms may be announced. If we see more stimulus policies or genuine reform introduced in the coming months, there could be a moderately positive impact on growth for 2025 and beyond. In terms of markets, onshore A-shares are more sensitive to additional policy easing, and we see better value there compared to offshore equities where we think the tactical rally is over for now.
Alex: Selectivity is key when it comes to Chinese markets. Looking around the world, however, many other equity markets are near all-time highs, from the U.S. to Europe to Japan. Now I turn to you - Weiheng – can they keep rallying?
Weiheng: In a word, yes. We continue to see upside for equities based on strong earnings growth. Valuations are full, but there are compelling reasons for that. When adjusting for growth expectations, valuations for the broad market and large-cap tech names do not look overly demanding due to strong relative earnings growth. Furthermore, the market is delivering near-record profit margins and are paying out those earnings to shareholders at near-record levels through dividends and buybacks. Those factors could justify a higher multiple.
We also continue to see tailwinds supporting Japan’s transition from deflation to reflation, presenting multi-year investment opportunities in Japanese equities. There is a virtuous cycle of rising wages, stronger consumption, and higher nominal growth. Corporate reform continues to gather pace. Supply chain shifts and A.I. also benefit Japan, which has a uniquely strong position in certain segments of semiconductor production. Meanwhile the government has implemented effective fiscal incentives to capitalize on global investment interest. Japan is also seeing increased export competitiveness due to a weak yen, but we advise investors to hedge FX exposure when investing in this market.
Alex: A key driver of equities has been the excitement around artificial intelligence. Is the AI rally more hype or reality? Have we missed the opportunity?
Weiheng: We think AI is just getting started, but investors need to be selective at this point. The first round of winners were closely linked to semiconductor manufacturing and cloud computing – the digital and physical infrastructure that powers AI. However, investors are starting to appreciate that this infrastructure buildout could be broader because 1) adoption will likely increase and 2) because AI requires substantially more energy than traditional computing. So far in 2024, companies that provide heating, cooling, electrical equipment and real estate for data centers have outperformed.
Beyond the beneficiaries of the digital and physical infrastructure build-out, we are focused on companies that could benefit from a boost to productivity (such as consumer goods, financials, transportation and energy), a boost to revenue (software, robotics and applications) or both (manufacturing and healthcare).
Weiheng: What we discussed all point towards a “strong economy” – let’s get to “fragile world”. What are the geopolitical risks you are most concerned about, and what can we do about them?
Alex: The first concern on most investors’ minds is the U.S. elections. Elections do not drive market returns over the long-run, but volatility tends to increase in the lead-up to elections as investors digest polling data and the policy positions of each candidate. And there are sector impacts, Biden and Trump will likely enact very different policies in areas such as taxes, tariffs, energy, healthcare and regulation.
For global investors, the key focus is trade tensions. The recently-announced U.S. tariffs will likely have a varied impact depending how China-dependent different sectors are, but by and large were fairly targeted are aren’t expected to have a macro impact on either side. The key concern is whether trade tensions turn global, which we’re already starting to see with Europe. Unlike the U.S., Europe is a significant source of bilateral trade with China, leaving ample room for escalation and negative economic effects.
For portfolios, investing into the beneficiaries of security concerns such as defense and infrastructure is an active way to capitalize on structural opportunities. In terms of tactical hedges, derivatives and structured notes can provide protection if volatility picks up. For diversification, gold is experiencing structural central bank demand and it can rally around geopolitical risk events. Diversified hedge funds can provide a useful source of uncorrelated returns and diversification within portfolios.
Weiheng: Thank you Alex, and thank you for watching. That’s our Mid-year Outlook in 5 questions.
Sources: J.P. Morgan Private Bank. Data as of June 2024.
