Manulife Investment: US interest rates likely to have peaked, more positive outlook on the Chinese market prospects

According to the Zhītōng Finance APP, Manulife Investment Management expects a significant shift in the global economic landscape. In its mid-2024 investment outlook, Manulife Investment Management stated that there is a high chance that U.S. interest rates have peaked, and it anticipates that the Federal Reserve will enter a global easing monetary policy cycle later this year. It mentioned that U.S. small-cap stocks have high leverage during the interest rate cycle, and their relative valuations have discounted to low levels seen in the past few decades, potentially benefiting from a declining interest rate cycle. Due to the lower valuations of Chinese stocks and the general cautious attitude in the market, Manulife Investment Management holds a more positive view on the prospects of the Chinese market. It believes that China's incremental housing policy measures are expected to alleviate the impact of the real estate industry downturn on the overall economy.

Manulife Investment Management expects inflation to align with the Federal Reserve's target level, and it anticipates that the employment situation will not exert upward pressure on service sector inflation. Despite these favorable trends, the expectation of credit tightening for businesses and consumers is likely to lead to a slowdown in the U.S. economy. In this delicate outlook, investors must remain flexible in adjusting their strategies to cope with the uncertain economic environment.

Luke Browne, Head of Asset Allocation for Manulife Investment Management Asia, mentioned that it is currently mid-year, and the global economy is still in good shape. Despite recent economic growth slowdowns, the U.S. economy remains in a leading position driven by strong consumer activity. Additionally, economies such as Europe, Japan, and China have shown signs of stability and improvement. Policymakers are taking intervention actions to address challenges faced by industries.

The pace of global inflation slowdown, especially the deflationary trend in the U.S., will be a focal point for the remainder of this year. Central banks in countries like Switzerland, Canada, and the European Central Bank have all cut interest rates in the past few months. However, due to persistent inflation factors such as car insurance and housing costs, uneven progress in deflation has led the Federal Reserve to maintain a cautious stance.

Looking ahead, it is believed that these one-off inflation factors will stabilize, allowing the Federal Reserve to cut interest rates by the end of this year. This is crucial because cutting rates in an environment of stable economic growth can make market or asset valuations relatively more attractive. For example, U.S. small-cap stocks have high leverage during the interest rate cycle, and their relative valuations have discounted to low levels seen in the past few decades. Therefore, they are expected to benefit from the declining interest rate cycle. In addition, attractive investment opportunities have emerged in developed and emerging markets outside the U.S., particularly in Japan and India. In terms of industries, investors should also focus on energy and commodities. Furthermore, the ASEAN market is presenting investment opportunities, with more opportunities to seize as it enters an easing cycle.

Murray Collis, Chief Investment Officer of Fixed Income Products for Manulife Investment Management Asia (excluding Japan), emphasized that Asian credit has outperformed other fixed income asset classes so far this year. There are ample reasons to believe that this positive momentum will continue until the end of this year, bringing substantial returns and potential capital appreciation to investors.

Murray Collis stated that due to the uncertain outlook of the Federal Reserve, there has been some volatility in the Asian fixed income markets at the beginning of the year. So far, elections in various countries have had little impact on Asian bonds, with the market generally expecting policies to remain unchanged. While U.S. investment-grade bonds have been negatively affected by the Federal Reserve's pause in rate cuts, Asian investment-grade credit has performed well in a strong fundamental and favorable market environment From the beginning of the year to the present, the performance of Asian high-yield credit has been more impressive, with stable and relatively low bond default rates and attractive valuation levels beginning to attract investors' interest.

From the perspective of Asian credit, it is expected that the positive momentum of this asset class will continue into the second half of the year, mainly driven by strong investor demand to meet the expected increase in new issuances. The fundamentals of the Asian economy remain resilient and continue to drive global growth. Compared to developed market credit, Asian credit is still trading at more attractive valuations and is expected to attract interest from investors seeking diversified income. If the Federal Reserve cuts interest rates later this year, investors may also increase their allocation to risk assets. In terms of risk adjustment, investment-grade credit remains attractive. Additionally, with credit spreads at historically high levels, providing investors with favorable entry points, the opportunities in the Asian high-yield sector are also promising.

Although inflation in Asia is generally under control, the persistently high interest rates in the United States are posing resistance to consumption and investment in Asian economies. However, Marco Giubin, Senior Portfolio Manager at Amundi Asset Management, believes that as the resistance weakens, coupled with the trend of upward revisions in Asian (excluding Japan) earnings forecasts and attractive valuations, it may promote a re-rating of Asian stocks.

Marco Giubin points out that the current expected price-to-earnings ratio of Asian stock markets is around 12 times the estimated earnings for 2025, with an expected earnings growth rate of over 15%. In comparison, the expected price-to-earnings ratio of the US stock market is higher, at around 21 times the estimated earnings for 2025, with a slightly lower expected earnings growth rate of only 14%. Compared to US stocks, Asian stocks seem to offer more attractive investment value. For investors, the lower price levels of Asian stocks may potentially achieve higher growth in returns.

From a regional perspective, due to the lower valuations of Chinese stocks and the general cautious attitude in the market, Amundi Asset Management holds a more positive view on the prospects of the Chinese market. Policy measures for incremental housing in China are expected to alleviate the impact of the real estate industry downturn on the overall economy. While India continues to maintain strong structural trends, the high valuations of Indian stocks and the reduced seats in the Narendra Modi government have raised concerns about the sustainability of its investment growth model, leading to a cautious stance on the Indian market, favoring consumer-related stocks that have underperformed industrial stocks ahead of the Indian elections.

Marco Giubin concludes that in North Asia, South Korea is relatively favored over Taiwan, as South Korean stocks have attractive valuations and the dynamic random-access memory (DRAM) industry is in an upswing. Additionally, although many technology stocks in Taiwan are not directly involved in artificial intelligence-related businesses, their stock prices have been significantly revalued due to this theme. Furthermore, despite the significant underperformance of many South Korean battery manufacturers due to concerns about the growth of the electric vehicle market, considering that growth opportunities still exist, these companies appear to be very cheap. Recently, protectionist measures against Chinese suppliers implemented in markets such as North America and Europe may also accelerate interest in the South Korean electric vehicle supply chain as an alternative