In an ever-changing investment landscape, perspective is power

Monthly Investment Update

Global Growth Remains Resilient, Earnings Momentum also strong

In its latest projections, the International Monetary Fund (IMF) revised up global economic growth forecast to 3.2% for 2024 and 2025. Economic growth projection for 2024 was revised up by 30bps relative to October’s forecast. Regardless, projections for global growth in 2024 and 2025 remain below the historical (2000–2019) annual average of 3.8%, underscoring impacts from restrictive monetary policies, withdrawal of fiscal support, as well as low underlying productivity growth. For developed economies, growth is projected to rise from 1.6% in 2023 to 1.7% in 2024 and 1.8% in 2025, marking an upward revision of 20bps for 2024. For emerging and developing economies, growth is expected to remain stable at 4.2% in both 2024 and 2025, with a moderation expected in emerging and developing Asia. Geopolitics and ability of global central banks to manage a “soft-landing” will be key determinants to this year’s global GDP growth.

U.S. retail sales stagnated in April showing zero MoM growth after growing 0.6%MoM in March. However, the IMF upgraded U.S. economic growth to 2.7% this year up 60bps from prior forecast. Sticky inflation and a strong run of U.S. economic data have cast doubts on the FED’s eagerness in lowering policy rate with September emerging as a candidate for first policy adjustment. The Euro Area continues to make significant headway against inflation. In April, inflation in the Euro Area was stable at to 2.4%YoY. ECB is projected to starting cutting interest rates starting June but would also ramp up QT during 2H 2024. Similarly, UK CPI rose by 2.3%YoY in April falling from 3.2%YoY in March, the slowest pace since September 2021. Japan’s Q4 2023 GDP was revised up to 0.4% expansion from -0.4% as reported earlier but shrank 2% in Q1 2024 as consumption soften.  China’s GDP expanded by 5.3%YoY during Q1 2024. Industrial production jumped 6.1%YoY during Q1 2024, boosted by strong growth in high-tech manufacturing. IMF expects the Indian economy to surpass that of Japan’s in 2025 and become the 4^th largest economy while the Indian central bank projects a solid 7% real GDP growth for 2024.

Global Equity: Q1 2024 earnings season is drawing to a close with 96% of S&P500 having reported earnings as of this writing. YoY earnings growth was 6% thus far partially allying concerns that growth momentum may be losing steam. Should this hold, Q1 2024 will mark the highest YoY earnings growth rate reported by the index since Q1 2022. AI remains a core focus for corporates with 199 of S&P500 constituents citing the term “AI” during their earnings call. This number is well above the 5-year average of 80.  Moreover, 78% have reported actual EPS above the mean EPS estimate, also above 5-year average. In line with a resilient U.S. economy, market now sees sequential acceleration of S&P500 earnings growth for remainder of 2024 with full year number pegged at 11%.

S&P500 TTM (Trailing-twelve-months) P/E stands at 24.7x above 10YR average of 21x. However, positive earnings surprises may sustain this premium.  Similarly, the NASDAQ100 TTM P/E stands at 34. above 10YR average of 27.1x. Performance of the Mag-7 names are bifurcated. Meta Platforms, Alphabet, and Amazon.com outperformed expectations with YoY sales growth of 27%, 15%, and 13% respectively, leading to year-to-date share price increases of 34%, 25%, and 21%. Regardless, concentration of market capitalization in the largest U.S. stocks is currently the highest in decades and is top heavy, at 33%, caution is required. This further support broadening out thesis as laggards are likely to narrow gap with top performers throughout 2024 and possibly beyond.

NIKKEI225 saw pressure from chip names such as Tokyo Electron, Renesas, Advantest which last month but was later reversed as major semiconductor-related shares largely advanced tracking a strong performance by their U.S. peers on the back of strong Nvidia earnings.

Indian equities volumes declined as national election is now underway. The election comprises of nearly one billion voters and 44 voting days. The incumbent BJP Party is the favorite to win. Foreign investors have resumed purchases as the BJP is set to emerging as a clear winner resulting in policy continuity.

China Equity: Much of the good news in manufacturing comes from China’s “new three” industries: EVs, solar panels and batteries. Policy rates were held steady and retail sales rose 4.7%YoY during Q1 2024. Low market expectations coupled with discounted valuations may result in upside surprises throughout 2024 as economic recovery picks up steam fueling earnings upgrades. HSI Index currently trades at 10.8x P/E slightly below 10YR average with EPS growth forecast of 5.66%YoY and 7.14%YoY for 2024 and 2025, respectively. The mainland CSI300 Index saw meaningful upward EPS revisions to a robust 15.64%YoY and 13.66%YoY for 2024 and 2025, respectively. However, the property sector remains a drag. Property investments slumped 9.5%YoY in Q1 2024, according to the official NBS data. New property sales slid 27.6%YoY during the same period despite local governments having scrapped some restrictions on land sales. To address this issue, China has announced major steps stabilize its crisis-hit property sector. Measures include cutting down payment requirements and removing the floor for mortgage rates, allowing SOEs to purchase completed unsold apartments from property developers and convert them into social housing, 300 billion-yuan (USD41 billion) relending facility, which could result in 500 billion (USD68 billion) yuan worth of commercial bank financing for SOE purchases - equivalent to 0.4% of the country's GDP. Greater policy intensity is highly desired by global investors and is a key enabler for larger allocation to China.

Alternative Assets: REITs performance soften since the start of 2024 after a strong Q4 2023 as investors reassessed policy rate path on the back of sticky U.S. CPI data. There is approximately USD6 trillion sitting in money market funds globally earning 5% from short-term U.S. Treasuries. REITs will see greater allocation as market converges around a rate cut consensus. Investors will need to seek out other income producing assets such as REITs and infrastructure assets for yield enhancement.

Market is increasingly cognizant of the risks posed by the Israel-Hamas conflict which have expanded to include Iran, Pakistan, Lebanon, Syria and Iraq. Disruption to cargo and energy transportation in the Strait of Hormuz, Red Sea and Suez Canal could put global economy in dire straits. Crude priced jumped to over USD90/BBL in April as Iran retaliated Israel’s attack on its embassy in Syria with Israel responding shortly after but has soften since. Moreover, Ukrainian attacks have destroyed 16% of Russia’s refined crude capacity and is further bolstered by a USD60 billion aid package. Crude prices have resulted in higher headline CPI and may indirectly drive core CPI higher over the next few months if prolonged

We continue to see a compelling case that calls for fixed income relative over a six-twelve months timeframe while equity bull market still well intact due to earnings momentum. We recommend clients to invest with a portfolio-based approach through a combination of strategic and tactical asset allocation (SAA and TAA) to best optimize risk-reward under all scenarios.

Arun Pawa, IP, FM, IA, Investment Strategist 

CIMB Thai Bank (CIMBT)