KGI Asia: 2024 Global Market Outlook Propelling Growth with Resilience

The chances of a soft landing in the United States continue to increase, and the market expects that the federal interest rate has peaked. Investors see interest-rate cuts coming soon, probably in the middle of next year. What implications does the end of tightening monetary policy have for the market outlook? The mainland’s deficit rate has increased, and China’s economic policy continued to be introduced, how would the US Presidential election affect the market?

Under this backdrop, we would recommend the “AAA” strategy for 2024:
A – America large cap
A – Asia including Japan
A – A-grade bonds

Global Macro and the US
Global economic recovery from the COVID-19 pandemic has differed among regions and industries. The notion of the US economy making a soft landing began as mere speculation in May 2023, but there is now more evidence to support this consensus view. With inflation becoming more manageable, the Fed has decelerated interest rate hikes to the extent that many believe tightening policy will soon be over, and this is key to expectations for a US economic soft landing. However, we believe a US economic downturn will extend beyond 1H24F given the lagged effect of high interest rates, depletion of excess savings, limited wage growth ahead and negative wealth effect driven by declining home prices. Based on readings of the Economic Surprise Index, we believe US GDP growth reached its peak in 3Q23 and that a decline ahead seems inevitable. The key factor to watch is the pace of the decline. We believe the decline will be moderate, given no sign of the balance sheet style recession. As far as monetary policy is concerned, we expect the Fed to begin rate cuts in mid-2024F, likely by 100bps on a full-year basis, which exceeds the Fed’s dot plot guidance of 50bps, as we think the Fed may have underestimated the odds of an economic slowdown worsening into a recession.

To recap, the US stock market rallied in January-July and pulled back in August-October, primarily because uncertainties surrounding monetary tightening and rising Treasury yields weighed on stock valuations. Currently, the market is convinced that tightening is over, US stocks are making a comeback again. The current consensus is that US corporate earnings will grow 12% YoY in 2024F. While this appears somewhat optimistic, we think the optimism has to some extent been priced in. Valuation-wise, we expect continued pressure on stocks, especially growth stocks, before the Fed pivots to rate cuts. We expect the ongoing US stocks rebound to persist into 1Q24F before corrections take place in 2Q24F in the face of a more pronounced economic slowdown and uncertainties stemming from the US presidential election. US stocks should regain momentum in July next year when the outlook clears up. In terms of market style, we believe defensive and large-cap names will prevail before 4Q24F. Moreover, investors could increase allocation to growth stocks in 2Q24F, following declines in the risk-free interest rate. Overweighting cyclical and small-cap stocks would be advisable when the US economy troughs and heads back into recovery again in 4Q24F.

Regarding bond investment, both short- and long-term Treasury notes are good investment targets before the commencement of rate cuts in mid-2024F. When rate cuts are just around the corner, investors should increase

the weighting of long-term Treasury notes in their portfolios. As for corporate bonds, investment-grade corporate bonds are worth engaging during the 1Q-3Q 2024F; and if the economy bottoms out or recovers in 4Q24F, it would be an entry point to invest in non-investment-grade bonds due to narrow credit spreads.

James Chu, Chairman at KGI Investment Advisory, says: “The economy is decelerating at an optimal pace, which is strong enough to put an end to the Fed’s monetary tightening, but not to the extent of triggering concerns about a recession. US Treasury yields have consolidated in a downward direction from previous upswings, thanks to expectations for rate hike cessation and an economic soft landing, which have boosted global stock markets. We expect stock markets will be shored up by double-digit growth in 2024 corporate earnings, backed by restocking demand and easing inflation. That said, as interest rates will remain high in 1H24F, we think further upside for stock markets will be limited due to the lingering risk of an economic slowdown. Stock rallies will be stronger in 2H24 after a rate cut cycle begins.”

Mainland China and Hong Kong

2023 review: A disappointing post-COVID economy
The Mainland economy grew by 4.5% in the first quarter of this year, beating estimates, unfortunately, the economy slowed down evidently afterwards and the performance of investment, consumption and exports was disappointing. As time goes, different policies are in place to combat current challenges, and the economy managed to grow at a better-than-expected 4.9% in 3Q23 and 5.2% in the first three quarters. In other words, the economy only needs to grow by about 4.4% in 4Q23 to achieve the annual growth target of about 5%. However, even if the full-year growth target is reached, challenges are awaiting the China’s economy in 2024. It is critical to guard against risks and strengthen the economic momentum at the same time.

2024 Preview: Prevent risk and boost confidence with policies
With the additional RMB1trn sovereign debt plan, the deficit ratio would be increased. The Central Financial Work Conference (formerly known as the National Financial Work Conference) was concluded in October. Follow-up policies to implement the directives of the conference are expected. Due to the scarring effect of the pandemic, KGI Asia expects that China retail sales will be in a better shape next year. Optimistically, the YoY increase for the full year could accelerate to roughly 6%. Yet, in terms of fixed asset investment, even though investment growth in the manufacturing industry and infrastructure could be positive, the real estate investment could be a drag. The YoY growth of overall fixed asset investment is forecast to rise to 4.4%. Summarizing the above analysis, we estimate that the Chinese government will set the economic growth target for 2024 at 4.5% to 5%, with the economic growth rate eventually at 4.9%.

China-US relations may cause hiccup for the capital markets again
China-US interactions have warmed up in recent months, and yet there are no fundamental changes in the US’ supposed intention to contain China. The US presidential election will be held in November next year. During the US election year, it cannot be ruled out that some of the candidates may try to offence China in order to have political capital. It is important for investors to keep an eye on China-US relations and geopolitical changes because the aforementioned factors could become grey rhino events for the Hong Kong stock market in 2024.

HSI target at 19,260
Looking ahead to 2024, we expect some improvements to the abovementioned adverse factors, such as the end of interest rate hikes, and the softer dollar may encourage global inflow to the non-US equity market. On top of that, the higher flexibility of the monetary policy of China and the fiscal policies rolled out by the Chinese government may boost economic growth. However, at the same time, the weak property sales, and a potential

worsening of China- US relations during the US presidential year, may potentially dampen the investment sentiment. The mixed factors will be reflected in market valuations for the HSI next year.

Under a base case scenario, the estimated forward price-to-earnings (P/E) ratio is approximately 9.3x, corresponding to a targeted HSI of 19,260. For the bear-case scenario could see a P/E of 7.3x, corresponding to a target of 14,500.

3 Major Investment Themes:

1. Potential beneficiaries during the end of interest rate hiking cycle
2. Certain industries showing signs of rebound
3. Better to balance growth and resilience when recession risk remains

Top Picks

Prepared by KGI Asia Limited

Kenny Wen, Head of Investment Strategy at KGI Asia, says: “There is a possibility of the US economy slow down in the coming year, with high interest rates causing instability in the capital market. But, the PRC government is continuously implementing policies to boost the economy, and therefore Hong Kong stocks with low valuations are expected to present good investment opportunities. Investors should focus on purchasing stocks with high earnings visibility at reasonable valuation levels. It’s important to take advantage of the market pullback and buy stocks at lower prices, rather than chasing highs.

Taiwan
The PCs and smartphones industries have recovered in 4Q23, benefiting from the end of the destocking of the global manufacturing industry. An inventory replenishment cycle has started and is expected to last until 2024 and beyond, as the restocking cycle usually lasts for 1.5-2 years.

Major tech firms continue to invest in AI infrastructure and have been developing new AI applications. Smartphone and PC brands are also adding AI features into new products. As such, we expect a new replacement cycle will begin in 2H24-2025F.

Given cyclical (manufacturing restocking) and structural (AI applications entering a high growth period, driven by generative AI) positives, we expect the Taiex to reverse the earnings contraction seen in 2023 by pulling off robust profit growth in both 2024-25F.

James Chu, Chairman at KGI Investment Advisory, says: “The US economy will continue to lose steam in 2024F, mainly due to a slowdown in the service sector. The manufacturing sector, which had suffered after 1.5 years of destocking, is now in a de facto restocking cycle. The structural growth in AI applications will

likely drive Taiex earnings growth over 20% in the next two years. We think AI applications will likely expand from cloud servers to PCs and smartphones, as brand names keep launching new products that support AI features. This will result in a replacement cycle, boding well for both PC and smartphone vendors, and the Taiex will benefit substantially given the crucial roles that Taiwanese firms play in the AI supply chain.”

Singapore
In the post-COVID period, Singapore’s economic performance remains stable in 2023 even though growth slows down due mainly to high bases in 2022. Industry performance is divergent. The service sector outshines the manufacturing sector; the domestic demand is robust, while the external demand, especially from China, is soft. High inflation remains a key impact on the domestic economy. Both housing and rental prices reached record highs even though the authority launched several cooling measures in early 2023. As an Asia wealth hub, Singapore continues to attract the affluent and capital inflows even though the authority raises barriers for family office and work permits in 2023.

Chen Guangzhi, AVP, KGI Asia at KGI Asia Singapore, says: “Moving to 2024, the overall economic growth is estimated to be better off amidst the end of rate hikes and recovery in consumer electronics and semiconductor sectors. Inflation is expected to moderate, however, housing and rental prices will remain high as demand is strong. Several tailwinds favour the banking and real estate investment trusts sectors.”

Indonesia
We look at household consumption, government spending, exports, and non-building investment to sustain economic growth. The government targets 2024 year-on-year economic growth at 4.7% to 5.5% (Bank of Indonesia (BI) estimate) thus we view that a figure above 5% is achievable. To maintain that growth, synergies in policies made by the central bank, government, and various other authorities need to be continuously encouraged.

Yuganur Wijanarko, Senior Analyst at KGI Asia Indonesia, says: “Despite the improvement of economies in China, India, and other Asian countries, uncertainties remain which should affect the Indonesian Economy. We look at volatility as a positioning opportunity to wait and ride out the storm. The global inflationary trend may be on the downside, with Indonesian interest rate predicted to flatten and has a possible mild reduction ahead.”