The signals from the Jackson Hole Symposium are that the US Federal Reserve will cut rates next month, wealth managers from UBS and Nomura say there are investment opportunities in Asia
Confidence in imminent US rate cuts was strengthened by US Federal Reserve Chair Jerome Powell at last week’s annual Jackson Hole Symposium. Powell’s speech emphasized that it is time for a policy adjustment, noting that inflation is now on a sustainable path toward the central bank’s 2% target.
Powell also indicated a shift in focus from controlling inflation to fostering maximum employment, which is the Fed’s other mandate. With recent increases in unemployment, Powell stated that the Fed does not seek further cooling of the labor market.
Mark Haefele, Chief Investment Officer at UBS Global Wealth Management, believes Powell’s remarks align with his prediction that the Fed will cut rates at its remaining three policy meetings this year. Haefele anticipates that a 50-basis-point cut could occur if upcoming employment and consumption data are weak.
Haefele has advised investors to prepare for a global rate-cutting cycle, expecting that the Fed will soon join in. The effects of a more dovish Fed are extending beyond the US, contributing to recent weakness in the US dollar. This easing should enable Asian central banks to manage disruptive capital flows and ease their own policies, similar to the Philippine central bank’s recent move.
Haefele predicts that Asian policymakers will reduce interest rates by about half as much as the Fed, translating to 25 to 50 basis points of cuts this year and another 25 to 50 basis points next year. This is expected to boost the economic outlook for the region and enhance the performance of risk assets.
For investors, Haefele sees promising opportunities across various asset classes. He points out that past Fed easing cycles and a weakening US dollar have been historically favorable for Asian equities. In the six previous Fed easing cycles, the MSCI Asia ex-Japan index posted median returns of 10% in the year following the initial rate cut. Regional equities have typically outperformed the US when the dollar weakened by 5 to 10%. Haefele anticipates a similarly positive environment, supported by strong earnings growth, with around 60% of Asia ex-Japan companies surpassing expectations midway through the second quarter.
Additionally, with the index trading at a 27% discount to global equities on a 12-month forward price-to-earnings basis, recent volatility presents a good opportunity for investors to increase their exposure. Haefele favors high-dividend yielders in ASEAN and Singapore real estate investment trusts, as well as structural growth leaders in India and promising opportunities in China. He also identifies buying opportunities in oversold markets, such as South Korea, Japanese banks, and select AI beneficiaries.
Haefele views medium-duration investment-grade bonds as offering the best prospects in Asian credit. The recent rate changes have improved returns on Asian investment-grade bonds to 2.6% since mid-year. He expects another 2 to 3% in total returns for the remainder of the year. Given the significant shift in the yield curve, he prefers bonds with maturities of up to five years, which are likely to be less volatile and benefit more from potential Fed rate cuts.
He highlights segments like select Asian bank tier 2 bonds, local currency Indian government bonds, and investment-grade bonds from Indonesia and South Korea. In Asian high yield, Haefele believes much of the performance for 2024 has already occurred in the first half of the year and recommends a bottom-up approach focusing on fundamental improvements.
Haefele also suggests hedging exposure to the Chinese renminbi amid an otherwise positive outlook for APAC currencies. With the anticipated Fed rate cuts setting the stage for further broad dollar weakness, he forecasts a 1.5 to 3% upside for APAC currencies over the next six to 12 months.
Analysts at Japan’s Nomura Holdings concur, recommending increased investments in ASEAN stocks. Nomura plans to upgrade Malaysia and Indonesia to overweight from neutral due to favorable local factors. To fund this, Nomura will downgrade MSCI China stocks to neutral from a previously favored tactical overweight position, which has not met expectations.
