HSBC and Invesco's investment managers discuss the macroeconomic outlook in the second half of 2024, and delve into investment opportunities, notably in Asia.

Wealth managers appear convinced that, whatever the troubles of China and the geopolitical situation, Asia is where it's at in terms of robust investment returns and growth. 

That appears to be the view of Cheuk Wan Fan, chief investment officer, Asia at HSBC Global Private Banking.

“Asia remains the most important growth engine of the global economy with projected GDP growth and earnings growth for Asia ex-Japan in 2024 at 4.6 per cent and 23 per cent, respectively, well above the global peers,” Fan said in a recent note.

China's stuttering growth in the past couple of years, as demonstrated by concerns about debt-laden real estate sectors, have given some managers pause about the country and wider region. Beijing unveiled stimulative measures in recent months to try and stabilise the situation. The MSCI China Index shows returns (capital growth added to reinvested dividends) at 7.44 per cent in the year to date (in dollars). By comparison, the MSCI World Index of developed countries' equities shows returns at 9.52 per cent.

Fan expects China’s latest property boosting measures to stabilise GDP growth at 4.9 per cent this year. "India’s economic activity continues to surprise to the upside on multiple fronts, supporting our forecast 2024 GDP growth of 6.3 per cent,” Fan said. “So far, the global equity rally has been led by Big Tech. We have been broadening our geographical and sector exposure in our global equity portfolios to widen the opportunity set and find attractive stocks at reasonable valuations.”  

Fan holds an overweight view on equities in Japan, India, and South Korea, where she sees the best opportunities to tap into Asia’s structural growth themes.

Nevertheless, she stays neutral on Hong Kong and mainland China equities with an end-2024 target for the Hang Seng Index at 19,230. Fan expects that China’s five supportive measures will attract southbound fund inflows into Hong Kong, which should help improve the liquidity conditions of the Hong Kong stock market and bring opportunities for undervalued quality stocks.

After the recent rally, Patrick Ho, chief investment officer, North Asia, at HSBC Global Private Banking and Wealth, thinks the Hang Seng Index’s valuation remains attractive. He prefers undervalued quality stocks in the Chinese service consumption and high-end manufacturing sectors. He focuses on select oversold high-quality Hong Kong developers and REITs with strong balance sheets and a competitive position. Ho prefers the Hong Kong insurance, telecom and utility sectors for their growth resilience and the benefit from expected Fed interest rate cuts.

Ho also favours corporate governance reform winners in Japan, China and South Korea, which are cash-rich companies with low leverage and the financial power to deploy cash to boost shareholders’ returns through increasing dividend payments, share buybacks and value-adding corporate actions. “Asian governments and regulators are pushing for corporate reforms to boost shareholders’ returns and close the valuation gaps of their equity markets relative to the global peers,” Ho said.

“Japan provides an example of how improved corporate governance standards can contribute to a re-rating of the equity market,” he added. “China’s State Council recently announced the ‘Nine-Point Guideline’ which stresses the importance of high dividends and share buybacks. In South Korea, regulators have announced the Corporate Value-Up Programme which aims at improving return on equity and narrowing the ‘Korea discount’ versus its global peers.” 

Reshaping Asia’s supply chain
Ho looks for winners of the accelerating supply chain reconfiguration and the friend-shoring trend amid deglobalisation. This has resulted in rapid trade integration in Asia. He favours high-end manufacturing leaders in Japan, South Korea and Taiwan given their pivotal roles in the global semiconductor supply chains. In ASEAN, Singapore, Malaysia and Vietnam are strengthening their leadership positions in the electronics industry.

“Electronics and electric vehicle manufacturers from North Asia are ramping up production capacity in ASEAN to expand market shares. ASEAN represents a big new market and a low-cost production base for Chinese companies facing slower growth at home,” Ho added. He favours companies in India and ASEAN that gain from supply chain reorientation under the ‘China+1’ strategy of multinational and Asian corporations.

The view from Invesco
Meanwhile, Raymond Ma, chief investment officer, Hong Kong & China at Invesco believes that since the low of last November, the bottom in the Chinese market has already been passed.

Ma thinks that by identifying Chinese companies which have a role in the reorganisation of global supply chains – and that are expanding their market share globally and domestically – the risk of tariffs on Chinese goods impacting the business is reduced. These companies have diverse supply chains, for example, selling Chinese-made goods in China, Vietnamese-made goods in the US, and Cambodian-made goods in Europe, limiting the impact of tariffs. 

The other theme Ma is watching in 2024 is companies that are crucial to the electrical revolution. “With demand for electricity-intensive industries like wind and solar energy, electric vehicles, and data centres growing, so too does the pressure on the grid. Therefore, we’re picking stocks which can power the electric revolution,” Ma said.

Capturing peaking Asian yields
For income opportunities, HSBC's Ho focuses on locking in multi-year high yields from Asian investment grade (IG) bonds with five to seven years' duration. With continued disinflation and the Fed’s rate cuts likely to start in September, he expects many Asian central banks to start cutting rates in H2 2024. He favours Japanese and Korean financials and IG corporate bonds, Indian local currency bonds, Indonesian quasi-sovereign IGs, Macau gaming and Chinese TMT credits.

India
Shekhar Sambhshivan, Indian equities investment director at Invesco, highlighted how the new generation of Indian investors are aspirational, save less, invest more, and consume more. This group is providing liquidity, boosting valuations, and giving rise to new investment opportunities for both local and global investors.

“Demographics are one such tailwind. With a population of 1.4 billion, and a median age of 29, there is a fast-growing population of aspirational consumers who are powering growth. For example, nine to 10 million Indians are getting married each year, more than the population of Hong Kong,” he said. He assessed the entire wedding market, and estimated that it is already worth close to $160 billion. He is seeing some very interesting ideas in this highly-underpenetrated space which has a long runway for growth.

“Further opportunities are arising from India’s manufacturing renaissance. Through government policy, India is enticing multinational companies like Apple and Micron to establish production facilities, providing boosts to the local economy,” Sambhshivan added. “Similarly, India’s reputation as ‘The World’s Back Office’ is creating attractive opportunities in artificial intelligence, with the power and real estate demands of the sector providing a boost to domestic industries.” See more commentary here on India.

Global asset classes
HSBC GPB expects the improving global economic cycle, broadening earnings' growth and central bank rate cuts will bring plenty of opportunities to put cash to work in quality bonds and equities.

For the next six months, HSBC GPB has adopted a risk-on investment strategy with zero allocation to cash and overweight on global equities, US Treasuries, and global investment grade bonds. The US market remains its largest overweight within global equities, and it stays overweight on Asian equities. It holds a bullish view on the dollar due to support of high real yield, divergent pace of central bank easing and safe-haven demand driven by geopolitical uncertainty.

“We are optimistic about the investment outlook for the second half of the year and continue to focus on putting cash to work in global equities and bonds that we maintain our overweight allocation,” Fan said. She believes that both the peak in bond yields and the bottom of the global economic cycle has been seen. This means that portfolio performance should be powered by two engines: attractive bond yields and broadening earnings growth.

Adding to income opportunities, HSBC GPB looks for earnings' growth, which is well supported by the broadening global cyclical tailwind and easing cost pressures. US domestic demand is resilient, while the eurozone and UK economies are bottoming out. It forecasts global and US GDP growth to stay solid this year at 2.6 per cent and 2.3 per cent, respectively.

Putting cash to work in bonds and multi-asset strategies
“Bond yields are currently near decade-high levels, and an allocation to bonds and multi-asset strategies can help generate a stable income stream, while providing portfolio diversification to mitigate against tail risk events,” Fan said.

“Private markets have delivered outperformance versus the public markets in the long term. As more companies are staying private for longer, the depth, diversity, liquidity and ways to access the market continue to grow,” Fan added. “Infrastructure investments offer compelling structural growth opportunities on the back of digitalisation, decarbonisation and re-onshoring.”