Self note on how 2024 has done so far

It's about time again to summarise a few key moments that happened within the past month or two that provided pointers as to where certain asset classes might head to for the rest of 2024, and to double check whether certain outcomes are in-line with our own outlook of 2024.

USDJPY:

With mixed data coming out from the US indicating a slight tilt towards a stronger US economy, strong labour market, and a stickier inflation, potentially leading to a delay in rate cuts (or no cuts), the Japanese Yen as a result remained weak, and touched the 160 level before the BOJ suspected to have come in and intervened to defend the Yen. With the help from Jerome Powell’s comments saying the next move in rates would be down (further reinforcing our view on rates topping, and inline with a rate cut in 2H of 2024), another help from the softer non-farm payrolls report in the US, and the narrowing gains from the annual change in average hourly earnings, the “hope” for rate cuts seems to be back on the table for. Yen quickly traded back towards 152, and most likely would trade within the range of 145 to 155 and then strengthen towards 140 when the FED rate cut begins. This would ease off inflation worries in Japan, and regaining its purchasing power for Yen holders. We currently do not expect the BOJ to hike rates anytime soon since they are now in a wait and see mode with eyes on the FED’s next move.

China SOEs

With the release of the 5 measures from CSRC, the State Council’s release of the 9 new measures, and the fund flows coming into Hong Kong and China, the market has traded better with SOE’s leading the gains, followed by Chinese and HK Financials, and Chinese Tech.

To recap what the 5 measures are:

1.????? expanding the scope of eligible exchange-traded funds (ETFs) ???under the Stock Connect;

2.??? incorporating real estate investment trusts (REITs) into the Stock Connect;

3.???? supporting the inclusion of yuan-denominated stocks into southbound Stock Connect;

4.??? enhancing the scheme of mutual recognition of funds; and

5.???? supporting the listing of leading mainland companies in Hong Kong.

When the stocks STILL appears to be undervalued at significant discounts (we have bene overweighting in China SOE names since 2022), and with an economy that remains to be robust after facing its challenges, and a market not to be ignored, we still see Hong Kong China as a market where it appears to be inexpensive and valuations are much more reasonable when comparing with stocks in the US. The average price to book value of companies that we are invested in still appears to be at around 0.8x, with Price to Earnings ratio at around 6-8 times, with cash to debt ratios at around 2.0 times, and dividend yield of 7.5-8.5% p.a. One key thing to note about these companies is that they have very low debt, which essentially makes them a cashcow, and even if they gear up slightly with a low interest rate environment in China, it will have very limited impact to both its balance sheet and its PnL. With extraordinary returns that the SOE names have generated within the past 2.5 years, this area remains to be our key focus to stay invested in. Tailwinds would still be coming from rate cuts in the US, which would elevate the RMB, and would create a larger “carry” between the dividend yield, and the risk free rate.

FED rate cuts:

Since the end of last year, we have been expecting rates to cut in the 2nd half of 2024. There are many reasons to justify why rates should go down in the US, and we still think its fiscal imbalances is one of the biggest problem that the US is current facing. With the US debt levels currently reaching 34.5 trillion, and expecting to reach 40 Trillion within the next 2 years, the government has to put a stop on the rising of its debts, and to clam down its interest expenses on its treasury bonds. As rates stay longer, it would become an ineffective tool to bring down inflation as this cycle of inflation began from COVID, a disruption of supply chains, and protectionism of their own countries, which resulted in deglobalisation, and the 2 war fronts that are currently still on going in Ukraine and Middle East certainty don’t help.

ECB rate cuts:

Another story for rate cuts is with the SNB already cutting rates by 25bps in March, with inflation nearly hitting 2% in most parts of Europe, we expect the ECB to cut sometime in June, officially calling an end to this rate hike cycle. Europe has been a net loser on all fronts with war in Ukraine, its previously energy crisis, war in the middle east, ageing population, and increasing competition from China.

Gold:

Gold has performed well this year, up +11.6% year to date. Again, with the potential rate cuts, and debasement of the major G7 currencies from its central banks (or simply print more money finance its debt and interests), gold would serve as a good hedge against that, and also with a hedge against political and military uncertainties in both Ukraine and the Middle east.

2H of 2024

In less than 2 months’ time, we will soon approach half way of 2024. Looking back within the past months, the only major surprise to us is the war which erupted in the middle east between Israel, Gaza, Yemen, and Iran. The Red Sea has been partially shut down (which means the Suez Canal is most likely shut as well, which disrupts the trading routes into Europe) which has caused a spike in shipping rates, and oil price. With further sanctions on Russia’s mining/metals, we probably would see limited impacts on Russia, but perhaps more damages being inflicted to the West, unless the economic activity is worse than expected that the diminishing demand in the West would counter balance off the reduction in supply of goods due to sanctions.

With many things that are happening around the world, how we would position ourselves is to remain i.) overweight on Hong Kong China equities within the SOE space with low debt, stable businesses with stable cashflow, and high dividend payouts, ii.) selectively overweight onto some Chinese tech names given its valuation being very cheap, iii.) allocate into short term T-bills/ UST for yield, iv.) Gold as a hedge against a devaluation of the major currencies across developed countries.

We would remain cautious on a.) Longer term UST or other sovereign’s debt given the fiscal imbalances that these countries have, b.) Cash, given rates are soon going to come off soon, with the lowering of risk free rates, c.) US overvalued equities – we simply can find better value elsewhere which we are more comfortable with and achieving +70% to +200% returns within the past 2.5 years.

With US’s presidential elections happening very soon, and protests in universities in the US (which not many media headlines are covering), and more refugees shifting into most parts of Europe (good gesture at first, but more troubles begin to appear), we do expect to see the West having more political troubles to deal with internally. Although we are home biased being in Asia, and Asia having its own problems in their own economies, structural issues with ageing population in parts of Asia, and natural disasters appearing every now and then, Asia remains to be a safer place to be with inflation much more under control on a relative basis, less crime rates, and its much safer to be out on the streets during day and night. There are a lot more to share about how great Asia is as a whole, but we should probably leave that for another time!

Disclaimer:

This post is circulated for informational and educational purposes only. There is no consideration given to the specific investment needs, objectives or tolerances of any of the recipients.

Additionally, our actual investment positions (if we have any) may, and often will, vary from its conclusions discussed herein based on any number of factors, such as investment restrictions, portfolio rebalancing and transactions costs, among others. Recipients should consult their own advisors, including tax advisors, before making any investment decision.

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The views expressed herein are based on our own appraisal of the applicable facts at the date hereof and are subject to change without notice. We shall not be liable for any errors, omissions or opinions contained herein and such information and opinions expressed should not be considered as a recommendation to take (or refrain from taking) any action in respect of any product. The information and opinions contained herein have been obtained from public sources believed to be reliable, but no representation or warranty, express or implied, is made that such information is accurate or complete and it should not be relied upon as such. We may have a significant financial interest in one or more of the positions and/or securities or derivatives discussed.