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Annual & Mid-year Outlook | Economy | Asset Allocation | Equities | Fixed Income

Q2 2024 | At a glance

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Our View

This is an unusually positive time for markets. Inflation is slowing while corporate profits are rebounding. Global equity markets, as reflected by the MSCI World Index, are up around 10% year-to-date. Earnings have remained resilient in the face of policy action and we believe there is a broadening of equity performance, and it is spreading beyond US shores.

This quarter, we are focused on yields and earnings. As mentioned, the Chief Investment Office believes equity performance is broadening and on its conviction list is healthcare and its sub-sectors, which include medical devices, select biotech companies, among others. This also an environment to lock yields in, especially in Investment Grade corporates. 


Focusing on core portfolios

Continuing off from Wealth Outlook 2024, our CIO maintains the views on focusing on core portfolios. We summarize our CIO views into four ideas:

  1. Building a 60/40 Core Portfolio
    After euphoric pandemic stimulus in 2020-21 and dramatic tightening in 2022-23, economies and markets are likely to normalize in 2024-25.
    60/40 returned 17% in 2023 and another 4% this year so far.
    This is likely to bring more moderate growth, inflation, and interest rates, which would support a broader set of assets and core balanced portfolios.
  2. High Quality Global Fixed Income
    Peak interest rate equals peak earnings. As inflation falls and real interest rates remain high, the Fed turns from hawk to dove, likely making it suitable to invest in bonds.
    We favor intermediate US Treasury and Investment Grade Credit, US IG preferred securities, as well as structured credit.
  3. Broader Equity Returns
    Rising earnings and cooling inflation are likely to broaden global equity returns. We believe healthcare is undervalued and prefer profitable small and mid-cap growth companies.
    Japanese equities have rallied on strong earnings, structural reforms, and investor inflows as China remains challenged.
  4. Unstoppable Trends and Economic Security
    Unstoppable trends remain as long-term phenomena that are transforming how we live and do business. We identify the 4 following themes that we seek portfolio exposure to:
    1. Digitization: AI, semiconductor supply chain
    2. Longevity: Medical innovation, devices & tools, biotech
    3. G2 Polarization: Beneficiaries of supply chain diversification
    4. Greening the world: Energy security, green innovation


Q2 APAC Investment Focus Themes

​Yield and Earnings – Three Keys as to Where Equities and Fixed Income Might be Heading This Year

  1. Earnings Recovery and Broadening
    In 2Q 2023 profits fell 6% year-on-year. We expect a recovery in 2024, but one with tempered growth and a broadening out. It is likely that the U.S. and the world economy will avoid a boom and bust cycle as different industries expand and contract at different times. It will not be a +25% year, but one with width. These will include segments of the economy like manufacturing, trade, and health care who saw their businesses in contraction for much of the past year.

Most Sectors Should Deliver Positive EPS Growth Next Year1

  1. Lower Inflation to Support Profit Margins
    As we look to 2024, while we don’t expect a return to the post-GFC deflationary environment, we see a weaker labor market as likely to put downward pressure on wage growth. Indeed, there’s a clear negative relationship between unit labor costs and profit margins. Recent deceleration in unit labor costs, if persistent, are indeed consistent with modest margin expansion. As noted in previous publications, markets are benefitting from a higher growth/lower inflation combination.

Profit Margins tend to Expand when Wage Costs Moderate2

  1. Expectations on Rates Falling Helps Both Assets
    While not a necessary precondition for our market broadening view, modest Fed easing could be icing on the cake for the 2024 equities catch-up trade. Over in the fixed income space, lower interest rates help bonds with a higher rate than the interest rate to appreciate in price. Current bond yields might be at their peak given our CIO’s expectation that the US Treasury yield could end at around 3.8-4% by end-2024. This may be a time to consider Investment Grade corporates and Treasuries.

Fed Funds Futures Implied Rate Levels3


Healthcare - Healthcare quickly turned from 2023’s laggard to 2024’s leader. From life sciences tools to biotech, the industry remains largely undervalued.

Healthcare Remains Undervalued

With last year’s gains in equities led by a very small number of large cap technology-related shares and a narrow breadth of performance in sectors such as healthcare, we see strong valuation opportunities remaining with healthcare being one of them. Within the healthcare space itself, medical devices and biotech, lagged pharmaceuticals and look poised for a run in 2024. In our view, cash-rich, cheaply-valued companies that facilitate drug research and development, save costs and improve patient outcomes look like a potentially safer way to play the Healthcare sector’s convalescence.

Medical Tech & Devices, Biotech Remain “On Sale as reflected by the S&P 500

Source: Bloomberg, January 11, 2024.


Earnings, M&As Could Drive Healthcare

After an exceedingly rare healthcare recession, healthcare acquisitions may help drive a performance recovery. The industry moves with new drug discoveries, and when big pharmaceuticals take over and begin mass production and marketing post M&A. In January 2024 alone, nearly US$10 billion worth of deals were recorded. The sector recorded positive earnings growth during all three recent global earnings recessions. With demographic shifts and the benefits of AI, healthcare appears ready to return to leadership due to its consistent and secular earnings growth. We expect the healthcare earnings recovery in 2024 to be one of the main drivers of potential outperformance in the sector.

Big Pharma has the Capacity for M&A Deals

Source: FactSet, February 5, 2024.


Sources: 1&2Bloomberg and Haver as of November 16, 2023. 3Bloomberg as January 31, 2024. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary. All forecasts are expressions of opinion, are subject to change without notice, and are not intended to be a guarantee of future events.

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