The Federal Reserve is expected to cut US interest rates 2-3 times this year starting from its June meeting, making global equity income a promising investment, says London-based Newton Investment Management.
Chief executive Euan Munro said 2024 is likely to be the third consecutive year with stubborn inflation, as a deteriorating economic backdrop and heightened volatility are likely to continue.
“Against this backdrop, we see compelling risk-reward dynamics across the equity income space. In the US, we expect rate cuts starting from the Fed’s June meeting. However, the bias of the risk is for the pace of cuts to be slower and to take longer,” said Mr Munro.
Looking ahead, Newton projects further moderation in US growth accompanied by a slow pick up in Europe and possibly China as well.
With voters representing 40% of the world’s population, 80% of global market cap and 60% of global GDP going to the polls in 2024, electoral uncertainties may weigh on the markets and potentially delay investment plans.
As the economic outlook remains uncertain and restrictive monetary policy is expected to continue, individual companies may be confronted with cumulative operational and refinancing costs, while consumers may retrench their consumption amid high inflation.
“The interest rate backdrop across Asia is not particularly restrictive as inflation was more benign than in the West. Central banks did not have to tighten as much in recent years,” he said.
“From an asset allocation standpoint, we see opportunities in companies that can raise dividends to combat inflationary pressures. The global equity income market is interesting as interest rates would remain high.”
Mr Munro said dispersion between stocks is likely to be high, meaning stock selection is important.
Global Manufacturing Purchasing Managers’ indices have started to tick up into marginally expansive territory, which should help Asian markets given the large manufacturing and export footprint of the region.
There is still spare capacity in most Asian economies, both in terms of labour and physical stock, according to the firm.
“Fears of strong Fed rate hikes and a strong dollar leading to large capital outflows from the region did not materialise,” he said.
Economies in Asia present a mixed picture. India is growing above trend while China’s economic development depends largely on further stimulus measures to be launched. In Indonesia, investors are awaiting more policy details from new President Prabowo who will take office in October.
Japan, meanwhile, is seeing an improvement in macro fundamentals with the Bank of Japan on the cusp of ending negative rates.
For the Thai market, Newton is optimistic about a cyclical recovery as tourism returns back close to pre-Covid levels. The recovery of the tourism industry will support the market’s leisure and hospitality sectors, as well as a medical care industry that benefits from health tourists.
“Thailand has a well-developed healthcare sector, which is seen as very skilled and competitively priced. That attracts health tourists from overseas, benefiting stocks in the medical sector,” said Mr Munro, adding the country’s large automotive industry could benefit from the transition to electric vehicles.
“However, structural demographic challenges in Thailand could be a risk in the long term. As a counter, a long-term trend for Thailand’s equity market given the ageing population is the growing potential for dividend-yielding companies.”