Krungthai Asset Management (KTAM) has highlighted three factors that warrant caution for investors, urging them to sell US dollars, US bonds and US tech stocks amid ongoing uncertainties.
Nattha Mahattana, assistant managing director for investment strategies at KTAM, said the fight over the US debt ceiling between the Democrats and the Republicans may cause serious turmoil in the global financial markets.
"If the tactic of playing hard drags on until the Treasury runs out of money, causing the US government to temporarily default on debt payments, such disgusting behaviour must finally come to an end," he said.
The latest data indicates US commercial banks are still requesting emergency liquidity assistance from the Federal Reserve. Deposits are flowing out of bank accounts in search of higher yields in money market funds, but the flow seems modest.
"There is good news. Western Alliance reported a US$2 billion increase in deposits since the start of the quarter. We believe higher financing costs will put pressure on the profitability of these regional banks, but the crisis has passed," said Mr Nattha.
The Chinese economy slowed based on April data, which is considered disappointing after a very strong first quarter, he said. Beijing reiterated its support for growth as the People's Bank of China (PBOC) seeks to ensure adequate liquidity and block yuan speculation to stabilise the market.
"We believe that soon investors will become more aware of the factual reasons and confirm with evidence from better data in the next phase", said Mr Nattha.
He recommends investors sell US dollars.
"The Fed stopped raising interest rates, but the market expects major central banks like the European Central Bank and Bank of Japan (BoJ) to keep raising them. The BoJ sticks to yield curve control policy, but Japan's inflation is at a four-decade high and should eventually force it to stop easing. All of these are factors pressing the dollar to weaken," said Mr Nattha.
Investors started to dump US bonds last week.
"Risks are reduced, eroding demand for long-term bonds, but if these three factors make the market feel risk is back on as we expect, it should encourage capital flows out of the bond market," he said.
Fear of many factors forced investors to buy only a few big tech stocks as they felt confident and safe until the price reaches the level of desperate assets, said Mr Nattha.
"Investors diverted money away from US big tech stocks to seek opportunities in other markets with better growth prospects at lower prices," he said.
KTAM suggested investors accumulate Chinese yuan and stocks, as well as commodities. The yuan has weakened to the "psychological level" of seven per US dollar on concerns about the weakening Chinese economy, said the brokerage.
"However, the currency began to rebound somewhat towards the end of the week after the PBOC rebuked speculators," said Mr Nattha.
Beijing believes growth led by measures to subsidise "new energy" vehicles, accelerate infrastructure investment and support consumption are likely to attract fund flows back to China for risk-on returns.
"These measures by Beijing are beginning to bear fruit. Big institutional investors are starting to move their money from the West to the East as the prices for this sector reflected overly optimistic expectations. They increased their proportion for China because the market is too afraid to create good investment opportunities that are worthwhile," he said.
Investors and stocks are also benefiting from rising commodity prices, which could reflect an uptrend, said the brokerage.
"We expect the Fed will stop raising rates, but will not lower them while the dollar weakens and yuan strengthens. The US economy may not hit a recession this year, while China's economy just hit a soft patch and recovered," said Mr Nattha.