As the outlook for stock markets globally remains far from rosy, weighed down by fears of recession, continuing high inflation and elevated interest rates, investors are chasing investment options that can offer a sensible return.
Most stock enthusiasts believe global interest rates are nearing their peak, but central banks remain vigilant about controlling inflation. In July, the Federal Reserve lifted the key borrowing rate in the US, known as the federal funds rate, as expected to a range of 5.25-5.50%, the highest level in more than 22 years.
While the Fed has not closed the door on further rate hikes this year, the European Central Bank (ECB) recently raised interest rates by 0.25%.
The Bank of Japan (BoJ) hinted it could gradually abandon years of ultra-cheap money and adopt a more flexible approach to controlling the yield on government bonds, which affects borrowing costs across the world's third-largest economy.
Interest rate hikes are anticipated to end soon, though rate cuts are unlikely anytime in the near future. Analysts said this environment presents good opportunities for investors to opt for various assets, such as high-quality debt instruments as well as Chinese and Thai equities.
NEARING A PEAK
Amonthep Chawla, executive vice-president, head of the research office and wealth research and advisory at CIMB Thai, said most investors seem convinced the Fed will not raise interest rates again as inflation figures have started to decelerate month-on-month.
Analysts advise investors to look for quality bonds from developed nations.
While key economic figures are showing signs of weakness, the US economy is unlikely to slip into a recession this year, he said. However, there are risks that growth could be less than 1% next year, said Mr Amonthep.
Banks in many US states have started to tighten their lending, he said.
"I think the unemployment rate will gradually pick up soon, likely resulting in slower wage growth and eventually lessening the pressure from inflation," said Mr Amonthep.
However, the Fed has not indicated when it will end its rate hike cycle. Inflation and the labour market need to be monitored before the next Federal Open Market Committee meeting in mid-September, said the central bank.
The financial markets may be somewhat volatile in the near future if US economic figures do not show signs of slowing down as expected or inflation decelerates more slowly than expected, he said.
The ECB raised its policy rate to 4.25% in July and most investors believe the bank will keep the rate at this level for some time to gauge economic risks, said Mr Amonthep. Major European economies such as Germany entered a technical recession earlier and inflation has begun to show signs of easing.
Analysts project a possibility the ECB will hike interest rates one more time this year, he said.
Japan's central bank governor Kazuo Ueda's yield curve control (YCC) strategy has come under criticism for distorting markets by keeping long-term interest rates from rising.
Under the YCC, the central bank targets short-term interest rates at -0.1% and the 10-year government bond yield at around 0%. It also sets an allowance band of 0.5% above and below the yield target.
"I think the YCC measures should end in the next phase. But the monetary policy adjustments of the BoJ will be gradually adjusted to help Japan's banking sector adapt to change," said Mr Amonthep.
In his view, central banks in Asia are done or nearly done with their fight against inflation, which began at the start of last year.
"After the fight against interest rates is over, central banks have to maintain their cautious approach and continue to monitor whether inflation declines are in line with their targets," said Mr Amonthep.
INVESTMENT OPPORTUNITIES
Analysts have some tips for investment in this climate.
Quality bonds: Investors should look for opportunities to invest in bonds with good credibility, he said. With interest rate hikes approaching an end this cycle, US government bond yields should start to balance or decline soon, said Mr Amonthep.
Experts say the current situation present good opportunities for investors to opt for various assets such as high-quality debt instruments as well as Chinese and Thai equities.
"I have a positive view on accumulating quality bonds that offer high returns with the opportunity to earn capital gains from the decline in the yield of fixed-income instruments," he said.
"But you have to be careful when investing in non-investment-grade debt securities by taking into account the credit risk of the issuer or the company you are investing in. I always recommend investing in government bonds or government-guaranteed entities."
Dividend-focused and globally diversified equity funds: Investors will likely find opportunities to invest in large companies with global diversification. With this strategy, they should focus on stocks that pay stable dividends and have profit growth, said Mr Amonthep.
When bond yields fall, investors tend to put more weight in risky assets such as stocks with attractive valuations, he said. As investors expect the US economy to avoid a recession next year, there is an opportunity for listed companies that are still growing well, said Mr Amonthep.
Chinese stocks: The Chinese economy is clearly on the decline and Beijing has already introduced stimulus measures, but they have proven inadequate in shoring up the world's second-largest economy. Economists expect the Chinese government to introduce more stimulus measures this year, partly to increase domestic consumption.
The Chinese government is interested in the growth of the technology sector and investors can find opportunities in the Chinese market, both in the A-share and H-share bourses, for stocks that have attractive valuations, he said.
Thai stocks: The Thai stock market recovered recently after a new government was finally formed. Equity prices remain cheap, while the prospects for an economic recovery are clarifying based on growing tourism income, said Mr Amonthep.
The new government is expected to launch stimulus measures to sustain the economy, which should be a positive factor in the Thai capital market.
He said investors should diversify their portfolios to broaden their opportunities when the global economy recovers, in addition to better management of potential volatility.
"I think interest rates may have reached their peak, but if anything goes wrong, rates will continue to increase and there will be continued volatility in the capital and financial markets," said Mr Amonthep.
"Diversifying a portfolio across multiple asset classes can help manage risks and reduce the impact of changes in interest rates on the overall portfolio."
Nattakrit Laotaweesap, head of wealth advisory at Tisco Bank, said the bank continues to encourage clients to divest US investment assets, including real estate investment trust funds, which invest in US real estate and US stocks in the S&P500 index.
He said US stocks are quite expensive, though the economy risks falling into a recession.
Meanwhile, global bond yields remain high, in line with rising interest rates to curb inflation. In the future, the bond yield may increase if the US economy slips into a recession and there is a chance returns would increase by more than 10%, said Mr Nattakrit.
Investors should shift their money to global bond funds focused on fixed-income investments with an investment-grade credit rating, he said.
Investment in bonds should focus on those in developed countries that have a high credit rating, such as the US and European countries, especially Britain, said Mr Nattakrit.
CORPORATE OR GOVERNMENT BONDS?
Morningstar Research (Thailand) said investment in fixed-income assets for the rest of the year should focus on long-duration bonds as they offer healthy long-term yields.
Mr Amorthep advised investors to diversify their investment portfolios.
Bond yields are picking up this year compared with the lows of 2022, with corporate bonds having better credit spreads and yielding better than US Treasury bonds.
In Morningstar's view, corporate bonds offer higher returns than government bonds or have sufficient credit spreads to offset the risk of default, or the risk of a credit rating downgrade.
"Corporate bonds yielded quite well this year," said the company, adding the Morningstar Corporate Bond Index gained 4.30% this year, while the Morningstar High Yield Bond Index jumped 6.81%.
The financial service company expects the Fed's July rate hike to be the last in this cycle.
The current long-term bond yield is expected to be near its peak and is likely to decrease in the next 6-18 months, said the firm.
"Investing in longer-duration bonds would be the right spot now compared with investing in stocks. In some markets, stock prices have already increased a lot and listed companies' profit outlooks are still being pressured by the slowing economy," Morningstar said in a research note.
The company expects interest rates for 10-year government bonds to decline in 2024-25, providing investors with good returns from rising bond prices.
The federal funds rate is expected to decline to an average of 4.15% and 2.15% in 2024 and 2025, respectively, according to Morningstar.
SCB Chief Investment Office (SCB CIO), a unit of Siam Commercial Bank, warned investors to avoid high-yield bonds, especially those tied to Chinese real estate because of high debt and a slow economic recovery.
"Persistently elevated interest rates throughout the remainder of the year could elevate the credit risk associated with high-yield debentures, especially those linked to heavily indebted businesses such as Chinese real estate firms," said Kampon Adireksombat, first senior vice-president and team head of SCB CIO.
"We advise against investing in high-yield bonds, particularly within the Chinese corporate bond market."
JAPAN'S OUTLOOK
SCB CIO predicts the Japanese stock market will be volatile in the short term as the government bond yield has risen.
The increasing yields would push up interest expenses of companies, affecting their competitiveness, said the research unit. Meanwhile, the yen is depreciating, hurting the profitability of Japanese companies.
Mr Amorthep advised investors to diversify their investment portfolios.
The BoJ meeting in mid-October is likely to keep the YCC strategy in place, while a hike in interest rates from -0.1% to 0% is likely to happen in the middle of next year, according to SCB CIO.
The think tank projects the Japanese bourse to rebound and Japanese government bonds and yen to gain more stability.
Banking stocks are the biggest beneficiaries of rising bond yields, as the yields of both new loans and refinanced loans are on the rise, said SCB CIO.
"SCB CIO believes supporting factors for the Japanese stock market remain in place and the Tokyo Stock Price Index [TOPIX] has potential upside. Consequently, we adjusted the outlook for the Japanese stock market from slightly negative to neutral," said Mr Kampon.
The supporting factors include reform of the Japanese bourse to encourage companies to improve their governance.
Another key factor is the financial performance of Japanese firms is expected to recover, he said.
Moreover, a general election is expected to take place between September and November, which should boost economic activities.
SCB CIO targets the TOPIX to stay near 2,393 points over the next 12 months.