Recently, Morgan Asset Management held the "Global Market Overview - China Edition" "20 Years and 20 Cities" launch event in Shanghai. Looking ahead to 2024, Morgan Asset Management has made a clear statement: "It may be a good time for investors to start again on the investment road."
"In the process of forging ahead, we can temporarily stop and wait for the weather to improve, but the cost may be arriving at our destination later, and the same applies to the market situation in 2024." Morgan Asset Management stated in its 2024 outlook. It believes that despite the relatively sluggish environment, various unfavorable factors in the past two years have created more favorable investment conditions for 2024, and fixed income may bring returns to investors. Most stock market valuations seem to have become more reasonable.
The downward pressure on A-share profit forecast is expected to ease
In terms of the domestic economy, Morgan Asset Management expects that the Chinese government will continue to take measures to support economic growth, but maintain balance in its efforts to avoid a significant increase in debt leverage. For example, the real estate policy may launch new old renovation investments in 2024, driving market demand, and the scenario for the real estate market may be a weak recovery.
In terms of domestic A-shares, Zhu Chaoping, a senior global market strategist at Morgan Asset Management, believes that as economic growth expectations stabilize in 2024, the pressure of downward revision of profit forecasts is expected to ease. Coupled with the gradual implementation of monetary easing policies, A-share market sentiment may be boosted to some extent. In addition, industrial enterprises are expected to enter the inventory replenishment stage in the first quarter, and there may be upward space for sectors and targets with stable profit prospects in the market.
After the revision of profit forecasts, the market's expectations for Chinese stocks have become relatively stable. The current P/E ratios of communication services and non essential consumer stocks on multiple large technology platforms are below the 15 year average, but overall profits are expected to continue to grow in 2023 and 2024.
In addition to profit growth, Morgan Asset Management believes that the dividend yield of some Chinese stocks is also attractive. In an environment of slowing economic growth, listed companies often reduce their investment in new projects and instead adopt the approach of increasing dividends to give back to investors. As of the end of October 2023, Wind data shows that the overall dividend yield of the Shanghai and Shenzhen 300 Index has reached 2.7%.
In terms of specific sectors, Zhu Chaoping suggests that sectors with growth logic and low correlation with economic cycles are worth paying attention to. Currently, the structure of China's manufacturing industry is undergoing changes, coupled with the innovation of general technologies in the new generation of artificial intelligence, which may mean more investment opportunities, such as AI supply side and AI application side (smart cars, humanoid robots, office applications, entertainment, etc.); Emerging industries such as new energy, electric vehicles, and advanced manufacturing continue to receive policy support, while also having international competitiveness. Overseas demand may provide a source of profit, while the recovery of the consumer electronics cycle, the replacement of AI mobile phone PC drivers, MRAR and other new product cycles, driven by the triple logic, may lead to a sectoral market in 2024.
The United States is expected to enter a rate cutting cycle around the second quarter
Looking ahead to the global macroeconomy in 2024, Zhu Chaoping stated that after two years of monetary tightening, it is expected that global economic growth will decline, but it is still expected to maintain some resilience, especially with a high possibility of a soft landing in the United States. However, given the current level of inflation in the United States and the dovish stance of the Federal Reserve, it is expected that the United States will enter a rate cutting cycle around the second quarter of 2024.
In this context, Zhu Chaoping suggests that while pursuing asset appreciation, investors also need to pay attention to potential risks in the US stock market, including US fiscal deficits, elections, geopolitics, oil prices, etc. They should also pay attention to the important role of medium - and short-term bonds and defensive stocks in balanced allocation, reducing portfolio volatility, and enhancing portfolio resilience.
Regarding the prospects of the European and Japanese markets, Zhu Chaoping stated that the economic growth in Europe is expected to show a trend of low in the beginning and high in the end. Growth risks will be released in the first half of the year. With the decline in inflation, real income of residents will increase, consumption is expected to be supported, and the manufacturing industry is also expected to see a rebound in demand. On the Japanese side, they continue to pay attention to inflation trends and policy adjustments by the Bank of Japan.
So, what opportunities do overseas stocks, bonds, and cash each have? Zhu Chaoping compared the profitability of the S&P 500 (reciprocal P/E ratio), the yield of US investment grade bonds (relative to the credit risk of the S&P 500) and the yield of US three-month treasury bond (representative of cash), and assessed the relative attractiveness of three categories of assets: stocks, bonds, and cash.
Zhu Chaoping believes that due to the risk in the economic outlook and the easing of inflationary pressure in the entire mature market, there is a high possibility of a decline in cash interest rates and short-term bond yields in the next 12 months. If investors hold too much cash now, they may miss out on investment returns in the stock and bond markets; Correspondingly, the United States may be able to avoid a recession and support overall index returns, but due to differences in valuations and relatively low valuations outside the United States and the possibility of increased corporate profits, the return prospects for stock markets in other regions may be better.
Be wary of the risk of overseas economic stagnation
So, what risks do we need to pay attention to in 2024? Morgan Asset Management believes that, considering the experience of the past two years, they are more focused on the potential challenges faced by investors in the Asia Pacific region, rather than the potential upward trend in asset prices.
Firstly, starting from the risk of severe recession in developed economies as a whole, weak economic growth may have a negative impact on corporate profits, but a shift in monetary policy may trigger a wave of valuation revaluation. Looking back at history, data on fund flows indicates that investors typically join the stock market recovery market relatively late because they hope to gain more evidence of economic and corporate profit recovery, which may result in missing out on the early stages of market rebound returns. Therefore, once economic data deteriorates and begins to stabilize, investors may be able to start investing funds in stocks.
The more challenging scenario is that the economy is trapped in stagflation, and economic growth is affected by contractionary monetary policies, leading to a decline, while inflation remains high. Central banks insist on paying attention to inflation, indicating their tendency to maintain high interest rates to combat inflation rather than lowering interest rates to boost the economy. This may lead to a return to positive correlation between stocks and bonds, and negative returns for both asset classes.
In this scenario, Morgan Asset Management believes that short-term bonds are expected to provide returns, especially at current high yields, and short-term bonds also help limit duration risk. In addition, alternative assets such as infrastructure and physical assets help manage downside risks during inflation, as their revenue is linked to inflation.