In recent months, foreign institutions' interest in the Chinese market has continued to rise. Northward funds have been net buying A-shares for four consecutive months from February to May, with a cumulative net purchase amount of as high as 97.529 billion yuan. While foreign investors are casting their vote of confidence in the Chinese economy, many foreign institutions have also expressed optimism about the Chinese stock market in recent public statements.

At the 2024 Global Investment Outlook Media Exchange Conference, with the theme of "Exploring Opportunities in Differentiated Markets", Zhao Yaoting, the global market strategist for Invesco Asia Pacific (excluding Japan), shared and looked into the future from three perspectives: macro, market, and market insights.

Global economic growth is in a mild state below the trend growth.

With regard to macroeconomics, Zhao Yaoting observed that as a result of the differentiation of global economic growth, inflation and monetary policy trends, the market theme and investment direction seem to rotate every few months. Although global economic growth has improved, it is not balanced. The United States, which previously grew faster than the trend, is gradually returning to normal levels. After experiencing a technical recession last year, the eurozone is now accelerating its recovery. The Asian region, benefitting from the global trade cycle, has shown outstanding performance in countries dominated by exports.

Focusing on the Asian region, Japan's economic growth may improve in the second half of this year, supported by a year-on-year increase in wages of more than 5% during the "Spring Struggle," which is expected to boost consumption and related economic activities in Japan, while its manufacturing capacity may also increase. Refocusing on the Chinese region, with more real estate policies aimed at stabilizing the market gradually taking effect, consumer sentiment is expected to improve in the second half of the year. In addition, China's manufacturing exports remain a bright spot in the economy, and this growth engine remains strong.

Global economic growth is still in a mild state below the trend growth. Zhao Yaoting expects it to improve in the second half of this year, but the performance of different economies is still uneven. There are also differences in the fight against inflation. Some countries, such as the United States and Europe, have made significant progress in fighting inflation, but their rhythm is not the same. Europe's anti-inflation pace is faster than that of the US. Some regions, including China, have long been in a relatively low inflation environment.

This is particularly important because the path to fight inflation will inevitably affect the Fed's decision-making. The ECB has already begun to cut interest rates. Zhao Yaoting pointed out that in the second half of this year, the most important data point to focus on in monetary policy is the progress of the fight against inflation.

Currently, inflation pressures in the first quarter of the United States are higher than expected, which is worrying because many people thought the Fed might once again significantly raise interest rates. However, CPI data in recent months shows that the trend of fighting inflation has begun to return. The latest CPI data for May shows that the progress of fighting inflation is continuing in both year-on-year and month-on-month terms. From the perspective of month-on-month growth, the decline in auto insurance prices is one of the main reasons for the cooling of inflation.

In terms of monetary policy, if inflation continues to cool for several months in a row, the United States may cut interest rates. The dot plot of the recent Federal Open Market Committee (FOMC) meeting shows that there may only be one interest rate cut this year, less than the three expected in the dot plot in March. However, the expected number of interest rate cuts in the next two and a half years has not changed and is still nine times. This indicates that the Fed will significantly lower policy rates in the next two and a half years. Although the timing of starting the interest rate cut has been pushed back somewhat, the number of cuts will not change significantly.

Is the timing of the first interest rate cut by the Fed important? Zhao Yaoting thinks not. The market is more concerned with a strong economy rather than a fragile economic environment with multiple interest rate cuts. Although the market expected six interest rate cuts this year at the beginning of the year, there have been no interest rate cuts so far and the S&P 500 index and other indexes have hit historical highs. This indicates that the market favors a strong economy.

This does not mean that the market will not fluctuate. The market will constantly reprice the progress of fighting inflation, the timing of the first interest rate cut, economic growth and its differentiation, which are the main reasons for the market volatility and the main reasons why the market theme and investment direction rotate every two to three months.

Therefore, Zhao Yaoting predicts that the Fed will cut interest rates twice before the end of the year, but it is unlikely that the timing of the first interest rate cut will be earlier than September.

Differentiation of industrial and trade policies will remain an important theme.

Looking ahead to the second half of this year, the differentiation of industrial and trade policies will remain an important theme. In the future, Zhao Yaoting will continue to pay attention to the participation of governments in industrial policies and related progress in the United States and Europe, especially against the background of the upcoming US presidential election later this year.

In regards to the trade outlook for the second half of the year, global trade performance has been poor not only over the past few years, but even the past few decades, with global trade growth consistently lagging behind global GDP growth. During the pandemic, China's manufacturing supply chains performed extremely well, but since then, overall global trade has started to decline. It is worth noting any changes and impact trade policies may face following the US election. Politicians in Europe, the US, and other countries are calling for a return to the era of free trade.

So does this mean the end of globalization or global trade? Zhao Yaoting does not think so. If we compare the global trade model to a balloon, when one side is squeezed, the gas will flow to the other side. Even if the US reduces trade with other countries and raises tariffs, it does not mean that global trade will disappear, only that trade channels and routes will change.

Overall, global trade may become more fragmented and new trade channels and routes will emerge. "We are beginning to see an increase in trade and investment flows between China and the Middle East, such as cooperation between China and the United Arab Emirates or Saudi Arabia. At the same time, we are also seeing India buying oil from Russia and paying in Indian rupees. These changes are worth paying attention to," noted Zhao Yaoting.

This leads to a key risk: if Trump is re-elected and further raises tariffs, it will have a certain impact on Asia. During Trump's previous term, the impact of the US-China trade friction on the economy was relatively limited because most companies could absorb tariff costs or transfer costs to suppliers and distributors to some extent. However, if Trump is re-elected and greatly increases tariffs, this will be an important risk for the Asia region.

The biggest geopolitical risk in the second half of this year is the US presidential election. If Trump is re-elected, he may implement stricter export controls, impose higher tariffs, or adopt other industrial policy measures. The impact of these measures on the economy and corporate profits can be quantified, so the market can digest such risks. However, some geopolitical risk factors cannot be quantified, such as the potential impact of geopolitical tensions on the global economy, which cannot be quantified at present.

Therefore, Zhao Yaoting believes that although market participants may hear various noises in the second half of the year, the impact of these noises will be temporary. Looking at the performance of the MSCI Asia Index or the MSCI Global Index after the US election in the past, it generally does not have a major impact due to the election results, but often performs well.

Bullish on China and emerging market stock markets.

Regarding the Japan market, the Bank of Japan recently announced that it will maintain its benchmark interest rate. Invesco is closely monitoring the latest developments of the Bank of Japan, especially whether the central bank will intervene in the situation of the depreciation of the yen. At the same time, the market is also paying attention to the Bank of Japan's bond purchase plan and its impact on the bond market.

Zhao Yaoting believes that the Japanese economy has more sustainable growth drivers in the future. On the one hand, Japan's inflation has remained at a low level in the past few decades; on the other hand, the valuation of Japanese stocks is currently very attractive.

Regarding the India market, from an investment perspective, Invesco favors Indian bonds over Indian stocks, mainly because the valuation of Indian stocks is already quite high. Overall, the Indian economy's fundamentals are improving, with a strong population dividend and GDP growth. Although it has not yet reached the rapid growth level of China several decades ago, it is undoubtedly that India will play an important role in global economic growth in the future.

From the perspective of stock and fixed income valuations, stocks are mainly compared by current price-to-earnings ratios and historical average price-to-earnings ratios. Data show that the current valuations of Chinese and Japanese stocks are very attractive relative to historical price-to-earnings ratios, but the valuations of the United States and India are higher.

Which assets are more attractive? Zhao Yaoting believes that currently, cash and US dollar yields are significantly higher than historical average levels. However, although the overall yield of fixed income assets is higher, except for bank loan yields, other asset categories are not very attractive. In comparison, the yields of private credit, private debt, and alternative assets are significantly higher than historical average levels and are highly attractive, which are also the categories to be bullish on in the latter half of this year.

Regarding the baseline scenario for the global economy, Zhao Yaoting believes that the anti-inflation process will continue in the latter half of the year, and economic growth may accelerate again. The European Central Bank has already taken the lead in reducing interest rates, and it is expected that the Bank of England and the Federal Reserve will also announce rate cuts later this year. In this case, stable growth should boost risk assets. It is expected that the risk tolerance or risk appetite of the market will increase in the latter half of this year.

As for China, it is expected that further fiscal and monetary stimulus policies will be implemented in the future. Although the efforts may not be as much as last year, they will still promote economic growth.

Overall, Zhao Yaoting is bullish on the stock market, especially emerging markets and Chinese stocks, as their valuations are very attractive. In addition, as the global economy further recovers, some global cyclical stocks are expected to perform well. As for fixed income, we are bullish on high-quality non-investment grade bonds, including bank loans and high-yield bonds. At the same time, we are also bullish on local currency bonds in emerging markets.

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