The US Federal Reserve has removed references to being “patient” about its interest rate stance in a recent policy statement, opening the door for a likely rate hike in September.
We are slightly overweight on US stocks and expect another 5-8 percent rally in the US market this year and we have increased our bet on US high-yield bonds.
High-yield bonds account for 13 percent of US energy bonds. The current credit spread of energy bonds indicate a default rate of 10 percent in the next 12 months which has been priced in by the market.
Meanwhile, the European Central Bank’s monetary easing will continue to press down the euro and lend additional support to European stocks.
As a result, we have upgraded our rating on eurozone stocks and increased our holding of high-yield bonds in the region.
The strengthening US dollar is set to be the main theme in the foreign exchange market this year.
A strong US dollar rally remains intact given improving US economic data and wide expectations for a rate hike.
Also, central banks in Australia, Canada and Britain have switched to monetary relaxation amid easing inflation pressure which would further buoy the US dollar.
In emerging markets, the valuation discount with developed markets is unlikely to narrow in the near term.
And emerging markets are facing various negative factors including sharp falls in commodity prices, a strong US dollar, China’s economic slowdown and difficult business environments in Russia and Brazil.
Indian stocks look very attractive as a result of massive reform by the new government and its commitment to improving infrastructure.
Also, India is the biggest beneficiary of lower oil prices.
In the meantime, China’s real economic growth is set to moderate further.
Beijing will continue to press ahead with economic restructuring and step up fiscal spending to maintain economic growth.
This year, the country’s economic growth rate is poised for a further decline. The issue is the degree of the slowdown and the extent of financial risks in certain parts.
The central government is trying to tackle the longstanding issue of local government debt.
A debt swap program announced recently will ease the financial burden on local governments and mitigate the risk to the financial system.
Also, local government debt will be folded into the central government budget which would pave the way for better management.
In addition, the Chinese central bank will use active monetary policy such as interest rate cuts and reserve requirement ratio reductions to manage financial risks and avoid a hard landing for the economy.
These measures will offset the impact of China’s slowdown on global economic growth.
More details of state-owned enterprise (SOE) reform will be unveiled soon. The key message is to improve efficiency with proper incentives.
We are focusing on potential beneficiaries of SOE reform and other government reform.
The “One Belt, One Road” strategy will support Chinese companies seeking overseas infrastructure projects.
The move is aimed at connecting Pakistan, India, Bangladesh and Myanmar. Future plans will include large investment projects.
These measures will benefit infrastructure plays and capital goods manufacturers, particularly those with overseas project management expertise.
Premier Li Keqiang said in his government work report at the recent National People’s Congress that the so-called “Internet Plus” strategy will be the new direction of the nation’s industrial development.
The strategy combines the internet, cloud computing, big data, logistics and modern manufacturing in a single platform.
The ambitious plan will accelerate development of e-commerce and internet financing, and help China’s internet companies expand their global footprint.
China Manufacturing 2025 is another medium to long-term industry blueprint aimed at upgrading the traditional manufacturing sector.
The plan calls for gearing up China in the value chain from traditional labor-intensive industries to high-end sectors such as machinery, new energy, new materials, biochemistry etc.
This article, published in the Hong Kong Economic Journal on March 19., was contributed by Pu Yonghao (浦永灝), managing director and regional chief investment officer of UBS Wealth Management.
Translation by Julie Zhu
[Chinese version 中文版]
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