Investment Insights

Investment Analysis

Stock Markets Analysis

Stock Markets View

  • Federal Reserve Chair Jerome Powell has signaled the possibility of maintaining high interest rates for a longer period, putting pressure on risk assets. US large-cap stocks are entering the peak earnings season, which is likely to influence the performance of the US stock market.
  • The market anticipates rate cuts by the European Central Bank and the Bank of England in June and the third quarter of this year respectively, which will help enhance the valuation of European stocks. However, recent earnings announcements in the European stock market have been mixed, and there are still uncertainties ahead.
  • The recent reversal in Asian stock markets can be attributed to a stronger US dollar and decreased profit forecasts for the semiconductor sector. However, with positive economic data from Europe and the US and the possibility of a soft landing, Asian economies and stock markets are expected to benefit.
  • Amid uncertain Federal Reserve rate cuts, a strong US dollar, and instability in the Middle East, short-term volatility is expected for emerging stock markets.
  • Regulatory authorities have further optimized and expanded the scope of eligible products under the Stock Connect program between Shanghai, Shenzhen, and Hong Kong, which enhances the long-term liquidity flow between the two markets. Additionally, the acceleration of capital market reforms in the A-share market has attracted noticeable investment in large-cap A-shares.
Note:

Positive - Expect that the particular asset class potentially may perform well relative to the relevant major global benchmark(s) in the long run
Neutral - Expect that the particular asset class potentially may perform in line relative to the relevant major global benchmark(s) in the long run
Cautious - Expect that the particular asset class potentially may not perform well or in line relative to the relevant major global benchmark(s) in the long run

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Bond Markets View

  • The instability in the Middle East caused a temporary decline in US Treasury yields due to risk aversion in the market. However, hawkish remarks from Federal Reserve officials may support an upward trend in US Treasury yields, leading to potential volatility in sovereign bond market.
  • Despite recent volatility in US Treasury yields affecting bond performance, investment-grade bond funds have experienced 25 consecutive weeks of net inflows as of last week. It is expected that the attractive yields will continue to attract demand for high-quality bonds.
  • The first-quarter economic growth in mainland China surpassed expectations, and the yield spreads of Asian investment-grade bonds have remained stable. This reflects a positive economic outlook, which is attracting capital inflows into the sector.
  • High outflows have been observed in high-yield bond funds recently. However, a multitude of US high-yield corporations have already made refinancing arrangements for future debt maturities since the beginning of the year. This is expected to reduce new bond supply and help stabilize the medium- to long-term performance.
  • Due to increased market risk aversion, the yield spreads of Asian high-yield bonds have widened. However, compared to similar bonds in Europe and the US, they exhibit relatively reasonable valuations, which are likely to support capital inflows into the relevant sector.
  • Factors such as a stronger US dollar and geopolitical risks have increased volatility in emerging market assets. However, the current attractive yield levels may attract capital back to the region once risk aversion subsides.
Note:

Positive - Expect that the particular asset class potentially may perform well relative to the relevant major global benchmark(s) in the long run
Neutral - Expect that the particular asset class potentially may perform in line relative to the relevant major global benchmark(s) in the long run
Cautious - Expect that the particular asset class potentially may not perform well or in line relative to the relevant major global benchmark(s) in the long run

Provided by Hang Seng Investment Services Limited

Market Drivers and Near-term Risk Sentiment

Asset Allocation Focus

  • Bonds – US Treasury yields have risen recently due to a slower decline in US inflation. However, the growth of US wages continues to decelerate, and the market still expects the US to initiate rate cuts within this year. Consequently, funds continue to flow into corporate bond assets to secure yields.
  • Equities – The uncertainty of US interest rate cuts and the geopolitical tensions in the Middle East have resulted in profit-taking across global stock markets. The stock market investment strategy this quarter should be conservative and avoid chasing a single high-volatility sector at elevated level. Developed stock markets have been under pressure at high levels recently, and Asian high-dividend stocks are expected to outperform the broader market amid volatile market conditions.
  • The rebound in the US March Consumer Price Index (CPI) inflation rate has heightened market attention on the upcoming first-quarter GDP and March core Personal Consumption Expenditures (PCE) inflation data, set to be released on April 25th and 26th. The market anticipates a slowdown in the growth rates to 2.5% and 2.7%, respectively. If confirmed, this could rekindle market hopes for rate cuts by the Federal Reserve. The US dollar is currently in a temporary consolidation.
  • The Middle East tensions have not worsened for the time being, leading to a reduction in market risk aversion and stabilization of US Treasury yields. Federal Reserve Chair Powell acknowledged that recent data reflects a lack of further progress in the decline of inflation, suggesting that a high-interest-rate policy may be appropriate for a longer period, thereby lowering market expectations of rate cuts. As a result, US Treasury yields may continue to hover at high levels.
  • The China Securities Regulatory Commission announced the expansion of the scope of ETF Connect and the inclusion of REITs and RMB-denominated stocks in the Stock Connect program between Shanghai, Shenzhen and Hong Kong stock exchanges. Additionally, it also supports leading mainland companies to list in Hong Kong. These measures will enhance the liquidity flow between these stock markets in the long run.

Provided by Hang Seng Investment Services Limited

Investment Commentaries

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