As inflation expectations fall, Julius Baer believes the first US interest rate cuts to happen in Q2 of this year, which would mark the beginning of a new cycle.
“We neither expect an economic boom nor a bust this year. However, we do envisage a transition from the current cycle into a new cycle,” Bhaskar Laxminarayan, CIO and head investment management Asia, Bank Julius Baer told a media roundtable in Hong Kong this week.
He expects economic growth in 2024 will be back-end loaded, with central banks becoming more accommodative again as inflation continues to slow towards target levels.
In this environment, Julius Baer prefers quality growth stocks with healthy balance sheets and high free cash flow levels.
“We maintain our preference for US equities given their promising earnings growth and innovation potential. We particularly like quality growth stocks in the IT and healthcare sectors,” said Mark Matthews, head of research Asia, Bank Julius Baer.
In line with its view that the US economy will expand in 2024, albeit at a slower pace, the backdrop for mega-cap information-technology stocks remains positive, while growth stocks in the healthcare have tailwinds.
In addition, Julius Baer has a strong conviction in the AI theme, because AI, and especially Generative AI (GenAI), has the ability to solve complex problems at a rapid pace, and the number of companies integrating AI into their offering, in industries as diverse as healthcare, automobiles, advertising, and education, is rapidly increasing.
“The recent interest in GenAI technology, in particular, has provided the next leg up in equity markets, driven by mega-cap technology stocks,” said Matthews (pictured left).
Asia prospects grow
Meanwhile, improving market dynamics in Asia, excluding China, should provide attractive opportunities for emerging market equities in the second half of the year.
Julius Baer has upgraded Japanese equities to overweight for several reasons, including a shift from deflation to inflation which should benefit companies and the broader economy.
Moreover, the Tokyo Stock Exchange has implemented several important reforms, which should result in improved governance, greater efficiencies, and more attractive corporate valuations. Lastly, improved fund flows from both foreign and domestic investors should provide a welcome tailwind for asset prices.
Indeed, the “winds of change make Japanese equities attractive again,” said Laxminarayan (main picture).
The bank’s highest conviction pick in emerging markets for 2024 is the Indian market. India’s structural transformation and growth trend remain intact, fuelled by a rising consumer market, a large youth population, and ongoing urbanisation, which is helping to boost household spending.
“This positive outlook is further reinforced by weakening investor confidence in China, which puts India in a favourable position as a viable alternative to China in the eyes of global investors,” said Laxminarayan.
“For China, we remain on the sidelines, as we wait for the bottoming process to unfold,” he added.
Quality fixed income
In the fixed income space, the Swiss private bank believes that there is still an opportunity to lock in the current attractive yields with quality bonds, since the quality segment compensates investors comfortably above expected inflation levels.
“The safer the issuer the better, therefore, we tilt towards USD-denominated investment-grade bonds. For those seeking additional income from emerging market hard-currency bonds, we point to Latin America, the Middle East, and investment-grade Asian corporate issuers,” said Matthews.
