Multi-Asset Weekly: Global Equities Uplifted by Inflation Data
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Chief Investment Office2 Sep 2024
  • Equities: Inflation data in the US and Eurozone supportive of rate cuts and markets
  • Credit: Credit sweet spot remains as A/BBB near a cycle pivot
  • FX: DXY Index faces resistance around 102.20; USD/CAD found support around 1.3450
  • Rates: Current Fed pricing overly dovish; assume a considerable downturn over the coming year
  • The Week Ahead: Keep a lookout for US Change in Nonfarm Payrolls; China PMI
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Equities: Benign inflation data supportive of interest rate cuts boosted sentiment and markets

Equity markets mixed, but generally supported by benign inflation data. US core PCE index rose 0.2% while personal spending increased 0.5% in July, reassuring the market that inflation is under control and US consumption remains resilient. The Dow Jones and S&P 500 rose 0.9% and 0.2% respectively for the week while NASDAQ dropped 0.9%, dragged by NVIDIA’s lower-than-expected sales forecast. Eurozone inflation at 2.2% in August raised market expectation of a rate cut by the ECB. The STOXX 600 and the FTSE gained 1.3% and 0.6% respectively for the week. Japan continued to recover from the sharp sell-off earlier this month. The Nikkei 225 gained 0.7% for the week. China’s residential property sales continued to fall in August. The SHCOMP dropped 0.4%. The HSI rose 2.1%, boosted by stocks in the EV sector which reported better-than-expected sales and the Hong Kong property sector which is expected to benefit from US interest rate cuts.

Topic in focus: US equities - beneficiaries of Fed rate cuts in past cycles. Analysing data from the most recent four rate cutting cycles unveils that Utilities, Consumer Staples, and Healthcare have, on average, outperformed the S&P 500 by 9.0 %pts, 4.3 %pts, and 4.2 %pts respectively on a three-month basis after the initial cut. We delve into each of these sectors to explore the underlying factors driving their outperformance:

  1. Utilities: The Utilities sector possesses consistent revenue streams due to its provisions of necessities such as electricity, water, and gas. Additionally, Utilities currently offers a yield of 3.0% (vs S&P 500's 1.4%). As interest rates decline, yield-focused portfolios will progressively shift allocation from bonds to income equities, auguring well for Utilities.
  2. Consumer Staples: The demand for consumer staple goods is essentially inelastic. Moreover, the lower interest rate environment also reduces the interest expense of consumers and enhances their spending power. Companies providing “value” goods at lower price points will stand to benefit as consumers trade down.
  3. Healthcare: Demand for healthcare is broadly inelastic, regardless of the macro environment and particularly so in an ageing society. Furthermore, pharma and biotech companies require significant capital for R&D to drive innovation. Moderating rate reduces the cost of borrowing for R&D.

Exposure to defensive plays complements our long-term conviction view on Technology. From a “barbell” perspective, the resilient and defensive nature of these sectors complements our structural long-term exposure to Technology plays.

Figure 1: Outperformance of Utilities, Consumer Staples, and Healthcare post-rate cut

Source: Bloomberg, DBS



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