[Special Contribution] Investment Opportunities Presented by Global Economic Uncertainty

The world is always full of unexpected events. Earlier this year, the market strongly reflected the view that the Federal Reserve could cut interest rates about six times (1.5 percentage points) within the year. However, recent strong U.S. employment and inflation data have undermined this optimism, shaking market expectations for rate cuts. Additionally, geopolitical tensions between Iran and Israel are escalating. In such a highly uncertain investment environment, it is essential to prepare both offense and defense. Strengthening the portfolio base by utilizing various assets can first establish a defensive stance. Building on this defense, adding aggressive investment ideas can turn volatility into opportunity.

① Differentiation in Timing of Rate Cuts: Focus on European Bonds

The U.S. is experiencing more resilient employment and sticky inflation compared to Europe due to unusual factors such as a surge in immigrants. As a result, the European Central Bank (ECB) is increasingly likely to enter a rate-cutting cycle earlier than the U.S. Federal Reserve (Fed). Therefore, it is necessary to pay attention to euro-denominated (EUR) investment-grade bonds, which have a high potential for price rebound following the recent sharp rise in bond yields.

② Securing Hedging Instruments Against Inflation and Geopolitical Risks

It remains to be seen whether the recent U.S. inflationary pressures are merely temporary fluctuations along a bumpy path, but considering the risk of renewed tensions in the Middle East and the resulting rise in oil prices, inflation risk cannot be overlooked. If geopolitical uncertainty expands further in the coming months, inflation hedges such as U.S. Treasury Inflation-Protected Securities (TIPS) and the U.S. energy sector will likely benefit.

First, TIPS can outperform government bonds if inflation exceeds expectations. Also, current profit forecasts for the U.S. energy sector have yet to fully reflect the fact that oil prices have risen more than 10% compared to the average level a year ago. Considering that Donald Trump, the Republican presidential candidate, supports the traditional energy industry, U.S. energy stocks can serve as a hedge not only against geopolitical risks in the Middle East but also against the possibility of a Trump victory in the upcoming U.S. presidential election.

③ Differentiated Earnings Growth of U.S. Companies

Regarding U.S. equities, considering current valuations and supply-demand factors, it is expected that investors will become more selective ahead of the Q1 earnings season. The positive aspect is that market expectations have already been significantly lowered. The estimated earnings growth rate for the S&P 500 index in Q1 is only about 5%.

Therefore, rather than broad-based earnings improvement across the index, selective sectors such as communication services and IT are expected to have higher earnings growth potential. Major platform companies are benefiting from positive advertising outlooks, and leading U.S. semiconductor companies are expanding strength from AI (artificial intelligence) chips to memory chips by recently raising product prices. Hence, it is advisable to use the weak phase of the U.S. stock market to increase exposure to sectors with high earnings visibility.

④ Indian Large-Cap Stocks and Indian Local Bonds

The earnings growth forecast for Indian large-cap stocks next year is around the mid-teens (about 15%). Based on solid growth, moderate inflation, and potential manufacturing improvements, this earnings outlook could be further upgraded. As a result, the Indian stock market is showing differentiated movements compared to other markets, and the improved earnings expectations can justify the higher valuations. Therefore, a positive view on Indian large-cap stocks remains valid.

Another asset to watch within India is rupee-denominated bonds. Currently, yields exceed 7%, surpassing the emerging market bond average of 6.3%. Additionally, Indian local bonds are scheduled to be included in global bond indices for the first time this quarter. Supported by stable fiscal soundness and foreign currency reserves, the Indian rupee is expected to maintain a relatively resilient trend. Furthermore, policy continuity after the Indian general election is likely to strengthen domestic and foreign capital inflows into the Indian capital market.

⑤ Chinese Non-Financial High-Dividend State-Owned Enterprises

The Chinese economy is showing a moderate recovery amid selective policy responses. The recent mixed economic indicators suggest the need for additional monetary easing. This is expected to positively impact the stock prices of Chinese non-financial high-dividend state-owned enterprises. The inclusion of corporate market value improvement in the performance evaluation of state-owned enterprise management, combined with attractive dividend yields and undervalued valuations, is likely to attract investor interest.

Summarizing the above, despite various uncertainties, tactical opportunities persist. However, rather than indiscriminately acquiring risky assets, it is also important to carefully select investment targets. In other words, it is necessary to broaden the investment horizon globally and secure growth opportunities identified in the market.

Raymond Cheng, Chief Investment Strategist (CIO) for North Asia, SC Group