Company Interview / A return of risk appetite

James Cheo of HSBC assesses the recent economic events, viewing the rapid recovery of equity markets as a result of receding recession fears, an increasing appetite for risk-taking, and the Federal Reserve's potential move towards reducing interest rates. He acknowledges the importance of the forthcoming jobs report on 6th September in deciding the size of the Federal Reserve's rate cut. James maintains that the US economy remains on a soft landing track, despite concerns.

Further expressing his positivity towards global equities, particularly in developing markets such as India and Japan, James shares his perspective on the impact of fluctuating tech spending on the market. He advises investors to focus more on the enduring long-term AI trend, instead of placing significant emphasis on quarterly readings. As for Nvidia’s stocks, he advises investors to regard them as a necessary element of a diverse portfolio.

In the context of currency, he suggests that the US dollar’s weakness may be somewhat overstated and anticipates a rangebound phase in its future. He commends the role of fixed income as a crucial part of any portfolio, given the negative correlation between bonds and equities. He encourages investors to deploy their cash into bond markets to take advantage of the current conditions.

Full unedited transcript:

0:11

Broader market now because we saw that selloff early this month triggered by concerns over US recession fears, tech valuations, sector rotation and also the unwinding of that yen carry trade. However, the stock market quickly reversed those falls to discuss why that is and what the outlook may be for equities. James Cho joining us from HSBC. James, good to catch up with you again. Thanks for joining us here at Osbi. What do you make of the response. You know we've seen on the equity markets, given that dramatic fall we saw at the beginning of the month, we've pretty much wiped out those losses.

0:50

Well, essentially, I think that whole recession fear has been abating. We have had a few data releases that points that things are slowing down, especially in the US, but it's not cracking. And as a result, I think we are seeing a kind of the appetite to take risks coming back to the market. And of course, if you add to the fact that now the Federal Reserve is likely and very likely to start to embark its rate cutting cycle, I think that would provide support for markets. So I think if you combine all these factors, recession fears receding because of stronger economic data positioning becoming more and more risk on. And of course, if you add that whole fed guidance of cutting interest rates, I think that's why markets are being supported right now. Do you feel as though when we take a look at the US that that soft landing is still on track? Because of course we're looking ahead to that rate cut in September? The question is the size. And I guess if they

1:50

were going to go 50, that would see some concern there emerge about where the US economy is tracking.

1:58

Yeah. Well, I think as of now, if you look at the data in in a holistic manner. I think it still looks very much a soft landing for the US economy. But clearly I think what happened at Jackson Hole is that the fed chair is still going to be extremely data dependent. September is a cut, but the question is is it 25 or 50 basis points. And I think what's going to matter a lot would be the jobs report on 6th September. So if you do get, you know, unemployment aging up slightly, then perhaps you might get a bigger rate cut. So I think the 6th September jobs report is going to be extremely crucial in determining the size of the rate cut

2:41

overall. James, how do you look at global equities? Are you generally positive? Where are you seeing the best performers at the moment.

2:51

Yeah. Well I think we still have a risk on position in terms of where we think global equities will go up to. But I think the performance of global equities is going to differentiate itself. I think the US is still going to be a very important market, but clearly I think there are other markets that could look interesting. I think India we continue to like I think Japan has pulled back somewhat and and Japan looks like an interesting market to focus on. Well as well as Korea. Right. You have that whole improvement and upcycle in tech spending. So that would also benefit uh, it uh sectors within Korea. Are you talk about IT tech spending there. Of course we're in focus this week with Nvidia's result going to drop on Wednesday in the US. Do you have any concerns? Uh, because certainly the summer concerns did emerge on Wall Street in regards to those returns. They're going to be less immediate, it would seem, from those AI facing stocks, and perhaps they're going to be pushed

3:51

out further. What's your view in particular in relation to those AI stocks?

3:56

Well, I think that's a behemoth. Uh, stock as you know. Right. So of course, the earnings report. The guidance is going to be very important, not just for the company itself, which is a big component of the stock market, but also, I think for the AI related companies. But I think it's important for investors to take a step back and not just place so much weight on one quarterly reading. I think to me, I trend it's much more enduring over the long term. So in the short term, yes, there will be volatility if there are disappointments. But clearly, I think the overall AI trend in terms of how it will improve productivity for other sectors outside of tech, I think it's going to to be sustained over the long haul.

4:41

James, on the currency front, where do you see the US dollar at the moment? Obviously, as we see those interest rate differentials, um, players began to look at what was going on, uh, in Australia here where we see those differentials, will will close given where remaining on hold essentially. Um, we have seen weakness in the US dollar having fallen to about eight month lows. And in fact, um, what's your view?

5:08

Oh, well, I think we are at the cusp of interest rate cut cycle. So that means that in terms of interest rate differential, that whole dollar strength probably is behind us. Um, my suspicion is that the current dollar weakness is also perhaps a little bit overdone. So I think one should think that the US dollar as of now would likely be rangebound. Uh, we have a neutral view now on the dollar. Uh, given that, um, it's not just the fed that's cutting interest rates, many other central banks are also cutting interest rates at the same time. So I think a rangebound dollar I think makes sense at this point of time, albeit that's going to be quite a bit of volatility. Uh, and I think that's going to be, uh, how the US dollar market will treat, uh, in the weeks and months ahead. And James, what do you think a balanced portfolio looks like at the moment, particularly bearing in mind, uh, fixed um, income? What, uh, What? What your view is on that?

6:06

Well, I think fixed income is a crucial part of, of a of a portfolio because clearly, I think right now what we are noticing is that that correlation, the negative correlation between bonds and equities, it's coming back. So it means that bonds can start to fulfill its role as a diversifier. And I think the best way for us is to you know, at this point of time, we are still seeing a lot of investors holding onto cash. And clearly, I think with cash rates going to fall alongside the Fed's cutting, uh, rate cycle, there is a case for investors to start to deploy and should deploy their cash, at least into the bond markets to capture yields. And you want to lock in that yield in the bond markets. We still like global investment grade bonds to keep that coupons. And I think to take advantage of the entire rate cycle over the course of the next 2 or 3 years as the fed starts to cut rate. So I think there is a case for bonds in a in a portfolio context.