Topic 1: Interest rates are high now, but rate cuts expected

Bonds are an important asset class in the current high interest rate environment. As the economy slows, bonds have the potential for capital appreciation. Even if interest rates fall later than forecast, bonds offer regular income while you wait.

Bond yields in the US have declined from the peak in October 2023 due to lower inflation and expectations of rate cuts ahead.

The 10-year US Treasury yield reached 5% in the middle of October, the highest level since 2007. It has since declined to 3.90% (as of 22 December). Bond yields fell significantly after the last US Federal Reserve (Fed) meeting when Fed Chairman Jerome Powell struck a more balanced tone than markets had anticipated. Interest rates are likely to have peaked and the Fed may lower rates from the middle of this year.

Bonds have done well after Fed pauses

Bonds usually perform well when the rate hike cycle is over and do not need a rate cut to rally. History suggests that when the Fed gets to the peak of its rate hike cycle, bonds tend to do much better than cash in the following period (Figure 8).

Bond refers to Bloomberg US Corporate Investment Grade Index. Cash refers to 3-month US Treasury bill. Bond total returns refers to bond coupon plus the change in bond price.
Source: JPMorgan Asset Management (30 November 2023)

Bond yields can fall further in 2024, as growth and inflation slow

Bond yields are likely to continue falling in 2024. As yields decline, bond prices rise. Weaker growth and slowing inflation contribute to lower interest rate expectations, leading to lower yields. Holding cash for yield will become less appealing when short-term interest rates come down. Owning high-quality bonds becomes even more attractive with potential price gains.

Lock in high yields before growth slows and rates fall

Bonds are also supported by uncertainty in the global landscape. Slowing growth as well as geopolitical risk can cause stocks to fluctuate at any time. High quality bonds, as safe havens, can benefit from slow growth and weak sentiment in stock markets. Lock in yields by adding high quality bonds to your portfolio before growth slows and rates fall.

Topic 2: Factors that signal the end of high rates

While central banks are not expected to raise rates further, the key question is how much longer before rates are cut. This depends on four factors (Figure 9).

Starting with the most important, US core inflation falling towards the Fed’s 2% target would precede the end of high rates. Inflation is a central bank’s main priority. Once inflation is under control, central banks can consider cutting interest rates if that is needed to support economic growth.

The second signal is a weakening jobs market and this can be seen from rising unemployment. Jobseekers will lower expectations of high wages if there are fewer jobs in the market, leading to wages and therefore inflation, to come down.

The third factor that signals impending rate cuts is significant deterioration of the economy, as fewer jobs would lead to people spending less.

The last factor, the most dire, is banks imposing stricter lending standards and, as a result, lend less in view of rising bad loans and defaults. In this scenario when the economy deteriorates, companies face pressure from both weaker economic activity as well as the inability to borrow, restricting hiring and business expansion.

When these factors occur, central banks would shift focus from controlling inflation to supporting economic growth with rate cuts. This is also when markets are expected to be more volatile.

As the first half of this year may see more volatility, spread your portfolio across different types of investments while interest rates are high. A portfolio diversified across different asset classes, regions and industries produces steady returns over time, with lower volatility than one that is made up entirely of stocks or bonds (Figure 10).

#Diversified refers to 60% MSCI World Index and 40% Bloomberg Global Aggregate Bond Index.
Source: UOB PFS Investment Strategists, Bloomberg (15 December 2023)

Topic 3: Dividend investing as interest rates fall

With interest rates forecast to fall in 2024, stocks that pay dividends become more appealing again as cash and bond yields come down. High-quality dividend stocks also have lower volatility than the broader market and become more important in a slowing economy. Dividend stocks have historically done better than other asset classes like bonds and commodities during periods when inflation declines from a peak. This is because they provide income and typically have lower valuations compared to growth stocks.

Asia is an attractive region for dividend stocks

Dividends play a key role in Asian stock markets. The MSCI Asia ex-Japan High Dividend Yield Index, which tracks the performance of quality Asian stocks that pay high dividends, stands out among broader markets. It currently has a dividend yield of 6.1%, much higher than that of the MSCI World High Dividend Yield Index at 3.8% (Figure 11). This attracts income investors who want high and steady dividends from Asian stocks in anticipation of falling interest rates.

Asia ex-Japan refers to MSCI AC Asia ex-Japan High Dividend Yield Index. Global refers to MSCI World High Dividend Yield Index. US refers to MSCI USA High Dividend Yield Index. Europe refers to MSCI Europe High Dividend Yield Index. Japan refers to MSCI Japan High Dividend Yield Index.
Source: UOB PFS Investment Strategists, Bloomberg (15 December 2023)

Relative to other markets, Asian dividend stocks look the cheapest (Figure 12). This gives dividend investing in Asia an overall advantage.

Asia ex-Japan refers to MSCI AC Asia High Dividend Yield Index. Global refers to MSCI World High Dividend Yield Index. US refers to MSCI USA High Dividend Yield Index. Europe refers to MSCI Europe High Dividend Yield Index. Japan refers to MSCI Japan High Dividend Yield Index.
Source: UOB PFS Investment Strategists, Bloomberg (15 December 2023)

Focus on dividend yielding stocks in Asia ex-Japan for income

We are optimistic about Asia ex-Japan, focusing on dividend stocks. The region’s resilient business activity should enable companies to maintain steady dividend distribution. Dividends become more important in supplementing income when bond yields fall.

Topic 4: Global healthcare combines defensive and growth characteristics

Healthcare trailed the broader market in 2023. Last year, exuberance over new uses of artificial intelligence, as well as an expected recession that did not happen, drove investors to growth sectors, particularly to mega-cap tech companies. This year, with economic growth slowing, defensive sectors like healthcare may have an advantage.

Defensive with positive earnings growth this year

Healthcare is seen as a defensive sector because of steady demand for health-related products and services across economic cycles. The sector’s resilience should enable it to cope with the challenges of a slowing economy better than the wider market. Moreover, the earnings growth outlook has turned positive for healthcare in 2024. This can be the catalyst for the sector to recover after a year of weak performance.

Medical innovation is driving long-term growth

The healthcare industry has long-term growth potential not only because of an ageing world population. Other contributing factors include continuing improvements in early disease detection as well as the increasing use of technology and artificial intelligence in medical treatment, for example robot-assisted surgery in minimally invasive procedures.

These growth trends stem from the demand for efficiency and cost savings in global healthcare systems. Therefore, they are likely to continue, regardless of macroeconomic challenges. Investors may overlook these opportunities if they only pay attention to current revenue and ignore the impact of medical innovation.

Anti-obesity drugs potentially a USD77 billion market

Obesity is a chronic health issue affecting more than 750 million people worldwide. The high obesity rate is a concern because health problems linked to obesity are among the leading causes of preventable early deaths, estimated to contribute to 5% of all deaths globally.

Recent studies highlight the importance of weight management not just for obesity, but also for related diseases. A recent groundbreaking study on obesity-related illnesses revealed that weight management medicine can reduce the risk of heart attacks, strokes and cardiovascular deaths by 20%. Along with the availability of new drugs such as GLP-1 receptor agonists, this could be a potential game-changer in obesity treatment. Morgan Stanley Research estimates that the total global market size for anti-obesity drugs could reach USD77 billion in revenue by 2030 (Figure 13).

Source: Morgan Stanley Research Estimates, Obesity Drugs Boost Pharma’s Growth Outlook (6 September 2023)

Healthcare sector combines resilience and growth

The composition of the MSCI World Health Care Index has undergone significant changes in the past 20 years. Pharmaceutical companies make up 41% of the index, compared to 82% two decades ago. At the same time, other industries with higher growth potential such as life sciences tools and services, healthcare technology and healthcare equipment now have larger weight in the composition of the index (Figure 14).

The evolution of the healthcare sector now gives you access to defensive pharmaceutical companies as well as growth opportunities in a wider range of companies within the sector. Therefore, global healthcare remains one of our Top Ideas in 2024.

Numbers may not sum due to rounding.
Source: MSCI and AllianceBernstein (AB) (31 December 2000 and 30 September 2023)

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Managing Editor
  • Winston Lim, CFA
    Singapore and Regional Head,
    Deposits and Wealth Management
    Personal Financial Services
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    Singapore Head,
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