The global financial markets consolidated over the week. Developed markets in the United States (US), Europe, and Japan closed with negative returns.
In Asia, the markets experienced a mixed performance over the week, with China offshore recording the largest gains while Taiwan and Hang Seng being the biggest drags.
“In Malaysia, the performance of FBMKLCI was flat over the week, primarily due to a combination of regional and domestic weakness,” said Principal in the recent Weekly Market Recap.
In the bond market, the price of the benchmark 10-year U.S. Treasury note closed marginally lower with the long-term yield rise higher driven by expectations for higher levels of issuance by the Treasury Department.
Towards the US, Fitch Ratings downgraded the credit rating of US government debt from AAA to AA+ due to a deterioration in the standards of governance and repeated debt-limit political standoffs and last-minute resolutions.
“In other news, July’s nonfarm payroll report indicated a slight increase of 187,000 jobs, similar to June’s revised figure of 185,000,” said Principal.
The Bank of England increased its key interest rate by 0.25%, reaching a 15-year high of 5.25%. This move indicates a commitment to keeping rates elevated for an extended period to bring inflation back to the 2% target.
Meanwhile, annual inflation in the euro area decreased to 5.3% in July from 5.5% in June, although it still remains significantly above the European Central Bank’s 2% target.
In China, the State Council announced new measures to boost consumption in sectors such as autos, real estate, and services to revive the sluggish economic recovery post-lockdown.
The People’s Bank of China also pledged support for the development of the real estate market. China’s official manufacturing Purchasing Managers’ Index (PMI) increased to 49.3 in July, as anticipated, but remained below the 50-point threshold for the fourth consecutive month, indicating contraction. The nonmanufacturing PMI declined to 51.5 in July from 53.2 in June, falling short of expectations.
Principal’s current stance is neutral on both equity and fixed income, with a preference for income-focused funds. Their strategy emphasises quality, growth, and income in stocks and credits.
They are exercising caution with USD assets, particularly in the technology sector, and believe that Asian equities and fixed income present more value in the short term.
On Fixed Income, Principal finds bonds appealing as they perceive a higher likelihood that central bank hiking cycles will end soon, despite recent guidance from the Fed.
“We also see potential for capital gains in the event of weaker economic growth. Therefore, we maintain our preference for investment grade bonds with longer durations as our preferred investment choice,” said Principal.
On equities, Principal favours quality and dividend-paying stocks for their defensive qualities that can help withstand the uncertain macroeconomic and geopolitical conditions.
Principal is positive on Asia and positioned in the areas of bottoming of the tech hardware cycle, and long term growth headroom from low penetration rates.
ASEAN continues to provide a combination of recovery plays and long-term structural themes. Then there is China’s reopening, although Principal is judicious in which areas.
“We also favour income-focused approach to ride out volatilities arising from geopolitical tensions, inflationary issues, and recessionary concerns,” said Principal.
