WITH inflation again becoming a point of concern for the US Federal Reserve, Julius Baer said investors should broaden out their portfolios beyond the magnificent seven tech stocks and consider sectors such as banking.
The Swiss private bank also sees value in Chinese equities, particularly as home sales show signs of stabilising, which could arrest the fall in property prices over the past three years.
Driving inflation to the forefront of the US central bank is the second Donald Trump presidency, whose threats to slap tariffs on key trade partners could push up consumer prices.
“With control of both the Congress and Senate, and a high approval rating, he can do a lot more than in the first administration,” Mark Matthews, head of Research Asia at Julius Baer, said on Monday (Jan 20).
Comments from Fed officials earlier this month, emphasising the need to finish off the fight against inflation, have reinforced the view that the central bank will be more cautious in cutting interest rates this year.
Given the defeat the Democrats took in last year’s elections, the scenario for higher inflation could be more than fleeting, with the potential that Vice-President JD Vance could succeed Trump and rule for eight years, Matthews said.
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As tariffs could lead to an intermediate spike in inflation, Julius Baer now forecasts zero interest rate cuts from the Fed for this year. That’s from an October 2024 outlook of two reductions, said Bhaskar Laxminarayan, chief investment officer and head investment management Asia at Julius Baer.
With interest rates projected to stay higher for longer, banks will benefit, particularly as the US economy is likely to stay robust. Julius Baer sees the world’s largest economy growing at a rate north of 3 per cent this year, which would stimulate demand for loans. And with Trump’s pro-business stance likely to ease regulatory hurdles, investment banking should also benefit from higher merger- and-acquisition volumes.
Julius Baer is less bullish on the S&P 500, which gained 25 per cent last year, following a 26.3 per cent jump in 2023.
Matthews noted that the benchmark typically falls once in every three years. In addition, he noted that historically, in the year following the six years when the S&P 500 logged at least 50 daily all-time highs, the index has fallen in four of them.
The S&P 500 hit 57 all-time highs in 2024.
As for Asia, Julius Baer is positive on Japan, China and Indian equities.
Noting that Japanese companies conduct more research and development in the US than other countries, Matthews recommends those that make complex products. Also helping Japanese equities is the likelihood that the yen will stay weak against the US dollar, which will boost the competitiveness of Japan’s exports.
As for China, Julius Baer said there are more than 40 stocks where the price to earnings ratio is lower than their dividend yields, which makes the market interesting from a value perspective.
Matthews also pointed to signs of improvement in China’s property market, from recent home sales data.
“Even if they (prices) just stop going down, it will be tremendously important for China, as 80 per cent of household wealth is from property.”
The decline in new home prices in China eased for a fourth month in December, reflecting signs of stabilisation after the government’s latest stimulus blitz.
Turning to India, the Swiss private bank said the country’s demography makes it an attractive investment. Between 2018 and 2055, it’s predicted that India’s working-age population will be greater than the dependent age population. That is on top of bets that the nation could replace China as a global export hub.