DESPITE the US Federal Reserve dialling back on its forecast for cuts following its latest policy meeting, analysts say that the “door is open” for two cuts this year, with most expecting the first to come as early as September.
They also expect the Asian equity market and bonds to remain attractive to investors despite the delay in rate cuts by the US central bank.
Their comments follow the Federal Open Market Committee’s (FOMC) decision to hold its benchmark interest rate steady at between 5.25 and 5.5 per cent on Wednesday (Jun 12).
Fed officials indicated that there would be just one 25-basis-point reduction this year, down from three cuts projected earlier in March.
This was despite the central bank’s acknowledgement that it had made “modest further progress” towards its 2 per cent inflation target.
ING Bank noted that the tone of the Fed’s latest statement was more dovish than the one following its last statement in May. At the time, the Fed said there was “a lack of further progress” in meeting its inflation target.
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Nevertheless, analysts said that the Fed’s decision to hold back on rate cuts came as no surprise.
Kerry Craig, global market strategist at JPMorgan Asset Management, said that given the “stickier inflation prints” in recent months, there was “little expectation” for the Fed to do anything other than hold off on rate cuts at its latest meeting.
Similarly, Jean Boivin, head of the BlackRock Investment Institute, said that it was “unambiguously clear” that the Fed has gradually adjusted to the reality that rates will need to stay high for longer, both in the short and long terms.
Two cuts on the cards
In line with the revised outlook for rate cuts, analysts expect the reductions to begin as early as September this year, with the potential for one more cut in December.
At a Bloomberg Intelligence roundtable on Thursday, Tamara Henderson, Bloomberg’s economist for South-east Asia, said that the “door is still open for two cuts” considering that Fed chairman Jerome Powell had based his projections on a conservative inflation forecast.
She expects the Fed to cut rates in September and December this year.
Likewise, DBS analysts said in a Thursday note that they expect rate cuts in September and December if there is stable or receding inflation in the coming months, with a total cut of 50 basis points in 2024.
“We think by the time the September policy meeting takes place, there will be plenty of data available for FOMC members to see that inflation worries have abated largely,” said the analysts.
JPMorgan Asset Management’s Craig also thinks that the Fed could cut rates twice this year if inflation figures continue to soften.
Given the less hawkish tone adopted by Powell at Wednesday’s press conference, markets should expect the US central bank to remain on the path of easing its policy, said Craig.
ING Bank was more optimistic, projecting three rate cuts of 25 basis points each in September, November and December. It said that the Fed could reduce the restrictiveness of its monetary policy if there is more evidence of inflationary pressures easing, labour market slack, and softening consumer spending.
Growing US economy to support Asian equity market
Craig noted that the “respectable” growth outlook and easing inflation provided a “good backdrop” for both equity and fixed income assets in the US.
He also expects an expanding US economy to benefit global growth and Asian exports.
“This should support Asian equity markets, offsetting some of the risks associated with strengthening of the US dollar due to delayed rate cuts,” he added.
BlackRock’s chief investment officer and head of Asia-Pacific fixed income, Neeraj Seth, and head of Asia macro for fundamental fixed income, Navin Saigal, said in a note on Thursday that Asian central banks have resisted cutting interest rates out of concern that an interest rate differential with the US would result in excessive currency weakness.
They added that this means that Asian bonds will continue to be an attractive way for investors to diversify their global portfolios as local yields remain higher than they otherwise might be relative to inflation, with currencies that are quite stable.
Bloomberg’s Henderson said that Asean central banks, especially those of Indonesia and the Philippines, will start cutting their rates once the Fed signals an easing of its monetary policy later this year.
High-yield stocks, banks to benefit from steady rates
Within Singapore, RHB analyst Shekhar Jaiswal said that investors should focus on stocks that feature earnings sustainability and offer high yields. These include companies with strong and visible earnings outlooks.
RHB’s preferred picks among the large and mid-cap stocks are ComfortDelGro, DBS, Singtel and ST Engineering. Among small caps, it prefers Centurion Corp, Frencken Group and Riverstone.
The banking sector also remains the best proxy for higher-for-longer rates, said Shekhar, adding that DBS is the brokerage’s preferred pick for exposure to the sector.
Among locally listed real estate investment trusts (Reits), DBS analysts said on Thursday that the clarity of an imminent rate cut this year is a reprieve for Reits and provides investors with opportunities to accumulate stocks selectively on a low base.
They picked retail Reits, such as Frasers Centrepoint Trust, and industrial Reits like CapitaLand Ascendas Reit and Mapletree Logistics Trust.
