AIA Group CIO Konyn on Federal Reserve Policy, Asian Markets

It seems like there’s this long going debate about whether the Fed can deliver on three cuts this year. What do you make of this right now? Are we likely to see Eddie? Well it’s not that long ago I was in the studio and the market was talking about six rate cuts in the year. I think the the market over interpreted the Fed pivot in the end of last year. The Fed are keen to cut rates at some point to make a statement and build some insurance into the policy set, but they’ll always be guided by the data. And the data so far is not indicating the need to really cut rates. We’ve still got, as you’ve just discussed, we’ve still got inflation trends that are that are causing concern. It’s proving stickier than than perhaps the market had anticipated. You’ve got a tight job market. You’ve got an economy which is growing well and you’ve got very, very strong fiscal tailwinds which are really supporting the biggest economy in the world. At the same time, you’ve still got recovery. You know you early signs of recovery in China, recovery in Japan, early signs of recovery in Europe. So all of these all of these items point to the fact that there is concern that inflation may hang around for longer than was originally anticipated. It might also point to just maybe the strongest signal yet that is, is it time to add further risk to portfolios? Well, so, so there are, there are risks associated with economies running too hot. But in the short term, great news for equities because you know the the earnings will continue to come through, investors will be invigorated by the economic activity and we’ll still see markets respond to that and we’ll still see positive momentum even in this region. In China since what early February we’ve seen 10% put on depending on which index you’re looking and which particular aspect of the market you’re looking, you’re still seeing you know some good performance now and hopefully that will encourage investors to to come back into the markets. So you could say basically you can continue on go along with assets, equities just even if the Fed doesn’t cut this year, do you think we could still see a a decent rally across global. I I strongly suspect that the Fed will cut this year, OK, I think it will be later rather than sooner. So that expectation of two cuts, first one in June is probably still needs to be adjusted, OK. So there will be a rate cut that’s a statement that needs to be made, you know according to what has already been stated. But can equities perform in that environment? Yes they can, a little bit more elevated inflation in, in this current environment when growth is still strong. You know employment is looking good, why not, which equity market seems most favourable at this point in time, Let me dig deeper into that. So we’re we’re seeing probably the next stage or next phase in the cycle is to see a broadening out of the key markets and and and many are still very focused on the US You know you’ve got a very significant public program which is encouraging a lot of investment in infrastructure and technology. It’s bringing in global capital. It’s bringing in firms that want to onshore in the US to take advantage of the Inflation Reduction Act. So that that is clearly a very strong tailwind and the broadening out of the market is what we expect beyond that, so-called Magnificent 7. And then as we lookout into this region, Taiwan and Korea obviously doing well from the enthusiasm around AI. And as we get into the second-half of the year, we’ll see a broadening out across this region with the Philippines probably being our most favored market where we’re seeing economic activity supportive of that. And also Malaysia, as we see the electronics industry more generally outside of a direct play on AI, start to benefit from some of these, some of these factors. Is it, is it more rotation into those laggards? Well, it’s a tide rise. I think until we see the rate cut and still we until we see some, some clear policy direction, it is a little bit of rotation. But I think as we go forward, when we see a bottoming out of expectations and we’re starting to see that even in China, we’re starting to see a bottoming out of of earnings expectations depending on the sector in in, in Internet plays, in manufacturing, we’ll start to see more capital allocated. But it’s all about relativity as well. Of course as long as investors can make good money in the US, there’s there’s a lack of appetite to move broadly outside of that, OK. And you mentioned about earnings revisions and trying to bottoming out, is that a sign to start increasing exposure to China. So we’ve closed our underweight, OK, that’s the first step I think we’re going to, we’re going to need to see more convincing evidence that this slight improvement that we’ve seen the so-called green shoots of a recovery start to take hold and we built some momentum. The big issue in China of course is consumer confidence which has been massively depleted and it’s going to take a big effort to to to move that back to where what we’ve seen pre pandemic.