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Rate cuts, dollar weakness to fuel Asean growth
AI revolution, led by profitable tech giants, offers huge long-term upside potential
Tom King 30 Sep 2024

Asean markets and risk assets are set to benefit from a favourable economic environment.

Sharing his outlook for the final quarter of 2024, DBS chief investment officer Hou Wey Fook says the Federal Reserve’s surprise 50bp rate cut earlier this month marks a significant shift towards monetary policy easing, which bolsters the chances of a soft landing for the US economy.

The combination of lower rates, economic resilience, and continued technological advancements, particularly in artificial intelligence (AI), are positive for risk assets, Hou says.

With AI-led growth continuing to drive productivity gains, the outlook remains positive across multiple asset classes. Hou points out that while US big tech firms remain at the forefront of growth portfolios, the current AI revolution is driven by profitable companies generating free cash flow, unlike the dotcom boom of the late 1990s, which was fuelled by debt. This, he says, positions AI as a long-term growth theme, with significant upside potential still in its early stages.

That said, Hou notes that growth is slowing, and investors should position themselves to navigate a more challenging environment. Lower bond yields and weaker demand across certain sectors mean that resilient risk assets should take centre stage.

Hou sees a number of asset classes outperforming. These include utilities, consumer staples, and healthcare, which he says tend to perform well after initial rate cuts due to their inelastic demand and solid dividend yields.

More tailwinds

Utilities offer attractive yields (around 3.0%) compared to the broader S&P 500 (around 1.4%), making them an appealing choice for income-seeking investors in a low-rate environment, Hou explains.

Despite global headwinds, the DBS investment chief says Asean markets are poised for robust growth in the coming months, driven by resilient domestic demand, robust tourism, and an export recovery supported by China+1 strategies. Further tailwinds from lower rates and a weakening US dollar, coupled with new stimulus measures from China, also make Asean equities particularly attractive, he says.

Asia real estate investment trusts (Reits) are also set to benefit significantly from the Fed’s rate-cutting cycle. Lower financing costs will enhance profitability, allowing for higher dividend distributions, which make Reits a prime choice for investors seeking steady income.

As a hedge against uncertainty, private assets such as hedge funds and private credit offer opportunities for alpha generation and diversification, while gold remains bullish as central bank demand rises, supported by fiscal concerns and de-dollarization themes, says Hou.