YOUR GOALS,OUR COMMITMENT.

Global Investment Committee’s outlook:stronger for longer

Buoyant financial and monetary conditions, firmer-than-anticipated economic
fundamentals to support risk assets

By Naomi Fink, Global Strategist
3 April 2024
Here are the key takeaways from the Global Investment Committee (GIC)’s central scenario:— Robust corporate earnings and firm employment alongside expectations for rate cuts areseen keeping markets more buoyant than anticipated by average consensus estimates.
— The Federal Reserve (Fed) appears committed to delivering cuts. The Fed, however, may
only be able to deliver one cut this year if growth and inflation do not slow as much as
expected. The ability to deliver at least one cut thanks to early disinflation may still act asa tailwind to growth thereafter.
— The European Central Bank (ECB) could maintain its monthly reductions of its balance
sheet assets but may find it difficult to deliver cuts amid higher-than-anticipated inflation.
— With Japan’s “virtuous circle” of reflation likely to remain intact, our central scenario
includes stronger private investment and domestic consumption assisted by real wage
growth.
— Chinese growth is likely to remain constrained below 5%, but the composition of thecountry’s GDP is expected to improve alongside better-than-expected external demand.
— The risks to our outlook are concentrated toward higher inflation, which could potentiallyrestrict real GDP growth. These risks are expected to intensify toward the end of 2024 on
issues including resource-driven inflation and escalating fallout from political divisions in
the US.

Q1 2024 in review: heartier growth and disinflation disappointment
As the GIC convened on 27 March, we found that our scepticism at our December meeting toward aggressive ratecuts by the Fed was justified. As growth remained much more robust than markets had been expecting at the time,disinflation continued at an accordingly much more gradual pace than expected through the end of 2023.
The slowdown in US growth that the markets had anticipated in December 2023 has not materialised, andexpectations were revised from a “soft landing” to a “no landing” scenario (a temporary slowdown in growth). GDP
figures remained robust, topping 3% in the US; at the same time, core inflation had come down to mid-2% levels, ofwhich Fed officials spoke approvingly. Markets continue to price in three Fed rate cuts this calendar year. However,
unexpected weakness in the labour market did not occur, and markets have priced in minimal risk of an immediate
downturn. Growth in the Eurozone, while struggling to remain positive, continued to muddle through; core inflation
remained stubbornly above the ECB’s target rate of 2%, although markets continue to price in a June cut. The Bankof Japan (BOJ), having recently exited unconventional easing measures including negative interest rates, yield curve
control and ETF purchases, signalled that it will remain accommodative for quite some time as it watches for signs ofJapan’s reflationary “virtuous circle” gaining traction. Meanwhile, China’s ailing property markets continued todampen domestic market sentiment; the government’s commitment to support domestic demand fiscally continues
to contrast with officials’ desire to stave off the moral hazard stigma typically associated with public bail-outs in the
FOR SOPHISTICATED INVESTORS ONLYGLOBAL INVESTMENT COMMITTEE’S OUTLOOK

wake of market crashes. The National People’s Congress (NPC) matched its 2023 commitment to boost China’s
economy by 5% year-on-year (YoY). As with 2023, the NPC will also issue ultra-long special government bonds.
Amid this backdrop, and alongside ongoing signals of significantly accommodative financial and monetaryconditions, the GIC found it difficult to find immediate catalysts for a downturn in growth.

Current consensus: US and most major economies to avoid recession, China
seen struggling to maintain 5% growth
According to consensus forecasts, US growth will likely slow substantially to the 1% range. This would justify thethree Fed rate cuts already anticipated by markets. The rate of inflation is projected to ease below 2.5% within thenext year, allowing the Fed to pre-empt the slowdown and potentially help the US avoid a recession. According toBloomberg, potential US growth is estimated to be less than 2% (and falling). This implies that the consensus is forany decline in US growth below its potential to be temporary and highly responsive to the Fed’s stimulus.
Nonetheless, consensus estimates show all components of US GDP slowing, with the domestic consumer being thelargest driver of the slowdown, before growth rebounds again in early 2025. Meanwhile, private investment is forecast
to pick up significantly before the end of 2024 with a cyclical recovery the likely driver. As for exports and imports,
both are expected to slow alongside the economy and pick up at the tail end of 2024.
Despite predictions of stagnant Eurozone GDP until the end of 2024, consensus forecasts are for real GDP growth tosurpass 1% again and slowly improve into 2025. Meanwhile, the zone’s CPI is forecast to ease from above 3% in Q1
2024 to near 2% by Q2 2025. The consensus is for the ECB to lower rates by at least 100 basis points (bps) over the
next four quarters with the first cut coming in June or July with some probability of more aggressive 50-bp cuts along
the way if data turn unexpectedly weak.
Japan’s GDP growth is expected to pick up from anaemic levels in Q4 2023 (thanks to robust Q4 private capex, GDPfigures were revised and a technical recession was avoided), rising above 1% YoY by Q1 2025. This would be
comfortably above most estimates of potential GDP growth, estimated to be around 0.5% by Bloomberg Economics.
Due to historic wage rises agreed during the spring “shunto” rounds of negotiations, real wage growth is expected tobuoy consumption and keep Japan’s “virtuous circle” of reflation alive. In addition, corporates are seen continuing tosupport private non-residential investment with healthy capex through 2024. The BOJ is expected to follow its exitfrom unconventional monetary policy with one or two rate hikes in 2024.
China, meanwhile, is expected to harness fiscal stimulus to keep its growth near 5%. However, consensus forecasts
are for China’s growth to slip below 5% by the second half of 2024, eventually decelerating to near 4% by Q1 2025.
In the equity markets, we continue to see considerable tolerance for the historically high valuations of large-cap techstocks, particularly in the US. This is driven by the market’s anticipation of productivity gains from the widespread useof artificial intelligence (AI) across a variety of sectors. The expected increase in demand and subsequent earnings
within these sectors, particularly those that can implement AI efficiently, like large cap tech-adjacent sectors in theUS, is likely to keep the market buoyant. This could potentially create a spillover effect to other sectors.

GIC outlook vs. consensus: high liquidity, industry cycle to buoy confidence
The GIC considered the consensus scenario alongside two additional central scenarios. It also considered “tail”
scenarios both on the upside and downside of consensus forecasts and settled on one that was mildly to the upsideof consensus. Sentiment within the GIC was widely dispersed regarding risks to the outlook. However, one point
acknowledged by the attendees was that financial conditions remain extremely accommodative, and they appear to
be feeding back into major economies. Not only do risk assets and the “carry trade” remain in demand, but domestic
demand indicators (jobs, wages, retail sales) partially owe their resilience to the continuation of accommodative
conditions even after the Fed’s rate hikes (see Chart 1: Financial Conditions in the US, EU). Meanwhile, we note thatsigns of many major PMI’s bottoming out and ongoing adjustments in US inventories-to-shipments provide some
additional support to GDP growth. Although a slowdown is possible, the GIC’s view is that even a single rate cut by
the Fed, particularly amid already buoyant conditions, may extend the economic cycle. Even if a slowdown does takeplace, it may not happen within our immediate forecast horizon, but perhaps later, for example later in 2025. As aresult, the GIC foresees slightly higher-than-target inflation that compels the Fed to pause after delivering one cut.
Following the rate cut, the Fed is expected to remain on hold, watching vigilantly for signs of a slowdown in the labour
market.

YOUR GOALS, OUR COMMITMENT.

2GLOBAL INVESTMENT COMMITTEE’S OUTLOOKChart 1: Financial Conditions in the US, EU

Chart 2: ISM new orders-inventories vs. ISM manufacturing

2

30

1.5

20

70
65
60

1

10

0.5
0

0

-0.5

-10

55
50
45
40

-1

-20

35

-1.5

30
Jun-2023

Apr-2021

May-2022

Mar-2020

Jan-2018

Feb-2019

Dec-2016

Oct-2014

Nov-2015

Sep-2013

Jul-2011

Aug-2012

Jun-2010

May-2009

Apr-2008

BFCIEU Index

Mar-2007

Jan-2005

BFCIUS Index

Feb-2006-30

ISM new orders - inventories (LHS)
ISM manufacturing (3m lag, RHS)
Source: Bloomberg

Source: Bloomberg

Growth and inflation: very constructive across the board
Our committee outlook is for growth to remain above 2% in the US throughout our investment horizon. Additionally,
we forecast core inflation to dip toward 2.5% but not sustainably reach disinflation below this percentage. Partially,
the forecast for the stubbornly high figure is due to favourable basis effects in H1 2024 disappearing in the latter halfof the year. However, given the market has foreseen the potential for a rise in YoY inflation as basis effects are priced
out, favourable headline growth should prove the greater force attracting attention. Inflation slowing toward midyear may allow the Fed to step in with one rate cut before prices rebound modestly, which should only help spurfurther growth without provoking fears of an inflationary spiral. Meanwhile, we foresee Japan’s healthy abovepotential growth continuing for the full calendar year, even with two additional rate hikes over our one-year horizon
with the BOJ taking rates to 50 bps by the end Q1 2025. Eurozone growth is likely to remain comparatively muted
yet rise back above 1% over our forecast horizon. We still expect the ECB to only match the Fed’s solitary mid-year
rate cut due to stubbornly higher-than-target inflation. Although we, along with consensus forecasts, see China being
unable to sustainably keep growth above 5%, the composition of growth will be such that domestic demand will
recover more than anticipated. Moreover, even as fixed asset investment sustainably regains the 4% YoY growth rate,
we see industrial production and domestic consumption surpassing 5%. Inflation is projected to remain modestly
positive but below 1% until late 2024.
%

2024Q2-Q3

2024Q4-2025Q1E

CY 2024

US GDP HoH SAAR

2.5%

2.3%

2.8%

JP GDP HoH SAAR

1.3%

1.7%

0.6%

EZ GDP HoH SAAR

1.2%

1.6%

0.7%

CN GDP HoH SAAR

4.8%

4.7%

4.8%

US Core CPI YoY

2.9%

2.8%

US CPI

3.3%

3.1%

Brent

USD 90

USD 92

YOUR GOALS, OUR COMMITMENT.

3

GLOBAL INVESTMENT COMMITTEE’S OUTLOOKPolicy rates may not be as easy as expected, while longer-end yields could see
a measured rise
As growth remains stronger for longer, the GIC foresees less opportunities for the Fed to cut rates than the market
anticipates. Hence our central scenario is for the Fed to cut rates in June, though corresponding US growth resilience
may keep the FOMC on hold throughout the rest of the year and into Q1 2025. Meanwhile, we expect the Fed toreduce the monthly pace of QT from May. We see this nudging up US 10-year Treasury yields toward 5% by the tailend of our forecast horizon. Meanwhile, we see the ECB keeping its current monthly pace of QT this year and thenaccelerating as it discontinues the reinvestment of their Pandemic Emergency Purchase Programme in 2025. Ourview is that like the Fed, both the ECB and the Bank of England will be able to manage one cut this year before
inflation reaccelerates. Accordingly, we foresee German 10-year bund yields drifting toward 3% over the same period(by March end 2025). Over the same period, we foresee UK 10-year Gilt yields moving toward 4.75%. Meanwhile, as
the BOJ withdraws accommodation in a gradual manner (raising the uncollateralised call rate to 50 bps by the end of
March 2025), we see the likelihood for gradual reductions in its balance sheet starting in Q3 2024.

Foreign exchange: dollar remains formidable as appetite for carry persists
Both market watchers worldwide and central banks continue to monitor the Fed’s rate cut prospects for guidance.
As such, we expect the combination of robust growth and the prospect of a rate cut by the Fed being limited to asolitary action in June in the near-term keeping the dollar supported over our investment horizon. Nonetheless, ourabove consensus forecast relies on ultra-easy financial conditions to persist, prolonging central bank liquidity even if
the Fed remains on hold in the latter part of 2024. For this reason, we foresee dollar/yen staying elevated at current
levels, with little impetus to adjust downward until financial conditions (including equities, credit spreads, volatilities,etc,) tighten. Likewise, we see euro/dollar ranging between 1.05 and 1.09 and sterling/dollar moving between 1.24
and1.28. We see a modest upside for dollar/yen toward 154 at the end of our investment horizon so long as 1) financial
conditions remain easy, 2) carry trades continue and 3) the Fed fails to deliver cuts currently priced into the market.
Meanwhile, we think that further BOJ rate hikes are already priced in by the market.

A strong liquidity narrative for equities while productivity benefits of AI could
be realised early
In light of the favourable growth environment and controlled, albeit higher-than-anticipated inflation, we see apositive outlook for global equities. Until now, many of the gains have been concentrated in the tech sector,
particularly those involved in AI-related semiconductors and software development. However, we see some potential
for an extended late cycle rally that could broaden the gains beyond tech-centric sectors. This includes those thatmight benefit from stronger-than-expected domestic demand in the US and Asia including Japan in particular.
Meanwhile, we note that manufacturing PMI’s appear to have bottomed in many areas. This may be particularly
supportive for areas with struggling growth such as China and Europe. The continuing adjustment in US inventories
is most likely positive for exporter firms world-wide.
The GIC foresees robust earnings growth continuing in most sectors. But given the greater-than-expected surge inglobal stock indices over the last two quarters, we see upside in price activity to be limited through the remainder of2024. We expect Japan’s TOPIX to rise further, gaining around 11% over the coming financial year, benefiting fromlow volatility, a weak yen and rebounding domestic growth. Meanwhile, we foresee decent but slightly lower gainsof 6 to 7% YoY for the S&P 500 and the MSCI by March 2025. Hong Kong’s Hang Seng could rebound from low levels,
potentially gaining 14% YoY by March 2025; MSCI Asia ex-Japan could also see similar gains.

YOUR GOALS, OUR COMMITMENT.

4GLOBAL INVESTMENT COMMITTEE’S OUTLOOKSc e n ar io 2

M ar 2 2 2 0 2 4

Ju n 2 0 2 4

Se p 2 0 2 4De c 2 0 2 4M ar 2 0 2 5

JP Un c o llat e r al C all

0.10%

0.10%

0.25%

0.25%

0.50%

US FF Rat e

5.50%

5.25%

5.25%

5.25%

5.25%

EC B Po lic y Rat e

4.50%

4.25%

4.25%

4.25%

4.25%

UK Po lic y Rat e

5.25%

5.00%

5.00%

5.00%

5.00%

JP 1 0 Y Bo n d

0.74%

0.85%

1.00%

1.10%

1.20%

US 1 0 Y Bo n d

4.20%

4.40%

4.60%

4.80%

5.00%

Eu r o 1 0 Y Bo n d

2.32%

2.55%

2.70%

2.85%

3.00%

UK 1 0 Y Bo n d

4.02%

4.15%

4.35%

4.55%

4.75%

AUD 1 0 Y Bo n d

3.93%

4.20%

4.40%

4.60%

4.80%

USD/ JPY

151.40151.00152.00153.00154.00EUR/ USD

1.08

1.08

1.07

1.06

1.05

GBP/ USD

1.26

1.27

1.26

1.25

1.24

AUD/ USD

0.65

0.65

0.64

0.63

0.63

SPX

5234

5300

5312

5321

5516

Eu r o ST OXX

515

520

522

525

530

FT SE

7931

8050

8120

8220

8350

T PX

2813

2890

2960

3030

3070

Nikke i 2 2 5

40888

42000

43000

44000

44500

Han g Se n g

16499

17324

17324

18149

18149

ASX

7771

7900

8000

8100

8200

85

88

90

91

92

Oil Br e n t

Risks to our outlook: elections, geopolitics and central bank policy errors
Given that the GIC’s view is on the higher side of consensus, downside tail risks likely outweigh upside tail risks.
Although we do not foresee them as central scenarios, we are also aware that they are sizeable hurdles. The risks
include the following:1.

Sub-optimal decision-making around elections: Elections will take place in many
major economies, including the US. In the initial stages of US presidential campaigns,
candidates often employ inflammatory rhetoric, including threats of varying degrees
of protectionism. Among such threats issued by presidential candidates are across-theboard implementation of a 10% tariff on all US trade partners and even more punitive
tariffs targeting China. Although not our central scenario, imposition of such tariffs
would likely pose risks for US trade partners and even Washington itself, and inflation
may diverge from the Fed’s target. Should inflation become untethered, the risk ofcentral bank policy errors may rise. The overall impact is likely to be inflationary for the
US and unfavourable for cross-border trade, consequently affecting Washington’s
trade partners negatively. Protectionism surrounding cross-border investment flows,
such as the much publicised resistance to a merger in the US steel sector, may alsousher in less favourable conditions for global markets. However, this is likely to have amuch smaller impact compared to comprehensive trade tariffs. Cross-party
antagonism, both in the run up to and after the US elections, also remains a risk. The
US, however, has so far managed to avoid the type of brinksmanship that invites
speculation over potential defaults on debt payments. Although our central scenario
is for the US to remain free of debt default concerns, there is still a very small probability
that political brinksmanship will escalate to a level that may disrupt the trading in US
Treasuries and disturb ultra-easy financial conditions. Likewise, although immigration
to the US has helped prevent wage rises from spiralling out of control despite tightemployment conditions, the approach of the election increases the threats ofdraconian policies. Such policies could potentially deprive the US of inflationmitigating labour supply, which is crucial for steering core inflation back towards its
target.

YOUR GOALS, OUR COMMITMENT.

5GLOBAL INVESTMENT COMMITTEE’S OUTLOOK

2.

3.

Uneasiness over Ukraine support, escalation of war in the Middle East, protracted
disruption of shipping routes: There appears to be no imminent end to Russia’s
ongoing war with Ukraine, and therefore few prospects of imminent peaceful growthenhancing reconstruction. Europe, which has experienced general political opposition
to Russia’s incursion, remains the hardest hit by the war, seeing volatility in fuel andfood prices. Europe is likely to keep up, if not increase, military spending in response to
the ongoing conflict. But lack of resolution, and potential for escalation, are likely tokeep sentiment cautious. Although our central scenario does not involve the US
halting aid to Ukraine, it remains a remote probability. If it is realised, it may result in a
downward adjustment to our Eurozone growth forecast. It could also lead to ourEurozone inflation forecasts being revised higher, with spillover to the zone’s trade
partners in particular.
Central bank policy errors: Although the BOJ withdrew unconventional easingsmoothly and the Swiss National Bank initiated the OECD rate cut cycle with little
impact, there remains some risk. This risk is particularly relevant at pivot points incentral bank policy, where market reactions to decisions—be it rate cuts/hikes or
prolonged inaction—could be potentially unfavourable. Even though most forecasters
do not hold either risk as their central scenario, a Bloomberg survey shows them seeing
a higher impact risk from the ECB cutting rates too soon rather than waiting too long.
There remains a similar risk that US markets may react poorly to any Fed rate cut (orlack thereof) should economic data unexpectedly weaken. This might happen in
anticipation of Fed rate cuts, or even after the first rate cut. In such a case, the market
may come to the conclusion that the Fed kept rates on hold for too long and depended
too heavily on financial conditions to supply the liquidity it could not provide.
However, this is not our central scenario.

Investment strategy conclusion: continue to see opportunities in the extensionof the current growth cycle
As we noted in the Equities section above, our view is that the current US-led global growth cycle has further to run.
So long as growth remains above expected in the US, external demand elsewhere (even in the lagging Eurozone) islikely to be buoyed, and economies in which domestic demand is slowly picking up (such as in Japan) or recoveringfrom a slump (such as in China) have some additional time wherein to build a broader base of GDP growth. We expect
the steady stream of investment in the tech sector to generate a more diverse range of opportunities for sectors thatmight be at the forefront of harnessing the productivity benefits of new technologies such as AI. This will likely boost
growth. Although we see central banks responding to stronger-than-expected growth by limiting policy stimulus, wehave observed that financial conditions still remain extremely accommodative despite rate hikes from the Fed, the
ECB, and more recently, the BOJ. We do not expect these conditions to last forever. However, we also see little reason
to turn risk-averse, given ample evidence of persistent risk tolerance across global markets. Nonetheless, highliquidity conditions and low volatilities mean that unexpected events—either policy moves or unforeseen shocks togrowth—may take markets by surprise. As such, we believe that it is worthwhile maintaining a well-diversified
portfolio that includes currently out-of-favour defensive sectors and inflation-protected securities, in addition to an
approach to incorporate longer-dated bonds as yields rise gradually toward the end of our investment horizon.

YOUR GOALS, OUR COMMITMENT.

6

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7GLOBAL INVESTMENT COMMITTEE’S OUTLOOK

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8