Q1 2024 Update from the Asia Trade Floor

Recession or soft landing? Asia Portfolio Manager Stephen Chang discusses PIMCO’s 2024 outlook for China, Japan and emerging Asia, and what it means for investors.

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Text on screen: Jingjing Huang, Credit Product Strategist

Jingjing Huang: Hello, I’m Jingjing Huang, credit product strategist. Welcome to our first quarterly Asia trade floor update for 2024. Joining me today is portfolio manager Stephen Chang.

Text on screen: Stephen Chang, Portfolio Manager, Asia

Stephen Chang: I’m delighted to be back, Jingjing.

Jingjing: Stephen, let’s begin with PIMCO’s recently-published Outlook for the next 6 to 12 months. What can investors expect in 2024?

Stephen: The title of our latest Outlook essay, “Navigating the Descent”, summarizes our thinking well.

Text on screen:

Key takeaways from PIMCO’s latest economic outlook

  • Resilience in 2023 expected to give way to stagnation or mild contraction in 2024
  • Countries with more rate-sensitive markets likely to slow at a faster rate
  • Developed market rate hike cycles likely over; focus is now on timing and pace of cuts

After a resilient 2023, we expect a slowdown or mild contraction in 2024, particularly in rate-sensitive markets, such as Australia and New Zealand in the region.

Inflation is finally easing, after the steepest interest-rate-hiking cycle in decades. Central banks in developed markets are likely at the end of their hiking cycles. That has shifted attention to the timing and pace of eventual rate cuts.

Jingjing: Do central banks historically cut rates ahead of recessions? Are we heading for a recession, or will we avoid one and achieve a so-called “soft landing”?

Stephen: Central banks adjust rates differently, and, as you would expect, tend to cut in much higher magnitude if they’re pretty certain that their economies are in recession.

Text on screen:

PIMCO’s view: Recession risks remain elevated

  • Supply and demand growth expected to be stagnant across developed markets
  • We anticipate rate cuts to begin closer to mid-2024

In our view, recession risks remain elevated. Both supply and demand growth are expected to be stagnant across developed markets in 2024.

We believe developed markets will probably cut rates a little later than the markets are currently pricing, closer to the middle of this year.

Riskier assets such as equities appear priced for an economic soft landing. However, we would hesitate to declare victory over either inflation or recession just yet.

Jingjing: The U.S. Fed has penciled in 3 rate cuts for 2024. What does this mean for the Asian region?

Stephen: With the timing of the Fed’s rate cuts still uncertain, it is likely that emerging Asian markets such as Indonesia, India, Thailand and the Philippines, will hold rates high for longer. This is not only due to inflation risks, but also to ensure local currency stability.

EM currencies tend to benefit from lower U.S. interest rates as this can ease the burden from U.S.-denominated debt, and also enhance the appeal of local investments. EMs finished 2023 on a strong footing, and we continue to see space for some EM Asia currencies to appreciate.

In particular, we see a compelling growth story in India, driven by resilient domestic demand, as well as strong growth in manufacturing and services. Its equity market performance and anticipation for its government bonds to be included in global EM bond indices later this year have also helped the Rupee outperform other Asian currencies.

Jingjing: Keeping on rates: is Japan headed in the opposite direction to other developed markets?

Stephen: Indeed. For over 20 years, the Bank of Japan has pursued largely a zero to negative interest rate policy as part of its efforts to combat deflation and stimulate economic growth.

We expect this to be abolished at the March or April Monetary Policy Meeting, followed by modest policy rate hikes later in the year.

We also expect a gradual and flexible balance sheet reduction to follow. This could lead to higher yields for long-term bonds, as private investors will need to step in to replace the BOJ’s buying.

Jingjing: What about China – what are we watching there?

Stephen: Our baseline growth forecast for China stands at 4.5% to 5% year-on-year for 2024, down from 5.2% in 2023.

Text on screen:

PIMCO’s China outlook

  • Baseline forecast of 4.5% to 5% annual GDP growth for 2024
  • Inflation remains soft
  • One or two small policy rate cuts
  • Government spending continues to be main support for the economy

We expect inflation to remain soft this year due to weak domestic demand and overcapacity.

China’s one-year policy loan rate is now at 2.5%. We think there could be one or two small rate cuts in the first half of this year to lower borrowing costs. Government spending will continue to be the main support for the economy, financed by central and local government bonds.

Jingjing: Do you think fiscal resources will be channelled to help China’s struggling property sector?

Stephen: The government has announced plans to spend on “major” infrastructure projects, as well as roll out supportive measures for the housing market to stimulate demand and ensure the completion of unfinished projects. However, we think these will not be enough to stabilize the property market, and we expect another year of contraction.

Government spending will mainly be allocated to infrastructure investment in new sectors such as AI and the digital and green economies. It will also go towards R&D for manufacturing upgrades, in a bid to climb up the value chain to higher-tech, higher-value products, such as EVs and aerospace components.

Jingjing: So given all we’ve covered, how should investors think about portfolios in the year ahead?

Stephen: The global economy is navigating an uncertain path, and we believe maintaining a focus on liquidity and portfolio flexibility is important to allow us to respond to events as they evolve.

In terms of Asia credit, with the Fed set to stabilize rates, we expect more issuance this year after a rather dry 2023, while this will be supported by reinvestment demand from bond maturities.

In the investment grade space, we see opportunities in some Japanese banks and Australian companies in the transportation and industrial sectors. For high yield, we see value in select Chinese and Indonesian companies.

Jingjing: We covered a lot of ground today. Thank you Stephen for your time. And thank you for joining us. Till next quarter – good bye.

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