LGT sees ‘soft landing’ for US, likes Japan, India, Europe and Thailand; predicts modest growth for China

Felicia Tan
9-min read
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The bank also expects investors to favour bonds over equities and cash in the first half of 2024.

LGT is upbeat on the prospects of the global economy in 2024.

The performance across most asset classes in 2023 ended on a better-than-expected note with a strong rally seen in bonds and equities, “and everything else” at the end of the year, says Stefan Hofer, managing director and chief investment strategist at LGT Private Banking in Asia.

“And that I think, certainly has improved the mood. People are relatively positive, as a consequence of that,” says Hofer at a briefing to journalists on Jan 18.

Country and sector picks

Moving forward, the strategist says that the bank has not made a huge number of changes, with a clear preference, still, for US, Indian and Japanese equities. LGT is “overweight” on the US, Japan and India, is “neutral” on China and “underweight” on European equities.

The bank has also not changed very much in terms of its sector preferences with technology- and innovation-led sectors still in favour.

One sector that has not been as successful but will still remain in the bank’s portfolio, is the healthcare sector.

“In 2023, healthcare stocks were kind of sideways, [they] didn’t perform extremely well. But healthcare stocks are very defensive,” says Hofer.

“So when the economy slows, and which we think will happen in 2024, then you may see money move into healthcare,” he adds. “There are some exciting themes in healthcare, you will have heard, for example, the weight loss, diabetes related [medication]. Those kind of things are booming and they are generating huge profits. So there are pockets of healthcare, which are very, very exciting.”

That said, the healthcare sector in general, is a more defensive one and is less on profit growth unlike other sectors such as the tech sector, for instance. “But in a world where growth slows down, those kinds of sectors, like healthcare, tend to be good insurance.”

US rate cuts may happen in the middle of the year

Within the US, LGT remains optimistic that the anticipated slowdown in the country’s economy in the 1H2024 will lead to a “soft landing”, avoiding an outright contraction in GDP.

“If this unfolds, the US Federal Reserve (US Fed) would have successfully curbed high inflation without pushing the economy into recession,” says LGT in its Jan 18 note.

“LGT attributes its optimism to the low US unemployment rate, following the sharp recovery as the Covid-19 pandemic ended. While the overall US labour demand is declining, the number of open job positions remains high. Notably, demand for construction-related workers continues to grow,” it adds.

In 2024, LGT expects the US economy to grow about 2% in real terms in 2024, with inflation returning to the 2% target by the 3Q2024.

“Against this backdrop, the US Federal Reserve may start cutting interest rates in the middle of the year,” predicts the bank.

Outlook for Japan still positive

Despite the stagnation seen in the Japanese economy at the end of 2023, with natural disasters and political uncertainties contributing to the country’s economic uncertainties, LGT remains positive on the country for the full year.

“Japanese companies have become more focused on generating shareholder returns as a result of corporate governance reforms. This, coupled with a weakened yen in 2023, contributed to record-high corporate profits. At the same time, there are currently strong signs of rising consumer and asset prices,” says the bank.

“Therefore, LGT expects Bank of Japan to tighten monetary policy in 2024, and the Japanese yen is expected to appreciate against the US dollar,” it adds.

“Japan is an extremely interesting case, because Japan had deflation for 20, 25 years, more or less. Not constantly, but [the country had] a long period of deflation… and now [the country] is experiencing inflation,” says Hofer.

In December 2023, Japan’s core consumer price index (CPI) rose by 2.3% y-o-y, which is “extremely high” by Japanese standards.

“[The] Bank of Japan is under a lot of pressure, because there's higher inflation now in Japan, but the Bank of Japan has negative interest rate policy, and also has a yield curve control and other measures,” he notes. “We think very strongly the Bank of Japan you know, by March, April, will have to move away from negative interest rate policy and start to actually move into positive interest rates.”

That said, he sees that the Japanese central bank is very cautious as the past interest rate increases have caused the economy to slow down.

“We think the Japanese economy is now very different because of this movement from deflation to inflation. Also, Japanese companies are extremely profitable. So the background is very different. And we think that the Bank of Japan will normalize monetary policy you know in the spring of 2024,” he says.

He adds that this difference in direction – with the US and European Central Bank expected to lower rates in 2024, in contrast with the Bank of Japan’s rates increase – will see a “much stronger” Japanese yen.

“We think by the end of 2024, Japanese yen will be 130 against the US dollar, or even stronger. So it's a very interesting moment for the Japanese economy in particular,” he says.

The positivity in Japanese equities already began in June 2023 where the bank recommended its clients to buy Japanese stocks, which was “basically the right call” and worked out very well.

“Under former prime minister Shinzo Abe, there was a lot of corporate governance reform in Japan. [This] made companies become more efficient, making companies become more transparent, improving corporate governance a lot, which also helps them focus on profitability. So therefore in Japan, dividends have gone up, share buybacks have gone up and outside investors are very impressed and like this very much,” he explains.

Coming off the Nikkei’s outperformance in 2023, Hofer expects to see double-digit returns in 2024, although the numbers may not reach the highs seen in 2023.

He also recommends that investors do not hedge their currency exposure to the yen as he believes that the yen will get stronger as the stocks go up at the same time.

India second most preferred market in Asia

The Indian market is the second most preferred market in Asia due mainly to the government’s huge investments in physical infrastructure such as roads, bridges, railways and airports.

In 2024, LGT expects India’s GDP to grow by 6% in real terms due to the robust infrastructure development across the country.

“We think that even though 2023, which again was a very good year for an Indian stocks, not much will change in 2024,” says Hofer.

“International investors are very excited about the India story and huge flows are moving into that country as a result. What we have to say, however, is valuation, like equity valuations in India are expensive. On the flip side, equity valuations in China are extremely cheap,” he adds. That said, he notes that China has a slower growth story while India’s growth story is faster. “So that's why we think there will be more emphasis by international investors on India in 2024, as opposed to anywhere else.”

China to see more modest growth

The Chinese economy is expected to see a more modest growth of around 5% for 2024, slightly lower than its 2023 GDP of 5.2%. This is largely due to the weakness in the country’s housing market, which is tipped to continue till 2025.

“Valuations of Chinese equities are near long-term lows, and investors are poised to re-enter the market in anticipation of material stimulus measures. Pending such and similar developments, China stocks may lag peer markets,” says LGT.

To Hofer, Chinese stocks are “extremely cheap”, although being “underweight” on the country is kind of risky.

“What could happen in 2024 is, let’s say in theory, you get a surprisingly positive policy announcement. If that happens in China, plus the valuations are at rock bottom which is where they are today, plus very light investor positioning, all those factors together… could see very sharp increases in Chinese equities,” he says.

Modest cyclical rebound for Europe expected in 2024

Meanwhile, LGT expects to see a modest cyclical rebound for Europe in 2024 supported by falling interest rates. In 2023, Germany and Italy experienced recessions, which were partly due to the slowdown in export orders from China.

That said, the unemployment rate in the Eurozone remains low as there is a high level of existing manufacturing orders that have accumulated since the end of the Covid-19 pandemic, says the bank.

Thailand and Asean

Within Asean, LGT expects Thailand’s GDP to grow by 3% in 2024 attributed to a gradual rebound in tourism flows and international investments in Thailand’s industrial sector.

“Consumer confidence readings have been increasing, arguably in part due to expectations of a significant fiscal easing (THB560 billion or $20.99 billion) that may materialise this year,” says the bank.

In Asean itself, LGT is “neutral-weighted”.

“We think long term prospects are very, very, very good. There's also been some very important improvements in infrastructure and, and so on, and number of countries. But I think the reality is, the way that international capital markets function is very dominated by US interest rates and factors of that nature,” notes Hofer.

“Now, what we think will happen in 2024, is that the dollar will go gently lower, which should then in turn, help push the currencies of the Philippines, Indonesia, Thailand, and so on, a little bit higher. That will certainly help the assets in those countries.”

“Even in the case of India, which normally has a sort of let's call it a depreciation bias, like in a normal environment, the rupee gently starts to just every year goes down a little bit. 2024 could be different for India, because there's going to be huge capital inflows as outside investors pour their money into India wanting to invest. That could actually cause the rupee, let's say conservatively, to be stable in 2024, which will be a relatively positive but an almost a somewhat unusual outcome,” he adds.

Bonds over equities and cash

On the whole, LGT expects investors to favour bonds over equities and cash in the 1H2024. This is as the yield level of investment-grade US dollar corporate bonds remains high.

“As interest rates begin to fall in the summer, LGT expects international capital to flow back into the stock market, in line with growing confidence in an economic rebound. In terms of potential impact from the upcoming elections in India and the US, LGT does not anticipate any material changes to India’s economic policy, while the US may see tax and policy changes in the summer months,” says the bank.

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