Dudley Sees Case for Half-point Fed Rate Cut

Four of the five best-performing Asian equity benchmarks this month are from the region, with Thailand leading the pack. The buying frenzy has put foreign inflows on track for a fifth consecutive week while the MSCI Asean Index is now trading near its highest level since April 2022.

Fuelling enthusiasm about markets from Indonesia to Malaysia is the relatively light positioning by foreign investors, supportive local policies, as well as attractive valuations. These advantages have set the stage for the region to capitalise on global investors’ shift away from larger peers like China, particularly given economic woes deepening in the world’s No 2 economy.

“Asean has been ignored for so long,” said John Foo, the founder of Valverde Investment Partners Pte Ltd. “Investors are beginning to wake up to the many alpha opportunities available, from the commodity companies in Indonesia to the stable real estate investment trust market in Singapore to the tech plays in Malaysia, and the export plays in Vietnam and numerous recovery plays in Thailand.”

A key source of bullishness about Southeast Asia is the relatively light positioning in the market by foreign funds, who have room to expand their allocations. Valuations also look attractive, with the MSCI Asean index trading at 13.6 times its 12-month forward earnings estimate. That’s compared to a five-year average of 14.7 times.

Recent positive policy catalysts such as Indonesia’s fiscal easing initiatives and measures in Thailand and Malaysia that favor stock ownership are helping too, according to Kenneth Tang, a portfolio manager at the Nikko AM Shenton Thrift Fund. The countries also benefit strongly from high representation of interest-rate sensitive and high-yield sectors from banks to property developers, he added.

Those factors have boosted Asean’s strength, with the index outperforming the MSCI Asia Pacific Index by about 14 percentage points since the start of July.

Brokerages are taking note. Goldman Sachs Group Inc upgraded Thailand to 'market weight' from 'underweight' this month on expectations that the country’s new state-controlled Vayupak Fund will provide “both sentimental and liquidity support, attracting foreign capital back to the market”, the banks’ strategist Timothy Moe wrote in a note. Last month, Nomura Holdings Ltd upgraded Malaysian and Indonesian stocks.

“If interest rate cuts are here to stay and there’s no recession, this rally can extend towards the end of 2025,” said Chun Hong Lee, a portfolio manager at Principal Asset Management Bhd.

Source: Theedgemarkets

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A wall of debt, a financing crunch and plummeting building values are looming over commercial real estate, menacing investors and banks, but Goldman Sachs Asset Management is a buyer.

“Just because there are some problem properties with very high vacancies and a problem with their cost of capital or the cost of debt — that doesn’t mean that the entire asset class has something wrong with it,” said Lindsay Rosner, the head of multi-sector investing at the firm. “What we have been able to do is find a lot of opportunities in commercial mortgage-backed securities (CMBS).”

Rosner — who describes CMBS as a market that “people were nervous about” — is focused on “very special properties that are super desirable”. It pays to be picky as an across-the-board recovery in offices is unlikely with remote work persisting, she told the Bloomberg Intelligence Credit Edge podcast.

Goldman also sees value in the debt of industrial warehouses used for logistics, and prefers CMBS to corporate bonds, according to Rosner. Despite all the doom and gloom predicting the pandemic would lead to empty buildings and a slew of defaults, commercial property debt has managed to outperform that of investment-grade corporates this year.

“Relative value is really there,” she said, referring to CMBS. “It is a good portion of our portfolio, and we think it generates a decent amount of carry.”

Rosner is generally positive on the outlook for credit markets because “there is still yield”, and while the economy is softening, she sees the odds of a US recession at only about 15% to 20%.

In investment-grade debt, Goldman likes financial-sector issuers, which she said have outperformed on an excess-return basis.

“It’s not just US money-centre banks,” said Rosner, who focuses on public fixed income at Goldman. “There was an opportunity in French banks where there was uncertainty around the French election.”

Goldman is meanwhile steering clear of utility-sector bonds, based on the high cost of the green transition. “That is just going to place them in a different kind of balance sheet posture than we think is advantageous to being a bondholder,” said Rosner.

By ratings bucket, Rosner favours BBB rated companies, which have retained cash and not increased leverage. “Triple Bs are still a part of the market that we really like,” she said.

Rosner prefers shorter-maturity Treasury bonds given the likelihood of curve steepening after the US election.

“Neither candidate is running on a fiscal restraint programme,” Rosner said. “The Treasury curve could really steepen out,” she said, adding that maturities of three- to five-years look most appealing in that scenario.

Source: The edge markets

Fiscal profligacy

General safe haven appeal

Fed rate cuts

Geopolitics and “de-dollarization”

Mexico’s annual inflation slowed roughly in line with expectations in August as a spike in food prices faded, giving the central bank more room to consider another interest rate cut this month.

Consumer prices rose 4.99% from a year earlier, a touch below the 5.06% median estimate from analysts in a Bloomberg survey, the national statistics institute reported on last Monday.

Core inflation, which excludes volatile items such as fuel, eased to 4%, at the top of the bank’s target range of 3% plus or minus one percentage point.

Mexico’s central bank, known as Banxico, is expected to mull its second-straight rate cut at its Sept 26 decision. Food items, including tomatoes, onions, and lemons had caused an inflation spike in recent weeks after a period of drought was followed by heavy rains. Still, that didn’t stop policymakers from lowering borrowing costs in August as economic activity weakened.

“Banxico is on track to lower its policy rate,” Kimberley Sperrfechter, emerging markets economist at Capital Economics, wrote in a research note . She expects borrowing costs to drop by another quarter-point this month, as activity shows signs of weakness and the Federal Reserve is expected to kick off its own easing campaign.

Still, print showed “continued strength in core services inflation,” reflecting “the tightness in the labour market, which is keeping wage growth elevated.”

"Mexico’s non-core prices fell quickly in August as supply shocks faded, while core inflation extended a gradual downtrend. Price gains remained above target, but were in line with central bank forecasts for continued moderation into next year. And with tight monetary conditions, weak growth and increasing economic slack, that’s likely to be enough for most policymakers to support additional interest-rate cuts. Accumulated peso depreciation since April, higher labour costs and persistent high inflation expectations are the main risks for inflation to stay above target over the two-year monetary policy outlook," said Felipe Hernandez, Latin America economist at Bloomberg Economics.

Weather impact

Prices of fruits and vegetables were the main driver of the slightly better-than-expected print, dropping 5.21% on the month. Energy costs, on the other hand, rose 0.48% and services picked up 0.27%. central bank deputy governor Jonathan Heath said in an interview that it was uncertain how soon food price pressure would cool to bring policymakers relief.

“The impact of adverse weather conditions is gradually easing, reducing upward pressures in the non-core component,” said Andres Abadia, chief Latin America economist at Pantheon Macroeconomics.

Headline inflation should cool further to 4.4% by December, as demand remains soft amid tight financial conditions, Abadia said. “The biggest risk in the short-term comes from domestic politics and its impacts to the currency,” he added.

Recent political tensions in the Mexican Congress, where the ruling party and its allies are preparing to pass a Bill that would change the constitution and overhaul the judiciary, has added to uncertainty about the path of the currency and inflation.

The peso has declined nearly 15% year-to-date, one of the worst performances in emerging markets, as government reforms worry investors. A weaker exchange rate risks fanning inflation by making imports more expensive.

Still, Mexico’s economic slowdown could help damp consumer prices, with the central bank in August dialing down its forecast for 2024 gross domestic product growth to 1.5% from 2.4%.

Source: Theedgemarkets