Rate cut trajectory remains uncertain: Time for investment strategy adjustments?

  • Under economic recovery and slowing inflation, expecting 1-2 Fed rate cuts this year
  • Emphasis on Asian tech, especially Taiwan and South Korea's semiconductor and AI sectors
  • Focus on energy stocks and Asian corporate credits to diversify and mitigate risks

The latest economic indicators showed that US disinflation is slowing as a result of sticky service components, sparking concerns of a resurgence in inflation. BEA Union Investment maintains that it is not unusual if rates stay elevated for a longer period, with the possibility of 1-2 rate cuts this year. As the US economy remains resilient, underscored by strong retail sales and labour market, investors have been dialling back the scope of rate cut expectations, and the change has already been priced in. From an investment strategy perspective, BEA Union Investment continues to prefer a multi-asset approach, with a tilt towards equities, supplemented by Asian credits.

Key themes in the multi-asset strategy

Bolstered by optimism in the US, Asian equities are having a good run. In addition, reasonable valuations and diversification benefits have given the region compelling advantages. As of end April, the P/E ratio of the MSCI AC Asia Pacific Index stood at about 17x, below the 21x of the MSCI AC World index. Opportunities abound throughout the region, providing appealing prospects across a spectrum of sectors. Within our multi-asset investment strategy, we prioritise technology, energy, industrial and dividend stocks as our preferred themes.

Among all spaces, the tech sector remains our top pick. The integration of AI continues to expand ferociously across various domains: from data centres to memory, semiconductors to AI-powered personal computers and smartphones. This exponential growth will subsequently bring about a wealth of investment opportunities as these sub-sectors undergo different cycles, supporting a more sustainable outlook for the AI theme. Among Asia, Taiwan and South Korea emerge as pivotal hubs for tech investment. Market data showed Taiwan accounted for about 68% of the world's advanced semiconductor capacity last year, with the US and South Korea trailing at 12% and 11%, respectively. Taiwan boasts a comprehensive AI value chain, encompassing the design and production of semiconductors as well as server manufacturing. At the same time, South Korea is also home to a plethora of memory chip manufacturers. Looking beyond Asia, American companies are leading the AI race. Companies that draw our attention did not just deliver better-than-expected earnings, but also operate with high margins and ample free cash flow.

Industrial stocks are also on our radar. India is more than tripling its infrastructure investment for the 2025 fiscal year from five years ago, and the country is also attracting considerable interest from foreign investors looking to establish factories for local production. India's structural growth potential is driving increased lending, fueled by mounting home and car sales on a burgeoning middle class and workforce. These positive factors will translate into corporate profitability, benefiting select companies in the fields of industrial, financials, utilities and consumption. Following a comparable trajectory is Indonesia, where we find select financial stocks attractive, in our opinion.

Diversify and hedge risks through Asian corporate credits

With geopolitical tensions on the rise again, all eyes are on the potential escalation of conflict between Iran and Israel. Energy stocks emerge as a good hedge against associated risks. As global attention pivots towards ramping up renewable energy capacities, traditional energy sectors face underinvestment, leading to supply shortages and consequently higher prices. As China's economy shows budding signs of stabilisation, its energy sector presents appealing value opportunities. High entry barriers, reasonable valuations and ample cash flow are reasons we favour Chinese energy producers in addition to their stable dividend payouts.

Alongside energy stocks, we believe that USD-denominated Asian credits can also serve as a hedge against risks and volatilities within a multi-asset portfolio. Notably, South Korean financial and Chinese tech, media and telecommunications (TMT) are among our preferred Investment-Grade bond selections, as we have previously mentioned. This year, the allure of High-Yield bonds is too compelling to overlook, especially within industries backed by strong credit fundamentals and government support, such as India's renewable energy and Indonesia's property sectors.

BEA Union Investment believes, in a dynamic market environment, a multi-asset investment strategy offers an ideal solution by providing diversification across various asset classes in a nimble manner, allowing investors to adeptly navigate the intricacies of today's market conditions while simultaneously fostering capital growth and income generation.