US economy and companies have outperformed in the long run, underpinned by a free market
Conclusion
We think current expectations for six interest rate cuts — compared to the Fed’s three — are overly optimistic, if the economy does achieve a soft landing. We still believe that interest rates, especially longer-dated Treasury yields, will stay higher for longer than the market currently expects — and higher than levels that had persisted since the global financial crisis. The end of the era of ultra-low interest rates will likely bring about more uncertainties and risks, perhaps some we do not yet know, to the global financial market and economies.
The US economy may or may not fall into recession, but a slowdown is almost certain. But if there are to be six rounds of rate cuts, then that must mean the economy is in a lot more trouble. And if that is the case, then the market must surely be underpricing the risks to demand, corporate margins and profits.
As such, we maintain our cautious view on stocks. We believe the current risk-reward proposition is unattractive. Bonds will fare comparatively better in the early stages of recession (if there is to be one), and against the backdrop of falling interest rates, as will banking and high-growth tech stocks (in general). That said, the US economy will likely still be one of the stronger-performing developed economies in the world.
China’s GDP growth will not return to levels we are used to seeing in the past. Growth was already slowing well before the pandemic as the country transitions from an export-investment-dependent economy to one that is driven by domestic consumption. Consumer sentiment is comparatively weak, dampened by troubles in its real estate sector — which accounts for a disproportionately high percentage of GDP (up to one-quarter) and household wealth — job market uncertainties and weak social safety net. Unemployment among youth is high. Global trade will slow, made worse by geopolitical tensions and rising protectionism, and that will affect the rest of the world, especially export-oriented economies, including many in Europe.
Growth in the eurozone has pretty much stagnated — its biggest economy, Germany, is in recession — as countries struggle with high energy costs (that will remain higher than they had been before the Russia-Ukraine war), broad-based inflation as well as higher interest rates. The recovery will likely also be tepid this year — and slower than growth in the US — considering the lag effects of rate hikes. Plus, there remain uncertainties with the ongoing war in its backyard.
This slower global economic growth scenario is perhaps best underscored by persistent weakness in oil prices, despite ongoing production cuts by Opec+ (see Chart 7). And rising gold prices suggest, at least in part, investor flight to safety amid heightened uncertainties. Credit risks, particularly in highly leveraged governments and companies, by and large, have yet to surface.
Increasing demand, including by central banks, and prices for gold are likely also due to the weaponisation of the US dollar. For example, some oil trades are now priced in currencies other than the greenback. (The petrodollar has been a cornerstone in the US dollar hegemony for the past 50 years.) It is why we think that longer-dated Treasury yields will not fall by as much as the market expects, even if the Fed cuts the short-term policy rates. In other words, the yield curve will steepen, instead of a broad decline in the cost of borrowing as the market expects. Large foreign buyers such as China are paring their holdings. Although there is still robust demand for “risk-free” treasuries, the private market will be more price-sensitive.
But the real lesson is this (and the main reason we wrote this article): Over time, Corporate America and the US capital markets have outperformed the rest of the world, in terms of resilience and dynamism, driven by innovation and adaptability. Why? It has well-established legal and regulatory framework and robust institutions, including world-renowned educational and research institutions. And despite all attempts to de-dollarise global trade and end the US dollar hegemony, its usage continues to rise (see Chart 8).
Importantly, the US is a free market, in terms of doing business as well as labour and capital flows. As a result, the US economy and stock market have both depth and diversity, which helps buffer the impact of down
turns in any single sector or stock. Case in point: While the economy as a whole avoided recession, there was rolling recession in certain sectors such as housing in 2022 and semiconductors and manufacturing (as consumption shifted from goods to services) in 2023. Its companies are performance-driven, and competitive, where only the best thrive. And this is what Malaysia must emulate — if we want to prosper. We will return to this in greater depth in the near future as we focus more on the economic future of Malaysia.
Because the market is liquid and transparent, stock prices very quickly reflect underlying fundamentals and idiosyncrasies. For instance, while the share price for Pfizer was down by more than 45% for 2023, Eli Lilly and Company was up by more than 57% — both are in the pharmaceutical industry. In other words, the market is efficient, and there will always be winners and losers, even within industries. It also means that if you do not have the inside track or information, or better-than-market-average analyses, then your best bet may simply be to invest in exchange-traded funds (ETFs) for the broad market indices. As the economy grows over time, the benchmark indices (and ETFs) will rise. To quote Warren Buffett, “Never bet against America”. At least, not yet.
The Malaysian Portfolio chalked up another week of gains, rising 1.1% and outperforming the broader market. The top gainers were REDtone Digital Holdings (+4.3%),
DBS Group Holdings (+1.6%) and Frasers Logistics & Commercial Trust (+0.6%), while the sole loser was Malayan Banking (-0.1%). Our acquisition of the Singapore Exchange-listed stocks has been very timely — they have outperformed in recent weeks. And we do apologise for adding SGX stocks into this Malaysian Portfolio, owing to the lack of equivalent opportunities on the Bursa Malaysia. Total portfolio returns now stand at 168.8% since inception. This portfolio is outperforming the benchmark FBM KLCI, which is down 20.1%, by a long, long way.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/ sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.