iFAST 2024 Investment Outlook: Your must-read guide to navigating markets in 2024 and beyond

1. The earnings recession in digital economy over. Big tech is set to lead the next phase of growth.

2. Semiconductor demand to rebound strongly. Quarterly sales growth to hit 40% year-on-year by 2Q25.

3. Brighter prospects for selected economies, global recovery will be uneven.

4. Singapore’s GDP to expand by 4% in 2024, led by a recovery in electronics exports.

5. Central banks will struggle to tame inflation. Inflation and interest rates to stay higher for even longer.

6. Turning more positive on equities. Upgrade equities to Neutral from Underweight

7. Fixed Income: Stick to short-duration, investment-grade bonds

8. Equities: Focus on high-quality companies

9. Top picks: Digital economy, semiconductors, New Asian Tigers.

10. Be selective in S-REITs as rates stay higher for longer. Potential downside risks not fully priced in.

11. Neutral on the USD. JPY and KRW to outperform.

2023 has been an eventful year for global markets. Despite the many ups and downs, global equities - gauged by the MSCI AC World Index - managed to deliver gains of 17% year-to-date (total returns in SGD terms as of 30 Nov 2023). Not bad considering investors were still anticipating a recession at the beginning of the year. Fixed income also did relatively well, even though major central banks such as the US Federal Reserve and the European Central Bank continued to hike rates for the most part of this year.

But all that is now in the past. 

With 2023 coming to a close, it is time investors start thinking about how to position their portfolios for the year ahead. This year, we have curated 11 investment themes which we think every investor should pay attention to as we head into 2024 and beyond.

1. The earnings recession in digital economy over. Big tech is set to lead the next phase of growth.

• US equities have had an exceptional year, with the S&P 500 generating a return of 20.6% (total returns in SGD terms as of 30 Nov 2023). Among the various sectors, technology, more specifically Big Tech stocks were responsible for close to 60% of the gains of the S&P 500 index. Following their strong performance, many investors have started to question whether these companies can continue to outperform. The short answer is yes. 

• We believe that the tech sector has already undergone a recession, marked by the surge in layoffs and an earnings slump last year (Figure 1). This year, both profit margins and earnings have started to pick up, a trend that is likely to persist due to the presence of structural tailwinds such as the faster-than-anticipated adoption of Artificial Intelligence (AI). With their deep pockets and vast experience dealing with AI, Big Tech companies are best positioned to harness everything AI has to offer. 

Figure 1: Earnings growth for Big Tech has bottomed and has started to recover 

• Besides AI, these companies also have a solid foothold in existing areas such as cloud computing and advertising. Given their dominant positions and competitive advantages (e.g. strong distribution channels, pricing power etc), these companies have been taking up more market share and are set to entrench their dominance in the years to come.

• Contrary to popular belief, Big Tech firms can still perform well even in a higher for longer interest rate environment due to their robust balance sheets, diversified revenue streams, and strong cash flow generating ability. Their huge cash piles mean they do not need to borrow at the current elevated interest rate levels. On the flipside, they can benefit from higher yields by investing their cash reserves, building up their cash pile even further.  

• Investors seeking exposure to Big Tech companies can consider the Invesco NASDAQ Internet ETF (NASDAQ: PNQI). 

Table 1: EPS projections for Nasdaq CTA Internet Index

Figure 2: Nasdaq CTA Internet Index vs. EPS 

Related Article: The earnings recession is over. Big Tech is set to lead the next phase of growth

2. Semiconductor demand to rebound strongly. Quarterly sales growth to hit 40% YoY by 2Q25.

• The semiconductor industry is once again at a pivotal turning point thanks to the rapid adoption of AI. Just like the PC and mobile revolutions in the past, we expect the AI revolution to bring tremendous opportunities for chipmakers over the next decade. While the technology is still in its early stages, we think that markets have grossly underestimated the impact AI will have on chip demand in the long run.

• We are confident that semiconductor sales growth has the potential to reach as high as 40% by 2Q25, driven by a recovery in the inventory cycle (Figure 3). There are signs of an imminent recovery with monthly semiconductor sales having risen by seven consecutive months already. A low base effect will also result in higher sales growth in the later years.

Figure 3: Chip sales to hit 40% year-on-year growth by 2Q25

• In the longer-term, we expect chipmakers to see a massive structural increase in demand as the world becomes increasingly digitalised, leading to (i) more semiconductor applications and (ii) higher silicon content in them. Massive government subsidies and the ensuing ramp-up of capex will also contribute to higher supply, thus resulting in greater sales. More broadly speaking, this should also benefit markets within the global semiconductor supply chain, such as the US, South Korea, Taiwan, Singapore, and Malaysia.

• We are confident that semiconductors will be one of the best performing sectors over the next decade. With an ever-growing sector such as this, investors should look beyond the near-term headwinds and imagine what the sector will look like five to ten years from now. Those who wish to invest in chipmakers can consider the VanEck Semiconductor ETF (NASDAQ:SMH).

Table 2: Significant earnings rebound expected as the inventory cycle turns

Figure 4: Stronger earnings growth to drive share prices of chipmakers in the long run

Related Article: Chip sales to top 40% year-on-year by 2Q25. Here’s how you can capitalise on this opportunity

3. Brighter prospects for selected economies, global recovery will be uneven.

• We expect the US economy to remain resilient heading into 2024. Recent economic data has held up surprisingly well and the likelihood of a broad-based recession is starting to diminish. Tight labour markets should aid consumption, which accounts for more than two-thirds of GDP growth. The US economy has also become less sensitive to higher interest rates. Unlike much of Europe, 90% of US mortgages have interest rates fixed over long periods. This means that when the Fed tightens, most homeowners tend to be unaffected. 

• On the corporate front, many companies took advantage of the pandemic to refinance their debt at lower rates and for longer durations – resulting in less refinancing needs in the near-term. Most of the corporate debt in the US also carries an investment grade rating, which means that the increase in interest expense should not be significant even with higher interest rates. As such, we anticipate that business investment will remain resilient as well. 

• Besides the US, the imminent recovery of the semiconductor cycle coupled with the structural increase in demand for chips will also have a positive impact on countries within the global semiconductor supply chain, particularly export oriented Asian economies such as South Korea, Taiwan or even Singapore and Malaysia.

• The outlook for Europe on the other hand is not as rosy as the US. Europe suffers from high inflation and weak economic growth. Consumer spending continues to weaken in the face of rising borrowing costs and higher prices while the manufacturing and services sectors remains in contractionary territory. Unlike their US counterparts, European corporates tend to also be more affected by higher interest rates as the majority of corporate borrowings are based on floating rate loans. Lastly, Europe also faces longer term structural issues such as the lack of energy self-sufficiency and low productivity growth. 

• We have taken a negative stance on China since November 2022, which will carry on into 2024. China’s reopening rebound has largely faded. The country faces a host of problems, such as fragile investor confidence, record youth unemployment, and never-ending problems in its property sector. Aside from these, there are also longer-term structural issues to worry about, particularly its embrace of a top-down state-controlled growth model and shifting geopolitics like a deterioration in US-China relations. All in all, we believe that China is in a structural decline, and in the absence of significant reforms, any quick turnaround is unlikely.

4. Singapore’s GDP to expand by 4% in 2024, led by a recovery in electronics exports.

• We project Singapore’s GDP to soar by 4% in 2024, higher than the Ministry of Trade and Industry forecast for growth to come in between 1% and 3%. A significant portion of this growth will likely be powered by exports, mainly electronics. The electronics sector is an integral part of Singapore’s economy, making up 42% of manufacturing output and 22% of all non-oil domestic exports. 

• We expect to see a notable increase in electronics demand, following the ongoing recovery in the semiconductor cycle. Based on our estimates, global chip sales could potentially achieve 40% year-on-year growth by 2Q25, partly due to low base effects and a structural surge in demand as the world becomes increasingly digitalised. Being one of the key players within the global electronics & semiconductor supply chain, we expect Singapore to benefit from this trend. 

• Known for its political stability, highly developed infrastructure and relatively low taxes, Singapore has long established itself as one of the premier business hubs in the region. Furthermore, given its prime geographical location and bilingual population, Singapore is also a bridge between the East and the West. These attributes make Singapore a highly attractive destination for foreign investments, which should serve to bolster its future growth. 

Table 3: STI earnings forecast 

Figure 5: Singapore equities are undervalued 

Table 4: Recommended products for Singapore 

5. Central banks will struggle to tame inflation. Inflation and interest rates to stay higher for even longer.

• As the US economy continues to remain resilient, we believe that inflation may prove stubborn. Investors should brace themselves for an extended period of higher inflation and higher interest rates. We do not expect to see any rate cuts in 2024 and we believe that long-term inflation may settle at 4% given the structural changes to the global economy. Consequently, long-term bond yields should rise as well. 

• Long-term factors such as increased government spending on healthcare, defense, and climate change will push prices up. Deglobalisation is another structural driver of inflation. Globalisation has long acted as a deflationary force by reducing labor and production costs, but this powerful disinflationary force is now in retreat with geopolitical tensions, protectionism, and trade conflicts being a regular occurrence.

• Inflation is hard to tame, and previous high inflationary regimes suggest that inflation across advanced economies has taken an average of more than 10 years to return to 2% once it breaks above 5% (Figure 6). Inflation has also never returned to its target level in a linear downward trend. Instead, it comes in waves with several peaks and troughs. As inflation slows, it will get harder to fight.

• To inflation proof their portfolios, investors can (1) opt for short-duration bonds for fixed income; (2) invest in quality companies and commodity-related stocks for equities.

Figure 6: Inflation has taken an average of 10 years to return to 2% once it breaks above 5%

Table 5: Recommended products to inflation proof your portfolio

Related Article: 2% inflation is unlikely! Here’s how to position for a higher for longer new normal

6. Turning more positive on equities: A pickup in corporate earnings to propel share prices higher 

• We have turned more positive on equities due to our expectation of a pickup in corporate earnings, led by sectors such as the digital economy and semiconductors. As mentioned above in points 1 & 2, we believe that these sectors have already been through a recession last year and are both currently on the path to recovery. 

• At the same time, the earnings downgrade cycle is likely set to turn, driven by the resilience of the US – the largest economy in the world. The US economy has continued to surprise on the upside by delivering better than expected economic data, raising the likelihood of a soft landing. With the economy holding up well, earnings growth for the US will likely normalise, paving the way for more upside for global equities. 

• With that being said, we are not advocating an aggressive “all-in” approach on equities. Equity valuations are still relatively expensive compared to fixed income, as the earnings-bond yield spread remain at one of the lowest levels since 2007. Investors should be selective in their equity exposure, focusing on areas with cheap valuations and strong earnings growth potential. As for fixed income, we reiterate our call for short duration bonds, which still offers appealing yields with minimal duration risk. 

Table 6: Recommended products for equity markets 

7. Fixed Income: Stick to short-duration, investment-grade bonds

• As for fixed income, we continue to reiterate our preference for short duration bonds over long duration bonds. Yields on short duration bonds remain high relative to history. The recent pullback in longer-term yields also makes the case for short duration even more compelling. With sticky inflation and resilient growth in the US, the prospect of a rate cut seems unlikely. We expect the yield curve to normalise, with long-term yields potentially heading higher, supporting the case for short duration bonds. As an alternative to short duration bonds, investors may also consider cash solutions such as the iFAST Auto-Sweep which offers attractive yields at minimal risk. 

• At current levels we think that the yield on longer duration bonds is insufficient to compensate investors with the duration risk they are taking, nor is it consistent with our view of higher for longer interest rates. We look to turn positive on long duration bonds when the treasury curve un-inverts and re-steepens, giving investors a premium to hold longer duration bonds. We believe a good point to add duration would be when the 10-year US treasury yield hits 6%.

• With regards to credit quality, we maintain our preference for investment grade bonds. As interest rates remain elevated, high yield issuers will face greater refinancing risks relative to their investment grade counterparts. From a valuation standpoint, high yield bonds are also unattractive compared to investment grade bonds given their tight spreads and low yield pick-up (Figure 7). 

• For emerging market bonds, we prefer hard currency vis a vis local currency bonds. At 7.6%, emerging market hard currency bonds offer yields that are close to the highest level since 2009. The segment, which has an investment grade rating, also offers a generous yield pickup over emerging market local currency and US treasury bonds of similar duration.

Figure 7: Valuations of high yield bonds remain unattractive compared to investment grade bonds

Table 7: Recommended products for fixed income 

Related Article: iFAST 2024 Global Fixed Income Outlook

8. Equities: Focus on high-quality companies

• As we head towards a slowing growth/higher for longer interest rate environment, the importance of investing in high quality, sustainable business models cannot be understated. High quality companies are defined as those with competitive advantages, durable long-term profitability, robust balance sheets, and high earnings quality. 

• These companies are often the largest in their sector, and they have been consistently increasing their dominance of industry market share over the years. The endurance of these incumbents can be attributed to their competitive advantages, such as strong brand names, massive scale, and high customer switching costs, allowing them to fend off competition from would-be disruptors. 

• Many of them also have massive cash piles, which reduces the need to borrow and the cost of borrowing in a high interest rate environment (Figure 8). Having a huge war chest enables these firms to invest in R&D initiatives that will allow them to innovate and stay ahead of their competitors. Cash also enables firms to make acquisitions that will help them access new markets, expand their customer base, and adapt to market disruptions, further consolidating their positions in an ever-changing competitive landscape.

• Having stakes in high-quality companies is a prudent long-term investment strategy. Regardless of economic conditions, these companies are well-positioned to withstand the test of time and will likely do well in the long run. One convenient way to gain targeted exposure to high-quality companies is via the JPMorgan US Quality Factor ETF (NYSE:JQUA). 

Figure 8: The largest US companies are hoarding lots of cash

9. Top picks: Digital economy, semiconductors, New Asian Tigers.

• Our top sector picks for equities this year includes the digital economy and semiconductors as mentioned above. As for markets, we like the New Asian Tigers, namely Japan, Singapore, and South Korea. We are also optimistic on Taiwan and Malaysia as these markets should benefit from the rebound in the semiconductor industry. Lastly, we like Brazil given its cheap valuations and favourable commodities outlook. 

• Japan’s outlook remains favourable, and Japanese equities are still one of our top picks heading into 2024. The country is finally getting out of deflation, which should result in positive shifts in consumption and investment patterns, helping to spur growth. Change is also on the horizon in terms of corporate governance, with many companies motivated to enhance shareholder returns. Long-term corporate profitability will also be boosted as companies can enhance their capital efficiency through investments. Finally, the normalisation of monetary policy in Japan is also expected to increase the attractiveness of Japanese equities to foreign investors. 

• Within Asia, South Korea is another market we are constructive on. Home to several conglomerates such as Samsung, SK Hynix and LG, the country’s outlook is significantly influenced by the global demand for electronics/semiconductors. Following the uptick in global chip sales, South Korea’s export growth has also returned to positive territory, a trend we expect to persist in 2024. This should ultimately benefit the country given how reliant it is on exports for growth. 

Related Article: The most promising sectors and markets to invest in 2024

10. Be selective in S-REITs as rates stay higher for longer. Potential downside risks not fully priced in.

• 2023 has been a tumultuous year for S-REITs, characterised by falling property values, greater refinancing risks and declining DPUs. Heading into 2024, we see further downside risks due to elevated interest rates, which will likely result in even poorer performances moving forward. We recommend investors to be selective when it comes to S-REITs, staying away from the ones with poor fundamentals. 

• We performed a stress test on the 10 largest S-REITs, analysing the impact on property values if cap rates were to rise by 1%. Our results showed that property values fell by an average of -20%, which effectively increased the leverage ratio of all S-REITs. Next, we analysed the impact higher interest rates would have on S-REIT’s cost of debt and their interest coverage ratios and found that close to half would see their interest coverage ratios fall below the regulatory limit of 2.5X (Figure 9).

Figure 9: Interest coverage ratio after refinancing

• Breaching the regulatory limits may force the REIT to take drastic actions, such as the distressed sales of properties (potentially causing a ripple effect in the market and widespread falling property valuations), equity fundraising (which serves to dilute the equity value of existing shareholders), or even the abandonment of distribution policy.

• We recommend investors to consider S-REITs such as Capitaland Ascendas REIT and Mapletree Industrial Trust, which have a greater buffer against cap rate expansion and would experience a relatively smaller increase in cost of debt after adjusting for the higher refinancing costs. 

Related Article: Be selective in S-REITs as rates stay higher for longer

11. Neutral on the USD. JPY and KRW to outperform.

• With the US economy expected to remain resilient in 2024, the prospect of rate cuts remains slim. The yield curve may normalise through a bear steepener, where longer term treasury yields (e.g. the 10Y treasury yield) could rise to 6%. The USD is also the world’s reserve currency, making up roughly 60% of foreign exchange reserves. By these factors we expect the USD to maintain its resilience. That said, the valuations of the USD appear elevated relative to history. 

• On a relative basis, the USD will likely appreciate against some major currencies, particularly the EUR and CNY as the economic outlook of both their respective markets remains challenging. However, we expect selected currencies, including the JPY and KRW to do well against the USD. The result is a net zero impact, prompting us to take a “Neutral” stance on the USD. 

• The Japanese Yen will likely be one of the top performing currencies in 2024. With wage growth strengthening, Japan is likely to be getting out of its 25-year battle with deflation. This should allow the Bank of Japan to gradually normalise its monetary policy, potentially bringing an end to its yield curve control. From a valuation standpoint Yen weakness has hit extreme levels in 2023, which could support a potential reversion to the mean. 

Table 8: Summary of currency views