Standout economies in a world of diverging growth trajectories

• We expect the US economy to continue to remain resilient, and we are optimistic on its continued leadership in the technology and semiconductor sectors.

• Export-oriented Asian economies like South Korea, Taiwan, Singapore and Malaysia would benefit from the rebound in global semiconductor demand.

• On the other hand, Europe faces slowing economic growth and longer-term structural issues. 

• We continue to hold the stance that China’s economy would struggle, with consumer confidence remaining low and a struggling real estate sector weighing on its growth.

As we close off 2023, some economies have held up better than expected, while others have underperformed. Heading into 2024, we continue to see divergence amongst the performance of various economies. Economies that we expect to perform well are underpinned by two broad themes - an upswing in global semiconductor demand and growing momentum in the technology sector backed by artificial intelligence (AI).

Brighter prospects for the US economy in the road ahead

As we head into 2024, we expect the US economy to remain resilient due to various reasons.

First off, recent economic data has held up better than most economists expect, diminishing the likelihood of a broad-based recession. With the labour market remaining tight, consumption remains robust, which bodes well for the US economy since consumption accounts for more than two-thirds of GDP growth.

Next, the US economy today has become less sensitive to rate hikes as compared to the past. On the consumer front, unlike other countries like Australia and Norway where the bulk of mortgages utilises variable rates, 90% of US mortgages have interest rates fixed over long periods. Therefore, even with one of the most aggressive rate hiking campaigns in history, homeowners are largely unaffected as many of them have refinanced at lower interest rates during the pandemic.

On the corporate front, many companies also 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. Furthermore, more than 60% of corporate debt within the next five years carries an investment grade rating, which means that the increase in interest expense should not be significant even with higher interest rates. Therefore, we anticipate that business investment will remain resilient as well. 

Looking into 2024 and beyond, one of the most promising growth drivers of the US economy can be found within the tech sector. We believe that the tech sector, led by the Big Tech giants, is primed for a multi-decade horizon of tremendous growth, on the back of Artificial Intelligence (AI) and continued digitalisation of the global economy. These megatrends would have positive spillover effects to the broader US economy (such as through increased productivity and job creation), as well as the equity market given that the tech sector comprises nearly 30% of the S&P 500 index.

Besides the tech sector, we also expect the semiconductor industry to be one of the key beneficiaries of the abovementioned megatrends, being set on a path of massive structural growth with the increase in demand for chips overtime. 

Overall, it also helps that the US economy is highly diversified, lessening the impact a shock in one sector has on the overall economy. With recent economic data surprising to the upside, as well as the combination of robust consumption and strong private domestic investment, we think that the US is unlikely to experience a broad-based recession, but rather a rolling recession where different sectors experience a downturn on different occasions, just like the earnings recession within the tech sector which has already shown signs of recovery.

On a valuation standpoint, while US equities on aggregate look relatively unattractive after the recent surge, there are still opportunities in areas such as the aforementioned technology and semiconductor sectors, which has enormous earnings growth potential and room for multiple expansion. Beyond which, in line with our expectation that interest rates are going to stay higher for longer, investors should also keep an eye out for quality stocks, which are likely to do well not only in a slowing growth environment, but also across the longer term.

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Asian economies that are export-oriented would benefit from an upswing in global semiconductor demand

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, and even Singapore and Malaysia.

South Korea and Taiwan

South Korea has already seen an acceleration in exports growth in recent months on the back of a rebound in semiconductor demand. With exports contributing almost 40% to total GDP, a strong rebound in exports growth creates optimism for the country’s economic outlook. Furthermore, a recovery in global semiconductor demand also brightens the prospects of established companies like Samsung and SK Hynix, which are powerhouses particularly in the DRAM market, commanding a combined market share of over 70% globally.

Meanwhile, Taiwan serves as the epicentre for worldwide semiconductor manufacturing where revenues from the semiconductor sector contributes 15% of GDP. It also accounts for more than 60% of global semiconductor production and over 90% of the most advanced ones. Companies like Taiwan Semiconductor Manufacturing Corporation, the largest semiconductor manufacturer in the world, would benefit tremendously from the rebound and growth in the semiconductor sector as they are able to produce chips faster and more accurately than any rival, due to higher efficiency and highly skilled labour. 

Singapore and Malaysia

Singapore and Malaysia, both of which play a significant role in the downstream semiconductor supply chain, would also be amongst the beneficiaries. This is particularly true for Singapore, where a significant portion of its economic growth stems from its exports, with a notable focus on electronics. This underscores the importance of closely examining its manufacturing sector, particularly the semiconductor industry. As demand for semiconductors increases due to digitalisation, we expect higher manufacturing output in Singapore, which would in turn lead to greater electronics exports, ultimately leading to stronger economic growth for the country.

Furthermore, known for its political stability, prime geographical location and bilingual population, Singapore is a key bridge between the East and the West. Another driver is the China-Plus-One strategy adopted by companies to promote greater geographical supply chain diversification beyond China.

This can be seen as global semiconductor giants like Taiwan Semiconductor Manufacturing Company Limited’s affiliate, Vanguard International Semiconductor Corporation, and GlobalFoundries, are actively pursuing expansions plans within Singapore, reinforcing the nation’s success in capitalising on the semiconductor industry’s growth.

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