US Financials

We retain US Financials as one of our Top Ideas. This boils down to higher interest rates boosting net interest margins, while bank earnings remain healthy overall. Long-term fundamentals remain strong as banking remains a core business with a high barrier to entry. It would take time for digital banks to build up their presence and compete with brick-and-mortar incumbents.

While clear challenges remain in the near-term, such as rising loan-loss provisions in preparation for a recession and lower investment banking fees amid an uncertain economic backdrop, these are short-term headwinds. If the potential recession proves to be short and shallow, loan-loss provisions will also be marked lower sometime in 2023, which should then provide a tailwind for bank stocks.

Furthermore, if interest rates remain high but the yield curve inversion abates, the combination of lower front-end funding costs and higher back-end lending revenues will boost bank earnings.

US Financials remain relatively attractive compared to the broader S&P 500 Index. The sector will continue to benefit from a high interest rate environment even if loan growth slows. Risks include recessionary concerns and rising competition from alternative payment platforms putting pressure on traditional banking revenues.

Asia/China

Asian stocks could pick up momentum as economic reopening continues to play out and as economies such as China adopt supportive policies to boost economic growth. Recent easing of pandemic policies and fresh stimulus for the Property sector were also welcomed by investors.

While Asian markets are not immune to recession risk in Developed Markets, they have become less reliant on export demand from Developed Markets. The growing Asian middle class is driving global consumer trends and spending, creating prospects for domestic and foreign companies to capitalise on. Furthermore, structural drivers such as urbanisation and digitalisation continue to be key drivers for sustainable domestic consumption. This ensures that Asia’s growth will become less dependent on Developed Market economic growth.

Within Asia and aside from market drivers, Chinese stocks offer compelling opportunities given their attractive valuations. Much of the negative news has likely been priced in, and earnings growth expectations have been trending downward. At such a low level, we believe that expectations can be easily surpassed, which would deliver an upside surprise to the market.

Valuations for Asia ex-Japan remain relatively attractive compared to historical averages. Economic reopening and normalisation of activity continue to have a positive effect on the region’s recovery. A slowdown in Developed Markets, on the other hand, may impact Asian businesses that rely on export revenue.

Valuations for Chinese equities are attractive compared to historical averages. Supportive policies and the COVID reopening may also boost investor confidence in the China market. A rough economic transition could compound current difficulties and risks, slowing China's economic growth.

Global Healthcare

We continue to see opportunities within the Global Healthcare sector as we enter the third year of the COVID-19 pandemic. We believe that this industry has both a defensive and long-term growth profile, with inelastic demand and compelling long-term structural drivers.

Pharmaceutical revenue is less affected by the economic cycle than that of other sectors, making it one of the most defensive industries. In a slow growth environment, we expect pharmaceutical stocks to hold up better compared to other sectors.

On top of its defensive characteristic, the Global Healthcare sector also benefits from structural tailwinds such as an ageing global population, which gives rise to the need for healthcare services. The pandemic has also accelerated digital transformation within the healthcare industry. We see long-term structural growth in themes such as health tech, which enables remote healthcare services at reduced costs.

Global Healthcare valuations are at a discount compared to broader global equities, while the sector’s earnings growth prospects remain strong. The sector also demonstrates defensive characteristics, such as lower volatility. US drug pricing and policy dynamics remain risks, although these may diminish over time with more clarity.