This March brought a steady rhythm to the market, aligning closely with our predictions at Polynesia Wealth. We saw affirmative signals from the Fed on solid economic growth which boosted investor confidence, exactly as we expected. The performance across various key markets such as MSCI USA, Taiwan, Germany, France, and Japan not only met but exceeded our optimistic forecasts, all marking new highs.
In the realm of currency, the US Dollar showed a modest increase, while the Euro held steady. The Japanese Yen and Swiss Franc, however, faced declines, the latter significantly due to a surprise rate cut by the Swiss central bank. The commodity sector also showed vitality, particularly with rises in gold and copper prices, although other commodities had a mixed month.
In this article, I would like to share our perspective on the economic landscape and end with our insights into potential macro scenarios, their probable impacts on market trends, and our strategic investment reasoning.
US Economy: A Beacon of Stability and GrowthÂ
March’s economic indicators have been reassuring. With nonfarm payrolls and retail sales both showing healthy increases, the US economic framework remains robust. The end of March also saw the Fed maintaining its rate cut trajectory while projecting a promising economic outlook through 2026. This setup suggests not just a soft landing but a scenario better than anticipated—a combination of steady growth and supportive monetary policy.
Chart explanation: This chart displays the stock market capitalization of major countries/exchanges worldwide, measured in US dollars. Higher total market values correlate with a greater weight in the MSCI ACWI index.
We are cautiously optimistic about a potential reduction to two rate cuts by June and expect an announcement to slow down balance sheet reductions around mid-year. Given these factors, we remain confident that the US will continue to demonstrate resilience, providing a stable backdrop for our investment strategies.
Global Economic Highlights: Strength and Stability Across the Board
Taiwan and Japan have shown impressive resilience, with rate hikes that are unlikely to derail their markets. Europe and China, while still consolidating, are past the worst of their economic downturns. Notably, Europe is seeing a rapid decrease in inflation, setting a favorable stage for potential rate cuts, with Switzerland already making a move.
Chart explanation: Why is this chart important?
Market expectations heavily influence sentiment, with 'liquidity' and 'sentiment' being key market dynamics. Expectations are central to driving sentiment.
How to read this chart?
The MacroMicro Economic Expectations Index aggregates GDP forecasts from institutions like the IMF and World Bank. An increase in the index suggests a positive economic outlook.
Observing the chart:
Normal global growth is around 3%. A fall below 2% signals a likely global recession.
Fluctuations in the index track short-term economic changes, indicating when economic downturns might be reversing.
China’s recovery is also gaining traction, demonstrated by stable growth in industrial output and retail sales. This indicates that China is poised to play a supportive role in the global economic landscape rather than being a point of concern.
Strategic Market Outlook and AllocationÂ
Our strategy is straightforward—map out potential scenarios and align our investment strategies accordingly. Our analysis suggests two probable scenarios for the coming months: one where AI-driven industries lead a strong recovery, allowing for mid-year rate cuts, and another where a balanced recovery across sectors delays these cuts. Neither scenario suggests a negative impact on the ongoing bullish trends in the stock market.
Interestingly, bond markets could benefit differently depending on the scenario. A scenario of rate cuts could enhance returns on corporate bonds, while a balanced economic scenario would sustain higher interest rates beneficial for bond investors.
In the currency realm, the dollar is likely to see some fluctuation, but within a manageable range.
Looking Ahead: Flexible Strategies for Dynamic MarketsÂ
While we remain positive about the stock market, particularly in tech and domestic demand driven regions, it's crucial to stay adaptable. For example, rising oil prices could reintroduce inflation concerns, suggesting a need for close monitoring and potentially adjusting our strategies outside the typical scenarios.
Chart explanation: The MM Global Recession Probability indicator, using data on consumption, employment, manufacturing, finance, and raw materials, estimates monthly economic conditions with 50% as a baseline. Readings consistently above 50% signal a high likelihood of a global recession, similar to those in 2000 and 2008. For example, increased recession risks in 2011 and 2015 were linked to regional crises in Europe and emerging markets, which minimally impacted the U.S. economy. Updated monthly on the second Monday, this indicator adjusts based on new or revised data and evaluates the effectiveness of its variables to reflect current business cycles and financial environments.
At Polynesia Wealth, we understand that while the future isn’t set in stone, a well-grounded analysis of data and trends allows us to optimize our strategies, capitalize on opportunities, and minimize risks. We strive to keep our investments data-driven, allowing us to adapt and refine our approaches as necessary.
Thank you for trusting us with your investments, and I look forward to navigating these promising markets together.
Best regards,
Dorian Chin
Source: Charts from MacroMicro