Jing Shun: The Fed's rate cut is imminent, taking defensive measures is a wise move.

"In this round of interest rate cuts, Zhao Yaoting, the Asia-Pacific market strategist of Invesco, stated that he leans more towards a defensive stance and is overweight in fixed income rather than stocks. He mentioned that by observing past interest rate cut cycles, he researches other assets that may perform well during a Fed interest rate cutting cycle. In terms of stocks, value and defensive assets, such as healthcare and consumer staples, may perform well, similar to previous interest rate cut cycles. He believes that the bear market in technology stocks may continue until further evidence proves the productivity gains brought by artificial intelligence. Recent economic data from the US and China shows that both economies are heading towards weakness - therefore, a defensive approach and reducing cyclical assets should be considered. Although the weakening growth of the world's largest economy may offset the benefits of loose policies, it seems that emerging markets and international assets tend to benefit from the Fed's interest rate cutting cycle. In other words, in terms of stocks, Zhao Yaoting believes that similar to previous interest rate cut cycles, defensive stocks such as value stocks, healthcare, and consumer staples are likely to perform well. The recent market volatility reflects investor concerns about whether the Fed's first interest rate cut to prevent an economic downturn is too small or too late. Although it is believed that the Fed will cut interest rates next week, the continuously deteriorating labor market data may give the Fed the opportunity to cut interest rates by more than 25 basis points next week. However, he believes that the likelihood of a rate cut of more than 25 basis points next week is low, as significantly reducing interest rates during the US election period would lead to market accusations of the Fed attempting to influence the election results and falling behind in rate cuts which should have been done earlier. Zhao Yaoting believes that despite experiencing an aggressive tightening cycle, the US will be able to avoid an economic downturn. Reference to the interest rate cut cycles from 1995 to 1996 The last time the Fed was able to raise rates and avoid an economic downturn was during the tightening cycle of 1995. Although history does not always repeat itself, there are usually rhymes, so lessons can be learned by studying what happened in the market during the Fed interest rate cut in 1996. Six months after the Fed began to cut interest rates on July 6, 1995, the S&P 500 index rose by 11.32%. Value stocks performed slightly better than growth stocks. The healthcare industry performed the best. In the six months after the Fed started cutting interest rates, international stocks performed slightly lower than US stocks, and bonds recorded a solid increase. Overall, the returns in the following six months were more moderate. This may be attributed to the fact that the loose cycle was very short-lived, with a small rate cut of only 75 basis points. Asset categories performance in the first and second six months after the Fed began its easing policy from 1995 to 1996 Data source: Bloomberg, as of September 3, 2024. The current trading price of the US stock market is higher than its historical valuation average, which may be due to the anticipation of the upcoming interest rate cut cycle, so he believes that the stock market will not see a significant increase similar to the 1996 interest rate cut cycle. For stock investors, it is wise to take a more defensive stock deployment. Similar to the 1995 cycle, in this round of loose cycle, defensive stocks such as healthcare and value stocks are expected to outperform growth stocks. Although the strong earnings of the largest artificial intelligence chip manufacturer failed to boost the market, the enthusiasm for artificial intelligence seems to have stalled. The market is likely to be cautious about artificial intelligence, especially in terms of whether it can achieve productivity breakthroughs. While the Fed's rate cut is expected to ease market tensions and should boost local currencies and risk assets in emerging markets, the positive effects may be offset by the weakening economic growth in China and the US. Overall, despite maintaining an optimistic view, it is expected that the US economy will slow down in the coming quarters. Although the US economy is cooling off, other major economies have not taken over the growth baton. The upcoming interest rate cut cycle in the US is likely to be interrupted due to anti-inflation forces and weak growth. Continuous rate cuts, moderate energy prices, and a weaker dollar should help prevent the US economy from falling into recession. However, policy uncertainties may exacerbate, especially before the US presidential election, which could mean companies delaying capital spending and investment. In this environment, he continues to believe that taking a defensive deployment is a wise move."