Summary

• The US economic activities have been seeing a decent recovery since the Covid- 19 period despite the elevated interest rate environment as well as heightened inflationary pressure environment; the US GDP grew 5.2% QoQ in 3Q23.

• Based on the recent FOMC meeting, the Fed is likely to maintain the interest rate at least for the near term and expecting to have 3 cuts by 2024. This should provide upside potential towards the global stock market overall.

• Given this scenario, we expect there will be opportunities in the US by exploring the ETFs that are listed on the US exchange.

Economic Review

US GDP

• The 3Q23 US GDP increased at a faster pace of 5.2% QoQ, up from the initial estimate of 4.9%, while economists predicted a 5% number. The number was revised upwards on the business investment and government spending. However, the consumer spending came in at 3.6% as compared to the initial figure of 4.0%.

• Despite the downward revision in consumer spending, it remained robust underpinned by a flurry of travel and events throughout summer holidays and the momentum could sustain towards year-end amid the festive season.

• Do note that the US shoppers spent a record USD12.4bn on Cyber Monday, up 9.6% from a year ago, but the Black Friday sales were slightly disappointing.

Inflation data

• The CPI data has peaked at 9.1% YoY in Jun-2022 and continued to decline 3.1% YoY in November. Meanwhile, the PPI data has declined from 11.7% YoY in Mar 2022 to 0.9% YoY for the month of November. The Fed has been able to tackle the inflationary pressure with increasing the interest rates.

• Another metric that the Fed will be monitoring will be the personal consumption expenditures price index, which was revised down to a 2.8% annual rate in the 3Q. Excluding food and energy, the number was marked lower to 2.3%.

• The Federal Reserve has kept the benchmark interest rates unchanged in the recent December FOMC meeting at 5.25-5.5%. Meanwhile, the 10-year US Treasury yield surged above 5% briefly in late October for the first time in 16 years before easing in the past 6 weeks.

• To determine the monetary policies going forward, the Fed will rely on the US GDP and inflation data, coupled with jobs data. Should the CPI continue to stay elevated, which indicates the inflationary pressure, it may warrant tighter monetary policy going forward.

• At this current moment, we opine that the Fed will maintain the interest rate at this elevated levels given the GDP numbers were resilient. Meanwhile, the inflation has declined it could hit the Fed’s inflation target at 2% by end-2024.

US jobs data & unemployment rate

• In November, the US job grew steadily with addition of 199k jobs vs. estimates of 180k, while the unemployment rate declined to 3.7%. Despite the elevated interest rate environment, the jobs data continue to be resilient, which the market could be looking at avoiding the recession concerns and may anticipate a soft landing approach to the economy.

US Outlook

• We expect the world largest economy to grow, premised on the following few factors:-

• Technological Innovations: The ongoing innovations and advancement in the AI space will provide more opportunities and poised to revolutionise in various industries. We expect this may boost productivity and creating new markets and should drive economic growth going forward.

• Global Trade: Despite ongoing trade war since Jan-2018 between the US and China, the US still rely on products imported from China, albeit at a softer pace in 2023 as compared to 2021-2022. We believe the world is interconnected and the globalisation effect should create opportunities for businesses.

• However, the downside risk towards the economy will include (i) a potential government shutdown, (ii) the debt ceiling discussion by 2025 and (iii) the threat of a wider war in the Middle East may dampen the recovery momentum. Also, the Bank Term Funding Programme will end 1st quarter next year, and it may put some pressure towards the banking sector in our view.

ETF Selections

• Based on the current environment, we think investors are advised to capture the overall economy through passive investment in Exchange Traded Funds (ETF).

• Given that we still believe that the companies in the US will continue to grow over time and we advocate investors to invest on a long term basis in these corporations within the Dow Jones, S&P500, Nasdaq and Russell Top 200 growth stocks. Do note that the members within the indices will be replaced by better companies periodically to reflect the overall market and this measure will provide investors the most up to date outperforming corporations at any point of time.

ETF selections for clients with aggressive and balance risk profiles

• We have screened through the ETF list from the Bloomberg terminal and summarized a list of ETF based on the (i) annualised 1-year, 3-year, 5-year, and 10- year returns, (ii) expense ratio, and (iii) dividend yield.

• Some of the important criteria to note will be the overall 3-year, 5-year, 10-year annualised returns must be above 7%. Given it is under the asset class of Equity, the max drawdown could range around 32-37% the past 5 years.

ETF selections for clients with conservative risk profile

• For the clients with conservative risk profile, we suggest to browse through the list of ETF with minimal max drawdown in order to provide protection to its capital and comfort to its investment journey.

• Some of the important requirements that we used to filter these ETFs from Bloomberg include (i) max drawdown of below 4%, and dividend yield of more than 4%, while the annualised return may range around 1-5% over the past 10 years.

Source: Mplus Research - 15 Dec 2023