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Market Chat - US Stock markets - Peak of Interest Rate Upcycle and Seeking High Yield Assets

Publish date: Thu, 11 Jan 2024, 10:23 AM
An official blog in I3investor to publish research reports provided by Malacca Securities research team.

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  • We expect the US economy continue to grow post-Covid-19 environment under the elevated interest rate environment and may avert a hard landing on the US economy.
  • Since that the market is pricing at least 3 rate cuts in 2024, this may boost the appetite for high dividend and stable income focus approach asset classes given the bond yield might decline throughout time in 2024.
  • Hence, based on this scenario, we reckon investors to look into ETFs with high yield ranging from 3.0-4.5% for 2024. Nevertheless, do note that there will be a 30% withholding tax for dividends paid out by US companies to Non-US citizens.

US Stock Markets

  • High yield and stable income approach. Follow up on our previous report on the US economy review and outlook, investors may want to look at high yield investments as well as stable income opportunities. We believe we are able to look for some ETFs under this segment to bridge the gap.
  • US GDP still growing. To recap, the US GDP has been continuing the momentum in 3Q23 at 5.2% QoQ, with the help from business investment and government spending. Meanwhile, we expect the consumer spending will stay robust from the recovery activities post-Covid era and due to year-end festive season.
  • Inflation data may have stabilised. Since mid-2022, the CPI and PPI, have been declining from its peak and stabilised on the recent note, with the Fed’s interest rates decisions.
  • The Fed kept the interest rates unchanged. In Dec-2023, the Fed kept the interest rates at 5.25-5.5% and suggested that there might be at least 3 rate cuts in 2024 based on the dot plots from the Fed’s officials. We view that the Fed will stay dovish given the stable US GDP and inflation data. Do note that the Fed’s inflation target is at 2% by end-2024.
  • Jobs data and unemployment rate. In November, the US jobs grew steadily with an addition of 199k jobs, while the unemployment rate declined to 3.7%, suggesting that it might be brushing off the recession concerns and is likely to expect a soft landing to the economy.
  • US Outlook. Since we continue to expect the world largest economy to grow, underpinned by the ongoing technological innovations and the advancement in the AI segment, which is definitely going to provide more opportunities and boost productivity, creating new markets and driving economic growth going forward.
  • Risks. However, some downside risk towards the economy might include (i) resumption of the debt ceiling discussion by 2025, (ii) the ongoing geopolitical tension in the Middle East, Ukraine-Russia as well as the concerns in the Red Sea region. Meanwhile, the banking sector may have some volatility after the lapse of the Bank Term Funding Programme by end-Mar-2024.

ETF Selections

  • Based on this setup, the investors that wish to seize the opportunity within the largest economy with some consistent dividends and passive income could look at the Exchange Traded Funds (ETF) that provide decent dividends or income focus ETFs.
  • We believe companies the US will continue to grow over time and investors should look at it on a long term basis. Hence, it may provide inventors an opportunity to seek for global assets via global ETFs.

ETF selections for clients with balance and conservative 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, (iii) dividend yield and (iv) max drawdown
  • For balance and conservative risk profiles investors, we believe that the dividend yield must be at least above 3.0-4.5%, while the max drawdown could range around 6-30% for the past 3-5 years.

Source: Mplus Research - 11 Jan 2024

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