- Optimistic prospects for AI have helped Taiwan’s stock market rise in the first half of 2024, making it the best-performing market in Asia-Pacific so far this year.
- Thailand and Indonesia’s stock markets were the worst performing in the region, falling nearly 8% and 3% respectively in the first half of the year.
Optimistic prospects for artificial intelligence have helped Taiwan’s stock market rally in early 2024, making it the best-performing market in Asia-Pacific so far this year.
The Taiwan-weighted index is up 28% so far this year, led by stocks in the AI value chain.
Major player Taiwan Semiconductor Manufacturing Co. (TSMC) rose 63% in the first half of this year, while rival Hon Hai Precision Industry Co. rose 105% in the same period.
“Global market performance this year has been primarily driven by the themes of artificial intelligence and central bank policy, and we expect this trend to continue,” Rahul Ghosh, global equity portfolio specialist at asset management firm T. Rowe Price, said in the firm’s investment outlook.
The potential and scale of the AI investment cycle continues to drive economic activity globally, and the impact of AI investment is spreading to sectors such as industry, materials and public works, he said.
Japan’s benchmark stock index, the Nikkei, repeatedly hit record highs earlier this year, making it the second-highest performing index in Asia. It’s up about 18% in the first half of the year.
The Nikkei Stock Average hit a 34-year high in February, surpassing the all-time high of $38,915.87 recorded on December 29, 1989.
The index then surged above the psychological threshold of 40,000, eventually hitting an all-time high of 40,888.43 on March 22.
According to analysts who spoke to CNBC, Taiwan may lead the Asian market, but Japan is likely to become the dominant market in the future.
Ghosh said improving corporate governance standards continue to have a visible and significant impact on company performance in Japan, the world’s fourth-largest economy.
Additionally, Ben Powell, chief investment strategist for Asia Pacific at BlackRock Investment Institute, noted in a June 14 report that the Bank of Japan is increasingly confident that it will achieve its inflation target and therefore normalize monetary policy “gradually and cautiously.”
Powell said the macroeconomic environment in Japan is favorable for risk assets: “We remain overweight Japanese equities given strong corporate reform momentum, favorable earnings and still-negative real interest rates.”
Most Asian markets have been in positive territory so far this year, but three stock markets – Thailand, Indonesia and the Philippines – have fallen into negative territory.
Thailand’s SET index fell 8 percent in the first half, making it the region’s worst-performing index, while the Jakarta Composite Index fell 2.88 percent and the Philippine Stock Exchange Index fell about 0.6 percent in the same period.
Focus on the Federal Reserve
Most Asian central banks are closely watching the Federal Reserve’s next move as they usually decide monetary policy based on expected moves from the U.S. central bank.
The Federal Reserve has signaled it plans to cut interest rates multiple times this year, leading up to the end of 2023.
But the latest “dot plot,” released at the Fed’s May meeting, projected just one 25-basis-point rate cut for the remainder of 2024. This is a stark difference from a chart released in late March, when the Fed was signaling a 75-basis-point rate cut in 2024.
The dot plot is a visual representation of each FOMC member’s interest rate forecast for the bank’s short-term interest rate at a specific point in the future.
However, the central bank has outlined a more aggressive path to tightening monetary policy in 2025, increasing the number of expected rate cuts to four by 25 basis points each.
Expectations of rate cuts have been repeatedly postponed as inflation has held up better than expected, and rising employment and wage growth in the U.S. has also strengthened the view that the Fed does not need to cut rates.
The question now is, when will the first rate cut come?
According to the CME FedWatch tool, 61% of traders expect the Fed to cut interest rates by 25 basis points at its September meeting.
However, Minneapolis Fed President Neel Kashkari said on June 16 that it was a “reasonable expectation” that the Fed would cut interest rates once this year but would wait until December to do so.
Kashkari’s views were echoed by Ken Orchard, head of international fixed income at asset management firm T. Rowe Price.
“We still expect the Fed to cut rates by 25 basis points at its December policy meeting after the November election, with the possibility of one more cut in the summer.”
But he predicted central banks would cut interest rates less in 2025 than the dot plot suggests, calling the outlook for 2025 “uncertainer” than this year.
“One or two rate cuts next year seems more realistic,” Orchard said, warning that the Fed could also raise borrowing costs next year.
“There is a risk that the Fed’s insurance cuts could worsen inflation and increase the likelihood of a return to rate hikes in 2025.”
Homin Lee, senior macro strategist at Swiss private bank Lombard Odier, was more optimistic, telling CNBC that his base case was for two rate cuts in the second half of 2024.
That’s one fewer than the three rate cuts the bank predicted in its May 9 outlook report, before the Fed revised its dot plot.
“However, we remain confident that rate cuts will begin in September given the Fed’s ‘asymmetric’ stance – i.e. the bar for new tightening is very high but the bar for starting to cut rates is much lower,” Lee added.
