Inflation may rise again, but bet on areas like AI to yield long-term returns: Bank of Singapore

SINGAPORE – Key events such as a rate cut by the US Federal Reserve and the US presidential election in November will drive markets in the second half of 2024, but investors should start tactically looking at emerging trends to guide their investment decisions beyond the year, Bank of Singapore (BOS) experts said.

With inflation easing and growth prospects improving,

the Fed is likely to cut rates in September and December,

BOS chief economist Mansoor Mohi-uddin said at the bank’s mid-year investment summit. A lower interest rate environment should fuel appetites for riskier investments such as stocks as well as gold, he added.

However, investors should also expect heightened uncertainty in the weeks leading to the US election, which could see US Treasury yields and the US dollar rise alongside greater market risk and volatility, Mr Mohi-uddin said.

Investors should also start taking heed of the emerging trends that are likely to shape the world going forward, and re-examine any preconceptions about how they plan to allocate their capital to maximise returns, said BOS global chief investment officer Jean Chia.

BOS has identified several “supertrends” that will shape global markets in the next five years.

One is the changing relationship between some of the world’s biggest economies, which is shifting from collaboration to competition.

Following Russia’s invasion of Ukraine, rising populism and geopolitical tensions between the US and China, governments have been forced to increase their spending on defence as well as healthcare and energy. They are also redrawing supply chains and moving production back or closer to home. Regardless of who wins the election, the US is likely to move the manufacturing of semiconductors back home and restrict countries like China and Russia from access to chip technologies.

“All this will drive long-term inflation and interest rates higher,” said Mr Mohi-uddin.

That will keep 10-year US Treasury yields at around 4 per cent for the rest of the decade, and investors more selective of equities, BOS forecasts. It sees stocks in sectors such as technology, healthcare, food and commodities benefiting more than other sectors.

Investors should also invest in countries that will be less impacted by the changing world order.

The US, for example, is likely to continue growing due to its strong domestic economy, whereas China’s growth could be stymied by factors such as foreign debt, trade disputes and investors moving production out of the country, BOS said. It noted that emerging economies with large domestic economies, such as Indonesia and Vietnam, mineral-rich countries such as Canada, Australia and some in the Middle East will also benefit.

Another trend is the expanding role of artificial intelligence (AI) across the economy.

BOS chief investment strategist Eli Lee noted that the rise in AI investments will lead to innovations in mainstream areas such as healthcare. For example, AI can be used to help identify compounds for new drugs and accelerate their development.

Responding to a snap poll at the summit, the majority of those in the 600-strong audience agreed that AI will have the greatest impact on the investment landscape in the next five years.

BOS sees capital expenditure on AI semiconductors by chipmakers continuing and noted that AI chipmakers such as Nvidia and Advanced Micro Devices have already revealed roadmaps for product development over the next few years.

The bank also sees alternatives for AI semiconductors emerging, and greater demand for data centres to support AI workloads, as well as the chips that power such infrastructure.

Investors who can identify and position their portfolios with investments in successful AI enablers and, in the longer term, AI providers and beneficiaries, stand to gain good returns, said Ms Fabiana Fedeli, chief investment officer at M&G Investments, who spoke at the BOS summit.

Correction note: An earlier version of the story said the Fed is expected to raise rates, when they are expected to cut them. The story has been amended to reflect this.