26 May 2023A potential Fed pause and ‘less bad’ US macroeconomic data are likely to collide with still-poor long-term fundamentals. We…
19 May 2023China’s economic data have underwhelmed lately after a strong start to the year, dragging Asia ex-Japan asset returns. This has also
4 May 2023The US Federal Reserve hinted that it may put on hold the second steepest rate hiking cycle after raising the benchmark rate by 25bps, as…
16 December 2022In 2023, we expect recessions in the US and Europe, a recovery in China, a slowdown in global inflation, and a pause in Fed rates in…- North America
- Europe ex-UK
- United Kingdom (UK)
- Non-Asia Emerging Markets
- Japan
- Asia ex-Japan
- DM IG Government bonds
- DM IG Corporate bonds
- DM HY Corporate bonds
- EM USD Government bonds
- EM LCY Government bonds
- Asia USD bonds
- Crude Oil
- Gold
- We remain Underweight on global equities as we expect a recession in the US and Europe to weigh on corporate earnings and equity market returns. The pace of interest rate hikes in the US and Europe will likely tip their economies into recession as central bankers prioritise keeping inflation under control.
- We are Overweight Asia ex-Japan. China’s earnings expectations have been upgraded as its growth outlook improves. In contrast, global equities’ earnings have been trimmed as growth slows due to increasingly restrictive monetary policies in the US and Europe. Within Asia ex-Japan, we are Overweight China equities due to the government’s pro-business stance and with negative sentiment largely priced in. We have an equal preference for onshore and offshore markets. We are Neutral India equities, where valuation relative to Asia ex-Japan continues to adjust lower a high, moving closer to the long-term average.
- We are Neutral US equities where valuation remains elevated and earnings could see weakness if the economy enters a recession. We are Neutral Euro area equities where the significant valuation discount is rightly pricing in vulnerabilities to growth. We are Neutral Japan equities where benefits from a revival in China’s growth are offset by still uncertain monetary policy. We are Underweight UK equities where we see the weakest earnings growth this year offsetting its low valuation.
The bullish case:
- Potential for Fed pivot
The bearish case:
- US recession risk
- Banking sector woes
The bullish case:
- Resilient margins
The bearish case:
- Still-elevated inflation
- Hawkish ECB
The bullish case:
- Attractive valuations
- Dividend yield
The bearish case:
- Prolonged BoE tightening
The bullish case:
- China recovery
- Resilient domestic demand
The bearish case:
- Potential BoJ tightening
The bullish case:
- China’s reopening and policy support
The bearish case:
- Escalating China-US tensions
- We are Overweight bonds given our expectation of sharply slower US growth. In our view, US government bond yields are likely to fall (ie, bond prices are likely to rise) as markets price in slower growth, and hence lower policy rates, in the future.
- Our Overweight on DM IG government bonds remains in place. Slowing growth is likely to mean the Fed pauses after another 25bps hike and starts to cut rates before the end of 2023. This is consistent with our view of falling bond yields, which should help this bond asset class outperform in the next 12 months. Our expected range for the 10-year US government bond yield by end-2023 remains unchanged at 2.75-3.00%. Concern over (i) the US debt ceiling and (ii) the impact on liquidity following the US banking turmoil could keep bond market volatility elevated, but we would use any rebound in yield to add exposure.
- We remain Overweight on Asia USD bonds, with a relative preference for Investment Grade bonds. Asia’s regional growth should remain supported by China’s post-COVID-19 recovery and pro-growth policy initiatives. Although a US recession would pose a risk to this regional economic rebound, we believe Asia USD bond’s relatively robust credit quality should act as a buffer.
- We are Neutral on DM IG corporate bonds and Underweight DM HY bonds. We believe current yield premiums over Treasuries are still insufficient to compensate for a likely forthcoming recession, particularly in HY. We are Neutral EM local currency (LCY) and EM USD government bonds. A US recession is likely to be a drag on EM credit quality. However, EM central banks have room to ease policy in need. EM USD bonds should benefit from a high sensitivity to falling US bond yields.
The bullish case:
- High credit quality
- Outperformance during a recession
The bearish case:
- Still-elevated inflation
The bullish case:
- High credit quality
- Moderate yields
The bearish case:
- Fairly valued
The bullish case:
- Attractive yield
- Low rate sensitivity
The bearish case:
- Deteriorating credit quality
- Wider spreads
The bullish case:
- Attractive yield
- Attractive value
The bearish case:
- Weakening EM credit quality
The bullish case:
- Moderate yield
- Potential for FX appreciation
The bearish case:
- Higher volatility
The bullish case:
- Mainly IG credit quality
- Declining default rates
The bearish case:
- Fairly valued
We turned more optimistic on oil in the near term, revising our 3-month WTI oil forecast to USD 75/bbl on the back of the surprise OPEC+ output cut. We expect OPEC+’s move to push the market into a deficit in Q2 vs earlier expectations of a surplus, especially given the strong compliance track record of the participating OPEC+ members in recent times. In the long run, however, we expect WTI oil to trend lower towards USD 65/bbl on (1) weaker oil demand from a slowing global economy, (2) resilience of Russia’s exports amid redirection of flows to Asia, and (3) the gradual build-up of inventories from warmer weather. Having said that, any further surprise OPEC+ output cuts are upside risks to our 12-month forecast.
We remain Overweight gold vs other major asset classes, viewing it as a hedge against tail risk scenarios, with a 12-month forecast of USD 2,100/oz.Gold has had a strong showing in April, breaking above USD 2,000/oz and staying above this level for most of the month before falling below that level in late April. A weaker USD, continued central bank demand and return of investor interest are key drivers behind its strength, which we expect to sustain. Furthermore, a likely end to the Fed rate-hiking cycle in H1, followed by rate cuts in H2, could propel gold prices to test 2020’s all-time high. The precious metal’s safe-haven properties also increase its appeal as a diversifier against the backdrop of elevated geopolitical uncertainty.
- We believe the unusual rise in stock-bond correlations in 2022 is unlikely to last into 2023. Nevertheless, the experience means the demand for relatively uncorrelated assets, or less volatile substitutes for traditional asset classes, is likely to sustain.
- This is where a neutral allocation to alternative strategies can help. Liquid alternative strategies are one potential route. While many of these tend to be relatively less volatile ‘substitutes’ for equities, ‘diversifiers’ such as macro/CTA strategies tend to outperform during recessionary and/or trending markets. Private asset classes can be another route. Private credit strategies, for example, fit well into our preference for income and are a preferred substitute for riskier bonds (such as leveraged loans or High Yield bonds).
- Income assets are one of the key investment opportunities in 2023, in our view. Our model, diversified multi-asset income (MAI) strategy, is offering a yield of over 6%, levels last seen before the Global Financial Crisis. We believe investors have a window to lock in an attractive yield given the Fed is likely to approach the peak of its hiking cycle in H1 23 and potentially cut thereafter.
- Within our MAI allocation, we have a larger-than-benchmark tilt towards fixed income assets. While the 10-year US government bond yield has declined recently, yields of other income assets are still trading near the top end of their historical range. High-quality fixed income assets have tended to trough around the last Fed hike, as markets start to price an economic slowdown and eventual rate cut. We expect the US economy to enter a mild recession in 2023. Today’s higher starting yields and relatively wide credit spreads mean the chances of earning returns in excess of the average yields across most bond assets is much higher than a year ago. We add a tilt towards Developed Market Investment Grade and Emerging Market bonds within the fixed income sleeve and have closed our relative preference for leverage loans vs High Yield bonds.
- We have a smaller-than-usual allocation to high dividend equities, given our expectations of a recession in the US and Europe in 2023. Having said that, we are acutely mindful of the risk of under-allocating to equities over longer horizons. High dividend equities remain an important source of income and growth within our MAI allocation and they usually outperform global equities during such recessionary periods. A still-reasonable allocation to high dividend equities also helps mitigate the long-term risk of losing value in inflation-adjusted terms if one allocates solely to cash and fixed income.
- USD
- EUR
- JPY
- GBP
- AUD
- ASIA EX-JAPAN
+ Hawkish Fed policy
+ Recession-linked safe-haven demand
+ Spike in geopolitical risks
– Global growth rotation ex-US
– Lower real rate differentials
– Correction of expensive valuation
+ ECB rate hikes
+ Rising real rates as EU inflation falls
+ Improved Balance of Payments (BOP)
– Energy dependency
– Persistent inflation hurting growth
– Banking sector concerns
+ Monetary policy divergence
+ Japan’s low nominal yields
– Reduction in yield differentials
– Potential BoJ hawkish pivot
– Cheap valuations
– Safe haven
+ Hawkish BoE due to sticky inflation
+ Lower political and Brexit-related risks
– Recession risks
– Unfavourable real rates
+ Cheap vs Terms of Trade
+ China growth rebound
– Capped commodity prices
– Risk-off sentiment
The bullish case:
+ Geopolitics
+ Unfavourable rate differentials
USD/SGD
The bullish case:
+ SGD vulnerable to weak global growth
+ Strong USD due to deeper recession
USD/INR
The bullish case:
+ RBI may bolster FX reserves
+ Risk premia due to 2024 elections
USD/MYR
The bullish case:
+ Global recession risk
+ Increased commodity price risks
USD/KRW
The bullish case:
+ Vulnerability to global growth and trade
+ US-China tensions
The bearish case:
– China growth rebound
– Capital inflows
The bearish case:
– Resilient domestic growth
– Tighter MAS FX policy to curb inflation
The bearish case:
– Lower oil price to ease current account deficit
– Strong growth; capital inflows
The bearish case:
– Strong Terms of Trade, FDI inflows
– Resilient GDP growth
The bearish case:
– Export growth and tourism inflows
– Cheap valuation and stable investment flows
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