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Weekly Market View
Buying Opportunity?
29 September 2023
Global Market Outlook
Reshuffling after the pause
22 September 2023
View from the CIO office
The Long Hope
CIO office multi-asset class views at a glance
Δ Overweight ∇ Underweight — Neutral
Equity – at a glance —
28 JULY 2023
- We remain Neutral on global equities as we expect the timing of a recession in the US and Europe to be pushed out to Q1 FY24. Economic data, particularly in the US, remain relatively resilient. However, we are Neutral US equities due to expensive valuation, offsetting this resilient growth backdrop.
- Our highest conviction Overweight is on Asia ex-Japan. Valuation remains at a discount vs global equities, and monetary policies are more supportive vs DMs. We believe China equities are likely to perform in line with the region. Economic data has been under-delivering, but Chinese policymakers are likely to continue with targeted stimulus to support growth. It is becoming easier to beat lowered economic expectations in China, compared with heightened economic expectations in the US and in Europe. We believe India equities are also likely to perform in line with the region due to a tug-of-war between high valuation premium vs strong estimated (consensus) EPS growth in excess of 20% in FY23 and FY24.
- We are Overweight Japan. Companies are increasingly focused on delivering strong profitability, dividends and share buybacks to investors. The BoJ is also likely to keep the economy “running hot” for a while longer. We are Neutral Euro area equities. Valuation discount continues to be significant and corporate margins resilient; however, this is offset by the ECB’s hawkish policies. Finally, we are Underweight UK equities where we see the weakest earnings growth this year, offsetting its low valuation. The risk lies in a shift in investor sentiment back in favour of Value stocks.
North America equities – Core holding —
28 JULY 2023
The bullish case:
- Resilient growth
- Disinflation
The bearish case:
- Restrictive monetary policy
Europe ex-UK equities – Core holding —
28 JULY 2023
The bullish case:
- Resilient margins
The bearish case:
- Still-elevated inflation
- Hawkish ECB
UK equities – Less Preferred holding ∇
28 JULY 2023
The bullish case:
- Attractive valuations
- Dividend yield
The bearish case:
- Prolonged BoE tightening
Japan Equities – Preferred holding Δ
28 JULY 2023
The bullish case:
- Domestic economic recovery
The bearish case:
- Potential BoJ tightening
Asia ex-Japan equities – Preferred holding Δ
28 JULY 2023
The bullish case:
- China’s policy support
The bearish case:
- Escalating China-US tensions
Δ Overweight ∇ Underweight — Neutral
Bonds – at a glance —
28 JULY 2023
- We still like high-quality bonds. Better-than-expected US data and corporate earnings have reduced imminent recession risk and raised the prospect of the Fed holding benchmark rate at its current 22-year high for the rest of the year. Yields have edged higher in July, but we view this an opportunity to add to high-quality bonds, such as Developed Market (DM) Investment Grade (IG) government bonds or Asia USD bonds, to lock in longer-term return as we approach the end of the economic cycle.
- We remain Overweight DM IG government bonds. We expect the US 10-year government bond yield to hover around 3.75-4.00% over the next three months. Over a 6-12-month horizon, the yield is likely to decline towards 3.00-3.25% due to more risk aversion and demand for longer-tenure bonds as growth slows. Hence, we would use the current window to lock in longer-term yield to benefit from likely capital gains (from a rise in bond price) as yields fall towards our 12-month target.
- We remain Overweight Asia USD bonds, with a relative preference for IG bonds. The positive signals delivered in the recent Chinese Politburo meeting should support growth. However, a challenging global trade outlook and still-weak Chinese HY bond fundamentals suggest retaining our preference for IG bonds, despite their relatively tight yield premiums over Treasuries.
- We are Neutral on DM IG corporate bonds and Underweight US HY bonds. Although US recession is likely delayed, we still believe the current yield premiums do not look attractive, particularly in HY. We are Neutral EM local currency (LCY) government bonds and Underweight EM USD government bonds. Our view of a weaker USD and prospect for EM central banks to cut rates are positive for EM LCY government bonds. However, sticky inflation and weaker credit quality, especially in a few distressed EM issuers, have moved us to a more defensive stance.
Developed Market Investment Grade government bonds – Preferred holding Δ
28 JULY 2023
The bullish case:
- High credit quality
- Outperformance during a recession
The bearish case:
- Still-elevated inflation
Developed Market Investment Grade corporate bonds – Core holding —
28 JULY 2023
The bullish case:
- High credit quality
- Moderate yields
The bearish case:
- Fairly valued
Developed Market High Yield corporate bonds – Less preferred holding ∇
28 JULY 2023
The bullish case:
- Attractive yield
- Low rate sensitivity
The bearish case:
- Deteriorating credit quality
- Wider spreads
Emerging Market USD government bonds – Less preferred holding ∇
28 JULY 2023
The bullish case:
- Attractive yield and value
The bearish case:
- Weakening EM credit quality
Emerging Market Local currency government bonds – Core holding —
28 JULY 2023
The bullish case:
- Moderate yield
- Potential for FX appreciation
The bearish case:
- Higher volatility
Asia USD bonds – Preferred holding Δ
28 JULY 2023
The bullish case:
- Mainly IG credit quality
- Declining default rates
The bearish case:
- Fairly valued
Δ Overweight ∇ Underweight — Neutral
Commodities – at a glance
28 JULY 2023
28 JULY 2023
- We remain Neutral on gold vs other major asset classes with a 12-month forecast of USD 2,050/oz.After a lacklustre June, gold rebounded from its three-month low on lower real yields (adjusted for higher long-term inflation expectations) and weaker USD. We expect further moderation of real yields and the USD over a 6-12-month horizon to boost gold prices as the Fed ends its hiking cycle and cuts rates as the economy slows. Continued demand from global central banks and physical demand are other key drivers behind our constructive view. A recent revival in ETF flows was short-lived, with total gold ETF holdings falling back to its March-low. In contrast, managed money positioning has risen in July. Put together, investor positioning appears mixed, and the shiny metal is likely to trade rangebound at around USD 1,950/oz in the short term.
- We are still bearish on crude oil and see WTI oil trending lower to USD 65/bbl in the next 12 months. The oil market saw some signs of life in July after two straight months of range trading between USD 67/bbl and USD 73/bbl. WTI oil broke higher and hit a 3-month high amid signs of supply tightness and increased prospect of further China stimulus. There is more concrete evidence of OPEC+ members, especially Russia, complying with their committed output cuts. We also expect China to provide further stimulus, supporting oil demand in the near term. Against this backdrop, we lift our three-month expectation to USD 79/bbl. In the long run, however, we expect WTI oil to trend lower on (1) weaker oil demand from a slowing global economy, (2) increasingly bearish investor positioning in anticipation of a recession, and (3) the build-up of inventories as demand slows.
Crude Oil
28 JULY 2023
Gold —
28 JULY 2023
The bullish case:
- Falling yields
- Portfolio hedge
The bearish case:
- Risk of a USD rebound
Δ Overweight ∇ Underweight — Neutral
Alternatives at a glance —
28 JULY 2023
The bullish case:
- Diversifier characteristics
The bearish case:
- Equity, corporate bond volatility
Δ Overweight ∇ Underweight — Neutral
Multi-Asset – at a glance
28 JULY 2023
- The recent turnaround in markets has supported the performance of multi-asset income (MAI) strategies. On a total return basis, our MAI model allocation returned 3.5% YTD (2.6% since the publication of Outlook 2023) and the income potential now stands at c.6%, which is an attractive absolute level, in our view. We saw gains across the board, with dividend equities, covered calls and EM bonds contributing to the bulk of the positive performance over the past quarter.
- Yields on offer continue to look attractive from an absolute and historical (since 2014) standpoint. In our view, the bulk of the Developed Market (DM) rate hiking cycle is likely behind us. The sensitivity of multi-asset strategies to whether the Fed Funds rate peaks at 5.25% or 5.75% is likely to be low. Yields on offer on MAI strategies remain attractive, against the backdrop of an impending pause in central banks’ hiking cycle.
- Neutral between Developed Market High Yield (DM HY) bonds and leveraged loans, given a push back in recession risk and the risk of rates remaining high for longer. DM HY also offers attractive yield per unit of interest rate risk across bonds (see the chart below). We remain Neutral between DM HY bonds and subordinated financial debt. Additionally, we closed our preference for covered calls over global dividend equities, following the strong performance in the former.
- We reviewed the MAI strategic asset allocation this month to enhance the yield and returns potential. We increased our structural allocation to dividend equities and DM HY bonds, while expanding the income universe to include US agency mortgage-backed securities and infrastructure equities. We believe this will enable the MAI allocation to deliver an attractive total return and yield over the long term. We plan to release a detailed paper on the MAI SAA update in the coming weeks.
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