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CIO office multi-asset class views at a glance
Equity
Δ Overweight ∇ Underweight — Neutral
Equity – at a glance —
1 MARCH 2024
- We are Overweight equities, and within that US equities, given our central scenario of a soft-landing in the US, at least in the first half of 2024. US companies are displaying strong pricing power, resulting in solid net margins. Stickier-than-expected inflation is a key risk, which may delay expected Fed rate cuts. Japan is the other Overweight region that continues to display a healthy combination of solid earnings, improving corporate governance and being less expensive than US equities.
- We are Neutral Asia ex-Japan equities. The region potentially offers the highest earnings growth among our key regions. We are Overweight Korea – rising demand for AI-related technology products is likely to support earnings, and the government’s “Value-up” programme may narrow the “Korean discount” by addressing company cross-holdings and improving corporate governance. We are Neutral China equities. Deflationary forces remain the key risk, but the government has been intensifying its policy stimulus, with more likely at the National People’s Congress. We are Neutral Indian equities. Positive drivers include the government maintaining fiscal consolidation, while upgrading infrastructure, with higher outlay for railways, roads, renewable energy, housing and agriculture. This keeps domestic growth strong and supports job creation.
- Elsewhere, we are Neutral Euro area equities. Growth prospects remain murky compared with the US, but cheap valuations and low investor positioning are counter-balancing factors. We stay Underweight UK equities – despite cheap valuations, the sector composition is overly defensive, leading to underperformance against global equities.
North America equities – Preferred holding Δ
1 MARCH 2024
The bullish case:
- Strong earnings growth amid robust consumption
The bearish case:
- Impact of high interest rates
Europe ex-UK equities – Core holding —
1 MARCH 2024
The bullish case:
- Inexpensive relative valuations
The bearish case:
- Still-weak cyclical & structural growth outlook
UK equities – Less Preferred holding ∇
1 MARCH 2024
The bullish case:
- Attractive valuations
- Attractive dividend yield
The bearish case:
- Stagflation risks
- Political uncertainty
Japan Equities – Preferred holding Δ
1 MARCH 2024
The bullish case:
- Reasonable valuations
- Rising dividends/share buybacks
The bearish case:
- Expected JPY strength
Asia ex-Japan equities – Core holding —
1 MARCH 2024
The bullish case:
- Earnings rebound
- China policy support
The bearish case:
- China structural growth concerns
Bonds
Δ Overweight ∇ Underweight — Neutral
Bonds – at a glance —
1 MARCH 2024
- We remain Overweight Developed Market (DM) Investment Grade (IG) government bonds and see an attractive opportunity to add exposure following this year’s rebound in US bond yields. We raise our 3-month target for 10-year US government bond yield slightly to 4.00-4.25% amid market repricing of higher-for-longer Fed policy rate, rising Treasuries supply and quantitative tightening (QT). We still expect the yield to move to 3.25-3.50% over 12-months as Fed rate cuts start in June.
- We remain Neutral DM IG and High Yield (HY) corporate bonds. Yield premiums over government bonds point to elevated valuations, but these are well supported by strong earnings and a favourable demand-supply balance. Nevertheless, we believe nominal yields of both the sub-asset classes are attractive when compared with cash.
- We remain Neutral Asian USD bonds, with preference for HY over IG. Asia HY bonds have outperformed IG bonds year-to-date. We expect this to extend further on expectations of more stimulus measures from China’s authorities and given the bonds’ still-attractive relative value when compared to Asia IG bonds.
- In Emerging Markets (EM), we are Neutral EM local currency government bonds. While USD strength and narrowing EM-DM yield differentials have weighed on the asset class year-to-date, we expect support from a weaker USD and falling bond yields in many EMs in the next 6-12 months. We remain Underweight USD government bonds as ongoing concerns about fundamentals and geopolitics in a year of intensive elections outweigh their sensitivity to decline in US bond yields.
Developed Market Investment Grade government bonds – Preferred holding Δ
1 MARCH 2024
The bullish case:
- High credit quality
- Attractive yield
The bearish case:
- High sensitivity to monetary policy
Developed Market Investment Grade corporate bonds – Core holding —
1 MARCH 2024
The bullish case:
- High credit quality
- Sensitive to falling yields
The bearish case:
- Elevated valuations
Developed Market High Yield corporate bonds – Core holding —
1 MARCH 2024
The bullish case:
- Attractive yield
- Low rate sensitivity
The bearish case:
- Elevated valuations
- Sensitive to growth
Emerging Market USD government bonds – Less preferred holding ∇
1 MARCH 2024
The bullish case:
- Attractive yield
- Sensitive to US rates
The bearish case:
- EM credit quality
- Election/political risks
Emerging Market Local currency government bonds – Core holding —
1 MARCH 2024
The bullish case:
- Attractive yield
- Room for policy rate cuts
The bearish case:
- USD strength
- Election/political risks
Asia USD bonds – Core holding —
1 MARCH 2024
The bullish case:
- Moderate yield
- Low volatility
The bearish case:
- China property contagion risk
- Elevated IG valuations
Commodities
Δ Overweight ∇ Underweight — Neutral
Commodities – at a glance
1 MARCH 2024
- Gold stays as a core allocation, with a 12-month forecast of USD 2,150/oz. The yellow metal started the year rangebound, caught between bullish drivers such as geopolitical tensions and seasonal demand, and bearish factors such as upside economic surprises and a stronger USD. We expect gold to continue trading around USD 2,030/oz over the next 3 months as the economic resilience buoys bond yields (hence, real yields). Global gold ETF outflows and a reduction in speculative positioning are also near-term drags. In the long run, however, a Fed rate-cutting cycle would bring down real yields and the USD, powering gold to record highs. Strong central bank demand and robust physical gold demand from China and India are structural tailwinds which, in our view, put a floor to gold prices even outside of our base scenario.
- We maintain our 12-month WTI oil forecast at USD 75/bbl. Crude oil prices have been trading in a tight range over the past few weeks. But, year-to-date, oil has performed relatively well on the back of OPEC+ supply curbs, resilient US consumption and high geopolitical tensions. We expect oil markets to remain tight in the short term, hence, we are raising our 3-month forecast to USD 80/bbl. Geopolitical risks are also likely to create some bouts of volatility. In the longer term, we believe that a slowdown in the global economy would dampen oil demand. Together with OPEC+’s modulation, demand-supply is likely to be more balanced, limiting the upside for oil prices.
Crude Oil
1 MARCH 2024
Gold —
1 MARCH 2024
The bullish case:
- Portfolio hedge
- Central bank demand
- Falling real rates
The bearish case:
- Resilient USD
Alternatives
Δ Overweight ∇ Underweight — Neutral
Alternatives at a glance —
1 MARCH 2024
The bullish case:
- Diversifier characteristics
The bearish case:
- Equity, corporate bond volatility
Multi-Asset
Δ Overweight ∇ Underweight — Neutral
Multi-Asset – at a glance
1 MARCH 2024
- The Multi-Asset Income (MAI) portfolio has a current yield of around 6.2% for 2023, an attractive level, in our view. This is a stark contrast to just two years ago when traditional bond yields were low on the back of rate cuts by major central banks and investors were on the hunt for yield. We expect yields to fall as central banks shift away from rate hikes and attention turns to the timing of potential rate cuts in 2024. We believe yields are attractive for investors today.
- Heading into 2024, we are increasing our allocation to bonds. We have increased our allocation to Developed Market High Yield (DM HY) bonds given their high coupon and modest maturity compared with leveraged loans. This is funded by a decline in allocations to Emerging Market (EM) bonds.
- Alongside the recovery in markets, our MAI model allocation has returned c.8.0% YTD. DM HY and EM local currency bonds have been the significant contributors to performance, while dividend equities and covered calls also contributed.
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