International. Interconnected. Inter-generational.

Δ Overweight     ∇ Underweight    — Neutral

Equity – at a glance     —

27 OCTOBER 2023

• We remain Neutral (core holding) on global equities in the coming 12-month horizon, backed by resilient economic data and corporate margins YTD. We upgrade the US to Overweight amid our positive view in the region’s earnings growth after it delivered stronger-than-expected Q2 results, on top of a likely pause in the Fed’s tightening cycle and recession delay.
• Japan remains our most preferred region. Tailwinds such as improving corporate governance, rising share buybacks, net cash positioning and relative insulation from geopolitical exposures compared with its Asia peers are expected to support the region’s sustainable growth. A potential relaxation of Yield Curve Control policy is a risk which may dampen corporate earnings.
• We trim Asia ex-Japan to Neutral, as a muted recovery in China weighs on consumption and earnings growth across Asian markets. We are Neutral on China within the region due to the “piece-meal”, but not “big-bang”, supportive policies from the government. India equities are also likely to perform in line with the region due to a tug-of-war between a high valuation premium vs strong estimated (consensus) EPS growth in excess of 20% in FY23 and FY24.
• We are Underweight UK equities as the region has the weakest earnings growth forecast this year, despite the market’s low valuation. We downgrade Euro Area equities to Underweight in light of the cooling macro data and declining profit margins.

North America equities – Preferred holding     Δ

27 OCTOBER 2023

The bullish case:

• Fed rate pause
• Growth resilience

The bearish case:

• Recession risks, valuations

Europe ex-UK equities – Less Preferred holding     ∇

27 OCTOBER 2023

The bullish case:

• Resilient margins

The bearish case:

• Still-elevated inflation
• Recession risks

UK equities – Less Preferred holding     ∇

27 OCTOBER 2023

The bullish case:

• Attractive valuations
• Dividend yield

The bearish case:

• More BoE tightening
• Earnings decline

Japan Equities – Preferred holding     Δ

27 OCTOBER 2023

The bullish case:

• Corporate governance
• Resilient domestic demand

The bearish case:

• Potential BoJ tightening

Asia ex-Japan equities – Core holding     —

27 OCTOBER 2023

The bullish case:

• China’s policy support, valuations

The bearish case:

• Geopolitical tensions
• China macro uncertainty

Δ Overweight     ∇ Underweight    — Neutral

Bonds – at a glance     —

27 OCTOBER 2023

Preference for government bonds. We remain Overweight on Developed Market (DM) Investment Grade (IG) government bonds as well as Emerging Market (EM) local currency government bonds as we believe most major central banks are close to the end of the current hiking cycle (indeed some EM central banks have started to cut rates). For international investors, our bearish USD view should also translate into FX gains for EM local currency bonds.We revise our 3-month target for 10-year US government bond yield to 4.25%-4.50%. We believe the recent increase in the 10-year US government bond yield is overdone (based on technical and our market diversity or fractal indicators) and offers an attractive opportunity for investors to add exposure to high-quality bonds. Most of the increase has been driven by increase in real (net of inflation) yield, which will act as a further drag on the economy, necessitating faster pace of rate cuts by the Fed. Hence, we maintain our 12-month yield target of 3.25%-3.50%, though we acknowledge potential upside risks to the target.We are Neutral on DM IG corporate bonds and Underweight US High Yield (HY) bonds. While the yield premiums are broadly in line with historical averages and the headline yields are attractive, we believe current valuations do not compensate for the ongoing deterioration in credit quality as seen from the uptick in rating downgrades and defaults. Asian USD bonds remain a core (Neutral) holding as ongoing concerns around China’s economic growth and property sector weigh on the asset class. We also retain our Neutral stance on EM USD government bonds. While the increase in oil prices due to geopolitical tensions is beneficial for energy exporters, higher import costs combined with high USD funding rates are likely to further erode credit profile of weaker sovereigns. When combined with the yield of c.9.4%, we believe the risk-reward is balanced.

Developed Market Investment Grade government bonds – Preferred holding     Δ

27 OCTOBER 2023

The bullish case:

• High credit quality
• Outperforming in a recession

The bearish case:

• High inflation
• Real yields rising

Developed Market Investment Grade corporate bonds – Core holding     —

27 OCTOBER 2023

The bullish case:

• High credit quality
• Moderate yields

The bearish case:

• Fairly valued

Developed Market High Yield corporate bonds – Less preferred holding     ∇

27 OCTOBER 2023

The bullish case:

• Attractive yield
• Low rate sensitivity

The bearish case:

• Deteriorating credit quality
• Wider spreads

Emerging Market USD government bonds – Core holding     —

27 OCTOBER 2023

The bullish case:

• Attractive yield
• Sensitivity to US yields

The bearish case:

• EM credit quality under pressure

Emerging Market Local currency government bonds – Preferred holding     Δ

27 OCTOBER 2023

The bullish case:

• Attractive yield
• Potential for FX+bond appreciation

The bearish case:

• Exposure to EM FX volatility

Asia USD bonds – Core holding    —

27 OCTOBER 2023

The bullish case:

• Moderately attractive yield
• Mainly IG quality

The bearish case:

• Fairly valued
• HY under pressure

Δ Overweight     ∇ Underweight    — Neutral

27 OCTOBER 2023

• We keep our Neutral view on gold vs other major asset classes, with a 12-month forecast of USD 2,010. The market believes the Fed’s rate hike cycle is close to its end though inflation accelerated for a second straight month in August to 3.7%, higher than expected. Real yields are likely to increase, which means the opportunity costs of holding gold may be pushed higher and lead us to see a smaller upside for gold from here. Gold has historically outperformed in recessions and displayed safe-haven properties during crisis situations. These increase the appeal of gold as a hedge against a backdrop of elevated macro uncertainty. Continued central bank, household and investor demand are other key drivers to support gold.
• We stay moderately bullish on oil on a 3-month horizon amid OPEC+ supply tightness. While Saudi Arabia extends its oil production cut till year end, with a possibility of extending it even further, the scope of further production cuts has not been ruled out. Because of this, we raise our 3-month WTI oil price expectation to USD 90/bbl. On a 12-month horizon, we expect it to trend lower towards USD 75/bbl. The global crude oil consumption growth y/y has declined amid a slowing Euro area and Asia, but oil’s slowing supply growth risks are intensifying the oil market deficit and offering more support to oil. China’s economy remains a key swing factor; oil demand could improve if the economy undergoes a significant recovery in Q4.

Crude Oil

27 OCTOBER 2023

Gold      —

27 OCTOBER 2023

The bullish case:

• Portfolio hedge

The bearish case:

• Risk of a USD rebound
• Rising yields

Δ Overweight     ∇ Underweight    — Neutral

Alternatives at a glance     —

27 OCTOBER 2023

The bullish case:

• Diversifier characteristics

The bearish case:

• Market volatility

Δ Overweight     ∇ Underweight    — Neutral

Multi-Asset – at a glance

27 OCTOBER 2023

• Our Multi-Asset Income (MAI) model allocation has returned 3.4% YTD and currently yields c.6.5%, an attractive level in our view compared with asset classes such as cash or government bonds. Dividend equities were the main contributor to the positive performance last quarter, while Developed Market High Yield (DM HY) and leveraged loans also added positively. The overall duration (a measure of price sensitivity to changes in interest rates) on the allocation is modestly lower than a year ago.
  
• The yield on the MAI allocation has been steadily rising since March this year. While major central banks, including the Fed and ECB, have signalled their intent to pause, rates are likely to remain elevated until policymakers have greater comfort inflation is returning sustainably to target. We believe the yield on MAI strategies will remain attractive in light of our view of an impending pause in central banks’ hiking cycle and potential rate cuts in 2024.
  
• We increased our allocation to dividend equities this month, narrowing our underweight gap vs the strategic asset allocation (SAA) benchmark. This was funded by a reduction in fixed income, notably high yield and leveraged loans where we see signs of rising defaults rates against the backdrop of tighter bank lending conditions.