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CIO office multi-asset class views at a glance

Equity

Δ Overweight Underweight Neutral

Equity – at a glance   

15 DECEMBER 2023

  • We are Overweight equities, and US equities within that, given our central scenario of a soft-landing in the US, at least in the first half of 2024. US companies are displaying strong corporate pricing power, resulting in solid net margins as inflation pulls back. Japan equities 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 attach a Neutral weight to Asia ex-Japan equities. The region has potentially the highest earnings growth. We are Overweight Korea – the demand for AI is likely to support earnings. We are Neutral China equities; although sentiment is bearish, the government is supporting the economy via piece-meal stimulus. We are Neutral Indian equities, given the trade-off between relatively strong earnings and high valuations. Within Indian equities, we prefer large-cap over small- and mid-cap.
  • Elsewhere, we are Neutral Euro area equities. Growth prospects remain lacklustre, but cheap valuations and low positioning are counter-balancing factors. We stay Underweight UK equities – despite cheap valuation, the sector composition could be overly defensive and may underperform as the current global rally continues.

North America equities – Preferred holding     Δ

15 DECEMBER 2023

The bullish case:

  • Resilient corporate profit margins
  • Technology sector propelling performance
  • More sensitive to declining bond yields

The bearish case:

  • Too-strong data leading to “higher for longer”
  • Macro uncertainties: eg, US election
  • Expensive valuations

Europe ex-UK equities – Core holding     

15 DECEMBER 2023

The bullish case:

  • Valuations remain attractive
  • Light positioning
  • Improving corporate margins and ROE

The bearish case:

  • Weakening earnings growth
  • Heightened recession risk
  • Euro area factory activity deterioration

UK equities – Less Preferred holding     

15 DECEMBER 2023

The bullish case:

  • High dividend yield
  • Valuations extremely cheap
  • Relatively defensive sectors

The bearish case:

  • Weak earnings growth expected in 2024
  • Substantial fund outflows
  • Lightly weighted toward growth sectors

Japan Equities – Preferred holding     Δ

15 DECEMBER 2023

The bullish case:

  • Strong corporate balance sheets
  • Corporate governance policies boost ROE
  • Foreign interest in Japan equities

The bearish case:

  • Rebound in JPY to hurt company earnings
  • Rising volatility from a tightening BoJ
  • Global growth slowdown

Asia ex-Japan equities – Core holding     

15 DECEMBER 2023

The bullish case:

  • China’s fiscal and monetary stimulus
  • Attractive valuations and light positioning
  • Highest projected EPS growth in 2024

The bearish case:

  • Persistence in geopolitical tensions
  • Structural issues: eg, China properties
  • Lack of confidence from investors
Bonds

Δ Overweight      Underweight     Neutral

Bonds – at a glance     

15 DECEMBER 2023

  • We prefer high quality bonds for their attractive yields and the likelihood of prices rising further as Developed Market (DM) economies weaken into 2024, pushing yields lower still. We are Overweight DM government bonds and expect the US 10-year government bond yield to soften further to 3.75-4.00% over the next 3 months and 3.25-3.50% over 6-12 months. The outlook for Emerging Market (EM) bonds is more balanced, despite a constructive outlook for EM currencies, as optimism on EM policy easing is likely already priced in. This leaves us Neutral EM local currency (LCY) government bonds.
  • In credit, we have a Neutral (core allocation) view towards both Investment Grade (IG) and High Yield (HY) DM bonds. While valuations are elevated, these neutral allocations can be key contributors to achieving portfolio yield goals. We are also Neutral Asia USD bonds and Underweight EM USD government bonds. The ongoing policy stimulus in China is a positive, but decelerating global growth and lower commodity prices are risks. Within Asia, we prefer HY bonds over IG as the sharp fall in the former’s prices, one-sided sentiment and increasingly expensive IG bonds have shifted the relative risk/reward, in our opinion.

Developed Market Investment Grade government bonds – Preferred holding     Δ

15 DECEMBER 2023

The bullish case:

  • Attractive yield
  • DM central banks’ pivot

The bearish case:

  • “Higher for longer” monetary policy amid a strong economic growth backdrop
  • Unfavourable supply-demand balance

Developed Market Investment Grade corporate bonds – Core holding     

15 DECEMBER 2023

The bullish case:

  • Long duration benefitting from a peak in interest rates
  • Attractive absolute yield on offer

The bearish case:

  • Relatively tight yield premium
  • Weakening credit fundamentals

Developed Market High Yield corporate bonds – Less preferred holding     

15 DECEMBER 2023

The bullish case:

  • Corporate credit fundamentals are still looking solid
  • Attractive yield on offer

The bearish case:

  • Rating downgrade risk
  • Surge of default risks

Emerging Market USD government bonds – Less preferred holding     

15 DECEMBER 2023

The bullish case:

  • Long duration benefitting from a peak in interest rates

The bearish case:

  • Commodity price disinflation
  • Geopolitical risk amid elections in the US and key EM countries

Emerging Market Local currency government bonds – Core holding     

15 DECEMBER 2023

The bullish case:

  • Supportive EM currency outlook
  • High EM monetary policy flexibility

The bearish case:

  • Unfavourable interest rate differentials with DM
  • Rate cut expectation is in the price

Asia USD bonds – Core holding    

27 OCTOBER 2023

The bullish case:

  • Regional growth continues to impress
  • Attractive yield on offer

The bearish case:

  • Soft China economic growth outlook
  • Defaults or bond restructuring risk
Commodities

Δ Overweight      Underweight     Neutral

Commodities – at a glance

15 DECEMBER 2023

  • Gold remains a core allocation within our portfolio. While other asset classes offer better return potential, we see gold as an attractive hedge against meaningful recession and geopolitical risks. Moreover, we see gold prices rising further to a record USD 2,150/oz over a 12-month horizon as Fed rate cuts commence, pulling down real yields and the USD. Central bank demand has been a dominant factor bolstering gold prices this year, defying several headwinds such as rising real yields, USD strength and weak investor demand. We expect central banks to remain buyers, lending additional support to the precious metal. In the near term, the continued disinflation, coupled with rangebound bond yields, is likely to lead real yields temporarily higher, capping gold’s upside. Therefore, we expect gold to move to USD 2,060/oz over the next three months.
  • Crude oil prices are likely to trade at around USD 75/bbl towards the end of 2024, albeit with some volatility, given the potential for oil supply disruptions. Global oil demand growth is likely to slow on the back of a sluggish global economy in 2024, weighing on oil prices. Conversely, thin spare capacity following many years of underinvestment puts a floor on the downside. Furthermore, we expect OPEC+ to react to the price dynamics to keep the demand-supply in equilibrium. Put together, this scenario suggests the oil market stays largely balanced in 2024, barring any exogenous shocks. In the near term, the geographical risk premium has mostly faded, but could return on any escalation of tensions in the Middle East.

Crude Oil

15 DECEMBER 2023

The bullish case:

  • Resilient DM economies
  • Stable demand growth in Asia
  • Supply reduction from EU embargo on Russian crude
  • OPEC+ supply cuts
  • Low inventories
  • US shale underinvestment
  • US SPR refill

The bearish case:

  • Rising rates and any resulting recession would hit global demand
  • Redirection of Russian oil flows
  • Non-OPEC supply growth; easing of sanctions against Venezuela
  • OPEC+ production compliance
  • Lower demand from energy transition

Gold      

15 DECEMBER 2023

The bullish case:

  • A peak in Fed rates as growth weakens
  • Escalation of geopolitical tensions
  • Gold outperforms during most recessions
  • Reserve diversification for central banks
  • Strong central bank and seasonal physical demand
  • USD weakness
  • Light positioning

The bearish case:

  • Rising real yields increase opportunity costs of holding gold
  • Geopolitical risk premium in gold tends to be short-lived
  • Resurgence in USD strength
  • Risk-on sentiment
  • Demanding valuations
  • Fading rates volatility
Alternatives

Δ Overweight      Underweight     Neutral

Alternatives at a glance     

15 DECEMBER 2023

The bullish case:

  • Diversifier characteristics

The bearish case:

  • Equity, corporate bond volatility
Multi-Asset

Δ Overweight      Underweight     Neutral

Multi-Asset – at a glance

15 DECEMBER 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.