- 14 October 2024China unveils fiscal plan. The Ministry of Finance press conference on 12 October mildly surprised on the upside in signalling increased…
- 11 October 2024US stocks scaled record highs and the US 10-year government bond yield once again rose above 4% after a surprisingly strong jobs report for…
- 27 September 2024The start of the Fed rate cutting cycle supports our view of the US economy achieving a soft-landing. Gold is likely to be a key winner, while cash…
- 15 December 2023US and other major economies are likely to witness sharply slower growth and sliding inflation in 2024. Equity and bond markets…
- North America
- Europe ex-UK
- United Kingdom (UK)
- 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 downgrade equities to Neutral, expecting the asset class to perform in line with bonds. The Fed pivot is supportive, balanced by risks from the US elections and the slowdown in the labour market. That said, US equities remain our most preferred region, as companies continue to demonstrate solid long-term growth in earnings and the recent market shakedown creates pockets of opportunities in the growth space related to AI.
- We upgrade UK equities to a core holding (Neutral), with cheap valuation, improving activity data and the catalyst of a strong and pro-business Labour government. However, it lacks growth exposure in its index composition. Japan equities remain a core holding (Neutral). The Bank of Japan is gradually normalising its rate policies, which is a headwind for equities. Its technicals also remain weak. This is offset by the structural improvement in companies’ corporate governance.
- We have a core holding (Neutral) view on Asia ex-Japan equities. Within the region, we remain Overweight Indian equities, with its healthy mix of economic growth and consumption trend. Taiwan and Korea equities are core holdings (Neutral), with tailwinds from the AI theme balanced by expensive valuations versus history. China equities stay as a core holding (Neutral), with piece-meal policy support and mixed earnings. We are Neutral onshore versus offshore equities. We remain Underweight on ASEAN, which is overly defensive. Finally, we downgrade Europe ex-UK equities to least preferred. Despite cheap valuation, there is headwind from the slowdown in growth and earnings. It is also exposed to the weakness in China and potential tariffs if Trump gets into power.
The bullish case:
- Strong earnings growth
- Room for rate cuts
The bearish case:
- Elevated valuations
The bullish case:
- Inexpensive relative valuations
- Improving growth
The bearish case:
- Political/election risk
The bullish case:
- Attractive valuations
- Dividend yield
The bearish case:
- Low earnings growth
- Political uncertainty
The bullish case:
- Reasonable valuations
- Rising dividends/share buybacks
The bearish case:
- Expected JPY strength
The bullish case:
- Earnings rebound
- China policy support
The bearish case:
- China structural growth concerns
- We are Neutral both government and corporate/EM bonds. We view Developed Market (DM) Investment Grade (IG) government bonds as a core holding (Neutral) amid softer DM growth and employment data. In our view, US election uncertainty and a lingering risk of hard landing could move yields lower. Thus, we move our 3-month target of the US 10-year bond yield lower to 3.75-4.00%.
- Although rate cuts provide the prospect of capital gains on bonds, we believe picking where one takes this exposure to rate-sensitive bonds is key. We therefore maintain an Overweight allocation on Emerging Market USD government bonds, where we see attractive relative value compared with DM peers in addition to sensitivity to falling yields. To balance this, we move DM IG corporate bonds holdings to Underweight, especially given the currently tight yield premiums. Meanwhile, we continue to view DM High Yield (HY) corporate bonds as a core holding (Neutral) for their solid fundamentals and likely performance in a soft-landing scenario. We raise EM local currency government bonds to a core holding (Neutral) as they offer decent carry amid stable EM currencies, as we anticipate the USD to weaken only modestly in the next 6-12 months. Additionally, Asia USD bonds remain a core holding (Neutral) and we now hold a balanced view on IG versus HY bonds.
The bullish case:
- High credit quality
- Attractive yields
The bearish case:
- High sensitivity to monetary policy
The bullish case:
- High credit quality
- Sensitive to falling yields
The bearish case:
- Elevated valuations
The bullish case:
- Attractive yield
- Low rate sensitivity
The bearish case:
- Elevated valuations
- Sensitive to growth
The bullish case:
- Attractive yield
- Sensitive to US rates
The bearish case:
- Commodity prices
The bullish case:
- Attractive yield
- Room for policy rate cuts
The bearish case:
- USD strength
The bullish case:
- Moderate yield
- Policy support
The bearish case:
- China structural growth concerns
- We raise our 3- and 12-month gold forecast to USD 2,550/oz and USD 2,625/oz, respectively, led by falling interest rates. Consequently, we also upgrade the shiny metal to an Overweight relative to other major asset classes. July’s easing inflation and jobs data, coupled with Powell’s dovish signal at the Jackson Hole summit, suggest the Fed cutting cycle is on the horizon. The ensuing lower real (net-of-inflation) yields and USD weakness augur well for the metal, especially with the strengthening of the negative gold-real yield correlation. The upshot is that the recent pickup in momentum for gold ETF inflows could extend. In India, there were signs of higher consumer demand following the reduction in taxes. Meanwhile, India’s central bank continued its measured pace of gold purchases, adding to the still-robust official sector demand. Gold is now its second largest reserve asset, after surpassing the EUR recently, but there is still room for catch up to the USD which retains the largest share.
- We trim our 12-month WTI oil forecast to USD 73/bbl, reflecting the weakening demand trends. The oil markets were quick to fade the geopolitical risk premium, as a string of slowing US and China economic growth data brought demand fears to the forefront. We expect global oil demand to normalise into 2025 as economic growth slows from the post-pandemic boom. We still assume that OPEC+ would start tapering production cuts in Q4, though the bloc would calibrate the pace to avoid a collapse in oil prices. On balance, our base case looks for oil prices to decline modestly in the next 12 months. In the short run, WTI oil price is likely to trade at around USD 75/bbl as demand-supply dynamics remain tight, especially after the Libya turmoil.
The bullish case:
- Portfolio hedge
- Central bank demand
- Falling real rates
The bearish case:
- Resilient USD
The bullish case:
- Resilient global economies
- Supply reduction from geopolitical conflicts
- OPEC+ supply cuts
- Low inventories
- US shale underinvestment
- US SPR refill
The bearish case:
- Tight monetary policies; growth slowdown
- Redirection of Russian oil flows
- Easing of sanctions against Venezuela
- Significant global spare capacity
- OPEC+ supply discipline
- Lower demand from energy transition
The bullish case:
- Diversifier characteristics
The bearish case:
- Equity, corporate bond volatility
- Our Multi-Asset Income (MAI) model allocation has delivered 4.4% YTD return. The model benefitted from optimism surrounding risk assets, and dividend equities also benefitted from a broadening of the rally in traditional equities. Developed Market High Yield (DM HY) and leveraged loans gained from a strong corporate earnings season, while EM USD government bonds benefitted from a decline in US government bond yields.
- Our MAI model now yields c.5.8%, dipping below the 6% mark for the first time this year. In recent weeks, major central banks, including the Swiss National Bank (SNB) and the European Central Bank (ECB), have initiated their rate cutting cycle, while the Fed has guided for one rate cut this year. We expect the ECB to deliver more rate cuts this year (see the macro section for more details), and the Fed to be more cautious in order not to loosen financial conditions prematurely while economic data remains resilient. We believe yield levels are attractive for income-focused investors to lock in the current high yield on offer.
- Over the next 6-to-12 months, the 2024 US elections will be closely watched by markets. History suggests income assets tend to deliver positive returns during US election years, regardless of whether the Fed is cutting or hiking rates. The only exceptions were REITs and Europe high dividend equities, which delivered negative returns in the 2020 pandemic election year.
- USD
- EUR
- JPY
- GBP
- AUD
- ASIA EX-JAPAN
+ US fundamentals surprise on the upside
– Dovish Fed, expensive valuation
+ ECB unlikely to cut rate aggressively
– Slower growth relative to US
+ BoJ policy normalisation pace is slow
– Further BoJ rate hikes, surge in QT size
+ BoE cautious approach amid inflation uptick
– Recession risk, consumption weakness
+ RBA holds rates for longer, strong gold prices
– China’s modest recovery
The bullish case:
+ SGD vulnerable to weak global growth
+ Revaluation of S$NEER
The bearish case:
– Resilient domestic growth
– CNH’s rebound
USD/INR
The bullish case:
+ RBI to continue to absorb capital inflows
+ Further strengthening in FX reserves
The bearish case:
– Lower oil price to ease current account deficit
– Strong growth; inflows
USD/MYR
The bullish case:
+ BNM is likely to reduce its record-high forward sales
+ Replenish FX reserves
The bearish case:
– Reversal in local dollarization trends
– Resilient GDP growth
USD/KRW
The bullish case:
+ Vulnerability to global growth and trade
+ Reliance on USD and CNH trend
The bearish case:
– Export growth and tourism inflows
– Cheap value; inflows
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