1 June 2023Financial markets appear to be gettingdisconnected from fundamentals. Parts of the equity market are in the grips of a frenzy…
26 May 2023A potential Fed pause and ‘less bad’ US macroeconomic data are likely to collide with still-poor long-term fundamentals. We…
4 May 2023The US Federal Reserve hinted that it may put on hold the second steepest rate hiking cycle after raising the benchmark rate by 25bps, as…
16 December 2022In 2023, we expect recessions in the US and Europe, a recovery in China, a slowdown in global inflation, and a pause in Fed rates in…- North America
- Europe ex-UK
- United Kingdom (UK)
- Non-Asia Emerging Markets
- 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 remain Underweight global equities on a 12-month horizon, as we expect a recession in the US and growth slowdown in Europe to weigh on corporate earnings and equity market returns.
- We are upgrading Japan to Overweight. Besides cheap valuation, Japan’s economic data, such as GDP growth and private consumption, have been beating expectations. Corporate governance has been improving – companies have been increasing their dialogue with investors, while share buyback reached a record high of USD 71bn for the financial year ending Mar-23.
- We remain Overweight Asia ex-Japan where we believe the Chinese government is likely to deliver targeted stimulus to support growth. Chinese companies are expected to deliver stronger earnings compared to other regions. However, China economic surprises are off their peak after the pandemic reopening so we downgrade China to Neutral within Asia ex-Japan. We are Neutral India within Asia ex-Japan, where relative valuation continues to adjust down closer to the long-term average.
- We are Neutral Euro area equities where the significant valuation discount is rightly, in our view, pricing in vulnerabilities to growth. We are Underweight UK equities where we see the weakest earnings growth this year offsetting its low valuation. Finally, we have downgraded US to Underweight on the margin. Valuation remains elevated and we believe earnings are likely to suffer once the US enters a recession. Risks to our view: (1) stronger-than-expected US economy; (2) stronger-than-expected earnings growth in the US and globally; (3) weaker-than-expected growth and earnings in China and Japan.
The bullish case:
- Potential for Fed pivot
The bearish case:
- US recession risk
- Banking sector woes
The bullish case:
- Resilient margins
The bearish case:
- Still-elevated inflation
- Hawkish ECB
The bullish case:
- Attractive valuations
- Dividend yield
The bearish case:
- Prolonged BoE tightening
The bullish case:
- China recovery
- Resilient domestic demand
The bearish case:
- Potential BoJ tightening
The bullish case:
- China’s reopening and policy support
The bearish case:
- Escalating China-US tensions
- We remain Overweight government bonds given our expectation of slower US growth in the next 12 months. In addition to weak US economic activity data, regional banking crisis and tighter financial conditions, the protracted US debt ceiling talks are likely to bolster risk-averse positioning towards risk-free government bonds. Even if a resolution is reached, it could involve budget spending cuts just as the economy is slowing. This raises the prospect of further decline in government bond yields.
- Our Overweight on DM IG government bonds remains in place. Our expected range for the 10-year US government bond yield by end-March 2024 is 2.75-3.00%. Concern over (i) the US debt ceiling and (ii) the impact on liquidity following the US banking turmoil could keep bond market volatility elevated, but we would use any rebound in yield to add exposure.
- We remain Overweight on Asia USD bonds, with a relative preference for IG bonds. While Asia’s regional growth should remain supported by China’s pro-growth policies, softer economic growth data of late and concerns about slower global growth reinforce our preference for high quality bonds. The outlook for the Chinese HY bond sector remains mixed; Chinese property bonds, which contribute one-third of the segment, remains under pressure from sluggish industry recovery and idiosyncratic risk.
- We are Neutral on DM IG corporate bonds and Underweight DM HY bonds. We believe current yield premiums over Treasuries, particularly for HY bonds, are still insufficient to compensate for a likely US recession. We are Neutral EM local currency (LCY) and EM USD government bonds. Although EM USD bonds have benefited from falling US bond yields, elevated external debt levels and potential negative impact from a US recession could lead to further decline in credit quality.
The bullish case:
- High credit quality
- Outperformance during a recession
The bearish case:
- Still-elevated inflation
The bullish case:
- High credit quality
- Moderate yields
The bearish case:
- Fairly valued
The bullish case:
- Attractive yield
- Low rate sensitivity
The bearish case:
- Deteriorating credit quality
- Wider spreads
The bullish case:
- Attractive yield
- Attractive value
The bearish case:
- Weakening EM credit quality
The bullish case:
- Moderate yield
- Potential for FX appreciation
The bearish case:
- Higher volatility
The bullish case:
- Mainly IG credit quality
- Declining default rates
The bearish case:
- Fairly valued
We continue to see limited near-term upside for oil and have a 12-month WTI oil forecast of USD 65/bbl. The oil markets have given back most of its post-OPEC-cut gains in May, as investors stayed cautious due to macroeconomic gloom and the US bought only 3m barrels (approx. 1% of SPR) to refill its depleted Strategic Petroleum Reserve (SPR). Investor positioning is now as bearish as in March, before the OPEC+ cut, suggesting weak demand and recession fears have outweighed supply factors. With that said, the accumulation of short positions increases the odd of further OPEC+ output cuts when it convenes in June. In the long run, however, we expect WTI oil to trend lower on (1) weaker oil demand from a slowing global economy, (2) resilience of Russia’s exports amid redirection of flows to Asia, and (3) the gradual build-up of inventories from a warmer weather.
We stay Overweight gold vs other major asset classes, with a 12-month forecast of USD 2,120/oz. Gold started May strongly due to the US debt ceiling impasse, before retracing below 2,000 on higher real (net of inflation) yields and stronger USD. However, we do not expect these headwinds to persist. A likely end to the Fed rate-hiking cycle in H1, followed by rate cuts in Q4, mean that real yields and the USD would likely moderate. Furthermore, net positive flows into gold ETFs are likely to continue as investors seek a hedge against macro and geopolitical uncertainties, especially given a structural under-allocation. Continued central bank and physical demand are the other key drivers behind our constructive view.
- We believe the unusual rise in stock-bond correlations in 2022 is unlikely to last into 2023. Nevertheless, the experience means the demand for relatively uncorrelated assets, or less volatile substitutes for traditional asset classes, is likely to sustain.
- This is where a neutral allocation to alternative strategies can help. Liquid alternative strategies are one potential route. While many of these tend to be relatively less volatile ‘substitutes’ for equities, ‘diversifiers’ such as macro/CTA strategies tend to outperform during recessionary and/or trending markets. Private asset classes can be another route. Private credit strategies, for example, fit well into our preference for income and are a preferred substitute for riskier bonds (such as leveraged loans or High Yield bonds).
- Our multi-asset income (MAI) allocation has delivered positive returns outlook to date, eking out a 0.5% return. The banking crisis in April has negatively impacted subordinated financials and the financial equity sector, which are core components within hybrid income and global dividend equities.
- We still find the income allocation attractive. The c.6% yield on offer on our income allocation remains attractive, in light of a likely pause in Fed rate hikes. There is a risk though that a greater allocation towards Value style equities, particularly in the financial and energy sectors, could weigh on total returns if the US and Europe enter a recession over the next 12 months.
- We continue to favour a heavy tilt towards fixed income at the expense of equity. The high absolute yields derived from fixed income assets continue to look attractive vs yield from high dividend equities. Downside risk to corporate earnings remain a risk, as credit is further tightened. Our investment committee ascribes over 70% probability of a US recession over the next 6-12 months. Slower economic growth or a recession typically benefits bond assets relative to equities. Within bonds, we now prefer DM HY bonds over leveraged loans, while continuing to be neutral between DM HY bonds and subordinated financials.
- USD
- EUR
- JPY
- GBP
- AUD
- ASIA EX-JAPAN
+ Hawkish Fed policy
+ Recession-linked safe-haven demand
+ Spike in geopolitical risks
– Global growth rotation ex-US
– Lower real rate differentials
– Correction of expensive valuation
+ ECB rate hikes
+ Rising real rates as EU inflation falls
+ Improved Balance of Payments (BOP)
– Energy dependency
– Persistent inflation hurting growth
– Banking sector concerns
+ Monetary policy divergence
+ Japan’s low nominal yields
– Reduction in yield differentials
– Potential BoJ hawkish pivot
– Cheap valuations
– Safe haven
+ Hawkish BoE due to sticky inflation
+ Lower political and Brexit-related risks
– Recession risks
– Unfavourable real rates
+ Cheap vs Terms of Trade
+ China growth rebound
– Capped commodity prices
– Risk-off sentiment
The bullish case:
+ Geopolitics
+ Unfavourable rate differentials
USD/SGD
The bullish case:
+ SGD vulnerable to weak global growth
+ Strong USD due to deeper recession
USD/INR
The bullish case:
+ RBI may bolster FX reserves
+ Risk premia due to 2024 elections
USD/MYR
The bullish case:
+ Global recession risk
+ Increased commodity price risks
USD/KRW
The bullish case:
+ Vulnerability to global growth and trade
+ US-China tensions
The bearish case:
– China growth rebound
– Capital inflows
The bearish case:
– Resilient domestic growth
– Tighter MAS FX policy to curb inflation
The bearish case:
– Lower oil price to ease current account deficit
– Strong growth; capital inflows
The bearish case:
– Strong Terms of Trade, FDI inflows
– Resilient GDP growth
The bearish case:
– Export growth and tourism inflows
– Cheap valuation and stable investment flows
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