Investor opportunities: Increase allocation to bonds, dial back equity exposure

With growing expectations of US recession this year, Standard Chartered remains underweight on equities and is recommending an overweight position in bonds with a higher allocation to developed market bonds and Asia eurobonds.

Last week, US Fed officials predicted a "mild recession" starting later this year before the economy recovers in the next two years.

Standard Chartered expects US government bond yields to move lower to below 3% by year-end, broadly favouring high quality investment grade bonds over riskier high-yield bonds. "While Asia US dollar bonds rank highest in the bank's corporate bond preference order, this is likely to add a tailwind to US dollar-denominated corporate bonds in the Middle East as well," the bank said in its Global Market Outlook report, which examines major asset classes globally.

"With the increased levels of uncertainty across the globe, investors are best served by diversifying their portfolios across asset classes and geographies. However, to capture opportunities at a time when income generating assets remain attractive, we believe that investors have a window to lock in an attractive yield given that the Fed is likely to approach the peak of its hiking cycle in the next few months," Dr. Owen Young, Head of Affluent and Wealth Management for Africa, Middle East and Europe at Standard Chartered Bank, said.

Within equities, Standard Chartered remains underweight given the central scenario of a recession in the US and Europe. However, the bank highlighted the prospect of capturing the opportunity in Asia (ex-Japan) equities especially with the increasing pro-business stance from the new government in China. While being overweight on China equities, it's underweight on UK equities as the risk on equity valuations increases with the slowing growth of the UK economy.

The UK economy has been slowing down in the last few years. The IMF data suggests that real GDP in the UK rose only a mere 6% between 2008 and 2022. This was the second worst performance in the G7, above Italy’s.

Macro level views

Standard Chartered believes that the economic outlook for the US has deteriorated with an increased probability of a recession.

In the meantime, the Euro area continues to face a more persistent inflation problem compared to the US, while China has been showing signs of acceleration as economic activity normalises with retail sales turning around and the property sector showing signs of recovery, the report said.

"The economic outlook for the US, Europe and China has diverged with an increased risk of a recession in the US and Europe and a turnaround in China. To capitalise on this, investors have the chance to increase their allocation to Bonds while capturing the opportunity provided by China equities,” Young added.

China’s GDP numbers that came out on Tuesday morning showed that the world's second largest economy grew 4.5% year-on-year in the first quarter, owing to strong growth in exports, infrastructure investment and a rebound in property prices.





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