Standard Chartered: “Bonds and Gold to outperform Equities”

• Raises allocation to DM bonds and Gold at the expense of equities
• Growing expectations of a US and EU recession this year
• China turnaround with accelerating economic recovery 

Standard Chartered announced today its Global Market Outlook report which examines major asset classes globally. In its report, the Bank highlighted key opportunities for investors to capture income through increasing allocation to Bonds and Gold while dialing back overall exposure to equities. 

The risk-reward balance for bonds has turned more attractive, especially with the growing expectations of a US recession this year (80%). As such, the Bank recommends an overweight position in Bonds with a higher allocation to Developed Market bonds and Asia Eurobonds with an underweight position in developed market high yield bonds.

The Bank continues to expect a modestly weaker US Dollar, however, remaining one important driver of capital flows to Emerging Markets. Modest USD weakness should, therefore, be supportive of further capital flows into the Middle East region.

Within equities, the Bank remains underweight given the central scenario of a recession in the US and Europe. However, Standard Chartered highlights the prospect of capturing the opportunity in Asia (ex-Japan) equities especially with the increasing pro-business stance from the new government in China. As such, the Bank is overweight China equities while underweight UK equities as the risk on equity valuations increases with the slowing growth of the UK economy. 

The Bank 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 USD bonds rank highest in the Bank’s corporate bond preference order, this is likely to add a tailwind to USD-denominated corporate bonds in the Middle East as well.

Commenting on the report, Dr. Owen Young, Head of Affluent and Wealth Management for Africa, Middle East and Europe at Standard Chartered Bank, said: “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.” 

The report also highlighted the Bank’s views on the global macro level. Strategists at Standard Chartered believe that the economic outlook for the United States 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. 

Dr. Owen Young added: “The economic outlook for the US, Europe and China have 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.”