Standard Chartered: “Bonds and gold to outperform stocks”

Standard Chartered today announced its Global Market Outlook report which examines key asset classes globally. In its report, the bank highlighted key opportunities for investors to capture income by increasing their allocation to bonds and gold while reducing their overall exposure to equities.

The risk-reward balance of bonds has become more attractive, especially with the growing expectations of a US recession this year (80%). The bank therefore recommends an overweight in bonds with a higher allocation to bonds in developed markets and Asian Eurobonds with an underweight in high-yield bonds in developed markets.

The bank continues to expect a modestly weaker US dollar, but still an important driver of capital flows to emerging markets. A modest USD weakness should therefore support further capital flows into the Middle East region.

Within shares, the bank is still underweight given the central scenario of recession in the US and Europe. However, Standard Chartered highlights the prospect of capturing the opportunity in Asia (formerly Japan) stocks, especially with the growing pro-business attitude of the new government in China. As such, the bank overweights Chinese stocks while underweight UK stocks as the risk to equity valuations increases with the slowing growth of the UK economy.

The bank expects US Treasury yields to move lower to below 3% by the end of the year, largely favoring high-quality, investment-grade bonds over riskier high-yield bonds. While Asia USD bonds rank highest in the bank’s order of preference for corporate bonds, this is likely to provide a tailwind for USD-denominated corporate bonds in the Middle East as well.

Commenting on the report, Dr Owen Young, head of wealth and wealth management for Africa, the Middle East and Europe at Standard Chartered Bank, said: “With the heightened level of uncertainty worldwide, 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 investors have a window of to lock in an attractive yield given that the Fed is likely to approach the top of its rate hike cycle in the coming months.”

The report also highlighted the bank’s view on the global macro level. Strategists at Standard Chartered believe that the economic outlook for the US has worsened with the increased likelihood of a recession. Meanwhile, the Eurozone continues to face a more persistent inflation problem compared to the US, while China has shown signs of acceleration as economic activity normalizes 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 has diverged with an increased risk of a recession in the US and Europe and a turnaround in China. To capitalize on this, investors have the chance to increase their allocation to bonds while taking advantage of the opportunity provided by Chinese stocks.”