Major central banks are now likely on pause as they gauge the impact of their extraordinarily rapid series of rate hikes amid a mixed bag of economic data. Investment strategists at Standard Chartered believe this favours taking selective region, sector and credit quality risks.
The house upgrades US equities at the expense of European equities on the back of relative growth resilience. Developed Market (DM) bonds continue to offer an attractive risk/reward, with current yields creating a sizeable buffer.
However, SC trims Asia ex-Japan equities and Asia USD bonds to core holdings, as a catalyst for more significant Chinese policy stimulus is absent. In Asia, it retains Japan equities Overweight and prefers diversified exposure across markets within Asia ex-Japan. And upgrades Emerging Market (EM) local currency bonds to Overweight.
Wait-and-watch policy ahead?
Financial markets have had a circumspect Q3. Major equity and corporate bond markets witnessed wide ranges, but are now back largely at end-Q2 levels. Strong Japanese equity market gains, the rise in US government bond yields, and the surge in oil prices have been key exceptions.
SC says the market picture is likely a result of an intense investor debate reflected in the recent macroeconomic data. The US economy is balancing still-strong consumer spending and a very nascent bottoming of manufacturing against very weak leading economic indicators, still-elevated inflation, and tight financial conditions. Europe is facing a manufacturing slump and a weakening services sector, the strong job market notwithstanding. Chinese growth remains under pressure from property sector woes, though some macro green shoots have been emerging.
Against this backdrop, the House is of the view that major central banks are now likely starting an extended pause as they gauge the impact of their unusually rapid series of rate hikes. As it laid out in its H2 Outlook, SC favours taking relatively smaller-sized risks within regions, sectors, and quality segments, while maintaining balanced allocations across equities, bonds, cash, alternatives, and gold.
