Major equity markets have broken out of recent sideways and downtrending ranges, with positive earnings and softer US real bond yields providing scope for further gains, according to Standard Chartered.
The bank said the breakout was evident across US, European and Japanese equities, as well as major Asian markets including China and India, improving the near-term outlook following recent weakness.
However, Standard Chartered Global Chief Investment Officer Manpreet Gill cautioned investors against excessive concentration in individual regions or sectors, saying recent market rotations supported a more diversified portfolio approach.
Earnings, Yields Support Equities
Standard Chartered said strong corporate earnings have been a key driver of the recent recovery, particularly in the US.
Around 85% of S&P 500 companies have beaten consensus earnings expectations so far, significantly above the long-term average of 67%.
In China, the bank also expects a positive earnings season as companies begin reporting their results next week.
Meanwhile, the pause in US real, or inflation-adjusted, bond yields after they approached multi-decade highs has provided another important tailwind for equities.
Standard Chartered said the combination of resilient earnings and softer real yields suggests the recent equity market gains have room to extend.
Despite this positive outlook, the bank recommended maintaining broad regional and sector diversification, citing recent market rotations as well as seasonal and US election-related risks later in the year.
Standard Chartered retained its overweight positions in US and Asia ex-Japan equities, alongside core holdings in Japan and euro area stocks.
At the sector level, the bank pointed to opportunities across growth and cyclical segments. It noted that the S&P 500 comprises approximately 45% growth sectors, 35% cyclical sectors and 20% defensive sectors.
The bank highlighted US communication services as an opportunistic way to gain exposure to growth, while its recent upgrade of US financials reflects opportunities arising from higher yields and increased mergers and acquisitions activity.
Hormuz Deal Reinforces Rangebound Oil View
Reports of an agreement between Oman and Iran to reopen shipping through the Strait of Hormuz have reinforced Standard Chartered’s view that oil prices are likely to remain range-bound.
The bank expects crude prices to trade largely within the US$70-US$90 a barrel range.
While Standard Chartered cautioned that headline diplomatic agreements should be treated carefully until there is evidence of changes in actual shipping activity, the announcement nonetheless reduces concerns over prolonged disruptions to global energy supplies.
A more stable oil market could also help contain oil-related inflation pressures, which in turn may limit upward pressure on real bond yields and reduce a potential headwind for equities.
Softer Real Yields Support Bonds, Gold
Beyond equities, Standard Chartered sees softer real bond yields creating opportunities in short-maturity bonds, allowing investors to lock in relatively attractive yields.
The decline in real yields could also reduce headwinds for gold, which has similarly broken above its recent trading range.
The bank continues to regard gold as a core portfolio allocation.
Yen Intervention Adds Volatility
Standard Chartered also expects greater two-way volatility in the Japanese yen following coordinated intervention by Japan and the US in the foreign exchange market.
While the intervention strengthens the credibility and potential impact of efforts to support the yen, the bank said the fundamental driver of yen weakness remains intact — the sizeable interest-rate differential between Japan and the US.
The wide yield gap continues to make yen-funded carry trades attractive, although higher intervention risks could encourage investors to reduce leverage and adopt tighter risk management.
The pace of Bank of Japan rate hikes remains the key risk to this strategy.
In the near term, Standard Chartered expects USD/JPY to remain range-bound as the underlying interest-rate differential persists.
“Positive earnings and softening US bond yields have supported a breakout in major equity market indices. We see room for gains to extend, but would ensure portfolios avoid excessive regional or sector concentration,” Gill said.
