Bonds and gold to outperform stocks, says Standard Chartered

Bonds and gold present significant opportunities for investors to generate income by increasing their allocation to these asset classes while reducing their overall exposure to equities, according to a report.

Standard Chartered’s Global Market Outlook report said the risk-reward balance of bonds has become more attractive, especially as expectations for a U.S. recession this year are growing (80%).

Therefore, the bank recommends overweight bonds, increasing allocations to developed market bonds, and underweight Asian European bonds in developed market high-yield bonds.

However, the bank continues to expect a moderately weaker dollar, which remains an important driver of capital flows to emerging markets. Therefore, moderate dollar weakness should support more capital inflows to the Middle East.

In equities, the bank remains underweight given the core scenario of recession in the US and Europe. However, Standard Chartered highlighted the prospect of seizing opportunities in Asia ex-Japan equities, especially as China’s new government increasingly takes a pro-business stance. As a result, the bank is overweight China stocks and underweight UK equities due to increased equity valuation risks due to slower UK economic growth.

The bank expects U.S. government bond yields to fall below 3% by the end of the year, generally favoring high-quality investment-grade bonds over riskier high-yield bonds. While Asian dollar bonds are the highest on the bank’s corporate bond priority list, this could also be positive for dollar-denominated corporate bonds in the Middle East.

Commenting on the report, Dr Owen Young, Head of Wealth and Wealth Management for Africa, Middle East and Europe at Standard Chartered, said: “As global uncertainty increases, investors are best served by diversifying their portfolios to serve classes and geographies. However, for Seizing opportunities while income-generating assets remain attractive, we believe investors have a window to lock in attractive yields given that the Fed is likely to approach the peak of its rate hike cycle in the coming months.”

The report also highlights the bank’s view on the global macro level. Strategists at Standard Chartered believe the U.S. economic outlook has deteriorated as the chances of a recession have increased. Meanwhile, the euro zone continues to face more persistent inflation problems compared to the US, while China has been showing signs of accelerating growth as economic activity normalizes as retail sales improve and the housing sector shows signs of recovery.

Dr Young added: “The economic outlook for the U.S., Europe and China is divergent, with the risk of recession rising in the U.S. and Europe, and an upturn in China. To capitalize on this, investors have an opportunity to increase their allocation to bonds while seizing on China’s opportunities offered by equities.” –trade arab news agency