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High-quality bonds in second half are ‘ideal, but cautious on equities’

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Standard Chartered advises investors to seize income opportunities in the second half of 2023 and increase their allocation to high-quality bonds while taking a cautious stance on equities.

Compared with other assets, high-quality bonds have a clearer risk/reward profile and attractive yields, the bank said in its second-half 2023 global market outlook report.

Bond prices are expected to rise as economic growth slows, and a small hike in the Fed’s peak rate is expected to have less of an impact on returns given that yields are already high. The report recommends using current market conditions to secure yields on high-quality investment-grade (IG) bonds before yields fall further, placing high-quality bonds in a favorable position relative to cash.

strike a balance

Additionally, the report advocates upgrading equity to core allocations, especially in combination with developed market (DM) investment-grade government bonds. The strategy seeks to strike a balance between capitalizing on strong stock market momentum and managing the potential risk of a U.S. recession, which remains a real concern, although it may be delayed.

In terms of regional positioning, the report tends to overweight Asian (including Japan) stocks and Asian dollar bonds. The report expects Chinese stocks to become cheaper and potentially unlock their real value as domestic policies increasingly stimulate the economy and geopolitical tensions between the US and China ease.

Additionally, the report identified two factors driving Japanese equities to outperform global equities: strong momentum in share buybacks and earnings growth, supported by higher nominal economic growth and persistent inflation levels.

The report acknowledged a moderation in Indian stock market valuations, pointing to improved value for investors seeking to capitalize on the market outlook.

gold in moderation

While the report recommends a more dovish view on gold, it remains neutral. Gold has historically outperformed the broader market during recessions and exhibited its safe-haven qualities in times of crisis. The report noted that continued demand from central banks, households and investors was a key factor supporting the inclusion of gold in investment portfolios.

Dr Owen Young, Head of Wealth and Wealth Management Africa, Middle East and Europe, Standard Chartered Bank, said: “Our Global Market Outlook report aims to provide investors with actionable insights into today’s rapidly evolving economic landscape. Investors can optimize their investment portfolios, capture potential returns, and manage risks effectively.” — trade arab news agency

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