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Investors should look to increase their allocation to high quality government bonds, while adopting a cautious stance towards equities, said Standard Chartered in a new report on Tuesday.
In its Global Market Outlook report for the second half of 2023, the bank said high quality government bonds offer a clearer risk/reward profile compared to other assets, boasting attractive yields.
"Bond prices are expected to rise as economic growth slows with returns projected to be less affected by a slightly higher Fed peak rate, given the already elevated current yields," the report noted.
The report also advises upgrading equity to a core allocation, particularly in combination with Developed Market (DM) investment grade government bonds. "This strategy aims to strike a balance between capitalising on strong equity momentum and managing the potential risk of a US recession, which remains a tangible concern although possibly delayed."
As to geographies, the bank is overweight on Asia, including Japan, for equities and Asia USD bonds. The outperformance of Japanese equities is driven by robust momentum in stock buybacks and earnings growth and is bolstered by higher nominal economic growth and sustained inflation levels.
The report foresees Chinese equities becoming even more affordable, with the potential for unlocking their real value as domestic policies increasingly stimulate the economy and US-China geopolitical tensions ease.
(Writing by Brinda Darasha; editing by Seban Scaria)
