Source: St Louis Fed, Data from Dec 2019 till June 2021
1. Why do the Fed’s comments matter?
Source: St Louis Fed, Data from Dec 2019 till June 2021
2. Should investors be worried about the Fed tightening?
Source: Bloomberg, data as of 25 June 2021. Investment involves risks. Past performance is not an indication for future. For illustrative purpose only.
3. How to brace for market volatility?
Source: Refinitiv Datastream, data as of 28 Jun 2021. Note: 60/40 portfolio allocates 60% to equities and 40% to government bonds. Index: S&P 500 and Bloomberg Barclays US Treasury Index. Investment involves risks. Past performance is not an indication for future. For illustrative purpose only.
Our latest short-term (3-6 months) and long-term (>12 months) views on various asset classes
Global economic recovery prospects are supported by the rollout of vaccines and the re-opening of economies. Markets exposed to cyclical sectors can continue to perform well even as bond yields rise. High frequency data generally supports economic rebound in a number of major economies.
US indices’ greater weight to “growth” stocks makes them vulnerable to higher US bond yields. This implies some relative caution, although exposure to quality names, mega-cap tech, and the digital economy remains beneficial.
UK equities are heavily exposed to the value and domestic factor which have scope to outperform in the current market environment. Services-related sectors benefit from UK’s strong cyclical rebound amid successful vaccination. However, Covid variants need to be monitored over summer as travel bans may resurface.
Europe is on track with its path of recovery with improving Covid cases, reopening and attractive valuation.
Structurally weak economic growth, slow vaccination and constrained monetary policy warrant a neutral stance.
Outlook of EM remains mainly positive on USD weakness in the long run, but near-term challenges remain in ASEAN which underperformed due to severe Covid cases and reliance on its economic reliance on tourism.
EMs outside of Asia has the potential to perform well against a backdrop of global economic recovery, but new virus variants and slow vaccine rollout remain major headwinds.
The region is blessed with high growth, exposure to cyclical stocks tied to the global growth recovery and to structural themes including electric vehicles and batteries, data server demand and semiconductor manufacturing, coupled with a rising middle class and tech-savvy population.
Regulatory concerns and policy normalisation have not been fully removed and have become consensus risks, but are largely priced-in. Quality growth and under-allocation from global investors and expanding institutionalisation of local markets are positives for both the short and long run.
Near-term outlook is uncertain due to wide-spread Covid cases. Inflation risks remain and valuation is high.
Hong Kong remains an attractive capital market underpinned by primary and secondary market activity; cyclical and financial sector exposure benefits from reflation but risks of prolonged border restrictions weigh on growth.
A key beneficiary from global rotation into cyclical and manufacturing sectors, with attractive dividend yield.
Korea gives beta exposure to growth via EV and tech, but is challenged by elevated Covid cases and slow vaccine.
Taiwan benefits from structural digital demand in semiconductors and 5G but we are neutral on high valuation.
Despite recent pick-up in US Treasury yields, we do not have a positive view on this asset class as negative bond yields remain an unattractive feature for major government bonds including Japan, German and UK instruments.
Bond prices are unlikely to be volatile as the Fed has now demonstrated confidence in the recovery in the latest FOMC meeting. Yield increase in 2021 has improved prospective returns, especially for long dated US Treasuries.
The BoE is supportive in the near term and there is scope for stronger-than-expected UK economic recovery. However prospective risk-adjusted returns and gilt yields are unattractive in the long term.
Valuations look unattractive and governments are issuing high levels of fresh debt.
Japanese government bonds (JGBs) are overvalued and the bond risk premium remains negative.
As bond yields are at historical lows, our positive stance on EM debt is unchanged on higher yields and undervalued EM currencies. Divergence in virus containment and politics mean that being selective is key.
rospective returns are relatively high as we view EM government bond yields attractive, but it will be crucial to monitor economic recovery trends, US bond yields as well as the path of the US dollar.
We moved global and US IG to neutral along with the Fed’s hawkish tilt and projection of inflation being transitory, but it remains important for investors to continue to have an allocation to IG for portfolio diversification reasons.
Long-term US Treasury yields have tightened and IG bonds spreads are compressed, hence we are taking profits.
Europe and UK economies are catching up on economic recovery as the re-opening continues but spreads and returns are unattractive. Meanwhile we keep a close watch on corporate fundamentals and the variants of the virus.
We have a preference for Asian credit despite the negative developments on Chinese Asset management companies, which negatively impacted the Chinese IG bond market, but we believe these concerns are priced-in.
We downgraded HY for the long term as default-adjusted spreads are at multi-year lows and uncertainties remain, implying an asymmetric return profile. In the near-term, we are still positive due to higher real yields and earnings.
The US economy is performing well on stimulus and low rates and we are positive in the short run, but downgraded in the long run as market action has compressed spreads to a level consistent with an underweight view.
Long-term European HY bonds valuations are now consistent with an underweight position while default rates may tick upwards. In the short term, underlying corporate fundamentals are likely to improve if re-opening is on track.
Asia HY can benefit from robust macro trends in the region. Default rates should remain low and spreads look attractive relative to other global opportunities.
Lower for longer rates, rising inflation risks and uncertainty relating to the recovery can support gold, with reasonable diversification benefits to multi-asset portfolios. However further price upside is limited at these levels.
Oil demand is still vulnerable to global growth shortfall although OPEC+ producers’ supply discipline helps prices.
Global and regional sector views based on a 3-6 month horizon
We expect further positive earnings revision and improving consumer sentiment driven by pent-up demand, falling debt levels and record high savings, particularly in Asia. There may be further gains in luxury and autos, as well as leisure and hospitality in developed markets in 2H if re-opening momentum picks up.
Fiscal packages in the US and Europe may help offset lower interest rates and the potential for higher taxes in the US. Attractive valuations, high trading revenues and lower loan provisions provide further support. Q1 US earnings were strong. Buoyant capital and real estate markets should also provide a tailwind for the sector.
The Industrials sector is a key beneficiary of infrastructure stimulus and companies restocking inventory. After strong performance over the last 12 months, upside potential is greater in Europe and Asia than the US. Capex and investment are picking up especially with respect to automation, infrastructure, agriculture and mining equipment.
Valuation remains a concern for the next 1-2 quarters. That said, long-term structural trends in digitalisation and new technologies are intact. Although semiconductor and chip shortage is causing near-term headwinds, Infrastructure spending should benefit digital infrastructure.
Steady cash flows and growth from increased data usage as more activity shifted on-line and business digitalised are key drivers. Media companies are likely to see continued robust demand. The 5G roll-out is positive for telecom equipment.
A constructive economic outlook has lifted hard commodity prices. Infrastructure focused fiscal stimulus plans, rebounding Chinese economy, and relatively attractive valuations should continue to support this sector, but volatility is likely to remain elevated.
We upgraded US and global real estate as demand for private residential runs strong on the back of high savings rate and lower interest rates. Supply chain issues and materials shortage have eased. However, commercial property suffers due to corporates reducing office space and moving online.
We anticipated the rotation out of defensive sectors into cyclical sectors with the rebound in economic activity and the roll-out of vaccines. Valuations have since fallen away. Slower YoY growth is expected in 2021 as 2020 benefitted from COVID-19 fears that drove panic buying and stock piling of consumer essentials.
Supply control is beneficial to energy prices and demand is picking up as economies reopen. A nuclear weapons deal with Iran, a major oil producer, could put pressure on oil prices. We expect geo-politics to continue to drive volatility of energy prices.
Healthcare spending should remain a priority for households and governments as large backlogs in elective surgical procedures should drive strong growth in 2021. Medical technology and biotechnology companies are likely to see strong demand. However, as pandemic tailwind ebbs, we expect volatility to resurface regarding drug pricing.
After benefitting from various green initiatives, short-term potential for the sector appears. Global sector valuations remain relatively attractive, but the defensive sector is likely to underperform in the cyclical recovery.
“Overweight” implies a positive tilt towards the asset class, within the context of a well-diversified, typically multi-asset portfolio.
“Underweight” implies a negative tilt towards the asset class, within the context of a well-diversified, typically multi-asset portfolio.
“Neutral” implies neither a particularly negative nor a positive tilt towards the asset class, within the context of a well-diversified, typically multi-asset portfolio.
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