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Markets should rise further but may slow

02/08/2021
Commodities
FX
Bonds
Global Equities

Key Takeaways

  • We remain positive on the stock market and other cyclical investments like high yield bonds but momentum may slow.
  • We move to Neutral on the Materials and Industrials sectors because we think the recovery will now be driven by services.
  • Long-term, we are positive on Chinese equities but we think it is prudent to move to a Neutral allocation shorter-term. We remain Overweight on Asia and are now more positive on Thailand and Taiwan equities.

Talking Points

1.How should investors be positioned?

  • The recovery remains on track and equities are our pick. The services sector is now driving the recovery (Chart 1) as more people are going out to consume. Thailand and some countries in Europe have even re-opened for tourists with minimal restrictions.
  • Because the services sector is likely to drive the current phase of the recovery, we have downgraded the Materials and Industrials sectors to Neutral. Materials and Industrial companies have also performed well and it is prudent to book some profits.
  • Inflation and the spread of COVID variants are risks and investors need to ensure appropriate diversification. Markets have arguably become used to higher inflation but volatility may arise as details emerge around the US Federal Reserve’s plans to taper quantitative easing.  

Source: Bloomberg, data as of 26 July 2021

Investment involves risks. Past performance is not an indication for future. For illustrative purpose only.

2. What is the 2Q 2021 earnings outlook?

  • US earnings are expected to grow 60% year-on-year and this should drive the stock market higher. It is still early in the reporting season but so far 72% of global companies have beaten expectations (Chart 2). However, expectations are high and this may mean slower upwards momentum in the stock market.
  • Our preference is for consumer focused sectors like consumer discretionary, financials and real estate. The financials sector, in particular, has the added benefit of functioning as an inflation hedge.
  • The key risk to earnings remains COVID. New cases and Delta variants around the world are rising and this could stall the recovery. However, our base case is that vaccine progress will facilitate continued recovery. 

Source: Refinitiv Datastream, MSCI All Country World Index, Data as of 28 July 2021.

Investment involves risks. Past performance is not an indication for future. For illustrative purpose only.

3. What do we think about Chinese equities?

  • Chinese equities sentiment has been hit following an increase in regulatory risks in the tech and education sectors. The Chinese stock market is down 9%* in July. This has spilled over to the Hong Kong stock market which is down 13%** over the same period.
  • We are positive longer-term but it is prudent to take a Neutral position on Chinese equities over the next 3-6 months because of the regulatory uncertainty. Investors shouldn’t panic sell because the structural investment case remains strong. Instead, one should ensure their Chinese equities exposure is appropriately diversified (not just in tech stocks) and allocated.
  • On a 3-6-month basis, we maintain our Overweight position on Asia and upgraded Taiwan and Thailand equities to Overweight. Thailand has recently re-opened to tourism and should benefit from the recovering tourism trade. Taiwan is a market that stands to benefit from high demand for semi-conductors (Chart 3).

Source: Refinitiv Datastream, Data as of 26 July 2021.

Investment involves risks. Past performance is not an indication for future. For illustrative purpose only.

House views

 

Our latest short-term (3-6 months) and long-term (>12 months) views on various asset classes

Global

Equity markets performed well in the first half of 2021, led by US and European indices and propelled by cyclical sectors across real estate, financials and energy. We maintain our risk-on stance as vaccination picks up, the cycle broadens out and infrastructure spending kicks in to offset inflation and policy risks.

overweight
Overweight
Short-term
overweight

Overweight

Long-term
United States

We expect outperformance of US to continue but volatility to pick up due to the Fed’s policy shifts on rates and tapering, higher taxes and regulations across industries such as tech. We remain overweight on US and cyclicals.

overweight
Overweight
Short-term
Neutral
Neutral
Long-term
United Kingdom

The market represents value while it emerges from COVID and Brexit. Notable progress with re-opening and vaccination, UK benefits from its exposure to financials and energy companies, trade deals and exports. 

overweight
Overweight
Short-term
overweight

Overweight

Long-term
Eurozone

Europe trades at a significant discount to the US with a value tilt, and consumer growth is yet to recover. It is also appealing from the angle of dividend income and quality global export exposures, but UK is currently cheaper.

 Neutral
Neutral
Short-term
overweight

Overweight

Long-term
Japan

Unable to benefit from the Olympics due to COVID concerns, Japan’s struggles include a sluggish economic growth outlook, constraint central bank stance and slow vaccination.

 Neutral
Neutral
Short-term
 Neutral
Neutral
Long-term
Emerging Markets (EM)

We have a positive stance on EM equities in the long run but near-term challenges remain due to the EM’s higher level of uncertainty surrounding central banks’ policies, path of the virus, vaccine progress and re-opening.

Neutral
Neutral
Short-term
overweight

Overweight

Long-term
Central & Eastern Europe and Latin America

CEE and LatAm have done well this year (up 16% and 6% respectively) on higher commodity prices and risk-on stance, but central banks’ policy divergence, delta variants and weak vaccine progress could hinder returns.  

Underweight
Underweight
Short-term
Neutral
Neutral
Long-term

Asian ex-Japan

Asian equities are attractive after recent sell-off and subsequent market stabilisation. Investment merits include high savings ratio, a rising middle class, a tech-savvy generation to lead consumer spending to pick-up. Manufacturing of cyclical goods such as tech and clean energy is another growth angle. 

overweight
Overweight
Short-term
overweight

Overweight

Long-term
China

Dramatic market corrections caused by China’s regulatory scrutiny on tech, education and online platforms have rattled investors. China is focused on minimising broader economic risks such as data privacy and antitrust. 

Neutral
Neural
Short-term
overweight

Overweight

Long-term
India

Virus cases may have peaked, but we remain neutral due to high valuations and risks of earnings downgrade. 

Neutral
Neutral
Short-term
Neutral
Neutral
Long-term
Hong Kong

HK is highly exposed to cyclical sectors such as financials and real estate but risks of China’s industry regulation and strict border controls cloud its near-term economic potential.

 Neutral
Neutral
Short-term
 Neutral
Overweight
Long-term
Singapore

Singapore benefits from tech manufacturing and exports, leading vaccination and a strong domestic economy.

overweight
Overweight
Short-term
overweight

Overweight

Long-term
South Korea

Korea’s clear leadership in tech and semiconductors give rise to its growth, but valuation has already reflected this.

Neutral
Neutral
Short-term
Neutral
Neutral
Long-term
Taiwan

Taiwan’s tech benefits from the global semiconductor shortage and the rising global demand in 5G, hardware/software and Apple supply chain exposure, but valuations are high and we are neutral long-term.  

Overweight
Overweight
Short-term
Neutral
Neutral
Long-term

Developed markets (DM)

Despite improvement in valuations and a temporary pick-up in US Treasury, negative bond yields remain an unattractive feature for major government bonds including Japan, ECB, Germany and the UK, hence underweight.

Underweight
Underweight
Short-term
Underweight
Underweight
Long-term
United States

US Treasury yields have stabilised after spiking amid risk aversion. Further upside is unlikely as inflation risks are largely priced in and we have a year-end forecast of 1%. Real yields remain very low. 

Neutral
Neutral
Short-term
Underweight
Underweight
Long-term
United Kingdom

The BoE’s policy stance is supportive with ongoing asset purchases and low interest rates but returns are poor.

Neutral
Neutral
Short-term
Underweight
Underweight
Long-term
Eurozone

The ECB’s bond repurchase program and the EU recovery fund are positive but valuations are unattractive. 

Underweight
Underweight
Short-term
Underweight
Underweight
Long-term
Japan

Negative yields on Japanese government bonds are not appealing and the bond risk premium remains negative.

Underweight
Underweight
Short-term
Underweight
Underweight
Long-term
Emerging Markets (local currency)

EM debt is attractive as yields and prospective returns are higher than global peers on the back of higher real rates and risk return. We have a positive view on local EM currencies hence our overweight stance. 

overweight
Overweight
Short-term
overweight

Overweight

Long-term
Emerging Markets (Hard currency)

Bond yields are at historic lows but there is a divergence of economic impact and policy stance in the EM universe. 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.  

overweight
Overweight
Short-term
 Underweight
Underweight
Long-term

Global investment grade (IG)

We remain neutral on global and US consistent with the Fed’s hawkish tilt and projection of inflation being transitory, although there is a place in clients’ portfolios for diversification purposes. 

Neutral
Neutral
Short-term
Underweight
Underweight
Long-term
USD investment grade (IG)

Prospective returns have become unattractive as spreads have come down materially whilst index duration remains high. This is largely determined by the path of the Treasury yields. We are less negative in the short term. 

Neutral
Neutral
Short-term
Underweight
Underweight
Long-term
EUR and GBP investment grade (IG)

Monetary policies are accommodative as both the ECB and BoE are supportive but valuations and yields are unattractive. Underlying corporate fundamentals have not yet significantly improved and default risks remain.

Neutral
Neutral
Short-term
Underweight
Underweight
Long-term
Asia investment grade (IG)

Credit tightening and more regulatory scrutiny in China suggest moderate growth ahead. Some China IG issuers in certain sectors have recently come under pressure but we remain positive on Asia credits.

overweight
Overweight
Short-term
overweight

Overweight

Long-term
Global high-yield (HY)

In the search of yield, global HY can still provide attractive risk returns due to higher real yields and earnings growth. We still prefer Asia to global HY as there are uncertainties on the global outlook but focus on quality. 

overweight
Overweight
Short-term
Underweight
Underweight
Long-term
US high-yield (HY)

We are underweight long term as spreads are compressed but positive on higher growth and yields in the short run.

overweight
Overweight
Short-term
Underweight
Underweight
Long-term
European high-yield ex UK (HY)

Underlying corporate fundamentals are likely to improve if vaccination picks up and economic recovery gains momentum in the near-term but valuations are unattractive in the long run despite an ultra-accommodative ECB. 

overweight
Overweight
Short-term
Underweight
Underweight
Long-term
Asia high-yield (HY)

We remain constructive on Asia HY bonds as they still have a yield and growth advantage, and spreads still look attractive relative to other global opportunities. Yet China’s economy and default risks need to be closely watched

overweight
Overweight
Short-term
overweight

Overweight

Long-term

Gold

Gold’s upside is limited after 2020’s outperformance, as inflation risks are now priced in, geopolitical tensions abate and economic recovery is in place. However, gold can offer diversification benefits in multi-asset portfolios. 

overweight
Neutral
Short-term
 Neutral
Neutral
Long-term
Oil

Oil holds its gains but Delta variant disrupts demand recovery and OPEC+ intends to lift production in August. 

 Neutral
Neutral
Short-term
 Neutral
Neutral
Long-term

Sector Views

 

Global and regional sector views based on a 3-6 month horizon

Consumer spending continues to recover as economies re-open, thanks to pent-up demand, high levels of savings and low debt levels. Further upward earnings revisions and improving consumer sentiment are expected with additional potential gains for the services industry and luxury goods, autos and hospitality even if travel restrictions remain largely in place. 

Global
Global
Overweight
US
US
Overweight
Europe
Europe
Overweight
Asia
Asia
Overweight

The improving economic outlook with the stimulus packages in the US and Europe should offset lower interest rates and the potential for higher taxes in the US. Attractive valuations, higher trading revenues and M&A activity are constructive. Q2 earnings beat expectations on higher capital markets activity, lower loan provisions and a buoyant real estate market. 

Global
Global
Overweight
US
US
Overweight
Europe
Europe
Overweight
Asia
Asia
Neutral

Industrial stocks have rallied strongly in anticipation of a demand rebound as economies re-open and the need to rebuild inventories remains strong. However, after one year of outperformance, upside in US and Asian stocks appears limited given valuations. Supply chain issues and higher input costs may weigh on margins. We downgraded Asia and Global industrials sector to neutral.

Global
Global
Neutral
US
US
Neutral
Europe
Europe
Overweight
Asia
Asia
Neutral

The IT sector has struggled to gain momentum in 2021 on regulatory risks and valuation concerns. Long-term trends in digitalisation and new technology should deliver above average growth for the long term. However, semiconductors shortage is causing some production challenges. Infrastructure spending should benefit digital infrastructure.

Global
Global
Overweight
US
US
Overweight
Europe
Europe
Neutral
Asia
Asia
Overweight

The sector benefits from steady cash flow and growth from increased data usage as more activity shifted online and business digitalised. Media companies are likely to see continued robust demand.  The 5G roll-out is positive for telecom equipment providers but neutral/negative initially for service providers

Global
Global
Overweight
US
US
Overweight
Europe
Europe
Neutral
Asia
Asia
Overweight

The economic recovery remains constructive, but is already reflected in valuations so we downgraded Asia and Global materials sector to neutral. Metal prices have lost momentum in the short-term as the Chinese authorities try to cool commodity prices. Infrastructure spending related to fiscal stimulus in the US, Europe and Asia will drive demand in the medium run.

Global
Global
Neutral
US
US
Neutral
Europe
Europe
Overweight
Asia
Asia
Neutral

Private residential real estate is seeing strong demand due to a unique combination of record high savings and low interest rates. In contrast, commercial real estate sees more headwinds as corporates look to reduce office space and retail moves online. The high dividend yield is appealing in a low yield world.

Global
Global
Overweight
US
US
Overweight
Europe
Europe
Neutral
Asia
Asia
Overweight

The defensive staples sector is likely to underperform given the positive economic backdrop. Although valuations appear attractive relative to the cyclical sectors, slower year-on-year growth is expected this year as 2020 benefitted from COVID-19 fears that drove panic buying and stock-piling of consumer essentials.

Global
Global
Underweight
US
US
Underweight
Europe
Europe
Underweight
Asia
Asia
Underweight

Supply-demand imbalances continue to support oil prices with demand rebounding quickly to close to pre-pandemic levels as economies re-open. Volatility in energy prices and stocks may arise with the ebb and flow of geo-politics. 

Global
Global
Neutral
US
US
Neutral
Europe
Europe
Neutral
Asia
Asia
Neutral

COVID has spurred healthcare spending, which is likely to remain a priority for households and governments as large backlogs in elective surgical procedures should drive strong growth. Medical technology, biotech companies and preventative care benefit from strong demand. We expect volatility to resurface regarding regulation on drug pricing, when COVID is contained.

Global
Global
Neutral
US
US
Neutral
Europe
Europe
Neutral
Asia
Asia

Neutral

 

The sector has benefitted from various ‘green’ initiatives. Global sector valuations remain relatively attractive, but the sector is likely to underperform in the cyclical recovery.  

Global
Global
Underweight
US
US
Underweight
Europe
Europe
Underweight
Asia
Asia
Underweight

 

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.

View on this asset class has been upgraded

View on this asset class has been downgraded

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