Global Market Outlook - Standard Chartered · PDF fileGlobal Market Outlook ... we continue to...
Transcript of Global Market Outlook - Standard Chartered · PDF fileGlobal Market Outlook ... we continue to...
This commentary reflects the views of the Wealth Management Group of Standard Chartered Bank
Global equities continue to climb the wall of worry. It is normal for
equity markets to start rallying even when there are a lot of fears in the
market. Indeed, many believe this is when returns are strongest. This
period of strong returns in the face of persistent fears is sometimes
referred to as ‘climbing the wall of worry’.
US equities have been climbing the wall of worry for some time. We
went overweight US equities in April 2012. At the time, there were many
excuses to ignore our views (see chart below). The deferment of the
latest excuses, debt ceiling fears and the government shutdown, pushed
the US market to a new all-time high within 24 hours.
While we remain bullish on US equities, we believe Europe has
greater scope to continue climbing the wall of worry in the coming
12 months. Investors are far from convinced the recent economic
recovery will prove sustainable, for instance citing record unemployment
levels. Meanwhile, banking sector stress tests are another reason to
worry, as is the reducing popularity of the Euro project in some of the
core countries, although notably not in Germany.
Positives are being downplayed. The fact that the periphery countries
have made substantial progress in addressing both fiscal and current
account deficits has been lost on many. As has the fact that equity
markets should do well from high unemployment levels as accelerating
growth can occur with no concern about inflationary pressures.
We expect strongly positive returns from European equities in the
coming 12 months as investors start to accept the economic recovery
is likely to be sustained, earnings are likely to accelerate and the
political commitment to the single currency project remains strong.
Contents Market Performance Summary Pg 2
Investment strategy Pg 3
Economic and policy outlook Pg 4
Asset class outlook
Fixed income Pg 6
Equities Pg 7
Commodities Pg 9
Alternative strategies Pg 10
Foreign exchange Pg 10
Conclusion Pg 11
Asset allocation summary Pg 12
Economic & market calendar Pg 13
Disclaimer Pg 14
Steve Brice Chief Investment Strategist
Rob Aspin, CFA Head, Equity Investment Strategy
Manpreet Gill Head, FICC Investment Strategy
Adi Monappa, CFA Head, Asset Allocation
Audrey Goh, CFA Investment Strategist
Victor Teo, CFA Investment Strategist
Climbing the ‘wall of worry’
US equities are still climbing the ‘wall of worry’
Source: Bloomberg, Standard Chartered
Global Market OutlookThis reflects the views of the Wealth Management GroupNovember 2013
Global Market Outlook
2
*Performance in USD terms unless otherwise stated, YTD period from 31 Dec 2012 – 16 May 2013 Sources: MSCI, JP Morgan, Barclays Capital, Citigroup, Dow Jones, HFRX, FTSE, Bloomberg, Standard Chartered
* All performance shown in USD terms unless otherwise stated. *YTD performance data from 31 Dec 2012 – 24 Oct 2013 and 1 Month performance from 24 Sep – 24 Oct 2013 Sources: MSCI, JP Morgan, Barclays Capital, Citigroup, Dow Jones, HFRX, FTSE, Bloomberg, Standard Chartered
Market Performance Summary (Year to date & 1 Month)*
-1.9%2.1%
5.4%8.8%
12.2%
-10.8%-7.4%
-1.3%-1.0%-0.3%
4.6%
-21.3%-19.6%
-14.0%-9.2%-8.5%
2.1%
0.9%1.0%
6.0%6.8%
12.3%
-5.6%-2.9%
-1.5%-1.0%-0.8%
3.6%
1.3%7.8%
14.2%14.9%
19.3%19.6%
23.1%24.1%
26.5%32.2%32.6%
-6.8%-5.4%
-4.0%-0.5%-0.1%0.0%
3.5%5.6%
11.2%17.0%
19.3%21.3%22.2%22.3%
24.7%26.1%
30% ‐10% 10% 30%
1234567891011121314151617181920212223242526272829303132333435363738394041424344454647484950515253545556575859606162636465666768697071
Year to Date
0.3%0.3%
0.9%1.7%
1.2%
1.5%2.5%
1.4%1.0%1.2%
2.4%
3.4%1.8%2.1%
0.4%0.3%
-0.7%
2.0%2.1%
1.9%2.2%
4.0%
2.3%3.0%
0.6%2.0%
2.8%3.0%
3.0%3.8%
2.6%2.8%2.9%2.9%
4.2%6.3%
3.3%3.8%
3.5%
1.9%6.3%
2.3%4.2%
2.1%-1.6%
2.0%2.9%
4.9%2.9%
3.4%2.1%
4.7%3.5%3.4%
0.9%
‐4% ‐2% 0% 2% 4% 6% 8%
Macro CTAsArbitrage
Composite (All strategies)Equity Long/Short
Event Driven
JPYAUDSGD
Asia ex-JapanGBPEUR
Precious MetalGold
Industrial MetalAgriculture
Diversified CommodityCrude Oil
Global IG CorporatesAsia High Yield Corporates
US High YieldGlobal High Yield Corporates
Europe High Yield
EM IG SovereignAsia EM Local Currency
US SovereignGlobal IG Sovereign
Global HY SovereignEU Sovereign
MaterialsGlobal Property Equity/REITs
EnergyUtilities
Consumer StaplesIT
FinancialTelecomIndustrial
HealthcareConsumer Discretionary
BrazilIndia
EM ex AsiaAfrica
Emerging Markets (EM)China
Asia ex-JapanRussia
AustraliaGlobal High Dividend Yield Equities
Global equitiesMiddle East
EuropeDeveloped Markets (DM)
USJapan
Alternatives
FX (against USD)
Commodity
Bonds | Credit
Equity | Country & Region
Equity | Sector
Bonds | Sovereign
1 Month
Global Market Outlook
3
Over the next 12 months, we expect:
equity markets to perform well, led by Developed markets (DM).
Asia ex-Japan expected to generate positive returns
the recent strong performance of investment grade bonds to
reverse and generate negative returns
US and Europe high yield to generate positive returns
Paradoxically, the recent government shutdown/debt ceiling debacle
should prove positive for global equities. With economic data likely to be
weak near term, the Fed may further delay the tapering of asset purchases.
This is supportive for global equities and may lead to short term out-
performance of Emerging market (EM) equity markets while offering an
opportunity to reduce Asian local currency bond exposures.
However, we continue to have a preference for DM equity markets on a
6-12 month basis. We expect liquidity conditions in Europe and Japan to
continue easing and even when tapering begins in the US, we believe this
will have a limited impact on the US equity market. However, eventually
liquidity conditions in EM may become less supportive - we have already had
a taste of what tapering could mean for currencies and liquidity in the region.
Additionally, China is proactively trying to control credit creation.
Under-performance relative to DM, but still positive performance. We
expect EM/Asia ex-Japan (AXJ) equities to under-perform DM over the next
6-12 months. That said, we believe AXJ markets will generate positive
returns given still-reasonable earnings growth, cheap valuations and a 2.6%
dividend yield. Therefore, we prefer a diversified global equity exposure,
tilted towards DM equities, but certainly not exclusively DM-focused.
USD-denominated investment grade bonds expected to generate
negative returns over the next 12 months. We believe recent positive
returns are likely to reverse as the uptrend in yields resumes once economic
data rebounds. Thus, we prefer to focus on high yield credit in the US and
Europe where we expect low, but positive, returns over the next 12 months.
We still see DM equities as the favoured asset class on a 12 month
view. EM equities could outperform in the short term, and are likely to
generate positive returns over the next 12 months.
B.R.I.D.G.E. themes performing well so far B.R.I.D.G.E. performance YTD (USD)*
* For the period 31 Dec 2012 to 24 Oct 2013 Source: Bloomberg, Standard Chartered * Income basket is equally weighted performance of global high dividend yielding equities (MSCI ACWI High Dividend Yield USD),Global HY bonds (BarCap Global HY TR USD) and Asian local curr bonds (BarCap Asia Local Net TR USD, until 20 June)
Asset Performance (USD)*
* For the period 24 Sept to 24 Oct 2013
Source: Bloomberg, Standard Chartered Indices are JP Morgan US 3M Cash Index, MSCI AC World TR Net, CITI World BIG, DJ-UBS Commodities, DXY and ADXY
‐1.0%
6.8%
‐5.7%
17.0%
11.1%
19.3%
-12% -7% -2% 3% 8% 13% 18%
Overweight Assets
Underweight Assets
+ High Dividend Yield Equities
Diversified Income Basket
Global Equities
+ Asia Local Currency Bonds
+ Global High Yield Bonds
G3 IG Bonds
Trade closed on 20 June 2013
0.97
-1.71
0.27
2.02
3.36
0.03
-3 -1 1 3 5
Asian FX
USD Index
Commodities
Bonds
Equities
Cash
%
Investment Strategy: ‘Risk on’ extended
Asset allocation summary*
Source: Standard Chartered, *’start date’ reflects the date at which this tactical stance was initiated
Asset Class Relative Outlook Start Date Relative Outlook Start Date
Cash UW Feb-12 Cash UW Feb-13
Fixed Income UW Jan-11 UW Jan-11
Equity OW Aug-12 N Oct-12
Commodities UW Jun-13 OW Sep-11
Alternatives OW Jun-13 N Sep-12
US OW Apr-12
Europe OW Jul-13
Legend Japan N Apr-13
Asia ex-Japan UW Jun-13
OW - Overweight N - Neutral UW - Underweight Other EM UW Aug-12
DM - Developed Markets Commodities UW Jun-13
EM - Emerging Markets Alternatives OW Jun-13
DM Investment Grade
EM Investment Grade
DM High Yield
EM High Yield
Sub-asset Class
Equity
Start Date - Date at which this tactical stance was initiated
Fixed Income
Global Market Outlook
4
Data becoming more mixed.
In the US, data has become more mixed. New orders sentiment remains
consistent with strong growth going forward while housing data has
stabilised. However, employment data has continued to soften.
In Europe and Japan, the data continues to point to a sustained
recovery with business confidence remaining firm.
In Asia, the economy has stabilised, but we continue to believe the
Chinese authorities do not want too strong an economic rebound. This
view is reinforced by recent interest rate moves and policy statements.
US: Still on recovery path
While data may soften in the near term, the recovery remains on track.
The government shutdown and last minute deal to avoid a breach of the debt
ceiling is likely to have negatively impacted sentiment and the economy. This
likely pushes Fed tapering into 2014.
Labour market data weakens. The employment report has been weak
for three consecutive months. More recently, initial benefit claims have
risen. While the latter has been caused by temporary factors, it is adding
to concerns the recent slowdown in job creation will extend.
Housing market data mixed. After a period of weakness, the situation
is stabilising. Construction activity is starting to increase and house
prices are still rising, reducing the number of home-owners that are in
negative equity.
Business confidence remains robust. Business confidence indices for
both the manufacturing and service sectors remain well above the 50
level which separates expansion and contraction. Meanwhile, the new
orders indices are the strongest areas of both surveys.
Government indecision has three implications:
Growth: Near term data releases may disappoint as the effects of the
government shutdown and uncertainty surrounding the debt ceiling talks
undermine activity.
Tapering: This backdrop is likely to persuade FOMC members to hold
off on tapering its asset purchases this year. We now expect the Fed to
taper only in Q1, with a bias to this happening later rather than earlier. It
would require strong upside data surprises to bring tapering to
December, in our opinion. It is important to note, however, that the
composition of FOMC voting members becomes more hawkish in 2014.
Chances of a long term fiscal deal have increased: Both political
parties and the President have seen dissatisfaction ratings rise. We
believe this increases the incentive to get a deal done before we run into
the debt ceiling again in Q1/Q2 of next year. The key is whether the
politics within the Republican Party allow for this to happen.
Europe: Recovery continues
Euro area business confidence data remains firm. Business
confidence data continues to point to an expansion in both the
manufacturing and service sectors. While we saw a marginal decline in
the latest surveys, they remained well above the 50 level – which
Positive economic surprises starting to wane Economic surprise indices – US & Europe
Source: Citigroup, Bloomberg, Standard Chartered
US labour market data weakens slightlyUS non farm payroll vs. initial jobless claims
Source: Bloomberg, Standard Chartered
US housing market is still on an uptrend NAHB index and US home price index %,y/y
Source: Bloomberg, Standard Chartered
US forward-looking indicators still strong US ISM new orders – Manufacturing and non-manufacturing
Source: Bloomberg, Standard Chartered
-210
-160
-110
-60
-10
40
90
140
Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13
Ind
ex
US Europe
300
350
400
450
500
550
600
650
700
-1000
-800
-600
-400
-200
0
200
400
600
Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13
'000
'000
US nonfarm payroll 3mma Initial jobless claims 4wma (RHS)
-15
-10
-5
0
5
10
0
10
20
30
40
50
60
70
Sep-08 Aug-09 Jul-10 Jun-11 May-12 Apr-13
%
Ind
ex
NAHB Index Home price index y/y (RHS)
30
35
40
45
50
55
60
65
70
Jan-09 Sep-09 May-10 Jan-11 Sep-11 May-12 Jan-13 Sep-13
Ind
ex
ISM Manufacturing PMI ISM Non-Manufacturing
Economic and policy outlook
Global Market Outlook
5
separates sector expansion from contraction – and was likely affected
by short term political uncertainty in both the US and Germany.
Economy sweet spot to extend. Inflation remains low and falling. High
levels of unemployment mean wage pressures are unlikely to increase
for many months, and possibly years, to come. This view is reinforced
by the continually dovish stance taken by European Central Bank
officials with a potential interest rate cut and another liquidity injection
still being discussed.
Banking sector stress tests important. The ECB is due to start
examining the health of Euro area banks in November. This will be key
as it may encourage banks to boost capital ratios – either by
constraining lending or raise capital – as well as raising provisions. This
is a potential source of risk.
Asia: Japan recovering, positive surprises in Asia ex-Japan wane
Japan
Signs on capital spending positive. The Bank of Japan’s quarterly
survey of Japanese companies showed that business investment plans
are accelerating. It seems business leaders are becoming increasingly
optimistic that ‘Abenomics’ will work. This optimism could prove self-
reinforcing, especially if wages start to accelerate.
Increase in consumption tax mitigated by the stimulus package.
The government has confirmed its plan to hike the consumption tax in
April 2014. However, the government has announced a stimulus
package to support the economy through the transition. Consensus
2014 growth forecasts have been stable since the announcement
suggesting analysts are willing to give the government the benefit of the
doubt and are projecting the recovery to extend into 2014.
China
Data may be taking a pause. There are signs the Chinese economic
recovery, following the government’s mini-stimulus, may be pausing.
Retail sales and industrial production data decelerated marginally while
power production fell. However, new loans accelerated, suggesting the
economy is unlikely to slump significantly in the coming months.
Policy: We expect the authorities to keep a tight leash on credit creation
as they try to balance off the need for growth and the need to avoid a
credit bubble. This view is reinforced by a central bank adviser saying
policy will be tightened slightly following the recent increase in inflation.
Rest of Asia:
Growth still relatively tepid. The wider Asian region appears to be
seeing the initial benefits of the recent pick-up in the global economy.
Growth is expected to pick up as we move into 2014.
EM policy: The likelihood that the Fed may not taper until Q1 2014 is likely
to alleviate some of the short term pressure on EM currencies, reducing the
need to tighten liquidity. However, many countries in the EM world are
entering their electoral cycles with significant current account deficits.
Therefore, we expect liquidity to generally tighten over the next 6-12 months.
Overall, the economic data is consistent with the ‘Transition to
Stronger Growth’ theme. However, we still foresee some speed bumps,
especially for some of the Emerging markets, along the way.
Europe manufacturing sector likely to strengthen Euro area – Manufacturing and services PMI
Source: Bloomberg, Standard Chartered
Economic surprises between China and Japan starting to converge Economic surprises indices – China & Japan
Source: Citigroup, Bloomberg, Standard Chartered
Japanese companies accelerate investment spending Japan Tankan business conditions, Manufacturing and Non-manufacturing
Source: Bloomberg, Standard Chartered
China recovery remains relatively tepid China manufacturing PMI and power production, % y/y
Source: Bloomberg, Standard Chartered
35
40
45
50
55
60
65
30
35
40
45
50
55
60
65
Mar-06 Apr-07 May-08 Jun-09 Jul-10 Aug-11 Sep-12
Ind
ex
Ind
ex
Europe Manufacturing PMI Europe Services PMI (RHS)
-150
-100
-50
0
50
100
Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13
Ind
ex
China Japan
-40
-30
-20
-10
0
10
20
30
-70
-60
-50
-40
-30
-20
-10
0
10
20
30
40
Mar-99 Apr-01 May-03 Jun-05 Jul-07 Aug-09 Sep-11
%%
Fixed Investments Manufacturing Fixed Investments Non-Manufacturing (RHS)
Global Market Outlook
6
We remain Underweight G3 government bonds. Rise in Treasury yields
is likely delayed, but is still expected as we move into 2014.
Developed market, both the US and Europe, high yield are our preferred
exposure within corporate credit.
We close our CNH bond Overweight on rising credit concerns.
The current rebound offers an opportunity to reduce Asia local
currency bond exposure at better levels.
G3 sovereign bonds:
Long-term path for US Treasury yields remains to the upside, but
short-term outlook is now likely more subdued. A higher likelihood of
a delay to Fed QE tapering is likely to delay a rise in US Treasury yields.
While much of the delay is now likely in the price, yields are likely to
remain largely around current levels until the tapering conversation
returns to the table. We maintain our view that 10-year Treasury yields
are likely to remain within a 2.4-3.0% range for now.
Longer-term, however, this does not change our view that Treasury
yields are likely to trend higher. Tapering of Fed QE purchases is only
delayed, not indefinitely postponed, in our view. We continue to believe
a short maturity profile is appropriate on a 12-month investment horizon.
Corporate credit (USD):
We remain comfortable with Developed market high yield credit.
Our case for US HY remains unchanged – lending conditions remain
comfortable, the all-in yield remains reasonably attractive and default
rates remain low. There are a number of similarities with European HY.
Valuations are largely in a similar place to US HY (see chart on left) and
an improving economic outlook arguably reduces forward-looking
default risks. While we believe risks for the HY asset class are gradually
rising, we believe Developed market HY (i.e. the US and Europe) offer
the most attractive relative value within corporate credit. As before,
however, we recognise total returns are likely to be moderate.
Local currency bonds:
Take profits on CNH bonds. ‘Dim Sum’ bonds have performed
reasonably well since we went Overweight, but we believe this is the
right time to take profits. We have noted before that the rising number of
ratings downgrades relative to upgrades is one piece of evidence
suggesting credit risks in Asia may be rising. Given the large number of
corporates (including unrated corporates) in the CNH universe, we
believe it makes sense to use the current rally to take profits.
Use rebound to reduce exposure to Asia local currency bonds. A
resumption in Fed tapering expectations is ultimately likely to lead to
renewed Asian FX weakness, similar to that witnessed in Q3. We see
the current rebound in this asset class as an opportunity for investors
who have not yet reduced exposure, as we suggested earlier, to do so.
Conclusion: Overweight Developed market HY. Continue to favour
corporates over sovereigns. Use current rebound to reduce exposure
to Asia local currency bonds, including taking profit on CNH bonds.
Stay Underweight G3 sovereigns.
Performance of Fixed income YTD* (USD)
* For the period 31 December 2012 to 24 October 2013
Source: Barclays Capital, JPMorgan, Bloomberg, Standard
Chartered. Indices are Barclays Capital US Agg, US High Yield,
Euro Agg, Pan-Euro High Yield, JPMorgan Asia Credit Index
Key support remains at 2.4% for US 10-year Treasury yields US treasury 10y yields trough to peak
Source: Bloomberg, Standard Chartered
European HY arguably offers slightly greater value relative to US HY US, Europe HY spreads, deviation from median
Source: Barcap, Bloomberg, Standard Chartered
Asian FX rebound likely offers an opportunity to reduce Asia local currency bond exposure BarCap EM Asia local currency, total returns index
Source: Barcap, Bloomberg, Standard Chartered
-0.62
6.02
6.84
12.31
-1.39
0.96
-4 0 4 8 12
US IG
US High Yield
Europe IG
Europe High Yield
Asia IG
Asia High Yield
%
2.401
3
5
7
9
11
13
15
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
%
+285bp
+325bp
+263bp
+160bp
-3
-1
1
3
5
7
Jun-09 Jan-10 Aug-10 Mar-11 Oct-11 May-12 Dec-12 Jul-13
%
BarCap Europe HY Barcap US HY
135
140
145
150
155
160
Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13
Ind
ex
50% retracement from May to August fall
Fixed Income – Underweight
Global Market Outlook
7
Given a gradually improving macro backdrop, benign inflation and still
loose G3 monetary policy settings, we believe equities will continue to
outperform other asset classes and end the year higher – particularly in
the case of Europe. Our view is supported by the fact that we are
entering what is typically a strong seasonal period for equities.
While constructive, we are the first to acknowledge that risks remain
and investors need to be cognisant that a) equities have had a strong
run year-to-date and b) that it remains a very policy-driven environment.
We maintain our preference for the Developed markets (DM) over Emerging
markets (EM) on a 6-12 month basis. However, as we noted last month, the
decision by the Fed not to taper has been supportive to EM equities and they
continued to marginally outperform this month due to the US debt ceiling and
Federal budget discussions being pushed out. We see this EM rally possibly
continuing a little further into year end, at least until the fears over tapering
come back to haunt the market. With this is mind, we would continue to
advocate that investors that are relatively OW EM, consider to shift some of
this exposure into the Developed markets, with a particular preference for
Europe.
We stick with our preference for DM longer term on the basis of:
Economic Momentum: The growth differential keeps narrowing. While
the macro outlook is improving in DM, the reverse is increasingly the
case for EM, with growth expectations being revised down.
Earnings expectations: While EM valuations are relatively cheap,
earnings continue to be revised down and the weaker macro outlook
may remain a headwind on the longer term. In parts of DM such as
Europe, there is scope, albeit on the longer term, for significant
improvement in earnings, due to operational leverage and margin
improvement.
Liquidity and stronger USD: Fed tapering has, in our view, only been
postponed and the eventual tightening will likely be negative for EM in
relative terms.
Key region/country views:
Europe (OW): Since going OW in July the market has outperformed and
we expect further upside.
Underlying economic data has continued to show improvement.
Although very early in the earnings season, companies are beating
earnings expectations and this may be a reflection of margins
stabilising/improving, in line with our expectations. Margins have been
beaten down over the past years and there is upside potential here.
While valuations have largely reverted back to their 10yr mean, the
improvement in margins and outlook will likely be reflected in an
improvement in earnings revisions (we are already starting to see this).
Since investor sentiment improved in July, we have seen the more cyclical
parts of the market outperform, particularly the previously sold down areas.
This is in line with our preference for ‘defensive & early cyclicals’ and we
Performance of Equity markets YTD* (USD)
* For the period 31 December 2012 to 24 October 2013 Source: Bloomberg, Standard Chartered. Indices are MSCI World TR, MSCI Emerging Markets TR, MSCI USA TR, MSCI Europe TR USD, MSCI Asia ex-Japan TR USD, MSCI Japan TR USD
US and EU entering a period of seasonal strength US and Europe equity market – average monthly returns from 1993
Source: MSCI, Bloomberg, Standard Chartered
DM has significantly outperformed since YTD MSCI World/MSCI Emerging markets price ratio
Source: Bloomberg, Standard Chartered
EU margins have fallen and room to improve MSCI Europe and US operating margins
Source: Bloomberg, Standard Chartered
26.14
3.49
22.19
24.73
-0.07
22.25
19.31
-8 -2 4 10 16 22 28
Japan
Asia ex-Japan
Europe
US
Emerging Markets
Developed Markets
Global equities
%
80
85
90
95
100
105
110
115
120
125
130
Jan-13 Mar-13 May-13 Jul-13 Sep-13
Ind
exed
=100(J
an 2
013)
Global Developed Emerging
6
7
8
9
10
11
12
13
14
15
Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12
%
Europe US
Equity – Overweight
Global Market Outlook
8
find the best opportunities in the Industrials sector and particularly those
areas of the market that are more domestically focussed.
US (OW): While Europe is preferred, the US should still offer further
upside.
Earnings are so far coming in ahead of expectations – of the companies
that have reported, the earnings surprise has been 5.1%, with earnings
growth coming in at over 6%.
With the Fed still very supportive, underlying inflation remaining low, the
housing market improving, economic growth likely to pick up and
companies doing share buybacks, the equity market should be well
supported.
We believe valuations will eventually overshoot into overvalued territory.
The best opportunity in the US, in our opinion, is the Technology sector.
It offers great value, higher than average returns on capital invested and
should benefit from an eventual improvement in technology capex.
Japan (N): BoJ actions still supportive.
We still have a preference for taking hedged exposure to Japan
(expecting the Yen to weaken further) and to the exporters.
Asia ex-Japan (UW):
Asian equity markets still expected to generate positive returns.
Valuations vary substantially across the region, but overall they remain
cheap relative to history – on both price-to-book and price-earnings
perspectives – and cheap relative to bonds.
Earnings growth is expected to remain relatively robust – the consensus
is for over 12% earnings growth. While this may prove slightly optimistic,
we believe earnings growth will remain significantly positive. Add in the
c.2.6% dividend yield and it would take a significant decline in valuations
to generate negative returns over the next 12 months.
Preferred themes:
High dividend & high quality: With cash and sovereign bonds offering
so little yield, or income, investors are likely to still favour equities for
their high dividend yield. The European market for example still offers a
yield of c.3.5%.
‘Defensive & early cyclicals’: This theme is particularly relevant to the
US and EU. In the US, we have a key preference for Technology while
in Europe we favour the more domestic focussed players and Industrials.
Risk to our view. Equities have continued to climb the wall of worry. EM
equities have rallied as fears of a hard landing in China and tapering eased.
In DM, the markets continue to get unprecedented support from central
banks in the form of QE and low interest rates. Kicking the ‘debt ceiling can’
down the road has also been supportive. Should underlying economic
growth disappoint, however, and/or monetary policy unexpectedly tighten,
equities may start to underperform. With this in mind, we advocate investors
consider having a balanced approach, maintaining diversity and a focus on
stock specific drivers, rather than just chasing the momentum.
Conclusion: We continue to prefer equities to bonds and would
suggest underweight investors consider averaging into equities, with a
focus on Developed markets.
Expectations for EU earnings showing an improving trend 12m forward EPS% (indexed=100, 1 March 2013)
Source: Datastream, Standard Chartered
Earnings beating expectations in US S&P 500 3Q earnings surprise
Source: Bloomberg, Standard Chartered
Average age of Tech equipment reaching historical peaks Age of Technology equipment and software in US
Source: Bank Credit Analyst Research, Standard Chartered
Asia ex-Japan earnings revisions still negative but trend improving MSCI Asia ex-Japan earnings revisions ratio and 3m chg% in 12m forward EPS
Source: Datastream, Standard Chartered Earnings revision ratio=Net upgrades/(Upgrades+Downgrades)*100
80
85
90
95
100
105
110
115
120
125
130
Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13
Ind
exed
(100=
1 M
ar
13)
US EU
5.1%
2.6%
14.2%
3.3%
4.2%
4.1%
2.0%
2.5%
0.9%
7.0%
6.2%
0 50 100 150 200 250
AllSecurities
Energy
Materials
Industrials
Discretionary
Staples
HealthCare
Financials
Technology
Telco
Utilities
No
of
co
mp
anie
s
Beat In-line Miss % - Earnings surprise
-10
-8
-6
-4
-2
0
2
4
6
8
-8
-6
-4
-2
0
2
4
6
Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13
Rat
io
%
MSCI ASIA EX-JAP 3m% Chg 12m Fwd EPS Earnings Revision Ratio(RHS)
Global Market Outlook
9
We remain Underweight commodities. A potential delay in Fed tapering
may be a short term positive for select commodities, but gold’s
disappointing performance during the US debt ceiling debate, in
particular, raises doubts on the extent of any potential strength in
commodities. Oil may fail to support the broader asset class due to
seasonal weakness. Continued uncertainty in China remains an
overhang.
We remain Underweight gold. There is a risk prices may strengthen
somewhat in the short term as a weaker US Dollar and a likely delay in Fed
QE tapering support the metal. However, a large part of this move may have
already occurred, suggesting further upside may be limited to key resistance
at USD 1360 or, at the most, USD 1420. A break below the long-term trend-
line (see chart on left) would be, technically, a very bearish outcome for gold.
Longer term, we maintain our Underweight and bearish view on gold:
The inflation-adjusted price of gold remains very high, inconsistent with
the low level of US inflation
Rising equity returns and bond yields over the longer term will likely
continue to raise the opportunity cost of holding gold
Geopolitical concerns have, thus far, provided little support. Gold’s
disappointing performance over the course of the US debt ceiling, in
particular, suggesting risk aversion may not be a significant source of
support.
Long-term US dollar strength would also work against the metal
We remain Neutral on industrial metals. Still high inventory levels and the
lack of any significant turnaround in final demand remain key risks. A delay
in Fed tapering may prove to be supportive in the short term, but this impact
alone is likely to be only temporary.
We remain Overweight oil, but expect prices to remain largely within their
3-year range. Demand and supply data remain well-matched for now. A
delay in Fed tapering would likely be temporarily positive for oil, but keep in
mind we are entering a seasonally weak period for oil prices (see chart on
left). Together, they point to a fairly balanced outlook for oil.
We remain Neutral agricultural commodities. Smaller-than-expected
planting intentions in the US (i.e. smaller acreage than expected) proved to
be initially supportive for most agricultural commodity prices. Indonesia’s
intentions to redirect some crude palm oil output towards domestic biodiesel
may place upward pressure on palm oil prices. Total demand, however,
remains subdued which, in turn, is likely to keep a lid on agri prices.
Conclusion: A delay in Fed tapering is positive for commodity prices in
the short term, but still high inventories (metals), seasonal weakness
(oil) and very high inflation-adjusted prices (gold) are likely to continue
weighing on commodities over a longer time horizon.
Performance of Commodities YTD* (USD)
* For the period 31 December 2012 to 25 October 2013
Source: DJUBS, Bloomberg, Standard Chartered
DJUBS, DJUBS Agri, DJUBS Precious metals, DJUBS
Energy, DJUBS Industrial metals
Break below long-term trendline would be very negative for gold Gold spot (USD/Oz)
Source: Bloomberg, Standard Chartered
We are entering a seasonally weak period for oil prices Average monthly performance of crude oil from 1988
Source: Bloomberg, Standard Chartered
-13.98
-0.81
-21.31
-9.19
-8.54
-30 -25 -20 -15 -10 -5 0
Industrial Metals
Energy
Precious Metals
Agriculture
Commodities composite
%
135
335
535
735
935
1135
1335
1535
1735
1935
2135
Oct-00 Oct-02 Oct-04 Oct-06 Oct-08 Oct-10 Oct-12
US
D/O
z
0.57%
1.60%
3.97%
2.56%
0.59%1.18%
5.61%
3.19% 3.06%
-2.98%-2.61%
-1.15%
-4%
-2%
0%
2%
4%
6%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
%
Commodity – Underweight
Global Market Outlook
10
We remain Overweight Alternative Strategies, based on our view that
the asset class offers exposure to our preferred asset classes, but with
the possibility of lower volatility. A diversified approach offers
attractive exposure by itself, but equity long/short offers an alternative
way of gaining exposure to equities, our preferred asset class.
Diversified exposure to Alternative strategies remains attractive, in our
view. A basket of alternative strategies offers the potential of a lower level of
volatility (relative to equities) and somewhat limited sensitivity to rising
interest rates. We view both these characteristics as attractive in an
environment where interest rates may continue trending higher over the long
term and the outlook for some regional equity markets remains uncertain.
Equity long-short and event-driven strategies remained the top-performing
strategies both year-to-date and for the full month of September.
We see equity long/short strategies as attractive for investors
uncomfortable with accepting the volatility associated with long-only
exposure. These strategies can be interesting for investors wanting to raise
equity exposure to benefit from what we view to be an attractive long-term
trend, but are uncomfortable with the inescapable volatility associated with a
long-only position.
Conclusion: Maintain Alternative Strategies Overweight. Favour
diversified exposure and equity long-short strategies both as portfolio
diversifiers and for lower volatility relative to long-only equities.
USD – We are moderately bullish on the USD in the medium term
We remain moderately bullish on the USD, but acknowledge the currency
may remain weak in the short term. The economic impact from the
temporary US government closure and relatively disappointing recent
economic data is likely to mean Fed tapering is delayed. While the USD may
have already largely priced this in, we are conscious that negative
momentum poses the risk of further weakness in the short term. Beyond
that, however, we continue to believe tapering of QE purchases is still likely
in 2014. This, together with our expectation for gradually higher Treasury
yields, causes us to maintain our medium term bullish view.
EUR – We are moderately bearish in the medium term
EUR strength may persist largely due to USD weakness in the short term. A
strong current account balance and rising Bund yields countries have also
supported to the currency. However, we continue to believe an eventual
resumption of Fed tapering expectation and likely European policymakers
preference to keep lower rates for longer than the are likely to weigh on the
currency. We therefore maintain our medium term bearish view on the Euro.
GBP – We are medium-term bearish
Inexpensive valuations and USD weakness are likely to offer some short-
term support to the currency. However, we continue to believe continued
monetary stimulus is likely needed to meet unemployment goals, which is
medium-term bearish for the currency. Elevated inflation remains a key risk.
Performance of Alternative Strategies YTD* (USD)
* For the period 31 December 2012 to 24 October 2013
Source: HFRX, Bloomberg, Standard Chartered
HFRX global hedge, HFRX equity hedge, HFRX event driven,
HFRX relative value, HFRX macro/CTA
USD likely to remain within long-term sideways range DXY Index
Source: Bloomberg, Standard Chartered
-1.88
2.10
5.43
8.76
12.17
-4 -2 0 2 4 6 8 10 12 14
Macro CTAs
Relative Value
Composite
Equity Long/Short
Event Driven
%
77
78
79
80
81
82
83
84
85
Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13
Ind
ex
Foreign Exchange
Alternative Strategies – Overweight
Medium term refers to a time horizon of 6 to12 months Short term refers to a horizon of the less 3 months
Global Market Outlook
11
JPY – We are medium-term bearish
Extreme net short market positioning and Japan’s decision to raise the
consumption tax poses the risk of short-term Yen strength. However, we
continue to believe the Bank of Japan is likely to act to defend its inflation
goal if growth suffers. We, therefore, remain comfortable with a long-term
bearish view on the currency.
AUD – We are medium-term bearish
Extreme market positioning has largely corrected following the currency’s
recent bounce. While we believe the RBA is likely to continue favouring a
weaker currency, the risk of renewed inflation pressure may hold the central
bank back from being able to lower rates further. Lacklustre commodity
prices are also not a support. We believe current levels offer an
opportunity to reduce exposure to the AUD.
We have favoured the NZD over the AUD since late February this year, a
trade that has performed well so far. However, given Australia’s higher
inflation outlook, is is likely the yield premium offered by NZD rates over AUD
rates has now peaked. We prefer to close this idea at this time.
CNY – We are medium-term neutral
We believe Chinese authorities are likely to maintain a stable Renminbi in
the midst of ongoing policy reforms and development of the offshore
Renminbi market. It remains our preferred regional currency.
SGD – We are medium-term neutral
The policy decision to maintain ‘modest and gradual appreciation’ of the
currency is in line with our view that the currency is likely to offer relative
stability in the region. We maintain a neutral medium-term view on the SGD.
We are medium-term bearish on other Asia ex-Japan currencies
Asia ex-Japan currencies are likely to be one of the key short-term
beneficiaries of any potential delay in Fed QE tapering. However, we are
reluctant to chase any rally as a large part of these expectations appear to
be in the price now following the currencies’ recent rally.
Longer-term, we remain concerned about continued external imbalances and
debt levels in select countries. An eventual Fed tapering decision poses the
risk of renewed volatility amongst the countries facing the largest risks. We,
therefore, remain medium-term bearish.
Conclusion: We remain medium-term bullish on the USD and bearish
on AUD and Asian currencies.
The likely delay in Fed tapering may lead to further, but temporary, USD
weakness. However, a likely eventual resumption of the Fed QE
tapering conversation causes us to maintain our medium-term views,
even if paths diverge in the short term.
The likely delay in Fed tapering is providing further support for global
equities. It is also encouraging investors to continue looking at
investments that generate significant income. EM equities may
outperform short term on the back of a likely delay in Fed tapering.
However, over the longer term, we expect DM equities to outperform as
Fed tapering comes back on the agenda. As such, we retain our
Overweight on Europe and US equities.
Current account surpluses have been a key source of support for EUR EUR currency and Euro area current account balance (%)
Source: Bloomberg, Standard Chartered
NZD outperformance over AUD has likely run its course NZD-AUD pair
Source: Bloomberg, Standard Chartered
Market positioning strongly net short the JPY JPY non-commerical future positions
Source: Bloomberg, Standard Chartered
Rising China FX reserves suggest appreciation pressure remains in place China foreign exchange reserves
Source: Bloomberg, Standard Chartered
-2.5
-1.5
-0.5
0.5
1.5
2.5
0.6
0.8
1
1.2
1.4
1.6
1.8
Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12
%
EU
R
Current Account Balance (RHS) EUR Curncy
0.77
0.79
0.81
0.83
0.85
0.87
0.89
Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13
NZ
D-A
UD
22 Feb 2013: expressed preference for NZD over AUD
-200
-150
-100
-50
0
50
Jan-05 Jan-07 Jan-09 Jan-11 Jan-13
'000
Co
ntra
cts
1.5
2
2.5
3
3.5
Jan-09 Sep-09 May-10 Jan-11 Sep-11 May-12 Jan-13 Sep
Trill
ion
Conclusion
Global Market Outlook
12
Asset Allocation Summary
Source: Standard Chartered
All figures are in percentages Currency : USD
Summary View vs. SAA Conservative ModerateModerately Aggressive
Aggressive
Cash UW 21 0 0 0
Fixed Income UW 35 35 17 4
Equity OW 27 43 61 86
Commodities UW 5 9 9 4
Alternatives OW 12 13 13 6
Asset Class Region View vs. SAA Conservative ModerateModerately Aggressive
Aggressive
Cash & Cash Equivalents USD Cash UW 21 0 0 0
IG Developed World UW 24 15 0 0
IG Emerging World N 4 9 3 0
HY Developed World OW 2 6 6 2
HY Emerging World N 5 5 8 2
North America OW 8 12 17 23
Europe OW 9 13 18 26
Japan N 0 2 2 3
Asia ex-Japan UW 8 13 20 27
Other EM UW 2 3 4 7
Commodities Commodities UW 5 9 9 4
Hedge FoF/CTAs OW 12 13 13 6
Emerging Market Equity
Tactical Asset Allocation - November 2013 (12M)
Investment Grade
High Yield
Developed Market Equity
Global Market Outlook
13
Economic & Market Calendar
25 October 2013 Source: Bloomberg, Standard Chartered
Next Week: October 25 - November 1 This Week: October 18 - October 25
Event Period Expected Prior Event Period Actual Prior
MO
N
CH Industrial Profits YTD YoY Sep -- 12.80% US Chicago Fed Nat Activity Index Sep -- 0.14
SK Consumer Confidence Oct -- 102 US Existing Home Sales MoM Sep -1.9% 1.7%
US Dallas Fed Manf. Activity Oct -- 12.8 JN Exports YoY Sep 11.5 14.7
JN Imports YoY Sep 16.5 16
JN Leading Index CI Aug F 106.80 106.50
TA Export Orders YoY Sep 2.0% 0.5%
HK CPI Composite YoY Sep 4..6% 4.5%
SK Foreign Direct Invetsments YoY 3Q -32.90% -3.30%
TU
E
JN Jobless Rate Sep 4.0% 4.1% US Richmond Fed Manufact. Index Oct 1.00 0.00
JN Small Business Confidence Oct -- 49.8 TA Unemployment Rate Sep 4.18% 4.19%
IN RBI Repurchase Rate Oct-13 7.75% 7.50% US Empire Manufacturing Oct 1.52 6.29
US Retail Sales Ex Auto and Gas Sep 0.50% 0.10%
US S&P/CS Composite-20 YoY Aug 12.40% 12.39%
US Consumer Confidence Index Oct 76 79.7
WE
D
SK Industrial Production YoY Sep -- 3.3% UK Bank of England Minutes -- --
JN Industrial Production YoY Sep P 6.20% -0.40% US MBA Mortgage Applications Oct-13 0.3% 1.3%
EC Economic Confidence Oct -- 96.9 CA Bank of Canada Rate Decision Oct-13 1.0% 1.0%
EC Industrial Confidence Oct -- -6.7 EC Consumer Confidence Oct -14.5 -14.9
US MBA Mortgage Applications Oct-13 -- -0.60% AU CPI YoY 3Q 2.2% 2.4%
US CPI Ex Food and Energy YoY Sep 1.8% 1.8% CH MNI Business Sentiment Indicator -- --
US CPI YoY Sep 1.2% 1.5% SI CPI YoY Sep 1.6% 2.0%
TA Industrial Production YoY Sep 1.06% -0.70%
MA CPI YoY Sep -- 1.9%
JN Small Business Confidence Oct -- 49.8
US NAHB Housing Market Index Oct 55.0 57.0
TH
UR
US FOMC Rate Decision Oct-13 -- 0.25% EC PMI Manufacturing Oct A 51.3 51.1
NZ RBNZ Official Cash Rate Oct-13 2.5% 2.5% EC PMI Services Oct A 50.9 52.2
JN Markit/JMMA Manufacturing PMI Oct -- 52.5 EC PMI Composite Oct A 51.5 52.2
NZ ANZ Business Confidence Oct -- 54.1 US Initial Jobless Claims Oct-13 358K 373K
TA GDP YoY 3Q P 2.50% 2.49% US New Home Sales MoM Sep -- 7.9%
JN Construction Orders YoY Sep -- 21.4% US Kansas City Fed Manf. Activity Oct 6 2
TH Exports YoY Sep -- 2.5% CH HSBC/Markit Flash Mfg PMI Oct 50.9 51.2
EC Unemployment Rate Sep -- 12.0% HK Exports YoY Sep 1.5% -1.3%
EC CPI Core YoY Oct A -- 1.0% HK Imports YoY Sep 0.4% -0.2%
CA GDP YoY Aug -- 1.4%
US Initial Jobless Claims Oct-13 -- --
JN BoJ Monetary Policy Statement Oct-13 -- --
FR
I
SK CPI YoY Oct -- 0.80% GE IFO Business Climate Oct -- 107.7
SK Exports YoY Oct -- -1.50% GE IFO Current Assessment Oct -- 111.4
SK HSBC/Markit Manufacturing PMI Oct -- 49.7 GE IFO Expectations Oct -- 104.2
CH Manufacturing PMI Oct -- 51.1 UK GDP YoY 3Q A -- 1.3%
CH HSBC/Markit Manufacturing PMI Oct -- 50.2 US Durable Goods Orders Sep -- 0.10%
TA HSBC/Markit Manufacturing PMI Oct -- 52 US Cap Goods Orders Nondef Ex Air Sep -- 1.5%
ID HSBC/Markit Manufacturing PMI Oct -- 50.2 US Univ. of Michigan Confidence Oct F -- 75.2
ID CPI YoY Oct -- 8.40% SK GDP YoY 3Q P 3.3% 2.3%
ID Exports YoY Sep -- -6.30% JN Natl CPI YoY Sep 1.1% 0.9%
IN HSBC/Markit Manufacturing PMI Oct -- 49.6 SI Industrial Production YoY Sep -- 3.5%
AU Commodity Index YoY Oct -- -3.10% TH Mfg Production Index ISIC NSA YoY Sep -- -3.10%
US ISM Manufacturing Oct 55.10 56.2
TH CPI YoY Oct -- 1.42%
ID Consumer Confidence Index Oct -- 107.1
Previous data are for the preceding period unless otherw ise indicated Previous data are for the preceding period unless otherw ise indicated
Data are % change on preivous period unless otherw ise indicated Data are % change on preivous period unless otherw ise indicated
P - preliminary data, F - f inal data, sa - seasonally adjusted P - preliminary data, F - f inal data, sa - seasonally adjusted
YoY - year on year, MoM - month-on-month YoY - year on year, MoM - month-on-month
Global Market Outlook
14
Disclosure Appendix
This document is not research material and it has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. This document does not necessarily represent the views of every function within the Standard Chartered Bank, particularly those of the Global Research function. Standard Chartered Bank is incorporated in England with limited liability by Royal Charter 1853 Reference Number ZC18. The Principal Office of the Company is situated in England at 1 Basinghall Avenue, London, EC2V 5DD Standard Chartered Bank is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. In Dubai International Financial Centre (“DIFC”), the attached material is circulated by Standard Chartered Bank DIFC on behalf of the product and/or Issuer. Standard Chartered Bank DIFC is regulated by the Dubai Financial Services Authority (DFSA) and is authorised to provide financial products and services to persons who meet the qualifying criteria of a Professional Client under the DFSA rules. The protection and compensation rights that may generally be available to retail customers in the DIFC or other jurisdictions will not be afforded to Professional Clients in the DIFC. Banking activities may be carried out internationally by different Standard Chartered Bank branches, subsidiaries and affiliates (collectively “SCB”) according to local regulatory requirements. With respect to any jurisdiction in which there is a SCB entity, this document is distributed in such jurisdiction by, and is attributable to, such local SCB entity. Recipients in any jurisdiction should contact the local SCB entity in relation to any matters arising from, or in connection with, this document. Not all products and services are provided by all SCB entities. This document is being distributed for general information only and it does not constitute an offer, recommendation, solicitation to enter into any transaction or adopt any hedging, trading or investment strategy, in relation to any securities or other financial instruments. This document is for general evaluation only, it does not take into account the specific investment objectives, financial situation, particular needs of any particular person or class of persons and it has not been prepared for any particular person or class of persons. Opinions, projections and estimates are solely those of SCB at the date of this document and subject to change without notice. Past performance is not indicative of future results and no representation or warranty is made regarding future performance. Any forecast contained herein as to likely future movements in rates or prices or likely future events or occurrences constitutes an opinion only and is not indicative of actual future movements in rates or prices or actual future events or occurrences (as the case may be). This document has not and will not be registered as a prospectus in any jurisdiction and it is not authorised by any regulatory authority under any regulations. SCB makes no representation or warranty of any kind, express, implied or statutory regarding, but not limited to, the accuracy of this document or the completeness of any information contained or referred to in this document. This document is distributed on the express understanding that, whilst the information in it is believed to be reliable, it has not been independently verified by us. SCB accepts no liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental or consequential loss or damage) from your use of this document, howsoever arising, and including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault, mistake or inaccuracy with this document, its contents or associated services, or due to any unavailability of the document or any part thereof or any contents. SCB, and/or a connected company, may at any time, to the extent permitted by applicable law and/or regulation, be long or short any securities, currencies or financial instruments referred to on this document or have a material interest in any such securities or related investment, or may be the only market maker in relation to such investments, or provide, or have provided advice, investment banking or other services, to issuers of such investments. Accordingly, SCB, its affiliates and/or subsidiaries may have a conflict of interest that could affect the objectivity of this document. This document must not be forwarded or otherwise made available to any other person without the express written consent of SCB. Copyright: Standard Chartered Bank 2013. Copyright in all materials, text, articles and information contained herein is the property of, and may only be reproduced with permission of an authorised signatory of, Standard Chartered Bank. Copyright in materials created by third parties and the rights under copyright of such parties are hereby acknowledged. Copyright in all other materials not belonging to third parties and copyright in these materials as a compilation vests and shall remain at all times copyright of Standard Chartered Bank and should not be reproduced or used except for business purposes on behalf of Standard Chartered Bank or save with the express prior written consent of an authorised signatory of Standard Chartered Bank. All rights reserved. © Standard Chartered Bank 2013.
THIS IS NOT A RESEARCH REPORT AND HAS NOT BEEN PRODUCED BY A RESEARCH UNIT.