We believe that US equities will continue to outperform as compared to other major equity markets in H2. Strong US corporate earnings are a cornerstone of our view, given that expected earnings growth for the next 12 months has been revised higher since the start of the year. We expect gains to broaden beyond the Mega-cap technology and communication sector stocks by the end of this year.
US equity valuations are high and have been one key pushback against our positive view. However, we believe these are justified by a high return on equity (ROE). In our view, this suggests valuations are unlikely to be a barrier to further gains in an environment where markets remain focused on growth assets amid upcoming Fed rate cuts.
12m forward Price/Book vs. return on equity
Source: FactSet, Standard Chartered
Nevertheless, despite strong gains in early 2024, equities may face short-term volatility due to low cash levels and the upcoming US elections.
Beyond the US, we have a Neutral view on most other major markets. We have upgraded Euro area equities from Underweight to Neutral. This is due to a revival in growth despite political uncertainties.
We also have a Neutral view on Japan. The positive factors such as share buybacks, shareholder-friendly reform, and higher nominal growth are offset by negative signals from our technical investment models. We are Underweight on UK equities amid low earnings expectations.
We are Overweight on Indian equities. The economic and earnings growth outlook stays positive and the completion of elections puts a key event risk behind us. Indian equity markets rank second highest, after the US, in terms of ROE. While valuations are challenging, we prefer large-cap equities which will help to mitigate this risk.
We have a Neutral view on Chinese equities. Positioning and valuations suggest the easy gains are now behind us as both metrics have moved away from excessively negative extremes. This now puts the onus on earnings growth, which is likely to require greater policy support.
‘Carry’, or the yield, remains the key opportunity in bond and FX markets. It is, however, much harder to find value. This balance causes us to have a Neutral view on global bonds.
History reminds us that US dollar bond yields generally peak not far from when the Fed stops hiking rates and fall near or ahead of Fed rate cuts. While the magnitude of this decline varies depending on the size of rate cuts, history strongly argues for locking in today’s yield. Holding a benchmark allocation to bonds in a diversified portfolio is attractive compared to cash. We have a Neutral view between government and corporate bonds. While corporate bonds offer a slightly higher yield, their yield premiums over government bonds offer little value.
Emerging Market (EM) bonds offer both opportunity and risk. We are Overweight on EM USD-denominated government bonds due to the high yield and better value. This means they are likely to outperform global bonds. In contrast, we are Underweight on EM local currency bonds as we believe the yield does not compensate for taking on currency risk. Many major EMs are also unlikely to cut rates as deeply or rapidly as Developed Market (DM) central banks, limiting price gains in EM local currency bonds.
Gold has been a top-performing asset class in the first half of this year. What we find most interesting is how the gold rally continues to be driven by a tight demand/supply balance rather than falling bond yields. We see room for this to continue given central bank demand is strong, while a likely decline in interest rates in the coming months turns more supportive for gold amid central bank rate cuts. While we continue to have a Neutral view on the asset class, H1 has been a lesson on why it is important to build and maintain a core holding in gold within diversified foundation portfolios.
Read our Global Market Outlook here
