Standard Chartered Bank remains optimistic about equities in the next 6-12 months, but warns of potential short-term risks that could impact markets. The bank’s latest market outlook suggests that fundamentals and quantitative models continue to support equities, particularly in Asia ex-Japan markets, Japan, and Europe. However, it advises investors to rotate their exposure from US equities to Asia ex-Japan, viewing any US equity rallies as opportunities to rebalance their portfolios.
The bank also identifies opportunities in fixed income, specifically in emerging market local currency bonds and mid-maturity US dollar-denominated bonds. With credit spreads on corporate bonds narrowing, Standard Chartered prefers high-quality bonds over cash and recommends locking in yields for longer durations.
Despite the overall positive outlook, the bank notes that the Federal Reserve faces a balancing act in its policy decisions. With US job market data weakening and producer prices still elevated, markets are pricing in a potential rate cut in September. Standard Chartered believes that interest rates remain above the Fed’s estimated neutral policy, which biases the decision towards cutting rates.
The bank also comments on trade policy, highlighting the risks associated with US tariff actions, including higher-than-expected tariffs on India and the extension of the tariff pause on China. However, it notes that markets are becoming less reactive to tariff announcements compared to previous episodes.
The key assumption underpinning Standard Chartered’s expectation of a “soft landing” for the US economy is the likelihood of Fed rate cuts. However, persistent inflation pressures pose a significant risk to this outlook. Overall, the bank’s commentary suggests that investors should remain cautious in the short term, while maintaining a longer-term bullish outlook on equities.
In terms of investment strategy, Standard Chartered recommends maintaining Japan and Europe as core holdings, while rotating exposure from US equities to Asia ex-Japan markets. The bank also advises investors to take advantage of fixed income opportunities, particularly in emerging market local currency bonds and mid-maturity US dollar-denominated bonds. By doing so, investors can potentially mitigate short-term risks and position themselves for long-term growth.