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This commentary reflects the views of the Wealth Management Group of Standard Chartered Bank
Economic data continues to surprise on the upside. The US,
European and Japanese economic recoveries are continuing, while
China has seen a recent upturn in its economic indicators.
The Fed’s decision to delay the tapering of quantitative easing may
extend the life of our B.R.I.D.G.E. investment framework with global
equities and the income generation theme getting a boost.
However, the big picture has not changed, in our opinion. It remains
a matter of time before the Fed proceeds with tapering. While it is
possible that EM equities may outperform in the near term, there are two
things to note:
DM equities are expected to continue performing well,
especially as we head into a seasonally strong Oct-Dec period.
We continue to have a preference for DM equities over EM on a
6-12 month basis, with Europe remaining our favoured market.
We remain Underweight global bonds, as we expect the uptrend in
yields to continue longer term. Within USD bonds, we continue to prefer
a short maturity portfolio and US high yield bonds.
USD rally may be delayed by the Fed’s decision to postpone QE
tapering. This may allow the AUD to extend its gains short term.
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
Fed tries to lower interest rate expectations Implied 3-month interest rates (Eurodollar futures)
Source: Bloomberg, Standard Chartered Data as of 19 Sept 2013
Heading towards a seasonally strong period US and European equity markets- average monthly returns from 1993
Source: Bloomberg, Standard Chartered
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
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Mar
-14
Jun-
14
Sep
-14
Dec
-14
Mar
-15
Jun-
15
Sep
-15
Dec
-15
Mar
-16
Jun-
16
Sep
-16
Dec
-16
%
1-May 19-Sep
Fed's median forecast (end 2016)
Fed's median forecast (end 2015)
-1.2
-0.7
-0.2
0.3
0.8
1.3
1.8
2.3
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Mon
thly
retu
rns
(%)
US EU
B.R.I.D.G.E. Extended
GLOBAL MARKET OUTLOOKOctober 2013 This reflects the views of the Wealth Management Group
Asset Allocation Summary*
* ‘Start date’ reflects the date at which this tactical stance was initiated
Tactical Call Start Date
UW Feb-12
UW Jan-11
OW Aug-12
UW Jun-13
OW Jun-13
Equity
Commodities
Alternatives
L1 Asset Class
CashFixed Income
L1 Asset Class L2 Asset Class Tactical Call Start Date
Cash UW Feb-12
DM IG UW Jan-11
EM IG N Oct-12
DM HY OW Sep-11
EM HY N Sep-12US OW Apr-12
Europe OW Jul-13Japan N Apr-13
Asia ex-Japan UW Jun-13Other EM UW Aug-12
Commodities UW Jun-13Alternatives OW Jun-13
Fixed Income
Equity
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 – 19 September 2013 and 1 Month performance from 22 August – 19 September 2013 Sources: MSCI, JP Morgan, Barclays Capital, Citigroup, Dow Jones, HFRX, FTSE, Bloomberg, Standard Chartered
Market Performance Summary (Year to date & 1 Month)*
-2.0%1.8%
4.6%7.2%
10.7%
-12.8%-9.2%
-2.0%-1.6%-1.4%
2.6%
-20.1%-18.4%
-13.5%-8.8%
-6.5%3.3%
-2.1%-0.6%
3.7%3.9%
8.3%
-7.7%-5.2%
-3.0%-3.9%
-2.4%0.5%
0.3%6.3%
12.3%12.4%
17.6%16.5%17.4%
20.2%23.4%
29.2%28.6%
-7.8%-7.3%
-4.4%-2.3%
-1.0%4.7%
2.4%2.6%
8.0%14.7%
16.7%17.8%
19.4%19.1%
22.4%24.2%
‐30% ‐20% ‐10% 0% 10% 20% 30%
1234567891011121314151617181920212223242526272829303132333435363738394041424344454647484950515253545556575859606162636465666768697071
Year to Date
0.4%0.2%0.8%0.9%1.6%
-0.8%4.8%
2.8%1.6%
2.8%1.3%
0.1%-0.7%
-1.6%2.2%
0.8%-0.1%
1.1%3.2%
1.3%1.4%
3.0%
3.7%4.1%
2.4%0.6%1.0%1.7%
7.4%7.9%
5.3%6.0%
5.1%5.1%
6.8%6.6%
7.4%6.5%
3.4%
18.8%16.1%
12.3%11.1%11.1%11.8%
10.0%7.7%
10.4%5.6%5.8%
5.4%5.2%
-1.3%4.2%
7.7%
‐5% 0% 5% 10% 15% 20%
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
Global HY SovereignGlobal IG Sovereign
US SovereignEU Sovereign
MaterialsGlobal Property Equity/REITs
UtilitiesEnergy
Consumer StaplesIT
TelecomFinancialIndustrial
Consumer DiscretionaryHealthcare
BrazilIndia
EM ex AsiaAfrica
Emerging Markets (EM)Russia
Asia ex-JapanChina
AustraliaGlobal High Dividend Yield Equities
Global equitiesEurope
Developed Markets (DM)Middle East
USJapan
Alternatives
FX (against USD)
Commodity
Bonds | Credit
Equity | Country & Region
Equity | Sector
Bonds | Sovereign
1 Month
Global Market Outlook
3
The Fed’s decision not to ‘taper’ quantitative easing (QE) may
extend the validity of our B.R.I.D.G.E. investment framework.
In particular, we remain optimistic on the outlook for global
equities and selected income generating assets.
We expect the trend increase in bond yields to continue in the
coming 6-12 months.
Fed cautious, but still relatively upbeat. The Fed struck a slightly cautious
tone in its decision not to taper QE, but its forecasts are still for a significant
recovery in 2014. Its main concern is over tightening monetary conditions,
which have led to some weakness in the housing market. However, we see
the Fed’s decision as reinforcing the themes of global equity
outperformance and income generation strategies.
Both Emerging market (EM) and Developed market (DM) equities
should be given significant support by the Fed’s decision. On a relative
basis, however, we still prefer DM equities, particularly Europe, on a 6-
12 month basis. When looking at equity markets, we tend to focus on three
factors – valuations, economic momentum and liquidity. From a valuation
perspective, EM is still relatively attractive. However, we believe economic
momentum and liquidity is more favourable for DM:
We continue to believe the Chinese authorities favour
economic restructuring over a strong recovery and doubt the
economy will accelerate significantly in the coming 6-12 months.
We see the mix of eventually tighter US monetary policies
together with current account deficits and election cycles in
many EM countries as a potentially challenging mix for EM in
2014. This may drain liquidity from the region once the euphoria
surrounding the Fed decision fades.
Therefore, we believe DM equities will continue to outperform
EM on a 12-month time horizon. Our favoured market remains
Europe as the economy recovers, boosting medium term earnings
prospects. This does not mean that EM equity markets will
necessarily generate negative returns.
US Treasuries less expensive, but still expecting negative returns. The
rise in US Treasury yields over the past 4 months has reduced markedly the
overvaluation of US government bonds, in our opinion. This increases the
portfolio diversification benefits of this asset class going forward. However, it
is important to note our central expectation is for this asset class as a whole
to generate negative returns on a 12-month basis. Therefore, we retain our
short maturity profile stance in USD bond portfolios. The decline in yields
following the Fed’s September meeting is providing an opportunity for
investors to shorten their maturity profile where they have yet to do so.
We see DM equities as the favoured asset class on a 12 month view.
EM equities could continue outperforming in the short term, but we
doubt this will be sustained.
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 19 Sep 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 22 August to 19 September 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
Fed still forecasting a strong recoveryFOMC member median forecasts (%)
Source: Federal Reserve, Standard Chartered
EU earnings playing catch-up YTD consensus EPS growth expectations*(indexed=100)
Source: MSCI, Datastream, Standard Chartered * *MSCI US & MSCI EU 12m forward EPS estimates
‐3.9%
3.9%
‐5.7%
14.7%
9.1%
16.7%
-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
1.55
-1.37
0.78
0.59
5.80
0.03
-3 -1 1 3 5 7
Asian FX
USD Index
Commodities
Bonds
Equities
Cash
%
Change in real GDP
Sept projection 2.15 3.00 3.25 2.90
June projection 2.45 3.25 3.25 -
Unemployment rate
Sept projection 7.20 6.60 6.05 5.65
June projection 7.25 6.65 6.00 -
Inflation (PCE)
Sept projection 1.15 1.55 1.80 1.85
June projection 1.00 1.70 1.80 -
2014 2015 2016Variable 2013
70
75
80
85
90
95
100
105
110
115
120
Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13
Ind
exed
(100=
1Jan 1
3)
US EU
Investment Strategy: Talk ≠ Action
Global Market Outlook
4
Data continues to generally surprise on the upside.
In the US, manufacturing data has recovered strongly from a soft patch,
while housing market data is hinting at a modest slowdown.
In Europe and Japan, the data continues to improve.
In Asia, the data has clearly rebounded with China leading the way.
We remain sceptical as to how strong the Chinese authorities want the
economy to be and we are not looking for a strong recovery from here.
Key will be the Third Plenum in November.
US: Housing and labour market data slow, manufacturing recovers
Growth still likely to accelerate in H2, but some doubts emerge.
Manufacturing data has rebounded strongly while the labour market remains
relatively strong. However, there are some signs that the housing market
may be softening somewhat. On balance, we believe the long-awaited
economic acceleration is still likely.
Labour market still relatively strong. The employment report has
disappointed for two consecutive months with net job creation slowing
over that period. However, the continued decline in initial claims augurs
well, in our opinion, for the labour market to remain relatively firm.
Meanwhile, we have seen wage growth starting to tick slightly higher.
Housing market data ‘weakness’ spreads. Housing market data
weakness started with mortgage refinancing falling sharply on the back
of higher long term interest rates. We are also now seeing housing
starts – a measure of construction activity – starting to wane slightly.
Even house price gains slowed in the latest data, although they still rose
almost 1%. This is likely something the Fed is monitoring closely (as
well as labour market developments) in deciding when to taper policy.
Manufacturing rebound extends. Manufacturing business confidence
has risen sharply over the past two months. This gives us confidence in
the outlook for the manufacturing sector and the economy as a whole.
Fed on hold. There are 3 key things to note from the monetary policy
meeting last week.
Tapering: The Fed surprised the market by not tapering QE this month.
Fed chairman Ben Bernanke indicated FOMC members are monitoring
the impact of the tightening of ‘financial conditions’ – for example, rising
bond yields – on the economy.
Economic projections: The Fed’s growth outlook has moderated since
June. However, it is still looking for 3% growth in 2014, which is
significantly faster than its median 2.1-2.2% growth forecast for 2013.
Interest rate guidance: Bernanke reaffirmed 14 out of 17 FOMC
members expect interest rates to only rise in 2015 or later. The FOMC’s
median expectation is for the Fed Funds rate to be only 2% by the end
of 2016. This is a clear attempt to moderate interest rate expectations.
Debt ceiling talks will be key. The upcoming debt ceiling talks are a key
hurdle for financial markets. We believe the political dynamics are conducive
to this being a smoother process than in 2011, but we are still some way
from an agreement being reached.
US and Europe data still surprising on the upside Economic surprises indices – US & Euro area
Source: Citigroup, Bloomberg, Standard Chartered
Decline in new unemployment benefit claims suggest US job creation will remain robust US nonfarm payroll 3mma vs. Initial jobless claim 4wmma
Source: Bloomberg, Standard Chartered
US house prices still rising, but housing construction softens slightly US housing starts vs. Case Shiller-20 city home index
Source: Bloomberg, Standard Chartered
US manufacturing recovers strongly US ISM manufacturing PMI vs. ISM new orders SA
Source: Bloomberg, Standard Chartered
-100
-80
-60
-40
-20
0
20
40
60
80
100
Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13
Ind
ex
US EU
250
300
350
400
450
500
550
600
650
700
-1000
-800
-600
-400
-200
0
200
400
600
Mar-08 Jan-09 Nov-09 Sep-10 Jul-11 May-12 Mar-13
'000
'000
US nonfarm payroll 3mma Initial jobless claims 4wma (RHS)
-25
-20
-15
-10
-5
0
5
10
15
20
0
500
1000
1500
2000
2500
Aug-00 Aug-03 Aug-06 Aug-09 Aug-12
%
'000
US Housing starts Case-Shiller composite-20 city home index (y/y, RHS)
40
45
50
55
60
65
70
75
80
48
50
52
54
56
58
60
62
Aug-09 Mar-10 Oct-10 May-11 Dec-11 Jul-12 Feb-13
%%
ISM Manufacturing PMI ISM Manufacturing new orders SA (RHS)
Economic and policy outlook
Global Market Outlook
5
Europe: Recovery continues
Euro area business confidence data strengthens. After moving
above the critical 50 level meant to separate expansion from contraction,
the manufacturing PMI – a measure of business confidence – rose
sharply again in August and is now at the highest level since June 2011.
We continue to believe the Euro area is likely to recover from its most
prolonged recession since its inception.
ECB remains reassuringly cautious. ECB President Mario Draghi has
continued to stress the need to keep monetary policy accommodative
and has not ruled out a further interest rate cut. While we believe an
interest rate cut is unlikely, it is reassuring to see the ECB is nowhere
close to thinking about tightening policy.
Asia: Japan continues to recover, China positively surprises
Japan:
Signs on capital spending positive. Machinery orders have been
picking up significantly. The Tankan survey on business confidence will
be critical to short term sentiment.
Consensus 2014 growth estimates have continued to rise, despite
rising expectations that the government will increase the consumption
tax in April 2014. The Bank of Japan has indicated it will act
appropriately should the consumption tax undermine economic activity.
China:
Strong rebound likely to be temporary. Data from China has clearly
taken a turn for the better with industrial production and exports, for
example, accelerating in the past two months. This has come as a relief
to investors. However, consensus 2014 growth forecasts are still falling
(currently 7.4%).
Policy: We expect the authorities to keep a tight leash on credit creation.
This may not be through official policy tightening, but via allowing short
term interest rates to rise gradually and pushing through with interest
rate liberalisation.
Asia:
Benefiting from the rebound. The wider Asian region appears to be
seeing the initial benefits of the recent pick-up in the global economy.
The sensitivity to the US and Chinese economies is well documented,
but the acceleration in Japan and Europe are also positive factors.
Consensus growth forecasts for 2014 are generally higher than for 2013,
but are still generally being revised lower.
EM policy: The recent Fed decision to delay tapering may alleviate some of
the short term pressure on EM currencies, reducing the need to tighten
liquidity. However, this may prove temporary as the structural challenges
remain. Many countries in the EM world are entering their electoral cycles
with significant current account deficits at a time when the Fed is moving
towards less monetary policy accommodation (albeit delayed). 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 outlined in December last year. However, we
believe the picture is less positive for EM than it is for DM.
Europe manufacturing sector likely to strengthen Euro area industrial production vs. manufacturing PMI
Source: Bloomberg, Standard Chartered
China surprises positively, Japan struggles to meet expectations despite growth accelerating Economic surprises indices – China & Japan
Source: Citigroup, Bloomberg, Standard Chartered
Japanese companies accelerate investment spending Japan machinery orders excluding volatile orders (3mma)
Source: Bloomberg, Standard Chartered
China growth improves in past 2 months China industrial production vs. exports (%,y/y)
Source: Bloomberg, Standard Chartered
30
35
40
45
50
55
60
-25
-20
-15
-10
-5
0
5
10
15
Jan-05 Jul-06 Jan-08 Jul-09 Jan-11 Jul-12
%%
Industrial production Manufacturing PMI (RHS)
-100
-80
-60
-40
-20
0
20
40
60
80
100
120
-100
-80
-60
-40
-20
0
20
40
60
80
100
Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13
Ind
ex
Ind
ex
China Japan
600
650
700
750
800
850
900
950
1000
1050
Jul-03 Jan-05 Jul-06 Jan-08 Jul-09 Jan-11 Jul-12
JPY
(b
n)
5
7
9
11
13
15
17
19
21
23
-40
-30
-20
-10
0
10
20
30
40
50
60
Jan-05 Jul-06 Jan-08 Jul-09 Jan-11 Jul-12
%%
Export (y/y) Industrial production (y/y, RHS)
Global Market Outlook
6
We remain Underweight G3 government bonds, but recognise 10-year
Treasury yields are not as stretched at current levels as before.
US HY remains our preferred sub-asset class. EM HY, including Asia,
offers rising value, but further underperformance may be in the offing.
We believe it may be too early to enter Asian local currency markets
despite sizeable FX weakness.
G3 sovereign bonds:
Treasury valuations are not as stretched today as they were when
US 10-year yields was at 1.6%. While yields have retreated from 3%
following the Fed’s decision to delay tapering, it is worth noting that 10-
year yields are now much closer to estimates of ‘fair value’ (albeit less
so today at 2.75% than at 2.95% before the Fed meeting). This does not
change our expectation that yields will likely trend higher long-term as
Fed policy eventually tightens, but it does argue that bonds are now a
better source of portfolio diversification than six months ago.
Short-term, we continue to expect US 10-year Treasury yields to
consolidate within a 2.4-3.0% range. We believe investors should use
this pullback in yields to consider shortening duration, if appropriate.
Corporate credit (USD):
EM HY, including Asia, offers increasing value, but relative
underperformance may extend further in the short term. Last month,
we pointed out that Asian HY now offers close to a 2% premium over
US HY. While this rising presence of long-term value suggests the
likelihood of stronger performance ahead, we remain mindful of
continued tail risks (for example, a significant default event) in many
Asian, and EM, markets. In Asia, for example, HY credit rating
downgrades continue to outpace credit upgrades. Credit quality across
the broader Emerging market universe continues to deteriorate. A short-
term bounce is likely following the Fed’s decision to delay tapering, but
long-term we would not be in a hurry to add to this asset class.
US HY remains the most attractive part of global corporate credit,
in our view. Lending conditions remain comfortable, the all-in yield
remains reasonably attractive and it stands to benefit most directly from
any delay in Fed tapering. Perhaps most importantly, better liquidity
conditions relative to EM HY mean investors are likely to be somewhat
better protected in case conditions take a turn for the worse.
Local currency bonds:
Downside risks have likely reduced for the broader universe for
now. Over the past few months, many Asian currencies have weakened
while bond yields have gone up, in some cases quite significantly. We
believe downside risks are far better contained from today’s starting
point, but we do not believe they have been eliminated.
Conclusion: Remain Overweight US HY. Continue to favour corporates
over sovereigns. Downside risks have likely reduced for Asian local
currency bonds, but we do not believe they have been eliminated. Stay
Underweight G3 sovereigns and use pullback in yields to shorten
duration.
Performance of Fixed income YTD* (USD)
* For the period 31 December 2012 to 19 September 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
Rise in US yields may temporarily pause following the delay in Fed tapering US Treasury 10-year yield (%)
Source: Bloomberg, Standard Chartered Value emerging in EM debt, but under-performance may have further to run yet JPMorgan Emerging Markets Bond Index Diversified HY blended spread (%)
Source: JPMorgan, Bloomberg, Standard Chartered
US HY likely to benefit from delay in Fed tapering BarCap US HY Spreads (bps)
Source: Barclays Capital, Bloomberg, Standard Chartered
-2.84
3.67
3.78
8.32
-3.45
-0.55
-6 -2 2 6 10
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
+117bp
300
350
400
450
500
550
600
650
700
Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13
EMBI Diversified HY Blended Spread
Median
+1 std dev
-1 std dev
2
3
4
5
6
7
8
9
10
Sep-09Mar-10 Sep-10 Mar-11 Sep-11Mar-12 Sep-12Mar-13 Sep-13
BarCap US HY OAS
Median
+1 std dev (10y)
-1 std dev (10y)
Fixed Income – Underweight
Global Market Outlook
7
Global equities remain our preferred asset class and Europe (OW) our
preferred market – both expected to generate strong absolute returns.
We are Overweight the US and Underweight Asia ex-Japan and other
EM.
The Fed’s decision not to taper is a near term positive for global
equities:
EM may outperform near term as tightening fears subside. We would
use such strength to continue switching into DM.
In DM, early cyclicals (Technology, parts of Financials and Consumer
Discretionary) are likely, in our opinion, to outperform.
With yields declining, income generation still remains a theme on the
near term.
Our preference for DM has worked year-to-date and, with our
increasingly constructive view on Europe, we maintain this bias.
We expect corporate margins to start stabilising and for earnings to start
improving further out. This, together with cheap valuations and an
accommodative central bank, is supportive to further upside in this
market.
The Fed announcement is likely to push global equities higher near
term. Over the next few months, we expect any correction to likely be
fairly modest and in the magnitude of up to 5%. Given this, and the fact
that we are entering a seasonally strong period (see chart on Page 1),
we would suggest underweight investors consider adding to equities.
Regional and Country allocations:
DM preferred over EM: We maintain our preference for DM, though in the
near term expect that those markets most sensitive to foreign fund flows may
rally on the FOMC decision not to taper. We look at the markets from the
standpoint of liquidity, valuation and economic momentum.
Liquidity: Our longer term preference for DM is in part due to our view
that Fed tapering has only been postponed and will impact EM liquidity
significantly. EM assets were the biggest beneficiary of fund flows and
easy monetary policy in the US, and when this is unwound, EM may be
more vulnerable.
Economic Momentum: While the macro outlook is improving in DM, the
reverse is increasingly the case for EM, with China’s growth outlook for
example still being revised down.
Valuations: While EM valuations are relatively cheap, earnings
continue to be revised down across most of EM. While we believe this
may start to stabilise, it may remain headwind in the medium term.
Europe (OW): We expect Europe to outperform
Improving GDP and earnings: While earnings growth is likely to be
subdued for the next few quarters, we expect a significant improvement
further out. The economy is expected to show modest improvement
which will drive the sales line. Margins are also likely to start to stabilise
and we expect earnings growth to average low double digit for the next
two years.
Performance of Equity markets YTD* (USD)
* For the period 31 December 2012 to 19 September 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
Equities are still attractive relative to bonds MSCI AC World equity yield minus US 10y government bond yields
Source: Datastream, Standard Chartered
Any retracement expected to be in the regionof 5%, close to key support levels MSCI AC world index
Source: Bloomberg, Standard Chartered
DM expected to continue outperforming on thelonger term YTD consensus EPS growth expectations*(indexed=100)
Source: MSCI, Datastream, Standard Chartered *MSCI World & MSCI Emerging markets 12m forward EPS estimates
24.17
2.36
17.83
22.39
-1.00
19.42
16.72
-8 -2 4 10 16 22 28
Japan
Asia ex-Japan
Europe
US
Emerging Markets
Developed Markets
Global equities
%
-4
-2
0
2
4
6
8
10
Sep-88 Sep-92 Sep-96 Sep-00 Sep-04 Sep-08 Sep-12
%
MSCI AC World Earnings-Bond Yield Gap Average
310
320
330
340
350
360
370
380
Sep-12 Dec-12 Mar-13 Jun-13 Sep-13
Inde
x
MSCI AC World Index 200 dma
5.53%
80
85
90
95
100
105
110
115
Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13
Ind
exed
(100=
1Jan 1
3)
DM EM
Equity – Overweight
Global Market Outlook
8
Reversion to mean: The market is trading below its 10yr median (on
P/E and P/B metrics) and we expect this to narrow, as the underlying
fundamentals improve. This is likely to add around 3% of total return.
High dividend yield: The European market continues to offer an
attractive yield of over 4%.
Many investors are concerned EUR weakness will undermine USD
returns. While we are moderately bearish on the EUR in the medium term,
we still expect a higher return for European equities even in USD terms. In
terms of periphery vs. core, we are agnostic and believe stock picking across
the various markets is still the best strategy.
US (OW): We still see further upside
The bull market is increasingly mature and returns are likely, in our
opinion, to be lower than Europe.
However, earnings growth is still expected to come in at high single
digits and may accelerate if economic growth is better than expected.
Japan (N): Looking for a breakout
With the market consolidating along key support, the likelihood of a
breakout is increasing. While looking for a move higher, we are
concerned it could falter unless the economy strengthens of the BoJ
takes further action.
Asia ex-Japan (UW):
With tighter monetary policy, a weaker growth outlook and continuing
downward earnings revisions, we remain Underweight.
We expect markets with high current account deficits to remain volatile.
That said, valuations are cheap and when liquidity and economic
conditions stabilise on a sustainable basis, the rally could be swift.
South Korea (OW): We have upgraded our outlook for the market on the
basis that a weaken yen is largely priced in, the housing market is improving
and exports have rebounded. The earnings outlook has also improved
recently. We had gone UW in July on the expectation that earnings
expectations would be cut significantly – they were and the UW worked in
August, but we missed the recent rebound in both the data and the market.
Hong Kong (N): We have downgraded Hong Kong, to reflect our preference
for South Korea. While we considered increasing our weight for China,
currently Neutral, we decided against it for the moment preferring to wait for
the 3rd plenary session to give further clarity on future policy.
Preferred themes:
High dividend & high quality: This has been reinforced by the Fed’s
decision not to taper QE. However, it is important to pay close attention
to the company’s ability to maintain and expand dividends over time,
especially with some areas of high dividend equities looking expensive.
‘Defensive & early cyclicals’: This theme is particularly relevant to the
US and EU. We consider the US to be in the early recovery phase,
which usually sees Consumer Discretionary (CD), Financials and
Technology sectors perform best. We expect the US Technology sector
to outperform over the next 12m.
Conclusion: We continue to prefer equities to bonds and would
suggest underweight investors consider averaging into equities, with a
focus on Developed markets.
Regional/country allocations Asian country allocations should be seen in thecontext of the overall Asia ex-Japan UW
Source: Standard Chartered
EU corporate margins expected to stabilise Europe operating margin (%)
Source: MSCI, Bloomberg, Standard Chartered * MSCI EU trailing operating margin
Japan equities trading just above key support TPX index
Source: MSCI, Bloomberg, Standard Chartered * MSCI EU trailing operating margin
South Korea attractively valued 12m Forward P/B ratio of MSCI Korea
Source: MSCI, Datastream, Standard Chartered
Region/Country ViewUS OWEurope OWJapan NOther EM UWAsia ex-Japan UW
Malaysia OW
South Korea OW
Rest of Asia ex-Japan N
Indonesia UW
6
7
8
9
10
11
12
13
14
Sep-03 Mar-05 Sep-06 Mar-08 Sep-09 Mar-11 Sep-12
%
600
700
800
900
1000
1100
1200
1300
Sep-12 Dec-12 Mar-13 Jun-13 Sep-13
Ind
ex
TPX Index 200 dma 100 dma 50 dma
0.8
1
1.2
1.4
1.6
1.8
2
Jan-04 Jan-06 Jan-08 Jan-10 Jan-12
12m
Fo
rward
P/B
x
MSCI KOREA 1.067 P/Bx Median +- 1SD
Global Market Outlook
9
We remain Underweight commodities. Signs of stabilisation in
Emerging markets are not sufficient, on their own, to help begin
running down still-sizeable inventories in many industrial metals. The
Fed’s decision, meanwhile, may help keep gold range-bound in the
short-term, but it remains in a long-term downtrend, in our opinion.
We remain Underweight gold. Prices may remain relatively range-bound in
the short term as a relatively dovish Fed coincides with temporarily softer
Treasury yields and a lack of US Dollar strength. Our bias, however, remains
to the downside.
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
Long-term US Dollar strength also works against the metal
We remain Neutral on industrial metals. The rebound in recent Chinese
economic data is a near-term positive for industrial metals, especially
considering how much prices have already fallen. However, still-high
inventory levels mean any turn in demand will likely take time to feed through
into the price.
We remain Overweight oil and expect prices to remain largely range-bound
in the short term. According to IEA data, demand and supply are largely
balanced for the time being. Both trend growth in Emerging markets and
OPEC production have been stable. Falling US crude oil inventories are a
positive factor.
Geopolitical risks, however, have likely been overstated in the short term.
Syria-related risks, in particular, are unlikely to have a sustained impact on
oil prices because any conflict does not directly affect either the production
or transportation of oil.
We remain Neutral agricultural commodities. Improved weather
conditions relative to last year have raised expectations of a reasonable
harvest for key grains, placing downward pressure on prices. However, the
most recent US Department of Agriculture report for August reported a
smaller harvest yield than initially expected, a bullish outcome for prices. We
maintain a downward bias for agricultural prices in the short term due to the
upcoming harvest, but remain neutral long-term.
Conclusion: A gradual global recovery is moderately positive for global
commodity prices, but the lack of strong demand, still-high inventories
in selective metals and the lack of a convincing Chinese growth
rebound work against commodities for now. Gold prices, in particular,
may be range-bound in the short-term, but are likely to face further
weakness beyond that, in our view. We remain Underweight
commodities.
Delay in Fed tapering likely to result in gold remaining range-bound in the short term Gold prices vs. Fed total assets
Source: Bloomberg, Standard Chartered
Oil demand and supply largely balanced Crude oil demand and supply (Million barrels)
Source: Bloomberg, Standard Chartered
Global copper inventories remain very high LME and Shanghai copper inventories (mt)
Source: Bloomberg, Standard Chartered
500
700
900
1100
1300
1500
1700
1900
500
1000
1500
2000
2500
3000
3500
4000
Nov-05 May-07 Nov-08 May-10 Nov-11 May-13
US
D
US
D m
ns
Fed size of balance sheet Gold (RHS)
65
70
75
80
85
90
95
Dec-93 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11
mln
s o
f b
arr
els
pe
r d
ay
IEA Crude oil demand IEA Crude oil supply
0
100000
200000
300000
400000
500000
600000
700000
800000
900000
Oct-06 Dec-07 Feb-09 Apr-10 Jun-11 Aug-12
Mn to
ns
LME Copper Shanghai Copper
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 to the asset class, but given our strong preference
for equities, we favour equity long/short as an alternative way of
gaining equity exposure.
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 long term
and the outlook for some regional equity markets remains uncertain.
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. The delay in Fed tapering may
lead to an extension of recent weakness in the short term, but this is likely to
be temporary as long as the US economy and the Fed do not change
direction. Indeed, the Dollar Index is already close to the bottom of its recent
(since March) range, suggesting a rebound in Q4 may be likely. Long term,
eventual Fed tapering and rising yields are likely to ultimately prove
supportive for the USD, in our view.
EUR – We are moderately bearish in the medium term
Policymakers appear to have been relatively unsuccessful thus far in
signalling lower interest rates for longer in Europe than in the US, something
that has spilled over into EUR strength. However, the currency appears to be
approaching the top of its recent range, suggesting much of this may now be
in the price. Germany’s general election outcome later this month is key.
GBP – We are medium-term bearish
The Bank of England’s forward guidance appears to have done little to
contain recent GBP strength. However, we continue to believe further
aggressive monetary stimulus will likely be needed to bring the
unemployment rate lower. Relatively higher levels of inflation remain the key
risk that may potentially delay any further Bank of England easing.
JPY – We are medium-term bearish
The prospect of a consumption tax hike is now likely key to the JPY outlook.
Historically, similar tax rises have triggered weakness in growth. In today’s
Performance of Alternative Strategies YTD* (USD)
* For the period 31 December 2012 to 19 September 2013
Source: HFRX, Bloomberg, Standard Chartered
HFRX global hedge, HFRX equity hedge, HFRX event driven,
HFRX relative value, HFRX macro/CTA
Delayed Fed tapering is temporarily negative for the US Dollar DXY Index
Source: Bloomberg, Standard Chartered
-2.02
1.84
4.58
7.25
10.71
-4 -2 0 2 4 6 8 10 12
Macro CTAs
Relative Value
Composite
Equity Long/Short
Event Driven
%
65
70
75
80
85
90
95
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Inde
x
Fed expands QE1 program
Bernanke hints at QE2
program
Bernanke hints at QE3
program
QE1 purchases completed
QE2 purchases completed
USD FED minutes hint at end of QE3
USDstrengthens
USD weakens
Foreign Exchange
Alternative Strategies – Overweight
’Medium term’ refers to a 6-12 month horizon
Global Market Outlook
11
context, this suggests the Bank of Japan is likely to consider further
quantitative easing measures, which should be bearish for the JPY. This
may involve a period of temporary JPY strength preceding any such action,
but we expect the longer-term trend to be to JPY weakness.
AUD – We are medium-term bearish
We remain bearish on AUD given the likelihood of further rate cuts by the
Reserve Bank of Australia and continued softness in many commodity
prices. However, we do believe the recent rebound could temporarily extend
in the short term level. Net positions still remain very short despite the
rebound thus far, and the Fed’s decision to delay tapering is likely to cause
this rebound to extend a little further. We emphasise that we expect this
rebound to be temporary – it has been led to a large extent by market
positioning, but the longer-term fundamental factors continue to argue for a
weaker currency. We, therefore, see this rebound as an opportunity to
reduce exposure.
We continue to believe the NZD is likely to outperform the AUD due to
diverging central bank policy directions.
CNY – We are medium-term neutral
We believe Chinese authorities are likely to maintain a stable Renminbi
market 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
We believe the SGD is likely to offer some stability relative to the region,
offering a lower beta exposure to Asia ex-Japan currencies. The next
monetary policy decision is likely to be announced in October.
We are medium-term bearish on other Asia ex-Japan currencies
Asia ex-Japan currencies are likely to temporarily rebound in the short term
following the Fed’s decision to delay tapering, especially current account
deficit currencies that have been under the most pressure recently. However,
unless Fed policy direction changes outright, this will likely be only a
temporary reprieve for these currencies. Ultimately, policymakers will need to
address external imbalances or risk facing renewed currency weakness once
Fed tapering expectations re-appear. We remain bearish.
Conclusion: We remain medium-term bullish on the USD and bearish
on AUD and Asian currencies. The delay in Fed tapering may lead to a
temporary rebound in AUD and Asian currencies, but they are likely to
face renewed pressure once tapering expectations re-appear. We would
use the current rebound to reallocate towards the USD.
The Fed’s decision to push back tapering may extend the validity of our
B.R.I.D.G.E. investment framework, including the focus on global
equities and the continued search for yield. It may also lead to the short
term outperformance of EM asset classes, which were badly hit by
tapering concerns. However, we believe that this is likely to prove
temporary and as such retain our preference for Developed market
equities, particularly Europe.
YTD, USD has strengthened against EM currencies and range-bound against majors DXY index vs. ADXY index (100=Jan2013)
Source: Bloomberg, Standard Chartered
Asian current account balances still pose downside risk to regional currencies ADXY index vs. Current account % of GDP – Weighted according to components of the ADXY Index
Source: Bloomberg, Standard Chartered
98
100
102
104
106
108
Jan-13 Mar-13 May-13 Jul-13 Sep-13
Ind
exed
(100=
Jan2013)
DXY Index ADXY Index (Inv)
USDweakens
USDstrengthens
95
100
105
110
115
120
2
3
4
5
6
7
Oct-02 Feb-04 Jun-05 Oct-06 Feb-08 Jun-09 Oct-10 Feb-12 Jun-13
Ind
ex
% o
f G
DP
Current Account % of GDP - ADXY weighted ADXY Index (RHS)
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 - October 2013 (12M)
Investment Grade
High Yield
Developed Market Equity
Global Market Outlook
13
Economic & Market Calendar
20 September 2013 Source: Bloomberg, Standard Chartered
Next Week: September 23 - September 27 This Week: September 16 - September 20
Event Period Expected Prior Event Period Actual Prior
MO
N
TA Unemployment Rate Aug 4.2% 4.2% EC Labour Costs YoY 2Q 0.9% 1.7%
CH HSBC/Markit Flash Mfg PMI Sep 50.8 50.1 EC CPI YoY Aug F 1.3% 1.3%
SI CPI YoY Aug 2.1% 1.9% US Empire Manufacturing Sep 9.0 8.24
HK CPI Composite YoY Aug 4.4% 6.9% US Capacity Utilization Aug 77.9% 77.6%
EC PMI Manufacturing Sep A -- 51.4 US Manufacturing (SIC) Production Aug 0.7% -0.4%
EC PMI Services Sep A -- 50.7 NZ Westpac Consumer Confidence 3Q 115.4 116.6
EC PMI Composite Sep A -- 51.5 IN Wholesale Prices YoY Aug 6% 5.8%
US Chicago Fed Nat Activity Index Aug -- -15.0%
TU
E
GE IFO Business Climate Sep -- 107.5 UK CPI YoY Aug 2.7% 2.8%
GE IFO Current Assessment Sep -- 112.0 EC ZEW Survey Expectations Sep 58.6 44.0
GE IFO Expectations Sep -- 103.3 GE ZEW Survey Current Situation Sep 30.6 18.3
US S&P/CS Composite-20 YoY Jul 12.6% 12.1% GE ZEW Survey Expectations Sep 49.6 42.0
US Richmond Fed Manufact. Index Sep -- 14.0 US CPI YoY Aug 1.5% 2.0%
US Consumer Confidence Index Sep 80.4 81.5 US CPI Ex Food and Energy YoY Aug 1.8% 1.7%
US NAHB Housing Market Index Sep 58.0 58.0
SI Electronic Exports YoY Aug -9.2% -11.1%
SI Non-oil Domestic Exports YoY Aug -6.2% -1.9%
AU RBA Policy Meeting
HK Unemployment Rate SA Aug 3.3% 3.3%
WE
D
JN Machine Tool Orders YoY Aug F -- -1.8% UK Bank of England Minutes
TA Export Orders YoY Aug 1.5% 0.5% US MBA Mortgage Applications Sep-13 11.2% -13.5%
GE GfK Consumer Confidence Oct -- 6.90 US Housing Starts Aug 891K 883K
US MBA Mortgage Applications Sep-13 -- 11.2% AU Conference Board Leading Index Jul 0.3% -1.1%
US Durable Goods Orders Aug 0.10% -7.4% MA CPI YoY Aug 1.9% 2.0%
US Durables Ex Transportation Aug 1.0% -0.8% CH Foreign Direct Investment YoY Aug 10.0% 24.1%
US Cap Goods Orders Nondef Ex Air Aug 1.2% -4.0%
US Cap Goods Ship Nondef Ex Air Aug -- -1.7%
US New Home Sales Aug 425K 394K
TH
UR
SK Consumer Confidence Sep -- 105.0 US FOMC Rate Decision Sep-13 0.25% 0.25%
SI Industrial Production YoY Aug 5.9% 2.7% JN Leading Index CI Jul F 107.9 107.8
TA Industrial Production YoY Aug 2.3% 2.1% US Initial Jobless Claims Sep-13 -- 309K
HK Exports YoY Aug 3.5% 10.6% US Philadelphia Fed Business Outlook Sep 10.0 9.3
HK Imports YoY Aug 3.8% 8.3% US Existing Home Sales Aug 5.26M 5.39M
TA CBC Benchmark Interest Rate Sep-13 1.9% 1.88% NZ GDP YoY 2Q 2.5% 2.7%
UK GDP YoY 2Q F -- 1.5% HK Composite Interest Rate Aug 0.32% 0.32%
US Initial Jobless Claims Sep-13 -- --
US Pending Home Sales YoY Aug -- 8.6%
US Kansas City Fed Manf. Activity Sep -- 8.0
FR
I
JN Natl CPI YoY Aug -- 0.7% CA CPI YoY Aug 1.3%
CH Industrial Profits YTD YoY Aug -- 11.1% IN RBI Cash Reserve Ratio Sep-13 -- 4.0%
TH Mfg Production Index ISIC NSA YoY Aug -- -4.5 IN RBI Repurchase Rate Sep-13 -- 7.3%
EC Economic Confidence Sep -- 95.2 IN RBI Reverse Repo Rate Sep-13 -- 6.3%
EC Industrial Confidence Sep -- -7.9
EC Consumer Confidence Sep F -- --
EC Services Confidence Sep -- -5.30
US PCE Core YoY Aug 1.2% 1.2%
US Univ. of Michigan Confidence Sep F 78.0 76.8
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. 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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. 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