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StanChart still bullish on global equities
EQUITIES are still preferred to bonds in an environment where yields are low, according to Standard Chartered's semi-annual investment update. The bank remains bullish on global equities - favouring, in order, Europe, the United States, and Asia ex-Japan.
Although there is concern that US equities are overvalued, StanChart's chief investment strategist for group wealth management, Steve Brice, said given where inflation is currently, equities should be more expensive than they are today.
With the current inflation rate of 2.1 per cent in the US, the average historical price-to-earnings (P/E) ratio of the S&P 500 has been 19.5. The current P/E is 17.9. "To us, that suggests that we don't believe valuations in the current inflation environment are a constraint to strong performance for US equities," said Mr Brice.
He expects P/E in the US to increase as long as inflation remains benign, from 0-4 per cent.
On top of an accommodative monetary policy in Europe, bank lending is already picking up, said Mr Brice. "What was interesting from an economic perspective is that we were expecting the economy to be dragged kicking and screaming into recovery by US growth. What's actually happened is that domestic demand has been fairly robust," he said.
Due to differentials in US and Europe monetary policy, Mr Brice also expects the euro to weaken. With about a third of corporate earnings coming from outside the eurozone, a weaker euro would boost corporate earnings.
In Asia ex-Japan, China's consensus growth expectations have been 7.3 per cent for the past six weeks, said Mr Brice. This seems to be stabilising. "Growth expectations, we believe, are starting to bottom," he said, adding that both liquidity conditions and market momentum in the region are improving.
Within Asia, StanChart is neutral on Singapore equities, with non-expensive valuations and strong corporate governance. But a tightening labour market could undermine growth and inflation, said Mr Brice. Investors' search for high yields continues, and real estate investment trusts (Reits) are very attractive, he said. Office Reits are favoured as StanChart believes they are less overvalued.
Mr Brice expects more volatility in this area due to earlier interest rate hikes. StanChart foresees interest rates being hiked in the first half of next year, about six months ahead of current market expectations.
This could cause "short- term digestion challenges" for high-dividend-yielding stocks, said Mr Brice. "We're expecting to go through it quite comfortably as monetary policy elsewhere in the world is very loose," he said.