Moderately risk-on and still positive on US stocks

Highlights:

• Equities to outperform
• Japan, India, UK equities worth a look
• AI theme is attractive even with valuation concerns
• Gold as portfolio diversifier

Eli Lee, chief investment strategist, Bank of Singapore: WE HAVE a moderately risk-on stance. We broadly expect risk assets to remain relatively supported. Our base case is for two 25 basis point (bps) rate cuts by the US Federal Reserve and an economic soft landing in the US. Still, we’re watchful of the risk of market volatility as uncertainties related to the US presidential election and global geopolitical risks ratchet up.

Historically, equities’ multiples tend to be supported in periods when the Fed cuts rates. At the same time, we see the outlook for global growth and corporate earnings growth to be resilient. This constructive backdrop underpins our overall overweight stance in equities in our tactical asset allocation strategy.

Within global equities, we favour Asia ex-Japan – with a preference for India, Indonesia, South Korea, Singapore, Hong Kong and China. In particular, India’s prospects appear bright with an improving fundamental outlook and positive earnings revision momentum. In terms of equity sectors, we favour technology, consumer staples and healthcare.

We recently moved our overall stance in fixed income to “neutral”, given rising uncertainties related to long-dated bond yields. In our view, it is still premature to predict the outcome of the US presidential election, but we are wary that investors could increasingly discount a potential Trump-win scenario. Ex-president Trump’s proposed policies on tariffs and fiscal spending, if implemented, are likely to result in upward pressure on inflation and long-dated bond yields.

Our 12-month forecast for the 10-year US Treasury (UST) yield is 4.25 per cent, and we expect long-dated bond yields to be mostly range-bound ahead, as the duration factor wanes as a positive tailwind for fixed income returns.

We continue to favour gold as an effective portfolio diversifier which is likely to further benefit from positive catalysts, such as central bank buying, US fiscal sustainability fears and anticipated Fed rate cuts.

We believe that the India equity market’s prospects remain constructive. Although the earnings revisions momentum of MSCI India was subdued heading into the June elections, it has since rebounded and is now in a positive trajectory. In addition, we expect global investors to increasingly allocate to Indian equities, and their exposure still appear low relative to history.

Hou Wey Fook, chief investment officer, DBS:

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We’re likely at the end of the hiking cycle, and we will see interest rates come down. I recommend going “overweight” in both the one to three-year and seven to 10-year bond segments, focusing on high-quality bonds to mitigate risk. This approach takes advantage of the potential for near-term rate cuts and longer-term yield opportunities.

An overweight in short-duration investment-grade credit and “BB+”-rated bonds in the one to three-year year segment capitalises on anticipated rate cuts, which will impact short-term rates the most. Investment grade credits in the seven to 10-year segment offer better spread compensation and allows one to secure high coupon returns amid an inverted US Treasury curve. This approach balances high starting yields and potential rate cuts.

Overall, I lean towards a risk-on stance, as recent corporate earnings have consistently surprised on the upside. Also, the likelihood of a rate cut by the Fed in September is increasing as there are signs of inflation cooling.

Maintain a strong exposure to the technology sector. It continues to show robust growth prospects and innovation, and is poised to capitalise on the broadening AI (artificial intelligence) ecosystem. My call to invest in the tech sector is driven by the AI boom. I continue to see AI and its potential to drive productivity and growth globally as one of the most profitable investments in the market.

The AI ecosystem expands beyond hardware (including semiconductors), where most investors currently focus on, to encompass software (such as cloud services, enterprise solutions and cybersecurity) and diverse industry-specific applications. This broadening landscape presents opportunities across the entire AI value chain.

A global approach is required to capture the benefits of the AI trend. The US and Europe excel in design and innovation as demonstrated by Nvidia and Google. Asia – notably Taiwan, South Korea, Japan and China – leads in manufacturing and production, with companies such as TSMC and Samsung excelling in semiconductor and memory production.

Steve Brice, chief investment officer, Standard Chartered Bank wealth solutions unit:

We are modestly risk-on. We expect equities to outperform bonds and cash in the coming months. We believe US equities will outperform. But it’s important to be diversified. Gold and emerging market US dollar government bonds are key diversifiers.

Rate cuts by major central bank, which started in Q2, are likely to extend into the second half of the year. Europe is the forerunner in this path. We believe the Fed has room to follow suit, albeit later in H2, as slowing rents and softening labour markets drive inflation lower.

For markets, this policy shift is significant as it creates the conditions for our soft-landing view to pan out. Pre-emptive rate cuts that help avoid a sharp, recessionary slowing of economic growth are likely to support an extended earnings growth cycle. These conditions should result in equities continuing to outperform bonds and cash in H2.

We believe US equities offer a strong case for continued outperformance relative to other major equity markets in H2. US earnings remain a cornerstone of our view – 12-month expected earnings growth remains robust and has been revised higher since the start of the year. More significantly, these expectations show gains broadening beyond the Magnificent 7 stocks by year-end.

US valuations are undoubtedly high, and have been one key pushback against our positive view. However, we believe valuations are justified by a high return on equity (ROE), which suggests they are unlikely to be a barrier to further gains in an environment where markets remain focused on growth assets, amid likely upcoming Fed rate cuts.

Further gains are unlikely to occur in a straight line. While our short-term quantitative and technical models are not flashing any warning signs, fund manager surveys note quite low levels of cash, which historically have been an indicator of short-term reversals. History also shows there is a risk of volatility in the weeks around US elections.

On gold, what we find most interesting is how the rally continues to be driven by a tight demand/supply balance rather than falling bond yields. We see room for this to continue as central bank demand remains strong, while the direction of yields turns more supportive amid rate cuts.

Hartmut Issel, head of Apac equities and credit, UBS Global Wealth Management:

We have a neutral positioning on equities and cash – neither tilted towards risk-on nor risk-off at this stage. Rather, we attempt to take advantage of what we believe to be idiosyncratic mispricing and hence tactical opportunities in diverse areas. These include high-grade bonds, UK equities and gold.

Starting with high-grade bonds, we observe that in the US the excess savings consumers accumulated during Covid are slowly getting exhausted. The recent speed of consumption growth is bound to decelerate further, and with it the inflationary pressure should continue to ease as well. This looks to be consistent with the soft-landing scenario the Fed aims to design. High-grade-bond holders can expect both capital gains and attractive interest income on top of it.

Unlike US stocks that trade at the top end of the historic range, UK stocks are at the opposite end – at the very bottom of their normal range. We need to bear in mind the UK market harbours few domestic names. Rather, a disproportionally large part of the business is generated outside the UK, and there is a heavy concentration in cyclical energy and materials stocks. Last year, earnings fell by 11 per cent. We expect a mild rebound this year and 7 per cent growth next year, which is a recovering trajectory.

If the bottom of the cycle turns out to be a soft landing and cyclical companies are valued at the bottom, this represents an interesting entry point. It might also cover one US election-related angle: In a Trump 2.0 scenario where, for example, fiscal support would be elevated, this would even be better for UK commodities names in particular. UK stocks may deliver the highest result towards yearpend.

But both high-grade bonds and gold should not be left too far behind. In addition, portfolios need to remain well diversified, so the right calibration of preferences remains crucial.

Longer term, we recommend investors to diversify across evergreen themes. Within equities, tailwinds should support what we call the ABCDs of Asia – AI beneficiaries; select banks for the next billions; consumption proxies; and high-dividend yielders in Asean.

Gold is interesting from a fundamental point of view as we expect rates to start falling, which supports non-interest paying assets. Furthermore, we observe central banks increasingly acting as relatively price-insensitive buyers in order to diversify their reserves. Gold can also act as a geopolitical hedge, against severe trade tensions or other turmoil.

Ben Powell, chief Middle East & Apac investment strategist, BlackRock Investment Institute:

Over the next six months, it’s essential to move beyond the typical cyclical ebbs and flows and focus on potentially transformational opportunities. This approach is crucial in a macro environment of sticky inflation, higher interest rates, slower growth, and elevated debt levels.

We believe that taking risk by leaning into transformative trends and adapting as the outlook changes will be key. It’s a time for investors to take risks more deliberately, across multiple dimensions, with a focus on selectivity and granularity in their investment playbook. This leads us to our top portfolio calls for the next six months.

One, the AI theme: The structural shift driven by AI represents a profound transformation that transcends traditional macroeconomic factors. We have high conviction that AI can continue driving returns in various scenarios. In the near term, a concentrated group of AI leaders is expected to drive significant market returns. Investment in AI infrastructure is also rising. AI-related data centre investments are projected to increase by 60 to 100 per cent anually in the coming years. This build-out will spur growth in multiple sectors such as semiconductor manufacturing and cloud computing.

Two, Japanese stocks: We also have a strong view in favour of Japanese stocks, both for the short and long term. Japan’s stock market has experienced a blistering rally, drawing global investor attention as the country emerges from decades of deflation or no inflation. We expect Japanese corporate earnings to improve in the medium term, driven by inflation and wage growth. 

Recent reforms to Japan’s tax-free investment schemes could lead to a sustained increase in household demand for local stocks. Another factor is strong forecast earnings in tech – 18 per cent year on year in Q2, compared to just 2 per cent for the rest of the index.

We are adopting a cautiously optimistic stance – neither fully risk-on nor risk-off. We advocate for deliberate risk-taking, focusing on high-conviction themes like AI and regions with significant upside potential, such as Japan. This balanced approach allows us to navigate the current volatile environment while positioning for long-term transformational growth.