StanChart sees decent return from equities

For Japan, the bank is optimistic that the boost to exports will translate into domestic demand-led growth. Shoppers in Mannheim, Germany. StanChart sees German consumers as a powerful force. Mr Brice says Standard Chartered Bank expects the deflatio
Mr Brice says Standard Chartered Bank expects the deflationary pressures of 2015 to ease and inflation to start rising next year, but gradually.PHOTO: DIOS VINCOY JR FOR THE SUNDAY TIMES
For Japan, the bank is optimistic that the boost to exports will translate into domestic demand-led growth. Shoppers in Mannheim, Germany. StanChart sees German consumers as a powerful force. Mr Brice says Standard Chartered Bank expects the deflatio
The Tesla Motors showroom in Britain. StanChart is bullish on European consumer equities. PHOTO: BLOOMBERG
The Tesla Motors showroom in Britain. StanChart is bullish on European consumer equities.
Shoppers in Mannheim, Germany. StanChart sees German consumers as a powerful force. PHOTO: BLOOMBERG
For Japan, the bank is optimistic that the boost to exports will translate into domestic demand-led growth. Shoppers in Mannheim, Germany. StanChart sees German consumers as a powerful force. Mr Brice says Standard Chartered Bank expects the deflatio
For Japan, the bank is optimistic that the boost to exports will translate into domestic demand-led growth. PHOTO: EUROPEAN PRESSPHOTO AGENCY

Steve Brice, chief investment strategist, group wealth management at Standard Chartered Bank, shares his 2016 market outlook with Jeremy Koh in the latest in our series featuring fund managers and leading market experts.

The United States is in a late stage of expansion that has 18 months or so to run, making equities the bank's preferred asset class going into 2016, according to StanChart executive Steve Brice.

He also noted that inflation will rise slowly, given the excess capacity in the US, Europe, Japan and China, and benign wage pressures in America.

As a result, the Federal Reserve can afford to raise rates gradually. Equities tend to do well until about six to 12 months before the end of the expansion, which is why StanChart prefers this asset class at present, he added.

However, higher volatility is also normal in this stage of the expansion. To offset this, the bank has added exposure to instruments such as US treasuries.

It is also bullish on European and Japanese consumer equities as the weaker currencies in these territories will drive export earnings. The domestic economies of these markets are likely to pick up next year, partly due to pent-up demand.

StanChart is overweight in European industrials, banks and technology and is optimistic about Japan's consumer sector.

Q What is your outlook for 2016?

A We think the US is in a late stage of economic expansion with about 18 to 24 months remaining.

The usual way the cycle plays out is that the economy grows from a low base, accelerates, the excess capacity is taken up, inflationary pressures build, the Fed tightens policy, and that lays the seeds of the coming recession.

Next year, we expect the deflationary pressures of 2015 to ease and inflation to start rising, but gradually, because of excess capacity in the US, Europe, Japan and China and benign wage pressures in the US.

This means the Fed can tighten gradually. If inflationary pressures accelerate, then they'll have to do something more significant but that's probably a 2017 story rather than a 2016 story.

Q What is your outlook for the Singapore market?

A We don't believe trade will drive growth as the US is not growing tremendously and growth in Europe and Japan is still very modest. Chinese growth is also likely to remain where it is now. So the logistics area is still going to be quite challenged.

We've just downgraded Singapore Reits as we think they'll look less attractive as interest rates rise and the yields of lower-risk assets start getting more attractive.

Banks will benefit from gradually rising interest rates. Our estimate for the Fed funds rates by the end of the next year is 75 basis points to 1 per cent. It allows banks to make more money on their cash deposits and cash balances they have so it's a significant driver for us.

Q In the global market, what are some of your investment picks?

A We don't go into individual stocks but we like European and Japanese consumer equities. Weak currencies will drive export earnings in those markets. Their domestic economies will likely pick up and there is pent-up domestic demand in both economies.

In Europe, car sales data was better than expected, reinforcing our view the domestic economy is recovering. Watch out for the rise of the German consumer in particular. That's a very powerful force; they've historically been huge savers and I think that is starting to reverse out a little bit.

In Europe, we are overweight in industrials, banks and technology, though there are very few tech-based companies in Europe.

For Japan, we're optimistic the boost to exports will translate into domestic demand-led growth. If wages there start pushing higher, that could create a strong consumption story. We don't believe the yen is going to weaken significantly from here but the euro can still weaken some more. We have hedged our exposure to the euro.

Q In the global market, what are some asset classes you like?

A We still prefer equity over any asset class. Normally the equity market does well until about six to 12 months to the end of the US expansion cycle. We think we're 18 to 24 months away from that point so we can still invest with some relative confidence that we're still going to see a decent return from equities.

We expect increased volatility - and that's normal as the US economy goes into late-stage cycle - but that doesn't mean the stock market's coming down.

The late 1990s were a great example of this, where volatility between 1998 and 2000 went up. However, in 1998 and 1999, the US market generated 50 per cent returns over the course of the two years. To reduce volatility, we have added exposure to instruments like US treasuries and alternative strategies.

Q Why are you invested in US treasuries?

A There are two real risks to our central scenario. One is we're wrong on the stage of the cycle, and the next recession is not 18 to 24 months away, it's six to 12 months away. If you're purely invested in equity - oh, it's going to be hard.

If our view is that we're 18 to 24 months away from the end of the US economic expansion, that means we could be six to 18 months away from the end of the bull market, so we're looking at bonds more favourably from that environment.

Q What is the other risk?

A The other risk is inflation in the US picks up much more dramatically than we expect and equities and bonds would not do well in that environment.

One of the areas we think is actually quite cheap is inflation-linked bonds in the States, but the yield on those is only 1.3 per cent.

Given our view, having a massive allocation there doesn't really make sense, but we have actually put it in our portfolio but it's quite a small weight.

One area that we also flag - but which we know is not available to all investors - is alternative strategies. They generally have a low or negative correlation with other asset classes or reduce volatility.

Q Which part of the curve do you like for US treasuries?

A You could earn a 1.5 per cent yield on a two-year bond and hold it to maturity but from an optimisation perspective we're saying the best risk reward is in the five- to seven-year area.

If you go out to the 20- to 30-year area, you're very reliant on our view that there won't be a spike in yields because a 20 to 40 basis point increase in long-term yields would hit you very hard in terms of a capital loss perspective.

A version of this article appeared in the print edition of The Sunday Times on December 20, 2015, with the headline 'StanChart sees decent return from equities'. Print Edition | Subscribe