Monthly Investment Outlook

Summary

• MONTHLY INVESTMENT OUTLOOK – Raising 10-year treasury yield target
• GLOBAL TACTICAL ASSET ALLOCATION - Downgrade hedge funds to neutral
• UBP ECONOMIC OUTLOOK - A slow and fragmented normalisation
• UBP ECONOMIC OUTLOOK - China: More stimulus needed to fend off deflation and real estate risks

• GLOBAL BONDS - Attractive investment-grade yields favour carry strategies
• GLOBAL EQUITIES - Corporate profitability stays resilient despite headwinds
• RECENT CHANGES - Reduce hedge funds in favour of short-term cash / cash + solutions

• Global stocks and bonds fell in August as risk free yields rose in Europe and the US.
• Though 10-year Treasury yields have entered the 4-4.5%range set out in our 2023 Investment Outlook (Walking the Tightrope, November, 2022), signs are growing that yields can continue to press higher moving into year-end.
• In the US in particular, with loan growth decelerating since the Silicon Valley Bank failure in March, momentum has bottomed out over the summer, with QoQ re-acceleration in commercial & industrial, commercial real estate and residential real estate lending.  Credit card lending continues to grow at a 10% annualised pace.
• As a result, we raise our 10-year Treasury yield target to 4.5-5.0% as the yield curve begins to normalise and markets seek to price a positive term premium for the first time in the past decade.
• This upward pressure on US yields should force the BoJ to continue to migrate Japanese 10-year yields towards its 1% target announced in July.  This should likewise place upward pressure on European yields looking to year-end towards our 3% target for German 10-year yields.

• Global liquidity remains a support for global equity markets with nearly US$250 billion from the Fed’s reverse repo facility since June alone now being joined by liquidity injections in support of Chinese economic recovery and
  in defence of Japan’s yield curve control strategy and the Japanese yen.  This is not unlike the backdrop in late-2022/early-2023 when the US Treasury, the PBoC and BoJ actions contributed to nearly US$2.5 trillion in liquidity injections, supporting global equity markets in 1H23.
• This liquidity backdrop is now being accompanied by early signs of a trough in forward looking earnings expectations which have been under pressure since 2022.  With the bulk of overvaluation in global equity markets accounted for by US ‘Big Tech’ and related artificial intelligence names, stock and sector selection opportunities are available for active investors looking to year-end.
• China’s struggle with economic recovery remains a headwind for global growth. We expect incremental stimulus measures to continue to be unveiled in the weeks ahead. China also faces structural challenges including the loss of market share to US re-shoring favourites including Mexico, Vietnam and India to accompany the domestic demand challenges it faces.