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January 26, 2023updated 01 Feb 2023 5:54am

Bet on bonds, gold and a falling dollar, says top UK private bank

By Will Wainewright

Stock tips: Wealth managers at Standard Chartered suggest investors tread carefully in 2023

Standard Chartered’s private bank is cautious about more market volatility in 2023 but sees opportunity in rising bonds, gold and FX plays as the US dollar weakens.

‘Play it safe’ is the wealth management unit’s guiding mantra to clients in 2023, according to Manpreet Gill, group CIO for Africa, the Middle-East and Europe, at a briefing at the international bank’s London headquarters.

It has an overweight rating on bonds compared to equities. ‘We haven’t seen the full earnings downgrade cycle,’ he said.

Stocks to sink

Gill pointed out that, historically, earnings fall by 11 per cent during a recession, which is still likely in the US and several other Western economies.

‘We do believe the US will end up in a recession, the risk being the US will have a deeper recession than consensus expects.’

Despite optimism early in 2023, with positive sentiment pervading the World Economic Forum in Davos and stocks and bonds rising, he does not believe US and European equities have yet bottomed.

Asian equities to excel

Asia ex-Japan, which continues to trade at a valuation discount to global equities, was the only positive region for stocks highlighted by Standard Chartered.

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China has reopened its economy following extensive lockdown restrictions. Image: Shutterstock

Gill sees limited valuation downside and expects the region to enjoy the highest earnings-per-share growth, helped by mainland China’s pro-growth policies and emergence from Covid lockdowns.

‘Some people started to refer to Chinese equities as un-investable last year,’ but they now represent a big opportunity, said Gill.

By sector, Gill picked out communication services and consumer discretionary in China, and financials and industrials in India.

Bonds to rally

Gill is far more bullish on bonds, which like equities saw historic sell-offs in 2022. ‘After severe declines, bonds have always rebounded strongly,’ Standard Chartered said in their outlook.

Stock tips from Manpreet Singh Gill

With the US facing recession, ‘we have a window of opportunity to lock in the yield, lock in the income,’ said Gill.

The unit plans to opportunistically add to high-quality bonds and start extending maturities in 2023, with a preference for dollar-domiciled emerging markets bonds and high-yield in developed economies.

Asian USD bonds were highlighted as especially good bets, boosted by strong economic growth and China’s reopening.

‘Strong credit quality, low volatility, attractive absolute yield and yield pick-up over US investment-grade corporates and local currency bonds [will] drive outperformance.’

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Dollar to dive

A falling dollar in the second half of 2023 will offer opportunities for some new currency plays.

‘The US dollar strengthened in the last 18-24 months because the Fed gave it a big yield advantage,’ said Gill.

Stock tips

A narrowing in interest rate differentials, with US rates tipped to peak in the second half of this year, plus an easing of geopolitical risks and a ‘correction’ in the greenback’s ‘stretched valuation’ will work against it.

This means currencies like the euro and Japanese yen, in particular, should benefit, he added. Pound sterling will be held back, relatively, against the dollar by its downbeat growth outlook.

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Going for gold

Gold is ‘the interesting one,’ he said, with buying by central banks boosting the yellow metal but rising real bond yields exerting downward pressure in the short term.

But over the longer term it could flourish, he said, pointing out that gold has gained around 12 per cent on average during the last 11 US recessions.

gold bars
Gold could flourish over the longer term, says Standard Chartered. Image: Shutterstock

Forecast falling 10-year real yields — with which gold prices tend to be inversely correlated — mean gold is ‘likely to rebound and move higher over a 12-month’ period.

Gill said they had a neutral view on hedge funds and private markets, despite alternatives delivering a ‘classic diversification benefit’ during last year’s stock and bond declines.

But alts are a core holding, meaning about 10 per cent in a typical client portfolio, with most interest around macro/CTA strategies. ‘We are in an environment where macro is driving everything.’

Will Wainewright is founder of hedge fund and private market news website Alternative Fund Insight

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