Executive summary
- With broad US monetary conditions already tight, and inflation forecast to continue falling slowly, while growth forecasts are positive, it seems consistent with US Fed funds peaking at 5.25% (a call the Fed has stuck with since December 2022).
- China’s recovery has been firm – driven by the reopening, stronger consumption, trade, and real estate sector stabilisation. This has positive spillover effects for Asia.
- Areas we favour the most in this environment are Asian (particularly Chinese) equities. We also have a positive view on DM equities (dominated by the US).
- In fixed income, the higher yield environment may be attractive for ‘buy and hold’ to maturity investors. Bonds can also give valuable downside cushion against recession risk.
- We maintain our positive view on Asian IG and HY. Fundamentals and interest coverage ratios are firm, and while further spread tightening may be limited, yields are favourable.
- We are negative on the dollar given the US’ weak terms of trade and peaking Fed rates.
- We are positive on oil (amid tighter inventories and recovering demand), as well as gold (given geopolitical risks).