The bank set out investment views and approaches to asset allocation, noting how moves by central banks to "taper" money printing will affect market direction.

Standard Chartered takes a negative view of developed government debt and developed investment grade debt, while it likes North American and Europe (ex-UK) stocks and has cut its stance on Japan.

The banking group is also positive on developed high-yield debt and emerging market dollar-denominated government bonds, but frowns on emerging market local currency government debt, it said in an investment note. 

Such views come as banks try and work out how to position portfolios during a time when the US Federal Reserve, and certain other central banks start to unwind the huge amounts of money printing, aka quantitative easing, that has been in place since before the pandemic struck early in 2020.

One paradox is that the prospect of higher interest rates is in some ways a sign of confidence that economic growth is gaining ground, not a cause for worry, the bank said. 

“Central bank bond purchase tapering and rising expectations of policy rate hikes across developed economies are signs of growing confidence in the economic recovery. Global equities and riskier bonds are likely to remain well supported on a 6 to 12-month horizon in this environment as inflation-adjusted interest rates stay low, or negative. We retain a preference for US and euro area equities,” it said. 

“Emerging market assets may face more headwinds from China’s regulatory crackdown. We believe a more selective sector and country focus in Asia and a preference for Asian/Emerging Market US dollar bonds are two routes to gain emerging market exposure,” it said. 

Preferring equites to bonds, cash
“As we have noted before, equity markets’ burst of strong performance from recessionary lows is likely to give way to a more moderate pace of gains. Policy rates may be starting to selectively rise, but equity bear markets usually occur only when monetary policy becomes too tight, which we remain a long way away from today at the early stages of the tightening cycle,” Standard Chartered said. 

The bank referred to mainland China’s recent crackdown on various tech sectors and areas such as for-profit/after-hours education as a cause for concern. A number of other banks, such as Pictet, have taken a similar cautious stance. 

“Expectations for emerging market equities, though, appear less rosy for now. While strong DM [developed market] growth and a weak US dollar outlook would normally be positive for EM assets, we believe China’s regulatory crackdown makes this period different from history as the growth outlook for China, and other EMs with close economic linkages, becomes more uncertain. China’s ongoing power shortages risk exacerbating this,” it said. This is the main driver behind our downgrade of Asia ex-Japan equities to least preferred. Having said that, we remain on watch for signs of improving growth on the back of accelerating vaccinations or renewed policy stimulus, which could brighten the outlook.”