Global equities could be subject to major volatility as the US presidential election, a Federal Reserve meeting, and a critical US jobs data release, all converge in early November.
As such, Eastspring Investments in its fourth quarter outlook has shifted to a tactically cautious view on global equities.
“Global equity valuations remain stretched and are highly susceptible to data disappointments, and ongoing volatility due to decelerating global growth and escalating geopolitical tensions, especially in the Middle East,” it said.
This marks a prompt shift from its views last quarter where it was overweight global equities on a three-month horizon due to anticipation of a Fed cut outweighing any economic weakness.
In its latest outlook, the firm acknowledged better than expected global economic growth over the past twelve months, but argued that “global growth momentum is deaccelerating”.
On a 12-month horizon, the firm is underweight global equities and risk assets broadly, preferring government bonds instead, with an emphasis on US Treasuries.
“This outlook is based on our expectation of a renewed decline in labour market conditions and underlying macroeconomic data, along with the asset class’s tendency to demonstrate ‘flight-to-safety’ behaviour at the onset of a recession,” it explained.
Despite rising expectations of a soft landing, the firm is cautious about the longer-term growth outlook, particularly over the next 6-12 months.
“We believe the odds of a recession are potentially higher than is currently priced into risk markets,” it said.
Eastspring also warned that a Fed cutting cycle in the middle of a resilient US economy could potentially trigger a resurgence of inflation, particularly if the labour market remains strong.
When it comes to other asset classes, Eastspring remains neutral on both emerging market and Asian equities.
It predicted that Asian equities might see less market volatility relative to developed markets since major regions such as the US, Europe and Canada are more susceptible to a global growth slowdown.
This also explains the firm’s underweight stance on European equities, where it warned that it is “highly sensitive to the global business cycle due to their pro-cyclical nature and a high presence of cyclical companies with global exposure”.
Gold, which has rallied to new highs recently, is one area the firm is decidedly optimistic.
“We believe that central banks’ strategic interest in gold will continue to support its demand and contribute to the rally in the coming years,” it said.
It also cited falling interest rates, and buying from physically backed gold exchange-traded-funds as other tailwinds for the precious metal.
