3Q23 was characterized by global investors’ expectations that the US Federal Reserve is at or near the tail end of its rate hiking cycle. And while Sep delivered the expected pause, the Fed has not taken a Nov hike off the table and has reinforced the “higher for longer” mantra for interest rates. Going forward, we believe three key event risks may inject renewed volatility into rates and currencies, higher crude oil prices, unwinding of BOJ’s Yield Curve Control and China slowdown.
From a tactical perspective, we have reduced equities in a mixed asset portfolio to a slight underweight, reflecting near-term challenges. We advocate investors to remain diversified with an anchor to high-quality bonds and short-term money market which pay attractive yields alongside some diversification into private assets with a focus on private credits.
In our view, names in defensive sectors (healthcare/consumer staples) could hold up better on resilient earnings. We are also constructive on selected cyclicals like the energy sector amidst tight crude supply putting a floor on crude prices and utilities stocks riding on the theme of renewable transition. We remain Neutral on US equities, stay Underweight on European equities, stay Overweight on Japanese equities and remain Neutral on EM Asian equities.
For Developed Markets (DM), we remain Overweight on DM USD IG, with the view to lock in yield carry without sacrificing credit quality and stay Underweight on DM USD HY as funding and liquidity conditions are set to tighten on the higher-for-longer rates narrative, with potential for credit spreads to widen further on rising default rates. For EM Asia IG, we remain Overweight given their role as portfolio stabilizers and stay Neutral on EM Asia HY as sentiment in this space could be largely affected by Chinese policy measures and the outlook on its property sector and continue to advocate caution, selectivity and diversification in this space.
Our view is that positive drivers have intensified and Brent is now ready to test the USD 100/bbl headline resistance. We raised our Brent price forecast by yet another USD 5/bbl to USD 95/bbl in 4Q23/1Q24 and to USD 100/bbl in 2Q24/3Q24. We forecast gold at USD 2,000/oz in 4Q23/1Q24, followed by USD 2,100/oz in 2Q24/3Q24. We maintain our mild negative outlook for Copper, forecasting USD 8,000/MT for 4Q23/1Q24, thereafter USD 7,000/MT for 2Q24/3Q24.
FX & INTEREST RATES
With “higher for longer”, there is likely a last hurrah for the USD in the near term even as we keep a long-term bearish view on the USD against DM peers. Meanwhile, our updated Fed view now calls for one more 25-bps hike in Nov with projections for rate cuts pushed back till mid-2024. We expect 3M compounded SOFR and 10Y US Treasuries yield would stay elevated above 5% and 4% respectively till 3Q24.