Global equities increased to neutral

We move global equities from least preferred to neutral as we have greater confidence that the USA will avoid a recession in the next 12 months. We therefore see a more balanced risk-reward outlook, but continue to prefer fixed income over equities.

Within equities, we continue to expect the laggards to catch up. We prefer emerging markets, consumer staples, energy, industrials, utilities, value and quality income.

The US economy is proving more resilient than previously expected and we now expect that a soft landing can be achieved. In addition, the second-quarter earnings season likely marked the trough in year-on-year (YoY) earnings growth, and the earnings outlook has improved. We therefore see a more balanced risk-reward outlook for global equities over our tactical investment horizon. That said, we continue to prefer bonds over equities as we still see limited room for a further rerating of equities. Within equities, we expect the laggards such as emerging markets (EM), defensives and value to catch up. Investors should therefore rebalance into those laggards, in our view.

Emerging market equities most preferred; Australia now neutral

Across regions, we continue to prefer EM equities. Our constructive stance on EM equities is supported by undemanding valuations, a better growth outlook compared to developed markets, and our expectation of a weaker USD. Our preferred markets in EM are China (appealing valuation, room for stimulus), India (strong capex and GDP story) and Indonesia (robust economic growth). We change our view for Australia from most preferred to neutral as the fundamentals now look less appealing. US equities are least preferred despite our improved assessment of the domestic economy, as we remain concerned about the lofty (relative) valuation of US equities, especially within the technology sector. For US equity exposure, we prefer US equal-weight indexes versus cap-weight indexes.

Energy equities now among most preferred sectors

In terms of sectors, we prefer consumer staples, energy, industrials and utilities. Energy is now among our most preferred sectors, as the improved economic outlook coupled with a tightening oil market should support oil prices. The consumer staples sector historically displays margin and earnings resiliency in periods of slowing economic growth and macro uncertainty. Industrials benefit from structural trends, such as reshoring/onshoring (i.e., more automation), the energy transition and decarbonization, along with infrastructure and defense spending. Utilities are defensive with solid fundamentals, and a key beneficiary of the transition toward green energy. We move communication services to neutral from least preferred, as we see improvement in areas like digital advertising. Materials is now among our least preferred sectors due to a weak earnings picture. Due to very demanding valuations, information technology remains least preferred. Healthcare is also among our least preferred sectors, as the softening USD is a headwind for pharmaceutical companies outside the USA and the fundamentals look unappealing.