Peaking U.S. Bond Yields May Drive Short-Term Equity Rally, Says StanC's Steve Brice

The U.S. bond yields are close to their peak and a positive bond-equity correlation means that it could drive gains in the stock markets in the short term, according to Standard Chartered Wealth Management's Steve Brice.

"We've been highlighting that there's been reduced market diversity when it comes to the bond markets, which means that bond yields are probably getting very close to a peak, and we're starting to see that play out," Brice, group chief investment officer at Standard Chartered Wealth Management, told BQ Prime's Niraj Shah.

Given the positive bond-equity correlation, a spike in U.S. bonds might well feed through into equity markets in the short term, he said.

U.S. bond yields crossed 5% for the first time since 2007, adding to global geopolitical worries. Heightened concerns and rising rates in the U.S. prompt investors to sell riskier assets like emerging market equities and invest in low-risk treasuries. A fall in yields, however, would drive them back towards stocks.

Brice had a note of caution for equity investors. Things in credit markets are coming under pressure, "so we don't think we're out of the woods when it comes to looking for a recession in the U.S", he said. "And so therefore, on a 6-12 month basis, we have a preference for high-quality bonds over equities because we think they're going to be much more of a protective factor in people's portfolios."

Standard Chartered sees short-term seasonality positive effects for equities but Brice said it is not the time to go overweight on a longer-term time horizon.

There is a strong connection between the U.S. stock market and other global markets, and that is a positive factor, Brice said. So a short-term positive rally in U.S. equities would also feed domestic stocks, he said.

The BSE Sensex has broken below the August lows, and NSE Nifty 50 is still just about hanging on to that. "So hopefully that remains the case, and we can build from here."

Brice also flagged decline in market diversity in the forex markets as well. This suggests that the recent strong performance of the U.S. dollar might be slowing down, he said.

"We're starting to see some weakness in the dollar, even against emerging market currencies, including the Indian rupee," Brice said. The dollar weakness could be a big tailwind for emerging equities again in the short term, if that were to play out, he said.

Over the next five to 10 years, India will be among the markets that outperform, given its strong growth potential, according to Brice.

"Obviously, the headwind is still this (high) valuation, but I think we're just going to have to live with that. India trades at higher valuations because it's got greater opportunities and greater earnings momentum over the long term," he said. "From that perspective, we definitely wouldn't be ignoring India at this stage."