High-dividend equities preferred

Brice:‘We have lowered the probability of a global recession to 20% from our earlier projection of 30%.’

KUALA LUMPUR: In an environment where the global economy is expected to “muddle through,” high-dividend equities are the favoured option for better returns and to enhance investors' income.

According to Standard Chartered (StanChart) chief investment strategist for consumer banking Steve Brice, high-dividend equities tend to outperform in low-growth environment.

“Dividends are inflation-protected, and historically, it has been proven that a significant part of equity returns come from dividends,” Brice said in a press briefing held in conjunction with StanChart's Second-Half Market Outlook 2012.

In general, Brice still believed that equities were good investment options despite the global economic uncertainties. He argued that there was significant value to be found in equities as a result of the recent re-escalation of eurozone debt crisis that had resulted in stock markets being battered.

Brice was, however, underweight on Malaysia's stock market, saying that it was less attractive compared with the likes of China and South Korea.

“I think the market is overbought, and valuations are not compelling,” he argued.

Having said that though, he maintained that Malaysia was a defensive market. While this might mean that the market would not deteriorate as much in a risk-averse environment, it also meant that the market would not be what many investors want to look for in a pro-risk environment.

Besides equities, Brice said StanChart was also overweight on corporate credit, arguing that spreads were still wide relative to history and expected defaults, while the search for yield would likely to continue supporting credit in a low-interest rate environment.

With Asian currencies back to their low levels, Brice said it was now an opportunity for investors to begin averaging into Asia local currency bonds. He argued that emerging market sovereign credit quality had continued to improve, while valuations looked reasonable.

On his macro outlook, Brice said the global economy would most likely avoid recession, but would muddle through, that is, experience low growth.

“We have lowered the probability of a global recession to 20% from our earlier projection of 30%,” he said.

Brice said the US economy would likely grow by 1.5% to 2.5% this year, while China would avoid a hard landing and experience a “U-shaped” recovery. Europe, nevertheless, was expected to enter a recession.

Meanwhile, Brice said he would still advise investors to hold gold in their portfolio.

“I recommend investors to have around 5% of their portfolio in gold,” he said, adding that gold was a good diversification of portfolio and could act as an “insurance policy” against significant monetary easing, which could have an impact on inflation.

Brice expected gold prices to average US$1,750 per ounce by the fourth quarter. Gold prices were traded at the US$1,570-to-US$1,580 range per ounce yesterday.

Brice said he expected commodity prices in general to start rallying again in the second half of this year.

For crude oil, for instance, he expected to see Brent crude oil prices rising to US$126 per barrel by year-end, compared with the US$90-US$95 per barrel now.