U.S., Asian IG bonds attractive as global growth outlook dims - fund managers

By Anisha Sircar

March 24 (Reuters) - U.S. equity markets have limited upside in 2023 while investment-grade (IG) bonds from the country and Asia look appealing as the ongoing turmoil in the financial sector complicates the global growth outlook, according to fund managers.

UBS changed its asset allocation strategy last week to "least preferred" on U.S. equities and financials, and "most preferred" on U.S. IG bonds, said Adrian Zuercher, head of global asset allocation at UBS Global Wealth Management's chief investment office.

"The U.S. equities and growth stocks' outlook is challenged due to high valuations, declining earnings, and latent risks from rate hikes," Zuercher told the Reuters Global Markets Forum (GMF) on Friday.

UBS has a base case of a 6%-7% return for U.S. IG bonds over the next 12 months, and an upside case of double-digit returns if the Fed cuts rates by 100 bps this year, he said.

U.S. markets have seesawed as investors weigh the Federal Reserve's rate decision on Wednesday and a banking crisis, which began with the failures of SVB Financial Group and Signature Bank.

Nigel Foo, head of fixed income at First Sentier Investors, said he did not expect the Fed to hikes interest rates aggressively from here.

As the banking crisis has been unfolding, "we've taken the opportunity to increase our U.S. duration," said Foo, whose firm had over $146 billion in assets under management in assets as of December 2022.

Foo also said Asian banks and corporates continue to have strong fundamentals, and he expects Asian IG bonds, with yields close to 6%, along with Chinese and Indonesian bond spreads to perform well this year.

Zuercher said he was positive on emerging market equities, including Chinese and Asian semiconductor stocks, and select European themes including German equities.

"We see near 10% upside for Asia ex-Japan by year-end," he said, supported by bottoming downgrades, fading dollar strength, and an expected 12% year-on-year earnings rebound in the second half of 2023.

"Asian equity valuations remain well below that of global equities," Zuercher added. (Join GMF, a chat room hosted on Refinitiv Messenger: https://refini.tv/33uoFoQ) (Reporting by Anisha Sircar in Bengaluru; Editing by Divya Chowdhury and Vinay Dwivedi)