Standard Chartered's North Asia Chief Investment Officer Tay Zi Feng stated at Standard Chartered Group's (2888.HK) Q4 2026 market outlook press conference that the pace of mainland China's economic recovery remains uneven. The bank has downgraded mainland Chinese equities from "overweight" to "core allocation" while adjusting the Hang Seng Index's 12-month target to 26,000-27,000 points.

Tay noted that if mainland China increases policy support for the AI industry, or if frontier large language model technology achieves breakthroughs, combined with international oil prices falling back to around US$70 per barrel, market sentiment could recover and the Hang Seng Index target range could shift upward to 28,000-29,000 points.

He also flagged risks, noting that if geopolitical tensions worsen, regulatory sanctions escalate, or oil prices breach US$120, market sentiment and corporate earnings would be suppressed, with the Hang Seng Index potentially dropping to 21,500-22,500 points in a pessimistic scenario.

He mentioned that since the mid-year outlook was published in the second half of the year, international oil prices surged 30% and broke through US$95, combined with global economic growth momentum being stronger than previously expected, which pushed up major central banks' rate hike expectations. The Federal Reserve, following July 2023, restarted rate hikes in September this year with a 25 basis point increase, officially entering a rate hike cycle with rising bond yields.

Standard Chartered has upgraded its interest rate trajectory forecast, expecting the Fed to raise rates by another 50 basis points over the next 12 months.

Market Rate Hike Expectations Overly Hawkish, US Treasury Yields Have Room to Fall

Driven by both elevated oil prices and labor market resilience, major global central banks have restarted rate hikes. Tay expects the Fed to raise rates two more times before the end of June next year; after the lagged effects of oil prices and tariffs gradually fade and inflation pressures ease, there is a possibility of shifting to rate cuts in the second half of next year.

Additionally, he expects the European Central Bank to hike once more and the Bank of Japan to hike up to three times to address local inflation levels exceeding expectations.

On the bond investment front, short-term US Treasury yields have room to decline. He recommends prioritizing 3-7 year bonds, with a preference for corporate bonds, while reducing duration fluctuation risk on bond prices; when the US 10-year Treasury yield hovers at 5.25% or above, investors can allocate to 10-year US Treasuries.

Rising Bond Yields Elevate Stock Market Volatility, Stock Selection Over Market Direction; China and Hong Kong Equities Downgraded to Core Allocation

Bond yield volatility amplification will push up global equity market volatility, but stock markets still have upside opportunities, and investment strategy needs to shift from betting on broad market direction to carefully selecting individual stocks.

In terms of allocation, priority should be given to markets benefiting from AI capital expenditure, including the US and Asia (excluding Japan), with an overweight focus on the Taiwan market.

Tay explained that the downgrade of mainland China and Hong Kong stock markets to core allocation was primarily due to the uneven structure of mainland China's economic recovery, combined with external pressures from Fed rate hikes.

Compared to the mid-year outlook, Standard Chartered slightly lowered the probability of the economic soft landing scenario from 50% to 45%; it raised the probability of the "no landing" scenario (sustained steady economic expansion), which would be more favorable for risk assets.

With soft landing as the base case, the S&P 500 Index 12-month target forecast is 8,400 points.

Oil Prices: Geopolitical Short-Term Premium, Medium to Long-Term Decline Expected

Tay analyzed that the Middle East geopolitical conflict has not been fully resolved, but crude oil transportation flows are gradually recovering, providing downward support for oil prices; however, strategic crude oil reserves in the US and other economies are at low levels, which will support oil prices in the short to medium term.

In response to the Gulf region risk premium, the 3-month New York crude oil forecast was raised to US$100 per barrel and the 12-month forecast to US$80 per barrel.

Although rising oil prices push up inflation pressures, improving economic sentiment indicators across major global economies can partially offset the negative impact of inflation, and institutions judge that inflation across regions will gradually decline toward the 2% target level.

Forex and Gold: US Dollar May Peak Short-Term, Medium to Long-Term Bullish on Gold

On the US dollar, Tay analyzed that the dollar will be supported by US Treasury yields in the short term, with a 3-month dollar index target of 100.2 and a 12-month target falling to 98.

Although currently in a rate hike cycle, the actual magnitude of rate increases will be significantly lower than the market's overly aggressive pricing, and the dollar may peak in the short term; weakening US employment and consumer confidence data will also limit further upside for the dollar.

On gold, he is bullish on medium to long-term performance and maintains an overweight position. The 3-month target price is US$4,750 and the 12-month target price is US$5,000.

Stock Market: Technology Remains the Main Theme, with Financials and Materials Also Considered

Tay stated that the rate hike cycle will suppress stock market valuations, but corporate earnings growth can offset the drag from declining price-to-earnings ratios, and the overall market is still expected to deliver positive returns.

The bank forecasts that global listed company earnings will remain robust, with growth driven primarily by the technology sector, powered by AI capital expenditure. It expects AI capital expenditure to maintain a compound growth rate of over 34% in the coming six months, with investment structure tilting toward security and system-related areas, and tech stocks still offering allocation value.

Currently, the actual AI application rate in the US is only about 20%, expected to rise to 25% within the year, with considerable commercialization growth potential.

Beyond technology, diversified allocation can include banking and financials and materials sectors. European and Japanese banks can directly benefit from net interest margin expansion driven by the rate hike cycle.

He also reminded that in US midterm election years, historical statistics show average market pullbacks of up to 16%, and recommends cross-regional diversification to avoid market turbulence triggered by political events.

Regional Allocation: Overweight US and Asia (Excluding Japan), China and Hong Kong Awaiting Catalyst Signals

The bank is overweight the US and Asia (excluding Japan), with a key overweight in the Taiwan region; core allocation to mainland China and Hong Kong stock markets, awaiting three major catalyst signals: policy support, AI technology breakthroughs, and oil price declines.

Tay stated that at this stage, capital tends to flow into markets directly benefiting from AI capital expenditure; if mainland China introduces strong AI support policies or local large language models achieve revolutionary breakthroughs, the investment rating for China and Hong Kong stock markets will be upgraded again.