DBS CIO Insights 2Q23: Break in the clouds

2Q23 Global Tactical Asset Allocation

Category

Indicator

Score

Range

Equities

Bonds

Europe

Japan

AxJ

Govt

Corp

Bonds

Fundamentals

PMI

-1 to +1

-1

Economic

surprise

-1 to +1

-1

Inflation

-1 to +1

Monetary

policies

-1 to +1

Forecasted

EPS growth

-2 to +2

-1

Earnings

surprise

-2 to +2

-1

Valuation

Forward P/E

-2 to +2

P/B vs ROE

-2 to +2

-1

Earnings yield –

10-yr yield

-2 to +2

-1

Free cashflow yield

-2 to +2

Credit spread

-2 to +2

-1

Momentum

Fund flows

-2 to +2

-2

-1

Volatility

-1 to +1

Catalysts

-2 to +2

Raw score

-1

-3

-1

-2

Adjusted

score*

-0,05

-0,14

-0,05

0,33

0,09

0,19

-0,13

Source: DBS*Note: The “Adjusted Score” is calculated using the “Raw Score” divided by the maximum attainable score for each category

Balanced Profile

TAA

Tactical Asset Allocation

SAA

Strategic Asset Allocation

Active

Equities

50,0%

25,0%

Europe

7,0%

10,0%

-3,0%

Japan

5,0%

Asia ex-Japan

13,0%

10,0%

3,0%

Fixed Income

36,0%

35,0%

1,0%

Developed Markets -

Government

13,0%

10,0%

3,0%

Developed Markets -

Corporate

19,0%

15,0%

4,0%

Emerging Markets

4,0%

10,0%

-6,0%

Alternatives

13,0%

10,0%

3,0%

Gold

2,0%

5,0%

-3,0%

Private Assets & Hedge Funds

11,0%

5,0%

-3,0%

Private Equity

6,0%

2,4%

3,6%

Hedge Funds

2,0%

Private Debt

3,0%

0,5%

2,5%

Cash

1,0%

5,0%

-4,0%

Media Information8 May 2023 DBS CIO Insights 2Q23: Break in the clouds

2Q23 Investment Summary

Macro Policy: Fed to hike in steps of 25 bps in the near term. Higher-for-longer rates will slow growth, while inflation is not easing enough for the Fed to cut rates.

Economic Outlook: US and global financial systems should have sufficient buffers in place to deal with late cycle risks. Controlling inflation remains the focus. Asia’s recovery intact.

Equities: Maintain constructive view on Asia ex-Japan as China’s growth outlook re-rates. Downgrade US equities to Neutral amid higher-for-longer rates.

Credit: Sweet spot remains in A/BBB-rated credit with duration of 3 to 5 years. Maintain quality bias across Asia and Developed Markets.

Currencies: Currencies to trade volatile with wide ranges on a slower rate hike trajectory as central banks seek to balance growth and inflation.

Rates: Expect two 25 bps hikes before the Fed terminates at 5.25%. The Bank of Japan’s YCC policy will exert upward pressure on long maturity bonds globally.

Alternatives: Macro hedge funds to cushion portfolio against economic and geopolitical risks. Less aggressive rate hikes to underpin long-term constructive view on Gold.

Commodities: Lower risk of a global recession and structural supply-side issues underscore potential upside for commodities.

Thematics: Cybersecurity is a geared beneficiary of a digitalised world as companies ramp up expenditures in preventing the high costs associated with cyberattacks.

Key investment takeaways

Views on global economic growth – clouded by a year of interest rate hikes and emerging concerns over the stability of financial systems – are now polarized between a soft and hard landing scenario. The mixed sentiment is reflected in an inversion of the yield curve (which historically foreshadows a recession), amid rather benign widening of credit spreads (which suggests a less dire scenario).

Notwithstanding a lack of clarity on economic growth, we believe this is an opportune time for investors to put surplus cash to work in high quality companies to navigate higher-for-longer rates, such as those that demonstrate economies of scale, and those with strong brand franchises that can pass rising input costs to their end consumers. In terms of geography, we have increased our Overweight stance on China equities as its reopening gathers momentum. We downgrade US and Japan equities to Neutral, against the possibility of higher-for-longer rates in the US, and relaxation of Japan’s yield curve control (YCC) respectively. In fixed income, we maintain our high conviction call on high quality Investment Grade vis-à-vis High Yield credit. In this volatile investing environment, we continue to look towards alternative investments for risk diversification.

A summary of our key investment takeaways for the quarter is as follows:

1. DM equities: Tightening financial conditions to slow growth; seek resilience in quality plays

The prevalence of sticky wages coupled with the resurgence of higher-for-longer policy rates will weigh on the outlook for US equities in the coming months. With inflation and retail sales numbers coming in stronger than expected in January, the Fed is compelled to maintain restrictive monetary policy. However, the recent banking crisis led to the sharp tightening of financial conditions and expectations of a less hawkish Fed, leaving markets in a conundrum. In navigating wage stickiness and higher-for-longer rates, gain exposure to companies that can pass on rising costs to end consumers while seeking resilience in quality growth equities and IG bonds.

In Europe, tightening financial conditions driven by soaring energy prices, the Russia-Ukraine conflict, the ECB’s rate hiking cycle amid sticky inflation will slow growth momentum. While the macro picture in Europe looks daunting, we believe exposure to niche sectors such as luxury, semiconductors, and energy players should drive outperformance. In volatile markets, holding low beta healthcare stocks will also add resilience to your portfolio.

2. Asia ex-Japan equities: Convincing recovery in Asian equities; China reopening a game changer

China’s decisive move to reopen the economy has renewed optimism in corporate earnings and profitability. After the exodus of investment funds from China holdings, we expect institutional funds to start reducing their underweight and capital markets to deliver compelling returns over the next two years.

We re-iterate our Overweight stance in Asia ex-Japan. Being Asia’s largest economy and a major trade partner to many, China’s turnaround will significantly alleviate headwinds that have overshadowed the region. On the growth end of the barbell approach, we favour themes and beneficiaries that ride on secular trends and reopening plays; namely the digital economy, IC design, e-Commerce, consumer brands, tourism, insurance, and participants of government-led fixed asset investments. On the income side, we like sectors and firms that demonstrate ability to distribute sustainable dividends at attractive yields. These include S-REITs which have exhibited stability in earnings and payout ratio, as well as China and ASEAN large cap financials.

3. Bonds: Maintain quality bias across Asia and DM. Sweet spot in A/BBB credit, 3-5Y duration segment

We continue to reiterate a high-quality bias for credit investors amid an uncertain outlook. Sovereign debt sustainability concerns and banking sector stresses in a financially interconnected world necessitate prudence with credit risks. Quality, however, needs redefinition – look beyond the DM/EM divide to seek high quality credit. Our preference in DM remains in US, given its command over the global reserve currency and low external energy dependence. High quality EM bonds in Asia, as well as commodity exporters in Middle East/ LatAm could be poised to navigate a world of structurally higher prices. While yield curves remain inverted and a growth slowdown is on the horizon, the sweet spot remains in A/BBB credit in the 3- 5Y duration segment.

4. Alternatives: All-weather strategy in macro hedge funds; Gold continues to shine as risk diversifier

The rapid surge in interest rates over recent months has coincided with a revival in macro hedge funds’ performance, given their penchant for volatility. As markets remain rife with speculation concerning policy changes and geopolitical uncertainties, macro hedge funds look set to exploit mispricing opportunities, and demonstrate their value as a portfolio stabiliser.

We remain constructive on gold on the back of slowing rate increases and dollar consolidation. Gold’s long term investment merits as a portfolio risk diversifier remain intact, while central bank buying, flows of exchange-traded funds (ETFs), and retail investor demand support the precious metal in the long run.

5. Commodities: Upside underscored by lower risk of global recession and persistent supply-side issues

Commodities are in a good position for strong performance in 2023 given the revival of China’s economy, resilient US growth and labour market strength, and a weakening dollar. Meanwhile, commodity supply-side issues remain structural and unresolved. This demand-supply imbalance could drive a commodity rally this year. Furthermore, considering commodities’ poor performance in 2H22 and investors’ relative underweighting of the asset class, the case for outperformance is even stronger. Within the commodity complex, we favour select “green” metals on tightening balances and their involvement in the energy transition. Energy markets are also set for a strong year.

6. Thematics – Cybersecurity

Corporates have committed massive amounts to cybersecurity spending, giving rise to a multitude of investment opportunities. In this second part of our dive into the cybersecurity investment theme, we examine large technology players that are making strategic acquisitions of smaller firms for their cybersecurity expertise and study the costs of cyberattacks and key growth areas for cybersecurity.

About DBS

DBS is a leading financial services group in Asia with a presence in 19 markets. Headquartered and listed in Singapore, DBS is in the three key Asian axes of growth: Greater China, Southeast Asia and South Asia. The bank's "AA-" and "Aa1" credit ratings are among the highest in the world.

Recognised for its global leadership, DBS has been named “World’s Best Bank” by Global Finance, “World’s Best Bank” by Euromoney and “Global Bank of the Year” by The Banker. The bank is at the forefront of leveraging digital technology to shape the future of banking, having been named “World’s Best Digital Bank” by Euromoney and the world’s “Most Innovative in Digital Banking” by The Banker. In addition, DBS has been accorded the “Safest Bank in Asia“ award by Global Finance for 14 consecutive years from 2009 to 2022.

DBS provides a full range of services in consumer, SME and corporate banking. As a bank born and bred in Asia, DBS understands the intricacies of doing business in the region’s most dynamic markets. DBS is committed to building lasting relationships with customers, as it banks the Asian way. Through the DBS Foundation, the bank creates impact beyond banking by supporting social enterprises: businesses with a double bottom-line of profit and social and/or environmental impact. DBS Foundation also gives back to society in various ways, including equipping communities with future-ready skills and building food resilience.

With its extensive network of operations in Asia and emphasis on engaging and empowering its staff, DBS presents exciting career opportunities. For more information, please visit www.dbs.com.