DBS CIO Insights 2Q24: A broadening rally
Indonesia, 01 Apr 2024 -
2Q24 Investment Summary
Macro Policy
Fed’s dotplot of three rate cuts through 2025 is in line with a soft landing. ECB could cut rates earlier on growth worries. Policy normalisation has begun at BOJ, China easing to continue.
Economic Outlook
Upbeat PMIs setting up for growth surprise globally amid stickier inflation. Visible uptick in Asia’s exports. Additional stimulus needed to achieve 5% growth target for China.
Equities
US equity rally to broaden on strong earnings and share buybacks while pro-growth policies should support China equity comeback. Stay neutral Japan and underweight Europe.
Credit
Opportunities in IG credit, bank capital securities, and MBS. As fiscal dominance drives curve steepening, the sweet spot lies in A/BBB credit within 3-5Y duration.
Rates
Soft landing and gradual rate cuts to steepen yield curves in US and Europe. A policy shift in BOJ to lift JGB yields across the curve.
Currencies
Asian currencies to recover after a rough start, driven by a rising yen and a stable RMB against a US-led worldwide rate cut cycle and turnaround in exports.
Alternatives
Capture enhanced returns from private assets through a well-paced, diversified programme across asset classes, strategies, and vintages.
Commodities
Oil price to stay firm on supply disruptions in Russia and Middle East. General commodity demand remains tepid as global economic momentum slows.
Thematic focus: Global Big Tech
Big Tech’s impressive performance is a manifestation of Quailty Growth-at-a-Reasonable Price (Q-GARP). Valuation multiples have grown, necessitating a new benchmark for reasonableness. Three areas best aligned with our strategy are: Big Tech, Artificial Intelligence, and Cybersecurity.
Our call in 2023 for investors to put cash to work in investments continued to pay off in 1Q24. The much-anticipated pull back in US economic momentum failed to transpire despite long-end treasury yields ranging at 2008-10 levels. In fact, a combination of a red-hot US jobs market and robust wage growth has prompted the Fed to rule out policy cuts until May at least. Despite the Fed’s reluctance in declaring victory in its inflation fight and overall ambiguity in its policy timeline, risk assets are already off to the races. Investors have priced-in eventual Fed easing this year with the S&P500 rallying 8% and US High Yield bond spreads tightening 22 bps.
Notably, our thematic favourites of Technology and AI, as well as Luxury, scored hefty gains. Gold was also a strong performer for our portfolios. Although bonds, being an interest-rate sensitive asset class, did not register capital gains, they accrued interest income of more than 5% p.a. from investment grade corporates.
After such strong performance by risk assets, the persistent question is: “
Are risk assets overly exuberant?”
It is worth noting that the recent rally has thus far been driven by a niche group of technology-related stocks – the “Magnificent 7” (Apple, Alphabet, Amazon, Microsoft, Meta, Nvidia, and Tesla) which account for significant weights in the S&P 500 Index, while valuations in traditional industries remain fair. Deeper analysis of tech performance allays concerns of a repeat of the 2000’s tech crash – unlike the dot-com bubble rally of the late 1990s which was valuations-driven, the current tech bull run is underpinned by strong earnings fundamentals.
Given the absence of exuberance in “real economy” stocks, we believe that a broadening of the current rally is forthcoming, with the drivers being:
Loose financial conditions
– US financial conditions remain loose, as surging equity prices and narrowing credit spreads offset the impact of elevated bond yields. These augers well for the trajectory of corporate earnings, which bodes well for the equity outlook.
Low interest expense ratio
– US corporates’ interest expense ratio has surprisingly hit a low despite currently elevated bond yields, as companies had seized the earlier zero-bound rates era to refinance their liabilities to long-term fixed debt at low interest rates. Low interest expense ratios translate to higher profit margins, underpinning corporate earnings resilience.
Favourable portfolio positioning
– Industry allocation data reveals that energy, tech hardware & equipment and capital goods have hit an extreme underweight in investor portfolios. This suggests a likely rotation of funds into these segments, which would broaden the equity rally.
US economic resilience
– Despite elevated rates, US growth has surprised on the upside, underpinned by robust consumer spending. A healthy jobs market, wage growth, and wealth effects given asset price gains will likely continue fuelling the broader economy, supporting our base-case of a US economic soft landing.
Overall, barring an unexpected resurgence of inflation, the likely scenario of slow rate cuts amid a soft landing in the US economy bodes well for equities and bonds.
Key highlights of our tactical calls for the coming quarter are:
1. Cross Assets – Marginal preference for bonds over equities
We retain a preference for bonds over income-generating equities given their attractive risk-reward. The negative yield gap between US equity dividend and 10-year treasury yields underscores relative attractiveness of bonds over equities. Year-to-date flow of funds data further evidences broad-based preference for bonds on a cross asset basis.
2. Equities – Maintain Overweight on Asia-ex Japan
Within the Equities space, we maintain our Overweight on AxJ equities as the beaten down market is starting to show signs of improvement, led by China. Although China continues to cast a shadow on the global outlook, recent policy meetings in China provide room for optimism, given focus on resolving structural imbalances, boosting investments and domestic consumption, suggesting policy support to sustain China’s growth momentum. This augers well for the outlook for domestic risk assets. With much of the downside priced in, the bar for an imminent rally in China equities is low.
3. Bonds – Stay positive on credit, sweet spot remains with A/BBB credit in 3-5Y duration segment
High starting yields in bonds are indicative of strong future returns. However, investors should remain cautions on junk-rated debt and duration risks. Opportunities are aplenty in IG credit, financial capital instruments, and MBS. Sweet spot remains with A/BBB credit, although selective candidates in the BB+ segment could become rising stars given private sector strength. The 3-5Y duration bucket remains the best position against yield volatility and curve steepening under a regime of fiscal dominance.
4. Alternatives – Seek resilience in Gold; gain exposure to private assets for greater diversity in investment opportunities
As the shift towards a multi-polar world order persists, exposure to Alternatives will enhance risk-adjusted portfolio returns. Gold continues to offer favourable risk-reward given intact long-term tailwinds of continued central bank buying, an environment of lower rates, and US dollar weakness. Private markets expand the investable opportunity set and enhance risk-adjusted returns in a portfolio. Investors may access private market opportunities through a well-paced, diversified programme across asset classes, strategies, and vintages.
[End]
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 15 consecutive years from 2009 to 2023.
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 businesses for impact: enterprises 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 underserved communities with future-ready skills and helping them to build 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
.
DBS Bank Ltd | 12 Marina Boulevard, DBS Asia Central @ Marina Bay Financial Centre Tower 3,
Singapore 018982 | Co. Reg. No. 196800306E
Tel: 65.6878 8888 | www.dbs.com
