Multi-Asset Weekly: Middle East Tensions Spur Decline in US Equities
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Chief Investment Office8 Apr 2024
  • Equities: US equities experienced a sharp decline over rising tensions in the Middle East
  • Credit: UST's influence over the supply of short-term bills have neutralised increased duration risk
  • FX: Amid EUR resilience, DXY failed to gain traction
  • Rates: UST yields receive a boost as NFP beat expectations
  • The Week Ahead: Keep a lookout for US Change in Initial Jobless Claims; Japan Industrial Production
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Equities: US equities fall as Middle East tensions rise

US equities fell amid escalating tension in Middle East. On Thursday (4 Apr), the US equity markets experienced a sharp decline as concerns of potential escalation in the Israel-Hamas conflict sent oil price surging above USD90 per barrel. The S&P 500, Dow Jones, and NSADAQ notched weekly losses of -1.0%, -2.3% and -0.8% respectively. The upcoming US CPI data is likely to dominate markets sentiment this week as investors assess its implication on Fed rate cuts decision.

China equities, on the other hand, rose as data signalled signs of the economic recovery. The Caixin Manufacturing Index rose to 52.7 in March, marking its fifth consecutive expansion. Furthermore, the official NBS Manufacturing PMI also came in higher than expected (50.8 vs 49.1 consensus) and entered expansionary territory for the first time since Sep 2023. These robust data heighted expectations for China’s economic resurgence. The SHCOMP and CSI 300 both gained 0.9% for the week.

Topic in focus: India’s homegrown opportunities. India equities have been resilient thus far and can be expected to sustain its strong performance. To navigate the elevated valuations while capitalising on attractive growth prospects, we recommend exposure to India via mid/small cap mutual funds which can capture the opportunities brought about by the fifth largest economy in the world by nominal GDP, and yet with significant room to grow as it lags in per capita income. These funds are particularly appealing to domestic investors given ample liquidity in the economy and offer better returns on a risk adjusted basis. Recent regulatory cautions regarding such funds are expected to prompt enhanced risk management practices.

Key sectors contributing to the growth in the mid/small cap space include technology, consumer goods, and services. India’s financial sector, including banks and non-banking financial institutions, play a crucial role in supporting economic activities. We see bright spots in well-established financial institutions as well as fintech companies innovating in the sector. In this digital transformation era, companies involved in engineering and research and development (ER&D), as well as those benefitting from AI and digital tech spend should perform well. A rising middle class and increasing urbanisation trends in India contribute to the growth of the consumer goods and services sector.

Figure 1: Better risk-adjusted opportunities in India’s mid/small caps

Source: Bloomberg, DBS


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