Market Insights & Seminars

Monthly Outlook

Stay updated with Monthly Outlook articles which consolidate key market indices and information each month. We hope you will find these insights and recommendations useful when deciding how best to manage your investment portfolio.

Top Investment Ideas

Stay Defensive

We are defensive in our asset allocation and continue to prefer credit over equity. The current environment of still low bond yields and range bound equities continues to make the case for the hunt for yield from both equity and fixed income markets for the rest of 2016.

In terms of fixed income, we remain positive on Emerging Market bonds, both high yield and investment grade paper, as they look well-positioned to deliver relatively strong performance over the coming months. We are also positive on Developed Market investment grades.

On equities, we are maintaining our cautious view on the back of extended valuations and event risks ahead. On equity regions, we would express our negative view evenly in the developed market – U.S., Europe, and Japan - while keeping to our neutral call on Asia.

With a great deal of uncertainty ahead, asset allocation should be a key consideration in managing and building your core portfolio.

Recommendations

Equity funds

Investors may seek to capture the strong growth potential of Asia through dividend yielding equities. The Schroder Asia Equity Yield Fund provides potential capital growth and income through investment in equity and equity related securities of Asian companies which offer attractive yields and sustainable dividend payments. You may reap attractive potential payouts of between 3 to 4 per cent per annum, paid out monthly.

Equity-Linked Convertible Investments or stock ideas

Earnings revisions trend for the Singapore equity market remain weak over the past month as the 3Q earnings season kicked off on a muted tone. With recent economic data continuing to point to slower growth for the Singapore economy, the earnings outlook for Singapore banks is subdued with low single digit loans growth and asset quality concerns lingering over the domestic banks’ exposure to oil & gas, commodity, property, Chinese and European loans. The positive is that valuations appear to have factored in much of the concerns. Within the sector, following a stronger pullback to date in DBS Group (DBS SP) towards 1x book value, we see long term value emerging in the stock.

Within a diversified portfolio, while we maintain our preference for some dividend yielding exposure given supportive spreads despite some near term weakness as the market prices in higher expectations of the next Fed hike, we advise investors to actively review their portfolios to reduce positions in stocks which offer less attractive growth outlook. Examples include Singapore Press Holdings (SPH SP) where we have highlighted a cautious stance following its lowered dividends and muted results release. We see limited growth surprises for SPH ahead given the continued structural headwinds for its traditional print media business amidst challenging economic conditions. Other ideas where we expect lacklustre fundamental outlook and are hence cautious include Sembcorp Marine (SMM SP) and Suntec REIT (SUN SP). Switch Buy rated ideas include City Development (CIT SP) and Capitaland Mall Trust (CT SP).

In the U.S., cyclicals outperformed in October despite the pullback in investor risk appetite as markets weigh the risks of a December Fed rate hike. Financials, which have been beaten down following the slew of negative news, led the pack. We continue to look for sectors with a combination of consumer exposure as well as relatively attractive valuations. Our preferred sectors are Consumer Discretionary, Healthcare, Technology and Telecoms.

Financials, the worst performing sector over the past 12-months, recovered to lead all sectors. The latest update by the IMF to its Global Financial Stability Report, which stated that “short-term risks have abated since April 2016, but medium term risks continue to build”, aptly reflect current sentiments for the sector. Recent efforts by central banks, such as the BOJ’s move to introduce yield curve management, suggest that they are recognizing the ineffectiveness of negative interest rates. This augurs well for the banks. While the low growth and low interest rates environment, coupled with gruelling regulatory backdrop, continue to weigh on the sector’s performance, we believe that a lot of the bad news has been discounted. As such, we are raising the sector from negative to Neutral. Our preferred name here is Bank of New York Mellon (BK US).

Energy stocks extended their gains but met greater volatility as questions over OPEC’s planned cuts emerged. With Bank of Singapore Economics Team’s crude oil price forecast of $48-50/bbl over the next 6-12 months, we see limited upside from here. On the other hand, valuations appear stretched following the sector’s best-performing re-rating year-to-date. Hence, we are cutting the sector to Negative from neutral.

We remain positive on Consumer Discretionary. Steady improvements in labour markets remain supportive for U.S. consumption growth. Key picks include Starbucks (SBUX US) and BMW (BMW GY).

Despite the outperformance, we continue to be overweight the Technology sector, especially names with consumer exposure. Preferred names include Visa (V US) and Salesforce.com (CRM US).

Healthcare underperformed again in October, in-line with other defensive sectors. Fundamentally, the sector continues to benefit from improving pipeline productivity with an increasing number of new therapeutic drugs approved by FDA. Also, valuations remain undemanding versus global peers while M&A activities provide potential catalysts. Our positive stance remains intact here. Buy-rated names include Wide-Moat rated Allergan (AGN US) and Sanofi (SAN FP).

Bonds

CapitaLand Limited US Dollar 4.076%, 20 September 2022

CapitaLand Limited is a real estate company focused on investment holding. The company and its subsidiaries are principally engaged in investment holding, real estate development, investment in real estate financial products and real estate assets, investment advisory and management services, as well as the management of serviced residences.

CapitaLand Ltd (CAPL) is one of Singapore’s leading real estate developers with a focus in key Asian and/or European cities, with a 39.5 per cent stake held by Temasek Holdings. CAPL delivered decent financial results for FY2015, mainly driven by the group’s China development projects and higher rental revenue from its serviced residence business. Debt levels have remained largely unchanged, while its net debt/equity has improved from 0.57 times in FY2014 to 0.48 times in FY2015 due to an accumulation of its cash position. In addition, the Group’s debt maturity profile is well-managed, having not more than S$3 billion of debt to be refinanced each year. We also expect liquidity to remain healthy given the group’s wide range of financing channels; currently, it has approximately S$3.8 billion of undrawn facilities from both the parent and its treasury vehicles. Free cash flow came in strong at S$1.4 billion in FY2015 as a result of higher sales collection from its China projects, as compared to –S$377 million over a year earlier. Credit profile remains strong, underpinned by its quality assets and close links to the Singapore government via Temasek Holdings. The weak residential market in Singapore -- primarily a result of property cooling measures -- may be a notable risk to note. However, its substantial operating presence in China property markets should provide some buffer should earnings from Singapore be affected adversely.

Bond Funds

Interested investors may consider the LionGlobal Short Duration Bond Fund. It gives investors exposure to investment grade bonds. Investors can receive potential payout of 2.5 per cent per annum, paid quarterly. The fund has a relatively lower duration which may be less risky when or if interest rates rise.

Investors may also consider the Fullerton USD Income Fund. This fund invests in a diversified portfolio of U.S. Dollar-denominated bonds, focused on quality companies with robust fundamentals. At least 70 per cent will be invested in investment-grade bonds to provide a combination of potential capital gains and stable dividend payouts.

In a low growth environment, Asian credits remain well-supported by monetary policy and the continued hunt for yield. This fund potentially provides an attractive income with lower volatility versus other asset classes. Its concentration risk is managed by careful credit selection and diversification and interest rate risk is managed by ensuring that portfolio duration does not exceed five years.

Mixed-Asset Funds

Three funds have shown resilience in the face of the volatility caused by the UK’s referendum to exit the EU and possibly other events going forward. A portfolio of these 3 funds gives you a fair diversification of your investment.

The BlackRock Global Multi-Asset Income Fund's dynamic asset allocation lets investors exploit opportunities in both traditional and non-traditional asset classes.

Investors may also consider the Schroder Asia Income Fund which offers an attractive potential monthly pay out of about 5 per cent per annum paid monthly. The fund aims to capture the growth potential of Asia through both equities and bonds. Investors may gain from an active asset allocation strategy which aims to maximize yield and total return in different market environments.

We also recommend the JPMorgan Global Macro Opportunities Fund. This fund leverages on global macro themes to generate performance through traditional and/or sophisticated investment instruments. It aims to deliver absolute performance in various market environments. The fund also has a low correlation with many asset classes and provides good diversification for your portfolio

Currencies: As expected, the U.S. dollar staged a strong recovery last month and should continue to be well supported. However, we do not see a strong appreciation trend from here as the expected rate hikes in December and in 2017 has already been factored in.

Global Outlook - From Deflation Risk to Inflation Overshoot

“The fear of global deflation of the past couple of years is fading. Solid growth and higher oil prices mean that a much smaller part of the world is at risk of falling into deflation.”

– Richard Jerram, Chief Economist, Bank of Singapore

Key Points:

  • Solid growth and higher oil prices mean that a much smaller part of the world is at risk of falling into deflation. In 2015 nearly 60 per cent of the world economy has inflation below 1 per cent. That proportion will fall to 30 per cent this year and by 2017 will be close to 10 per cent, which is more normal.
  • Central bankers are also more comfortable with the risk of excess inflation rather than deflation. Bank of Japan has committed to expanding liquidity until inflation overshoots its 2 per cent target. More recently, Fed Chair Janet Yellen had suggested allowing the economy to “run hot” in order to repair some of the structural damage caused by the Great Recession. This pro-inflation bias means that interest rates are not raised until well into the recovery.
  • Yet, a slow pace of normalisation does not necessarily mean zero rate hikes. We continue to expect the Fed to push interest rates 0.25 per cent higher at its mid-December meeting, with two more increases in 2017, a comfortably gradual pace of rate increases.
  • In the U.S we are starting to see some evidence of capacity constraints pushing up wages and consumer prices. However, the pace of the pick-up is still quite moderate, which means that the need for Fed tightening is not as urgent, allowing them to move at a fairly gradual pace.
  • Increased government spending is the common theme for both Mr Trump’s and Mrs Clinton’s campaigns. This may imply a faster pace of rate hikes by the Fed as the economy does not have much spare capacity to absorb any material fiscal stimulus. Hence, it would need to be balanced by tighter monetary policy. Such a combination would probably be positive for USD.
  • In Europe, talk of tapering by the European Central Bank (ECB) does not look justified as long as inflation is not making material progress towards the ECB’s target. The ECB is likely to extend its quantitative easing programme at its meeting in December.
  • Growth in the Eurozone seems solid, with composite Purchasing Manager Indices (PMIs) staying over 50, implying expansion, for the past three years, even in the face of a range of geo-political shocks. That resilience will be tested again going into 2017 with a crowded political calendar. Brexit negotiations, the Italian referendum on a new constitution in early December and national elections in France, the Netherlands and Germany in 2017 are inescapable risks in the coming year.
  • For the U.K., the focus on limiting immigration points to a “hard” Brexit and means that trade and investment flows are likely to take a hit. The U.K.’s large current account deficit means that GBP will remain vulnerable.
  • We remain concerned over China’s ballooning credit-to-GDP ratio despite efforts aimed at deleveraging. Rapid lending, high investment rates and slowing growth are a combination that suggests an inefficient allocation of credit and an eventual bad debt crisis. In China the process is largely internal – so no Lehman shock – and dominated by the state. Consequently, this implies that China’s growth rate should grind much lower should the credit bubble pop.
  • In Japan, the relentless grind of demographics means that growth has likely settled around its potential at 0-1 per cent, with fluctuations driven by fiscal policy or swings in the exchange rate. The emphasis needs to be on structural reform to raise the potential growth rate. Unfortunately, it is hard to find much evidence of progress, despite the government’s dominance of both houses of parliament.
  • Adjustments in Emerging Markets (EM) in the last few years in reaction to slower Chinese demand, lower commodity prices and the taper tantrum have improved growth prospects especially in countries like Argentina, Brazil, Indonesia, Mexico and Russia. This should help resilience if the U.S. implements two or three rate hikes in 2017, as we expect.
  • Asia still looks solid in the face of sluggish growth in the developed world and troubles in China. Low inflation and (mostly) solid government finances give policy flexibility if needed

Equities - Mind the Potholes Ahead

“Near-term, sentiments are likely to stay cautious as investors continue to weigh the likelihood of a Fed hike this year. Accordingly, we maintain our cautious stance on equities.”

– Sean Quek, Head Equity Research, Bank of Singapore

Key Points:

  • Near-term, sentiments are likely to stay cautious as investors continue to weigh the likelihood of a Fed hike this year. Much like the rate hike cycle of 2014, we can expect some market fear and perhaps correction post the December hike. Contingent on a compelling correction, we may see an opportunity to add equity risk.
  • Event risks such as the U.S. Presidential election and a crowded political calendar in Europe spell higher volatility ahead. Coupled with the extended valuations, risk-reward remains unfavourable for investors. Accordingly, we maintain our cautious stance on equities.
  • We think the necessary conditions are already in place and continue to expect a rate hike at the December meeting. Volatility is expected to spike in the lead up to the U.S. Presidential election and the Fed’s move in December. Coupled with the extended valuations of 18.4x forward price-to-earnings (PE), we remain cautious on U.S. equities.
  • Political risks loom large for European equities given the busy political calendar. These include the negotiations between the U.K. and the EU over the future of their relationship, Italy’s constitutional referendum scheduled in December and Germany and France’s elections in 2017. With forward PE of 16.3x above long-term average of 13x, we remain cautious on European equities given the prospect of higher political uncertainty.
  • There is little by way of market catalysts for the Japanese stock market. It has also become increasingly clear that any additional short-term monetary or fiscal stimulus is unlikely to have a meaningful impact. Ultimately, the sustained re-rating of Japanese equities would require more meaningful structural reforms that would boost Japan’s growth potential. While valuations are not demanding at current levels, we would rather remain cautious in this space and look for companies with high earning visibility.
  • Asia Ex-Japan equities held up relatively well in October as growth outlook for the region improved. Although Asia Ex-Japan stocks continue to trade at a significant discount to its developed market peers, valuations for the region are no longer cheap versus its own long-term historical range. Nevertheless, an uptick in earnings growth as well as the relatively solid outlook, especially in comparison to the developed world, leads us to take a neutral stance on the region’s equities relative to our negative stance on the other Developed Markets (U.S., Europe, Japan).

Bonds - EM High Yield Bonds Still Have Some Way to Go

“Given less compelling valuations and the prospect of headwinds from higher interest rates, carry (income) will be a more critical component of total returns. This should augur well for High Yield bonds.”

– Vasu Menon, Senior Investment Strategist, Wealth Management Singapore, OCBC Bank

Key Points:

  • There has seen some fears that the impending Fed rate hike would cause a sharp bond market sell-off. This fear is misplaced when we look back at history. Examining the last hike cycle in 2004, the Fed raised rates aggressively – at almost a hike each month - from 1 per cent to 5.25 per cent. Remarkably, the U.S. 10-year Treasury bond yields were stable during the entire 2004 hiking cycle, trading between 4 to 5.25 per cent.
  • Compared to the 2004 rates cycle, the current Fed is extremely dovish. Therefore, the Fed should be able to increase rates in December without causing a big sell-off in the bond market.
  • Also, the resultant flows into the U.S. in the hunt for yield due to negative yielding assets in Japan and Europe are likely to restrain the rise in long term U.S. Treasury yields even if the Fed continues with policy tightening.
  • While this should limit the increase in U.S. bond yields, it should not prevent it altogether. Accordingly, we see 10-year Treasury yields at around 1.75 per cent by year end, with further modest increases in 2017. This should mean that investment grade bonds offer slightly better returns than cash for the remainder of the year.
  • Emerging Market (EM) bonds have had a resounding year and look set to surpass the second best ever annual return of 12.5 per cent achieved in 2010. Yet, the final leg of the race is likely to be a crawl rather than a sprint upwards as there are a few remaining obstacles such as the U.S. Presidential election in November and potential Fed rate hike in December. There are also few obvious catalysts within Emerging Markets.
  • And so, we expect modest returns here on in which should be delivered largely from carry or income rather than capital appreciation. It’s worth noting that income looks to be an increasingly critical component of total returns given less compelling valuations, prospects of actual headwinds arising from higher interest rates and the absence of strong catalysts to drive Emerging Market economies going into 2017.
  • Here, High Yield bonds -- where there is more of a buffer from the credit spread component -- are better-positioned to outperform Investment Grade paper given the latter’s higher correlation with U.S. Treasuries and lower credit component of total return.
  • We would continue to focus on specific country, sector and individual credit bets as the primary driver of outperformance in a return environment likely to be dominated by carry.
  • While we remain constructive on the EM High Yield in general, investors should be both circumspect and selective as this risk-on environment tends to result in increasingly lower quality issuers. As such, we would maintain our preference for higher quality names despite less compelling valuations.

Foreign Exchange & Commodities - Don't Chase the U.S. Dollar Rally

“A Fed rate hike and QE extension by the ECB in December should keep the greenback well supported, but we still see the currency as more range-bound versus G10 currencies than in a strong appreciation trend.“

– Michael Tan, Senior Investment Counsellor, OCBC Bank

Key Points:

  • We do not expect the U.S. Dollar to set new highs moving forward for a few reasons. First, U.S. core inflation data is still not strong enough to merit a rapid Fed tightening. Also, other major central banks may not have the scope to ease monetary policy significantly beyond current levels. Second, while China has come back as a potential worry, we are less concerned of the CNY weakness triggering a sustained global risk sell-off that would fuel safe-haven demand for the USD.
  • In relation to the Yuan, the higher USDCNY fixings recently are more a reflection of USD strength as opposed to an outright sharp devaluation. Thus, we dismiss fears of ‘accelerated CNY depreciation’. Our view of orderly and gradual Yuan depreciation trend remains unchanged.
  • In terms of the Sterling, we believe Brexit developments rather than economic data will continue to drive movements in the currency. Uncertainty surrounding Brexit negotiations could nudge the sterling below 1.20 against the U.S. Dollar over the next 3-6 months.
  • The European Central Bank (ECB) could extend their Quantitative Easing (QE) programme in December at the current pace, but we believe this is now broadly priced in at current levels.
  • Diminishing downside risk for oil prices on the back of speculations that an OPEC deal is forthcoming continue to support Emerging Market FX high-yielders such as IDR, INR, RUB and BRL. However, given the number of approaching event risks such as the U.S. elections, Fed December hikes and Brexit negotiations, it is prudent to take only measured exposure to these risky trades and hedge against any potential short-term risks.
  • We are not long-term gold bulls, but gold remains a useful portfolio diversifier on a 3-6 month timeframe. There are enough potholes to navigate, including the U.S. elections, Italian referendum and Brexit considerations to name but a few, to still warrant a buy-on-dip bias on gold over the next few months. We would thus view a gold sell-off below US$1,240 as a strategic buying opportunity.
  • Moderate slippage in oil inventories over the past few months suggests that supply and demand forces are roughly in balance. As it stands, prices seem to be normalising around the US$50 level. We believe the longer-term equilibrium oil price should hover within the US$50-60 range. This implies prices should be stable around current levels.

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Top Investment Ideas

Hunt for yield reigns as politics come to the fore

Politics will force itself into spotlight soon as we head on to the final stretch of the year. We have learnt from Brexit not to ignore political risks. Hilary Clinton’s first debate with Donald Trump heralds the start of the run-in to the election in November. Italy, meanwhile, has firmed up the date for its constitutional referendum as December 4.

Markets may enter into a phase of higher uncertainty. Risks remain elevated as one of the concerns about market levels has been that much of the gains have been fuelled by liquidity, not underlying growth. There is a realization that monetary policy is coming to the end of its usefulness as a stimulant for growth, and that something more is needed.

The environment of still low bond yields and range bound equities argues for income from both equity and fixed income markets for the rest of 2016.

We continue to prefer credit over equity. We are negative in our outlook on equity evenly in the developed market - US, Europe, and Japan - while keeping our neutral call on Asia.

Asset allocation should be the key consideration in managing and building your core portfolio.

Recommendations

Equity funds

You may capture the strong growth potential of Asia through dividend yielding equities. The Schroder Asia Equity Yield Fund provides capital growth and income through investment in equity and equity related securities of Asian companies which offer attractive yields and sustainable dividend payments. You may reap attractive potential payouts of between 3 – 4 per cent p.a., paid monthly.

Equity-Linked Convertible Investments or stock ideas

Looking ahead, while we continue to see long term value for the equity market, near term catalysts are limited. Hence we maintain our preference for quality dividend yield stocks.

With the yield spread versus the Singapore 10-year bond yield remaining supportive, we believe that yield strategies remain relevant in the current sluggish macro environment where interest rates are expected to remain accommodative.

While Singapore REITS (SREITs) have outperformed the STI index, the sector still offers attractive yields and is among the highest yielding REIT markets globally. Within the SREITs sector, our preference is for retail and industrial sub-sectors over office and hospitality.

Stock picks with more stable earnings visibility include Keppel DC REIT (KDCREIT SP) , SPH REIT (SPHREIT SP) and Frasers Centrepoint Trust (FCT SP).

We remain neutral on the property sector, which saw some lift in sentiment following regulatory announcements made to fine-tune refinancing rules for borrowers of owner-occupied residential properties. Overall sector fundamentals remain muted with home prices expected to decline over FY16-17.

Our preferred sector picks are diversified blue chips with healthy balance sheets, such as City Developments (CIT SP) and CapitaLand (CAPL SP).

In the U.S., cyclical sectors, led by Technology and Financials, continued to outperform in September. Given our cautious view on global equities, we continue to look for global sectors with a combination of consumer exposure as well as relatively attractive valuations. These would be Consumer Discretionary, Healthcare, Technology and Telecoms. At the same time, we are raising Financials from negative to Neutral and downgrading Energy from neutral to negative.

The latest move by the BOJ to introduce yield curve management rather than expansion of negative interest suggests that central banks are recognizing the ineffectiveness. This augurs well for the banks which were de-rated further since the introduction of negative interest rates. However, we see further risks from rising operational uncertainties post the UK referendum, with the regulatory environment and dilution risk capping the upside. Our preferred pick here is Bank of New York Mellon (BK US).

Energy stocks continued to underperform in-line with the weakness in crude oil prices. Crude oil price is forecast at US$48-50/bbl over the next 6-12 months, with limited upside catalysts for the sector, especially after the recent outperformance.

The U.S. economic recovery remains on track. Steady improvements in labour markets remain supportive for U.S. consumption growth. Also, the Consumer Discretionary sector continues to trade at a discount to its global peers. We pick Lowe’s (LOW US) and Starbucks (SBUX US).

We continue to be overweight the Technology sector, especially names with consumer exposure. Valuations are relatively less demanding and preferred names include Visa (V US) and Salesforce.com (CRM US).

Healthcare underperformed in August in-line with other defensive sectors as risk appetite improved. Our positive stance remains intact here. Besides healthy fundamentals from expected strong pricing power for drug and biotech companies, the sector is likely to be less impacted should global growth decelerate.

Valuations remain undemanding versus global peers while M&A activities provide potential catalysts. We prefer Allergan (AGN US) and Sanofi (SAN FP).

Bonds

GuocoLand Limited 3.95%, 1 April 2019

GuocoLand Ltd (GLL) is a subsidiary of Guoco Group, which is listed on the Hong Kong stock exchange and is in turn, a member of the Hong Leong Group, one of the largest conglomerates in Southeast Asia.

GLL develops and invests in properties. The company also provides investment trading, underwriting managers, and fund management & advisory services. In addition, GLL offers internet commerce services.

GLL is increasing its focus on commercial development to diversify its portfolio. Launched in February 2015, the Tanjong Pagar Centre’s (an integrated mixed-use development in the Singapore central business district) is expected to be completed this year and will be a near term catalyst.

GLL paid S$595.1 m during a government land sale in June for a plot in River Valley. In all, there were 13 bidders, indicating healthy interest and potentially signalling a trough to the Singapore private residential market. While GLL’s credit profile has improved since its Dongzhimen divestment, the redemption of its perpetual securities and its recent land acquisition in River Valley would result in an uptick in its gearing.

As at 30 June, GLL’s total debt to total capital was 52.67 per cent (from 51.18 per cent in 31 March 2016) while its EBITDA to interest expense was 6.20 times (from 3.25 times in 31 March 2016). GLL has demonstrated ability to access credit in the Singapore corporate bond market as well as divesting its integrated developments for capital recycling.

Bond Funds

Interested investors may consider the LionGlobal Short Duration Bond Fund. It allows investors to invest in investment grade bonds. Investors can receive potential payout 2.5 per cent p.a quarterly. This may be less risky when or if interest rates rise.

You can also consider the Fullerton USD Income Fund. This fund invests in a diversified portfolio of USD-denominated bonds, focused on quality companies with robust fundamentals. At least 70 per cent will be invested in investment-grade bonds to provide a combination of capital gains and stable dividend payouts.

In a low growth environment, Asian credits remain well-supported by monetary policy and the continued hunt for yield. This fund may provide an attractive income with lower volatility versus other asset classes. Its concentration risk is managed by careful credit selection and diversification and the interest rate risk is managed by ensuring that portfolio duration does not exceed five years.

Mixed-Asset Funds

Three funds have shown resilience in the face of the volatility caused by the UK’s referendum to exit the EU and possibly other events going forward. A portfolio of these 3 funds gives you a fair diversification of your investment.

The BlackRock Global Multi-Asset Income Fund’s dynamic asset allocation lets investors exploit opportunities in both traditional and non-traditional asset classes.

Investors may also consider the Schroder Asia Income Fund which offers an attractive potential monthly pay out of about 5.25 per cent per annum paid monthly. The fund aims to capture the growth potential of Asia through both equities and bonds. Investors may gain from an active asset allocation strategy which aims to maximize yield and total return in different market environments.

We also recommend the JPMorgan Global Macro Opportunities Fund. This fund leverages on global macro themes to generate performance. It aims to deliver absolute performance in various market environments. The fund also has low correlation with many asset classes and provides good diversification for your portfolio. The fund manager can employ traditional and/or sophisticated investment instruments.

Currencies: Fed inaction leaves U.S. Dollar vulnerable for now. But we do not expect the U.S. Dollar setback to last given Fed’s readiness to hike in December.

Global Outlook - Signs of a Shift in Policy Thinking

“The focus is shifting towards greater acceptance of the potential for fiscal policy to support growth if necessary, due to the sense that monetary policy is starting to reach its limits.”

– Richard Jerram, Chief Economist, Bank of Singapore; Member of OCBC Wealth Panel

Key Points:

  • Central banks have come round to realise that negative interest rate policies need to be calibrated more carefully, so the harm to the financial sector does not neuter the impact from lower borrowing costs.

  • In any case, there is a limit to how far into negative territory interest rates can go. Even confidence in the soothing effects of ever-more quantitative easing seems to be diminishing.

  • In many cases, fiscal or monetary policy does not offer solutions to the deeper causes of slow growth – issues like demographics or poor productivity.

  • With the U.S. (and even Japan) bordering on full employment, raising potential growth is becoming more important than delivering a short-term stimulus to demand. Unfortunately, in most developed markets there appears to be little commitment to deliver the effective structural reform that is necessary to boost potential growth./

  • The implication is that developed economies will struggle to escape from the sluggish growth of recent years, although downside risks will be limited by a flexible approach to policy marking. That leaves the global economy stuck in the range of 3.0-3.5 per cent growth.

  • The U.S. economy remains in a sweet spot where growth is fast enough to absorb unemployed workers, but not so strong that it is generating much of a rise in inflation. As long as this balance is maintained, the Fed can continue with its cautious approach to tightening monetary policy.

  • A move in early November – just before the presidential election – looks unlikely, so we continue to see the next move as coming in December, followed by another two hikes in 2017. Faster inflation would be a threat to this gradual pace of tightening.

  • Concern that the Eurozone would suffer significant contagion from the UK’s Brexit vote has faded. Taking the purchasing managers’ index (PMI) as the broadest and most timely guide to economic activity, it is hard to see any impact. Readings are still comfortably above 50, at levels associated with GDP growth of around 1.5 per cent.

  • Political risk in Europe is inescapable over the coming year, with the referendum on a new constitution in Italy (probably November), followed by national elections in France, the Netherlands and Germany in 2017.

  • China’s PMI readings show that the manufacturing sector is steady, while non-manufacturing is stronger, which is supportive of claims of re-balancing. Unfortunately the stability comes at a price. The credit bubble continues to expand very rapidly, despite official claims that it will come under control.

  • The partial recovery in commodity prices has eased the pressure on some emerging markets (EM) and allowed a rebound in exchange rates. Several countries are benefitting from improved policy-making, often in the wake of political change.

  • More fundamentally there are signs of improving growth heading towards 2017 in major EM such as Argentina, Brazil, Indonesia, Mexico and Russia. This should help resilience if the U.S. implements two or three rate hikes in 2017, as we expect.

  • Asia still looks solid in the face of sluggish growth in the developed world and troubles in China. Low inflation and (mostly) solid government finances give policy flexibility if needed.

Equities - Brace for Volatility

“Investors' focus is expected to shift towards the U.S. Presidential Election as swings in election polls in the run up to November could impact investor-sentiment and result in greater volatility.”

– Sean Quek, Head Equity Research, Bank of Singapore; Member of OCBC Wealth Panel

Key Points:

  • Global equities ended September higher as dovish indications from central banks buoyed investor enthusiasm. Volatility, which spiked in mid-September, collapsed back to August’s levels.

  • The conditions are already in place to expect a rate hike at the December meeting. As the focus shifts towards the U.S. President Election, extended valuations continue to provide limited downside margin even as volatility is expected to return.

  • Coupled with the extended valuations at 18.9 times forward price earnings, we are turning more cautious on U.S. equities even as they recovered to end September in positive territory as less hawkish Fed commentary restored investor risk appetite.

  • European equities gained as macroeconomic data suggest that the impact of Brexit has been more muted than expected. At the same time, the earnings downgrade appears to be stabilising. Overall, we are turning less negative on the region.

  • However, the risk of a political contagion is still a potential overhang in anticipation of a busy 2017 political calendar. Also, even as investors question the efficacy of ECB stimulus, the resilient economic numbers for Europe has reduced the need for the central bank to respond in the near future. With forward price earnings of 16.5 times above the long-term average of 13 times, we remain cautious on European equities given the prospect of higher uncertainty.

  • A lower JPY helped Japanese equities to outperform in September. However, the disappointing BOJ move received underwhelming market response. Nevertheless, the absence of any further cut in negative interest rates and the introduction of yield curve control by the BOJ provided a fillip for the banks.

  • Looking forward, we maintain the view that sustained re-rating of Japanese equities would require more meaningful structural reforms. Valuations, at forward price earnings of 14.4 times are not demanding. We stay Negative here and prefer companies with high earning visibility.

  • Asia ex-Japan was the top performing region again, as the less hawkish than expected Fed commentary provided the biggest relieve for Asia ex-Japan equities.

  • North Asian markets led by China and Hong Kong outperformed. On the other hand, the Philippines, Thailand and Malaysia lost ground. Although Asia ex-Japan continues to trade at a significant discount to its developed market peers, valuations for the region are no longer cheap versus its own historical levels, so we maintain our Neutral stance.

  • Within developed markets, Cyclical sectors, led by Technology and Financials, continued to outperform in September. We continue to look for global sectors with a combination of consumer exposure as well as relatively attractive valuations. These would be Consumer Discretionary, Healthcare, Technology and Telecoms.

  • Overall, we maintain our cautious stance on equities. As always we advocate a diversified portfolio and investors may consider paring down their exposure to regional equities, which in sum, should lead to a paring down of overall equity exposure. Thus, investors will continue to have exposure to equities, but with a lower weightage relative to the size of the portfolio.

Bonds - Fed's Delay a Boon for Credit Markets

“With accommodative monetary policy globally, bonds should continue to deliver performance over the coming months. However, we expect returns to be driven more by income than capital appreciation.”

– Vasu Menon, Senior Investment Strategist, Wealth Management Singapore, OCBC Bank; Member of OCBC Wealth Panel

Key Points:

  • After a modest decline early in the month, the Fed’s decision to put off a rate hike led to a rally in global bond markets. Emerging Market (EM) produced its seventh consecutive positive month.

  • The JPM CEMBI, a global, liquid corporate emerging markets benchmark that tracks U.S.-denominated corporate bonds issued by emerging markets entities, was up 12.1 per cent with High Yield gaining 16.7 per cent and High Grade up 9.3 per cent. EM bond seem on track to eclipse the 12.5 per cent return of 2010, the second best year on record, barring unforeseen calamities.

  • Within Developed Markets, U.S. High Yield managed to eke out a modest 0.1 per cent gain while Global Investment Grade declined 0.4 per cent.

  • Returns in Latin America have been both significant as well as broad-based. As such, valuations are no longer as attractive and we advocate a more neutral Asia/CEEMEA/Latin America top-down strategy. Our focus will be on specific Country, Sector and Individual Credit bets as the primary driver of performance for the remainder of the year.

  • Within Asia we would take a more neutral stance on High Yield given that spread levels have tightened to around ~500 bps, well below the 5-year historical average of ~700 bps. We would also maintain our Underweight in Asian Investment Grade (particularly Korea and Malaysia) where spreads often trade inside of comparably rated Developed Market Credits.

  • We expect the spike in High Yield issuance to continue in October as issuers have found a receptive audience in the current ‘Hunt for Yield” environment.

  • While we remain constructive on the EM High Yield asset class in general, investors should be both circumspect and selective as this risk-on environment tends to result in increasingly lower quality issuers.

  • As such, we would maintain our preference for higher quality names (‘BB’ and above) despite less compelling valuations. Although the BOJ and Fed actions should be supportive for long dated bonds in the short-term, investors should be mindful of duration risk on an increased likelihood of a December hike.

  • An accommodative monetary policy globally should enable Fixed Income assets to continue to deliver performance over the coming months.

  • However, we expect returns to be driven more by income than capital appreciation. Given current valuations within EM, we are positive on EM High Yield along with U.S. and EM Investment Grade.

Foreign Exchange & Commodities - From Policy to Politics

“Fed inaction at its September meeting leaves the U.S. dollar vulnerable for now. However we do not expect the setback to last given Fed’s readiness to hike interest rates in December.“

– Michael Tan, Senior Investment Counsellor, OCBC Bank; Member of OCBC Wealth Panel

Key Points:

  • We are back to yield hunting following the Fed’s inaction in September. The U.S. Dollar will likely trade sideways after losing some ground.

  • The U.S. elections will be the main market theme as central banks take a break. The possibility of Trump win is negative for currencies that would be affected by his anti-immigration and anti-trade rhetoric. A Trump victory carries higher risk of policy uncertainty but it is unclear if this would be broadly negative for the U.S. Dollar.

  • The likelihood of a Trump presidency could weigh on the U.S. Dollar versus reserve currencies such as Japanese Yen, and also versus gold. Trump’s victory also poses a negative for Asian currencies, given the risk of rising global trade tensions.

  • The BOJ policy to steepen the yield curve is good for the financial sector but does not matter much for USD/JPY given that there is no addition of monetary stimulus. The fact that USD/JPY is below the pre-BOJ level shows that the Fed matters more than BOJ in driving USD/JPY.

  • We expect USD/JPY to hover in a broad ¥100-110 range for the rest of 2016, with the downside capped by expectations of closer coordination of monetary and fiscal policies in Japan.

  • A patient ECB (the central bank is not rushing to ease policy) is a positive risk for the EUR. Extension of QE by ECB in December and resumption of Fed rate hikes by end-2016 should limit the risk of EUR becoming the new JPY.

  • However, upside risk to EUR will amplify if perceived European political risk unexpectedly turns begin.

  • The MAS is likely to maintain its neutral slope stance in the upcoming policy announcement in mid-October, judging from hints of a slightly more positive take on Singapore’s core inflation outlook.

  • But given prospects of below-trend growth and a softening labour market, we believe that MAS would like to see SGD/NEER trade in the weaker half of the policy band.

  • Gold losing steam on worries over hawkish Fed but prices should find support around US$1,300.

  • Gold bulls are likely to remain wary of hints that the Fed might raise rates in December. We maintain the view that gold will continue to trade in a new higher range of US$1250-1400 for the rest of 2016. Implied volatility for gold options is back near the lows of the year.

  • Oil rebounded in August as speculative short positions were cut on rumours of supply restraint, but there is a lack of fundamental drivers to produce a significant move in prices.

  • The equilibrium price where long-term supply and demand is in balance is an unknowable number, but most specialists put it in the US$60-70 range.


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Top Investment Ideas

Good Yield Hunting

Financial markets remain in a tentative risk-on mode, encouraged by good enough economic data to take recession risks off the table for now, but enough economic uncertainty to keep central banks in easing mode.

We prefer emerging market high yields and are neutral on investment grade bonds.

For fixed income, investors should continue to hold bonds with shorter tenors, as such bonds are less sensitive to increases in interest rates.

Asset allocation should be the key consideration in managing and building your core portfolio.


Recommendations

Equity Funds

For a diversified equity strategy, you may consider the Fidelity Global Dividend Fund for stable and rising dividends, strong performance with lower volatility and exposure to the best dividend stocks globally.

Equity-Linked Convertible Investments or Stock Ideas

The latest earnings season saw more misses than beats, which did not come as a surprise. Some downward revisions were seen in the commodity sector (due to weaker earnings production and hedging issues), as well as aviation and energy sectors. The surprise liquidation announcement by troubled energy services firm Swiber Holdings also resulted in share price volatility in banks and oil and gas stocks last month.

Following the correction in DBS Bank shares over the past month, the buy rating is maintained on the view that the expected increase in allowances has been priced in. Nevertheless, we expect the near term asset quality overhang on the sector to persist, and prefer accumulation in stages for long term investors. Similarly, we remain cautious on oil and gas names on the view that concerns over the prolonged impact of weak global growth and over-supply situation is likely to remain as a headwind in the offshore oil services industry.

2Q earnings for S-REITs have largely met expectations with stable dividends per unit from a year ago and weaker performances in hospitality and industrial REITs. Within Singapore equities, we reiterate our preference for yield plays with more stable earnings visibility such as Keppel DC REIT (KDCREIT SP), Mapletree Greater China (MAGIC SP), SPH REIT (SPHREIT SP) and Frasers Centrepoint Trust (FCT SP). While SREITs have performed well year to date, we expect the outperformance to continue on the back of a global hunt for yield.

In the U.S., cyclical sectors - led by Technology and Consumer Discretionary - rebounded sharply in July and defensive names generally underperformed. Our preferred sectors continue to be Consumer Discretionary, Healthcare, Technology and Telecoms.

We remain positive on Consumer Discretionary, especially in the U.S. where economic recovery remains on track. Improvements in labour markets, solid household balance sheets and lower oil price are supportive for U.S. consumption growth.

Also, valuations for the sector remain relatively attractive, especially in an environment where most sectors are already trading above their long-term average PE levels. Key picks include Starbucks (SBUX US) and Walt Disney Co. (DIS US). Similarly, we continue to be overweight the Technology sector, especially names with primarily consumer exposure. Similarly, valuations for the sector are relatively less demanding. Preferred names include Paypal Holdings (PYPL) and VISA Inc. (V US).

Healthcare underperformed in August in-line with other defensive sectors as risk appetite improved. Our positive stance remains intact here. Besides healthy fundamentals from expected strong pricing power for drug and biotech companies, the sector is likely to be less impacted should global growth decelerate. Valuations remain undemanding versus global peers, while M&A activities provide potential catalysts. Buy-rated names include Wide-Moat rated Amgen (AMGN US) and Sanofi S.A. (SAN FP).

Marred by asset quality concerns and the low interest rate environment, valuations for Financials remain depressed. However, we see further potential downside from rising operational uncertainties post the UK referendum, with the regulatory environment and dilution risk capping the upside. Taking a more defensive stance within Financials, one of our top picks here is Bank of New York Mellon Corp. (BK US), the largest player in the asset custody and servicing business.

Bonds

First Real Estate Investment Trust 4.125%, 2 May 2018

First Real Estate Investment Trust (First REIT) is Singapore’s pioneer REIT focusing on healthcare and/or healthcare-related real estate assets across Asia. These assets include hospitals, nursing homes, medical clinics, pharmacies, laboratories, lifestyle & wellness management etc. Since its IPO listing on the SGX in 2006, First REIT had managed to grow its portfolio of 4 hospital assets to a total of 17 as at FY2015 (ending Dec). Currently, these 17 assets have an investment value of around S$1.27 billion as at Dec 2015. Properties are mainly located in Indonesia with 3 in Singapore and 1 in South Korea (Yeosu City). First REIT has a current market capitalization of S$1 billion as at Jul 2016.

PT Lippo Karawaci TBK (PLKT) is the main Sponsor for First REIT (33% owned) and also a Master Lessee for all of First REIT’s Indonesian properties excluding Siloam Hospitals Purwakarta and Siloam Sriwijaya, which are leased to PT Metropolis Propertindo Utama. PLKT is the largest listed property developer in Indonesia with a market capitalization of US$2.48 billion as at Jan 2015; it currently has a strong pipeline of 46 hospitals to which First REIT has a Right-of-First-Refusal (ROFR) for the purpose of future acquisitions. First REIT is also managed by Bowsprit Capital Corporation Ltd., a wholly-owned subsidiary of PLKT.

Master Lease Agreements

The properties which are leased by the Group’s respective special purpose companies (SPC) to the Master Lessee are typically held under long-term master leases of between 10 to 15 years, with a base rent to include a step-up mechanism based on CPI rates respective of the various geographical segments. A Master Lessee bears all operating costs relating to the property, which reduces the Group’s exposure to increasing operating expenses.

Bond Funds

We always advocate a diversified investment strategy to mitigate risks, and interested investors may consider investing in a bond fund to reduce single issuer risk. The LionGlobal Short Duration Bond Fund allows investors to invest in investment grade bonds and receive potential payouts of 2.5 per cent p.a quarterly. This may be less risky when or if interest rates rise.

Mixed-Asset Funds:

Three funds have shown resilience in the face of the volatility caused by the U.K.’s referendum to exit the EU and possibly other events going forward. A portfolio of these 3 funds gives you a fair diversification of your investment.

The BlackRock Global Multi-Asset Income Fund’s dynamic asset allocation lets investors exploit opportunities in both traditional and non-traditional asset classes.

Investors may also consider Schroder Asia Income Fund, which offers an attractive potential monthly pay out of about 5.25 per cent per annum paid monthly. The fund aims to capture the strong growth potential of Asia through both equities and bonds. Investors may gain from an active asset allocation strategy which aims to maximize yield and total return in different market environments.

We also recommend the JPMorgan Global Macro Opportunities Fund. This fund leverages on global macro themes to generate performance. It aims to deliver absolute performance in various market environments. The fund also has low correlation with many asset classes and provides good diversification for your portfolio. The fund manager can employ traditional and/or sophisticated investment instruments.

Currencies: The markets have repriced the odds of interest rate hike/s this year after the speeches delivered at the Jackson Hole meeting of central bankers on 26 August. Those who had collected US dollar when it dipped below SGD1.3400 should probably be looking at higher levels like SGD1.3700-1.3800 to take profits.

 

Global Outlook - Global Economy Has Been Resilient

“In a low-growth, post-crisis world, plagued by political instability there are plenty of things that can go wrong. Policy offers some insurance, but no guarantees. However, in 2016 the world economy has continued to dodge the downside risks.”

– Richard Jerram, Chief Economist, Bank of Singapore; Member of OCBC Wealth Panel

Key Points:

  • A period of slow growth in the wake of a financial crisis is unsurprising, and in recent years it has been exacerbated by weak productivity. The result is global growth has been stuck in a 3 to 3.5 per cent range that is neither impressive, nor particularly problematic.

  • However, the world economy has dodged various predicted disasters in recent years, sometimes thanks to timely policy interventions. This has continued in 2016 with a bounce in commodity prices, firmer emerging market growth and stability in China.

  • The outlook will never be entirely free of concern. The next major risk will be the U.S. Presidential election, where a Trump victory would drive uncertainty. The odds are against him, but that was also true for Brexit.

  • The lesson is that we need to be sensitive to observable downside risks and to have some insurance against unpredictable “black swan” events. At the same time, we must remember the resilience and mean-reverting nature of the global economy, as well as the backdrop of policy support.

  • In the United States, the economy has enjoyed a steady recovery from the depths of recession in 2009. Recent data releases are volatile but the secret is to focus on finding consistency among the majority of the releases and not put too much emphasis on outliers. If policy is loose and the external environment is stable, then we should expect recovery to continue.

  • Concern that the Eurozone would suffer significant contagion from the U.K.’s Brexit vote has faded. Taking the purchasing managers’ index (as the broadest and most timely guide to economic activity), it is hard to see any impact. Readings are still comfortably above 50, at levels associated with GDP growth of around 1.5 per cent.

  • In Japan, another fiscal package has completed Japan’s U-turn from budget deficit reduction to economic stimulus. Despite the shift in priorities, it is hard to find evidence of material progress on the structural reform that is needed to raise the potential growth rate.

  • In China, the steady expansion of the credit bubble and the need for regular bursts of policy stimulus are two signs that, so far, reform has not been effective in producing an acceptable pace of sustainable growth. Adjustment will be a multi-year process, but at the moment progress seems slow and this suggests that another round of stimulus will be on the agenda by the end of the year.

  • Asia still looks solid in the face of sluggish growth in the developed world and troubles in China. The internally-driven dynamism that has been the feature of the past few years should continue to deliver growth. Current account surpluses, large foreign exchange reserves and floating exchange rates should be an adequate buffer against external events.


Equities - Maintain Cautious Stance

“We continue to expect market volatility in the near term amid the political and global growth uncertainties, even as central banks are ready to act further to support growth. Valuations are extended and overall downside risks have increased.”

– Sean Quek, Head Equity Research, Bank of Singapore; Member of OCBC Wealth Panel

Key Points:

  • Since the Brexit-triggered sell-off in late June, global equities have rebounded by almost 11 per cent. Valuations at a forward price-to-earnings ratio (PE) of 17.5 times continue to look stretched. While we maintain our cautious stance on equities, we do not yet want to downgrade our call further, as there appears to be enough growth to prevent an outright contraction in earnings. Nevertheless, we think markets will trade sideways with heightened volatility and we prefer to focus on income over growth.

  • U.S. equities extended further into all-time high territory in August, albeit at a decelerated pace. Defensive sectors, led by Telecom and Utilities, continued to underperform as risk appetite grew. Looking ahead, we continue to see the on-going U.S. recovery and domestic consumption growth, driven by the tight labour market and rising inflation, to be supportive of earnings growth. Near-term, we see rising political risk running up to the Presidential election in November.

  • European equities recovered in August as the latest figures suggest that the economic fallout of Brexit could be isolated to the United Kingdom. However, the risk of political contagion is a potential overhang in anticipation of a busy political calendar over the next 6 to 12 months. These include Italy’s referendum on constitutional reforms and the general elections in France and Germany. With forward PE of 16.3 times above the long-term average of 13 times, we remain cautious on European equities given the prospect of higher uncertainty.

  • Japanese equities continued to bounce back in August as the better-than-expected quarterly results season helped to stem the sharp earnings downgrade trend. Following the big Upper House election win, the Abe administration’s stimulus package is nowhere close to the level anticipated by the market and there is now further pressure on the BOJ to introduce more aggressive easing measures. We maintain the view that a sustained re-rating of Japanese equities would require more meaningful structural reforms. Valuations, at a forward PE of 13.6 times, are not demanding.

  • Asia ex-Japan equities climbed further in August. Unlike its global peers, consensus 2016 earnings-per-share forecast for Asia ex-Japan has continued to improve after picking up in June. Investors still seem complacent about a lower for longer interest rate environment even as Fed commentary has started to take a more hawkish stance with the U.S. economy showing further signs of strengths. The low expectations of a U.S. rate hike this year suggests that the market could be easily spooked by any hawkish Fed commentary.



Bonds - Still Positive EM High Yields

“Our prognosis that interest will stay low for a fairly long period, given accommodative monetary policy globally, is a forecast that is supportive of bonds, especially emerging market high yield bonds which still enjoy reasonable valuations.”

– Vasu Menon, Senior Investment Strategist, Wealth Management Singapore, OCBC Bank; Member of OCBC Wealth Panel

Key Points:

  • Recent months of strong jobs growth and a lack of contagion – either financial or economic – from the Brexit vote have emboldened Fed officials to guide towards a rate hike before the end of the year. Fed Chair Yellen’s speech at the Jackson Hole conference rounded off a sequence of positive comments, without giving any clarity on the precise timing, which seems to be dependent on the data flow. We see a Fed move in December as more likely than September.

  • Even though further easing from the Bank of Japan or European Central Bank might be limited, their current quantitative easing policies are likely to run for at least another year, and probably much longer. The resultant flows into the U.S. are likely to restrain the rise in U.S. Treasury yields even if the Fed puts through a series of rate hikes over the next couple of years.

  • Foreign inflows are expected to limit the increase in U.S. bond yields, but not prevent it altogether. In this scenario we see 10-year Treasury yields at around 1.75 per cent by year end, with further modest increases in 2017. This should mean that investment grade bonds offer slightly better returns than cash for the remainder of the year.

  • While some equity markets have been reaching all-time highs, bonds have been performing equally well. We are less worried about the valuations on corporate bonds. One of the key valuation metrics of such bonds is its spread over government bonds. This is measured simply by the additional yield paid to the investor compared to the yield that would be paid on a government bond of the same maturity.

  • Emerging Market (EM) assets are typically vulnerable to Fed rate hikes. Higher U.S. rates often buoy the U.S. dollar and weigh on EM assets and commodity prices. Yet the reaction to the next rate rise could be muted. We expect the Fed to raise rates just once this year − likely in December − and to proceed gingerly thereafter.

  • The recent strong flow into EM assets is not without reason. EM fundamentals that saw the worst of the three year downturn is on the cusp of recovery, with external imbalances shrinking, and EM growth dynamics improving compared to Developed Market growth.

  • The lower-for-longer outlook for Fed rates extends investors’ reach for yield. It also buys time for EMs to implement structural reforms, such as India’s recent tax reform and Indonesia’s renewed push for fiscal reform. This could enable selected EMs to be more resilient when the Fed eventually normalises rates.

  • Fixed income should be in a position to continue to deliver performance over the coming months. Given current valuations within Emerging Markets, we continue to favour Emerging Market High Yield Bonds and maintain our positive stance towards the asset class.



Foreign Exchange & Commodities - U.S. Dollar Bears Should be Wary

“Our view of the trade-weighted U.S. Dollar is still one bounded in the year’s range. With the exception of a brief broad U.S. Dollar surge in late 2015 driven by a China devaluation scare, as well as the hit to commodity currencies, the U.S. Dollar index has been in a broad holding pattern since early 2015.“

– Michael Tan, Senior Investment Counsellor, OCBC Bank; Member of OCBC Wealth Panel

Key Points:

  • The U.S. Dollar had dipped near to the low end of this year’s range against the Euro, the Australian Dollar and the New Zealand Dollar respectively. U.S. Dollar bears should be wary of a reversal. The Fed is increasingly worried about an overheating U.S. economy and its hesitance to raise rates may end once the November U.S. Presidential election is over.

  • The Japanese Yen and gold have proven to be attractive portfolio diversifiers so far this year. However with both the Yen and gold near the strong end of this year’s range, and with Bank of Japan governor Kuroda’s hint of more easing likely at the 21 September meeting, this could limit the effectiveness of the Yen and gold as a risk-off hedge. If the source of shock is a hawkish Fed, being long the Yen and gold may also not be particularly good hedges against the resulting risk-off sentiment.

  • A Trump victory carries higher risk of policy uncertainty. But it is unclear this would be broadly negative for the U.S. Dollar. Greater likelihood of a Trump presidency could weigh on the U.S. Dollar versus reserve currencies such as Japanese Yen, and also versus gold. A Trump presidency could be a negative for Asian currencies given the risk of rising global trade tensions.

  • Our view on the targets for the Pound are unchanged. Its recent stabilisation is not strong enough yet to suggest that the lows are in place. We continue to believe that the broader Pound downtrend remains intact, reflecting the U.K.’s chronic funding position.

  • If Fed comments turns more hawkish, this could push gold price to test the key psychological level at US$1,300 per ounce. We expect buying interest to emerge around this area. Any significant dips should be viewed as opportunities to build long tactical gold exposure for a 3 to 6 month timeframe.

  • We maintain the view that gold will continue to trade in a US$1,250 to US$1,400 per ounce range in 2H16. With other G3 central banks continuing with loose monetary policy and with core bond yields low to negative, gold remains an attractive portfolio diversifier against policy event risks such as a Trump election victory.

  • Oil prices are stabilising just below US$50 per barrel as solid demand gradually absorbs supply. Short-term volatility is being driven by speculative activity, apparently in response to sentiment over supply disruptions or hopes of an OPEC deal to limit production. Oil rebounded in August as speculative short positions were cut on rumours of supply restraint, but there is a lack of fundamental drivers to produce a significant move in prices.

  • Most specialists put the equilibrium price where long-term supply and demand is in balance in the US$60 to US$70 per barrel range. This is a reasonable medium-term target, which implies a moderate upward bias to prices. Feedback loops should mean that if prices push much higher, then the supply and demand adjustment will stall, which is a barrier to having an overly positive view.




Important Information

Any opinions or views of third parties expressed in this material are those of the third parties identified, and not those of OCBC Bank. The information provided herein is intended for general circulation and/or discussion purposes only. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Before you make any investment decision, please seek advice from your OCBC Relationship Manager regarding the suitability off any investment product taking into account your specific investment objectives, financial situation or particular needs. In the event that you choose not to seek advice from youfr OCBC Relationship Manager, you should carefully consider whether the product is suitable for you. This does not constitute an offer or solicitation to buy or sell or subscribe for any security or financial instrument or to enter into any transaction or to participate in any particular trading or investment strategy.

A copy of the prospectus of each fund is available and may be obtained from the relevant fund manager or any of its approved distributors. Potential investors should read the prospectus for details on the relevant fund before deciding whether to subscribe for, or purchase units in the fund. The value of the units in the funds and the income accruing to the units, if any, may fall or rise. Please refer to the prospectus of the relevant fund for the name of the fund manager and the investment objectives of the fund.

OCBC Bank, its related companies, their respective directors and/or employees (collectively ‘Related Persons’) may have positions in, and may effect transaction in the products mentioned herein. OCBC Bank may have alliances with the product providers, for which OCBC Bank may receive a fee. Product providers may also be Related Persons, who may be receiving fees from investors. OCBC Bank and the Related Person may also perform or seek to perform broking and other financial services for the product providers.

Foreign currency investments or deposits are subject to inherent exchange rate fluctuation that may provide opportunities and risks. Earnings on foreign currency investments or deposits would be dependent on the exchange rates prevalent at the time of their maturity if any conversion takes place. Exchange controls may be applicable from time to time to certain foreign currencies. Any pre-termination costs will be deducted from your deposit.

No representation or warranty whatsoever (including without limitation any representation or warranty as to accuracy, usefulness, adequacy, timeliness or completeness) in respect of any information (including without limitation any statement, figures, opinion, view or estimate) provided herein is given by OCBC Bank and it should not be relied upon as such. OCBC Bank does not undertake an obligation to update the information or to correct any inaccuracy that may become apparent at a later time. All information presented is subject to change without notice. OCBC Bank shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein. The information provided herein may contain projections or other forward-looking statements regarding future events or future performance of countries, assets, markets or companies. Actual events or results may differ materially. Past performance figures are not necessarily indicative of future or likely performance. Any reference to any specific company, financial product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the same.

The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.

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  1. Indonesia: The offering of the investment product in reliance of this document is not registered under the Indonesian Capital Market Law and its implementing regulations, and is not intended to constitute a public offering of securities under the Indonesian Capital Market Law and its implementing regulations. The investment product may not be offered or sold, directly or indirectly, within Indonesia or to citizens (wherever they are domiciled or located), entities or residents, in any manner which constitutes a public offering of securities under the Indonesian Capital Market Law and its implementing regulations.
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Top Investment Ideas

Don’t chase the rally

Buoyant markets in the face of weak fundamentals and political uncertainties need to be validated by actual economic performance. Otherwise the rise of stock markets cannot be sustained. We have since downgraded European equities to underweight and upgraded U.S. equities to overweight.

We prefer emerging market high yields and are neutral of investment grade bonds.

For fixed income, investors should continue to hold bonds with shorter tenors, as such bonds are less sensitive to increases in interest rates.

Asset allocation should be the key consideration in managing and building your core portfolio.


Recommendations

Equity Funds

For a diversified equity strategy, you may consider Fidelity Global Dividend Fund for stable and rising dividends, strong performance with lower volatility and exposure to the best dividend stocks globally.

Equity-Linked Convertible Investments or Stock Ideas

Singapore equities added to gains in July following global equities rebound post-Brexit.

We remain selective given our view that the macro environment will remain lacklustre, also evident from the latest external trade numbers where both Singapore’s exports and imports fell in May on the back of sluggish global trade.

For yield focused investors, Singapore equities offer interesting opportunities. Dividend yield spread vs the Singapore government 10-year bond yield is supportive with further room for compression. With the view that bond yields are likely to remain low, due to delayed Fed rate hike expectations and increased macro uncertainties, we have upgraded our rating on Singapore REITs.

Our preferred SREITs picks include Frasers Centrepoint Trust (FCT SP) and Keppel DC REIT (KDCREIT SP) which are one of the few compelling bottom up picks with decent growth prospects.

In the U.S., cyclical sectors, led by Technology and Consumer Discretionary, rebounded sharply in July. Defensive names generally underperformed. Our preferred sectors continue to be Consumer Discretionary, Healthcare, Technology and Telecoms.

We remain positive on Consumer Discretionary, especially where economic recovery remains on track. Even after the rebound in July, we see the sector’s recent weakness as a buying opportunity. Improvement in labour markets, solid household balance sheets and lower oil price are supportive of U.S. consumption growth.

Key recommendations include Starbucks (SBUX US) and Disney (DIS US). Similarly, we continue to be overweight the Technology sector, especially on names with primarily consumer exposure. For Technology, we prefer Mastercard (MA US) and Apple (AAPL US).

Within defensive names, Healthcare outperformed in July. Our positive stance remains intact here. Besides healthy fundamentals from expected strong pricing power for drug and biotech companies, the sector is likely to be less impacted should global growth slow due to Brexit uncertainties.

The sector continues to trade at a discount to global equities while M&A activities have further strengthened their edge.

We recommend Amgen (AMGN US) and Sanofi (SAN FP).

Marred by asset quality and Brexit concerns, valuations for Financials remain depressed. However, we see further downside from rising operational uncertainties post the UK referendum, with the regulatory environment and dilution risk capping the upside.

One of our top recommendations here is State Street Corp (STT US). STT’s massive scale in custody business means that few competitors can match its profit margins or breadth of product offerings. Within banks, we continue to prefer U.S. domestic banks like US Bancorp (USB US) and Wells Fargo & Co (WFC US), reflecting our positive view on the U.S. economy and relatively limited regulatory scrutiny.

Bonds

First Real Estate Investment Trust 4.125%, 2 May 2018

First Real Estate Investment Trust (First REIT) is Singapore’s pioneer REIT focusing on healthcare and/or healthcare-related real estate assets across Asia. These assets include hospitals, nursing homes, medical clinics, pharmacies, laboratories, lifestyle & wellness management etc.

Since its IPO listing on the SGX in 2006, First REIT had managed to grow its portfolio of 4 hospital assets to a total of 17 as at FY2015 (ending Dec). Currently, these 17 assets have an investment value of around S$1.27 billion as at Dec 2015. Properties are mainly located in Indonesia with 3 in Singapore and 1 in South Korea (Yeosu City). First REIT has a current market capitalization of S$1 billion as at Jul 2016.

PT Lippo Karawaci TBK (PLKT) is the main sponsor for First REIT (33% owned) and also a master lessee for all of First REIT’s Indonesian properties excluding Siloam Hospitals Purwakarta and Siloam Sriwijaya, which are leased to PT Metropolis Propertindo Utama. PLKT is the largest listed property developer in Indonesia with a market capitalization of US$2.48 billion as at Jan 2015; it currently has a strong pipeline of 46 hospitals to which First REIT has a Right-of-First-Refusal (ROFR) for the purpose of future acquisitions.

First REIT is also managed by Bowsprit Capital Corporation Ltd., a wholly-owned subsidiary of PLKT.

Master lease Agreements

The properties which are leased by the Group’s respective special purpose companies (SPC) to the master lessee are typically held under long-term master leases of between 10 to 15 years, with a base rent to include a step-up mechanism based on CPI rates respective of the various geographical segments.

A master lessee bears all operating costs relating to the property, which reduces the group’s exposure to increasing operating expenses.

Bond Funds

Interested investors may consider the LionGlobal Asia Bond Fund. It allows investors to own a good mix of both investment grade and high yield bonds. The portfolio consists of about 70 bonds issued by Asian companies that the investment manager assesses to have strong debt servicing capability, and hence lower default risk.

Mixed-Asset Funds

Three funds have shown resilience in the face of the volatility caused by the UK’s referendum to exit the EU and possibly other events going forward. A portfolio of these 3 funds gives you a fair diversification of your investment.

The BlackRock Global Multi-Asset Income Fund’s dynamic asset allocation lets investors exploit opportunities in both traditional and non-traditional asset classes.

Investors may also consider the Schroder Asia Income Fund which offers an attractive potential monthly pay out of about 5.25 per cent per annum paid monthly. The fund aims to capture the strong growth potential of Asia through both equities and bonds. Investors may gain from an active asset allocation strategy which aims to maximize yield and total return in different market environments.

We also recommend the JPMorgan Global Macro Opportunities Fund. This fund leverages on global macro themes to generate performance. It aims to deliver absolute performance in various market environments. The fund also has low correlation with many asset classes and provides good diversification for your portfolio. The fund manager can employ traditional and/or sophisticated investment instruments.

Currencies

The return of the policy divergence theme should support the U.S. dollar amid better U.S. data. Consider building U.S. Dollar positions at previous lows seen this year.

 

Global Outlook - Central Banks to the Rescue

“Central banks are again responding to heightened risks by pouring oil on troubled waters, which has limited Brexit risks to the UK so far. The Fed seems to be in no hurry, but we expect a hike in December as the U.S. recovery continues.”

– Richard Jerram, Chief Economist, Bank of Singapore

Key Points:

  • In the UK, early signs are that the Brexit vote has caused a shock to business and consumer confidence, reflecting the expected damage from impaired transactions with the rest of the European Union (EU). A likely recession should be reversed in 2017 as a result of the competitive benefits from the weaker exchange rate.
  • The remainder of the EU seems relatively relaxed about the economic hit from Brexit. Growth has been comfortably above trend, so the main concern might be that Brexit will prolong the EU’s escape from the risk of deflation. This is likely to spur the ECB to expand and extend its quantitative easing programme.

  • A deeper risk is that the stability of monetary union ultimately requires a move towards fiscal union. This appears highly problematic after the public’s dissatisfaction with the EU that has been highlighted by Brexit.

  • Any hints of referendum (let alone an exit) by a Eurozone member could be hugely disruptive. Elections in France, the Netherlands and Germany in 2017 will be a focus for market concern, especially as the UK has illustrated the unpredictability of events and the poor reliability of opinion polls.

  • Strong job growth in June eased concerns over the health of the domestic U.S. economy. Growth is bumpy but it looks like 2016 as a whole should see the economy expand by something close to the 2.0 per cent average of the previous five years.

  • In Japan, the early promise of Abenomics seems to have had little impact on the factors behind slow growth, which will make it hard to fix the fiscal problems.

  • The Bank of Japan has been under pressure to complement the government’s move by loosening policy further. However, the announcement of a near-doubling in ETF purchases to ¥6tr is a long way from the concept of “helicopter money” that has been receiving attention lately.

  • Immediate concern over the Chinese economy has faded as growth has responded to monetary and fiscal stimulus. The steady expansion of the credit bubble and the need for regular bursts of policy stimulus are two signs that, so far, reform has not been effective in producing an acceptable pace of growth. Adjustment will be a multi-year process, but at the moment progress seems slow.

  • Asia still looks solid in the face of sluggish growth in the developed world and troubles in China. The internally-driven dynamism that has been the feature of the past few years should continue to deliver growth of around 5 per cent in Asean.

  • Current account surpluses, large foreign exchange reserves and floating exchange rates should be an adequate buffer against short-term turbulence from Brexit.


Equities - Good Recovery in Global Equities

“Global equities recovered well in July from the unexpected Brexit driven sell-off in June, benefiting from growing expectations of further stimulus. We expect volatility to remain high in the near term amid the political and global growth uncertainties, even as central banks are ready to act further to support growth.”

– Sean Quek, Head Equity Research, Bank of Singapore

Key Points:

  • Given the risk of political contagion, Europe not surprisingly, underperformed. On the other hand, Asia outperformed.
  • US equities extended further into all-time high territory, boosted by better than expected earning so far. Both sales and earnings surprised positively, albeit still early days in the current season and versus beaten-down expectations.
  • For European equities, we see uncertainties re-emerging in the months ahead as UK kick-starts the process of unprecedented withdrawal from the EU. UK may head into a short-term recession from less investment and difficult negotiations with EU.
  • Consensus earnings estimates seem too optimistic and could see renewed downgrade pressure. While the ECB is likely to act to limit downside risks to growth, risk of political contagion is a potential overhang in anticipation of a busy political calendar over the next 6-12 months.
  • We expect volatility to remain high in the near term amid the political and global growth uncertainties, even as central banks are ready to act further to support growth. Valuations continue to extend although overall downside risks have increased. We maintain our Negative stance on equities. Regionally, we remain Negative on Europe in favour of the U.S.
  • Japanese equities rebounded strongly in July on growing expectations of fresh fiscal and monetary stimulus.
  • We maintain the view that sustained re-rating of Japanese equities would require more meaningful structural reforms. Valuations, at a PE of 13.7 times, are not demanding. We stay Neutral here and prefer companies with high earning visibility.
  • Boosted by speculation of central banks easing and growing risk appetite, Asia Ex-Japan continued to outperform in July.
  • Taiwan and Hong Kong were the best performing markets and Malaysia and Singapore underperformed. The low expectations of a U.S. rate hike this year suggests that the market could be easily spooked by any hawkish Fed commentary.
  • Also, the growth outlook for the region has started to soften again. Nevertheless, with valuations undemanding, we maintain our Neutral stance.


Bonds - Fabulous Month for Bonds Globally

“Emerging Market bonds have rallied significantly thus far this year. High Yield bonds have gained about 14 per cent and High Grades are up about 8 per cent. The market appears poised for its best year since 2012 with a reasonable shot at the second best year ever behind 2009.”

– Vasu Menon, Senior Investment Strategist, Wealth Management Singapore, OCBC Bank

Key Points:

  • Emerging Market produced its fourth excellent month in the past five (the other month was a gain as well, albeit a modest one) as it rose consistently throughout the month. Developed Market Credit also had a tremendous month with U.S. High Yield and Global High Grade up an incredible 2.9 per cent and 1.1 per cent respectively.
  • The market appears poised for its best year since 2012 with a reasonable shot at the second best year ever behind 2009. However, we view the potential upside as capped by challenging valuations in both EM High Yield and EM High Grade.
  • In the near-term post-Brexit world, Emerging Markets fixed income should be well-placed to outperform other risk asset classes. Concerns surrounding global growth should elicit accommodative monetary policy which in turn should be salutary for fixed income.
  • Moreover, while equity performance is highly influenced by earning momentum, fixed income is dependent on earnings adequacy. We believe that ongoing cash flows are supportive of credit quality. Hence we would maintain our EM HY overweight and market weight EM HG.
  • We have witnessed a massive spike this year in High Yield issuance. In the search for yield in the “lower for longer” low interest rate environment, issuers have found a receptive audience.
  • While we remain constructive on the Emerging Market High Yield asset class in general, we advise investors to be both circumspect and selective as this risk-on environment tends to result in increasingly lower quality issuers.
  • Abundant central bank liquidity together with various economic and political uncertainties provides a supportive backdrop for investment grade bonds, even in a world where the Fed is (gradually) raising interest rates. As a result we maintain our neutral asset allocation stance.
  • In terms of Fed policy, a September rate hike is possible, as there are two more jobs releases to come, while financial conditions have normalised after the initial turmoil from Brexit. However, its recent history suggests that the Fed is likely to err on the side of caution and delay until December.
  • Barring a surprising pick-up of inflation, we can see two or three more hikes in 2017, which implies sustained upward pressure on U.S. bond yields, without being likely to cause an aggressive sell-off.


Foreign Exchange & Commodities - U.S. Dollar to Remain Range-bound

“The return of the policy divergence theme should support the U.S. dollar amid better U.S. data. This contrasts with expectations of policy easing from the other three developed market central banks. However, we expect broad U.S. dollar strength to merely retrace recent range highs, rather than breaking significantly new ones for the rest of 2016.“

– Michael Tan, Senior Investment Counsellor, OCBC Bank

Key Points:

  • The return of the policy divergence theme should support the U.S. Dollar amid better data and some hawkishness out of Fed speakers.
  • Expect the U.S. Dollar to merely retrace recent range highs, rather than break new ones for the rest of 2016 as global conditions do not seem weak enough to promote such a safe haven demand for U.S. Dollar.
  • Prospects for coordinated monetary/fiscal stimulus have triggered renewed Yen weakness. A genuinely radical policy departure such as helicopter money could have a significant impact but we are not counting on helicopter money to revive the weak Yen trend. Yen has proven to be an attractive portfolio diversifier and will likely remain so.
  • GBP weakness has more to run given the ongoing implications and fallout from Brexit. This includes uncertainties surrounding trade deals, passporting of financial services and financing of the UK’s huge current account deficit. We expect further weakening of GBP/USD to 1.26 in 3 months’ time.
  • Asian currencies, supported by yield-seeking foreign bond and equity inflows, seems unconcerned about the recent Yuan weakening. But the resilience of Asian currencies seems a bit tired as markets begin to move towards pricing a greater chance of a Fed tightening in 2H2016 and with the People’s Bank of China likely to resume its Yuan depreciation after a pause going into the recent G20 meeting.
  • The recent decline in gold prices suggests that investors are less convinced of the Fed staying dovish to support risk assets.
  • Gold is vulnerable to profit-taking especially considering the near record high positioning. However, gold will continue to trade in a new higher range of US$1250-1400 (old range: US$1170-1320) in 2H16 with the Italian Senate referendum and the U.S. elections in November being two potential “risk off” events, which will be supportive for gold.
  • Temporary supply disruption boosted oil prices in 2Q2016, but this has reversed as the impact faded. The rebound in U.S. drilling is a side-show as activity is still at low levels. The exit of unprofitable producers points to a firmer medium-term price trend.
  • The equilibrium price where long-term supply and demand is in balance is an unknowable number, but most specialists put it in the US$60-70 range. This is a reasonable medium-term target, which implies a moderate upwards bias to prices. Feedback loops should mean that if prices push much higher, then the supply and demand adjustment will stall, which is a barrier to having an overly positive view.



Important Information

Any opinions or views of third parties expressed in this material are those of the third parties identified, and not those of OCBC Bank. The information provided herein is intended for general circulation and/or discussion purposes only. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Before you make any investment decision, please seek advice from your OCBC Relationship Manager regarding the suitability off any investment product taking into account your specific investment objectives, financial situation or particular needs. In the event that you choose not to seek advice from youfr OCBC Relationship Manager, you should carefully consider whether the product is suitable for you. This does not constitute an offer or solicitation to buy or sell or subscribe for any security or financial instrument or to enter into any transaction or to participate in any particular trading or investment strategy.

A copy of the prospectus of each fund is available and may be obtained from the relevant fund manager or any of its approved distributors. Potential investors should read the prospectus for details on the relevant fund before deciding whether to subscribe for, or purchase units in the fund. The value of the units in the funds and the income accruing to the units, if any, may fall or rise. Please refer to the prospectus of the relevant fund for the name of the fund manager and the investment objectives of the fund.

OCBC Bank, its related companies, their respective directors and/or employees (collectively ‘Related Persons’) may have positions in, and may effect transaction in the products mentioned herein. OCBC Bank may have alliances with the product providers, for which OCBC Bank may receive a fee. Product providers may also be Related Persons, who may be receiving fees from investors. OCBC Bank and the Related Person may also perform or seek to perform broking and other financial services for the product providers.

Foreign currency investments or deposits are subject to inherent exchange rate fluctuation that may provide opportunities and risks. Earnings on foreign currency investments or deposits would be dependent on the exchange rates prevalent at the time of their maturity if any conversion takes place. Exchange controls may be applicable from time to time to certain foreign currencies. Any pre-termination costs will be deducted from your deposit.

No representation or warranty whatsoever (including without limitation any representation or warranty as to accuracy, usefulness, adequacy, timeliness or completeness) in respect of any information (including without limitation any statement, figures, opinion, view or estimate) provided herein is given by OCBC Bank and it should not be relied upon as such. OCBC Bank does not undertake an obligation to update the information or to correct any inaccuracy that may become apparent at a later time. All information presented is subject to change without notice. OCBC Bank shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein. The information provided herein may contain projections or other forward-looking statements regarding future events or future performance of countries, assets, markets or companies. Actual events or results may differ materially. Past performance figures are not necessarily indicative of future or likely performance. Any reference to any specific company, financial product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the same.

The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.

Cross-Border Marketing Disclaimer

  1. Indonesia: The offering of the investment product in reliance of this document is not registered under the Indonesian Capital Market Law and its implementing regulations, and is not intended to constitute a public offering of securities under the Indonesian Capital Market Law and its implementing regulations. The investment product may not be offered or sold, directly or indirectly, within Indonesia or to citizens (wherever they are domiciled or located), entities or residents, in any manner which constitutes a public offering of securities under the Indonesian Capital Market Law and its implementing regulations.
  2. Malaysia: Oversea-Chinese Banking Corporation Limited (“OCBC Bank”) does not hold any licence, registration or approval to carry on any regulated business in Malaysia (including but not limited to any businesses regulated under the Capital Markets & Services Act 2007 of Malaysia), nor does it hold itself out as carrying on or purport to carry on any such business in Malaysia. Any services provided by OCBC Bank to residents of Malaysia are provided solely on an offshore basis from outside Malaysia, either as a result of “reverse enquiry” on the part of the Malaysian residents or where OCBC Bank has been retained outside Malaysia to provide such services. As an integral part of the provision of such services from outside Malaysia, OCBC Bank may from time to time make available to such residents documents and information making reference to capital markets products (for example, in connection with the provision of fund management or investment advisory services outside of Malaysia). Nothing in such documents or information is intended to be construed as or constitute the making available of, or an offer or invitation to subscribe for or purchase any such capital markets product.
  3. Myanmar: OCBC Bank does not hold any licence or registration under the FIML or other Myanmar legislation to carry on, nor do they purport to carry on, any regulated activity in Myanmar. All activities relating to the client are conducted strictly on an offshore basis. The customers shall ensure that it is their responsibility to comply with all applicable local laws before entering into discussion or contracts with the Bank.
  4. Taiwan: The provision of the information and the offer of the service concerned herewith have not been and will not be registered with the Financial Supervisory Commission of Taiwan pursuant to relevant laws and regulations of Taiwan and may not be provided or offered in Taiwan or in circumstances which requires a prior registration or approval of the Financial Supervisory Commission of Taiwan. No person or entity in Taiwan has been authorised to provide the information and to offer the service in Taiwan.
  5. Thailand: Please note that OCBC Bank does not maintain any licences, authorisations or registrations in Thailand nor is any of the material and information contained, or the relevant securities or products specified herein approved or registered in Thailand. Interests in the relevant securities or products may not be offered or sold within Thailand. The attached information has been provided at your request for informational purposes only and shall not be copied or redistributed to any other person without the prior consent of OCBC Bank or its relevant entities and in no way constitutes an offer, solicitation, advertisement or advice of, or in relation to, the relevant securities or products by OCBC Bank or any other entities in OCBC Bank’s group in Thailand.
  6. Hong Kong SAR: This document is for information only and is not intended for anyone other than the recipient. It has not been reviewed by any regulatory authority in Hong Kong. It is not an offer or a solicitation to deal in any of the financial products referred to herein or to enter into any legal relations, nor an advice or a recommendation with respect to such financial products. It does not have regard to the specific investment objectives, financial situation and the particular needs of any recipient or Investor. This document may not be published, circulated, reproduced or distributed in whole or in part to any other person without OCBC Bank’s prior written consent. This document is not intended for distribution to, publication or use by any person in any jurisdiction outside Hong Kong, or such other jurisdiction as the Bank may determine in its absolute discretion, where such distribution, publication or use would be contrary to applicable law or would subject the Bank and its related corporations, connected persons, associated persons and/or affiliates to any registration, licensing or other requirements within such jurisdiction.

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Top Investment Ideas - Volatility continues

The UK voted to leave the EU and triggered a risk-off phase in the short term. We have since downgraded European equities to underweight and upgraded U.S. equities to overweight.

We prefer emerging market high yields and are neutral of investment grade bonds.

For fixed income, investors should continue to hold bonds with shorter tenors, as such bonds are less sensitive to increases in interest rates.

Asset allocation should be the key consideration in managing and building your core portfolio.


Recommendations

Equity Funds

For a diversified equity strategy, you may consider the Fidelity Global Dividend Fund for stable and rising dividends, strong performance with lower volatility and exposure to the best dividend stocks globally.

Equity-Linked Convertible Investments or Stock Ideas

In Singapore, with the current risk off climate, we expect more buying opportunities ahead and highlight our preference for defensive stocks and selected dividend yielding ideas such as Singapore Telecommunications (ST SP) and Singapore Technologies Engineering Ltd (STE SP) for accumulation.

Following the surprise outcome of the UK voting to leave the EU, financial markets have endured a turbulent time. Amongst our S-REITs coverage, we believe Ascott Residence Trust will be the most affected, while the impact on Keppel DC REIT (KDCREIT) is expected to be minimal. Given the continued vagaries in the macroeconomic and geopolitical landscape, we see a structural shift towards a prolonged period of accommodative interest rates and believe that defensive yield plays are likely to enjoy significant tailwinds ahead, in our view. As such, we are upgrading our rating on the S-REITs sector from ‘Neutral’ to OVERWEIGHT, although we are cognisant of the headwinds that may pose operational challenges in the near-term. Our top S-REIT picks have performed relatively well amid the current volatile market conditions. We recommend Frasers Centrepoint Trust, KDCREIT and Ascendas REIT, given their defensive attributes, strong management team and healthy financial position.

In the U.S., we remain positive on Consumer Discretionary. U.S. economic recovery remains on track, with improvement in labour markets, solid household balance sheets and lower oil price supportive for consumption growth. We recommend Starbucks Corp (SBUX US) and The Walt Disney Co (DIS US). The recent pullback for the Technology sector also presents a good entry opportunity, especially names with substantial exposure to consumer demand. We recommend MasterCard Inc (MA US) and Apple Inc (AAPL US).

While Healthcare underperformed in June as investors took a risk-off stance, our positive stance remains intact. Besides healthy fundamentals from expected strong pricing power for drug and biotech companies, the sector is likely to be less impacted should global growth slows due to Brexit uncertainties. The sector continues to trade at a discount to global equities while M&A activities have further strengthened their edge. We prefer Amgen Inc (AMGN US).

Marred by asset quality and Brexit concerns, valuations for Financials remain depressed. While the sector appears oversold, we maintain our Neutral view as the regulatory environment and dilution risk could continue to cap the upside. In Europe, operational uncertainties post the UK referendum could remain an overhang. Reflecting our positive view on the USU.S. economy and with the USU.S. banks passing the recent Fed stress tests, we reiterate our preference for USU.S. domestic banks, especially US Bancorp (USB US) and Wells Fargo (WFC US).

Bonds

Wing Tai Properties Ltd 4.25%, 29 November 2022

Wing Tai Properties Limited invests in and manages real estate. The company invests in residential and commercial properties, serviced apartments and boutique hotels.

Wing Tai Properties Limited owns a healthy stable of investment properties from which they derive a steady stream of recurring income. As at 31 December 2015, the company’s portfolio of investment properties, which includes Grade-A office spaces, industrial buildings and hospitality assets, is valued at HK$22 billion. The company continues to expand and diversify this portfolio by acquiring investment properties in London, including a boutique office building at the West End as well as a commercial Grade-A office and retail space. These acquisitions are expected to contribute to recurring income in the coming quarters.

In addition, Wing Tai Properties’ improving credit profile and strong liquidity position continue to bode well for the company’s credit outlook. The company’s net debt position decreased to HK$1.67 billion on the back of a reduction in gross debt and stronger cash position, with the latter increasing to HK$2.1 billion, from HK$1.6 billion owing to solid operating cash flows and limited capital expenditures. As a result, net gearing improved to 7 per cent as at end-December 2015 from 10 per cent in December 2014. With a cash balance of HK$2.1 billion coupled with an unutilized revolving loan facility of HK$2.2 billion, Wing Tai Properties boasts a healthy liquidity profile. However, while we remain comfortable with Wing Tai’s leverage and liquidity positions, we note that the company’s credit profile, sound as it is, is still constrained by its small operating scale as compared to its larger peers.

Bond Funds

Interested investors may consider the LionGlobal Asia Bond Fund. It allows investors to own a good mix of both investment grade and high yield bonds. The portfolio consists of about 70 bonds issued by Asian companies that the investment manager assesses to have strong debt servicing capability, and hence lower default risk.

Mixed-Asset Funds

Three funds have shown resilience in the face of the volatility caused by the UK’s referendum to exit the EU.

The BlackRock Global Multi-Asset Income Fund’s dynamic asset allocation lets investors exploit opportunities in both traditional and non-traditional asset classes.

Investors may also consider the Schroder Asia Income Fund which offers an attractive potential monthly pay out of about 5.25 per cent per annum paid monthly. The fund aims to capture the strong growth potential of Asia through both equities and bonds. Investors may gain from an active asset allocation strategy which aims to maximize yield and total return in different market environments.

We also recommend the JPM Global Macro Opportunities Fund. This fund leverages on global macro themes to generate performance. It aims to deliver absolute performance in various market environments. The fund also has low correlation with many asset classes and provides good diversification for your portfolio. The fund manager can employ traditional and/or sophisticated investment instruments.

Currencies

Elevated market volatility could trigger more portfolio outflows in Asia, particularly on the equity side. On the flip side, the market could further push back Fed rate hike expectations to December or beyond, which is U.S. Dollar negative. Under the leadership of Chair Janet Yellen, the Fed seems particularly attentive to downside risks.

 

Global Outlook - No global downturn due to Brexit

“Our view is that Brexit has an adverse economic impact but it will be largely contained within the U.K. and to some extent Europe. Financial and economic contagion risk remains small, but political contagion – the unity of the EU is of a greater concern.”

– Richard Jerram, Chief Economist, Bank of Singapore

Key Points:

  • The UK’s surprising decision to leave the European Union (EU) introduces several uncertainties into the economic outlook. There is unavoidable damage to the UK and, to a lesser degree, the EU, but the rest of the world should not be badly affected. We expect a G3 policy response to limit the disruption, including delays to Federal Reserve tightening. Our base case is now for the U.S. to hike in December.
  • Similar to Black Wednesday in 1992, the plunge in the GBP will help to reduce the hit to the UK economy. So far, the exchange rate drop has been on a similar scale; in 1992, it quickly brought the economy out of recession.

  • The UK is 2.3 per cent of the world economy, which makes it the ninth largest, between Indonesia and France. The Eurozone is 12.1 per cent. Any changes to the global forecast are highly provisional, but we have shaved 0.2 percentage points off developed economy growth in 2016 and 2017 due to the damage to Europe, which takes global growth down by 0.1 percentage points, but keeps us in the 3.0-3.5 per cent range of recent years.

  • This existential threat to the project of European integration is probably the biggest risk posed by Brexit. Unlike the UK, there is no process for a Eurozone member to exit and this could be hugely disruptive. Elections in France, the Netherlands and Germany in 2017 will be a focus for market concern, especially as the UK has illustrated the unpredictability of events and the poor reliability of opinion polls.

  • The direct impact of Brexit on the U.S. economy is limited. Exports to the EU are just 1.6 per cent of U.S. output, about one-fifth of which is trade with the UK. However financial market turbulence and the stronger U.S. Dollar will be a mild drag.

  • The Fed is likely to continue to err on the side of caution when it comes to deciding on the next interest rate hike. A move in 3Q 2016 now looks very unlikely. If markets calm reasonably quickly then a 0.25 per cent rise in December looks feasible and this is our base case.

  • By postponing the next round of sales tax increase, Japan’s government has shown that short-term growth is still the main priority. A broader fiscal stimulus package is also expected, with the likely size increasing in the wake of Brexit. We can also expect more action from the Bank of Japan, as well as aggressive intervention to defend the USD/JPY ¥100 level if necessary.

  • The Chinese economy has responded to monetary and fiscal stimulus, but the growth pick-up has faded in a way that is consistent with an “L-shaped” rather than “V-shaped” recovery. Policy-makers are suggesting that this is acceptable if it is the price to pay for containing the credit bubble, although there is no evidence that growth in the credit bubble is slowing down.
  • Asia ex-Japan still looks resilient in the face of sluggish growth in the developed world and troubles in China. The internally-driven dynamism that has been the feature of the past few years should continue to deliver growth of around 5 per cent in ASEAN. Current account surpluses, large foreign exchange reserves and floating exchange rates should be an adequate buffer against short-term turbulence from Brexit.

Equities - Cautious on global equities

“Given the heightened concerns with political risks, especially for the EU following the unexpected Brexit, we have lowered global equities further to underweight, in line with a more defensive asset allocation stance. On the back of this risk-off posture and the near-term uncertainties in the EU, we have also raised U.S. equities to overweight and downgraded EU equities to underweight. ”

– Sean Quek, Head Equity Research, Bank of Singapore

Key Points:

  • Global equities sold off in June as the unexpected Brexit outcome spooked investor confidence. Japan and Europe, which had held up relatively well, underperformed. Near-term, we see rising uncertainties as UK embarks on the process of unprecedented withdrawal from the European Union. While economic and financial contagion risks are likely limited, heightened political contagion risks have led us to lower our overall stance on equities to negative, from neutral.
  • Since our equities downgrade to neutral in June on valuation concerns, the MSCI World Index corrected only 2.3 per cent in June. Valuations at a forward PE of 15.6 times remain above the 5-year average of 13.9 times, while earnings could be revised down.
  • Regionally, we have lowered Europe to negative in favour of the U.S., which is likely to be more defensive relatively. We stay Neutral on Japan and Asia ex-Japan.
  • In Europe, consensus earnings estimates which were relatively stable in the past three months, could see renewed downward pressure as analysts revise their outlook. The prospective PE of 15.4 times above long-term average of 12.9 times, offers further justification for our downgrade of Europe.
  • Uncertainties are likely to dominate in the months ahead, as the UK kick starts the process of an unprecedented withdrawal from EU. We expect the UK to head into a short-term recession. While the European Central Bank (ECB) is likely to act to limit downside risks to growth, risk of political contagion is a potential overhang as governments confront rising pro-independence voices in a busy political calendar over the next 18 months.
  • In the U.S., the recovery and domestic consumption growth is likely to remain intact. However Fed rate hikes are likely to be delayed as Fed assesses the implications from Brexit. Near-term, we see rising political risk if Donald Trump secures the Republican nomination. With the U.S. likely to outperform in times of uncertainty, we favour the U.S. despite premium valuations, and prefer U.S. consumer exposure.
  • In Japan, the yen’s spike as a safe haven post Brexit vote drove the market even lower. Rising possibility of the Bank of Japan (BOJ) easing to stem currency strength could lift the market tactically but a sustained re-rating of Japanese equities would require more meaningful structural reforms, possibly after the Upper House election. Valuations, at a price earnings ratio of 12.3 times and price-to-book ratio of 1.5 times, are not demanding.
  • Asia ex-Japan remained resilient amid the recent volatility, with less perceived trade linkages to Europe. With U.S. rate hikes likely delayed, this potentially cushions the growth outlook for the region, which has started to soften again. On the other hand, with valuations undemanding, we maintain our Neutral stance on the region.


Bonds - Positive on EM High Yields

“In the near-term post-Brexit world, Emerging Markets Fixed Income should be well-placed to outperform other risk asset classes. Concerns surrounding global growth should elicit accommodative monetary policy which should be salutary for fixed income.”

– Vasu Menon, Senior Investment Strategist, Wealth Management Singapore, OCBC Bank

Key Points:

  • Brexit is bad for the UK’s economy and, to a lesser degree, for that of the Eurozone, but there is no clarity on the scale of the damage. Broader concern about financial system stability looks misplaced, but is understandable after events of recent years. Uncertainty is set to persist in 2H 2016 as the UK chooses a new prime minister, and begins to negotiate the terms of its exit.
  • Demand for low risk assets increases in this environment, especially as the policy response of central banks is likely to involve an expansion of quantitative easing and lower than previously expected interest rates. This is a more favourable world for investment grade bonds than we have been expecting. As a result, we have upgraded our asset allocation stance to neutral from underweight.
  • In terms of Fed policy, it is hard to envisage a rate hike in 3Q2016 even if U.S. jobs data improves. The Fed is likely to be cautious in the face of volatile markets and uncertainty in Europe. The past year has shown that the Fed is still very responsive to downside risks and will err on the side of being too loose for too long when deciding on policy.
  • Our base case is now a Fed rate hike in December, when markets have calmed down and the U.S. has edged closer to fulfilling the Fed’s dual mandate of full employment and 2 per cent inflation. Looking further, the Fed is unlikely to be in a hurry in 2017, unless inflation picks up faster than has been the case recently. We have pencilled in two or three more Fed hikes in 2017.
  • The expectation of further policy easing from Europe and Japan has pushed more bond yields into negative territory, which implies steady foreign demand for U.S. Treasuries. This should limit the rise in U.S. yields, even when the Fed resumes rate hikes.
  • Emerging Market (EM) bonds experienced its best six month return since 2012 during the 1H2016. The JPMorgan Corporate Emerging Markets Bond Index rose 7.5 per cent, driven mainly by a 10.3 per cent increase in EM High Yield Bonds. These spectacular results occurred as the stars aligned for EM Bonds in the guise of dovish Fed monetary policy, rising commodity prices, growing confidence in the Chinese government’s ability to deal with its economic challenges and the successful impeachment of Brazilian President Dilma Rousseff.
  • We remain sanguine on EM Bonds in 2H2016 but the upside may be capped by headwinds. Our positive view on EM Bonds is underpinned by supportive top-down and bottom-up fundamentals as well as reasonably solid technical factors. However, valuations for both High Yield and High Grade are somewhat challenging.
  • Furthermore, while we believe that the impact from Brexit should be modest and short-lived, the negative sentiment and volatility may limit the asset class’s performance, particularly over the coming weeks. Ultimately, we believe that the 2H2016 will be more about yield rather than capital appreciation. In such an environment, we maintain our preference for EM High Yield Bonds.


Foreign Exchange & Commodities - Pound may not have bottomed yet

“The Pound has been the biggest loser from Brexit, reflecting vulnerabilities in the U.K.’s double fiscal and current account deficit and deterioration in the growth outlook. It’s unclear if it’s seen a bottom given the lack of clarity as to the final consequences of the political and economic separation from the EU.“

– Michael Tan, Senior Investment Counsellor, OCBC Bank

Key Points:

  • Brexit caused a sharp sell-off of the Pound and it could weaken further. We doubt that the Bank of England (BoE) will intervene to support the currency. The BoE will likely tolerate a weaker Pound and possibly ease further, as concerns over the sharp loss of economic momentum will trump short-term inflationary impact from the currency’s weakness. The weaker Pound is a vital economic shock absorber. Concerns over a break-up of the Euro area have also taken a toll on European currencies such as the Euro.
  • The traditional risk aversion in currency markets has seen the U.S. dollar gaining ground against EM and commodity currencies and falling against safe haven assets such as the yen and gold. Central banks around the world will likely respond decisively to restore calm although the hurdle towards coordinated currency markets intervention is high.
  • The low direct trade links between Asian countries and the UK has limited the fallout on Asian currencies. The biggest Brexit casualties within EM are currencies of countries such as Poland and Hungary, which have stronger trade ties with the UK. However, elevated market volatility could trigger more portfolio outflows in Asia. On the flip side, the market could further push back Fed rate hike expectation to December or beyond, which is a U.S. Dollar negative. On balance, this leaves Asian exchange rates with a moderate bias for depreciating against the U.S. Dollar, in our view.
  • Also important to watch will be the reaction of policymakers in China to U.S. Dollar strength amid recent indications that the Chinese economy may once again be losing momentum. International investors and global policymakers alike are likely to prefer that Chinese policy plays a stabilizing role by restraining the U.S. Dollar’s advance against the CNY. If China does not do so, the risk headwinds could get stronger for Asian currencies.
  • With Brexit, we expect gold to trade in a new higher range of US$1,250 per ounce to US$1,400 (old range: US$1,170 per ounce to US$1,320). Investors flocked to safe-haven assets and currencies in the wake of Brexit, a theme that could support gold in 2H2016.
  • With a contraction in supply, due to pressure on high-price producers combined with evidence of resilient global demand, it seems that the oil market is moving closer to equilibrium. Inventories are still at high levels but are showing some early signs of correcting. Moreover, the absence of large speculative positions in the futures market is another factor supporting price stability around the US$50 per barrel level.

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  6. Hong Kong SAR: This document is for information only and is not intended for anyone other than the recipient. It has not been reviewed by any regulatory authority in Hong Kong. It is not an offer or a solicitation to deal in any of the financial products referred to herein or to enter into any legal relations, nor an advice or a recommendation with respect to such financial products. It does not have regard to the specific investment objectives, financial situation and the particular needs of any recipient or Investor. This document may not be published, circulated, reproduced or distributed in whole or in part to any other person without OCBC Bank’s prior written consent. This document is not intended for distribution to, publication or use by any person in any jurisdiction outside Hong Kong, or such other jurisdiction as the Bank may determine in its absolute discretion, where such distribution, publication or use would be contrary to applicable law or would subject the Bank and its related corporations, connected persons, associated persons and/or affiliates to any registration, licensing or other requirements within such jurisdiction.

© Copyright 2016 - OCBC Bank | All Rights Reserved.




Top Investment Ideas - Volatility Returns

We see volatility returning, especially as the Fed seems to be increasingly hawkish. Hence, we are lowering equities to Neutral.

We prefer emerging market high yields and continue to be negative on investment grade bonds.

For fixed income, investors should continue to hold bonds with shorter tenors, as such bonds are less sensitive to increases in interest rates.


Recommendations

Equity Funds

For a diversified equity strategy, you may consider the Fidelity Global Dividend Fund for stable and rising dividends, strong performance with lower volatility and exposure to the best dividend stocks globally.

Equity-Linked Convertible Investments or Stock Ideas

In Singapore, opportunities are re-emerging in the equity market. Following an unexciting set of 1Q16 results season, the Singapore equity market pulled back last month. However, with valuations close to the lower end of the market’s long term historical valuation range and not far from its 2009 trough of 1.06 times price to book, we see buying opportunities re-emerging.

We remain positive on City Developments Ltd (CIT SP), where there may be short-term catalysts from any potential re-inclusion into the index at the upcoming FTSE EPRA/NAREIT June quarterly review, while medium term catalysts come from continued asset monetization.

With positive total returns expected for StarHub Ltd (STH SP) backed by monetization of mobile data from growing data usage and take-up of value added services, the risk reward ratio looks favourable for the stock.

Singapore REITs have outperformed the STI index year to date, helped by the delay in Federal Reserve rate hike expectations. However, we expect this outperformance to taper off as we head towards the next Fed meeting in June, where rate hike concerns may re-surface.

Overall dividend growth for SREITs has contracted from a year ago, partly due to drag from rights issues by some REITs. Names we have downgraded over the past month include Mapletree Logistics Trust (MLT SP). Given that we do not see compelling value amid soft market conditions, we maintain our selective stance with preferred picks Keppel DC Reit (KDCREIT SP), Frasers Centrepoint Trust (FCT SP) and Ascendas Reit (AREIT SP).

In the U.S., technology and healthcare were the best performing sectors in May, rebounding well from a recent sell-off. Anticipating further recovery in global economic growth, led largely by the U.S., we continue to prefer cyclical names.

We remain positive on the technology sector – especially companies with substantial exposure to consumer demand and continue to see the recent weakness as buying opportunity. We recommend Microsoft Corp (MSFT US) and Apple Inc (AAPL US).

Healthcare outperformed again in May as investors continued to look for bargains here, following the sector’s earlier pullback. The sector still trades at a discount to global equities despite healthy fundamentals. Pricing power for drug and biotech companies are expected to remain strong. Also, M&A activities have further strengthened their edge (as well as provided some floors to the sector’s valuations). We recommend Amgen Inc (AMGN US).

We remain positive on U.S. domestic banks, especially US Bancorp (USB US) even though we are neutral of on the financial sector.

We continue to be positive on consumer discretionary. U.S. consumption growth would continue to benefit from the combination of strong labour markets, solid household balance sheets, improving housing market and lower oil price. We recommend VF Corp (VFC US).


Bonds

Wing Tai Properties Ltd 4.25%, 29 November 2022

Wing Tai Properties Limited invests in and manages real estate. The company invests in residential and commercial properties, serviced apartments and boutique hotels.

Wing Tai Properties Limited owns a healthy stable of investment properties from which they derive a steady stream of recurring income. As at 31 December 2015, the company’s portfolio of investment properties, which includes Grade-A office spaces, industrial buildings and hospitality assets, is valued at HK$22 billion. The company continues to expand and diversify this portfolio by acquiring investment properties in London including a boutique office building at the West End as well as a commercial Grade-A office and retail space.

These acquisitions are expected to contribute to recurring income in the coming quarters. In addition, Wing Tai Properties’ improving credit profile and strong liquidity position continue to bode well for the company’s credit outlook. The company’s net debt position decreased to HK$1.67 billion on the back of a reduction in gross debt and stronger cash position, with the latter increasing to HK$2.1 billion from HK$1.6 billion owing to solid operating cash flows and limited capital expenditures. As a result, net gearing improved to 7 per cent as at end-December 2015 from 10 per cent in December 2014. With a cash balance of HK$2.1 billion coupled with an unutilized revolving loan facility of HK$2.2 billion, Wing Tai Properties boasts a healthy liquidity profile.

However, while we remain comfortable with Wing Tai’s leverage and liquidity positions, we note that the company’s credit profile, sound as it is, is still constrained by its small operating scale as compared to its larger peers.

Bond Funds

Investors may consider the LionGlobal Short Duration Bond Fund for its diversified holdings, short duration and exposure to primarily investment grade bonds. This fund should be able to weather further U.S. Federal Reserve rate hikes well. Furthermore, the potential pay out is 2.5 per cent per annum paid on a quarterly basis.

Another bond fund investors may consider is the Fidelity Asian High Yield Fund which offers the opportunity to tap into a growing fixed income segment while receiving monthly income of between 6 to 7 per cent per annum.

Mixed-Asset Funds

Investors concerned with expected market volatility but still seeking market participation can allocate part of their investment to mixed asset funds. The BlackRock Global Multi-Asset Income Fund’s dynamic asset allocation lets investors exploit opportunities in both traditional and non-traditional asset classes

Those looking for exposure to the Asian market through a diversified approach may also consider the Schroder Asia Income Fund which offers an attractive potential monthly pay out of about 5.25 per cent per annum. The fund aims to capture the strong growth potential of Asia through both equities and bonds. Investors may gain from an active asset allocation strategy which aims to maximize yield and total return in different market environments.

We also recommend the JPM Global Macro Opportunities Fund. This fund leverages on global macro themes to generate performance. It aims to deliver absolute performance in various market environments. The fund also has low correlation with many asset classes and provides good diversification for your portfolio. The fund manager can employ traditional and/or sophisticated investment instruments.

Currencies

The U.S. Dollar early setback may reverse following unexpectedly hawkish message from the FOMC minutes. We believe that the U.S. Dollar up-cycle is not over and this is reinforced by Fed’s preparation of markets for higher interest rates. We remain U.S. Dollar bulls, particularly against Asian currencies.

 

Global Outlook - Adequate but Uneven Growth

“Overall global growth will remain solid albeit unimpressive, as in recent years. “Stop & go” policies help to limit downside risks but also prevent material acceleration in growth. We should expect periods of calm followed by bursts of worry; no booms but no crisis either.”

– Richard Jerram, Chief Economist, Bank of Singapore

Key Points:

  • Global growth is adequate but uneven as policy swings between “Stop” and “Go”. Such policies help to limit downside risks but also prevent material acceleration in growth. We should expect periods of calm followed by bursts of worry; no booms but no crisis either.
  • In the U.S. a roughly neutral fiscal policy combines with low real interest rates to produce above trend growth. This pulls down unemployment, tightens capacity and leads to incipient inflationary pressure. It would take an external shock to disrupt this positive cyclical momentum.

  • U.S. growth seems likely to pick up in coming months as the drag from market turbulence at the start of the year reverses, in line with the rebound in financial market conditions. This could increase the inflationary pressures that are already starting to emerge in wages and in core inflation readings.

  • In Japan, the government seems to be edging towards another short-term fiscal stimulus. However, the merits of short-term demand stimulus through fiscal or monetary policy are dubious. It would be more productive to push structural reform aggressively in order to raise the potential growth rate.

  • In Europe, the Eurozone growth has held up well in 2016, untroubled by political or financial market concerns. Brexit would threaten the recovery in the UK, and probably damage the rest of the European Union, although at the moment it does not appear likely.

  • The Brexit vote will not resolve political uncertainty in Europe, with renewed elections in Spain, followed by the presidential election in France and the possible retirement of Chancellor Merkel in 2017.

  • The Chinese economy is another example of “stop & go”. Recent years have shown that attempts to deregulate, tackle over-investment, and cut leverage, quickly lead to a worrying deceleration in economic activity. In response, fiscal and monetary stimulus has been effective in lifting growth, but at the price of exacerbating structural imbalances. In particular, the credit bubble continues to expand at a frightening pace.


Equities - Volatility Looks Set to Return

“The steadily recovering global economy led by the U.S. remains a stable backdrop for equities. However, we see volatility returning, especially with an increasingly hawkish Fed. Coupled with the strong rebound in global equities from the lows in February, we are lowering our call on equities from a positive to a neutral stance.”

– Sean Quek, Head Equity Research, Bank of Singapore

Key Points:

  • Profit-taking extended into May as investors start to refocus on the Fed. The pullback from late April follows the 15 per cent rebound in global equities from the lows in mid-February. Reflecting growing concerns of a potential Fed rate hike in June or July, Asia Ex-Japan again bore the brunt of the pullback since equities peaked on 20 April.
  • Given the potential Fed rate hike in June or July, we are raising our stance on U.S. equities to a neutral one as the U.S. market remains relatively low beta amid volatility. However we foresee headwinds with the demanding valuations for U.S. equities and wage pressure hurting corporate profits. Near-term, politics is also a potential risk if Donald Trump secures the Republican nomination.
  • In Europe, the macro backdrop remains conducive for growth and is likely to stay supportive especially with the ECB keen to step in with further stimulus to limit downside risks. However, we remain near-term cautious given the political agenda over the next few weeks. The outcome of the U.K. referendum on Brexit in late-June and the Spanish elections are events on the geopolitical watch list.
  • In Japan, the near-term economic and corporate earnings growth outlook remains uninspiring. The somewhat confusing BOJ stance has added further uncertainties for investors. A weaker yen driven by impending Fed rate hikes could provide some short-term reprieve, especially given that valuations are not demanding. Also, expectations for more short-term stimulus are growing.
  • Fundamentals for the Asia ex-Japan region, especially China’s economic activities and the regional corporate earnings growth outlook, have started to soften again. Valuations, on the other hand, remain undemanding. As we anticipate more hawkish Fed manoeuvres in the coming weeks, we are reducing our call on the region to a neutral stance.


Bonds - EM High Yields Look Attractive

“We remain positive on Emerging Market High Yield bonds. From a valuation perspective, they appear more attractive vis-à-vis High Grade bonds. Moreover, the higher spread component of High Yield bonds should provide a buffer against rising interest rates.”

– Vasu Menon, Senior Investment Strategist, Wealth Management Singapore, OCBC Bank

Key Points:

  • We continue to expect two rate hikes this year (in June or July and again in December). Comments from various Fed officials together with the minutes from the most recent policy meeting show a willingness to raise rates as soon as the economic data is firmer. The mid-June meeting comes shortly before the Brexit vote, so the Fed might find it advisable to wait until July, when it should also have more evidence of solid data, but the next rate hike is not far away.
  • The big gap between U.S. bond yields and those in Europe and Japan is already creating a positive force driving demand for high quality U.S. debt. The rebound in the oil price might also help from a supply and demand perspective, as it reduces the risk that sovereign wealth funds will need to sell their US Treasury holdings.
  • These factors should limit the rise in yields in the U.S., but not prevent some increase. We see yields pushing up towards 2.25 per cent by year-end on the back of two Fed rate hikes, with further moderate increases in 2017. As a result we retain an underweight position in U.S. investment grade bonds, balanced by being overweight Emerging Market High Yield bonds, which should be less sensitive to the impact from Fed tightening.
  • Emerging Market High Yield bonds are modestly attractive versus corresponding High Grade (HG) bonds. EM High Yields now currently trade 486 basis points wider than EM HG. It is still well off the three-year lows of around 340 basis points in July 2014 but it is also now inside the three-year average spread differential of 503 basis points.
  • Emerging Market bonds have rallied significantly with High Yield up 8.7 per cent and High Grade up 4.6 per cent year-to-date. However, while we think upside to the asset class exists, tighter valuations due to the rapid run up in prices over the past few months will result in slower price appreciation versus recent experience. Over next several months, returns are likely to be more dominated by yield than capital appreciation.


Foreign Exchange & Commodities - Greenback Poised to Rise in 2H2016

“U.S. Dollar strength could resume in 2H2016 but the stronger Dollar and higher U.S. rates could affect risk sentiment as well and result in a choppy Yen and Euro which are safe haven currencies. There is more scope for a sustained upside in the greenback against Asian currencies.“

– Michael Tan, Senior Investment Counsellor, OCBC Bank

Key Points:

  • The unexpectedly hawkish message from the April Fed policy minutes, hawkish comments from Fed members in recent weeks and the fading likelihood of the U.K leaving the EU all augur well for the U.S. Dollar’s outlook. Our view that that it is hard to see potential for any further dovish surprises, which seems to imply that the U.S. Dollar is close to a bottom and could stage a rebound in the second half.
  • We remain positive on the U.S. Dollar, particularly against Asian currencies and the Renminbi over the medium-term. Once the Renminbi becomes, operationally speaking, part of the IMF SDR basket in September, China will move towards greater forex flexibility. Recent Chinese data are showing signs of growth slowing once again. We remain cautious on the further build up in leverage amidst falling returns. As policy support ebbs, we are keeping a close watch over Chinese data to assess if the mini-cycle recovery has tapered off.
  • Turning to commodities, some of the factors that have sent prices higher seem temporary, such as the hit to production from fires in Canada and upheaval in Nigeria. Others are more durable, such as the rise in demand due to steady global growth and the response to lower fuel prices. For example, road miles travelled in the U.S. have been rising at the fastest pace in nearly two decades.
  • Similarly, the extended period of low prices has cut into supply. For example, the U.S. rig count is down 80 per cent from the late 2014 peak and output is starting to fall. More broadly, OPEC supply is still rising, but non-OPEC production is down.
  • The temporary factors have sent prices up to our US$50 per barrel target faster-than-expected, but it is hard to see prices pushing much higher in 2H2016. We would expect prices to track roughly sideways, as the temporary positives fade, while the more fundamental factors continue to argue for higher prices.
  • The equilibrium price where long-term supply and demand is in balance is an unknowable number, but most specialists put it in the US$60-70 per barrel range. This is a reasonable medium-term target, which implies a moderate upwards bias to prices. Feedback loops should mean that if prices push much higher, supply and demand adjustment will stall, which is a barrier to having an overly positive view.
  • We have become less negative on gold but still find it hard to get excited on gold’s upside potential over the medium-term. We are not rushing to buy gold given that there is still potential for market to re-price a more hawkish Fed. We project gold prices to trend mostly sideways in 2016 within a broad range of US$1,170 per ounce to US$1,320, a change from our significantly more bearish view previously.

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Top Investment Ideas - Global economy recovers, led by the U.S.

We continue to be positive on Asia-ex Japan equities. U.S. earnings so far have been positive mainly due to beaten-down expectations.

We also prefer emerging market high yields and are negative on investment grade bonds.

For fixed income, investors should continue to hold bonds with shorter tenors, as such bonds are less sensitive to increases in interest rates.



One way to express a positive view of Asian equities is via the Schroder ISF Asian Equity Yield Fund. This fund aims to provide a total return primarily through investment in equity and equity related securities of Asian companies which offer attractive yields and sustainable dividend payments.

The fund seeks to deliver superior return with low volatility and downside support. It is not managed with reference to any country or sector allocation. Bottom-up stock selection accounts for 100 per cent of the value-add in the investment process.

For a diversified equity strategy, you may consider the Fidelity Global Dividend Fund for stable and rising dividends, strong performance with lower volatility and exposure to the best dividend stocks globally.

Equity-Linked Convertible Investments or stock ideas

The Singapore equity market continued the rebound last month, supporting our earlier country upgrade. Valuations of the equity market remain at reasonable levels, with current price/book still close to the lower end of its long term historical valuation range.

Following last month's feature of City Development Ltd (CIT SP) as one of our top ideas, its share price has continued to make new highs for the year with double digit gains year to date, while valuations remain close to -1 standard deviation to long term price/book multiples. While we remain positive on the stock's long term growth prospects supported by its capital recycling strategy, we believe tactical clients should lock in some gains in line with investment discipline.

ComfortDelGro Corp (CD SP) is our sector pick in the land transport sector for its improving cashflows and likelihood of special dividends post bus reform expected by 2H16. We see some respite for the land transport sector following the introduction of new regulations for private hire car drivers effective by 1H17, which will help to level the playing field.

Healthcare outperformed in April as value investors started to bargain hunt following the sector's recent pullback. Valuations remain undemanding and the re-rating could continue. The ongoing political rhetoric coming from the U.S. presidential campaign has created further volatility for the sector. But pricing power for drug and biotech companies are expected to remain strong. Also, M&A activities have further strengthened their edge (as well as provided some floors to the sector's valuations). We recommend Biogen Inc (BIIB US) and Amgen Inc (AMGN US).

Marred by asset quality concerns, valuations for Financials continue to look depressed. Although some of these fears seem overblown, we continue to maintain an overall Neutral stance as the regulatory environment and dilution risk could continue to cap the upside. Given our positive view on the U.S. economy, we remain positive on U.S. domestic banks, especially US Bancorp (USB US).

We continue to be positive on Consumer Discretionary. U.S. consumption growth would continue to benefit from the combination of strong labour markets, solid household balance sheets, improving housing market and lower oil price. We recommend VF Corp (VFC US). At the same time, we remain positive on the Technology sector, especially those names with substantial exposure to consumer demand like MasterCard Inc (MA US) and Apple Inc (AAPL US).

Bonds

First REIT (SGD) 4.125%, 22 May 2018

First Real Estate Investment Trust (First REIT) is a real estate investment trust focusing on healthcare and/or healthcare-related real estate assets throughout Asia. These assets include hospitals, nursing homes, medical clinics, pharmacies, laboratories, lifestyle and wellness management, etc.

The group reported a fairly healthy set of results for 1Q2016, with gross revenues increased 7.1 per cent yoy to S$26.5 million while net property income increased 8.1 per cent yoy to S$26.2 million.

As at 1Q2016, the group has recognized cash proceeds of S$8.2 million from the divestment of Plot B of the existing Siloam Hospitals Surabaya. Investment properties held on its balance sheet was valued at S$1.26 billion.

First REIT is currently priced around par with YTM of 4 per cent, with remaining maturity of 2.2 years. Given the current YTM versus its short tenor to maturity, we think valuations continue to provide an attractive opportunity to switch into a business yielding recurring rental income amid volatile oil price environment. We maintain our BUY recommendation of First REIT due 2018, with a stable credit direction over the next 6-12 months.

Bond Funds

Interested investors may consider the LionGlobal Asia Bond Fund. It allows investors to own a good mix of both investment grade and high yield bonds. The portfolio consists of about 70 bonds issued by Asian companies that the investment manager assesses to have strong debt servicing capability, and hence lower default risk.

Another bond fund investors may consider is the Fidelity Asian High Yield Fund which offers the opportunity to tap into a growing fixed income segment while receiving monthly income of between 6 to 7 per cent per annum.

Mixed Asset Funds:

Given the volatile markets expected in coming months, investors can consider mixed asset funds. The BlackRock Global Multi-Asset Income Fund's dynamic asset allocation lets investors exploit opportunities in both traditional and non-traditional asset classes.

Investors may also consider the Schroder Asian Income Fund which offers an attractive potential monthly pay out of about 5.25 per cent per annum paid monthly. The fund aims to capture the strong growth potential of Asia through both equities and bonds. Investors may gain from an active asset allocation strategy which aims to maximize yield and total return in different market environments.

We also recommend the JPMorgan Global Macro Opportunities Fund. This fund leverages on global macro themes to generate performance. It aims to deliver absolute performance in various market environments. The fund also has low correlation with many asset classes and provides good diversification for your portfolio. The fund manager can employ traditional and/or sophisticated investment instruments.

Currencies: A dovish Fed, stable China and higher commodity prices have kept the U.S. Dollar firmly depressed over the past three months, especially against the commodity/high yield currencies. But the weak U.S. Dollar phase is likely over as the Fed outlook shifted to more neutral from dovish given receding external risks and easing of financial conditions. The short-term catalyst for further Fed re-pricing should be better U.S. economic data. Make use of this opportunity to build long U.S. dollar positions.

Global Outlook - No Global Recession

“Economic data out of the G3 still looks fine. Confidence readings have surprisingly been unaffected by market turmoil. The Chinese economy is also showing signs of responding to stimulus, which should allay fears of an imminent hard landing.”

- Richard Jerram, Chief Economist, Bank of Singapore

Key Points:

  • The U.S. remains on its 2 per cent to 2.5 per cent growth path of recent years, held back at the moment by the delayed effects of the strong U.S. Dollar on trade flows. The bounce in the oil price will also be a drag on consumer spending, after the best growth in a decade in 2015. The general impression is a steady mid-cycle expansion, with limited fears of recession, but no particular reason to hope for acceleration.
  • In Europe, policy remains supportive for growth, with bank lending picking up even before the latest easing from the European Central Bank. This complements the shift to a neutral fiscal policy now that years of austerity have brought government finances under control. Public deficit is now below the Maastricht requirement of 3 per cent of GDP (although not in all countries) and debt levels actually fell slightly in 2015.
  • In Japan, the government seems to be edging towards another short-term fiscal stimulus. Even though the public deficit is still around 5 per cent of GDP and net debt 128 per cent of GDP, the debt markets are not constraining policy, now that the Bank of Japan has sent yields on 10-year debt into negative territory.
  • Even though inflation is still below the 2 per cent target in Japan, labour markets are tight and there does not seem to be much excess capacity in the system. In this case the merits of short-term demand stimulus through fiscal or monetary policy are dubious. It would be more productive to push structural reform more aggressively in order to raise the potential growth rate.
  • Asia has been less troubled than other regions in the past few years, with most countries being commodity importers, while a current account surplus and healthy foreign exchange reserves provide a barrier against external risks.
  • The Chinese economy is showing signs of responding to stimulus, which should help to allay fears of an imminent hard landing. Unfortunately the rebound is being "bought" by continued rapid credit growth, which is not sustainable in the longer term. Policy-makers have little choice, but this is a dangerous game. If the transition is too slow, or growth slows too much, then government will be facing a huge bill to protect the financial system. This could also raise existential questions related to political stability.

Equities - Remain Positive on Equities

“We are sanguine on the global economic outlook, and thus remain positive on equities which will benefit from the benign macro environment. However, gains going forward will be more modest than the past two months, with periodic setbacks and heightened volatility.”

- Hou Wey Fook, Chief Investment Officer, Bank of Singapore

Key Points:

  • The rebound from mid-February extended into April and brought global equities into positive territory year-to-date for the first time in 2016. In addition to more encouraging macroeconomic data, the global earnings outlook has also continued to improve. The steadily recovering global economy, led by the U.S., remains a stable backdrop for equities.
  • However, we suspect that the current risk rally will be at a more modest pace than in the two past months, with periodic setbacks and heightened volatility. In particular, the upturn in U.S. inflation and the view that the Fed rate cycle will be steeper than is currently discounted are not yet on investors' radar screens. Furthermore, political risk appears to be growing with "Brexit" and the U.S. presidential elections.
  • It's hard to predict markets, but when it comes to May, there is the familiar adage of "sell in May and go away." Looking at how the S&P 500 has performed between the period of May and September each year since 1985, the S&P 500 delivered positive returns in 20 out of the past 31 years. Therefore, from the observation of data over the past three decades, there is not a convincing case for investors to "sell in May and go away", especially if 2016 is not a recession year.
  • A month ago, we upgraded Asian equities and turned positive on the region due to a more favourable external environment and also because the Fed delayed its hiking cycle. The good news is that the global economy is still improving. When the year started, markets were afraid of China, oil and a U.S. recession. In the past month, we are encouraged to see improvements in these areas.
  • Fundamentals for Asia, ranging from China's economic activities to corporate earnings growth expectations, have been recovering. Valuations, on the other hand, remain undemanding. Hence, we are maintaining our positive stance on Asia. Key risks include a more hawkish Fed, a stronger U.S. Dollar and a fading of the commodities rally.
  • Elsewhere, we are cautious on U.S. equities. Valuations remain demanding. Also, we should start to see wage pressure on record-high corporate margins, given the tightening labour market. Over the next few months, politics is a potential risk factor if Donald Trump secures the Republican nomination.
  • In Europe, the macro picture is likely to stay supportive especially with the ECB keen to step in with further stimulus to avoid downside risks. However, we remain near-term cautious given the political backdrop. In particular, concerns over the outcome of the U.K. referendum on EU membership will cause volatility until the vote on June 23
  • We are also neutral on Japan because of the strong yen. However a reversal of the yen as risk appetite returns should provide further lift for the market. Near-term, expectations of further policy easing should also underpin the market. For a more sustained re-rating of Japanese equities, investors would need to see more impactful government policy actions.

Bonds - EM bonds Look Attractive

“We remain positive on Emerging Market High Yield bonds even though the asset class has posted gains of nearly 8 per cent this year. Stability in commodity and currency prices, accommodative monetary policy and the better outlook for China augur well for these bonds”

- Vasu Menon, Senior Investment Strategist, Wealth Management Singapore, OCBC Bank

Key Points:

  • The policy statement from the Fed's end-April meeting reduced the focus on external risks but showed a continued dovish bias, although less so than before. The Fed left its options open to raise rates in June or July and still seems to favour two rate hikes this year. As a result we have cut our forecast from three to two rate hikes this year but the market is not even fully pricing in a single rate hike.
  • Fed Chair Yellen seems to have been frightened by the early year financial market turmoil and has become even more sensitive to downside risks. Yellen's view seems to dominate for the time being, but the result is contradictory communication from various Fed speakers, and less predictability to policy decisions.
  • A rate hike in June (or perhaps July, depending on Brexit risk) is still our base case, but with diminished conviction. The Fed's claim that policy is "data dependent" does not give much guidance, as based on the data they should have raised rates already this year.
  • Investment grade bonds are likely to suffer as pessimism on the U.S. economic outlook continues to fade and Fed tightening resumes. This is behind our pro-risk investment stance, including remaining cautious on investment grade bonds. We see Fed tightening pushing 10-year Treasury yields up towards 2.50 per cent by the end of 2016.
  • Emerging Market High Yield Bonds are modestly attractive versus equivalent investment grade bonds. The former now currently trades 546 basis points wider than the latter, about 70 basis points tighter year-to-date. It is still well off the three-year lows of around 340 bps in July 2014. However, it is also around 50 basis points wider than the three-year average spread differential of 499 basis points.
  • From a valuation perspective Emerging Market High Yield Bonds appear more attractive vis-à-vis High Grade Bonds. Moreover, the higher spread component of High Yield Bonds should provide a buffer against rising interest rates. Given that we see modest spread tightening, we expect that carry will be an increasingly important component of returns in 2016.
  • Inflows into Emerging Market High Yield bonds also reflect improving investor sentiment. As such, we believe that the recent rally could have further room to run. For the week ending 22 April, Emerging Market Bond received around US$1.3billion in inflows. It was the ninth consecutive week of inflows and during this time more than US$9 billion had flown into the asset class. Year-to-date flows into Emerging Market Bond are up 0.3 per cent after being down substantially in 2015.

Foreign Exchange & Commodities -Greenback Poised for Rebound

“The weak U.S. Dollar phase is likely over as the Fed's outlook has shifted to more neutral from dovish. U.S. Dollar upside against selected Asian currencies remains a compelling medium-term proposition.”

- Michael Tan, Senior Investment Counsellor, OCBC Bank

Key Points:

  • A dovish Fed, stable China and higher commodity prices have kept the U.S. Dollar firmly depressed over the past three months, especially against the commodity/high yield currencies. However the Fed seems to have become less dovish recently, given receding external risks and easing of financial conditions, which could signal the end of the weak U.S. Dollar phase.
  • The U.S. Dollar should bottom out soon against Asian currencies before pushing higher again in the second half of 2016. The greenback's upside against selected Asian currencies remains a compelling medium-term proposition.
  • In Singapore, the Monetary Authority of Singapore surprised markets by reducing the slope of the nominal effective exchange rate (S$NEER) band to 0 per cent in mid-April. This effectively removes the appreciation bias. Spillover from slowing global trade on the small and open Singapore economy and weak inflation are concerns for policymakers.
  • Despite more signs of macro stability in China, credit-fueled growth increases medium-term risk. Medium term, China fundamentals are not out of the woods yet, and that means the renminbi should still weaken.
  • Given that China gains greater competitiveness against regional partners with EM stability than EM instability, it remains an ongoing challenge for China on how to weaken the renminbi without igniting EM instability.
  • Despite the short-term price support, we still find it hard to get excited on gold's upside potential over the medium-term. We think gold's resilience may prove fleeting in the second half of this year, as Fed resumes rate hike in June or July depending on Brexit risk.
  • Oil prices continue to rebound even though talks among major producers in Doha failed to lead to an agreement to limit output. The implicit prospect of cooperation if necessary has put a floor under prices.
  • Low prices boost demand - up 1.5 per cent in 1Q 2016 - and cut supply, so in the end will restore the market to equilibrium. Increased confidence over the global economic cycle has reduced concern over the outlook for demand.
  • From a supply perspective, the U.S. rig count is down by nearly 80 per cent since late 2014, so this will soon start cutting into potential output. Inventories are still high, but are showing clear signs of a decline, although the pace remains fairly moderate.
  • It is hard to see sustained upside for oil prices from current levels, as it will threaten the underlying supply-demand adjustment. We should expect a more moderate pace of rebound in coming months, and we remain comfortable with a forecast for prices to rebound in the medium-term. As a result we are holding our 12-month forecast to US$50 for both WTI and Brent.

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Top Investment Ideas - Asia, a Winner in the Region

Asia ex-Japan equities performed well in the first quarter, in spite of the shaky start at the beginning of this year.

The region has coped well the slowdown in China. One of the reasons is that Asia is less dependent on Chinese demand than the raw trade figures suggest, as many exports are processed and then re-exported to developed markets. Another reason is that economic reform and a rising middle class have helped to generate domestic demand.

Corporate earnings growth expectations appear to have bottomed and valuations remain depressed despite the recent outperformance. Further, Asia's macroeconomic growth outlook is stabilising and a pick-up in economic reforms and policy support has started to provide the much needed equity market catalysts.

For fixed income, investors should continue to hold bonds with shorter tenors, as such bonds are less sensitive to increases in interest rates.



Recommendations

Equity Funds

One way to express a positive view of Asian equities is via the Schroder ISF Asian Equity Yield Fund. This fund aims to provide a total return primarily through investment in equity and equity related securities of Asian companies which offer attractive yields and sustainable dividend payments.

The fund seeks to deliver superior return with low volatility and downside support. It is not managed with reference to any country or sector allocation. Bottom-up stock selection accounts for all of the value-add in the investment process.

Schroders has a strong regional presence, with an experienced and well-resourced investment team. They also conduct over 5,300 company visits per year and adopt a disciplined and repeatable investment process with strong risk controls.

For a diversified equity strategy, you may consider the Fidelity Global Dividend Fund, which offers stable and rising dividends, strong performance with lower volatility and exposure to the best dividend stocks globally.

Equity-Linked Convertible Investments

Recent results season have also largely met expectations, with no substantial worsening in Singapore corporates earnings, while valuations of the equity market remain at attractive levels (current price/book is close to 2008 lows).

We prefer large cap picks that include City Developments Ltd (CIT SP) and Venture Corp Ltd (VMS SP). 4Q15 earnings for Singapore REITs have also ended without much surprise, with overall dividend per unit growth of about 2 per cent on a yearly basis.

Comparing across segments in the sector, the largest drag came from the hospitality sector, which continued to face challenges from tighter corporate travel budget and higher competitive pressures from increased hotel rooms supply. Industrial and retail REITs remain brighter spots.

Over the past month following the market bounce, we have advised clients invested in CapitaLand Mall Trust (CT SP) to lock in some gains while reiterating our positive outlook on Frasers Centrepoint Trust (FCT SP) and Mapletree Logistics Trust (MLT SP).

Downgrades in U.S. corporate earnings that started at the beginning of 2016 appear to be stabilising. While corporate margins remain at record levels, the weakened U.S. Dollar would provide some respite, especially for those with Emerging Markets exposure.

The somewhat slower than expected pick-up in wages, despite the strengthening labour market, is also providing some reprieve. The combination of a strong labour market, solid household balance sheets, improving housing market and lower commodity prices continue to augur well for U.S. consumer spending, which in turn accounts for 70 per cent of the economy.

Given our view that the U.S. Federal Reserve would look to raise rates again in June, we expect Fed officials to start signalling their intention to the market. Also, valuations at a PE of 17.5 times (versus the 10-year average of 15.1 times) remain relatively more demanding.

Even though we are positive on U.S. economic outlook, we remain underweight on the U.S. market as a whole. However, within the U.S., we are positive on the Consumer Discretionary sector, as consumption growth will continue to benefit from a combination of strong labour market, solid household balance sheets, improving housing market and lower oil prices.

We recommend Visa Inc (V US), Berkshire Hathaway Inc (BRK/B US), and VF Corp (VFC US). At the same time, we remain positive on the Technology sector, especially names with a substantial exposure to consumer demand, such as Apple (AAPL US).

In-line with other defensive plays, Healthcare underperformed as investors took a risk-on stance.

Overall, pipeline innovation outpacing impending patent losses augurs well for pharmaceutical companies' competitive advantage. Also, M&A activities have further strengthened their edge. The sector is now trading at a discount to global equities and we believe this provides a good entry opportunity into quality names, such as Biogen Inc (BIIB US) and Allergan plc (AGN US).

Financials rebounded in March from an oversold territory as fears of deteriorating asset quality diminished. We maintain our overall neutral view here, as the regulatory environment and dilution risk could continue to cap the upside as banks continue to need more capital.

Given our positive view on the U.S. economy, we are positive on American banks, especially US Bancorp (USB US). Energy stocks have rebounded in line with the recovery in oil prices. Nevertheless, we expect Energy stocks to remain volatile and therefore prefer a neutral stance.

Bonds

OUE Limited (SGD) 4.25% 30 October 2019

OUE Limited operates as a diversified real estate owner, developer and operator with a portfolio of assets in prime locations in Singapore. The company focuses its business in the commercial, hospitality, retail and residential sectors.

OUE Ltd reported full-year 2015 results with revenue up 3.6 per cent year-on-year to S$431.5 million. Increased contributions from investment properties (revenue up 22.6 per cent year-on-year due to consolidation of One Raffles Place and higher occupancy from U.S. Bank Tower) offset weak property development. Cash on the balance sheet increased to $172 million from S$162 million at the end of 2014.

Looking forward, the sale of Crowne Plaza Changi Airport Extension for S$205 million should be completed in June, while asset enhancement initiatives for OUE Downtown and US Bank Tower are also due for completion this year. The company will look to sell remaining units in OUE Twin Peaks in the face of weak sentiment in the Singapore property market, especially in the luxury segment.

Bond Funds

Interested investors may consider the LionGlobal Asia Bond Fund. It allows investors to own a good mix of both investment grade and high yield bonds. The portfolio consists of about 70 bonds issued by Asian companies that the investment manager assesses to have strong debt servicing capability, and hence lower default risk.

Also investors may consider the LionGlobal Short Duration Bond Fund for its diversified holdings, short duration and exposure to primarily investment grade bonds. This fund should be able to weather further U.S. Federal Reserve rate hikes well. Furthermore, the potential pay out is 2.5 per cent per annum paid on a quarterly basis.

Another bond fund investors may consider is the Fidelity Asian High Yield Fund which offers the opportunity to tap into a growing fixed income segment while receiving monthly income of between 6 to 7 per cent per annum.

Mixed Asset Funds:

Given the volatile markets expected in coming months, investors can consider mixed asset funds. The BlackRock Global Multi-Asset Income Fund's dynamic asset allocation lets investors exploit opportunities in both traditional and non-traditional asset classes.

Investors may also consider the JPMorgan Asia Pacific Income Fund which offers an attractive potential monthly pay out of about 5 - 5.5 per cent per annum. The fund also aims to provide returns with lower volatility relative to equity markets. On an asset class level, Asian equities remain attractively valued, while Asia credit spreads allow for a positive total return, even in a rising interest environment. The fund has 25 - 75 per cent allocation range in both equities and fixed income.

Currencies: A key question now is whether U.S. data will remain consistent with the U.S. Federal Reserve's tightening stance, and whether financial market conditions will remain healthy enough to allow the Fed to move ahead. If U.S. data comes in strong, this may reverse the U.S. Dollar's decline and add to financial market's jumpiness, as they know the Fed faces a medium-term inflation problem despite near-term dovishness.

Global Outlook - Global Recovery Remains on Track

“The dull but steady global expansion remains on track, and this was behind our upgrade of equities in early February. Economic releases suggest recent market turmoil was noise, rather than a signal of deeper problems”

- Richard Jerram, Chief Economist, Bank of Singapore

Key Points:

  • The outlook for the global economy seems reasonably sanguine. Aside from China - where we think the imbalances are self-contained - it is hard to find cycle-threatening strains.
  • In the U.S., the labour market remains solid. The recent financial market turmoil has not had much impact on firms' hiring plans. Now that the unemployment rate is below 5 per cent, the bargaining power of workers has improved, with wages starting to edge up.
  • U.S. elections is a source of concern. If Donald Trump secures the Republican nomination, then markets would worry about his views on trade protectionism (particularly relevant for Asia), the fiscal deficit and the labour market.
  • In Europe, the unemployment rate in the region is down to 8.9 per cent from the peak of 10.9 per cent three years ago, with a striking six-point decline in Spain. However, political risk is a serious concern in Europe. The risk of Brexit, the survival of Chancellor Merkel, extremism in France and, to some extent, weak government in Spain, are all concerns.
  • The European Central Bank (ECB) eased policy again, but the economic impact is likely to be limited. The policy change was telegraphed when financial markets were under stress in January and seemed to be aimed at stabilising sentiment more than delivering a direct boost to growth.
  • In Japan, consensus expectations are for further easing of monetary policy in coming months. It is hard to see how the BOJ might contribute much to the recovery as Japan no longer appears to be suffering from excess capacity or deflation. The main problem is the low potential growth rate, where solutions rest with structural reform and not monetary policy.
  • Concerns about a hard landing in China have eased as the government appears intent on doing what it takes to ensure that growth comes in this year at 6.5 to 7 per cent. Avoiding a collapse in the credit bubble and a hard landing for the economy would be an admirable achievement, but it would come at the cost of poor productivity growth and a continued multi-year structural economic slowdown.
  • Asia looks relatively well-placed among emerging markets, having demonstrated over the past few years that it is capable of coping with a slowdown in China. This is because the region is less dependent on Chinese demand than the raw trade figures suggest, as many exports are processed and then re-exported to developed markets. Another reason is that economic reform and a rising middle class has helped to generate domestic demand.

Equities - Asian Equities in a Sweet Spot

“We are broadly positive on Asian markets, as the weaker U.S. Dollar as a result of a dovish Fed will give reprieve for Asian markets to bounce back from their historically low valuations.”

- Hou Wey Fook, Chief Investment Officer, Bank of Singapore

Key Points:

  • The steadily recovering global economy led by the U.S. remains a stable backdrop for equities. With the corporate earnings growth outlook bottoming and valuations still depressed, we are raising Asia Ex-Japan from neutral to positive.
  • Fundamentally, Asia is running strong current account surpluses, a beneficial response to low commodity prices. The terms of trade (export prices divided by import prices) have risen sharply for commodity importers and boosting profit margins. As profit margins filter into earnings, we suspect Asian earnings growth might be in the nascent stage of bottoming out.
  • Looking ahead, corporate earnings growth expectations in Asia appear to have bottomed and valuations remain depressed despite the recent outperformance among Asian markets. Asia's macroeconomic growth outlook is stabilising and pick-up in economic reforms and policy support has started to provide much needed equity market catalysts. Key risks include renewed turbulence in oil prices and concerns with China's growth outlook and RMB devaluation.
  • In Europe, the macro picture is likely to stay supportive of equities, especially with the ECB's stimulus to avoid downside risks. Also, we see corporate margin improvements ahead, driven by better economic growth, easier credit and cheaper commodities. Equity valuations are no longer cheap but neither are they expensive.
  • Key risks for European equities include greater political uncertainties. In particular, Brexit concerns running up to the U.K. referendum in late June could continue to weigh on the markets.
  • With the benefits of weaker yen and commodity prices on earnings growth already fading, the strengthening yen clearly is not helping. On the other hand, growing expectations of further postponement of the consumption tax hike has provided a boost to retail names. Nevertheless, valuations are not demanding. As such, a reversal of the yen as risk appetite returns should provide a tactical lift for the market. For a more sustained re-rating of Japanese equities, investors would need to see more impactful government policy actions.
  • Among global equity markets we are the most cautious on U.S. equities which have outperformed other major regions in recent years and valuations remain relatively demanding. Also, we expect the U.S. Federal Reserve to hike rates in June and this could weigh on U.S. equities in the short term.
  • Higher market volatility will remain a feature of financial markets in 2016. We witnessed in the first two months of the year how unpredictable markets can become and the recent calm should not be taken for granted. The delay in the Fed hiking cycle will give risky assets some breathing space, but this calm is unlikely to last for the remainder of 2016. Market volatility will return, especially with the U.K. referendum slated for 23 June, and the Fed restarting its hiking cycle towards the end of Q2.

Bonds - EM bonds look attractive

“Emerging Market bonds look interesting given their attractive yield in a world of low or negative yields. Local-currency EM government bonds yield nearly 7 per cent while hard-currency bonds yield just over 6 per cent.”

- Vasu Menon, Senior Investment Strategist, Wealth Management Singapore, OCBC Bank

Key Points:

  • Bonds continue to be sought after by investors due to continued global uncertainties and relatively low interest rates which have led to investors looking for stable assets to protect their wealth while seeking yield.
  • Mid-March policy meetings by both the European Central Bank and the U.S. Federal Reserve produced more dovish outcomes than expected. Although the Bank of Japan left policy unchanged, its end-January move had already pushed Japanese 10-year yields into negative territory.
  • Central bank support looks like an over-reaction to market turmoil at the start of the year, reflecting the intention of adding insurance against the downside risks. Necessary or not, it pulls in credit spreads and supports risk assets like high yield bonds.
  • We can understand the Fed's intention to proceed with extreme caution, but it is worth noting that they are already well behind the curve, with labour markets much stronger than when tightening cycles normally begin, and inflation close to the Fed's target. The pick-up in wages and core inflation in recent months will limit the Fed's room for manoeuvre and we continue to expect three more rate hikes this year (in June, September and December).
  • Among bond markets, Emerging Market bonds look interesting: Given that our views on long-term rates remain fairly stable, Emerging Market bonds look interesting given its attractive carry. If the dollar rally is on a pause, there is a short window of opportunity to tactically long EM bonds. Even when the dollar rally returns, a relatively minor retracement in beaten-up emerging-market currencies could still deliver double-digit returns.
  • We are most positive on Emerging Market high yield bonds which currently trade 611 basis points wider than EM High Grade bonds, roughly 55 basis points tighter than a month ago. However, with a 3-year average spread differential of 493 basis points, the current spread differential does underscore the relative value of high yield bonds.

Foreign Exchange & Commodities - Greenback Takes a Breather

“The U.S. Dollar took a breather as the likelihood of Fed interest-rate increases fell sharply after the Fed meeting in March. However, the greenback's weakness may be temporary because better U.S. data will push the Fed back into the tightening cycle again.”

- Michael Tan, Senior Investment Counsellor, OCBC Bank

Key Points:

  • The U.S. Dollar stopped strengthening as the likelihood of future Fed interest-rate increases fell sharply after the Fed meeting in March. However, we think that the current U.S. Dollar weakness will be temporary because either other major central banks will ease in response, or better U.S. data will push the Fed back into the tightening cycle again. Once the Fed restarts its rate hike policy in June, the Dollar rally will likely resume.
  • We may see a flattish and broad range for Euro versus the U.S. Dollar of 1.05-1.15 and the U.S. Dollar versus the Japanese Yen of 110-120 for most part of 2016. Japanese policymakers will likely announce more accommodative economic policies in 2Q16, both fiscal and monetary policies, which should improve risk sentiment among domestic investors and limit the risk of sustained Yen strength.
  • The Belgium blasts could continue to fuel Brexit concerns and weigh on Pound. The downward pressure on the currency is likely to intensify as we get closer to the referendum date on 23 June. This is likely to be followed by the Pound's recovery if U.K. voters choose to remain members of the European Union (EU) as we expect.
  • If Brexit does occur, the Pound is likely to depreciate significantly against the U.S. Dollar but it is less clear if the Euro will rally against the Pound as Brexit would not be good news for the rest of Europe either. Markets would begin to question whether a referendum to leave the EU or the Euro area could be called in another member state.
  • We are wary that the market may have to re-price back a more hawkish Fed by mid-year, which will limit the 'sweet spot' for RMB policy. It remains our base case that a large, one-off RMB devaluation is unlikely. Expect managed RMB depreciation, not dramatic weakness.
  • In Singapore, the slew of targeted fiscal measures, announced during Budget 2016, will be supportive of the Singapore economy. This effectively removes the near-term catalyst for monetary easing by the Monetary Authority of Singapore (MAS) in mid-April, although Singapore's disappointing growth outlook will likely keep MAS easing hope alive.
  • The weaker U.S. Dollar has boosted safe haven flows and spurred the strongest year-to-date performance in gold since the financial crisis. We have increased our 12-month gold price forecast to US$1,100 per ounce from US$1,000 previously in part because of gold's stellar start to 2016. However, the revised forecast is still consistent with our belief that gold will come under continued downside pressure in a rising interest rate environment over the medium-term.

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Any opinions or views of third parties expressed in this material are those of the third parties identified, and not those of OCBC Bank. The information provided herein is intended for general circulation and/or discussion purposes only. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Before you make any investment decision, please seek advice from your OCBC Relationship Manager regarding the suitability off any investment product taking into account your specific investment objectives, financial situation or particular needs. In the event that you choose not to seek advice from youfr OCBC Relationship Manager, you should carefully consider whether the product is suitable for you. This does not constitute an offer or solicitation to buy or sell or subscribe for any security or financial instrument or to enter into any transaction or to participate in any particular trading or investment strategy.

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Top Investment Ideas - We see recent market weakness as a buying opportunity

While we remain overweight equities and negative cash, we continue to advocate exposure to mixed asset strategies, as it provides a balance of yield and equity market participation in addition to managing the volatility in the markets.

Among equity markets, our preference is still for Europe over the U.S.

For fixed income, investors should continue to hold bonds with shorter tenors, as such bonds tend to be less sensitive to increases in interest rates.



Recommendations

Equity Funds

The BlackRock European Equity Income Fund is our top call and provides exposure to dividend stocks in Europe, which is ideal under current conditions. It offers yield (of around 4 per cent per annum, paid monthly) as well as potential capital growth by investing in high-quality stocks and those with above average yield.

For a growth oriented strategy in European equities, the JPMorgan Europe Dynamic Fund aims to provide access to attractively valued, fundamentally sound stocks with positive momentum through an unconstrained approach. You may also consider the Fidelity Global Dividend Fund for stable and rising dividends, strong performance with lower volatility and exposure to the best dividend stocks globally.

Equity-Linked Convertible Investments

Since our upgrade of Singapore equities last month to a positive rating, selling pressures in the equity market has eased for the month of February as global markets gained some respite.

Results from the Singapore banks were also closely watched on asset quality concerns, which came in generally in-line with expectations. Singapore banks have increased their disclosure levels, in response to investors' concerns over energy exposures. While the oil and gas exposure is estimated at around 6 per cent of banks' total loans with banks monitoring and engaging in restructuring discussions, other loan segments are showing minimal stress at this point while coverage levels remain healthy. Our relative preference for DBS Group Holdings (DBS SP) over United Overseas Bank (UOB SP) is maintained following the 4Q2015 earnings releases, where DBS surprised on the upside, largely helped by improved net interest margins, while its loan exposure to oil and gas and commodities was largely unchanged and non-performing loans ratio remained flat at a low 0.9 per cent. With banks' valuations trading below 1 standard deviation to 10-year historical average multiples and pricing in most negatives, we view that risks to growth remains manageable and hence, see the current weakness as opportunities for long term investors to accumulate positions.

We continue to be positive on U.S. Consumer Discretionary. U.S. consumption growth would continue to benefit from the combination of strong labour markets, solid household balance sheets, improving housing market and lower oil prices. Recovery in consumer confidence in Europe is providing another lift. In this regard, we recommend Priceline (PCLN US). At the same time, we remain positive on the Technology sector - especially companies with substantial exposure to consumer demand. Key picks here include Visa (V US) and Apple (AAPL US).

Following the recent sell-off, valuations for Healthcare are now back in neutral territory. This provides a good entry opportunity into quality names. Overall, pipeline innovation outpacing impending patent losses augurs well for pharmaceutical companies' competitive advantage. Also, merger and acquisition activities have further strengthened their edge. We recommend Biogen (BIIB US) and Allergan (AGN US).

Although the sector seems oversold and would provide some entry opportunities, we maintain our overall neutral view on Financials as the regulatory environment and dilution risk could continue to cap the upside as banks continue to need more capital. Given our positive view on the US economy, we remain positive on U.S. domestic banks, especially US Bancorp (USB US).

Bonds

First REIT (SGD) 4.125% 22 May 2018

First Real Estate Investment Trust (First REIT) is a real estate investment trust focusing on healthcare and/or healthcare-related real estate assets throughout Asia. These assets include hospitals, nursing homes, medical clinics, pharmacies, laboratories, lifestyle and wellness management clinics etc. First REIT was listed on the Singapore Stock Exchange on 11 December 2006 and currently has a market capitalisation of SGD 871 million.

Through First REIT, investors can participate in an asset class that has a focus towards Asia's growing healthcare sector, which is boosted by an increase in life expectancy in Indonesia and the rest of Southeast Asia. For growth opportunities, First REIT has identified 3 properties in Indonesia for Asset Enhancement initiatives over the next few years for value optimisation.

Liquidity profile remains at a healthy level. Net operating cash flow of S$74.3 million (FY2014: S$80.8 million) sufficiently covers cash interest paid by 5.5x (FY2014: 5.8x). Given its plans to expand its property portfolio, the REIT's leverage ratio is expected to be around 38-40 per cent (FY2015: 35 per cent).

A key risk of the bond is a potential slowdown in Indonesia's healthcare demand.

Bond Funds

Interested investors may consider the LionGlobal Asia Bond Fund. It allows investors to own a good mix of both investment grade and high yield bonds. The portfolio consists of about 70 bonds issued by Asian companies that the investment manager assesses to have strong debt servicing capability, and hence lower default risk.

Also investors may consider the LionGlobal Short Duration Bond Fund, for its diversified holdings, short duration and exposure to primarily investment grade bonds. This fund should be able to weather further Fed rate hikes well. Furthermore, the potential payout is 2.5 per cent per annum paid on a quarterly basis.

Another bond fund investors may consider is the Fidelity Asian High Yield Fund which offers the opportunity to tap into a growing fixed income segment while receiving monthly income of between 6 to 7 per cent per annum.

Mixed Asset Funds:

Given the volatile markets expected in coming months, investors can consider mixed asset funds. The BlackRock Global Multi-Asset Income Fund's dynamic asset allocation lets investors exploit opportunities in both traditional and non-traditional asset classes.

Investors may also consider the JPMorgan Asia Pacific Income Fund which offers an attractive potential monthly payout of about 5 - 5.5 per cent per annum. The fund also aims to provide returns with lower volatility relative to equity markets. On an asset class level, Asian equities remain attractively valued, while Asia credit spreads allow for a positive total return, even in a rising interest environment. The fund has 25 - 75 per cent allocation range in both equities and fixed income.

Currencies:

Don't write off the U.S. Dollar recovery just yet, as fears of policy exhaustion and sharp decline in Fed pricing seem overdone. Opportunities are likely to present themselves should the U.S. Dollar weaken against the Singapore Dollar, Australian Dollar and New Zealand Dollar.

Global Outlook - Growth Worries are Unfounded

“Market weakness results in tighter financial conditions which will be a drag on growth, but this should be short-lived and does not threaten to cause renewed recession in the developed markets”

- Richard Jerram, Chief Economist, Bank of Singapore

Key Points:

  • The economy can drive financial markets, but not vice-versa. There could be some damage from the turbulence of the past two months, but this will be more like the soft patches we have seen at various times during the current expansion, rather than a cyclical downturn. Overall we remain optimistic about the global economic outlook.
  • A large part of confidence in the durability of U.S. growth rests on the consumer. Spending accounts for nearly 70 per cent of the economy, so signs of a healthy consumer could give reassurance to turbulent financial markets. Spending growth in 2015 was the fastest in a decade.
  • In China decades of domestic financial repression means that there is a large pool of domestic savings looking to exit. Offering better returns through domestic deregulation and managing the outflow through capital controls should allow the authorities to avoid a large-scale devaluation.
  • In Europe, political risk will be high running up to the U.K. referendum on June 23. Prediction (betting) markets are still confident that the U.K. will remain part of the European Union, although opinion polls are more mixed. Brexit would damage the broader European economy, as well as the U.K., and could be very de-stabilising for markets.
  • In Japan, the Bank of Japan (BOJ) surprised markets with a move to negative interest rates. In our view, there seems to be little reason for the BOJ to act, as core inflation is trending higher and temporary factors (like weak oil prices) may be depressing headline inflation. Nevertheless more BOJ action cannot be discounted if markets run into more turbulence and the Yen strengthens.

Equities - Anticipate a Volatile Year

“We are optimistic about equities from a medium-term perspective. However, there is still considerable uncertainty in the near-term, and the recent calm in financial markets is by no means a given.”

- Hou Wey Fook, Chief Investment Officer, Bank of Singapore

Key Points:

  • Last month, we turned more positive on equities, to reinforce our view that the recent market correction was overdone, and asset prices will soon adjust to reflect its intrinsic value. We continue to hold that view as we see no big fundamental change in the global economic outlook.
  • Global equities got off to a shaky start in February but ended the month slightly lower as sentiments recovered. Even as we continue to anticipate a volatile year, we see the recent weakness as a buying opportunity and maintain a positive stance on equities.
  • Financial markets are discounting a sharp slowdown in global growth. Unless the world is breaking down, whether triggered by a recession in the U.S. or hard landing in China, markets seem too bearish and this provides investors with a good buying opportunity.
  • On a relative basis, we are cautious on U.S. equities because valuations are more demanding than global peers. Nevertheless among U.S. stocks, we like companies with exposure to U.S. consumers who stand to benefit from rising wages and lower commodity prices.
  • Recovery of the Eurozone remains intact despite the recent market turbulence but the market seems to be discounting much slower growth. Overall, we remain positive on Europe but political uncertainties due to Brexit could continue to weigh on the markets in the near term.
  • Japanese equities have underperformed as the sharp appreciation of the Yen triggered a further sell-off. Nevertheless, valuations are now more attractive and a reversal of the currency’s recent strength as risk appetite returns should provide a tactical lift for the market. To ensure a sustained re-rating of Japanese equities, investors would need to see more impactful government policy actions.
  • Turbulence in oil prices and China’s growth outlook could continue to drive volatility in Asia ex-Japan markets in the near term. Nevertheless, with the sustained de-rating, earnings growth expectations have moderated and valuations remain undemanding. Within the region, we prefer North Asia and Singapore over Southeast Asia and India.

Bonds - Bonds have Outperformed Equities

“Global uncertainties and risk aversion have helped bonds to outperform equities so far this year. Given the prospects for more volatility in equities and the low interest rate environment, we see continued opportunities in bond markets.”

- Vasu Menon, Senior Investment Strategist, Wealth Management Singapore, OCBC Bank

Key Points:

  • Global uncertainties and financial market turbulence have benefited bonds so far this year as investors look for relatively more stable assets to protect their wealth while seeking yield.
  • A sharp downward adjustment to market expectations about future Fed rate hikes following the January Fed policy meeting and indications of ever more accommodative monetary policy from the other major central banks have also supported bond markets.
  • Going forward, the outlook for U.S. interest rates will affect how bond markets perform. We think that financial markets have over-reacted in predicting no further U.S. rate hikes in 2016. Unless the Fed sees something more than a temporary soft patch, it will need to resume the gradual normalisation of interest rates by the middle of the year in view of tightening labour markets and potential inflationary pressures.
  • Leaving interest rates unchanged in March looks like an easy call for the U.S. central bank, but the policy decision could become harder in coming months if inflationary pressure continues to build. Rate hikes in June, September and December are still realistic.
  • If markets remain volatile, but inflation continues to tick higher, then the Fed is going to be facing a very uncomfortable dilemma. The tightening of labour markets is leading to faster wage growth as unemployment falls below 5 per cent. In turn, core measures of inflation are beginning to edge higher, even though the headline rate is being held down by low oil prices.
  • The Fed should be aware of the risk of excessive response to financial market weakness, as it interrupted a tightening cycle in 1998 in the wake of the Asian Financial Crisis. The three 25 basis point rate cuts helped to stoke the flames of the dot.com bubble which led to an overshoot in inflation. In turn, that required a switch to more aggressive rate hikes, which helped to trigger the 2000-01 recession.
  • Among bond markets, we are most positive on emerging market high yield bonds. They are attractively valued - they currently trade about 679 basis points wider than their investment grade counterparts. It is still well off the 52-week lows of around 455 basis points achieved in May 2015 and around 200 basis points wider than the three-year average spread differential of 480 basis points.
  • The higher spread component of emerging market high yield bonds should provide a buffer against rising interest rates. Given that we see modest spread tightening, we expect that the "carry" will be an increasingly important component of returns in 2016.

Foreign Exchange & Commodities - Greenback Awaits Calmer Markets

“Expectations for Fed tightening this year and the next have been significantly scaled back, undercutting the U.S. Dollar. However, don’t write off the greenback’s recovery, as fears of policy exhaustion and Fed inaction seem overdone.”

- Michael Tan, Senior Investment Counsellor, OCBC Bank

Key Points:

  • Expectations for Fed tightening this year and the next have been significantly scaled back, undercutting the U.S. Dollar. The market continues to doubt the Fed's ability to normalise monetary policy any further, having de-priced all but an estimated 30 basis point of hikes through 2017.
  • Given that the decline in Fed pricing seems excessive, we are reluctant to write-off an eventual modest U.S. Dollar recovery against major funding currencies such as the Euro and Yen. We also think that a U.S. recession is unlikely, even after considering the recent tightening in financial conditions.
  • Brexit risks could keep the Pound volatile in the run up to the U.K. referendum on June 23. However, the betting market put the odds of Brexit at roughly 35 per cent, perhaps taking comfort that U.K. voters will eventually vote to stay in the European Union (EU) as the media starts to draw their attention to the huge economic costs of Brexit. The Pound should recover over the medium-term if the U.K. votes to stay in the EU as we expect.
  • We believe the relief for emerging market currencies from a stable-to-firmer CNY fixing and reduced Fed rate hike expectations is merely temporary. The Renminbi (RMB) is not out of the woods yet. Stable-to-lower fixing of the RMB may be tolerated only as long as the U.S. Dollar remains broadly weak.
  • The macro outlook for China remains challenging. As the U.S. Dollar firms up, resumption of RMB weakness and FX reserve losses is likely. We still anticipate RMB depreciation driving Asian currencies weaker over the medium-term.
  • Gold's impressive gains this year have taken us by surprise. Gold is acting as a safe haven against market turmoil, concerns over global growth and heightened systemic fears. Gold price could rise further if the global risk-off sentiment persists in the near-term. However, we continue to remain bearish on gold in the medium-term as any stabilisation in financial markets is likely to cause gold price to weaken.
  • Oil prices are expected to stay weak given the global oversupply situation and prospects for fresh supply from Iran now that sanctions have been lifted.

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Top Investment Ideas - Finding Opportunities Amid Market Turbulence

We have raised our equity call to “overweight” and downgraded cash to negative, holding the view that the recent market correction was largely due to investor sentiment and not the result of deteriorating economic fundamentals. Among equity markets, our preference is for Europe over the U.S.

Nevertheless, we continue to advocate exposure to mixed asset strategies, as it provides a balance of yield and equity market participation.

For fixed income, investors should continue to hold bonds with shorter tenors, as such bonds tend to be less sensitive to increases in interest rates.

Recommendations

Equity funds

The BlackRock European Equity Income Fund is our top call and provides exposure to dividend stocks in Europe, which is ideal under current conditions. It offers yield (of around 4 per cent per annum, paid monthly) as well as potential capital growth by investing in high-quality stocks and those with above average yield.

For a growth oriented strategy in European equities, the JPMorgan Europe Dynamic Fund aims to provide access to attractively valued, fundamentally sound stocks with positive momentum through an unconstrained approach. You may also consider the Fidelity Global Dividend Fund for stable and rising dividends, strong performance with lower volatility and exposure to the best dividend stocks globally. This equity income strategy can be used by investors of all types and ages.

Equity-Linked Convertible Investments

Valuations of the Singapore equity market are undemanding at this point, trading below long term average multiples, and providing patient investors with opportunities to add quality names. Following earnings contraction of 1.9 per cent for 2015E, broad corporate earnings growth is expected to improve moderately to 5.5 per cent in 2016E.

With a subdued growth backdrop, our preferred picks for ELCIs include DBS Group Holdings (DBS SP), CapitaLand (CAPL SP), Singtel (ST SP), Raffles Medical (RFMD SP), Sheng Siong (SSG SP), Singapore Post (SPOST SP), United Overseas Land (UOL SP) and Venture Corp (VMS SP). We expect oil & gas, commodity and property sectors to have limited price drivers in 1H16. We maintain our advice to trim oil and gas sector exposure given the muted outlook on oil price trends. Our relative preference for developers over SREITs is unchanged on valuations ground, as SREITs are expected to face more volatility ahead with a higher interest environment and muted dividend growth prospects in FY16. Within this sector, we prefer Ascendas REIT (AREIT SP), Frasers Centrepoint Trust (FCT SP) and Keppel DC Reit (KDCREIT SP).

U.S. equities fell in-line with global peers in January. Valuations, though still not cheap at a price-to-earnings of 15.6x (versus the 10-year average of 15.1x), have moved towards more neutral territory. Further ahead, we should start to see wage pressure on corporate margins, given the accelerating labour market. On a relative basis, we underweight U.S. stocks and continue to prefer names with exposure to the domestic economy. Our preferred picks include PayPal (PYPL US) and Wells Fargo (WFC US).

We continue to be positive on Consumer Discretionary. Further improvements in the U.S. economy and labour market would remain supportive of this sector. We recommend Priceline (PCLN US) and VF Corp (VFC US). While we are more selective now given the strong performance, we remain positive on the Technology sector. We continue to be positive on a mix of winners, such as Apple (AAPL US) and quality laggards, such as Oracle (ORCL US). Healthcare has been a massive outperformer over the past few years and has remained relatively resilient during the recent market rout. Overall, pipeline innovation outpacing impending patent losses augurs well for pharmaceutical companies’ competitive advantage. Furthermore, M&A activities have further strengthened their edge. Within this space, we recommend Biogen (BIIB US).

We maintain our overall neutral view on Financials. Near-term, the regulatory environment and dilution risk could continue to cap the upside as banks continue to need more capital. Given our positive view on the U.S. economy, we remain positive on U.S. domestic banks, especially US Bancorp (USB US).

Bonds

OUE Limited 4.25% 30 October 2019

OUE Limited operates as a diversified real estate owner, developer, and operator with a portfolio of assets in prime locations in Singapore. The company focuses its business in the commercial, hospitality, retail and residential sectors.

OUE continued to strengthen its balance sheet through capital recycling. Cash increased by S$256.3mn from end-2014 levels to S$418.3mn, mainly due to the divestment of Crowne Plaza Changi Airport to OUE Hospitality Real Estate Investment Trust. This is despite the S$157.3mn investment in Gemdale. Net debt position decreased to S$1.8bn from S$1.9bn as at end-2014. Net gearing decreased to 41 per cent from 44 per cent in 2014 and 57 per cent in 2013.

However, earnings capacity remains weak in relation to the company’s debt load. LTM EBITDA/interest multiple was 0.8 times, down from 1.4 times at the end of 2014. 3Q2015 revenue was down 6.9 per cent year-on-year to S$99mn, mainly due to lack of contributions from property development. Its hospitality division reported stable performance while its investment property sector performed strongly, with revenue up 15 per cent year-on-year to S$43.7mn, mainly due to higher occupancy at U.S. Bank Tower. Although OUE’s earnings capacity remains weak, the company is flush with cash which could potentially be used to pare down debt.

 

Bond Funds

You may consider the LionGlobal Asia Bond Fund. It allows investors to own a good mix of both investment grade and high yield bonds. The portfolio contains about 70 bonds issued by Asian companies that the investment manager assesses to have strong debt servicing capability, and hence lower default risk.

Also consider investing in the Lion-Bank of Singapore Emerging Market Bond Fund for its diversified and well-selected portfolio of Emerging Market investment grade and high yield sovereign and corporate credits. Through the fund, investors will have access to expert credit selection by Bank of Singapore’s Fixed Income Research team. The fund is actively managed by the Bank of Singapore Discretionary Portfolio Management team and investors can enjoy non-guaranteed potential semi-annual payout of 4 per cent per annum.

Mixed-Asset Funds: Given the volatile markets expected in coming months, investors can consider mixed asset funds. The BlackRock Global Multi-Asset Income Fund’s dynamic asset allocation lets investors exploit opportunities in both traditional and non-traditional asset classes. For investors interested in Asia, we continue to advocate exposure through a diversified approach via a multi-asset fund. For this purpose, investors may consider the JPMorgan Asia Pacific Income Fund. The fund manages a well-diversified Asian portfolio consisting of investments drawn from a wide range of asset classes.
 

Currencies: Investors can take advantage of U.S. Dollar weakness driven by risk-on strategies and the market’s less aggressive view of interest rate hikes in 2016 to build up long U.S. Dollar positions.

 

Global Outlook- Stable Global Growth

“The volatility in financial markets contrasts with a stable and healthy growth outlook for developed markets, although central banks will be watchful of any collateral damage. Elsewhere, China should avoid a hard landing and Asia looks relatively stable.”

– Richard Jerram, Chief Economist, Bank of Singapore

Key Points:

  • We see world growth at 3.3 per cent this year, nowhere near the recession that some bears are predicting. Growth is set to remain in the 3 to 3.5 per cent range for the fifth successive year in 2016, a pace that is neither impressive nor troublesome.
  • China is the main risk due to the scale of its credit bubble. While policy-makers have proved inept at permitting market solutions, resolving the bad loans problem will require directing government-related bodies to act, which is more familiar territory.

  • The U.S. economy created 851,000 new jobs in the fourth quarter of 2015, in a sign that the slowdown in exports or oil-related sectors is not enough to make much of a dent in the domestic recovery. In fact, low oil prices should have a positive effect on the U.S. economy, as the initial hit from weaker investment fades.

  • The European economy has been untroubled by events inside or outside its borders over the past year. Stable PMI readings, comfortably above 50, illustrate the lack of impact from the Greek crisis or emerging market troubles.

  • Japan continues to prosper with the tightest labour market in a generation and the strongest corporate profitability on record. Core inflation has pushed up to the fastest pace in two decades. Price rises of 0.9 per cent are still half of the Bank of Japan’s target, but the exit from deflation is convincing.

  • Some emerging markets continue to struggle, but Asia looks relatively stable. The region is a beneficiary of lower commodity prices and most countries in the region have a solid external surplus which provides some insulation from the worst of the currency turmoil.


Equities - More Positive Year in 2016

“The recent market panic is due to sentiment, and not a result of deteriorating economic fundamentals. Consequently after the January sell-off, we have turned more positive on equities. Europe remains our favourite region.”

– Hou Wey Fook, Chief Investment Officer, Bank of Singapore

Key Points:

  • China has been at the epicentre of the recent turbulence in financial markets since the start of this year as investors worry about its slowdown as it transitions from a credit-fuelled investment-led economy to one that's driven by consumption and services.
  • Market reforms in China have also caused sharp falls in its stock and currency markets, resulting in some clumsy and disappointing policy moves which have shaken confidence in the ability of Chinese policy makers.
  • It will take time for China to restore confidence in its stock markets, currency and economy - the interim uncertainty could cause significant volatility in global markets in the coming months.
  • China aside, oil has also been on a roller coaster ride as well, hurting the oil & gas industry and resulting in job losses. It has also caused investors to worry about deflation and whether the fall in oil prices is due to slower-than-expected global growth.
  • Monetary policy in the U.S. is also going through a major transition as the era of zero interest rates comes to an end. Investors are concerned and uncertain about how quickly the Fed will hike rates.
  • Although markets are volatile, fundamentals seem reasonable. Major economies like the U.S., Europe and Japan are improving. We also believe that the probability of a hard landing in China is relatively low given the significant resources and policy tools at the government's disposal.
  • The steadily recovering global economy led by the U.S. and easier macro policies in Japan and Europe remain a stable backdrop for equities - even as volatility is expected to persist.
  • Despite the reasonable macro outlook, equity markets have seen a sharp sell-off in recent months and value is starting to emerge in global stock markets. We have therefore turned more positive on equities.
  • Our top pick remains European equities as the region is at an early stage of recovery after its debt crisis, with the potential for positive surprises on the earnings and policy fronts. We are cautious on the U.S. as its equity markets have done very well and valuations are less compelling.
  • Stock markets in Asia ex-Japan are also starting to look interesting after a sharp sell-off from the peak last year. Japan is another region worth keeping an eye on as easy monetary policy and improvements in corporate governance should augur well for stock prices in the medium term.


Bonds- Fed Could Delay March Rate Hike

“The Fed will not want to be overly sensitive to market volatility, but delaying the next rate hike from March to June is not much of a risk. Three 25 basis point rate hikes this year now look more likely than our previous expectation of four.”

– Vasu Menon, Senior Investment Strategist, Wealth Management Singapore, OCBC Bank

Key Points:

  • Central banks are responding to financial market weakness. The Fed is set to slow the pace of tightening, but it is still likely to be much more rapid than what the market expects.
  • It looks like central banks in Europe and Japan are being panicked into further policy loosening by weak financial markets. The policy moves have marginal direct economic impact, but are useful in offering reassurance to jittery markets.
  • The Bank of Japan surprised markets with a move to negative interest rates at its end-January meeting, while leaving its quantitative easing targets unchanged. This was a double surprise.
  • In contrast, Draghi hinted in January at more easing to come at the European Central Bank's March policy meeting. We suspect that this is part of a strategy to back the German bloc into a corner so they are unable to prevent a pre-announced policy easing.
  • The U.S. Federal Reserve is being more circumspect, but it appears to be prepared to delay the March interest rate hike if financial conditions do not improve.
  • The Fed is in an easier position as it has already waited until the economic recovery is much more developed than usual before raising interest rates, with labour markets around full employment. This allows U.S. central bank to tilt the pace of tightening without having to think about reversing policy.
  • Although U.S. interest rates are headed higher, this is unlikely to dampen bond markets. Interest rates are rising but will likely stay low by historical standards. As such, the search for yield will continue and this should augur well for high yield bonds, especially those in the emerging markets.
  • Emerging market high yield bonds are attractively valued – they currently trade about 680 basis points wider than their investment grade counterparts and are also around 200 basis points wide of the three-year average spread differential of 478 basis points.
  • Lower yielding investment grade bonds, performed well in January, which is unsurprising in a risk-averse environment. However, we view this as short-term volatility rather than a fundamental change in direction. As a result, we remain cautious on investment grade bonds.


Foreign Exchange & Commodities- Greenback Could Post More Gains

“The greenback may post further gains on the back of the next two Fed rate hikes. However, periods of Fed tightening are not necessarily associated with U.S. Dollar strength once the direction of policy is discounted – so upside for the greenback may be limited.”

– Michael Tan, Senior Investment Counsellor, OCBC Bank

Key Points:

  • Currency markets seem to be overreacting to global growth fears. The outperformance of funding currencies such as the Japanese Yen and the Euro, underperformance of commodity currencies, and the Pound's significant underperformance are typically observed during heightened fears of global recession.
  • As investor sentiment stabilises, depreciation pressures on Pound and commodity currencies should wane while appreciation pressures on the Yen and Euro should ease.
  • Also, Fed tightening coupled with policy easing by the European Central Bank and Bank of Japan (BOJ) should benefit the greenback at least in the short term. However, the greenback may not post substantial gains against the major currencies having already appreciated significantly against them.
  • Despite the BOJ's move to negative interest rates, the Japanese Yen may not weaken substantially over the medium-term as the currency is seen as a hedge against another possible flare-up of market turmoil as experienced at the start of 2016.
  • Possible delay of the Bank of England's rate hike, uncertainty around Brexit and negative risk sentiment have been key drivers of recent outsized Pound weakness. However, Brexit risks are exaggerated as polls underestimate the strength of status quo. But if the U.K. votes to stay in the EU as we expect, the Pound should moderately recover over the medium-term.
  • China has preferred to keep its currency's fixings to the U.S. Dollar stable in recent weeks after sparking fears of devaluation with higher fixings in the very first few days of 2016. Nevertheless with the slowing Chinese economy, we expect the Renminbi to depreciate further.
  • On the commodities front, gold posted gains in recent weeks due to the market turbulence at the onset of the year. We caution that the recent rise in gold price is likely to prove temporary as the focus will soon switch back to further rises in U.S. interest rates.
  • Oil prices are expected to stay weak at least in the first half of this year given the global oversupply situation and prospects for fresh supply from Iran now that sanctions have been lifted.




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