Equities (December 2016/January 2017)

Remain Cautious on Equities

"In 2017, we expect volatility to remain elevated as markets continue to discover what a Trump presidency really represents. We remain cautious on equities and have upgraded U.S. equities from underweight to neutral for its defensive traits.”

- Sean Quek, Head Equity Research, Bank of Singapore

  • Markets dived onto a reflationary trade even as the Republican’s sweep has widened the range of possible global growth and geopolitical outcomes. At the same time, the pace of Fed rate hikes is likely to accelerate. Further, ahead of the busy political agenda, European political risks lurk. Coupled with extended valuations, risk-reward remains unattractive. Hence, we remain cautious on equities. Regionally, we are neutral on the U.S. and cautious on Europe, Japan and Asia ex-Japan.
  • The post-U.S. election rally to record levels - notwithstanding the rise in yields - suggests that the market sees growth acceleration outweighing the impact from higher rates. Clearly, there is not enough information at this stage to arrive at such a conclusion with conviction. Further, with the recent rise, valuations have become extended. Without more concrete details, the Trump reflation trade could run out of steam. Nevertheless, U.S. equities remain more defensive on a relative basis.
  • Going into 2017, the risk of political contagion remains a potential overhang in Europe given the busy political calendar. In the meantime, negotiations between the U.K. and the EU are expected to kick-off. Also, consensus earnings growth for 2017 seems to be optimistic again. Combined with the region’s above-average price-to-earnings ratio, we remain cautious in European equities.
  • In Japan, we maintain the view that investors would see beyond short-term stimulus, whether from monetary or fiscal policy and more sustained re-rating of Japanese equities would require more meaningful structural reforms that would boost Japan’s growth potential. Meanwhile, near-term, the market would continue to be driven mainly by movements of the Yen. Although valuations are not demanding, we remain cautious on Japanese equities.
  • Asia ex-Japan equities bore the brunt of Trump’s victory. Besides fears of Trump-triggered trade war, growing expectations of faster Fed tightening also weighed on regional currencies. If Trump pursues his anti-trade policies, it is highly negative for Asia’s growth. Also, an accelerated Fed tightening phase would weigh on the region. Hence, although Asia Ex-Japan markets continue to trade at a discount to their Developed Market peers, risk-reward for the region has deteriorated.