Equities (October 2016)

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

  • 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.