Equities (July 2017)

Still Cautious On Equities

“Given the stretched valuations, on-going slowdown in global growth and potential disappointments on the policy fronts, we remain cautious and prefer to hold back for a better entry opportunity.”

– Sean Quek, Head Equity Research, Bank of Singapore

  • With markets hitting new highs and most markets looking fully valued to us, we are sceptical that markets can continually go much higher. The rally in risky assets since the end of last year was largely due to the improvement in the economic cycle. However, with economic growth stalling and the increasing likelihood that Trump cannot enact big economic reforms, it is difficult for markets to go much higher.
  • Finding value in a fully-valued market is a challenge. To ensure a safe outcome in the long run, diversification is much more important than timing the market. By holding too much cash as a defensive strategy, investors risk long-term harm by being under-invested.
  • The actual policy outcomes of the Trump presidency cannot be predicted in full – the man is just too temperamental for that – but we can make a good guess that mostly, it will fail to live up to the promises he made for bold changes.
  • Infrastructure spending will likely prove to be the biggest disappointment to his support base. He has been slow to move on proposals, and it has become clear that the path to much higher infrastructure spend will be a tortuous one. It is likely that he will give up on the notion entirely once the scope of the problem becomes clear.
  • The surge and recent drop in technology needs to be viewed through a prism, which is: As investors reconsider the “Trump trade,” they have gone back to two investment themes, that of yield and growth. While tech valuations may not be in bubble territory, large cap U.S. technology companies are trading at the highest level since late 2007.
  • We are neutral on U.S. and Europe equities. We do not see significant upside potential for U.S. equities at current valuations in the absence of a breakthrough on corporate tax reform in the U.S. In Europe, political risk was mitigated when Macron won the French presidency. We do not see much risk for markets lurking in the German election. Italian elections could be troublesome, but that is a story for next year.
  • Asia ex-Japan equities continued to benefit from the positive earnings upgrades. Looking forward, the positive economic growth momentum has started to moderate. China’s growth outlook, in particular, has started to decelerate in-line with falling policy support. Asia ex-Japan could bear the brunt again as the investors’ focus on the Fed and ECB’s exit plans gain momentum. Also, we will not completely rule out a trade war risk for the region, as Trump’s stance on global trade remains unclear.
  • Japanese equities lack a catalyst. We maintain our view that a sustained re-rating of the market would require more meaningful structural reforms. Valuations, at forward price earning ratio of 14.5 times versus the 5-year average of 14.7 times, remain in neutral territory.