Equities (May 2017)

Remain Cautious on Equities

“With the Fed indicating that it would start to shrink its balance sheet towards the end of the year, the market is likely to start anticipating the timing and pace of the reduction. We remain cautious and prefer to hold back for a better entry opportunity”

- Sean Quek, Head Equity Research, Bank of Singapore

  • Given the potential for a slowdown in the global growth outlook and disappointments on the policy and political fronts as well as limited support from the extended valuations, we remain cautious on equities and prefer to hold back for a better entry opportunity.
  • Another concern for equities is the impact of Federal Reserve policy. Given indications from the Fed that it would start to shrink its balance sheet towards the end of the year, the market is likely to start anticipating the timing and pace of the reduction which could cause jitters in markets.
  • Regionally, we have tactically raised Europe to a neutral weighting and continue to prefer the U.S., for its relatively defensive traits. We remain underweight Japan and Asia ex-Japan.
  • Given the run-up in U.S. equity markets since November, investors need to see clearer signs that the Republican sweep can indeed make a meaningful difference for corporate America. At the same time, extended valuations provide limited downside support. Fundamentally, the tighter labour market and potentially higher interest rates suggest that corporate profit margins are unlikely to be sustained going forward. Nevertheless, given our overall cautious view on global equities, U.S. equities remain more defensive on a relative basis.
  • On Europe we have turned more positive tactically as tail-risk of the French election has receded. We prefer now to focus on fundamentals, particularly Europe’s improving growth outlook. European valuations are not compelling but more attractive when compared with other markets like the United States. In addition, European equities have higher dividend yield compared to other markets which provides a good source of carry
  • While the European Central Bank (ECB) continues to reiterate its dovish stance, the debate on when the central bank would start to end its quantitative easing programme is expected to pick up pace. Further ahead, the political calendar in Europe remains eventful.
  • Near-term, the Japanese market continues to be driven mainly by macro factors and movements of the yen. Fundamentally, we maintain our view that a sustained re-rating of the market would require more meaningful structural reforms. Valuation, at a forward PE ratio of 14 times versus the 5-year average of 14.6 times is not demanding.
  • Although it would be highly negative for Asia’s growth if Trump pursues his anti-trade policies, recent Trump manoeuvres have helped to allay any such concerns. However, we would not completely rule out trade war risk for the region as Trump’s stance on global trade remains unclear. Perhaps more importantly, Asia Ex-Japan could bear the brunt again as the investors start focusing on the Fed and ECB’s exit plans. Seasonally, the region has suffered negative returns in the month of May in six of the past seven years.
  • After a strong start to the year, Singapore equities saw some profit taking pressures in April largely as a result of rotations in regional fund flows and profit taking pressures after valuations of the equity market reached one standard of its past 5-year historical average PER.