Equities (November 2016)

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

  • 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).