Equities (March 2017)

Cautious on Equities

“A lack of clarity about Trump’s policies, Fed rate hikes, political risk in Europe and extended valuations means that the risk-reward for equities remains unattractive at this juncture.”

- Sean Quek, Head Equity Research, Bank of Singapore

  • Positive global growth momentum and hope of clearer U.S. fiscal stimulus and tax reform plans continued to drive global equities higher in February. The first month of President Trump’s administration has been typified by drama in Washington. It remains to be seen how much longer the market’s patience last. In addition, the pace of Fed interest-rate normalisation is likely to pick up and political risk in Europe remains an issue. Coupled with extended valuations, risk-reward remains unattractive. Hence, we maintain our cautious stance on equities.
  • In the U.S., the stronger than expected quarterly earnings season has ignited 2017 earnings growth expectations. Looking ahead, the stronger U.S. dollar, higher interest rates and tighter labour market suggest that corporate profit margins are unlikely to be sustained. Also, the intricacies and time involved in pushing through tax reforms mean that the Trump reflation trade could lose steam. Nevertheless, given our overall cautious view on global equities, U.S. equities remain more defensive on a relative basis.
  • In Europe, equities underperformed other regions as concerns with political risk re-merged as hustling of the French presidential election gaining momentum, even as uncertainty hangs over U.K.’s departure of the EU market. Although firmer economic growth on loose monetary policy and fiscal austerity is expected to provide a boost, consensus CY2017 earnings growth of 13.7 per cent remains optimistic. Meanwhile, risk of political contagion remains, given the busy political calendar. Hence we remain cautious on European equities.
  • Japanese equities continued to mirror movements of the yen. We maintain our view that a sustained re-rating of the market would require more meaningful structural reforms. After China, Japan accounts for a substantial share of the U.S. trade deficit and is vulnerable to potential trade pressure. Near-term, the market would continue to be driven mainly by macro factors and movements of the yen, which is expected to stay volatile. Valuations, however, are not cheap.
  • In Asia ex-Japan, Trump’s “America First” posture does not augur well for China and the region. While it would be highly negative for Asia’s growth if Trump pursues his anti-trade policies, investors seem surprisingly sanguine. Coupled with potential impact of faster-than-expected U.S. interest-rate normalisation and currency vulnerability, we remain cautious on Asia Ex-Japan.