Equities (September 2017)

Still Cautious

“Given the prospects for tighter global monetary policy and extended stock valuations, we remain cautious on equities; but within the equities space we prefer the U.S. for its defensive traits and remain neutral on Europe.”

– Sean Quek, Head Equity Research, Bank of Singapore

Given our view that global monetary policy environment will become tighter, even as overall growth prospects seem to have peaked, we remain cautious on the outlook for equities.

With leading central banks owning 20 per cent of their government’s total debt and the ECB and BOJ balance sheets now bigger than the Fed’s, pressure is for the massive balance sheet expansion to finally come to an end. Also extended valuations provide limited support.

United States
In the U.S., the recently concluded 2Q earnings season provided further boost to consensus earnings expectations. However, negative headlines from the White House, including the disbanding of pro-business councils, continued to mar hopes of a fiscal stimulus driven boost. Nevertheless, given our overall cautious view on global equities, U.S. equities remain more defensive.

Consensus earnings per share downgrades for Europe finally stabilised in August - after deteriorating steadily since peaking in May, despite signs of economic strength and positive earnings surprises. With ECB balance sheet surpassing the Fed’s in U.S. dollar terms, pressure for the central bank to start phasing out its quantitative easing is mounting. Near-term, financial market movements would continue to be dictated by clues on the ECB’s next move. As highlighted earlier, we see a less dovish central bank as the economic recovery continue to gain pace. Overall, we remain neutral on European equities.

The persistently strong yen continued to weigh on Japanese equities (in yen terms) in August. This is notwithstanding the robust 2Q economic growth, a relatively more positive earnings season and improving consensus EPS estimates. Fundamentally, we maintain our view that sustained re-rating of the market would require more meaningful structural reform to boost growth. To this end, Abe’s fading popularity is not encouraging. Hence, we see macro factors and movements of the JPY to remain key drivers for the market.

Asia ex-Japan
Asia ex-Japan equities have done very well this year posting strong double digit gains. However the region’s equities could bear the brunt again as the investors’ focus on the Fed and ECB’s balance sheet exit plans gain momentum. Also, notwithstanding the period of unexpected calm, trade war risks, especially between China and the US, remains real.

In Singapore, the equity market saw some profit taking pressures in August, with seasonal effects partly contributing to the equity market’s softer performance for the month. Near term, in the absence of potential catalysts, we expect the current consolidation phase may continue. One of the brighter spots on the ground remains the improvements in the local property market, where there have been more transactions and en-bloc sales.