Senior Investment Counsellor, Wealth Management Singapore - OCBC BankMember of OCBC Wealth Panel
We are defensive in our asset allocation and continue to prefer credit over equity. The current environment of still low bond yields and range bound equities continues to make the case for the hunt for yield from both equity and fixed income markets for the rest of 2016.
In terms of fixed income, we remain positive on Emerging Market bonds, both high yield and investment grade paper, as they look well-positioned to deliver relatively strong performance over the coming months. We are also positive on Developed Market investment grades.
On equities, we are maintaining our cautious view on the back of extended valuations and event risks ahead. On equity regions, we would express our negative view evenly in the developed market – U.S., Europe, and Japan - while keeping to our neutral call on Asia.
With a great deal of uncertainty ahead, asset allocation should be a key consideration in managing and building your core portfolio.
Investors may seek to capture the strong growth potential of Asia through dividend yielding equities. The Schroder Asia Equity Yield Fund provides potential capital growth and income through investment in equity and equity related securities of Asian companies which offer attractive yields and sustainable dividend payments. You may reap attractive potential payouts of between 3 to 4 per cent per annum, paid out monthly.
Equity-Linked Convertible Investments or stock ideas
Earnings revisions trend for the Singapore equity market remain weak over the past month as the 3Q earnings season kicked off on a muted tone. With recent economic data continuing to point to slower growth for the Singapore economy, the earnings outlook for Singapore banks is subdued with low single digit loans growth and asset quality concerns lingering over the domestic banks’ exposure to oil & gas, commodity, property, Chinese and European loans. The positive is that valuations appear to have factored in much of the concerns. Within the sector, following a stronger pullback to date in DBS Group (DBS SP) towards 1x book value, we see long term value emerging in the stock.
Within a diversified portfolio, while we maintain our preference for some dividend yielding exposure given supportive spreads despite some near term weakness as the market prices in higher expectations of the next Fed hike, we advise investors to actively review their portfolios to reduce positions in stocks which offer less attractive growth outlook. Examples include Singapore Press Holdings (SPH SP) where we have highlighted a cautious stance following its lowered dividends and muted results release. We see limited growth surprises for SPH ahead given the continued structural headwinds for its traditional print media business amidst challenging economic conditions. Other ideas where we expect lacklustre fundamental outlook and are hence cautious include Sembcorp Marine (SMM SP) and Suntec REIT (SUN SP). Switch Buy rated ideas include City Development (CIT SP) and Capitaland Mall Trust (CT SP).
In the U.S., cyclicals outperformed in October despite the pullback in investor risk appetite as markets weigh the risks of a December Fed rate hike. Financials, which have been beaten down following the slew of negative news, led the pack. We continue to look for sectors with a combination of consumer exposure as well as relatively attractive valuations. Our preferred sectors are Consumer Discretionary, Healthcare, Technology and Telecoms.
Financials, the worst performing sector over the past 12-months, recovered to lead all sectors. The latest update by the IMF to its Global Financial Stability Report, which stated that “short-term risks have abated since April 2016, but medium term risks continue to build”, aptly reflect current sentiments for the sector. Recent efforts by central banks, such as the BOJ’s move to introduce yield curve management, suggest that they are recognizing the ineffectiveness of negative interest rates. This augurs well for the banks. While the low growth and low interest rates environment, coupled with gruelling regulatory backdrop, continue to weigh on the sector’s performance, we believe that a lot of the bad news has been discounted. As such, we are raising the sector from negative to Neutral. Our preferred name here is Bank of New York Mellon (BK US).
Energy stocks extended their gains but met greater volatility as questions over OPEC’s planned cuts emerged. With Bank of Singapore Economics Team’s crude oil price forecast of $48-50/bbl over the next 6-12 months, we see limited upside from here. On the other hand, valuations appear stretched following the sector’s best-performing re-rating year-to-date. Hence, we are cutting the sector to Negative from neutral.
We remain positive on Consumer Discretionary. Steady improvements in labour markets remain supportive for U.S. consumption growth. Key picks include Starbucks (SBUX US) and BMW (BMW GY).
Despite the outperformance, we continue to be overweight the Technology sector, especially names with consumer exposure. Preferred names include Visa (V US) and Salesforce.com (CRM US).
Healthcare underperformed again in October, in-line with other defensive sectors. Fundamentally, the sector continues to benefit from improving pipeline productivity with an increasing number of new therapeutic drugs approved by FDA. Also, valuations remain undemanding versus global peers while M&A activities provide potential catalysts. Our positive stance remains intact here. Buy-rated names include Wide-Moat rated Allergan (AGN US) and Sanofi (SAN FP).
CapitaLand Limited US Dollar 4.076%, 20 September 2022
CapitaLand Limited is a real estate company focused on investment holding. The company and its subsidiaries are principally engaged in investment holding, real estate development, investment in real estate financial products and real estate assets, investment advisory and management services, as well as the management of serviced residences.
CapitaLand Ltd (CAPL) is one of Singapore’s leading real estate developers with a focus in key Asian and/or European cities, with a 39.5 per cent stake held by Temasek Holdings. CAPL delivered decent financial results for FY2015, mainly driven by the group’s China development projects and higher rental revenue from its serviced residence business. Debt levels have remained largely unchanged, while its net debt/equity has improved from 0.57 times in FY2014 to 0.48 times in FY2015 due to an accumulation of its cash position. In addition, the Group’s debt maturity profile is well-managed, having not more than S$3 billion of debt to be refinanced each year. We also expect liquidity to remain healthy given the group’s wide range of financing channels; currently, it has approximately S$3.8 billion of undrawn facilities from both the parent and its treasury vehicles. Free cash flow came in strong at S$1.4 billion in FY2015 as a result of higher sales collection from its China projects, as compared to –S$377 million over a year earlier. Credit profile remains strong, underpinned by its quality assets and close links to the Singapore government via Temasek Holdings. The weak residential market in Singapore -- primarily a result of property cooling measures -- may be a notable risk to note. However, its substantial operating presence in China property markets should provide some buffer should earnings from Singapore be affected adversely.
Interested investors may consider the LionGlobal Short Duration Bond Fund. It gives investors exposure to investment grade bonds. Investors can receive potential payout of 2.5 per cent per annum, paid quarterly. The fund has a relatively lower duration which may be less risky when or if interest rates rise.
Investors may also consider the Fullerton USD Income Fund. This fund invests in a diversified portfolio of U.S. Dollar-denominated bonds, focused on quality companies with robust fundamentals. At least 70 per cent will be invested in investment-grade bonds to provide a combination of potential capital gains and stable dividend payouts.
In a low growth environment, Asian credits remain well-supported by monetary policy and the continued hunt for yield. This fund potentially provides an attractive income with lower volatility versus other asset classes. Its concentration risk is managed by careful credit selection and diversification and interest rate risk is managed by ensuring that portfolio duration does not exceed five years.
Three funds have shown resilience in the face of the volatility caused by the UK’s referendum to exit the EU and possibly other events going forward. A portfolio of these 3 funds gives you a fair diversification of your investment.
The BlackRock Global Multi-Asset Income Fund's dynamic asset allocation lets investors exploit opportunities in both traditional and non-traditional asset classes.
Investors may also consider the Schroder Asia Income Fund which offers an attractive potential monthly pay out of about 5 per cent per annum paid monthly. The fund aims to capture the growth potential of Asia through both equities and bonds. Investors may gain from an active asset allocation strategy which aims to maximize yield and total return in different market environments.
We also recommend the JPMorgan Global Macro Opportunities Fund. This fund leverages on global macro themes to generate performance through traditional and/or sophisticated investment instruments. It aims to deliver absolute performance in various market environments. The fund also has a low correlation with many asset classes and provides good diversification for your portfolio
Currencies: As expected, the U.S. dollar staged a strong recovery last month and should continue to be well supported. However, we do not see a strong appreciation trend from here as the expected rate hikes in December and in 2017 has already been factored in.
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