Top Investment Ideas

February 2017

Michael Tan
Senior Investment Counsellor, Wealth Management Singapore - OCBC Bank
Member of OCBC Wealth Panel

Asset Allocation Key amid Greater Uncertainty

We expect greater volatility ahead with President Trump’s increasingly anti-trade rather than the highly-anticipated reflationary, posture.

Given the uncertainties and volatility ahead, asset allocation should be the key consideration in managing and building a core portfolio. We are moderately defensive in our asset allocation and continue to prefer credit over equity.

On equities, we are negative on Europe, Japan and Asia ex-Japan but with a preference for neutral on the U.S., given its defensive traits. Among bond markets, we are positive on Emerging Market and Developed Market high yield bonds.

Recommendations

Equity funds

Fidelity Global Dividend Fund

This fund’s focus on high quality, dividend yielding stocks enables it to be more resilient and to better weather volatility and downside than other equity funds. At the same time, should risk assets rebound, the fund’s equity orientation and strong focus on companies that are backed by earnings potential should help it capture more market upside relative to defensive funds. The benefit to investors is they can achieve income, stability and growth in one fund. They may also reap attractive potential payouts of approximately 3 per cent per annum, paid monthly.

Equity-Linked Convertible Investments or stock ideas

For U.S. stocks, cyclical sectors, led by Materials, Technology and Consumer Discretionary, outperformed in January. Looking ahead, our preferred sectors are Consumer Discretionary, Healthcare, Technology and Telecoms.

Fundamentally, we continue to prefer Technology names with consumer exposure – particularly in the U.S. where sustained improvements in labour markets buoyed consumer confidence to a 9-year high. However, Trump’s victory has brought about greater uncertainty for the sector. On one hand, the Republican sweep has raised expectations of a successful tax reform and this would boost profitability for the sector. Also, many global companies here have large offshore cash balances and could benefit directly if the new administration decides to go ahead with a cash repatriation tax holiday. On the other hand, many U.S. Technology players have substantial exposure to China and Asia and could bear the brunt of retaliatory actions in the event that trade wars between the U.S. and Asia escalates.

Besides generating revenues from the region, many have major manufacturing facilities residing here as well. Preferred names include Visa Inc (V US) and Salesforce.com (CRM US). Similarly, we remain positive on Consumer Discretionary as sustained improvements in labour markets buoyed consumer confidence. Key picks are L Brands (LB US) and Starbucks (SBUX US).

While Trump and the Republicans have been clear on the desire to repeal the Affordable Care Act (ACA), there is less clarity on their Healthcare policies. 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 while M&A activities provide potential catalysts. We remain positive here. Key picks include Bristol-Myers Squibb (BMY US) and Express Scripts (ESRX US).

For Singapore stocks: With value added exports making up more than half of its GDP, Singapore’s open economy is exposed to a potential sharp slowdown in global trade should Trump-initiated trade conflicts arise. We favour quality stocks with more resilient business models and relative earnings visibility to withstand a challenging environment. Our preferred picks include Singapore Telecommunications (ST SP), City Developments (CIT SP), CapitaLand (CAPL SP), Raffles Medical (RFMD SP) and Ascendas REIT (AREIT SP).

Buoyed by expectations of a higher-rate environment as the Fed accelerates policy normalization, our banking top pick, DBS Group Holdings (DBS SP), has rallied more than 20 per cent since early November. Similarly our stock feature Global Logistic Properties (GLP SP) has also outperformed strongly, gaining more than 40 per cent over the past three months. Investors who followed these ideas should lock in some profits.

Bonds

Lippo Malls Indonesia Retail Trust 4.5% 23 November 2023 (SGD)

Lippo Malls Indonesia Retail Trust (LMRT) is a retail REIT with a portfolio of 20 retail malls and 7 retail spaces in Indonesia.

LMRT has portfolio occupancy of above 90 per cent since its IPO in 2007. Apparently, 3Q2016’s portfolio occupancy of 94.8 per cent outperformed the 84.3 per cent occupancy rate of the retail market in Jakarta. Rental reversions have been healthy since 1Q2011, though the rate of increase has been declining. 3Q2016 results were stable, with revenue and NPI inching up 0.4 per cent to S$47.0m and S$43.3mn respectively, contributed by small gains in the IDR and rental reversion. LMRT benefits from retail growth in Indonesia, with retailers expecting sales to increase by 5.2 per cent y/y in October 2016.

We view the Indonesian consumer sector in a positive light despite the slowing government spending.

Bond Funds

In a rising rate environment, Asian high yield bonds have a lower duration than most fixed income sectors. In addition, this asset class exhibits lower volatility than equities and it has a more attractive risk return profile than major fixed income and equity markets.

With one of the largest fund size and longest track record, the Fidelity Asian High Yield Fund has delivered consistent performance and a lower drawdown during challenging market conditions.

Trump’s expansionary fiscal policy plans would be conducive for high yield bonds, coupled with improving fundamentals and lower default rates. Allianz US High Yield Fund aims to capture potential capital appreciation through its disciplined focus on security selection and robust investment process.

Mixed-Asset Funds

Three funds have shown resilience in the face of the recent volatility and possibly will continue to do so for other related events going forward. A portfolio of these three funds gives investors a fairly well-diversified approach to their holdings:

The Fidelity Global Multi-Asset Income Fund’s dynamic asset allocation lets investors exploit opportunities in both traditional and non-traditional asset classes to achieve income, stability and growth. This fund offers an attractive potential pay-out of about 4.5 per cent per annum (paid monthly).

Investors may also consider the Schroder Asian Income Fund, which offers an attractive potential 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 gain from an active asset allocation strategy which aims to maximise 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. It aims to deliver absolute performance in various market environments. The fund also has low correlation with many asset classes and provides good diversification for an investor’s portfolio. The fund manager can employ traditional and/or sophisticated investment instruments.

Currencies

Given that the medium-term trend of a weaker RMB is still intact, along with the and non-negligible risk of U.S. -trade protectionist policies targeting China, we maintain our bearish view on trade-exposed Asian currencies, including SGD. The recent U.S. Dollar correction offers opportunities to reinstate fresh shorts in trade-exposed Asian currencies.