Opportunities Exist Despite Stretched Valuations
There are market opportunities despite stretched valuations. Of more concern, however, should be if the potential for significant downside risks exists from here on.
The numbers are reassuring to some extent: past history does not contain too many instances where the market drops appreciably, apart for the summer of 2010 when it declined sharply due the debt crisis in Europe.
Otherwise, carry strategies tend to perform better than a blanket exposure to U.S. stocks, when comparing between High yield bonds and U.S. high dividend equities. The message: stay cautious, but don’t panic. A period of moderation is different from a recession, and we are not calling for a recession.
We maintain our moderately defensive investment stance, preferring High yield bonds as they offer potentially higher returns. On regional equity markets, we are still negative Japan and Asia ex-Japan, but neutral on the U.S. and Europe.
On bonds, we remain positive on Emerging Market and Developed Market high yields.
Fidelity Global Dividend Fund
This fund’s focus on high quality, dividend yielding stocks allows it to weather volatility and downside risks better than other equity funds. Should risk assets rebound, the fund’s equity orientation and strong focus on companies backed by earnings potential should help it capture more market upside relative to defensive funds. As such, investors can potentially achieve income, stability and growth in one fund. They may also reap attractive potential pay outs of approximately 3 per cent per annum, paid monthly.
Equity-Linked Convertible Investments or Stock Ideas
U.S. equities moved sideways in June as cautious commentaries from Fed members spooked investor confidence. Trump administration’s policy agenda suffered another hit as Senate Republicans delayed a vote on healthcare reform.
U.S. financials are receiving better support after recent positive Fed stress tests. We remain positive on the consumer discretionary sector bolstered by strong consumer confidence and low unemployment levels. Furthermore, sector valuations are cheaper on a relative basis.
Fundamentally, tighter labour market and potentially higher interest rates suggest that corporate profit margins are unlikely to be sustained going forward.
Nevertheless, given our overall cautious view on global equities, U.S. equities remain more defensive on a relative basis. Preferred picks are Amazon (AMZN US), Starbucks (SBUX US) and Blackrock (BLK US).
Singapore equities closed June little changed from a month ago due to limited catalysts ahead of the second quarter reporting season, expected to commence late July. Positive earnings revisions year to date, reversing 2016’s earnings contraction, has helped drive the equity market’s rebound in 1H2017.
Moving into the third quarter, we expect a rangebound market pending higher conviction on 2018 earnings prospects. Our overweight rating on Singapore equities within the region is maintained given attractive dividend yields and fairly reasonable valuations of 14.4 times price earnings ratio and 1.3 times price to book, close to its 5-year historical average price earnings ratio and price-to-book multiples of 13.2 times and 1.3 times respectively.
Preferred stocks to accumulate on pullback include DBS Group Holdings (DBS SP) and selected REITs such as Keppel DC REIT (KDCREIT SP) and Mapletree Industrial Trust (MINT SP) where we expect more resilient growth prospects.
Policy tailwinds for developers continue to come through recent data points from the property market, underpinning our earlier advice to accumulate property developer stocks. According to estimates from SRX Property, non-landed private home resale prices added 0.4 per cent from a month ago in May 2017, with stronger rebound in mid and high end segments.
We expect the oversupply situation in the domestic residential market to balance out next year. Pick up in the collective sales market as developers replenish inventory levels may also support home prices, which could reach an inflection point by 2018.
Following strong outperformance of our preferred pick City Development (CIT SP) year to date, we highlight CapitaLand (CAPL SP) and OUE Limited (OUE SP) as laggard property ideas to accumulate.
Buy STSP 2.72% 3 Sep 2021 (SGD)
We expect Singapore Telecommunications Ltd (SingTel) to mitigate new competition from a position of strength given its significant capex plans, which should bolster its mobile network. SingTel’s proven access to the bond markets has allowed it to source its debt via different currencies while maintaining a well-staggered bond maturity profile. Though exposed to foreign currencies via its associates, FX risk is manageable with a healthy credit metrics.
LionGlobal Short Duration Bond Fund allows investors to invest in investment grade bonds and receive a potential pay out of 2.5 per cent per annum (paid quarterly). This may be an ideal investment in an environment where interest rates are on the rise.
In the U.S. high yield space, investors may consider Allianz US High Yield Fund. The fund's investments are concentrated in the U.S. corporate bonds rated below investment grade. High yield bonds may be more resilient in the face of interest rate hikes. Also, improving fundamentals in the U.S. means the likelihood of defaults have decreased considerably. The fund aims to capture potential capital appreciation through its disciplined focus on security selection and robust investment process.
Lion-OCBC Global Core Fund provides exposure to globally diversified asset classes via cost efficient iShares ETFs. The fund typically invests into 10-15 iShares ETFs, and allow investors visibility on most or all their portfolio holdings.
Investors get to enjoy potential quarterly payouts, which could range between 3.5 to 4.5 per cent per annum, depending on the portfolio selected (Moderate or Growth) and the currency share class. Portfolio rebalancing is done periodically, typically every quarter or ad hoc in response to significant market risk events.
For investors with a preference for Asia, the Lion-Bank of Singapore Asia Income Fund may be able to provide income and capital growth via investments in a diversified portfolio of Asian equities and Exchange Traded Funds, and bonds. The fund employs a covered call strategy which reduces the impact of negative returns in a down market. Its flexibility to hold a higher proportion of its portfolio in cash (up to 30 per cent) can also help to mitigate risks.
Alternative Funds (For Premier Private Client only)
For investors who are looking for exposure into alternative assets in this rising rate environment, the Invesco US Senior Loan Fund could be a suitable hedge. Senior loans are less sensitive to interest rate changes because of their shorter duration and floating rates. This can lead to potentially more stable yields and better risk-adjusted returns for investors. In addition, Invesco has significant presence in all aspect of the bank loan market and has been managing bank loans for 27 years. The fund aims to pay out 4-5 per cent p.a. (monthly).
Don’t write off the potential for a mini U.S. Dollar rally as the Fed continues to normalise policy by hiking rates and shrinking its balance sheet. The greenback’s weakness due to unwinding of Trump trades since the start of 2017 and hawkish rhetoric from central banks seems to have gone a bit too far. The Fed hiked in June and seems intent on normalising policy. This should fuel modest renewed U.S. Dollar strength.
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