Senior Investment Counsellor, Wealth Management Singapore - OCBC BankMember of OCBC Wealth Panel
Rebalance in Times of Uncertainty
The strong growth backdrop remains intact in the U.S., and has been reaffirmed through the latest economic data. We prefer not to chase the equity market rally in the event there is a market pullback should President Donald Trump intensify his anti-trade rhetoric or if he does not deliver the fiscal reforms, given the surge in market confidence since November. There is also a possibility the robust data that we have seen so far may moderate over the months, as has been the case in the past few years.
We are poised for greater volatility, as European political risks arise to complement President Trump’s antics.
Our cautious stance doesn’t mean that we are bearish and taking risk down further; rather, we prefer to rebalance between sectors: Rebalance out of sectors that are over-valued and with low growth prospects, and into sectors with undemanding valuation and strong growth outlook.
Given the uncertainties and volatility ahead, asset allocation is key to navigating the markets. Our moderately defensive asset allocation stance states a preference for credit over equity, holding on to a bit more cash for opportunities down the road.
Fidelity Global Dividend Fund
This fund’s focus on high quality, dividend yielding stocks enables it to be resilient and to weather volatility and downside risks better 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. Investors 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, we are investing in sectors that will do well in both bull and bear markets, maintaining a barbell approach between Cyclical (with a preference for Consumer Cyclical and Technology) and Defensive (with a preference for Healthcare and Telecom) sectors. The technology and healthcare sectors had led the rally in February.
In Technology, we prefer names with a consumer exposure, particularly in the U.S., where sustained improvements in labour markets have buoyed consumer confidence to a 9-year high. Valuations for the sector have also re-rated significantly given the sharp rally post-elections.
We recommend Visa (V US) and Salesforce.com (CRM US). Visa is well-positioned to benefit from growing consumer spending and a rapid cash-to-electronic transition globally. Enormous network effects and strong brand are key barriers to entry for the company. Salesforce.com has successfully expanded into a number of fast-growing verticals to prop up long-term revenue growth.
In Consumer Discretionary, sustained improvement in the labour market has buoyed consumer confidence. Here, our key picks are L Brands (LB US) and Walt Disney (DIS US).
While Trump and the Republicans have been clear on the desire to repeal the Affordable Care Act, 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 on the sector and include Bristol-Myers Squibb (BMY US) and Express Scripts (ESRX US) among our key picks.
For Singapore stocks, with valuations close to historical average long term multiples, our preference remains for quality stocks with resilient business models and relative earnings visibility as external events approach. Singapore Telecommunications (ST SP), City Development (CIT SP), Thai Beverage (THBEV SP) and Sheng Siong Group (SSG SP) are among those we believe suitable to withstand the challenging environment ahead.
Overseas Education Limited 5.2% 17 April 2019 (SGD)
Overseas Education Limited (OEL) is a private foreign school system in Singapore offering the K-12 IB curriculum. The company provides a globalised multi-cultural environment to children aged between 3 and 18 years.
OEL’s liquidity profile has remained adequate with cash position at ~S$48.7 million, as matched against total current liabilities of S$29.7 million in 1H2016. Free cash flow is expected to be largely positive over the long run, which should help improve leverage (net debt/EBITDA ~2.2x).
Last September, OEL had repurchased S$7 million of the existing SGD bonds, with management indicating that they may opportunistically repurchase the bonds in order to pare down debt obligations. While the OELSP bonds are currently trading inside Raffles Education 5.9% due 2018 (88.6/14.4%) and G8 Education 5.5% due 2019 (98.25/6.24%), unlike both of its peers, OEL does not actively seek acquisitions. Hence, it has little need for future major capex over the next few years.
LionGlobal Short Duration Bond Fund allows investors to invest in investment grade bonds and receive a potential payout 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.
The Fullerton USD Income 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 capital gains and stable dividend payouts.
The following funds have shown resilience in the face of recent volatility and possibly will continue to do so going forward. A portfolio consisting of these funds would give investor 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 monthly pay-out of about 4.5 per cent per annum (paid monthly).
For investors who wish to capture Asia’s growth through a multi-asset strategy, the Lion-Bank of Singapore Asia Income Fund aims to provide potentially regular income and capital growth through dynamic and flexible asset allocation. The fund invests in a diversified portfolio of Asian equities and fixed income instruments with the objective to deliver capital growth and sustainable income via three sources, that is, dividend yield, bond coupons and premium from covered call option writing. The covered call strategy helps to reduce the impact of negative returns in a down market and potentially extract more yield. It also has the flexibility to hold higher levels of cash, which can help to protect against downside risks.
We also recommend the JPMorgan Global Macro Opportunities Fund to leverage 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 to an investor’s portfolio. The fund manager can employ traditional and/or sophisticated investment instruments.
Our medium-term outlook favouring weaker trade-exposed EM Asian currencies has not changed. Any U.S. Dollar correction offers an opportunity to reinstate fresh shorts in trade-exposed Asian currencies.
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