Top Investment Ideas

April 2017

The Reflationary Environment has Further to Go

We prefer high yielding bonds where higher income can provide a cushion against rising interest rates and heightened uncertainty.

Given prevailing uncertainties and potential volatility ahead, asset allocation is key to navigating the markets.

A consolidation phase is probable following the earlier run-up, especially as risk assets seem over-extended in the aftermath of the U.S. election. We are not bearish on risk assets because the medium-term economic outlook remains moderately constructive with corporate margins improving.

On equities, we are still negative on Europe, Japan and Asia ex-Japan but neutral on the U.S. given its defensive traits.

On bonds, we remain positive on Emerging Market and Developed Market high yield.

Recommendations

Equity funds

Fidelity Global Dividend Fund

This fund’s focus on high quality, dividend yielding stocks allows it to better weather volatility and downside risks 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 payouts of approximately 3 per cent per annum, paid monthly.

Equity-Linked Convertible Investments or stock ideas

U.S. stocks

We continue to maintain a barbell approach between Cyclical (prefer Consumer Cyclical and Technology) and Defensive (prefer Healthcare and Telecom) sectors.

In wake of the failure to repeal Obamacare, the Trump administration is expected to move on to other reform initiatives, offering some reprieve for the Healthcare sector. Fundamentally, the sector continues to benefit from improving pipeline productivity with an increasing number of new therapeutic drugs approved by the FDA. Also, valuations remain undemanding while M&A activities provide potential catalysts. We remain positive here. Key picks include Gilead Sciences (GILD US) and Biogen (BIIB US).

We stay overweight Technology names with consumer exposure, particularly in the U.S. where sustained improvements in the labour market buoyed consumer confidence, although we are more selective now. Valuations for the sector have also re-rated significantly given the sharp rally. Also, the Trump administration’s shift towards highly anticipated tax reforms would bring about greater uncertainty for the sector. On one hand, global companies with large offshore cash balances would benefit directly if a cash repatriation tax holiday is introduced. 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. Preferred names include Visa (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 Fiat (FCAU US) and Walt Disney (DIS US).

Singapore stocks

Our neutral stance on SREITs is maintained, following an unexciting set of results, muted dividend growth prospects and not compelling valuations of close to 1x price/book (in line with its long term historical average multiple). Selective picks in this space are Keppel DC Reit (KDCREIT SP), Frasers Centrepoint Trust (FCT SP) and Frasers Logistics & Industrial Trust (FLT SP).

With the rebound in the equity market this year, investors should also take the opportunity to reduce and switch out of fairly valued stocks such as Starhub (STH SP), Suntec REIT (SUN SP) and Singapore Press Holdings (SPH SP).

With valuations of the broad equity market now close to its historical average long term multiple, further re-rating of the equity market will hinge on further improvements in earnings expectations and ROE recovery. We maintain the focus on bottom up stock picking given that the risk reward ratio for the equity market has reduced. Our preference remains in quality stocks with more resilient business models, such as Singapore Telecommunications (ST SP), City Development (CIT SP) and ComfortDelgro (CD SP).

Bonds

FCL Treasury Pte Ltd 4.15% 23 Feb 2027 (SGD)

FCL Treasury Pte. Ltd is a wholly-owned subsidiary of Frasers Centrepoint Limited (FCL). Its principal activities are the provision of financial and treasury services to the Guarantor (Frasers Centrepoint Limited), its subsidiaries and the joint ventures and associates of the Guarantor.

FCL is a diversified property conglomerate, with exposure in residential, commercial and hospitality real estate. It is the second largest integrated property developer in Singapore by total assets, with SGD24.6bn as of end-1QFY2017. Core markets are Singapore and Australia, with secondary markets such as China and Thailand.

As at 29 March 2017, FCL’s market capitalisation is approximately S$5.08 billion. FCL has been diversifying both its geographical footprint (into Australia and Europe) and ramping up its investment property portfolio in recent years, hence decreasing reliance on the domestic residential property market and providing the company with recurring income.

Though FCL remains very much in the growth phase, we expect that FCL’s credit and liquidity profile would not deviate too far from current levels of about 68 per cent net-gearing at the end-1QFY2017 with FCL expanding its balance sheet mainly at the REIT level.

Bond Funds

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.

In a low growth environment, Asian credits remain well-supported by monetary policy and the continued hunt for yield. This fund may provide an attractive income with lower volatility versus other asset classes. Its concentration risk is managed by careful credit selection and diversification and the interest rate risk is managed by ensuring that portfolio duration does not exceed five years.

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. Investors may benefit from potential monthly payouts as well.

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 investor a fairly well-diversified approach to their holdings.

The Fidelity Global Multi-Asset Income Fund’s dynamic asset allocation let 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 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/ETF and bonds (IG/HY). 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.

Currencies:

The USD is set to keep benefitting from the backdrop of a strong U.S. economy and further Fed tightening. With valuations for GBP extremely cheap and speculative positioning still short, there is a risk that GBP rallies become more frequent.