Top Investment Ideas

December 2016/January 2016

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

Stay Defensive and Diversify

Donald Trump’s election victory should be viewed as a new global shock, mixing positive demand and negative supply elements. There is considerable uncertainty about the actual mix of policies to be enacted. 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 cautious on Europe, Japan and Asia ex-Japan but have upgraded U.S. to a neutral stance given its defensive traits.

Among bond markets we are positive on Emerging Market high yields and have turned less cautious on Developed Market high yields.

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, our preferred sectors are Consumer Discretionary, Healthcare, Technology and Telecoms.

Healthcare lagged in November 2016 although the sector is seen as a key beneficiary of Trump’s victory given Hillary Clinton’s aggressive rhetoric on regulating drug pricing. 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, except for the focus on reducing regulations.

Repealing the ACA is largely a net neutral for the U.S. healthcare sector, with the drug, biotech, and insurance industries benefiting slightly while hospitals and drug supply chain firms may be impacted negatively; and the remaining industries could be less affected. Fundamentally, the sector continues to benefit from improving pipeline productivity with an increasing number of new therapeutic drugs approved by the Food and Drug Administration (FDA). Also, valuations remain undemanding while M&A activities provide potential catalysts. Key picks in this sector include Amgen Inc. and Express Scripts Holding Company.

Steady improvements in labour markets remain supportive for U.S. consumption growth, hence our positive stance on Consumer Discretionary stocks. Key picks in this sector are Lowe's Companies, Inc. and The Walt Disney Company.

We continue to be overweight the Technology sector, and prefer names with consumer exposure, such as Visa Inc. and Salesforce.com.

For Singapore stocks, we are on the lookout for signs of an earnings trough to emerge over the course of 2017. We favour quality stocks with more resilient business models and relative earnings visibility to withstand a challenging environment. Within a diversified portfolio, we retain a selective approach to dividend yielding stocks which are not overly geared and where spreads still offer attractive long term value for equity income investors. Our preferred picks include Singapore Telecommunications Ltd, City Developments Ltd, Global Logistic Properties Ltd, Ascendas REIT and Frasers Centrepoint Trust.

Bonds

GuocoLand Ltd 4.1% 13 May 2020 (SGD)

GuocoLand Ltd. operates as an investment holding company, which engages in the property development and investment, hotel operations and provision of management, property management, marketing and maintenance services. It had reported weaker 1QFY2017 results, mainly due to an absence of contribution from property sales and divestment gains from a year ago. Otherwise, revenue had only inched down 5.5 per cent on a quarter-on-quarter basis.

The gearing ratio currently towers over peers but we believe GuocoLand’s credit metrics remains manageable with a larger recurrent income base. We see a potential supply risk in the short-term debt sector and hence favour the tenor recommended over others.

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

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 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 5 per cent per annum (paid monthly).

Investors may also consider the Schroder Asian 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 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:

We are positive on the prospects for the U.S. Dollar but the direction of the greenback will depend on Trump’s economic policies and on this front, there is still a lack of clarity at the time this was published. Trade-exposed Asian currencies stand to lose most from an escalation of trade tension between China and the U.S.