Moderately Defensive, in Favour of High Yield Bonds
Growth is likely to moderate for the next few quarters; considering that valuations are stretched to the point where all the good news the market has to offer has been more or less priced in, we maintain our broadly cautious stance in equity markets.
Markets, which have been on the rise since November last year due to improving economic cycles, are now in a consolidation phase as the economic momentum moderates. Such an environment favours asset classes that offer income and rely less on growth acceleration, as equities start to moderate.
In anticipation of some market volatility, we maintain our moderately defensive investment stance, preferring high yield bonds as they offer higher returns.
We remain cautious on equities, focusing on high quality dividend plays to get additional returns in a sideways market.
By 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
Global equities rebounded in late April as European political risks abated but we remain cautious and prefer to hold back for a better entry opportunity.
The strong showing from the earnings season provided some reprieve for U.S. equities. 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.
Our strategy is to take a barbell approach between Cyclical (Consumer Discretionary and Financials) and Defensive (Healthcare and Telecom) sectors.
The Financial sector should benefit from expectations of easier regulation and potentially higher rates environment following the Republican sweep. Also, relative valuation remains compelling (as prior to November, the low interest rates and gruelling regulatory environment weighed on the sector for an extended period). Buy-rated picks here include Blackrock (BLK US) and Wells Fargo (WFC US).
We remain positive on Healthcare as fundamentally rising R&D productivity, along with faster regulatory approval is leading to shorter time to market for new drugs. Among the specialty pharma and biotech sub-sectors, our top pick is Allergan (AGN US).
Technology, where we have been positive for some time, has been the best performer over the past 12 months and on a year-to-date basis. With many U.S. Technology players having substantial exposure to China and Asia, trade war risks remain even though this is on the backburner for investors for now. As such, we believe that investors should look to take profit here. Similarly, we remain positive on Consumer Discretionary as sustained improvements in labour markets buoyed consumer confidence. We recommend Hanesbrands (HBI US) and Walt Disney (DIS US).
Closer to home, we are buyers of Singapore property developers on any pullback.
Regionally, we prefer Singapore developers to Hong Kong developers, with improved sentiment from recent government relaxation of seller stamp duties and continued positive primary sales momentum supporting a steady growth outlook for the residential sector.
Beneficiaries of a sustained residential sales improvement in Singapore include City Development (CIT SP), CapitaLand Limited (CAPL SP) and UOL Limited (UOL 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 be influenced by improvements in earnings expectations.
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).
OUE Ltd 3.75% 17 April 2022 (SGD)
OUE is the sponsor of OUE Hospitality Trust and OUE Commercial REIT. The company is 68 per cent owned by the Lippo Group.
With its diverse portfolio and asset base, the group believes that it is well-positioned to benefit from this growth potential. Accordingly, the group will continue to assess potential investment opportunities in real estate which are aligned with its growth strategy and focus.
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.
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 pay outs.
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.
Two funds have shown resilience in the face of the recent volatility and possibly will continue to do so going forward. A portfolio of these two 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 4 to 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 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.
It is too early write off the US Dollar. Tax reform in the U.S. is likely to return and to involve some element of fiscal stimulus. The interest rate market is pricing in too little for the Federal Reserve to hike, and the extent of the Fed balance sheet normalization in our view, particularly if fiscal reforms go ahead. Take this opportunity to build up U.S. Dollar positions at low levels, perhaps even against the Singapore Dollar.
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