Chief Investment Officer
Bank of Singapore
Member of OCBC Wealth Panel
In the few days after the last Fed meeting mid-March, U.S. equities did not really budge one way or another, until late March when concerns about whether Trump would get enough Congressional support for his policies caused a pull back on Wall Street.
Apart from the Fed’s comparatively dovish remarks, the market has been devoid of serious news: the Dutch election was a non-event and nothing else has succeeded in disturbing the peace.
In other markets than stocks, the reaction has been a bit more marked. First, the drop in the oil has had a noticeable effect in the high yield bond market. As oil drifts towards US$45 per barrel, the market is quick to remember the energy sector’s near-death experience when the market was last at these levels. The reason is of course that the U.S. high yield sector is heavily represented by oil and energy bonds: somewhere in the region of 15 per cent at last count.
So, it makes sense for the market to express caution by forcing spreads higher. Is this the sign of broader systemic fears or is it a temporary blip?
First, the drop in the oil price this time around is still pretty modest by the standards of the previous collapse from over US$100 per barrel to US$40. Second, survival of the fittest has already taken care of the problem to a significant degree: a large number of issuers that were not up to operating in a weak oil-price environment have already gone down the chapter 11 route. Third, the global backdrop of solid growth should provide support for oil demand, even if recent indicators of inventories hint at a mini-glut.
Despite these factors, mutual fund flows have been outwards in big volume. Our initial assessment is that the move is overdone. Credit as an overall asset arguably benefits more directly from strong underlying growth than equities. Equity markets have high growth expectations to live up to; bonds only have to remain creditworthy. That is much less of a challenge in a benign economic environment. We thus remain confident in our call to hold high yield bonds.
It should also be the case that any short-term wobbles in Emerging Markets will turn out to be just that: short-term. For the immediate future, there are enough economic tailwinds around to make a sudden change in fortune unlikely.
Also of note post-Fed has been the slip in fortunes of the U.S. dollar against the majors. As we indicated a while ago, the idea was that the dollar was running out of steam somewhat after a surge after the U.S. elections. The more dovish tone of the Fed has reinforced this move. While we are not changing the call on the dollar yet, it is instructive to keep an eye on developments in this market to read broader risk sentiment.
Not all equity markets stand to do well if the dollar falters, even for a while. The Nikkei would be the first to come under pressure. The broader risk-on rally itself may also be at risk, given that to date a strong U.S. equity market has been accompanied by a strong dollar. Ultimately the view will boil down to an opinion on Fed policy. Given the recent growth performance there is the risk that the Fed may be erring on the side of being too dovish. A more convincing argument for a moderation of equity performance is stretched valuations, not a dive in the value for the dollar.
Any opinions or views of third parties expressed in this material are those of the third parties identified, and not those of OCBC Bank. The information provided herein is intended for general circulation and/or discussion purposes only. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Before you make any investment decision, please seek advice from your OCBC Relationship Manager regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs. In the event that you choose not to seek advice from your OCBC Relationship Manager, you should carefully consider whether the product is suitable for you. This does not constitute an offer or solicitation to buy or sell or subscribe for any security or financial instrument or to enter into any transaction or to participate in any particular trading or investment strategy.
OCBC Bank, its related companies, their respective directors and/or employees (collectively ‘Related Persons’) may have positions in, and may effect transaction in the products mentioned herein. OCBC Bank may have alliances with the product providers, for which OCBC Bank may receive a fee. Product providers may also be Related Persons, who may be receiving fees from investors. OCBC Bank and the Related Person may also perform or seek to perform broking and other financial services for the product providers
No representation or warranty whatsoever (including without limitation any representation or warranty as to accuracy, usefulness, adequacy, timeliness or completeness) in respect of any information (including without limitation any statement, figures, opinion, view or estimate) provided herein is given by OCBC Bank and it should not be relied upon as such. OCBC Bank does not undertake an obligation to update the information or to correct any inaccuracy that may become apparent at a later time. All information presented is subject to change without notice. OCBC Bank shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein. The information provided herein may contain projections or other forward-looking statements regarding future events or future performance of countries, assets, markets or companies. Actual events or results may differ materially. Past performance figures are not necessarily indicative of future or likely performance. Any reference to any specific company, financial product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the same.
The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.
The information in this document is not intended to constitute research analysis or recommendation and should not be treated as such.Cross-Border Marketing Disclaimer
1. Indonesia: The offering of the investment product in reliance of this document is not registered under the Indonesian Capital Market Law and its implementing regulations, and is not intended to constitute a public offering of securities under the Indonesian Capital Market Law and its implementing regulations. The investment product may not be offered or sold, directly or indirectly, within Indonesia or to citizens (wherever they are domiciled or located), entities or residents, in any manner which constitutes a public offering of securities under the Indonesian Capital Market Law and its implementing regulations.
2. Malaysia: Oversea-Chinese Banking Corporation Limited (“OCBC Bank”) does not hold any licence, registration or approval to carry on any regulated business in Malaysia (including but not limited to any businesses regulated under the Capital Markets & Services Act 2007 of Malaysia), nor does it hold itself out as carrying on or purport to carry on any such business in Malaysia. Any services provided by OCBC Bank to residents of Malaysia are provided solely on an offshore basis from outside Malaysia, either as a result of “reverse enquiry” on the part of the Malaysian residents or where OCBC Bank has been retained outside Malaysia to provide such services. As an integral part of the provision of such services from outside Malaysia, OCBC Bank may from time to time make available to such residents documents and information making reference to capital markets products (for example, in connection with the provision of fund management or investment advisory services outside of Malaysia). Nothing in such documents or information is intended to be construed as or constitute the making available of, or an offer or invitation to subscribe for or purchase any such capital markets product.
3. Myanmar: OCBC Bank does not hold any licence or registration under the FIML or other Myanmar legislation to carry on, nor do they purport to carry on, any regulated activity in Myanmar. All activities relating to the client are conducted strictly on an offshore basis. The customers shall ensure that it is their responsibility to comply with all applicable local laws before entering into discussion or contracts with the Bank.
4. Taiwan: The provision of the information and the offer of the service concerned herewith have not been and will not be registered with the Financial Supervisory Commission of Taiwan pursuant to relevant laws and regulations of Taiwan and may not be provided or offered in Taiwan or in circumstances which requires a prior registration or approval of the Financial Supervisory Commission of Taiwan. No person or entity in Taiwan has been authorised to provide the information and to offer the service in Taiwan.
5. Thailand: Please note that OCBC Bank does not maintain any licences, authorisations or registrations in Thailand nor is any of the material and information contained, or the relevant securities or products specified herein approved or registered in Thailand. Interests in the relevant securities or products may not be offered or sold within Thailand. The attached information has been provided at your request for informational purposes only and shall not be copied or redistributed to any other person without the prior consent of OCBC Bank or its relevant entities and in no way constitutes an offer, solicitation, advertisement or advice of, or in relation to, the relevant securities or products by OCBC Bank or any other entities in OCBC Bank’s group in Thailand.
6. Hong Kong SAR: This document is for information only and is not intended for anyone other than the recipient. It has not been reviewed by any regulatory authority in Hong Kong. It is not an offer or a solicitation to deal in any of the financial products referred to herein or to enter into any legal relations, nor an advice or a recommendation with respect to such financial products. It does not have regard to the specific investment objectives, financial situation and the particular needs of any recipient or Investor. This document may not be published, circulated, reproduced or distributed in whole or in part to any other person without OCBC Bank’s prior written consent. This document is not intended for distribution to, publication or use by any person in any jurisdiction outside Hong Kong, or such other jurisdiction as the Bank may determine in its absolute discretion, where such distribution, publication or use would be contrary to applicable law or would subject the Bank and its related corporations, connected persons, associated persons and/or affiliates to any registration, licensing or other requirements within such jurisdiction.
© Copyright 2016 - OCBC Bank | All Rights Reserved.