Market Insights

Market Outlook

Stay updated with Market Outlook articles which consolidate key market indices and information each month. We hope you will find these insights and recommendations useful when deciding how best to manage your investment portfolio.

Stay Invested But Get Ready For Greater Volatility

 

Fundamentals support further upside for stock markets but with a slew of global headwinds in the coming months, investors need to be prepared for greater market volatility. In this section, we share some ways to invest and grow your wealth despite macro headwinds and the uncertainties ahead.

  • Unit Trust: CIMB-Principal Asia Pacific Dynamic Income Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors Only
    This fund invests in equities in the Asia Pacific ex-Japan region with the aim of providing regular income and capital appreciation over the medium to long term. Asia’s macroeconomic growth outlook remain strong with better policy management and higher commodity prices, improving the region’s appeal for foreign direct investment flows. The near-term momentum for equities in Asia ex-Japan remains positive as the region continues to catch up.
  • Unit Trust: CIMB-Principal Global Titans Fund (Risk rating: High)
    Eligibility: Retail and High Net Worth Investors
    Investors seeking exposure and investment opportunities in the developed markets, i.e US, Europe and Japan may consider this fund. This fund invests at least 50% of its NAV into 3 PGI Funds and 3 Schroder funds in the global titans market of the US, Europe and the Japan. This fund also has exposure to the Malaysian equities to balance any short term volatilities. The steadily recovering global economy especially in Europe and the US remains a healthy backdrop for equities.
  • Autocallable Equity-linked Structured Investment: Xiaomi Corp, Alibaba Group and Tencent Holdings. (Risk rating: High)
    Eligibility: High Net Worth Investors
    Investors looking for alternative sources of income aside from traditional asset class can consider this structured investment. Invests in one of 3 underlying stocks, Xiaomi Corp. Alibaba Group and Tencent Holdings. Potential yield of 7% - 8% p.a. with a structured tenure of 6 months.
  • Unit Trust: RHB Asian Income Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    This fund invests in one target fund, the Schroder Asian Income fund and is suitable for investors seeking income and capital growth over the medium- to long-term via an active allocation strategy. Exposure in Asia is opportunistic as we view Asia being in a relatively strong position with a high level of foreign reserves, limited external debt and improving growth potential which benefitted from structural reforms.

Top Investment Ideas are an expression of the investment outlook in this publication. They are not recommendations made in accordance with your investment objective and risk profile. As such, we recommend that you complete a suitability assessment before purchasing your selected investment product.



This document is not intended to constitute research analysis or recommendation and should not be treated as such.

We recommend that you read and understand the contents of the Prospectus Issue No. M3 for the CIMB-Principal Asia Pacific Dynamic Income Fund dated 31 May 2017 by CIMB-Principal Asset Management Berhad. Investments in the Fund are exposed to country risk, credit (default) risk and counterparty risk, currency risk, interest rate risk, liquidity risk, risk associated with temporary defensive positions, risk of investing in emerging markets, stock specific risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Prospectus Issue No. M2 for the CIMB-Principal Global Titans Fund dated 25 January 2017, by CIMB-Principal Asset Management Bhd. Investments in the Fund are exposed to counterparty risk, country risk, currency risk, fund manager’s risk, legal and taxation risk, manager’s risk, stock specific risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Prospectus for the Affin Hwang World Series - Global Balanced Fund dated 6 June 2017, by Affin Hwang Asset Management Berhad. Investments in the Fund are exposed to collective investment schemes risk, credit and default risk, interest rate risk, currency risk, liquidity risk, related parties transaction risk, country risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Master Prospectus for the RHB Asian Income Fund dated 6 October 2017, by RHB Asset Management Sdn Bhd. Investments in the Fund are exposed to management risk, liquidity risk, foreign investment risks such as currency risk and country risk and others as disclosed in the prospectus.

Product Risk Rating and Suitability Determination Matrix:

Product Risk Rating What this rating could mean to your principal amount Suitable for risk profiles:
Moderate Partial loss of full principal investment amount possible, total loss unlikely.
(‘Partial loss’ means the loss suffered by the investor can be up to 15% of the original investment principal)
  • Balanced
  • Growth
  • Aggressive
High Client may suffer substantial or 100% loss of principal investment amount.
(‘Substantial loss’ means the loss suffered by the investor can be more than 15% of the investment principal)
  • Growth
  • Aggressive


Unit Trust investments are not bank deposits and are not obligations of or guaranteed or insured by OCBC Bank (Malaysia) Berhad. Unit Trust investments are not guaranteed and are subject to investment risk unless otherwise specified. The investment risk includes general risks as described in the Information Memorandum/Prospectuses for Unit Trust investment funds (“Information Memorandum/Prospectuses”) and specific risks which may be different for each Unit Trust investment. Description of specific risks and general risks are published in the Information Memorandum/Prospectuses. With respect to Unit Trust investment, past performance is not indicative of future results; the net asset value can go up or down. Investors should also note that the net asset value per unit and distributions payable, if any, may go down as well as up.

Where unit trust loan financing is available, investors are advised to read and understand the contents of the unit trust loan financing risk disclosure statement before deciding to borrow to purchase units. Where a unit split/distribution is declared, investors are advised that following the issue of additional units/distribution, the NAV per unit will be reduced from pre-unit split NAV/cum-distribution NAV to post-unit split NAV/ex-distribution NAV; and where a unit split is declared, investors should be highlighted of the fact that the value of their investment in Malaysian ringgit will remain unchanged after the distribution of the additional units.

The Information Memorandum/Prospectuses have been registered with the Securities Commission Malaysia, which takes no responsibility for its content. A copy of the Information Memorandum/Prospectuses can be obtained at OCBC Bank’s branches. Units will only be issued upon the receipt of application form referred in, and accompanying the Information Memorandum/Prospectuses. Investors are advised to read and understand the contents of the Information Memorandum/Prospectuses, and if necessary consult their adviser(s), as well as consider the fees and charges involved before investing in the Unit Trust.

This document has been prepared without taking account of the objectives, financial situation or needs of any specific person or organisation who may receive this document. Accordingly prior to making an investment decision, you should conduct such investigation and analysis regarding the product described herein as you deem appropriate and to the extent you deem necessary obtain independent advice from competent legal, financial, tax, accounting and other professionals, to enable you to understand and recognise fully the legal, financial, tax and other risks arising in respect of the product and the purchase, holding and sale thereof.

You should obtain and read the Product Highlight Sheet of the product before you make a decision to acquire the product. All information provided in this document is general and does not take into account your individual objectives, financial situation or specific needs.

You are required to read and understand the terms and Product Highlight Sheet of the product carefully before executing any transaction relating to the product with us. You may request for a copy of the Product Highlight Sheet at OCBC Banks’ branches.

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question 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 a transaction or to participate in any particular trading or investment strategy.

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 statement 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.

OCBC Bank and its respective associated and connected corporations together with their respective directors and officers may have or take positions in any securities mentioned in this report (which positions may change from time to time without notice) and may also perform or seek to perform broking and other investment or securities related services for the corporations whose securities are mentioned in this report as well as other parties generally.

The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.




Lai Mun Yew (Michael)
  Vice President, Research, Wealth Management, OCBC Bank (Malaysia) Berhad

 

Global Outlook – Balance Sheets Are Peaking

 

After a decade of ever-expanding quantitative easing from central banks, September marks a peak and in October, the combined balance sheet of the US, Eurozone and Japan will start to shrink.

Key Points:

  • October sees the next stage of policy tightening in developed markets as central bank balance sheets start to contract.

    The Federal Reserve went into reverse with quantitative tightening (QT) to cut the size of its balance sheet. It has been gradually stepping up the pace and it will reach maximum velocity of US$50 billion shrinkage per month from October this year.

    The European Central Bank (ECB) will also cut back its monthly asset purchases from €30b to €15b, before halting altogether at the end of the year. Japan has been targeting bond yields rather than a specific volume of purchases for the past couple of years. Its QE looks set to run at a US$20-30b monthly pace; much slower than a few years ago.

    All these mark another rung down the long path of normalisation after the crisis of a decade ago, and so far, the process has not involved any serious disruption to major economies or financial markets.

  • United States
    Fiscal stimulus should support continued strong growth in the US into 2019. After eight rate hikes, monetary policy is gradually becoming less supportive, but is not set to edge into restrictive territory for about another year. Growth prospects look less certain in 2020, with the possibility of a meaningful drag from both fiscal and monetary policy.

    Wages are starting to show a more pronounced upward trend, as the tightest labour market in decades shift bargaining power towards workers. Record numbers are quitting in search of higher incomes. Firms are absorbing some of the increased wages on their profit margins, but the Federal Reserve will recognise that there is growing pressure to pass on higher costs to consumers. With core inflation already at its 2% target, the Fed is likely to continue to tighten through to the end of 2019, but it is a slow-moving change and the current pace of one hike per quarter looks sustainable.

    Even after the latest round of 10% tariffs on US$200b of imports from China, this scale of trade friction is not likely to have a material impact on the US$20 trillion US economy. However, escalation is still possible and complaints over the automobile sector remain unresolved. Trade policy is controlled by the President, so should be largely unaffected by the result of mid-term elections.
  • Europe
    Growth in Europe has cooled from the unusually rapid pace seen in late 2017. However, it is still strong enough to continue to pull down the unemployment rate, which has reached levels where it is starting to boost wages. So far, consumer price inflation has not seen much impact, but the ECB seems confident that it will pick up as the cycle continues to mature.

    Brexit negotiations remain fractious, both inside the UK and with the European Union. The political bargaining process is due to intensify in coming months, with compromises needed to produce a rough framework agreement that will open the way for a more detailed deal after the March 2019 deadline.
  • Japan
    The economic recovery in Japan remains solid and is driving record levels of corporate profitability. However, the prospect of further structural reform looks limited. Even though Prime Minister Shinzō Abe is set to remain in office for another three years, his focus seems to have shifted away from economic issues.
  • China
    US tariffs are now hitting US$250b of Chinese exports, with the threat of more to come. Restricted access to Western technology will be a further impediment to growth, albeit one that is hard to quantify. To offset the hit to the economy, China is loosening policy with tax cuts, easier access to credit and increases in infrastructure spending, which should limit any slowdown in growth.

    Exports are only around one-fifth of the overall economy, so stimulating domestic demand should offer some balance. It is likely to come at the cost of further increasing the debt-to-GDP ratio, but this is a longer-term concern that is secondary to the short-term imperative of maintaining an adequate pace of growth.
  • Emerging markets
    Rising US interest rates present a challenge for emerging markets where an external deficit results in significant funding needs. Fortunately, this only applies to a small number of countries, led by Argentina and Turkey which have already started to implement policies to rebalance their economies.

    Asia looks relatively well-placed to withstand the pressure from higher US interest rates, as most countries run an external surplus. As the two main deficit economies, Indonesia and India face some strains, but policy is already responding prudently. US tariffs on Chinese exports are a risk, as a lot of the region’s exports to China are ultimately dependent on US demand, but this is offset by the possibility of taking market share from China when selling directly to the US.

    In Asia, general fiscal positions are solid, inflation is under control and imbalances are limited. These mean that most of the economies in the region have enough policy flexibility to respond to external pressures and to limit the overall impact on growth.



 

Foreign Exchange & Commodities – Oil Prices Up On Supply Fears

 

Fearing rising oil prices? We don’t think there’s much to worry about. OPEC is working to stabilize prices by increasing output, and US shale producers are likely to restart production following the attractive prices. This will eventually stabilize prices closer to our target.

Key Points:

  • Oil
    Supply concerns due to sanctions on reduced fears of a big hit to oil demand due to trade tensions caused prices to move towards the top end of the recent range (US$65 and US$75 per barrel in the case of WTI).

    The prospect for further price rises seems to be limited. These are the sort of levels that should start to spur a response by U.S. shale producers, while OPEC will also be under pressure to prevent an overshoot.
  • Gold
    Despite rising trade war risk and negative EM sentiment, gold has struggled as a safe-haven amid the backdrop of a stronger US Dollar and US equity market resilience. With gold prices having already declined as we expected, our outlook for a mild rebound in gold price to US$1,240 per ounce in 12 months’ time is premised mainly on the fact that the extremely short market positioning of gold is vulnerable to unwind in the event EM sentiment improves or the US Dollar weakens anew.
  • Currency outlook
    We continue to see evolving global risk-sentiment as a driver of currency markets in October. Higher US Treasury yields are another driver. At this juncture, these global and US-centric cues may pull the Dollar in opposite directions, leaving us with a lack of significant traction in terms of broad dollar directionality.

    We have seen a sustained improvement in overall risk-sentiment since mid-September, and the successful completion of the United States-Mexico-Canada Agreement (USMCA), may add another layer of positivity. This has dented demand for safe-haven currencies, including the US Dollar and Yen, leaving the cyclical currencies relatively resilient. Nevertheless, during this period, Sino-US trade tensions and political uncertainty in the UK and US remain, with no imminent end in sight. Therefore, a sustained buoyancy in risk-sentiment is questionable. With risk-sentiment looking exceptionally shifty in Q32018, we urge caution in excessively chasing risk-on trades in the currency space.

    Elsewhere, 10-year US Treasury yields hovering above the 3% handle, and re-widening yield differentials between the US and other G10 economies, lends implicit support to the US dollar. Nevertheless, apart from the USD-JPY, there has been limited positive traction for Dollar due to yield differentials for now. However, market attention could re-focus on this and re-establish the positive relationship between yield differentials and the broad dollar.

    In Europe, the Italian budget situation will continue to weigh on the Euro, while the Pound gyrates on Brexit-related headlines as we remain no clearer on the divorce terms. Meanwhile, the Canadian Dollar may bask in the afterglow of the USMCA conclusion.

    In Asia, currencies have benefited from the easing of worries over the EM space and consequent improved risk-sentiment. Nevertheless, we think the impact of these rosy conditions on Asia currencies may be increasingly diffused. Going forward, higher US Treasury yields and crude prices may start to filter though and add negative pressure.



 

Bonds – Prefer EM over DM HY bonds

 

With credit spreads still tight, consider moving into the safer parts of the credit spectrum and focus on shorter maturities. After recent price declines, we believe that EM corporate bonds are attractive again.

Key Points:

  • Along with less bearish investor sentiment, there appears to be some stabilisation in the Emerging Market (EM) universe. The problems in EM do not look systemic. The economic imbalances are not widespread and limited to the likes of Argentina and Turkey.

    Growth across EM economies appears solid and, from a bottom up basis, corporate balance sheets have demonstrated improvement over the past several quarters with default rates still below historical averages.

    In recent months, spreads for EM high yield bond have widened considerably but spreads for Developed Market (DM) high yield bonds continued to trade at very tight levels. On a relative valuation basis, we have a strong preference for EM over DM high yield bonds. As a result, from a tactical asset allocation perspective, we are turning underweight on DM high yield bonds from a neutral position.
  • EM high yield bonds did well in September
    EM bonds notched a solid gain in a non-eventful month in September which was probably a relief to fixed income investors weighed down by a seeming tidal wave of political headline news throughout the year. The JPM EM CEMBI Broad index rose almost 0.8% , the second positive result in the past three months with high yield bonds up a strong 2%and investment grade bonds down 0.1%.
  • Positive outlook for EM bonds
    We consider September a fair representation of how we expect EM corporate bonds to play out over the coming months. The asset class is supported by the tailwinds of adequate economic growth, company-specific operational performance that has afforded balance sheet reduction over the past several quarters and more compelling valuations. However, this is balanced by the headwind of rising rates with the net result of the two forces a modest positive gain for EM corporate bonds, with the less interest rate sensitive high yield bonds outperforming investment grade bonds. Absent further political histrionics and volatility, we would expect this trend to play out for the remainder of 2018.

    Within the bond segments, we are most positive on EM high yield bonds. In terms of the region, Asia is sour favourite region driven partly by China. Amidst slowing economic growth exacerbated by rising trade tensions, China has started to reflate domestic demand via monetary and fiscal measures. China is also largely insulated from the political headline noise that has embroiled much of EM during 2018.
  • The quest for carry with EM bonds
    We believe one of the best carry opportunities can be found in the Emerging bond universe. Fears of EM contagion from Turkey and Argentina appear to be overdone. This presents an opportunity for investors looking to find solid EM bonds with good carry. Economic and corporate fundamentals in EM are healthy. With the price correction in recent months, we believe that valuations for EM high yield bonds appear compelling. With Dollar strength waning and the US10-year Treasury bond yields entering a range of 3.0 to 3.3%, adding EM high yield bonds into one’s portfolio for carry is a good strategy.



 

Equities – Japan Upgraded To Neutral

 

Recovery in Japanese equities in September and the subsequent improvement in fundamentals suggest that the country may finish the year healthier. However, while neutral on Japan, we still want to see more meaningful reforms in the country.

Key Points:

  • Global equities held up relatively well in September. Trade war concerns continued to hog the headlines with Trump imposing a 10% tariffs on US$200b of China exports effective from 24 September 2018. China responded immediately with new tariffs of 5% to 10% on US$60b of US goods. Nevertheless, with investors anticipating as much as a 25% tariff from the US on Chinese goods, global equities reacted positively. Also, the non-proportional retaliation by China seems to have helped US equities march to new all-time high levels.

    While the full impact of China’s highly targeted stimulus measures would take time to kick-in, overall credit growth has shown early indication of stabilisation. Also, we see room for further stimulus and easing if necessary. The full impact of the unwinding on risk assets remains to be seen but EM valuations are now at more neutral levels following the sharp sell-off since the highs in January. Meanwhile, the Fed’s policy normalisation should continue but at a steady pace. Overall, with a backdrop of rising interest rates, we do not expect valuation multiples for global equities to retest the recent highs. As such, earnings growth expectations remain the key driver. Consensus 2019 EPS growth has remained at 9.5%. Besides the escalating trade war, the full impact of the unwinding on risk assets remains a key risk.
  • United States
    US equities continued to brush aside the deteriorating US-China trade war and domestic political backdrop to breach new highs in September. Healthcare and Energy led the market. Consensus 2018 and 2019 EPS forecasts remained largely unchanged (with 2019 EPS growth forecast at 10.6 %). Given the 10% year-to-date performance for US equities, investors would be looking for additional drivers to take the growth outlook and market further forward. Not surprisingly, valuations for the US remain the most demanding across the regions we track. We maintain a Neutral stance here.
  • Eurozone
    Marred by lingering Brexit and Italian budgetary concerns, European equities had another volatile month. Signalling that the central bank is well on track to raise interest rates later next year, ECB’s Mario Draghi said he sees a "relatively vigorous" pickup in underlying euro-area inflation. This is despite the slightly weaker than expected Euro area composite PMI of 54.2 in September, versus consensus estimate of 54.5. Through September, consensus 2019 EPS growth forecast has been largely unchanged at 9.7 per cent. Overall, the region’s ongoing economic recovery remains intact, and we maintain our Neutral stance. Besides concerns about a trade war and its impact on the growth outlook, political events remain a key risk here.
  • Japan
    Following months of selling pressure, Japanese equities outperformed in September. PM Abe’s re-election as LDP party president is seen as a boost to Japan’s leadership stability. Positive domestic growth data points and Bank of Japan’s reiteration of easy monetary policy stance also helped. We see several near-term factors, such as continued gradual improvements in the earnings outlook, providing support - although a more sustained re-rating of the market would require more meaningful structural reform. Also, valuations remain depressed. We have upgraded Japan to Neutral.
  • Asia ex-Japan
    Now is the time to diversify into Asian equities. As global economic data has stabilised recently, investors seem less concerned about rising trade tensions. Nevertheless, trade issues remain a serious risk and bear close watching.

    Ironically, Asian equities have been hurt much more by trade worries over the past few months than have US equities. Much of this divergence – US outperforming and Asia underperforming – is a result of the corresponding climb in the US Dollar, which made US stocks appear like a safer haven asset. As the US Dollar rally is losing steam, the fall in Asian stock prices has probably been excessive and seems to reflect worse-than-expected economic and fundamental conditions. Asian equities valuation at this juncture looks attractive. Furthermore, China’s recent policy easing – looser credit, lower taxes, more infrastructure spending and weaker CNY - will provide an economic boost for Asia.
  • Singapore
    The MSCI Singapore Index is trading at a 12.3 times forward PER, this is lower than the minus one standard deviation (SD) level based on the historical 10-year average. The last two periods when the index slipped below minus one standard deviation were during the Global Financial Crisis and the RMB devaluation in early 2016. While the economic outlook is unclear, we believe value is starting to emerge and it is a good time to selectively buy into quality stocks for medium to longer term recovery, especially blue chips with good dividend yields of more than 4%.



 

Important Information

 

Any opinions or views expressed in this material are those of the author and third parties identified, and not those of OCBC Bank (Malaysia) Berhad (“OCBC Bank”, which expression shall include OCBC Bank’s related companies or affiliates).

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question 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 a 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.

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.




 


Be Prepared For More Volatility

 

We have turned more positive on Asian equities after they corrected sharply in recent months. This is not to suggest that investors should concentrate their investments in Asia. For prudence, we continue to advocate diversification across asset classes and regions to reduce investment risk. In this section, we share some ways to invest and growth your wealth despite macro headwinds and the uncertainties ahead.

  • Unit Trust: CIMB-Principal Asia Pacific Dynamic Income Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors Only
    This fund invests in equities in the Asia Pacific ex-Japan region with the aim of providing regular income and capital appreciation over the medium to long term. Asia’s macroeconomic growth outlook remain strong with better policy management and higher commodity prices, improving the region’s appeal for foreign direct investment flows. The near-term momentum for equities in Asia ex-Japan remains positive as the region continues to catch up.
  • Unit Trust: CIMB-Principal Global Titans Fund (Risk rating: High)
    Eligibility: Retail and High Net Worth Investors
    Investors seeking exposure and investment opportunities in the developed markets, i.e US, Europe and Japan may consider this fund. This fund invests at least 50% of its NAV into 3 PGI Funds and 3 Schroder funds in the global titans market of the US, Europe and the Japan. This fund also has exposure to the Malaysian equities to balance any short term volatilities. The steadily recovering global economy especially in Europe and the US remains a healthy backdrop for equities.
  • Unit Trust: Affin Hwang World Series – Global Balanced Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    Investors seeking capital growth opportunities through a portfolio of collective investment schemes with access into equities listed in global markets, fixed income instruments such as debt securities, money market instruments and fixed deposits, issued globally may consider this fund.
  • Unit Trust: RHB Asian Income Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    This fund invests in one target fund, the Schroder Asian Income fund and is suitable for investors seeking income and capital growth over the medium- to long-term via an active allocation strategy. Exposure in Asia is opportunistic as we view Asia being in a relatively strong position with a high level of foreign reserves, limited external debt and improving growth potential which benefitted from structural reforms.

Top Investment Ideas are an expression of the investment outlook in this publication. They are not recommendations made in accordance with your investment objective and risk profile. As such, we recommend that you complete a suitability assessment before purchasing your selected investment product.



This document is not intended to constitute research analysis or recommendation and should not be treated as such.

We recommend that you read and understand the contents of the Prospectus Issue No. M3 for the CIMB-Principal Asia Pacific Dynamic Income Fund dated 31 May 2017 by CIMB-Principal Asset Management Berhad. Investments in the Fund are exposed to country risk, credit (default) risk and counterparty risk, currency risk, interest rate risk, liquidity risk, risk associated with temporary defensive positions, risk of investing in emerging markets, stock specific risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Prospectus Issue No. M2 for the CIMB-Principal Global Titans Fund dated 25 January 2017, by CIMB-Principal Asset Management Bhd. Investments in the Fund are exposed to counterparty risk, country risk, currency risk, fund manager’s risk, legal and taxation risk, manager’s risk, stock specific risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Prospectus for the Affin Hwang World Series - Global Balanced Fund dated 6 June 2017, by Affin Hwang Asset Management Berhad. Investments in the Fund are exposed to collective investment schemes risk, credit and default risk, interest rate risk, currency risk, liquidity risk, related parties transaction risk, country risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Master Prospectus for the RHB Asian Income Fund dated 6 October 2017, by RHB Asset Management Sdn Bhd. Investments in the Fund are exposed to management risk, liquidity risk, foreign investment risks such as currency risk and country risk and others as disclosed in the prospectus.

Product Risk Rating and Suitability Determination Matrix:

Product Risk Rating What this rating could mean to your principal amount Suitable for risk profiles:
Moderate Partial loss of full principal investment amount possible, total loss unlikely.
(‘Partial loss’ means the loss suffered by the investor can be up to 15% of the original investment principal)
  • Balanced
  • Growth
  • Aggressive
High Client may suffer substantial or 100% loss of principal investment amount.
(‘Substantial loss’ means the loss suffered by the investor can be more than 15% of the investment principal)
  • Growth
  • Aggressive


Unit Trust investments are not bank deposits and are not obligations of or guaranteed or insured by OCBC Bank (Malaysia) Berhad. Unit Trust investments are not guaranteed and are subject to investment risk unless otherwise specified. The investment risk includes general risks as described in the Information Memorandum/Prospectuses for Unit Trust investment funds (“Information Memorandum/Prospectuses”) and specific risks which may be different for each Unit Trust investment. Description of specific risks and general risks are published in the Information Memorandum/Prospectuses. With respect to Unit Trust investment, past performance is not indicative of future results; the net asset value can go up or down. Investors should also note that the net asset value per unit and distributions payable, if any, may go down as well as up.

Where unit trust loan financing is available, investors are advised to read and understand the contents of the unit trust loan financing risk disclosure statement before deciding to borrow to purchase units. Where a unit split/distribution is declared, investors are advised that following the issue of additional units/distribution, the NAV per unit will be reduced from pre-unit split NAV/cum-distribution NAV to post-unit split NAV/ex-distribution NAV; and where a unit split is declared, investors should be highlighted of the fact that the value of their investment in Malaysian ringgit will remain unchanged after the distribution of the additional units.

The Information Memorandum/Prospectuses have been registered with the Securities Commission Malaysia, which takes no responsibility for its content. A copy of the Information Memorandum/Prospectuses can be obtained at OCBC Bank’s branches. Units will only be issued upon the receipt of application form referred in, and accompanying the Information Memorandum/Prospectuses. Investors are advised to read and understand the contents of the Information Memorandum/Prospectuses, and if necessary consult their adviser(s), as well as consider the fees and charges involved before investing in the Unit Trust.

This document has been prepared without taking account of the objectives, financial situation or needs of any specific person or organisation who may receive this document. Accordingly prior to making an investment decision, you should conduct such investigation and analysis regarding the product described herein as you deem appropriate and to the extent you deem necessary obtain independent advice from competent legal, financial, tax, accounting and other professionals, to enable you to understand and recognise fully the legal, financial, tax and other risks arising in respect of the product and the purchase, holding and sale thereof.

You should obtain and read the Product Highlight Sheet of the product before you make a decision to acquire the product. All information provided in this document is general and does not take into account your individual objectives, financial situation or specific needs.

You are required to read and understand the terms and Product Highlight Sheet of the product carefully before executing any transaction relating to the product with us. You may request for a copy of the Product Highlight Sheet at OCBC Banks’ branches.

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question 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 a transaction or to participate in any particular trading or investment strategy.

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 statement 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.

OCBC Bank and its respective associated and connected corporations together with their respective directors and officers may have or take positions in any securities mentioned in this report (which positions may change from time to time without notice) and may also perform or seek to perform broking and other investment or securities related services for the corporations whose securities are mentioned in this report as well as other parties generally.

The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.




Lai Mun Yew (Michael)
  Vice President, Research, Wealth Management, OCBC Bank (Malaysia) Berhad

 

Global Outlook – Solid Growth

 

Risk are easy to find but they do not seem likely to de-rail the world economy, which still looks healthy and remains supported by loose policy settings.

Key Points:

  • Growth remains healthy in most major economic centres. Stress in some emerging markets is real, but these are too small to have much impact on developed market growth. Simulative policy settings and the lack of structural imbalances point to low risk of a serious growth slowdown over the coming 12-18 months.

    Of course, there are always uncertainties such as rising US interest rates, trade friction and the Italian budget, and arguably these risks and other random events that invariably occur have the potential to cause disruption. However, they do not seem likely to de-rail the positive global cycle over the next 12 to 18 months.

  • United States
    The US economy stands out for its continued strong performance in 1H 2018, with growth of 2.7% compared to a year earlier. The combination of loose monetary and fiscal policy remains supportive and will help to sustain above-trend growth for at least another year. There are some question marks over 2020, once interest rates start to bite and with the possibility that fiscal policy becomes a drag on growth, but that is still too far away to have much clarity.

    Disruption in some emerging markets is unlikely to have any material impact on the US economy. Similarly, the risk of tariffs seriously damaging trade with NAFTA or Europe appears to have diminished, leaving the focus on China. About 20% of U.S. imports are from China, but this is only about 3% of GDP, so the impact of continued escalation will be uncomfortable for some sectors, but the overall damage should be limited.
  • Europe
    Growth indicators from Europe remain healthy, although softer than the unusually rapid pace of 2017. Business and consumer sentiment readings have moderated but are still at strong levels and point to a solid pace of expansion.

    Political uncertainty continues in Italy, where the next budget – with details expected in September – will show whether the government intends to abandon the fiscal austerity that has stabilised public finances in recent years. This would risk bringing it into conflict with the European Union and could bring renewed stress to the region’s bond markets. Pursuing such a policy shift just as the European Central Bank (ECB) begins to tighten policy looks particularly problematic.

    Brexit is another risk, although a more isolated one. The initial plan of reaching a deal with the European Union (EU) at the October summit looks highly unlikely. EU negotiations often involve a rush for a last-minute compromise, which could be stressful for financial markets. Even now, finding a solution that satisfies factions in the ruling Conservative party, the overall UK parliament and the EU looks extremely difficult
  • Japan
    There is the promise of policy continuity in Japan, with Prime Minister Abe set to remain in place until after the 2020 Olympics. However, economic reform has lost momentum and the recent labour market reform bill – which was far from radical – might be the last major piece of legislation.
  • China
    As the main target of U.S. trade barriers, China is proactively loosening policy to try to balance any hit to growth. Authorities are already taking steps to ease access to credit, lower borrowing costs and loosen fiscal policy. This short-term stimulus has been effective in the past and this time around it should limit downside risks. However, it will have the unfortunate consequence of undermining efforts to control the credit bubble – which have been gaining some traction over the past 18 months – but recent years have made it clear that maintaining an adequate pace of growth in the short term will take priority over the aim of securing longer-term stability.

    So far, the slower growth in 2018 seems to reflect tighter credit conditions that were part of the squeeze on excessive borrowing, rather than anticipation of US tariffs. However, barriers to US$250b of exports (about 2% of Chinese GDP) and impaired access to US technology is likely to hurt growth over the coming year.
  • Emerging markets
    Rising US interest rates present a challenge for emerging markets where an external deficit results in significant funding needs. Fortunately, this only applies to a small number of countries, led by Argentina and Turkey. The scale is not large enough to be systemic, especially as several have improved economic policy making after pressure from the “taper tantrum” of 2013. It is reasonable for fast-growing emerging markets to run a moderate current account deficit, as they offer the prospect of a better return on investment, so can import capital.

    Asia looks relatively well-placed to withstand the pressure on emerging markets from higher US interest rates, as most countries run an external surplus. Even Indonesia has been proactively raising interest rates to try to avoid any contagion from Turkey. US tariffs on Chinese exports are more of a risk, as a lot of the region’s exports to China are ultimately dependent on US demand. Most of the economies in the region have enough policy flexibility to respond to external pressures and to limit any overall impact on growth.



 

Foreign Exchange & Commodities – Positive US Dollar Drivers

 

While long-term USD prospects look dimmer, short-term demand as a safe haven currency should lend some support amid upcoming global uncertainties.

Key Points:

  • Oil
    Oil prices are starting to trade in a relatively narrow range of between US$65 and US$75 per barrel in the case of WTI. Prices can temporarily push higher on geopolitical uncertainties, but the upside is constrained by the threat of a supply response from US shale producers. Conversely, the downside – perhaps in response to trade friction – is limited by the surprising discipline of OPEC. Current prices do not have particularly significant implications for the global economy and even the impact on inflation will fade in coming months due to the base effect.
  • Gold
    After breaking below the important psychological US$1,200 per ounce level in mid-August, gold has rebounded. There may be room for further rebound in gold price as short positioning in gold futures appears stretched and could capitulate if US Dollar strength loses momentum. It still makes sense to expect slower US growth in a year’s time as fiscal stimulus wears out and as Fed rate hikes restrain growth. The US Dollar could weaken back to the benefit of gold. The 12-month gold forecast of US$1,250 per ounce expresses this view.
  • Currency outlook
    We think that the US Dollar (USD) may continue to find support from upcoming global developments which could affect risk appetite negatively. Despite progress in talks between the US and its European and North American trading partners, the main concern is still the Sino-US trade relationship. Although talks were held, progress has been very limited. As the US is thought to be better positioned in the near term for a trade war, expect continued worsening of the Sino-US trade tensions to broadly favour the USD as a safe-haven currency. Periodic deleveraging and de-risking from Emerging Markets (EM) will also be supportive of G7 currencies, especially the USD.

    On the flipside, a potentially USD negative risk event could be the legal issues of Trump’s previous associates, Paul Manafort and Michael Cohen, which may eventually implicate the President Trump himself. Going forward, if the political situation in the US degenerates ahead of mid-term elections in November, we expect the USD to be negatively pressured.

    In Asia, all eyes will be on the Chinese renminbi (RMB) which will be a key driver of the region’s currencies. While the RMB has stabilised after currency measures from the PBOC, it has not seen the turnaround that many has expected. We do not expect Asian currencies to be sold off like the Turkish Lira and Argentinian Peso as Asian economies generally have much better fundamentals. Nevertheless, we expect that Asian currencies with current account deficits, like the Indian Rupee and the Indonesian Rupiah to be more badly affected than their peers.

    Elsewhere, we remain negative on the Australian and New Zealand currencies due to their cyclical nature and exposure to Asia. As for the Yen and Swiss Franc, they may benefit in the near term if news headlines about EM and Sino-US trade continue to be negative.



 

Bonds – Positive EM High Yield Bonds

 

History shows the best periods to buy EM bonds are often when prices decline to levels that reflect excessive pessimism relative to fundamentals.

Key Points:

  • In the fixed income space, we are forecasting that the10-year US Treasury Yield will rise gradually. So, at current levels we continue to be cautious of duration risk.

    We favour Emerging Market (EM) High Yield bonds, and see the combination of attractive valuations, healthy bottom-up fundamentals, and adequate economic growth outweighing EM headwinds over the longer term.

    EM corporate balance sheets have generally improved over the last few quarters with default rates still expected to be below historical averages.

    While a strong US Dollar could remain as a headwind over the near-term, particularly with unabated trade tensions, current account positions across the EM universe have generally strengthened since the taper tantrum in 2013, and EM currency valuations are also broadly in line with their fundamentals.
  • Outlook for interest rates
    The Federal Reserve seems content to continue with a gradual pace of rate hikes if inflation remains subdued. After several years of undershooting its 2% target, a moderate overshoot is unlikely to trigger a strong reaction from the Fed. By mid-2019, even with the federal funds rate at 3%, it is likely that inflation is higher and unemployment lower than they are today, so the Fed will need to keep hiking until policy starts to bite. We see six more hikes by the end of 2019 – there has never been a tightening cycle where the Fed stopped at its neutral rate. As for US bond yields, we see the 10-year Treasury yield rising gradually to 3.4% in the next 12 months.

    In Eurozone, even though inflation remains subdued, the ECB seems comfortable with its plan to finish asset purchases by the end of 2018 and raise interest rates in 3Q 2019. Following the Fed’s playbook, policy tightening will be gradual, although the ECB is institutionally perhaps more hawkish than the Fed.

    In Japan, the BOJ continues to pursue its target of 2% inflation. Prices have certainly stopped falling after the radical policy shift implemented by Governor Kuroda, but upward momentum is limited. The BOJ continues to push out the timing of any possible tightening but struggles to find a way to hasten reaching their goal.
  • Expect better performance from EM corporate bonds segment
    We expect overall better performance going forward and view the lacklustre August performance as more of a bump in the road. The longer-term contagion from Turkey should also be limited. Top down economic growth remains adequate, and company-specific operational performance appears strong enough to continue the delivering trend of the past several years. Defaults also remain low by historical standards. Meanwhile, the recent pull-back in spreads makes valuations much more compelling.
  • Overweight on EM High Yield bonds
    After recent price declines, we believe that the risk-reward in EM corporate bonds is compelling again. More attractive valuations on a historical basis for EM High Yield bonds and vis-à-vis EM Investment Grade and US High Yield bonds, low levels of stressed bonds and historically modest default levels underpin our recommendation.



 

Equities – Positive Asia

 

Valuations are attractive following the recent sell-off in Asian equities. We are now overweight Asia from a portfolio perspective, as the risk-reward environment has turned positive.

Key Points:

  • We have turned more positive on Asia after the MSCI Asia ex-Japan Index declined 14% from its peak in late January 2018, and given the stark divergence in performance between US equities and those in Asia. The Chinese authorities are also showing willingness to undertake measures to cushion the economy and stabilise the renminbi, which augurs well for Asia.

    Because of our upgrade of Asian equities, we now have an overweight position on equities. Geographically, we now have an overweight position in China, neutral weight positions in US and Europe, and an underweight position in Japan.

    Given healthy economic and earnings growth, we believe there are reasons to be generally constructive on equities today even as interest rates rise. However, with a backdrop of rising interest rates, we do not expect valuation multiples for global equities to retest the recent highs. As such, earnings growth expectations remain the key driver. Consensus 2019 EPS growth has remained at 9.5%.
  • United States
    Benefiting from the earnings beat, positive guidance, and accelerating investment activity, US equities breached new highs despite rising geopolitical and trade war risks. Legal drama at the White House seems to have limited impact so far. Buybacks have been a major boost. However, notwithstanding the positive results and guidance, consensus 2018 and 2019 EPS forecasts remained largely unchanged (with 2019 EPS growth forecasted at 10.6%). This suggests that expectations are already high and additional drivers are needed to take the growth outlook and market further forward. Valuations for the US remain most demanding across the regions we track. We maintain a neutral stance here.
  • Eurozone
    Impacted largely by the developments in Turkey, European equities had a tough month in August. The Lira’s dramatic fall triggered concerns about the exposure of European companies. Lenders from Spain, France and Italy particularly were seen to be vulnerable. The mixed 2Q results season did not help. Consensus EPS forecasts have been largely unchanged for the month with the market looking for a 9.7% 2019 earnings per share growth. Growth outlook has moderated in recent months, but the region’s ongoing economic recovery remains intact. However, concerns over impact of a trade war on growth outlook linger. Political events continue to be a risk for the region.
  • Japan
    Despite the positive earnings season, Japanese equities lagged again in August. The recent pace of ETF purchases is seen to be unsustainable and Bank of Japan’s (BOJ) new market dependent policy has been widely interpreted as slower buying. According to Bloomberg, BOJ already hold stakes of more than 10% in 27 listed companies. Given concerns with earnings impact from the trade spat and a potentially stronger Yen, consensus FY2019 EPS growth remains largely unchanged despite the latest earnings beat. Valuations are now relatively depressed versus developed market peers. Therefore, any improvement in the earnings growth outlook could provide a fillip. However, we maintain the view that a sustained re-rating of the market would require more meaningful structural reform to boost overall growth.
  • Asia ex-Japan
    While developments in Turkey did not help emerging market risk appetite, Asia ex-Japan equities have started to stabilise in August. China was the biggest loser and the Philippines and Thailand did relatively well. The earnings season started poorly but consensus EPS cuts have started to stabilise. China’s more proactive loosening in recent weeks has started to stem the growth deceleration. Authorities have taken steps to ease access to credit, lower borrowing costs and loosen fiscal policy. Meanwhile, valuations have moderated back to more neutral levels following the recent sell-off. Overall, financial conditions for the region seem to be stabilising. We are raising the region from neutral to positive. The impending end of the unprecedented quantitative easing and trade war between the US and China remain the key risks for the region.
  • Singapore
    Looking ahead, the market is still going to focus on the trade situation and that could impact near to medium term market sentiment. Re-focusing on fundamentals, purchasing manager’s index for developed nations and corporate earnings trends are generally positive. Recent market correction has brought valuations to more attractive levels. In the last decade, the Straits Times Index (STI) traded below -1 standard deviation (SD) price-to-book (PB) only twice. These were during the 2008/2009 Global Financial Crisis and the 2016 renminbi devaluation periods. The Singapore market is currently trading at -1SD PB or a PB of about 1 times. With estimated dividend yield of 4.2%, we believe that the current correction is an opportune time to slowly collect quality stocks.



 

Important Information

 

Any opinions or views expressed in this material are those of the author and third parties identified, and not those of OCBC Bank (Malaysia) Berhad (“OCBC Bank”, which expression shall include OCBC Bank’s related companies or affiliates).

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question 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 a transaction or to participate in any particular trading or investment strategy.

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The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.




 


Investing In Uncertain Times

 

Expect more volatility in the coming months given a confluence of factors - escalating trade tensions, rising interest rates, prospects for a further slowdown in China and geopolitical concerns in Europe. In this section, we share some ways to invest and grow your wealth despite these macro headwinds and the uncertainties ahead.

  • Unit Trust: RHB Global Macro Opportunities Fund (Risk rating: High)
    Eligibility: High Net Worth Investors Only
    This fund invests in a target fund, the JPMorgan Investment Funds – Global Macro Opportunities fund and is suitable for investors seeking to benefit from enhanced diversification and sophisticated multi-dimensional risk management. This fund capitalises on global macroeconomic trends to drive returns by employing a dynamic multi-asset approach and aims to achieve capital appreciation in excess of its cash benchmark by investing primarily in securities globally, using financial derivative instruments where appropriate. This fund also targets to deliver potentially positive returns in varying market environments with expected volatility of 6-10% over the medium-term.
  • Unit Trust: CIMB-Principal Global Titans Fund (Risk rating: High)
    Eligibility: Retail and High Net Worth Investors
    Investors seeking exposure and investment opportunities in the developed markets, i.e US, Europe and Japan may consider this fund. This fund invests at least 50% of its NAV into 3 PGI Funds and 3 Schroder funds in the global titans market of the US, Europe and the Japan. This fund also has exposure to the Malaysian equities to balance any short term volatilities. The steadily recovering global economy especially in Europe and the US remains a healthy backdrop for equities.
  • Unit Trust: Affin Hwang World Series – Global Balanced Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    Investors seeking capital growth opportunities through a portfolio of collective investment schemes with access into equities listed in global markets, fixed income instruments such as debt securities, money market instruments and fixed deposits, issued globally may consider this fund.
  • Unit Trust: RHB Asian Income Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    This fund invests in one target fund, the Schroder Asian Income fund and is suitable for investors seeking income and capital growth over the medium- to long-term via an active allocation strategy. Exposure in Asia is opportunistic as we view Asia being in a relatively strong position with a high level of foreign reserves, limited external debt and improving growth potential which benefitted from structural reforms.

Top Investment Ideas are an expression of the investment outlook in this publication. They are not recommendations made in accordance with your investment objective and risk profile. As such, we recommend that you complete a suitability assessment before purchasing your selected investment product.



This document is not intended to constitute research analysis or recommendation and should not be treated as such.

We recommend that you read and understand the content of the Information Memorandum for RHB Global Macro Opportunities Fund dated 1 June 2016 by RHB Asset Management Sdn Bhd. Investments in the Fund are exposed to country risk, equity risk, currency risk, management risk, emerging market risk and others as disclosed in the Information Memorandum. This fund is eligible to be purchased by High Net Worth Individuals only, the criteria of High Net Worth Individuals as per stated in Schedules 6 and 7 of Capital Market and Services Act (CMSA) 2007.

We recommend that you read and understand the contents of the Prospectus Issue No. M2 for the CIMB-Principal Global Titans Fund dated 25 January 2017, by CIMB-Principal Asset Management Bhd. Investments in the Fund are exposed to counterparty risk, country risk, currency risk, fund manager’s risk, legal and taxation risk, manager’s risk, stock specific risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Prospectus for the Affin Hwang World Series - Global Balanced Fund dated 6 June 2017, by Affin Hwang Asset Management Berhad. Investments in the Fund are exposed to collective investment schemes risk, credit and default risk, interest rate risk, currency risk, liquidity risk, related parties transaction risk, country risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Master Prospectus for the RHB Asian Income Fund dated 6 October 2017, by RHB Asset Management Sdn Bhd. Investments in the Fund are exposed to management risk, liquidity risk, foreign investment risks such as currency risk and country risk and others as disclosed in the prospectus.

Product Risk Rating and Suitability Determination Matrix:

Product Risk Rating What this rating could mean to your principal amount Suitable for risk profiles:
Moderate Partial loss of full principal investment amount possible, total loss unlikely.
(‘Partial loss’ means the loss suffered by the investor can be up to 15% of the original investment principal)
  • Balanced
  • Growth
  • Aggressive
High Client may suffer substantial or 100% loss of principal investment amount.
(‘Substantial loss’ means the loss suffered by the investor can be more than 15% of the investment principal)
  • Growth
  • Aggressive


Unit Trust investments are not bank deposits and are not obligations of or guaranteed or insured by OCBC Bank (Malaysia) Berhad. Unit Trust investments are not guaranteed and are subject to investment risk unless otherwise specified. The investment risk includes general risks as described in the Information Memorandum/Prospectuses for Unit Trust investment funds (“Information Memorandum/Prospectuses”) and specific risks which may be different for each Unit Trust investment. Description of specific risks and general risks are published in the Information Memorandum/Prospectuses. With respect to Unit Trust investment, past performance is not indicative of future results; the net asset value can go up or down. Investors should also note that the net asset value per unit and distributions payable, if any, may go down as well as up.

Where unit trust loan financing is available, investors are advised to read and understand the contents of the unit trust loan financing risk disclosure statement before deciding to borrow to purchase units. Where a unit split/distribution is declared, investors are advised that following the issue of additional units/distribution, the NAV per unit will be reduced from pre-unit split NAV/cum-distribution NAV to post-unit split NAV/ex-distribution NAV; and where a unit split is declared, investors should be highlighted of the fact that the value of their investment in Malaysian ringgit will remain unchanged after the distribution of the additional units.

The Information Memorandum/Prospectuses have been registered with the Securities Commission Malaysia, which takes no responsibility for its content. A copy of the Information Memorandum/Prospectuses can be obtained at OCBC Bank’s branches. Units will only be issued upon the receipt of application form referred in, and accompanying the Information Memorandum/Prospectuses. Investors are advised to read and understand the contents of the Information Memorandum/Prospectuses, and if necessary consult their adviser(s), as well as consider the fees and charges involved before investing in the Unit Trust.

This document has been prepared without taking account of the objectives, financial situation or needs of any specific person or organisation who may receive this document. Accordingly prior to making an investment decision, you should conduct such investigation and analysis regarding the product described herein as you deem appropriate and to the extent you deem necessary obtain independent advice from competent legal, financial, tax, accounting and other professionals, to enable you to understand and recognise fully the legal, financial, tax and other risks arising in respect of the product and the purchase, holding and sale thereof.

You should obtain and read the Product Highlight Sheet of the product before you make a decision to acquire the product. All information provided in this document is general and does not take into account your individual objectives, financial situation or specific needs.

You are required to read and understand the terms and Product Highlight Sheet of the product carefully before executing any transaction relating to the product with us. You may request for a copy of the Product Highlight Sheet at OCBC Banks’ branches.

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question 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 a transaction or to participate in any particular trading or investment strategy.

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 statement 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.

OCBC Bank and its respective associated and connected corporations together with their respective directors and officers may have or take positions in any securities mentioned in this report (which positions may change from time to time without notice) and may also perform or seek to perform broking and other investment or securities related services for the corporations whose securities are mentioned in this report as well as other parties generally.

The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.




Lai Mun Yew (Michael)
  Vice President, Research, Wealth Management, OCBC Bank (Malaysia) Berhad

 

Global Outlook – Global Growth Remains Healthy

 

Despite trade tensions, global growth remains healthy, with America standing out as it benefits from fiscal stimulus, while other developed markets continue to enjoy supportive monetary policy.

Key Points:

  • Trade friction is making headlines, but so far, the measures announced are not material to the global economy. Some degree of escalation seems likely, but we would need to see a substantial broadening of tariffs before it has any meaningful impact on the economic cycle.

    The growth of global production networks over the past couple of decades means that barriers to trade could be more damaging than in the past. However, this is also a reason to hope for restraint.

    Retaliation by China and Europe has been carefully targeted at regions that have been supportive of President Trump. However, so far this has had little apparent impact on his approval ratings, so it is not generating any moderation in behaviour. Similarly, the US equity market is not showing a reaction that might provoke a policy re-think.

    Moreover, if we look at global trade flows, these have moderated after the surge in 2017, but are still growing at a healthy pace.

    Nevertheless, a trade war appears to be the most immediate threat to the economic recovery. If the US puts tariffs on all imports from China and all automobile-related products, it would amount to about 5 per cent of US GDP. Equivalent retaliation would directly affect nearly 10 per cent of global trade flows. However, economic relations would have to deteriorate significantly from here before that is a serious risk.

    Overall, the global cycle still looks well supported by loose policy settings in most developed markets. On a 12 to 18 month view the solid growth seen recently is set to continue.

  • United States
    The pace of US economic growth appears to have picked up slightly in 2018, probably in response to the large tax cuts and big increase in government spending enacted at the start of the year.

    This is shown by new job growth running at an average of 215,000 per month so far this year, compared to 189,000 over the previous couple of years.

    Surveys show that labour shortages are becoming severe and record numbers of workers are quitting their jobs to find better paid work elsewhere. So far, the pick-up in wages has been moderate, but pressure looks set to intensify.
  • Europe
    The pace of recovery in Europe has softened a little in 1H 2018, but growth is still relatively healthy.

    Business and consumer sentiment readings are positive and point to a solid pace of expansion. Monetary policy should be gaining traction as financial health improves, especially as the European Central Bank (ECB) is in no hurry to raise interest rates. Benefits from structural reforms are gradually filtering through and fiscal policy is no longer a drag on growth.

    Political uncertainty continues in Italy, where the next budget – due in the autumn – will show whether the government intends to abandon the fiscal austerity that has stabilised public finances in recent years. This would risk bringing it into conflict with the European Union and could bring renewed stress to the region’s bond markets.

    Brexit remains deeply problematic. A last-minute scramble to find a compromise – as is often the case with EU negotiations – seems like the best-case scenario - but this could be stressful for financial markets.
  • Japan
    The Japanese economy remains healthy, with business sentiment and profitability at unusually strong levels.

    However, headline growth is constrained by demographic challenges, with the working-age population shrinking by about 1 per cent per year. Extreme tightness in labour markets is still producing very little wage growth or inflation, as the deflationary mind-set is taking a long time to banish.
  • China
    As the primary target of US trade barriers, China is already looking for ways to offset any hit to growth.

    Recent years have made it clear that maintaining an adequate pace of growth in the short term will take priority over the longer-term aim of controlling the credit bubble. Stimulus is likely to take the form of looser regulation, cuts in the reserve requirement ratio, and fiscal policy.

    This is unfortunate, because after several years of talking about the problem of excessive credit growth, policy-makers had finally been squeezing out the worst borrowers and introducing an element of control.

    The huge trade imbalance between the two countries means that China will quickly lose the ability to retaliate through higher tariffs on US imports. Measures to make life difficult for American businesses operating in China seem like a realistic response.
  • Emerging markets
    Rising US interest rates present a challenge for emerging markets where an external deficit results in significant funding needs.

    Fortunately, this only applies to a small number of countries, led by Argentina and Turkey. The scale is not large enough to be systemic, especially as several have improved economic policy making after pressure from the “taper tantrum” of 2013.



 

Foreign Exchange & Commodities – Oil Prices Face a Supply Drag

 

The supply-side reaction to the prospect of more profitable production should limit the scale of the rise in oil prices, unless the geopolitical situation deteriorates significantly.

Key Points:

  • Oil
    Despite continued geopolitical noise, notably between Iran and the US, oil prices have slipped on increased expectations that OPEC will raise supply if necessary to prevent prices spiking higher.

    Demand is underpinned by the global economic cycle, but there are also fears that a trade war would hit the market for oil, which will also translate into a drag on prices.

    Rising US production – to record levels – is a positive factor for overall supply, but in recent months geopolitical concerns have been the swing factor driving prices.

    In the end the supply-side reaction to the prospect of more profitable production should limit the rise in prices unless the geopolitical situation deteriorates significantly.
  • Gold
    Gold is unloved as a safe-haven asset for now. In the past month, trade war fears have escalated and yet gold weakened. The inverse US Dollar-gold return relationship is the strongest since the Global Financial Crisis while the sensitivity of gold to interest rates has been diminishing.

    It still makes sense to own some gold as a hedge against more global turmoil.

    We expect gold to consolidate in the short-term. However, a resumption of the US Dollar downtrend should lift gold prices moderately against lingering headwinds from a gradually tightening of monetary policy by major central banks.
  • Currency outlook
    The positive US Dollar driver in the form of a hawkish Fed has largely dissipated. The broad US Dollar is now entrenched within a defined range. Short-term noise in currency markets is insufficient to cause a range break. It might be helpful for investors to stay nimble and flexible to take advantage of the swings induced by idiosyncratic headlines.

    In addition, we also expect the Aussie and Kiwi, as a proxy to China and Emerging Markets (EM) Asia, to drift lower against the greenback.

    With two more Fed rate hikes in 2018 (i.e. four hikes in 2018) largely the default expectation now, any shift in expectations towards three hikes in 2018 may trigger US Dollar weakness.

    Any further escalation on the Sino-US trade front will negatively pressure EM Asian currencies. Nevertheless, it is worth noting that underlying fundamentals for the EM Asian currencies (excluding China) have been improving.

    Net portfolio outflows from Asia have been essentially curtailed, and we are starting to observe some inflow momentum building across Asia. Asian central banks also appear to be on the tightening move again. These factors should serve to strengthen EM Asian currencies (excluding China). However, the uptrend of the US Dollar against the Renminbi remains intact, and this threatens to be a drag on EM Asian currencies.

    We expect the Singapore Dollar to range trade in the near term versus the US Dollar. With the June core inflation rate surprising on the upside, we think the Monetary Authority of Singapore (MAS) may tighten policy at the upcoming October meeting, especially if the core inflation accelerates towards the key 2 per cent threshold.



 

Bonds – EM High Yield Bonds Upgrade

 

We have upgraded Emerging Market High Yield bonds to overweight as valuations have become attractive, especially for Asian high yield bonds, supported also by healthy fundamentals and low default rates.

Key Points:

  • Emerging Market (EM) bonds staged one of their worst historical performances in 1H 2018. The poor performance can be attributed to multiple factors: rising interest rates, a strong US dollar, trade tensions, rising oil prices and concerns about Fed quantitative tightening.
  • EM High Yield bonds look attractive
    While a rise in interest rates was widely predicted at the start of the 2018, the rapid pace of increase was not. Investors had widely expected an orderly 50 basis points increase in the 10-year US government bond yield over a twelve-month period through to end-2018. However, fears over the trajectory of inflation saw this play out over a manner of weeks early in the year.

    Over the coming months, we believe that rates should be less of a drag on fixed income performance. The 10-year U.S. yield has basically been range-bound between the 2.8 to 3 per cent area over the last few months, suggesting that investors are more comfortable with the trajectory of inflation and interest rates.

    Similarly, while we expect a strong US dollar to remain a headwind, we do not expect the same rate of EM currency depreciation experienced in 1H 2018.

    Additionally, overall economic growth across global EM markets appears adequate. Also, from a bottom up basis, corporate balance sheets have demonstrated improvement over the past several quarters with default rates still below historical averages.

    At current levels, we believe that valuations for EM high yield bonds appear compelling.
  • Prefer High Yield to Investment Grade
    Overall, we prefer high yield bonds to investment grade bonds as credit spreads should provide a buffer to rising rates.

    EM high yield bonds is poised to do better in 2H 2018 after the poor first half performance. EM investment grade bonds outperformed high yield bonds in the 1H 2018, which is the opposite of what we saw in Developed Markets.

    We do not believe that this was indicative of a systemic problem in EM high yield, but rather due to a confluence of idiosyncratic problems.

    In the 2H 2018, we expect EM high yield bonds to outperform investment grade bonds, underpinned by still-supportive credit fundamentals and more attractive valuations. Among EM high yield bonds, Asia is our favourite region.
  • Cautious on Investment Grade bonds
    Investment grade bonds are facing dual headwinds from steady Fed rate hikes, together with supply concerns coming from weakening government finances and a shrinking Fed balance sheet.

    Even though the yield curve should flatten over the coming year, we expect longer-dated yields to head higher as the Fed tightens. This could cause poor returns on Investment Grade bonds.
  • Fed to continue hiking rates and ECB to start hikes in 3Q 2019
    We expect the Fed to tighten twice more this year and four times in 2019, with interest rates turning into a drag on growth before the end of next year.

    Elsewhere, the ECB plans to wrap up asset purchases by end-2018, with a rate hike expected perhaps in 3Q 2019. This suggests that policy support for Italy will be diminishing.



 

Equities – Tread Carefully

 

Risk-reward environment remains unattractive despite solid economic outlook and healthy earnings growth. Stay cautious ahead of market ructions.

Key Points:

  • With a backdrop of rising interest rates, we do not expect valuation multiples to retest the recent highs. As such, further upside for global equities would be limited mainly to earnings growth.

    As we progress through 2H 2018, investors would be increasingly focused on 2019 earnings. Consensus 2019 EPS growth remains largely stable at 9.5 per cent.

    We maintain a slight underweight stance.
  • United States
    Boosted by a positive start to the 2Q 2018 earnings season, US equities continued its long march.

    Supported by easy fiscal policy, 2019 earnings growth is expected to stay solid at 10.7 per cent. However, monetary policy could start to be a drag on earnings further into 2019.

    Valuations for US equities remain the most demanding across the regions that we track.

    We maintain a neutral stance on US equities.
  • Eurozone
    The results season so far has been disappointing. However, consensus 2018 EPS was largely unchanged for July.

    The growth outlook has moderated in recent months, but the region’s ongoing economic recovery remains intact. Consensus is looking for 9.5 per cent 2019 EPS growth.

    The trade war spat with the US has clearly clouded the outlook. At the same time, political events continue to be a risk for the region.

    Valuations remain less demanding versus developed market peers.
  • Japan
    The Japanese equity market continues to be driven by swaying concerns about the earnings impact from the trade spat, and a potentially stronger yen.

    Despite a positive earnings season so far, 2019 consensus earnings outlook remain muted at 4.6 per cent EPS growth. Valuations are now relatively depressed versus developed market peers. Therefore, any improvement in the earnings outlook could provide a near-term lift.

    However, we maintain the view that a sustained re-rating of the market would require more meaningful structural reform to boost overall growth.

    Hence, we remain underweight on Japanese equities.
  • Asia ex-Japan
    Asia ex-Japan equities continued to underperform in July. Besides the weaker than expected earnings season so far, the ongoing trade war uncertainty and concerns with the impending end of Quantitative Easing (QE) continued to weigh on the region.

    The depreciation of the CNYUSD remains a particular focus for investors.
  • China
    Overall, we remain neutral on China.

    Against a challenging macro backdrop characterised by escalating US-China trade tensions and a domestic slowdown induced by financial deleveraging, we expect further monetary and fiscal policy easing in 2H 2018.

    We also expect financial deleveraging to continue as a key objective of the government. Hence any policy easing is likely to be incremental and targeted, barring a full-blown trade war.

    With risk and volatility likely to remain elevated, we recommend a selective approach. We find MSCI China A-shares more attractive compared to H-shares and ADRs. We also recommend sticking to large, quality companies or those that could benefit from policy easing.
  • Singapore
    Based on the MSCI Singapore Index, the market is trading at 11.9x FY18 earnings and 11x FY19 earnings, which are lower than the recent average of about 14x earnings. Price to book is at 1.2x and dividend yield is at around 4.4 per cent. Current price-to-book is also near the lower end of the recent 5-year range.

    The 2Q 2018 earnings season is unlikely to throw up any major earnings shocks, but if the trade war escalates, it could potentially result in earnings revisions in the coming quarters.

    With trade tensions looming, we expect market sentiment to remain weak in the coming weeks. In addition, on the Singapore property front, more measures to cool the property market undertaken on 5 July 2018 took the market by surprise and has dampened sentiments.
  • Developed market sectors
    We maintain our barbell approach between Cyclical (prefer Financials and Consumer Discretionary) and Defensive (Healthcare and Telecom) sectors.

    With further interest rate normalization and economic recovery, the outlook for banks remain positive in general. US banks also benefit from better loans growth and more conducive regulatory environment. Healthy consumer sentiment and low unemployment also augur well for the Consumer Discretionary sector.

    Crowded Technology shares underperformed in July mainly on the disappointing growth outlook. Valuations are clearly not supportive and investor sentiments are increasingly edgy. At a forward PE of 19.2x, the sector continues to trade more than one standard deviation above its 10-year average PE multiple of 16.2x. We believe that overall valuations for the sector are reflecting rosy scenarios in new and emerging technologies. As such, investors should be cautious.



 

Important Information

 

Any opinions or views expressed in this material are those of the author and third parties identified, and not those of OCBC Bank (Malaysia) Berhad (“OCBC Bank”, which expression shall include OCBC Bank’s related companies or affiliates).

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question 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 a transaction or to participate in any particular trading or investment strategy.

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The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.




 


How to Invest in Uncertain and Volatile Markets

 

Given the nebulous second half outlook, investors ought to tread carefully and seek investments that are well placed to manage the volatility and potential market drawdowns ahead. This includes investing in multi-asset funds, bonds with shorter duration and funds that can write equity call options.

  • Unit Trust: RHB Global Macro Opportunities Fund (Risk rating: High)
    Eligibility: High Net Worth Investors Only
    This fund invests in a target fund, the JPMorgan Investment Funds – Global Macro Opportunities fund and is suitable for investors seeking to benefit from enhanced diversification and sophisticated multi-dimensional risk management. This fund capitalises on global macroeconomic trends to drive returns by employing a dynamic multi-asset approach and aims to achieve capital appreciation in excess of its cash benchmark by investing primarily in securities globally, using financial derivative instruments where appropriate. This fund also targets to deliver potentially positive returns in varying market environments with expected volatility of 6-10% over the medium-term.
  • Unit Trust: CIMB-Principal Global Titans Fund (Risk rating: High)
    Eligibility: Retail and High Net Worth Investors
    Investors seeking exposure and investment opportunities in the developed markets, i.e US, Europe and Japan may consider this fund. This fund invests at least 50% of its NAV into 3 PGI Funds and 3 Schroder funds in the global titans market of the US, Europe and the Japan. This fund also has exposure to the Malaysian equities to balance any short term volatilities. The steadily recovering global economy especially in Europe and the US remains a healthy backdrop for equities.
  • Unit Trust: Affin Hwang World Series – Global Balanced Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    Investors seeking capital growth opportunities through a portfolio of collective investment schemes with access into equities listed in global markets, fixed income instruments such as debt securities, money market instruments and fixed deposits, issued globally may consider this fund.
  • Unit Trust: RHB Asian Income Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    This fund invests in one target fund, the Schroder Asian Income fund and is suitable for investors seeking income and capital growth over the medium- to long-term via an active allocation strategy. Exposure in Asia is opportunistic as we view Asia being in a relatively strong position with a high level of foreign reserves, limited external debt and improving growth potential which benefitted from structural reforms.

Top Investment Ideas are an expression of the investment outlook in this publication. They are not recommendations made in accordance with your investment objective and risk profile. As such, we recommend that you complete a suitability assessment before purchasing your selected investment product.



This document is not intended to constitute research analysis or recommendation and should not be treated as such.

We recommend that you read and understand the content of the Information Memorandum for RHB Global Macro Opportunities Fund dated 1 June 2016 by RHB Asset Management Sdn Bhd. Investments in the Fund are exposed to country risk, equity risk, currency risk, management risk, emerging market risk and others as disclosed in the Information Memorandum. This fund is eligible to be purchased by High Net Worth Individuals only, the criteria of High Net Worth Individuals as per stated in Schedules 6 and 7 of Capital Market and Services Act (CMSA) 2007.

We recommend that you read and understand the contents of the Prospectus Issue No. M2 for the CIMB-Principal Global Titans Fund dated 25 January 2017, by CIMB-Principal Asset Management Bhd. Investments in the Fund are exposed to counterparty risk, country risk, currency risk, fund manager’s risk, legal and taxation risk, manager’s risk, stock specific risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Prospectus for the Affin Hwang World Series - Global Balanced Fund dated 6 June 2017, by Affin Hwang Asset Management Berhad. Investments in the Fund are exposed to collective investment schemes risk, credit and default risk, interest rate risk, currency risk, liquidity risk, related parties transaction risk, country risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Master Prospectus for the RHB Asian Income Fund dated 6 October 2017, by RHB Asset Management Sdn Bhd. Investments in the Fund are exposed to management risk, liquidity risk, foreign investment risks such as currency risk and country risk and others as disclosed in the prospectus.

Product Risk Rating and Suitability Determination Matrix:

Product Risk Rating What this rating could mean to your principal amount Suitable for risk profiles:
Moderate Partial loss of full principal investment amount possible, total loss unlikely.
(‘Partial loss’ means the loss suffered by the investor can be up to 15% of the original investment principal)
  • Balanced
  • Growth
  • Aggressive
High Client may suffer substantial or 100% loss of principal investment amount.
(‘Substantial loss’ means the loss suffered by the investor can be more than 15% of the investment principal)
  • Growth
  • Aggressive


Unit Trust investments are not bank deposits and are not obligations of or guaranteed or insured by OCBC Bank (Malaysia) Berhad. Unit Trust investments are not guaranteed and are subject to investment risk unless otherwise specified. The investment risk includes general risks as described in the Information Memorandum/Prospectuses for Unit Trust investment funds (“Information Memorandum/Prospectuses”) and specific risks which may be different for each Unit Trust investment. Description of specific risks and general risks are published in the Information Memorandum/Prospectuses. With respect to Unit Trust investment, past performance is not indicative of future results; the net asset value can go up or down. Investors should also note that the net asset value per unit and distributions payable, if any, may go down as well as up.

Where unit trust loan financing is available, investors are advised to read and understand the contents of the unit trust loan financing risk disclosure statement before deciding to borrow to purchase units. Where a unit split/distribution is declared, investors are advised that following the issue of additional units/distribution, the NAV per unit will be reduced from pre-unit split NAV/cum-distribution NAV to post-unit split NAV/ex-distribution NAV; and where a unit split is declared, investors should be highlighted of the fact that the value of their investment in Malaysian ringgit will remain unchanged after the distribution of the additional units.

The Information Memorandum/Prospectuses have been registered with the Securities Commission Malaysia, which takes no responsibility for its content. A copy of the Information Memorandum/Prospectuses can be obtained at OCBC Bank’s branches. Units will only be issued upon the receipt of application form referred in, and accompanying the Information Memorandum/Prospectuses. Investors are advised to read and understand the contents of the Information Memorandum/Prospectuses, and if necessary consult their adviser(s), as well as consider the fees and charges involved before investing in the Unit Trust.

This document has been prepared without taking account of the objectives, financial situation or needs of any specific person or organisation who may receive this document. Accordingly prior to making an investment decision, you should conduct such investigation and analysis regarding the product described herein as you deem appropriate and to the extent you deem necessary obtain independent advice from competent legal, financial, tax, accounting and other professionals, to enable you to understand and recognise fully the legal, financial, tax and other risks arising in respect of the product and the purchase, holding and sale thereof.

You should obtain and read the Product Highlight Sheet of the product before you make a decision to acquire the product. All information provided in this document is general and does not take into account your individual objectives, financial situation or specific needs.

You are required to read and understand the terms and Product Highlight Sheet of the product carefully before executing any transaction relating to the product with us. You may request for a copy of the Product Highlight Sheet at OCBC Banks’ branches.

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question 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 a transaction or to participate in any particular trading or investment strategy.

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 statement 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.

OCBC Bank and its respective associated and connected corporations together with their respective directors and officers may have or take positions in any securities mentioned in this report (which positions may change from time to time without notice) and may also perform or seek to perform broking and other investment or securities related services for the corporations whose securities are mentioned in this report as well as other parties generally.

The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.




Lai Mun Yew (Michael)
  Vice President, Research, Wealth Management, OCBC Bank (Malaysia) Berhad

 

Global Outlook – No Imminent Downturn

 

The best of the current economic expansion is behind us, but it seems too early to argue that a downturn is imminent, as low inflation and loose policy could keep the recovery on track till late 2019.

Key Points:

  • The current recovery has been unusually long and slow. By some measures, it is in its late (or final) stages but by others, it is merely mature, with plenty more to come.

    For now, the global cycle looks well supported by loose policy settings over the next 12 to 18 months. However, there are some question marks as we look into 2020. Among the major economies, the US is the best candidate to see a recession, as its cycle is the most advanced and it has the added risk of tightening fiscal policy by 2020. However, even there, the risk of recession is only a possibility rather than a certainty.
  • United States
    Growth is still being supported by the looser fiscal policy that is blowing out the budget deficit. This is extremely unusual at such a mature stage in the cycle; government borrowing typically rises and falls with the unemployment rate.

    Fiscal stimulus into a hot economy is likely to suck in imports to meet some of the additional demand, which will widen the trade deficit, even in the face of current protectionism. These twin deficits point to downwards pressure on US Dollar once interest rate expectations have adjusted to a more realistic profile.
  • Europe
    The pace of recovery in Europe has slipped to some extent, but it is still relatively healthy. Business and consumer sentiment readings are still comfortably positive and pointing to a solid pace of expansion. Monetary policy should be gaining traction as financial health improves, while benefits from structural reforms gradually filter through, and fiscal policy is neutral and no longer a drag on growth.

    Perhaps as a warning to the new government in Italy not to reverse fiscal reforms, the ECB made an earlier-than-expected announcement that its asset purchases would wind up by the end of this year, with the first rate-hike following, perhaps in 3Q 2019. It seems to be following the same path as the Fed in managing the exit from ultra-loose policy, albeit with a lag of about three years.
  • Japan
    Tight labour markets show that the Japanese economy continues to prosper, while surprisingly good tax revenues suggest that growth might be stronger than some of the economic data indicate. Even so, inflation remains subdued, although the headline rate is being boosted by higher energy prices.

    The Bank of Japan is set to remain on hold for the foreseeable future, with no realistic options for meaningful easing if the recovery stalls or the yen spikes, and no urgency to start to tighten. It will be the last major central bank to exit from the current loose policy.
  • China
    The short-term need to support growth in the face of trade restrictions and barriers to technology transfer from the US seems set to interrupt longer-term efforts to reduce leverage in China’s economy. This is likely to come through cuts in the reserve requirement ratio, accompanied by fiscal stimulus.

    Over the past 18 months, the credit bubble that developed after the Global Financial Crisis has stabilised, suggesting that policies to control leverage were finally gaining traction. However, credit growth is likely to pick up again, which will complicate the eventual long-term challenge of deflating the bubble without causing significant economic or financial system disruption.
  • Emerging markets
    Rising US interest rates present a challenge for emerging markets where an external deficit results in significant funding needs. Fortunately, this only applies to a small number of countries, led by Argentina and Turkey. The scale is not large enough to be systemic, especially as several have improved economic policy making after pressure from the “taper tantrum” of 2013.

    Another current issue is that higher commodity prices help emerging markets, but there are winners and losers, especially when oil prices are strong. Rising interest rates have the potential to exacerbate the problems of the commodity importers.



 

Foreign Exchange & Commodities – Where is the U.S. Dollar Headed?

 

USD continues to push higher, spurred on by the ongoing trade tensions. Asian currencies have been hit by prospects of a weaker China, even though there a full-scale trade war is unlikely.

Key Points:

  • Oil
    Oil was weighed down for much of June due to expectations of an increase in supply after an OPEC meeting. However, the impact of the compromise within OPEC on supply is limited, and prices have rebounded in response.

    Meanwhile a rebound in US shale drilling continues to send output to record highs. Rising US production – to record levels – is a positive factor for overall supply, but in recent months has been outweighed by geopolitical concerns.

    In the end, the supply-side reaction to the prospect of more profitable production should limit the scale of the rise in prices unless the geopolitical situation deteriorates significantly.
  • Gold
    Gold has disappointed against a background of rising protectionism and trade tensions, risk-off sentiment and falling equity markets. The US Dollar is gaining from Fed tightening and the Fed's balance sheet is still shrinking. The unexpected US Dollar strength has been challenging for gold bulls. We retain a view that gold price is poised to hover between US$1,200 to US$1,380 per ounce over the next few months. An aggressive gold sell-off is unlikely, as longer-term investors continue to be attracted to gold as a means of diversification and to hedge against rising uncertainty across other asset classes.
  • Currency outlook
    The Fed and ECB policy meetings in mid-June brought market attention back to relative central bank dynamics, with markets now viewing the Fed as being on a hawkish tilt and the ECB as dovish on its interest rate trajectory. Consequently, the stronger economic data in the US relative to the rest of the world (and the EU in particular), is back in focus.

    The question is whether the stronger US economic data will persist in 2H2018. If so, this would favour the greenback. At this juncture, we note that the slowdown in Europe and Asia seem to have been arrested, and our Macro Surprises Indices are showing an improvement for both regions. Therefore, we expect the broad US Dollar to weaken in the next 6 to 12 months. Nevertheless, we continue to keep a close watch on the Euro and upcoming Eurozone economic data to confirm our assessment of the greenback.

    In the near term however, the broad US Dollar may still consolidate. We note that without further material political uncertainties, the downside support for the Euro near the US$1.15 level remains strong. This should cap the upside for the broad US Dollar.

    Elsewhere, the US-China trade spat, and the weakness of the Renminbi have weighed on Asian currencies, and which may continue to remain weak even though a full-scale trade war has not materialised yet. At this juncture, there are fundamental reasons for China to favour a weaker Renminbi. Any further deterioration in trade tensions could bring more pain for export-focused Asia. On the local front, we expect the Singapore Dollar to weaken against the US Dollar along with other Asian currencies.



 

Bonds – Still Prefer High Yield Bonds

 

Given the prospect of a significant move up in rates, we maintain our neutral rating on High Yield bonds, where credit spreads should provide some buffer to the adverse move in rates.

Key Points:

  • In 1H 2018, a toxic cocktail of higher interest rates, tighter liquidity, a strong US Dollar, rising oil prices and ongoing global trade tensions dominated the narrative. While we do not expect all of these headwinds to disappear, rate increases may be more measured and predictable. This factor, coupled with still adequate top-down economic growth, solid bottoms-up financials and more attractive valuations, means that bond markets can still offer investment opportunities.
  • Fed expected to raise rates further
    The Fed’s policy intentions are sufficiently transparent that the seventh rate-hike of the current cycle and a slightly more hawkish tilt in the outlook was met with minimal financial market reaction. We continue to expect two more hikes this year and another four in 2019, as the Fed struggles to contain inflation close to the 2 per cent target. It will eventually need to push rates past neutral levels of 2.5 to 3 per cent to cool down growth. Also, markets expectations for the path of US policy rates looks too low.

    US Treasuries seem to be more interested in the potential impact of trade friction on growth (and on demand for safe-haven assets), rather than Fed policy changes. Similarly, yields have shrugged off the lowest US unemployment rate in 50 years and the probability of a strong bounce in 2Q GDP growth.

    The likely reaction of the Fed – or other affected central banks – to rising tariff barriers is unclear. If the situation escalates then it will both hurt growth and boost inflation. This is perhaps like the dilemma facing the Bank of England due to Brexit, where tightening has been slow and hesitant despite a lengthy inflation overshoot.
  • Yield curve inversion and rising bond yields
    Yield curve inversion remains a popular topic for discussion but does not seem likely until sometime after policy becomes restrictive, which is probably not until 2020. We expect longer-dated yields to head higher as the Fed tightens, and generate poor returns on investment grade bonds, so we remain underweight. On our forecast, 10-year US bond yields are projected to rise to 3.4 per cent in the next 12 months.
  • Yield gap should also limit upside of US Treasury yields
    A significant gap has developed between US bond yields and those in major developed markets. With other central banks well behind the Fed in their tightening cycles, US yields should generate some “carry trade” flows that will help to fund the growing trade and budget deficits and prevent longer dated US bond yields from rising too sharply. US 10-year Treasuries offer a substantial premium over the 0.4 per cent yields in Germany and zero in Japan. Even Italian yields are below the US, at 2.7 per cent, despite high-profile concerns about the willingness of the new government to maintain fiscal discipline.
  • Preference for High Yield over Investment Grade
    During the first half of the year, Investment Grade bonds outperformed High Yield bonds. In 2H 2018, High Yield bonds, buoyed by improving company balance sheets and historically low default rates, could reverse the trend and outperform Investment Grade bonds.



 

Equities – Cautious on Equities

 

Healthy economic and earnings outlook is tapered by uncertainties surrounding trade and concerns about monetary policy. Stay cautious on equities.

Key Points:

  • While the solid economic outlook and healthy earnings growth continue to be supportive, macro headwinds are expected to continue to curb investor risk appetite. Valuations are less demanding following the pullback in recent months. However, with rising interest rates, we do not expect earnings multiples to retest the peak in January and further upside for the markets would be driven primarily by earnings growth.
  • United States
    Boosted by tax cuts, repatriation of overseas cash and higher profits, US companies continued to buy back their own shares. Share repurchasing announcements for S&P500 companies in 2Q 2018 were 50 per cent higher year-on-year. Fundamentally, notwithstanding the emerging recession fears, consensus 2018 and 2019 earnings per share (EPS) for US equities rose steadily since late April, as the growth outlook received a leg up from the Trump Administration’s late-cycle fiscal boost.
  • Eurozone
    Although Europe originally appeared to be collateral damage in the escalating trade spat between the US and China, Trump’s threat of a 20 per cent tariff on all imports of European Union (EU) manufactured cars, in response to the EU’s retaliatory measures against US steel and aluminium tariffs, brought the region back into focus. Political events in Italy also weighed on the market. Despite the slower growth momentum, Europe has continued to catch up with the rest of the developed world. Consensus EPS has been upgraded over the past few weeks as the drag from the Euro appears to have faded. Although coming a bit earlier than expected, European Central Bank’s plans to exit quantitative easing was more dovish than the market had anticipated. Valuations remain less demanding versus developed market peers. Besides Italy, Spain’s political stability is also a near term key risk.
  • Japan
    Besides the earnings impact from the escalating trade conflict, a potentially stronger yen has also weighed on the equity market. After a stellar 35 per cent earnings growth last year, FY2018E earnings growth expectations have improved slightly to a modest 4 per cent. Relative valuations are now the cheapest versus peers in developed markets but a sustained re-rating of the market would require more meaningful structural reform to boost overall growth. Near term risks include domestic politics, US protectionism and yen strength.
  • Asia ex-Japan
    Asia ex-Japan was the biggest loser in June as risk appetite shrunk. Thailand, the Philippines and Singapore were the biggest losers. India, Taiwan and Malaysia held up relatively better. All markets generated negative returns in 1H2018, with the Philippines suffering the biggest drawdown. Since peaking in early April, consensus 2018 EPS continued to be downgraded. A trade war between the US and China remains the key risk for the region. Further ahead, the potential impact of rising borrowing costs and the unprecedented global central bank balance sheet unwinding are other risks to watch out for.
  • Singapore
    Renewed concern over the US-China trade war was the main drag on the market, as the MSCI Singapore Index fell in tandem with regional and global markets. Currently, the index has already erased all the gains so far this year and is now in negative territory.

    Based on the MSCI Singapore Index, the market is currently trading at 11.7 times FY2018 earnings and 10.8 times FY2019 earnings, which are lower than the recent average of about 14 times earnings. Price to book is at 1.2times and dividend yield is at around 4.5 per cent. Current price-to-book is also near the lower end of the recent 5-year range.



 

Important Information

 

Any opinions or views expressed in this material are those of the author and third parties identified, and not those of OCBC Bank (Malaysia) Berhad (“OCBC Bank”, which expression shall include OCBC Bank’s related companies or affiliates).

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question 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 a 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.

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.




 


Opportunities Can Still Be Found Despite Turbulent Markets

 

Despite higher market volatility, opportunities can still be found, as highlighted below.

Emerging Markets suffered a setback last month, but Asia looks relatively resilient, having learned the hard lessons from two decades ago.

We have moved European equities a notch down to neutral as developments in Italy may pose headwinds, at least in the near-term. But we are more positive about the long-term prospects.

  • Unit Trust: RHB Global Macro Opportunities Fund (Risk rating: High)
    Eligibility: High Net Worth Investors Only
    This fund invests in a target fund, the JPMorgan Investment Funds – Global Macro Opportunities fund and is suitable for investors seeking to benefit from enhanced diversification and sophisticated multi-dimensional risk management. This fund capitalises on global macroeconomic trends to drive returns by employing a dynamic multi-asset approach and aims to achieve capital appreciation in excess of its cash benchmark by investing primarily in securities globally, using financial derivative instruments where appropriate. This fund also targets to deliver potentially positive returns in varying market environments with expected volatility of 6-10% over the medium-term.
  • Unit Trust: Affin Hwang Select Dividend Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    This fund is suitable for investors who prefer stable and regular investment returns. Primarily invests in high dividend yielding equities and equities that could potentially experience high dividend pay-out growth. Investments are mainly focused in Malaysian equities with a minimum of 70% of the Fund’s NAV and may invest up to 30% of its NAV in Asia-Pacific region. In this environment of lingering uncertainties, income component is key to portfolio returns.
  • Unit Trust: Affin Hwang World Series – Global Balanced Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    Investors seeking capital growth opportunities through a portfolio of collective investment schemes with access into equities listed in global markets, fixed income instruments such as debt securities, money market instruments and fixed deposits, issued globally may consider this fund.
  • Unit Trust: RHB Asian Income Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    This fund invests in one target fund, the Schroder Asian Income fund and is suitable for investors seeking income and capital growth over the medium- to long-term via an active allocation strategy. Exposure in Asia is opportunistic as we view Asia being in a relatively strong position with a high level of foreign reserves, limited external debt and improving growth potential which benefitted from structural reforms.

Top Investment Ideas are an expression of the investment outlook in this publication. They are not recommendations made in accordance with your investment objective and risk profile. As such, we recommend that you complete a suitability assessment before purchasing your selected investment product.



This document is not intended to constitute research analysis or recommendation and should not be treated as such.

We recommend that you read and understand the content of the Information Memorandum for RHB Global Macro Opportunities Fund dated 1 June 2016 by RHB Asset Management Sdn Bhd. Investments in the Fund are exposed to country risk, equity risk, currency risk, management risk, emerging market risk and others as disclosed in the Information Memorandum. This fund is eligible to be purchased by High Net Worth Individuals only, the criteria of High Net Worth Individuals as per stated in Schedules 6 and 7 of Capital Market and Services Act (CMSA) 2007.

We recommend that you read and understand the Master Prospectus for the Affin Hwang Select Dividend Fund dated 28 March 2017 by Affin Hwang Asset Management Berhad. Investments in the Fund are exposed to specific risks including market risk, managers’ risk, performance risk, inflation risk, credit and default risk, country risk, warrants investment risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Prospectus for the Affin Hwang World Series - Global Balanced Fund dated 6 June 2017, by Affin Hwang Asset Management Berhad. Investments in the Fund are exposed to collective investment schemes risk, credit and default risk, interest rate risk, currency risk, liquidity risk, related parties transaction risk, country risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Master Prospectus for the RHB Asian Income Fund dated 6 October 2017, by RHB Asset Management Sdn Bhd. Investments in the Fund are exposed to management risk, liquidity risk, foreign investment risks such as currency risk and country risk and others as disclosed in the prospectus.

Product Risk Rating and Suitability Determination Matrix:

Product Risk Rating What this rating could mean to your principal amount Suitable for risk profiles:
Moderate Partial loss of full principal investment amount possible, total loss unlikely.
(‘Partial loss’ means the loss suffered by the investor can be up to 15% of the original investment principal)
  • Balanced
  • Growth
  • Aggressive
High Client may suffer substantial or 100% loss of principal investment amount.
(‘Substantial loss’ means the loss suffered by the investor can be more than 15% of the investment principal)
  • Growth
  • Aggressive


Unit Trust investments are not bank deposits and are not obligations of or guaranteed or insured by OCBC Bank (Malaysia) Berhad. Unit Trust investments are not guaranteed and are subject to investment risk unless otherwise specified. The investment risk includes general risks as described in the Information Memorandum/Prospectuses for Unit Trust investment funds (“Information Memorandum/Prospectuses”) and specific risks which may be different for each Unit Trust investment. Description of specific risks and general risks are published in the Information Memorandum/Prospectuses. With respect to Unit Trust investment, past performance is not indicative of future results; the net asset value can go up or down. Investors should also note that the net asset value per unit and distributions payable, if any, may go down as well as up.

Where unit trust loan financing is available, investors are advised to read and understand the contents of the unit trust loan financing risk disclosure statement before deciding to borrow to purchase units. Where a unit split/distribution is declared, investors are advised that following the issue of additional units/distribution, the NAV per unit will be reduced from pre-unit split NAV/cum-distribution NAV to post-unit split NAV/ex-distribution NAV; and where a unit split is declared, investors should be highlighted of the fact that the value of their investment in Malaysian ringgit will remain unchanged after the distribution of the additional units.

The Information Memorandum/Prospectuses have been registered with the Securities Commission Malaysia, which takes no responsibility for its content. A copy of the Information Memorandum/Prospectuses can be obtained at OCBC Bank’s branches. Units will only be issued upon the receipt of application form referred in, and accompanying the Information Memorandum/Prospectuses. Investors are advised to read and understand the contents of the Information Memorandum/Prospectuses, and if necessary consult their adviser(s), as well as consider the fees and charges involved before investing in the Unit Trust.

This document has been prepared without taking account of the objectives, financial situation or needs of any specific person or organisation who may receive this document. Accordingly prior to making an investment decision, you should conduct such investigation and analysis regarding the product described herein as you deem appropriate and to the extent you deem necessary obtain independent advice from competent legal, financial, tax, accounting and other professionals, to enable you to understand and recognise fully the legal, financial, tax and other risks arising in respect of the product and the purchase, holding and sale thereof.

You should obtain and read the Product Highlight Sheet of the product before you make a decision to acquire the product. All information provided in this document is general and does not take into account your individual objectives, financial situation or specific needs.

You are required to read and understand the terms and Product Highlight Sheet of the product carefully before executing any transaction relating to the product with us. You may request for a copy of the Product Highlight Sheet at OCBC Banks’ branches.

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question 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 a transaction or to participate in any particular trading or investment strategy.

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 statement 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.

OCBC Bank and its respective associated and connected corporations together with their respective directors and officers may have or take positions in any securities mentioned in this report (which positions may change from time to time without notice) and may also perform or seek to perform broking and other investment or securities related services for the corporations whose securities are mentioned in this report as well as other parties generally.

The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.




Lai Mun Yew (Michael)
  Vice President, Research, Wealth Management, OCBC Bank (Malaysia) Berhad

 

Global Outlook – Are Emerging Markets Vulnerable?

 

Rising rates in developed markets mean that pressure on emerging markets is unlikely to disappear; but Asia looks relatively resilient, having learned hard lessons from the regional crisis two decades ago.

Key Points:

  • There is a concern that almost a decade of near-zero interest rates has led to some poor decisions, which stand to be exposed as interest rates rise. Pressure is building after six rates hikes from the Fed, with more to come.

    The “taper tantrum” of 2013 showed where financial markets are likely to focus: on poorly-run countries with large internal or external imbalances. Partly due to policy improvements after the scare from five years ago, the list of vulnerable countries is relatively short, headed by Argentina and Turkey.

    Taking an external deficit of 3 per cent of GDP as the cut-off, looking across all emerging markets, only 4 per cent of the world economy has a potential problem (and two-fifths of that is Argentina and Turkey), which is unlikely to be systemic. The “fragile five” that were targeted in 2013 look less vulnerable today.

    Asia looks relatively resilient, having learned the hard lessons of the regional crisis two decades ago, with far more prudent policy management since then.
  • United States
    The unemployment rate has fallen below 4 per cent, to the lowest level since the turn of the century. The boost to demand from fiscal stimulus means that it is likely to head still lower over the coming year. So far, the impact on labour costs has been relatively muted, but it is beginning to intensify, with the fastest wage gains since the Global Financial Crisis.

    Similarly, inflation has rebounded to within a whisker of the Fed’s 2 per cent target, which means that interest rates will need to keep rising until the economy slows down enough to avert the risk of meaningful overheating.

    Policy will start to be a drag on growth by the end of next year, by which time the Fed’s job will be more difficult, depending on how much growth has slowed, and how far inflation has overshot. As rates push higher, the risk of a recession in 2020 will need more attention.

    The trade spat between the U.S. and China is still playing out and even if the situation improves from time to time, a rising U.S. trade deficit means that the issue will reappear as a source of friction, presumably when it is politically convenient.
  • Europe
    Flash Purchasing Managers' Index (PMI) for May point to a continued slowdown in the Eurozone economy.

    However, business sentiment remains healthy, suggesting fluctuations in the pace of growth are not a threat to the underlying expansion. To put the current situation in context, the overall PMI of 54.1 is a touch stronger than the 53.5 average of 2015-2016, when GDP growth was running at 1.9 per cent.

    Political uncertainty is never very far below the surface in the Europe, even though the region negotiated various elections in 2017 without much difficulty. Italy is still problematic and a source of uncertainty. However, a repeat of the Euro debt crisis 2011-12 is not likely. This is because the European economy now is in a much better shape. European growth should not be stifled by the ongoing political uncertainty in Italy.

    The risk of contagion to the rest of the Eurozone is far less than it was in 2011. The other vulnerable countries like Spain, Ireland, Portugal and even Greece are now in much better position (with lower budget deficits, stronger growth and falling unemployment). Furthermore, the ECB has a playbook in place to deal with contagion risk.

    Elsewhere, continued uncertainty over Brexit seems to be weighing on the U.K. economy, with growth decelerating over the past year, compared to the pick-up across the rest of the region.
  • Japan
    Japanese Gross Domestic Product (GDP) recorded a drop in 1Q 2018, but this is a volatile and much-revised series. Other indicators – such as business or consumer confidence – point to steady economic conditions, which seem more consistent with tightening labour markets.

    The cycle is mature, but inflationary pressures remain weak, reflecting the difficulty in changing expectations and behaviour after such a long period of deflation.
  • China
    Domestically, growth is solid and inflation under control. The huge credit bubble that developed after the Global Financial Crisis, due to efforts to support rapid economic growth, has stabilised over the past year, as credit has been growing no faster than economic output. However, this will remain China’s biggest policy challenge, both in terms of the resource inefficiencies that come from trying to prevent a disruptive resolution of distressed borrowers, as well as avoiding short-term shocks that hit growth and impede the ability to service debt.

    Financial system risk remains in the background for the moment, and the more immediate issue is trade friction. Finding an enduring solution to tension with the U.S. looks very difficult. Roughly 4 per cent of China’s GDP is dependent on U.S. demand, so import barriers could have a direct impact, while limits on technology transfer would have a more pernicious effect.



 

Foreign Exchange & Commodities – Will the U.S. Dollar Take a Breather?

 

U.S. Dollar’s strength may start to fade as markets begin to question its resilience.

Key Points:

  • Oil
    Elevated prices are generating a response in U.S. drilling, which should be a medium-term barrier to sustained strength. A rebound in U.S. shale drilling continues to gather pace. U.S. rig count is up more than 60 per cent from the trough in May 2016. The supply-side reaction to the prospect of more profitable production should limit the scale of the rise in prices unless the geopolitical situation deteriorates significantly.
  • Gold
    We retain the view that gold price is poised to hover between US$1,200/ounce to $1,380/ounce, as the tug-of-war between bearish and bullish factors calls for neither an exceptional rally nor an aggressive sell-off. We struggle to see convincing catalysts for a further gold rally above US$1,380/ounce against a broadly positive global macro backdrop with low probability of recession. On the other hand, an aggressive gold sell-off is unlikely as high U.S. government debt will pose a threat down the road.
  • Currency outlook
    Themes that moved in an aligned fashion in favour of the U.S. Dollar in the past month are starting to diverge. Thus, after a good run, the U.S. Dollar may potentially enter a near-term consolidative phase as the markets start to contemplate the longevity of its recent strength.

    U.S. 10-year yields, which have been supportive of the greenback, have had difficulty staying above the 3 per cent handle. The U.S. Dollar may find little upside momentum from here if the 10-year yield fails to regain lost ground to consolidate above 3 per cent.

    In terms of trade and geopolitics, recent improvements in Sino-U.S. trade relations may have lulled the markets into overlooking it as a driver for FX markets. Our FX Sentiment Index is still in the risk-neutral zone, although it is on a slow grind higher towards risk-off territory.

    Elsewhere, differentials in economic performance are still favourable to the greenback. U.S. data has stayed comparatively more robust, while the slowdown in the Eurozone and Asia has extended well into 2Q18. Global central banks will increasingly find it difficult to adopt a hawkish posture in 2018 given this backdrop. This could precipitate a breakdown in the U.S. Dollar-weakness narrative. We continue to weigh global central bank rhetoric against the Fed benchmark. At this stage, the bar may be too high for other central banks to overcome.

    In Asia, the actual net portfolio flow environment does not look favourable for Asian currencies. The U.S. Dollar may see another leg higher against Asian currencies if the still-contained trade and geopolitical tensions boil over. Notwithstanding a potential consolidation in the broad U.S. Dollar momentum, we expect the Asian currencies (Singapore Dollar included) to drift lower against the U.S. Dollar. Meanwhile, we expect the Singapore Dollar to outperform the likes of Euro and Pound on idiosyncratic factors plaguing Europe.



 

Bonds – Headwinds from Rising Rates

 

Given the prospect of a significant move up in rates, we maintain our neutral rating on High Yield bonds, where credit spreads should provide some off-set to the adverse move in rates.

Key Points:

  • Global interest rates have started rising and will continue rising, posing a headwind for bond markets which have benefited from record low interest rates for several years.

    Despite this, opportunities can still be found in bond markets. Bonds have a place in investors’ portfolio as they serve as a stabiliser given that bond markets are generally less volatile than equity markets.

    Also, bonds offer coupon, and opportunities can still be found in high yield bond space, although high yield spreads have not widened enough to merit shifting to an overweight position.

    We re-iterate our view that the best place to be in corporate bonds at this juncture is at the shorter-dated end of the spectrum.

    Monetary tightening across the developed markets is still in its relatively early stages, as the maturing economic cycle has yet to generate significant inflationary pressure. Hence, we remain underweight in investment grade bonds.
  • Fed expected to raise rates further
    The Fed is likely to need to continue to send short-term interest rates higher, with inflation back at target and unemployment already below 4 per cent. We expect a total of four rate hikes in 2018, with the probability of four more next year as the economy shows increasing signs of overheating. The Fed will eventually need to push rates past neutral levels of 2.5 to 3 per cent in order to cool down growth.
  • Higher target for U.S. Treasury yields
    The U.S. yield curve is likely to continue to flatten as the Fed tightens, but longer-dated yields will still head higher and generate poor returns on investment grade bonds, hence we remain underweight these bonds.

    We have raised our 12-month target for 10-year U.S. Treasuries to 3.4 per cent from the 3.3 per cent made three months ago. A grind higher in yields remains the expected trend, rather than a sharper sell-off that would probably need to be driven by concerns that inflation was rising too quickly. Fed tightening could cause the yield curve to invert, but probably not until 2020.
  • Yield gap should limit upside of U.S. Treasury yields
    Rising U.S. yields are stretching the gap with other developed markets, where monetary policy continues to hold down interest rates across the curve. Weakening government finances imply that the U.S. should pay a higher premium, but even so, the relative attractiveness is improving. In Japan 10- year bond yields are still at zero; in Germany it is about 0.3 per cent and in the U.S. it is about 1.2 per cent.



 

Equities – Slight Underweight

 

We are now neutral Europe following the intensifying political scene in Italy. On equities, as an asset class, we are underweight following the ongoing troubles in the global markets linked to trade threats.

Key Points:

  • Given solid growth, gradual interest rate hikes toward more neutral levels are unlikely to derail equity markets. Valuations are also less demanding after the recent pullback although an incrementally less accommodative monetary environment means that markets would struggle to re-test recent peak valuation multiples.

    President Trump’s shifting positions on trade talks with China and a newly-announced probe to consider tariffs on auto imports pose uncertainties and potential headwinds for the markets. Rising interest rates and the impending central banks’ balance sheet unwinding are other headwinds to bear in mind. Overall, the unusually low volatility of 2017 is unlikely to resume. We have a slight underweight on equities after downgrading European equities to neutral from overweight due to concerns about Italy.
  • United States
    Fuelled by a more positive 1Q2018 earnings season and consensus earnings per share (EPS) upgrades, U.S. equities had a good month in May. Consensus 2018 EPS has been raised by 9 per cent year-to-date and represent a year-over-year growth of 22.2 per cent.

    The overall, the growth outlook for the U.S. remains upbeat. However, concerns surrounding peaking corporate earnings and economic growth and tighter financial conditions could continue to weigh on stocks. We are neutral on U.S. equities.
  • Eurozone
    Italy is the Eurozone's weak link and the main long-term risk to the sustainability of the monetary union due to Italy's systemic importance.

    Italy’s euro exit is not impossible, but it is going to be very difficult to orchestrate.

    The other risk with Italy is fiscal policy. A populist government could suggest slashing taxes and ramping up spending, challenging European Union rules and prompted rating agencies to credit rating.
  • Japan
    Japanese equities fell marginally in May as FY2018 corporate earnings guidance was relatively muted. Relative valuations are now the cheapest versus Developed Market peers but a sustained re-rating of the market would require more meaningful structural reform to boost overall growth. We are underweight Japanese equities for now and continue to see Japan as a bottom-up stock picking market.
  • Asia ex-Japan
    The threat of a trade war between China and the U.S. remains a key risk for Asian equities. Further ahead, the potential impact of the unprecedented global central bank unwinding remains a significant risk, especially for smaller Asian markets. We maintain our neutral stance for the region.
  • Singapore
    Based on historical trend since 2000, May is typically a weak month, giving credence to the saying “sell in May and go away”. In the last 18 years, the index has ended lower in 11 out of 18 periods, or 61 per cent of the time versus the average of 43 per cent for the rest of the year. The positive news is that June and July are typically better months, after the decline in May.

    The surprise outcome of the recent Malaysian election, in and of itself, is not likely to significantly affect the outlook of Singapore-listed stocks as only a handful of companies have exposure to the Malaysian market.

    In terms of sectors, we have been positive on the banking sector for several quarters now. We are also positive on select property stocks. Collective sales remained active for the first five months of the year. The previous peak was in 2007 when about S$11.5 billion deals were transacted. Last year, some S$8.6 billion were recorded. For the first few months of the year, more than S$7 billion have announced. At this pace, collective sales transactions are likely to exceed the record in 2007. Buoyed by this, property transactions have picked up this year and prices have also moved higher.



 

Important Information

 

Any opinions or views expressed in this material are those of the author and third parties identified, and not those of OCBC Bank (Malaysia) Berhad (“OCBC Bank”, which expression shall include OCBC Bank’s related companies or affiliates).

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question 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 a 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.

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.




 


Investing In A Late Cycle Environment

 

We maintain our overweight call on equities, as we believe that it continues to be a good hedge against inflation in the long term. Exposure in the bond space will ensure consistent income and serves as a portfolio diversification tool. However beware of continued uncertainty in the markets.

In regional markets, we are Overweight on Europe, Neutral Asia ex-Japan and US and Underweight Japan.

On bonds, we remain Neutral in both Emerging and Developed Market High Yields and are Underweight on Investment Grade bonds in the Emerging and Developed Markets.

  • Unit Trust: RHB Global Macro Opportunities Fund (Risk rating: High)
    Eligibility: High Net Worth Investors Only
    This fund invests in a target fund, the JPMorgan Investment Funds – Global Macro Opportunities fund and is suitable for investors seeking to benefit from enhanced diversification and sophisticated multi-dimensional risk management. This fund capitalises on global macroeconomic trends to drive returns by employing a dynamic multi-asset approach and aims to achieve capital appreciation in excess of its cash benchmark by investing primarily in securities globally, using financial derivative instruments where appropriate. This fund also targets to deliver potentially positive returns in varying market environments with expected volatility of 6-10% over the medium-term.
  • Unit Trust: Affin Hwang Select Income Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    This fund is suitable for investors focused on income as this fund invests in fixed income instruments such as bonds, money market instruments, repo and deposits with financial institution which provides regular income as well as high dividend yield stock to enhance income and return to the Fund. In addition, this fund comprises a portfolio of short-dated securities and should help moderate market volatilities impact amidst current market volatilities stemming from growth, inflation and trade frictions.
  • Unit Trust: Affin Hwang World Series – Global Balanced Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    Investors seeking capital growth opportunities through a portfolio of collective investment schemes with access into equities listed in global markets, fixed income instruments such as debt securities, money market instruments and fixed deposits, issued globally may consider this fund.
  • Unit Trust: RHB Asian Income Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    This fund invests in one target fund, the Schroder Asian Income fund and is suitable for investors seeking income and capital growth over the medium- to long-term via an active allocation strategy. Exposure in Asia is opportunistic as we view Asia being in a relatively strong position with a high level of foreign reserves, limited external debt and improving growth potential which benefitted from structural reforms.

Top Investment Ideas are an expression of the investment outlook in this publication. They are not recommendations made in accordance with your investment objective and risk profile. As such, we recommend that you complete a suitability assessment before purchasing your selected investment product.



This document is not intended to constitute research analysis or recommendation and should not be treated as such.

We recommend that you read and understand the content of the Information Memorandum for RHB Global Macro Opportunities Fund dated 1 June 2016 by RHB Asset Management Sdn Bhd. Investments in the Fund are exposed to country risk, equity risk, currency risk, management risk, emerging market risk and others as disclosed in the Information Memorandum. This fund is eligible to be purchased by High Net Worth Individuals only, the criteria of High Net Worth Individuals as per stated in Schedules 6 and 7 of Capital Market and Services Act (CMSA) 2007.

We recommend that you read and understand the Master Prospectus for the Affin Hwang Select Income Fund dated 18 July 2017 by Affin Hwang Asset Management Berhad. Investments in the Fund are exposed to specific risks including equity investment risk, equity-linked securities investment risk, credit/default risk, interest rate/price risk, structured products risk, country risk, currency risk, regulatory risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Prospectus for the Affin Hwang World Series - Global Balanced Fund dated 6 June 2017, by Affin Hwang Asset Management Berhad. Investments in the Fund are exposed to collective investment schemes risk, credit and default risk, interest rate risk, currency risk, liquidity risk, related parties transaction risk, country risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Master Prospectus for the RHB Asian Income Fund dated 6 October 2017, by RHB Asset Management Sdn Bhd. Investments in the Fund are exposed to management risk, liquidity risk, foreign investment risks such as currency risk and country risk and others as disclosed in the prospectus.

Product Risk Rating and Suitability Determination Matrix:

Product Risk Rating What this rating could mean to your principal amount Suitable for risk profiles:
Moderate Partial loss of full principal investment amount possible, total loss unlikely.
(‘Partial loss’ means the loss suffered by the investor can be up to 15% of the original investment principal)
  • Balanced
  • Growth
  • Aggressive
High Client may suffer substantial or 100% loss of principal investment amount.
(‘Substantial loss’ means the loss suffered by the investor can be more than 15% of the investment principal)
  • Growth
  • Aggressive


Unit Trust investments are not bank deposits and are not obligations of or guaranteed or insured by OCBC Bank (Malaysia) Berhad. Unit Trust investments are not guaranteed and are subject to investment risk unless otherwise specified. The investment risk includes general risks as described in the Information Memorandum/Prospectuses for Unit Trust investment funds (“Information Memorandum/Prospectuses”) and specific risks which may be different for each Unit Trust investment. Description of specific risks and general risks are published in the Information Memorandum/Prospectuses. With respect to Unit Trust investment, past performance is not indicative of future results; the net asset value can go up or down. Investors should also note that the net asset value per unit and distributions payable, if any, may go down as well as up.

Where unit trust loan financing is available, investors are advised to read and understand the contents of the unit trust loan financing risk disclosure statement before deciding to borrow to purchase units. Where a unit split/distribution is declared, investors are advised that following the issue of additional units/distribution, the NAV per unit will be reduced from pre-unit split NAV/cum-distribution NAV to post-unit split NAV/ex-distribution NAV; and where a unit split is declared, investors should be highlighted of the fact that the value of their investment in Malaysian ringgit will remain unchanged after the distribution of the additional units.

The Information Memorandum/Prospectuses have been registered with the Securities Commission Malaysia, which takes no responsibility for its content. A copy of the Information Memorandum/Prospectuses can be obtained at OCBC Bank’s branches. Units will only be issued upon the receipt of application form referred in, and accompanying the Information Memorandum/Prospectuses. Investors are advised to read and understand the contents of the Information Memorandum/Prospectuses, and if necessary consult their adviser(s), as well as consider the fees and charges involved before investing in the Unit Trust.

This document has been prepared without taking account of the objectives, financial situation or needs of any specific person or organisation who may receive this document. Accordingly prior to making an investment decision, you should conduct such investigation and analysis regarding the product described herein as you deem appropriate and to the extent you deem necessary obtain independent advice from competent legal, financial, tax, accounting and other professionals, to enable you to understand and recognise fully the legal, financial, tax and other risks arising in respect of the product and the purchase, holding and sale thereof.

You should obtain and read the Product Highlight Sheet of the product before you make a decision to acquire the product. All information provided in this document is general and does not take into account your individual objectives, financial situation or specific needs.

You are required to read and understand the terms and Product Highlight Sheet of the product carefully before executing any transaction relating to the product with us. You may request for a copy of the Product Highlight Sheet at OCBC Banks’ branches.

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question 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 a transaction or to participate in any particular trading or investment strategy.

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 statement 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.

OCBC Bank and its respective associated and connected corporations together with their respective directors and officers may have or take positions in any securities mentioned in this report (which positions may change from time to time without notice) and may also perform or seek to perform broking and other investment or securities related services for the corporations whose securities are mentioned in this report as well as other parties generally.

The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.




Lai Mun Yew (Michael)
  Vice President, Research, Wealth Management, OCBC Bank (Malaysia) Berhad

 

Global Outlook – Growth Outlook Remains Solid

 

The outlook for global growth remains solid, with the healthy pace of 2017 set to continue this year and the next. Inevitably there are risks, but these do not seem any more pronounced than usual.

Key Points:

  • PMIs both in developed and emerging markets have slipped moderately slippage from the unusually elevated levels at the turn of the year, but not to a worrying degree.

    Trade friction is the most pressing concern, after the escalation of threats from the U.S. to China, followed by the promise of retaliation. The assumption is that this is mainly a negotiating tactic, although it is clear that the U.S. feels a genuine grievance. Fiscal stimulus into a hot economy will suck in imports and raise the U.S. trade deficit, so trade friction will remain a constant risk, irrespective of any short-term deal.

    Looking more broadly, the developed economy monetary tightening cycle continues to proceed very slowly and cautiously. Headline inflation will be impacted by higher commodity prices, but core inflation is still subdued which means that there is no urgency to change policy, despite low unemployment rates.
  • United States
    After a long and slow recovery, the U.S. economy has normalised, with full employment and inflation at the 2 per cent target. Relatively low interest rates and the recently-implemented fiscal stimulus means that growth is likely to remain above trend for at least the next 18 months. In turn, this implies that capacity shortages should become more intense, with the unemployment rate falling below 4 per cent. Meanwhile inflation should rise above target, even if we ignore the impact of the weaker U.S. Dollar and stronger oil prices and focus on the core rate.
  • Eurozone
    Growth in Europe has clearly slowed from the unusually rapid pace of late 2017, but this seems partly due to temporary factors such as weather, strikes and inventory adjustment. It is hard to see a trigger for a more meaningful hit, as the policy environment is still supportive of growth and the structural reforms of recent years are starting to pay dividends.

    A further point to note is that even though indicators such as PMIs have slipped since the start of the year, they are still at relatively elevated levels. This is consistent with a strong economic performance and should provide the European Central Bank (ECB) with the necessary reassurance to wind down its asset purchase programme by the end of the year. Details are likely at the June policy meeting.

    The timing of the first interest rate hike is less clear, with the ECB’s guidance that it will not come until “well past” the end of quantitative easing. That points us to expect a move in 2Q 2019, but if inflation fails to respond to the improving economy then they are likely to wait.

    Brexit inevitably continues to dominate U.K. policy discussion, but still with little clarity on the likely relationship with the European Union once the transition period is over. The lowest unemployment rate in over 40 years and above-target inflation mean that another interest rate hike is not far away, although the Bank of England (BOE) seems to be wavering over a move in May after a burst of softer data. Expectations that the BOE might hike in May have diminished considerably with the market pushing out possibility of next rate rise to August.
  • Japan
    Minor scandals continue to affect Prime Minister Shinzo Abe and raises serious questions about his survival. However, the economic reform agenda seems to have run out of steam, while the recent reappointment of Bank of Japan (BOJ) Governor Haruhiko Kuroda should ensure monetary policy continuity. As such it is hard to see a big impact on economic policy if Abe were to step down.

    The economy remains in good condition. Labour market tightness is extreme and is forcing companies into productivity-enhancing changes, as well as raising incentives for capital spending. Core inflation is starting to edge higher, but it is a slow process as expectations have become entrenched after such a long period of deflation. The BOJ’s 2 per cent inflation target is still far in the distance and Japan seems likely to be the last central bank to emerge from current extreme monetary policy settings.
  • China
    Despite a strong start to the year that produced 6.8 per cent growth in 1Q 2018, policy-makers are clearly concerned about being the main target of U.S. trade policy. Reduced access to the U.S. market and to U.S. technology will hurt Chinese growth, although it is still hard to see how disruptive the barriers will be, considering the scope for negotiation. Nevertheless, we have to recognise that U.S. policy has fundamentally changed and this will involve some degree of damage to China. Concern about the hit from U.S. trade barriers might be behind signs that domestic policy is becoming slightly looser.
  • Emerging markets
    So far emerging markets have been resilient in the face of U.S. monetary tightening. In part this probably reflects the fact that policy settings across developed markets are still relatively loose, but it is also a testament to economic reforms in several emerging markets of recent years as well as improved current account positions. On balance, higher commodity prices help emerging markets.



 

Foreign Exchange & Commodities – Will The U.S. Dollar Head Higher?

 

US dollar remains supported by the prospects of tighter monetary policy, but the currency’s resilience may be tested if trade tensions resurfaces or if central banks turn out to be less hawkish than expected

Key Points:

  • Oil
    The supply-side reaction to the prospect of more profitable production should limit the scale of the rise in oil prices, unless the geopolitical situation deteriorates significantly. In the longer term, we doubt the durability of the OPEC-led supply constraints. As a result of the supply response, we doubt recent price levels can be sustained, and see WTI at US$60/barrel over the coming year, with Brent at US$65/barrel in 12 months.
  • Gold
    We retain the view that gold is poised to hover between US$1,200 to US$1,380 per ounce, as the tug-of-war between bearish and bullish factors calls for neither an exceptional rally nor an aggressive sell-off. We struggle to see convincing catalysts for a rally above US$1,380 per ounce given a broadly positive global macro backdrop. On the other hand, an aggressive sell-off is unlikely as high U.S. government debt will pose a threat and only inflation can help resolve that problem.
  • Currency outlook
    The U.S. Dollar was well supported in April after U.S. 10-year Treasury yields rose above 3 per cent. Looking ahead, the resilience of the U.S. Dollar depends on several factors.

    If U.S. 10-year yields stay in the 2.95 to 3.05 per cent range, this may continue to support the U.S. Dollar. However if it falls below 2.95 per cent, expect the recent U.S. Dollar rally to fizzle out and the greenback could retrace. Elsewhere, the ECB and the BOJ remained fairly confident of their growth and inflation outlook in April and this view may be increasingly echoed by other major central banks. Specifically, central bank rhetoric at this juncture seems to be downplaying the recent deceleration in economic momentum while focusing on the prospect of an eventual attainment of inflation targets in the medium term. If the accompanying rhetoric from non-U.S. central banks is not unduly accommodative, rate differential may not work in favour of the U.S. Dollar, which could cause the greenback to weaken.

    If trade tensions re-occur, expect the U.S. Dollar to weaken against the likes of the Euro and the Pound, while prospects for the Yen and the cyclicals/Emerging Market currencies will depend on the resultant impact on global risk appetite levels.

    On technical grounds, the U.S. Dollar index (DXY) may need to surmount the 92 level to keep the greenback afloat. However, base building behaviour within the 91 to 92 levels should suffice to provide the U.S. Dollar with support for now. Any failure to stay in this range or breakout of it on the downside could also weigh on the greenback.

    Despite the moderation of net inflows into Asia in recent weeks, the Singapore Dollar may continue to outperform the Euro, the Pound, and the Australian Dollar in the near term. Again, note that the relative outperformance of Asian currencies (including the Singapore Dollar) has been supported by better risk appetite levels; and another spike in risk aversion could well see sentiment towards Emerging Market and Asia currencies unravel rapidly.



 

Bonds – Yields Heading Higher

 

The rise in bond yields is manageable as long as the move is not too fast. Nevertheless, higher bond yields can contribute to downward price pressure on bond markets and we remain underweight on investment grade bonds.

Key Points:

  • This year has already provided a good example of what we can expect for the rest of 2018 and 2019, with periods of sharply rising bond yields followed by consolidation. Nevertheless this should not distract from the basic trend of rising bond yields in response to the maturing global economic cycle which will put growing pressure on inflation and, in turn, push central banks to tighten policy.
  • Fed should continue with slow pace of interest rate hikes
    The U.S. is furthest along the path of monetary policy normalisation, but most other developed economies are heading in the same direction. As we saw in the U.S. a few years back, the first steps towards policy tightening are very tentative and easily delayed by a patch of softer data, as we are seeing at the moment. Tightening in the U.S. is much more advanced, with six rate hikes and the start of unwinding the balance sheet expansion. So far, this has not been disruptive and the Fed is likely to see the need to continue to push rates higher gradually, with inflation back at target and unemployment nearly at 4 per cent. The Fed seems unconcerned about a moderate inflation overshoot, hinting at a payback after several years of undershoot.

    We expect three more rate hikes in 2018 with the probability of four more next year as the economy shows increasing signs of overheating. The Fed will eventually need to push rates past neutral levels of 2.5 to 3 per cent in order to cool down growth.
  • Should you worry about rising U.S. Treasury yields?
    Despite weak public finances and unstable politics, Italian debt yields are a per cent less than U.S. Treasuries, while any move away from zero in Japan is likely to be a slow process. The implicit attractiveness of U.S. debt to foreign investors should limit the scale of any sell-off and supports our 12-month target of 3.3 per cent for 10-year U.S. Treasuries yield. However, a continued rise in rates would be enough to generate poor returns on investment grade bonds, so we remain underweight on this segment of the bond market. Also, while the increase in U.S. Treasury yields should be gradual, it can contribute to some near-term equity market volatility and downward price pressure on bond markets as well.
  • Underweight duration and stay neutral High Yield bonds
    Generally, shorter duration bonds tend to be less adversely impacted compared to their longer maturity counterparts. For this reason, we remain underweight duration, in order to moderate the impact of higher interest rates on bond performance.

    Given the prospect of the move up in rates, we maintain our neutral rating on High Yield bonds, where credit spreads should provide some off-set to the adverse move in rates.



 

Equities – Supportive Backdrop

 

The economic and corporate earnings outlook remains solid. Valuations are less demanding after the pullback, but markets would struggle to retest recent peak earnings multiples given rising interest rates.

Key Points:

  • Emerging signs that trade war tensions are easing gave the markets some reprieve in April, even as concerns about higher rates again weighed on investor sentiment. Talks that the Trump administration is looking to negotiate directly with China provided some respite. On the other hand, yields on U.S. 10-year Treasuries hitting 3 per cent for the first time since 2014 reignited concerns that higher rates would again unsettle financial markets. Also, volatility in crowded technology stocks refused to go away. It was chipmakers’ turn to face selling pressure on potentially weaker-than-expected growth outlook.

    We maintain the view that robust global economic growth prospects and healthy corporate earnings outlook will continue to provide a supportive backdrop for equities. With growth staying solid, gradual rate hikes toward more neutral levels are unlikely to derail the positive stance. Valuations are also less demanding after the recent pullback although an incrementally less easy monetary environment means that market would struggle to re-test recent peak valuation multiples. Near-term, trade war threat and interest rate concerns continue to be key risks to derailing market momentum as well as the fundamental growth outlook. Further ahead, other major risks include the impending central banks’ balance sheet unwinding. Overall, the unusually low volatility of 2017 is unlikely to resume. Therefore, investors should stay engaged but continue to be discerning and adopt a diversified portfolio approach.
  • United States
    Boosted by the impact of recent tax cuts and potential fiscal stimulus, the growth outlook for the U.S. remains upbeat. At the same time, this means that earnings expectations were getting much tougher to beat. Not surprisingly, U.S. equities struggled to outperform in April even as the latest earnings season started positively. Despite this, earnings revision has remained flat. Also reflecting the somewhat unforgiving expectations, chipmakers saw selling pressure in April. In addition to fears from the trade war impact, concerns that slower-than-expected smartphone demand would derail earnings growth led to the rout. Overall, the growth outlook remains solid but the high expectations, continues to be challenge. We maintain a neutral stance on U.S. equities.
  • Eurozone
    European equities outperformed in April even as headline growth numbers started to moderate and the earnings season was muted. Coupled with the flat consensus earnings revision trend year-to-date, expectations remain relatively low. Fundamentally, we expect Europe to continue to catch-up with the rest of the developed world. Valuations remain less demanding versus developed market peers.
  • Japan
    Japanese equities had a relatively better month in April as selling pressure from foreign investors appeared to have eased. The weak start to the earnings season did not help though. As we progress through the fiscal year earnings season in the coming weeks, corporate guidance on earnings, share buybacks, dividends and medium-term plans will remain the focus. Relative valuations are now least demanding versus Developed Market peers but a sustained re-rating of the market would require more meaningful structural reform to boost overall growth. We stay underweight and continue to see Japan as a bottom-up stock picking market for now.
  • Asia ex-Japan
    Asia ex-Japan has not done well so far this year because of some concerns about the region’s growth prospect. Taiwan and the Philippines were the biggest losers. Singapore and India led the winners. Given its exposure to U.S. trade and technology, Taiwan succumbed to selling pressure in April. On the other hand, Singapore benefited from a positive consensus earnings upgrade trend. Although tensions seem to have eased, the trade war threat between China and the U.S. remains the key risk that could derail the bullish momentum. Looking ahead, the potential impact of the unprecedented global central bank unwinding of monetary stimulus remains a key risk, especially for smaller Asian markets.
  • Singapore
    Singapore equities led the region in April. While higher interest rates and trade tensions hogged the headlines, Singapore’s cabinet revamp was also closely watched for indications of future leadership on the local front.

    Despite the current U.S.-China trade tensions, strong gains for the three banking stocks helped to lift the MSCI Singapore Index above its January high. Based on the current level, the MSCI Singapore Index is trading at 13.3 times FY18 earnings and 11.9 times FY19 earnings and lower than the recent average of about 14 times earnings. Price to book is at 1.3 times and dividend yield is at around 4 per cent. We estimate that the current proposed tariffs on Chinese and U.S. goods will have minimal impact on Singapore listed companies.



 

Important Information

 

Any opinions or views expressed in this material are those of the author and third parties identified, and not those of OCBC Bank (Malaysia) Berhad (“OCBC Bank”, which expression shall include OCBC Bank’s related companies or affiliates).

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question 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 a transaction or to participate in any particular trading or investment strategy.

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The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.




 


Trading Volatility

 

While the outlook for equities remains constructive, investors need to be on the alert for lurking risks that may shift momentum quickly. We maintain a slight overweight in the equity sector.

On regional equity markets, we rate Europe as overweight, Asia ex-Japan and US both at neutral and Japan at underweight.

On bonds, we are still neutral on Emerging Market and Developed Market high yields, while we underweight Emerging Market and Developed Market Investment Grades.

  • Unit Trust: RHB Global Macro Opportunities Fund (Risk rating: High)
    Eligibility: High Net Worth Investors Only
    This fund invests in a target fund, the JPMorgan Investment Funds – Global Macro Opportunities fund and is suitable for investors seeking to benefit from enhanced diversification and sophisticated multi-dimensional risk management. This fund capitalises on global macroeconomic trends to drive returns by employing a dynamic multi-asset approach and aims to achieve capital appreciation in excess of its cash benchmark by investing primarily in securities globally, using financial derivative instruments where appropriate. This fund also targets to deliver potentially positive returns in varying market environments with expected volatility of 6-10% over the medium-term.
  • Unit Trust: Affin Hwang Select Income Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    This fund is suitable for investors focused on income as this fund invests in fixed income instruments such as bonds, money market instruments, repo and deposits with financial institution which provides regular income as well as high dividend yield stock to enhance income and return to the Fund. In addition, this fund comprises a portfolio of short-dated securities and should help moderate market volatilities impact amidst current market volatilities stemming from growth, inflation and trade frictions.
  • Unit Trust: Affin Hwang World Series – Global Balanced Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    Investors seeking capital growth opportunities through a portfolio of collective investment schemes with access into equities listed in global markets, fixed income instruments such as debt securities, money market instruments and fixed deposits, issued globally may consider this fund.
  • Unit Trust: RHB Asian Income Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    This fund invests in one target fund, the Schroder Asian Income fund and is suitable for investors seeking income and capital growth over the medium- to long-term via an active allocation strategy. Exposure in Asia is opportunistic as we view Asia being in a relatively strong position with a high level of foreign reserves, limited external debt and improving growth potential which benefitted from structural reforms.

Top Investment Ideas are an expression of the investment outlook in this publication. They are not recommendations made in accordance with your investment objective and risk profile. As such, we recommend that you complete a suitability assessment before purchasing your selected investment product.



This document is not intended to constitute research analysis or recommendation and should not be treated as such.

We recommend that you read and understand the content of the Information Memorandum for RHB Global Macro Opportunities Fund dated 1 June 2016 by RHB Asset Management Sdn Bhd. Investments in the Fund are exposed to country risk, equity risk, currency risk, management risk, emerging market risk and others as disclosed in the Information Memorandum. This fund is eligible to be purchased by High Net Worth Individuals only, the criteria of High Net Worth Individuals as per stated in Schedules 6 and 7 of Capital Market and Services Act (CMSA) 2007.

We recommend that you read and understand the Master Prospectus for the Affin Hwang Select Income Fund dated 18 July 2017 by Affin Hwang Asset Management Berhad. Investments in the Fund are exposed to specific risks including equity investment risk, equity-linked securities investment risk, credit/default risk, interest rate/price risk, structured products risk, country risk, currency risk, regulatory risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Prospectus for the Affin Hwang World Series - Global Balanced Fund dated 6 June 2017, by Affin Hwang Asset Management Berhad. Investments in the Fund are exposed to collective investment schemes risk, credit and default risk, interest rate risk, currency risk, liquidity risk, related parties transaction risk, country risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Master Prospectus for the RHB Asian Income Fund dated 6 October 2017, by RHB Asset Management Sdn Bhd. Investments in the Fund are exposed to management risk, liquidity risk, foreign investment risks such as currency risk and country risk and others as disclosed in the prospectus.

Product Risk Rating and Suitability Determination Matrix:

Product Risk Rating What this rating could mean to your principal amount Suitable for risk profiles:
Moderate Partial loss of full principal investment amount possible, total loss unlikely.
(‘Partial loss’ means the loss suffered by the investor can be up to 15% of the original investment principal)
  • Balanced
  • Growth
  • Aggressive
High Client may suffer substantial or 100% loss of principal investment amount.
(‘Substantial loss’ means the loss suffered by the investor can be more than 15% of the investment principal)
  • Growth
  • Aggressive


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The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question 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 a transaction or to participate in any particular trading or investment strategy.

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 statement 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.

OCBC Bank and its respective associated and connected corporations together with their respective directors and officers may have or take positions in any securities mentioned in this report (which positions may change from time to time without notice) and may also perform or seek to perform broking and other investment or securities related services for the corporations whose securities are mentioned in this report as well as other parties generally.

The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.




Lai Mun Yew (Michael)
  Vice President, Research, Wealth Management, OCBC Bank (Malaysia) Berhad

 

Global Outlook – Outlook Solid but Growth Easing

 

After the broad-based pick-up in global growth over the past 18 months, there are signs that momentum is starting to moderate. The outlook is still solid, but we are seeing less room for positive surprises.

Key Points:

  • Prospects for global recovery remain encouraging, although there are some early signs that momentum might be moderating slightly. Considering the large fiscal boost in the U.S. and loose policy settings in other developed economies, the main risk to growth seems to relate to trade friction.

    The latest Purchasing Managers' Index (PMI) show that business confidence has slipped a little, but is still at the elevated levels associated with healthy growth. The U.S. is the exception, where continued improvement probably reflects the big fiscal stimulus hitting the economy. Similarly, the economic surprise index has slipped to neutral levels.
  • United States
    Trade friction is the biggest threat to the benign global outlook. So far, the scale of the announcements from the U.S. has been quite limited and thus, not particularly disruptive. However, past comments of key players on the U.S. side show that China will be the focus and there is a clear risk of escalation after the initial round of Section 301-related measures, which could threaten supply chains across the whole Asian region.

    Elsewhere, a quirk of U.S. data in recent years is that the first quarter GDP release is often substantially slower than the rest of the year, even though the numbers are supposed to be adjusted for seasonal factors. A repeat seems likely in 2018, with growth set to come in below 2 per cent in 1Q 2018, even though tax cuts and spending increases should help to push full-year growth towards 3 per cent. Bumpy data should not distract from the positive growth outlook.
  • Eurozone
    Eurozone growth is cooling slightly, probably in response to Euro strength in recent months. PMIs remain at higher levels than in the U.S. or Japan, despite the softness of the past three months, and continue to point to robust growth.

    The cycle in Europe is perhaps two-to-three years behind that in the U.S., mainly due to the less resolute response to the crisis of a decade ago, followed by a period of premature policy tightening.
  • United Kingdom
    Short-term risks to the U.K. economy have diminished with agreement over a transition deal that will give until the end of 2020 to develop post-Brexit trade arrangements. The transition largely reflects U.K. pragmatism in recognising its weak bargaining position and acceding to European Union demands. This bodes well for a final settlement, although it involves risks for the U.K. government, given the sizeable support for a more pronounced break with the EU.
  • Japan
    The resurgence of a relatively minor political scandal has hit Prime Minister Abe’s poll ratings and is a risk to his position. However, there is no clear competing platform of ideas for running the economy.

    Growth remains relatively healthy and labour markets are steadily tightening, with the lowest unemployment rate in a generation.
  • China
    Chinese economic growth continues to look solid, although PMIs point to a mild slowdown, which looks credible considering the continued credit squeeze as well as signs of cooling in trade flows.

    Latest figures from Bank for International Settlements (BIS) suggest that policy-makers are having some success in controlling the credit bubble, with the debt-to-GDP ratio tracking sideways over the past year. Importantly, this has been achieved without any substantial hit to growth, presumably because the weakest borrowers have been targeted.

    However, the debt-service ratio is uncomfortably high after nearly a decade of excessive debt accumulation, which implies some vulnerability to disruption from trade friction with the U.S. China accounts for nearly half of the U.S. trade deficit and is the obvious target for U.S. import tariffs. The response will need to be finely calibrated, in order to show some push-back, but not so aggressive as to provoke an escalating trade war.
  • Emerging markets
    Many emerging markets are at an earlier stage of the economic cycle than in the developed world. Others are seeing their potential growth rate improve as a result of structural reform. This is positive for the overall global cycle as, in many cases, stronger growth is happening alongside that in the developed markets, but it is not “synchronised” as it is being driven by different factors. This is healthy from the perspective of the resilience of the overall recovery.

    There are some signs that the surge in global trade that helped to drive a positive growth surprise in Asia in 2017 is losing momentum. This is unlikely to turn into a cyclical headwind, but it could produce a more trend-like performance in 2018. The main threat to the region would come from the knock-on effects of U.S. protectionism towards China, as it is the processing centre for many exports from the region that are ultimately destined for America.



 

Foreign Exchange & Commodities – Greenback Struggling for Direction

 

It appears that Powell has smothered any hawkish expectations – the earlier commotion surrounding the dot plots and macro projections – for the near term following the FOMC meeting in March. This potentially weighs on the Dollar.

Key Points:

  • Oil
    The supply response to higher oil prices continues to develop, with U.S. output at record levels and the rig count up 7 per cent since the start of the year. However, hawkish appointments in Washington threaten a more aggressive policy towards the Middle East – especially Iran. This increases the political risk premium in oil markets.

    The supply-side reaction to the prospect of more profitable production should limit the scale of the rise in prices. In the longer term, we also doubt the durability of the OPEC-led supply constraints. We doubt recent price levels can be sustained over the coming year.
  • Gold
    The rising yield environment is a headwind for gold but concerns around global trade policies and slower global growth momentum have made financial markets nervous, which in turn kept gold well-supported. However, with gold primarily more of a hedge against systemic risk, we continue to struggle to see convincing catalysts for a further gold rally above US$1,380 per ounce against a broadly stable global macro backdrop with low recession risk.
  • Currency outlook
    Over the last few weeks, investors have focused on two main issues. Firstly, potential global trade war tensions, which is not expected to subside in the near term. Depending on the extent to which it impacts risk appetite, this may continue to have a dualistic impact on the U.S. dollar and Emerging Market currencies. On this front, note that our risk appetite indicator has been making more frequent incursions into risk-off territory and this is not expected to subside anytime soon.

    Secondly, despite continued dovish/neutral hints by a number of global central banks, markets continue to cling on to the belief that some central banks (apart from the Fed) would ultimately assume a more hawkish posture – which is the foundation of the current weak U.S. dollar narrative. As stated previously, pretty much only the ECB at this juncture is keeping that banner flying. On the U.S. dollar per se, note that Fed Chair Powell has pointedly doused any hawkish expectations for the near term following the Fed policy meeting in March. This is despite the initial (and very short-lived) commotion surrounding the dot plots and macro projections. For all intents and purposes, the Fed-centric U.S. dollar dynamics remains unchanged.

    Structurally however, expect global markets to start on a slightly more cautious footing for 2Q 2018. Note that our Macro Surprise Indices (for the U.S., Euro-zone, Asia) continue to head south, the global inflation impulse is far from fast, while cross-asset cues from the commodity/equity complex have been increasingly cautious. As such, expect global long-end yields to be capped, while the cyclicals on the currency front may find few fans.



 

Bonds – Recalibrate Expectations

 

With return expectations more muted, investors need to refocus on fixed income for its more traditional role as a means of providing consistent cash flow in the context of capital and wealth preservation.

Key Points:

  • Over the past decade investors have reaped super-sized returns during the secular bull market in bonds. Indeed, short-term capital gain strategies were almost viewed as a given during much of this period. With return expectations more muted (particularly in the coming months), investors need to refocus on fixed income for its more traditional role as a means of providing consistent cash flows in the context of capital and wealth preservation.
  • Fed likely to maintain gradualist strategy
    Fed Chair Jerome Powell’s first meeting in charge of the Fed last month pointed to a continuation of the gradualist strategy of his predecessor. Materially more positive growth forecasts had little impact on the Fed’s outlook for inflation or interest rates and even by the end of 2020 the Fed sees interest rates only 0.5 per cent above neutral levels. We think it is more realistic to expect a hike every quarter for the next couple of years, and policy starting to bite before end-2019, but this will probably involve incrementally hawkish shifts, rather than a more dramatic change.

    There is a risk that the Fed is seen as behind-the-curve, if inflation picks up over the coming months, which could lead to the yield curve steepening. Even though the year-on-year rate of inflation is set to step higher in March, due to the base effect, the overall trend for prices has been sticky in recent years and a rapid change seems unlikely.
  • Long bond yield stays below 3 per cent
    Yields are little changed over the past month as the impact of a heavy flow of news seemed to balance out. Despite trade friction, a Fed rate hike, higher oil prices and a weaker U.S. dollar, 10-year U.S. Treasury yields have been stuck a little below 3 per cent.

    Despite weak public finances and unstable politics, Italian debt yields are a per cent less than U.S. Treasuries, while any move away from zero in Japan is likely to be a slow process. This should limit the scale of any sell-off and supports our 12-month target of 3.3 per cent for 10-year U.S. Treasuries. However, a continued rise in rates would be enough to generate poor returns on investment grade bonds, so we remain underweight.
  • Maintain bias toward reducing duration
    Rising interest rates in recent months have put downward pressure on bond prices, and opened up an interesting entry point for shorter-duration (5-year or below maturity) bonds. Generally, shorter duration bonds tend to be less adversely impacted compared to their longer maturity counterparts. Since the start of 2018, duration has, by far, been the paramount factor in driving performance. We recommend that investors target overall portfolio duration modestly below the market average of just-under 5 years.
  • Stay neutral on High Yield bonds
    Given the prospect of substantive move up in rates, we maintain our neutral rating on High Yield, where credit spreads should provide some off-set to the adverse move in rates.



 

Equities – Maintain Slight Overweight

 

The ease with which global equities sell-off and volatility spikes serve as a reminder that risks continue to linger and momentum can shift quickly. As such, we continue to view the outlook for equities as constructive.

Key Points:

  • Spooked by fears that trade tensions initiated by the U.S. could deteriorate into a full-blown trade war, global equities had another difficult month in March.

    Markets rebounded in late March as tensions eased on talks that the Trump administration is negotiating directly with China, but not before wiping out year-to-date gains. Japanese equities bore the brunt as the impact was exacerbated by the risk-aversion triggered by the Yen appreciation.

    Fundamentally, we maintain the view that solid global economic growth prospects and healthy corporate earnings outlook would continue to provide a good backdrop for equities. As long as the growth momentum continues, gradual rate hikes toward more neutral levels are unlikely to derail the positive stance for equities.

    However, the ease in which markets sold-off and volatility spiked recently, is a good reminder to investors that risks lurk and momentum can shift quickly. It is hard to predict what could derail the positive momentum but the unusually low-volatility environment of 2017 is unlikely to be sustained into the year. Besides the trade war spat, key risks include U.S. inflation expectations, Fed rate hikes and the impending central banks’ unwinding of balance sheets. Investors should stay engaged but be more discerning and adopt a diversified portfolio approach.
  • United States
    U.S. economic data continued to surprise positively in March. However, following the sharp consensus earnings upgrade in January (+5.6 per cent), earnings revision has been flat (+1.4 per cent) since. Overall, EPS has been raised by 7 per cent since the beginning of the year and now represents a projected EPS growth of 10.6 per cent over 2017. Near-term, investors are looking for further growth catalysts; in particular, whether the windfall from the recent tax reform would translate into another round of share buybacks and special dividends as well as more sustained capital spending.
  • Eurozone
    European equities performed relatively well in the latest sell-off, helped by early signs that the EU and the U.S. seem to have averted a trade war for now. Despite a positive 4Q 2017 earnings season, year-to-date consensus earnings upgrades remained muted (with 2018E EPS growth largely unchanged at 8.3 per cent).

    Economically, we expect Europe to continue to catch up with the rest of the developed world. Valuations remain least demanding.
  • Japan
    Japanese equities bore the brunt of the trade war sell-off. In addition to the potential economic effect, risk-aversion triggered by a Yen appreciation also adversely impacted Japanese stocks. In addition to trade war fears, political risks for Japan have also come to the fore with Prime Minister Shinzo Abe's prospects of being elected for the third time now under threat. Also, earnings growth outlook are muted following the appreciation in the Yen. Relative valuations are not as demanding versus global peers but a sustained re-rating of the market would require more meaningful structural reform to boost overall growth.
  • Asia ex-Japan
    As a whole, Asia ex-Japan was relatively unscathed by the latest pullback in global equities. Within the region, Indonesia and the Philippines were the biggest losers. Korea, Malaysia and Taiwan were most resilient. While the results season so far has been positive, earnings growth outlook is moderating. Since the upgrades in January, consensus 2018 EPS revision for the region has been largely flat. Consensus 2018 EPS growth at 10.9 per cent remains a tad higher than the global average of 8.9 per cent. But the valuation-gap with developed markets has narrowed since the beginning of the year.

    Although tensions seem to have abated, a looming trade war between China and the U.S. remains the key risk that could derail the bullish momentum. Further ahead, the potential impact of unprecedented global central bank unwinding remains a key risk, especially for smaller Asian markets.
  • Singapore
    Singapore equities traded within a narrow band in March, after the strong rebound at end February. The MSCI Singapore Index was not able to break above the key resistance level in March, largely due to U.S.-China trade tension. In terms of valuation, the MSCI Singapore Index traded at 12.8 times FY 2018 earnings and 11.8 time FY 2019 earnings, lower than a recent average of about 14 times earnings.

    We believe that the current weakness in the market is an opportune time to look to accumulate quality stocks. We do not expect the current tariffs on Chinese goods to have a major impact on most Singapore sectors or stocks. The key local sectors such as telecommunications, retail, hospitality, tourism, property and healthcare are largely shielded from the impact of any potential trade war. For the Singapore Banking sector, higher interest rates have historically been positive and this is likely to be the case for this year.



 

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Volatility Strikes Back

 

A potential spike in inflation outlook was one of the reasons behind last month’s market correction, which threatened to wipe out all year-to-date gains. Markets have since recovered somewhat but the ease with which global equity markets sold off is a reminder as to how quickly momentum can shift, even as economic and earnings growth outlook remain positive.

On regional equity markets, we rate Europe as overweight, both Asia ex-Japan and U.S. are neutral while Japan is an underweight.

On bonds, we are still neutral on Emerging Market and Developed Market high yield sectors while we are underweight Emerging Market and Developed Market investment grade sectors.

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Global Outlook – Focus Shifting to Inflation

 

As the global expansion has matured over the past couple of years, the balance of risks has inevitably shifted and policy-makers and financial markets are now focused more on the threat from inflation.

Key Points:

  • Rising inflation seems like a realistic probability, especially with the tighter labour market, lower excess capacity and the boost from higher oil prices, but this is a long way from “runaway” inflation.

    The background of rising inflationary pressure and broader monetary tightening is likely to dominate market attention for the next couple of years. It should continue until we start to anticipate the next recession, but that is perhaps a question for 2020; for the moment, the global cycle looks solid.
  • United States
    We have again nudged up the U.S. growth forecast as a result of the bipartisan deal on the budget that sets out an even looser fiscal position than was implied by the tax reform passed at the end of 2017. It is feasible that growth this year could hit a high of 3 per cent.

    Fiscal stimulus into a mature cycle is imprudent. This is the point where the budget deficit should be minimal and the debt burden should be moderating. However, the deficit is set to top 5 per cent of GDP by 2019, while debt is over 100 per cent. This could create pressure for fiscal tightening in 2020 and will limit policy flexibility in the next downturn.

    A further effect of a sizeable fiscal boost into an economy with limited capacity is that imports will meet some of the additional demand. The U.S. trade deficit is already rising, but will climb further over the coming year. This means that trade friction will be a constant danger, as seen from the recent imposition of steel and aluminium tariffs
  • Eurozone
    Manufacturing PMIs for the past couple of months point to a moderate slowdown and could reflect a drag resulting from Euro strength, which will naturally hit manufacturing more than services. Nevertheless, business conditions remain buoyant as the Eurozone enjoys the best period of growth in a decade.
  • United Kingdom
    In the U.K., support for a soft Brexit is rising as the costs and complexities of the process become more apparent. However, the clock is ticking and the fluid situation in British politics means that the outcome is still deeply unpredictable. However, even Brexit uncertainty is not likely to be enough to prevent the Bank of England from soon raising interest rates in response to a 40-year low in unemployment, with inflation well-above target.
  • Japan
    Growth remains solid and there are finally some signs that the extended cyclical recovery and tight labour markets are starting to have an impact on inflation. After flat-lining for nearly two years, prices have moved higher over the past six months, with core inflation running close to 1 per cent.
  • China
    Policy-makers in China must be relieved to see subdued consumer prices, as a burst of inflation would lead to pressure for higher nominal interest rates. In turn, this would challenge the gradual approach of bringing the credit bubble under control. This is starting to have some effect, with the credit-to-GDP ratio tracking sideways in 2017, after several years of sharp increase.

    The growing dominance of President Xi is extending into an unlimited term in office. From a short-term perspective this could be viewed positively as it should increase the scope for reform. However, many countries have a two-term limit in order to prevent a slide into absolutism that can lead to poor policy decisions going unchallenged. China’s own experience with the mass starvation that accompanied the Great Leap Forward and the destruction of the Cultural Revolution should serve as enough of a warning about a dominant ruler.

    China accounts for nearly half of the U.S. trade deficit and is the obvious target for U.S. import tariffs. The response will need to be finely balanced, in order to show some push-back, but not so aggressive as to provoke an escalating trade war.
  • Emerging markets
    Many emerging markets are at an earlier stage of the economic cycle compared to the developed markets. Others are seeing their potential growth rate improve as a result of structural reforms. This is positive for the overall global cycle as, in many cases, stronger growth is happening alongside steady progress in the developed markets. This is healthy from the perspective of the resilience of the overall recovery.

    There are some signs that the surge in global trade that helped to drive a positive growth surprise in Asia in 2017 is losing momentum. This is unlikely to turn into a cyclical headwind, but it could produce a more trend-like performance in 2018. The main threat to the region would come from the knock-on effects of U.S. protectionism towards China, as it is the processing centre for many exports from the region that are ultimately destined for America.



 

Foreign Exchange & Commodities – Gold to Stay Range-bound

 

The combination of a softer greenback and demand for the precious metal as a portfolio hedge explains gold’s resilience to the higher interest rates. The recent market pullback was also no exception given that gold has often acted as a portfolio hedge in market downturns.

Key Points:

  • Oil
    The OPEC agreement to restrict supply is proving surprisingly effective, but the risk is that higher prices should bring more non-OPEC supply into the market. This should put a cap on a sustained rise in prices and, in the longer term, is also a threat to the cohesion of OPEC, if they cannot deliver higher prices in return for production restraints. As a result of the supply response, we doubt recent price levels can be sustained.
  • Gold
    We retain a view that gold price is poised to hover between US$1,200 to US$$1,380 per ounce, as the tug-of-war between bearish and bullish factors calls for neither a strong rally nor an aggressive sell-off. Our forecast reflects a view that the broad developed market monetary tightening will dampen gold prices over the medium-term.

    Gold's resilience to higher rates can be explained by portfolio hedge demand. However, with gold primarily more of a hedge against systemic risk, we continue to struggle to see convincing catalysts for a further gold rally.
  • U.S. Dollar
    Foreign exchange dynamics going into March promises to be a minefield of distractions. Barring an acute unwinding of confidence in the greenback from a spike in trade tensions, the U.S. Dollar may attempt to base-build against the majors in the coming weeks as we head into the 21st March Fed policy meeting.

    U.S. Treasury yields almost round tripped in the past month but are slightly firmer nevertheless. Despite new flows and aggregated rate differentials in favour of the U.S. Dollar in the past month, the broad Dollar only managed to rise to the top of its recent range. We continue to monitor market implied odds for a fourth Fed rate hike this year and the possibility of the 10-year U.S. Treasury yield breaching 3 per cent in the coming weeks.

    Looking ahead, the prospect of heightened global trade tensions may threaten to erode any bounce in the U.S. Dollar.

    Structurally, the general weak Dollar narrative may also continue to hum in the background and the rallying point for this construct may remain squarely on the shoulders of the ECB, given how the other cyclical central banks (Reserve Bank of Australia and Reserve Bank of New Zealand for example) have remained less than hawkish. On this front, investors may remain on the lookout for any expected change in the ECB’s forward guidance in the coming months.
  • Asian Currencies
    In Asia, note that the positive impetus for regional currencies from net portfolio inflows has petered out in recent weeks and they may not witness a resurgence if risk appetite levels continue to be weak. The potential for an escalation of global trade tensions (especially if the Eurozone and China weigh in) and the resultant deterioration of investor sentiment could also weigh on Asia and Emerging Markets.



 

Bonds – Don’t Ignore Bonds

 

Rising inflation may not be the best piece of news for bond markets but from a tactical perspective, there are bond strategies that investors can employ to cope with the near-term prospects of higher inflation.

Key Points:

  • Relatively speaking, we prefer equities over bonds. Among bonds, we prefer high yield credits to investment grade bonds. Returns on the latter are likely to be poor as economic recovery increases concern over the risk of inflation and this raises the prospect for tighter monetary policy. Supply and demand conditions are also deteriorating. As a result, we retain our underweight position on investment grade bonds.

    Here are some bond strategies that investors can employ to cope with the near-term prospect of higher inflation.
  • Lower bond duration
    Low duration bond strategies have lower sensitivity to interest rates and will mitigate capital losses associated with interest rate spikes. In this respect, we have been advocating an underweight position in investment grade bonds in both developed and emerging markets.
  • High yield credit can help enhance portfolio yield
    Staying invested in high yield credit as it can help diversify the sources of return in a bond portfolio. Having high yield bonds in a portfolio provide a cushion against the price impact of interest rate rises. However, we continue to hold a neutral position in high yielding bonds and would not advise investors to raise their exposure to this segment of the bond market due to the higher risk associated with the sector.
  • Active bond management can tide through rising rates
    As bond yields rise, active bond fund managers’ ability to manage duration can help to preserve the capital of bond portfolios. At the same time, skilled bond managers can opportunistically manage credit positions during periods of market dislocation.

    In a volatile rising interest rate environment, bond managers can help investors build income while reducing the level of risk on a portfolio level. Ideally, if bond yields rise gradually, it will be positive for active bond management. The ability of bond portfolio managers to reinvest maturing bonds into a higher coupon bonds in such an environment has the potential to increase the income investors receive over the long haul.
  • Interest rate outlook
    In the United States, the Federal Reserve is under pressure to respond to the inflationary impact of fiscal stimulus, although its gradualist approach seems unlikely to change under the new leadership of Jerome Powell. The underlying rate of core inflation is already close to the Fed’s 2 per cent target, and while they will not be too worried about a moderate overshoot, policy needs to respond as the risks change. Our expectation of four rate hikes in 2018, with more to come next year, looks increasingly probable.

    In the Eurozone, inflation is still subdued, which allows the European Central Bank (ECB) to edge towards policy tightening. The quantitative easing programme has already been scaled back and will wind up before the end of the year, with the first interest rate hike targeted for the middle of 2019.

    In Japan, inflation is still below the Bank of Japan’s 2 per cent target, but the extended cyclical recovery and tight labour markets are starting to raise confidence that the target is attainable.



 

Equities – Markets Have More Upside

 

Gradual rate hikes toward more neutral levels are not likely to derail the positive stance for equities against a backdrop of solid economic outlook and healthy corporate earnings growth.

Key Points:

  • Triggered by concerns with a potential spike in inflation outlook and the ensuing rise in U.S. 10-year Treasury yield, global equities sold-off by 9 per cent over 2 days in late January. The VIX index soared to 37, the highest level in 3 years. Markets have since recovered somewhat and volatility subsided, although new Fed Chair Jerome Powell’s upbeat views on the economy in late February did not help, given that it may be seen as a precursor to further rate hikes.

    Fundamentally, the solid global economic outlook and healthy corporate earnings growth prospects has provided a buoyant backdrop that remain largely in place. As long as the growth momentum continues, gradual rate hikes toward more neutral levels are unlikely to derail the positive stance for equities.

    However, the ease in which markets sold-off and volatility spikes is a good reminder to investors that risks lurk and momentum can shift quickly.

    It is hard to predict what could derail the positive momentum but market conditions are expected to be more challenging further into 2018 – as the acceleration in central bank unwinding coincides with the maturing economic cycle. Also, valuations remain extended and provide little support. Investors should stay engaged but be more discerning and adopt a diversified portfolio approach.
  • United States
    U.S. economic data continues to surprise positively, albeit at a more muted pace. On the back of the improving macroeconomic outlook and positive 4Q2017 earnings surprise so far, consensus 2018 earnings per share (EPS) has been raised by nearly 7 per cent since the beginning of the year and now represents a projected EPS growth of 10.6 per cent over 2017. These continue to provide a constructive setting for equities. However, these key growth drivers are likely to be front loaded. An unexpected spike in U.S. inflation is a key risk for domestic U.S. equities and, in turn, global equities as a whole. Inflation is starting to show signs of moving higher, and given the tight labour market, the accelerating growth could quickly change the inflation outlook.
  • Eurozone
    European equities were obviously not spared in the latest sell-off. The earnings season so far has been positive but year-to-date consensus earnings upgrades have been muted (with 2018E EPS growth at 8.1 per cent) as the sharp run-up in the Euro continued to be a dampener. Economically, we expect Europe to continue to catch up with the rest of the developed world. Valuations remain least demanding.

    Geopolitical risks here include the final outcome of the Italian elections. The results suggest that forming a new government will be a difficult and lengthy process, paving the way for a prolonged period of a caretaker cabinet led by the current Prime Minister Paolo Gentiloni. The next date to look forward to in Italy is 23 March, when the upper and lower house will reconvene and begin voting on a Chair for both houses, after which a government will be created.
  • Japan
    Japanese equities continue to do well, benefiting from the strong quarterly results season. However, the growth outlook is more muted. Relative valuations are not as demanding versus global peers but a sustained re-rating of the market would require more meaningful structural reform to boost overall growth. Following the recent catch-up by Japanese equities, we would be even more selective here.
  • Asia ex-Japan
    Asia ex-Japan, not unexpectedly, bore the brunt of the spike in volatility, although the region recovered fairly quickly to remain positive on a year-to-date basis. India and China were the biggest losers in February. Thailand and Malaysia were more resilient. While the results season so far has been positive, the earnings growth outlook is moderating. Year-to-date consensus 2018 EPS revision for the region is just +2.2 per cent, versus 5.5 per cent globally. Consensus 2018 EPS growth at 10.8 per cent is still a tad higher than the global average of 9 per cent.

    But the valuations gap with developed markets has narrowed. Key risks that could derail the bullish momentum include the trade war threat between China and the U.S. Even as the U.S. starts introducing new barriers to trade, China is intensifying efforts to seal free-trade arrangements. Further ahead, potential impact of the unprecedented global central bank unwinding remains a key risk, especially for smaller Asian markets.
  • Singapore
    Singapore equities have rebounded since the broad market correction which started in late January. In terms of valuations, the MSCI Singapore Index is trading at a blended forward price/earnings ratio of 14 times but is still attractively valued compared to peers in the region. Singapore’s FY2018 Budget remains an expansionary one, which a hike in the goods and services tax to 9 per cent expected sometime in 2021–25, to cater for rising costs. Other revenue initiatives include increasing the buyer’s stamp duty to 4 per cent from 3 per cent, which will apply to all residential properties with value in excess of US$1 million.



 

Important Information

 

Any opinions or views expressed in this material are those of the author and third parties identified, and not those of OCBC Bank (Malaysia) Berhad (“OCBC Bank”, which expression shall include OCBC Bank’s related companies or affiliates).

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question 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 a 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.

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.




 


Adjust Your Sails

 

2018 started with a bang for global equities as the positive momentum from late 2017 extended well into the new year. Trade war risk may be the biggest near term threat that could derail this bullish momentum.

On regional equity markets, we upgrade Europe to Overweight (from Neutral), Asia ex-Japan to Neutral (from Underweight) while keeping U.S. at Neutral and Japan at Underweight.

On bonds, we are still Neutral on Emerging Market and Developed Market high yields while we Underweight Emerging Market Investment Grades (from Neutral).

  • Unit Trust: CIMB-Principal Asia Pacific Dynamic Income Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    This fund invests invests in equities in the Asia Pacific ex-Japan region with the aim of providing regular income and capital appreciation over the medium to long term. Asia’s macroeconomic growth outlook remain strong with better policy management and higher commodity prices, improving the region’s appeal for foreign direct investment flows. The near-term momentum for equities in Asia ex-Japan remains positive as the region continues to catch up.
  • Unit Trust: TA European Equity Fund (Risk rating: High)
    Eligibility: Retail and High Net Worth Investors
    This fund invests in a diversified portfolio of local and/or foreign equity funds, REITs and ETFs investing in Europe. Prospects for European equities have improved – quantitative easing lowers borrowing costs and ECB’s actions appear to be improving sentiment, economic output and, for the time being, inflation expectations. As such, investors seeking exposure in the European region may consider this fund.
  • Unit Trust: Affin Hwang World Series – Global Balanced Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    Investors seeking capital growth opportunities through a portfolio of collective investment schemes with access into equities listed in global markets, fixed income instruments such as debt securities, money market instruments and fixed deposits, issued globally may consider this fund.
  • Unit Trust: CIMB-Principal Global Titans Fund (Risk rating: High)
    Eligibility: Retail and High Net Worth Investors
    Investors seeking exposure and investment opportunities in the developed markets, i.e US, Europe and Japan may consider this fund. This fund invests at least 50% of its NAV into 3 PGI Funds and 3 Schroder funds in the global titans market of the US, Europe and the Japan. This fund also has exposure to the Malaysian equities to balance any short term volatilities. The steadily recovering global economy especially in Europe and the US remains a healthy backdrop for equities.

Top Investment Ideas are an expression of the investment outlook in this publication. They are not recommendations made in accordance with your investment objective and risk profile. As such, we recommend that you complete a suitability assessment before purchasing your selected investment product.



This document is not intended to constitute research analysis or recommendation and should not be treated as such.

We recommend that you read and understand the contents of the Prospectus Issue No. M3 for the CIMB-Principal Asia Pacific Dynamic Income Fund dated 31 May 2017 by CIMB-Principal Asset Management Berhad. Investments in the Fund are exposed to country risk, credit (default) risk and counterparty risk, currency risk, interest rate risk, liquidity risk, risk associated with temporary defensive positions, risk of investing in emerging markets, stock specific risk and others as disclosed in the prospectus.

We recommend that you read and understand the content of the Master Prospectus for TA European Equity Fund dated 1 October 2016 which must be read together with the First Supplementary Master Prospectus dated 10 April 2017 by TA Investment Management Berhad. Investments in the Fund are exposed to country risk, equity risk, currency risk, market risk, emerging market risk and others as disclosed in the Master Prospectus and Product Highlights Sheet.

We recommend that you read and understand the contents of the Prospectus for the Affin Hwang World Series - Global Balanced Fund dated 6 June 2017, by Affin Hwang Asset Management Berhad. Investments in the Fund are exposed to collective investment schemes risk, credit and default risk, interest rate risk, currency risk, liquidity risk, related parties transaction risk, country risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Prospectus Issue No. M2 for the CIMB-Principal Global Titans Fund dated 25 January 2017, by CIMB-Principal Asset Management Bhd. Investments in the Fund are exposed to counterparty risk, country risk, currency risk, fund manager’s risk, legal and taxation risk, manager’s risk, stock specific risk and others as disclosed in the prospectus.

Product Risk Rating and Suitability Determination Matrix:

Product Risk Rating What this rating could mean to your principal amount Suitable for risk profiles:
Moderate Partial loss of full principal investment amount possible, total loss unlikely.
(‘Partial loss’ means the loss suffered by the investor can be up to 15% of the original investment principal)
  • Balanced
  • Growth
  • Aggressive
High Client may suffer substantial or 100% loss of principal investment amount.
(‘Substantial loss’ means the loss suffered by the investor can be more than 15% of the investment principal)
  • Growth
  • Aggressive


Unit Trust investments are not bank deposits and are not obligations of or guaranteed or insured by OCBC Bank (Malaysia) Berhad. Unit Trust investments are not guaranteed and are subject to investment risk unless otherwise specified. The investment risk includes general risks as described in the Information Memorandum/Prospectuses for Unit Trust investment funds (“Information Memorandum/Prospectuses”) and specific risks which may be different for each Unit Trust investment. Description of specific risks and general risks are published in the Information Memorandum/Prospectuses. With respect to Unit Trust investment, past performance is not indicative of future results; the net asset value can go up or down. Investors should also note that the net asset value per unit and distributions payable, if any, may go down as well as up.

Where unit trust loan financing is available, investors are advised to read and understand the contents of the unit trust loan financing risk disclosure statement before deciding to borrow to purchase units. Where a unit split/distribution is declared, investors are advised that following the issue of additional units/distribution, the NAV per unit will be reduced from pre-unit split NAV/cum-distribution NAV to post-unit split NAV/ex-distribution NAV; and where a unit split is declared, investors should be highlighted of the fact that the value of their investment in Malaysian ringgit will remain unchanged after the distribution of the additional units.

The Information Memorandum/Prospectuses have been registered with the Securities Commission Malaysia, which takes no responsibility for its content. A copy of the Information Memorandum/Prospectuses can be obtained at OCBC Bank’s branches. Units will only be issued upon the receipt of application form referred in, and accompanying the Information Memorandum/Prospectuses. Investors are advised to read and understand the contents of the Information Memorandum/Prospectuses, and if necessary consult their adviser(s), as well as consider the fees and charges involved before investing in the Unit Trust.

This document has been prepared without taking account of the objectives, financial situation or needs of any specific person or organisation who may receive this document. Accordingly prior to making an investment decision, you should conduct such investigation and analysis regarding the product described herein as you deem appropriate and to the extent you deem necessary obtain independent advice from competent legal, financial, tax, accounting and other professionals, to enable you to understand and recognise fully the legal, financial, tax and other risks arising in respect of the product and the purchase, holding and sale thereof.

You should obtain and read the Product Highlight Sheet of the product before you make a decision to acquire the product. All information provided in this document is general and does not take into account your individual objectives, financial situation or specific needs.

You are required to read and understand the terms and Product Highlight Sheet of the product carefully before executing any transaction relating to the product with us. You may request for a copy of the Product Highlight Sheet at OCBC Banks’ branches.

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question 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 a transaction or to participate in any particular trading or investment strategy.

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 statement 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.

OCBC Bank and its respective associated and connected corporations together with their respective directors and officers may have or take positions in any securities mentioned in this report (which positions may change from time to time without notice) and may also perform or seek to perform broking and other investment or securities related services for the corporations whose securities are mentioned in this report as well as other parties generally.

The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.




Lai Mun Yew (Michael)
  Vice President, Research, Wealth Management, OCBC Bank (Malaysia) Berhad

 

Global Outlook – Solid Outlook for 2018

 

The faster pace of global growth looks set to continue in 2018, with additional support from U.S. tax cuts. With positive momentum, we have revised up our global growth forecast for 2018 and 2019.

Key Points:

  • Solid global growth should continue in 2018 and it is set to remain encouragingly broad-based. This year is set to see the strongest expansion since 2010-11 when the world rebounded from the deep recession that followed the global financial crisis (GFC). However, growth remains well below the 5.1 per cent pace seen in the five years leading up to the GFC.

    The breadth of recovery is an encouraging sign of resilience. All of the major economic centres are set to grow above trend in 2018. This should make the global cycle less vulnerable to a negative shock in any particular country.
  • United States
    Corporate and income tax cuts should boost U.S. growth over the coming two years, which involves some overheating risks, coming so late in the cyclical recovery. The unemployment rate is already the lowest since the start of the century and another two years of solid growth could push it to dangerous levels. The drop in the unemployment rate has persistently been faster than the Fed has expected through the current cycle and alarm bells could ring if it heads towards 3.5 per cent. The Fed is trying to slow the economy onto a glide path and avoid the pattern of unemployment undershoot; inflation overshoot; interest rate squeeze and recession. Tax cuts make that task more difficult.

    Trade friction remains one of the leading risks, and could receive more attention from policy-makers following the completion of tax reform. Playing to nationalist sentiment will have its attractions in an election year. The US trade deficit has already rebounded close to record levels and will push higher as imports meet some of the additional demand that will come from tax cuts. China accounts for nearly half of the deficit, which makes it an obvious target, but not one that is likely to be passive in the face of higher US tariffs.
  • Eurozone
    The Eurozone recorded its strongest growth in a decade last year and something similar seems likely in 2018, with unusually strong PMIs at the start of the year.

    The various economies are at different stages of their economic cycles, after several Mediterranean countries suffered a recession after the austerity of 2011-2012, while Germany has already seen an extended recovery. This poses a problem for the European Central Bank (ECB), in designing a suitable policy, but “one size fits all” is a fundamental challenge of the monetary union.
  • United Kingdom
    The U.K. continues to be obsessed by Brexit, along with faint hopes that a second referendum might reverse the process. So far, the economic damage is limited, although higher inflation has cut into consumers’ spending power. The Bank of England appears to be expecting a more serious hit to come; otherwise policy-makers would not be so relaxed about a 40-year low in unemployment and inflation well above target.
  • Japan
    Japan has struggled to generate much inflation, even though a solid run of growth has exhausted the pool of labour. It looks like the current expansion will become the longest seen in the post-war period (although certainly not the fastest). There are now three vacancies for every two job seekers, but even that is failing to generate significant wage growth. Firms are responding to labour shortages by increasing investment and taking other organisational measures to boost productivity, but are keeping a cap on wages.
  • China
    Even though China has seen a steady pace of growth over the past year, in contrast to the pick-up elsewhere, the quality of that growth has improved. Policy-makers have squeezed credit creation, with the debt-to-GDP ratio stabilising over the past year (albeit at very high levels). The economic impact has been muted, apparently because it has been the least productive areas that have been starved of credit.

    Our expectation is that the drag from restricting credit growth becomes more pronounced in 2018, as the easiest cuts have already been made. However, the process is unlikely to be so aggressive that economic activity takes a big hit.

    Trade friction is a more pressing risk and policy-makers face a dilemma in dealing with US protectionism. No response would mean an easy “win” for the U.S. side but retaliating too aggressively would risk escalation. Finding a middle-ground will be a challenge.
  • Emerging markets
    Many emerging markets are at an earlier stage of the economic cycle than in the developed world. Others are seeing their potential growth rate improve as a result of structural reform. This is positive for the overall global cycle as, in many cases, stronger growth is happening alongside that in the developed markets, but it is not “synchronised” as it is being driven by different factors. This is healthy from the perspective of the resilience of the overall recovery.

    From a cyclical viewpoint, Asian economies are some of the prime beneficiaries from the rebound in global trade. However, from the same perspective, they are also vulnerable to protectionism, even if it is superficially directed towards China.



 

Foreign Exchange & Commodities – USD Weakness to Continue

 

The market seems convinced that the shifting monetary policy dynamics across the G10 central will continue to benefit these major currencies. On the flip side, however, this could weigh on the U.S. dollar.

Key Points:

  • Oil
    Demand growth has barely responded to the upturn in global economic activity, but the OPEC agreement to restrict supply is proving surprisingly effective.

    However, we remain cautious due to lingering concern over the likelihood of a supply response from non-OPEC producers. In particular, U.S. rig count is again showing signs of improving, as drilling responds to the recent strength in prices. This should put a cap on a sustained rise in prices and, in the longer term.
  • Gold
    Despite rising real yields, gold prices have stayed supported. Gold has been buoyed by the weaker U.S. dollar, and perhaps rising U.S. political uncertainty surrounding the U.S. government shutdown, debt ceiling and trade policy. Gold remains relevant as a portfolio diversifier and hedge.

    We retain a view that gold price is poised to hover between US$1,200 and revised upper end of the range of US$1380 in 2018, as the tug-of-war between bearish and bullish factors calls for neither a strong rally nor an aggressive sell-off.
  • U.S. Dollar
    Going into February 2018, investors may require a material shift in the current narrative to enable the U.S. dollar to pull out of its January 2018 dive.

    As it stands, the market remains convinced that shifting monetary policy dynamics across the G10 central banks will continue to benefit other major currencies at the expense of the U.S. dollar. To this end, ECB rhetoric in recent weeks has continued to fuel this scenario. Apart from the ECB, however, we note that other major global central banks (including those in Asia) have sought to dispel and defuse excessively hawkish intentions. However thus far, this has largely fallen on deaf ears.

    It remains to be seen therefore, if the U.S. dollar can re-establish a meaningful link with aggregate rate differentials, or even the nominal 10-year U.S. Treasury yields, both of which have continued to move in favour of the greenback for the past 3 months since November 2017. Nevertheless, this has failed miserably to grant the greenback any lasting traction during this period. In the interim, Dollar vulnerability may remain a path of least resistance.

    For Emerging Markets and Asia, note that our risk appetite indicator finally retraced back into Risk-Neutral territory in late January after dipping into Risk-On territory in late December 2017. This presents a potential caveat to the recent “Goldilocks’ environment in Asia, especially if Global and Emerging Market equities stumble or consolidate in the coming weeks. Note that the actual net portfolio inflows into Asia started to taper off at the end of January after the initial rush of inflows in the first few weeks of the month.
  • Singapore Dollar
    Elsewhere, the Singapore dollar’s appreciation remains constrained by NEER (nominal effective exchange rate) considerations and if the U.S. dollar continues to weaken broadly in February, expect other major currencies to continue to outperform the Singapore dollar.



 

Bonds – More Pressure on Bonds

 

Bonds may see more pressure as rising inflation means the Fed may hike rates faster than anticipated while a wider budget deficit and shrinking Fed balance sheet could push U.S. 10-year yields past 3 per cent.

Key Points:

  • The Fed has been happy to raise interest rates very slowly despite tight labour markets because of low inflation. However, there are now signs that the underlying pace of price rises could rise. This means that interest rate hikes will have to continue and we will see more pressure on bonds. Going forward, returns in 2018 will be more modest than last year as monetary policy normalisation take hold.

    Given the prospect of substantive move up in rates, we maintain our neutral rating on High Yield bonds where credit spreads should provide some off-set to the adverse move in rates. However, we lower our recommendation on Investment Grade bonds, which are more correlated with interest rates, to underweight.
  • United States
    The Fed is set to raise interest rates for the sixth time this cycle in March, and we now expect four rate hikes in 2018 (compared to three previously). Inflation is starting to show signs of moving higher and the year-on-year growth rate will jump from 2Q when some one-off factors drop out of the base for comparison. Higher oil prices, the weaker U.S. dollar and the tighter labour market are other factors that could fuel higher inflation. A burst of price pressures represents the biggest threat to expectations that the gradual policy adjustment can continue.
  • Europe
    Some ECB policy-makers seem nervous about holding policy loose for so long, in the face of strong demand. At the moment, the sluggish inflation rate is restraining the hawks but policy pressures could change quickly if prices rebound. At the moment, expecting the first rate hike in 1H 2019 seems realistic, after quantitative easing winds down in late 2018.
  • Japan
    Core inflation has edged higher in recent months, but the 2 per cent target is still well in the distance. Hints of a policy shift might come later in the year, starting with increasing in the target yield for 10-year bonds from the current zero. The Bank of Japan will be the last of the major developed economy central banks to tighten policy, whether or not Governor Kuroda is re-appointed.
  • Reduce exposure to investment grade bond.
    Monetary policy is set to tighten across an increasingly broad range of developed economies, through both interest rate hikes and reduced liquidity. This is likely to be a challenging environment for investment grade bonds.

    With the prospect of higher inflation, there is a need to reduce exposure to low-interest bearing and long-duration bonds. As a result, we are turning underweight on emerging market investment grade bonds from a neutral call – in addition to our existing underweight position in developed market investment grade bond.

    If we add the rising supply of U.S. government bonds (with wider budget deficits and the shrinking Fed balance sheet) into the mix, this point to continued pressure on U.S. Treasury yields which will also reduce the appeal of investment grade bonds.



 

Equities – More Positive on Equities

 

With the ongoing economic expansion and robust earnings outlook, it is hard to see a big systemic risk derail it in the near term. This paints a supportive backdrop for the current momentum for equities and overshadows the case of stretched valuations in the equity space.

Key Points:

  • Global equities markets are on a tear. The performance in 2018 to date is the strongest in almost two decades, and the MSCI World Index has entered its longest period since 1972 without a 5 per cent correction.

    This does not mean a short-term correction is imminent, but one will not surprise us. Current technical factors, such as the high level of margin debt and investor positioning, may result in a deeper dip, but drawdowns in bull markets are usually short-lived and take less than six months on average to recover.

    While there are many positives for equities, including a synchronized uplift in global growth and accommodative financial conditions, we remain cognizant of risks in the backdrop, such as inflation and political uncertainties. Hence investors need to brace themselves for speed bumps ahead.

    Overall, markets are expected to be more challenging as we progress through the year. Furthermore, the extended valuations suggest increasingly poor risk-reward potential for investors over the next 12 months. Regionally, our order of preference is Europe, the U.S., Asia Ex-Japan and finally Japan.
  • United States
    The ninth year of the rally for U.S. equities that started from the trough in 2009 kicked off with a boom. Driven by a more positive economic and corporate earnings growth outlook, the market rose by nearly 6 per cent in January. Boosted by several drivers, economic growth is projected to accelerate in 2018. These include the corporate and income tax as well as the acceleration in corporate capital expenditure. However, these key growth drivers are likely to be front loaded. Even though valuations continue to be the most demanding, the U.S. continues to be in the driving seat in terms of potential growth catalysts. Also, US equities provide the defensive end of our barbell strategy. Unexpected spike in U.S. inflation is a key risk for both domestic U.S. and global equities. Inflation is starting to show signs of moving higher, and given the tight labour market, the accelerating growth could quickly change the inflation outlook.
  • Eurozone
    We are now overweight (from neutral) on European equities because of Europe’s favourable growth outlook but also rising bond yields could benefit the European banking sector which is a major component of European market indices.

    The unusually strong business indicators so far suggest that Europe would continue to catch up with the rest of the developed world. Perhaps more importantly, despite the improved macroeconomic growth outlook, corporate earnings growth expectations (with 2018E EPS growth at 8.5 per cent) remain relatively muted as the sharp run-up in the Euro has been a dampener. Valuations are also least demanding. Geopolitical risks here include an Italian election expected by May 2018.
  • Japan
    Japanese equities started January on a strong note, as the market continued to catch up with global peers, but faded as concerns that the strong yen could derail earnings outlook grew and triggered some profit-taking. Although relatively muted, earnings growth outlook has been steadily improving. Relative valuations are not as demanding versus global peers but sustained re-rating of the market would require more meaningful structural reform to boost overall growth. Following the run-up, we would be even more selective here.
  • Asia ex-Japan
    Another strong set of macroeconomic numbers, for key markets in the region, added fuel to the on-going risk-on rally for Asia Ex-Japan equities. China is the biggest winner by far. However, the Philippines suffered negative returns in January. Led by China, expectations are increasingly discounting a faster growth trajectory for the region. Valuations gap with developed markets continue to narrow also as a result of the inflows. We remain neutral on China but would be even more selective here. Near-term, key risks that could derail the bullish momentum include the trade war threat between China and the US. Even as the U.S. starts introducing new barriers to trade, China is intensifying efforts to seal free-trade arrangements. Further ahead, potential impact of the unprecedented global central bank unwinding could have an adverse impact, especially on the smaller Asian markets.
  • Singapore
    Singapore equities continued the strong momentum from last year’s 36 per cent returns in the MSCI Singapore Index, with the market gaining another 6.4 per cent in January. The oil and gas sector was the leading outperformer, buoyed by several positive developments including the strong rebound in oil price and positive company specific developments.

    As prices head higher, valuations have also moved higher. At current price, the market is trading at about 1.4 times book, 14.4 times earnings and with an average dividend yield of about 3.5 per cent. In terms of valuations, this is not expensive versus historical levels or against regional markets. Given the run-up so far this year, we prefer to adopt a more cautious stance and recommend accumulation on price weakness.



 

Important Information

 

Any opinions or views expressed in this material are those of the author and third parties identified, and not those of OCBC Bank (Malaysia) Berhad (“OCBC Bank”, which expression shall include OCBC Bank’s related companies or affiliates).

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question 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 a 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.

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.




 


Sailing on the Winds of Change

 

After stellar market returns for 2017, stretched valuations and challenging macroeconomic conditions suggest winds of change are blowing.

On regional equity markets, we are still negative on Japan and Asia ex-Japan, but neutral on the U.S. and Europe.

On bonds, we are now neutral (from Overweight) on Emerging Market and Developed Market high yields. We are, however, neutral (from Underweight) on Emerging Market Investment Grades.

  • Unit Trust: RHB Global Macro Opportunities (Risk rating: High)
    Eligibility: High Net Worth Investors Only
    This fund invests in a target fund, the JPMorgan Investment Funds – Global Macro Opportunities fund and is suitable for investors seeking to benefit from enhanced diversification and sophisticated multi-dimensional risk management. This fund capitalises on global macroeconomic trends to drive returns by employing a dynamic multi-asset approach and aims to achieve capital appreciation in excess of its cash benchmark by investing primarily in securities, globally, using financial derivative instruments where appropriate. This fund also targets to deliver potentially positive returns in varying market environments with expected volatility of 6-10% over the medium term.
  • Unit Trust: RHB Asian Income Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    This fund invests in one target fund, the Schroder Asian Income fund and is suitable for investors seeking income and capital growth over the medium- to long-term via an active allocation strategy. Exposure in Asia is opportunistic as we view Asia being in a relatively strong position with a high level of foreign reserves, limited external debt and improving growth potential which benefitted from structural reforms.
  • Unit Trust: TA European Equity Fund (Risk rating: High)
    Eligibility: Retail and High Net Worth Investors
    This fund invests in a diversified portfolio of local and/or foreign equity funds, REITs and ETFs investing in Europe. Prospects for European equities have improved – quantitative easing lowers borrowing costs and ECB’s actions appear to be improving sentiment, economic output and, for the time being, inflation expectations. As such, investors seeking exposure in the European region may consider this fund.
  • Unit Trust: Affin Hwang World Series - Global Balanced Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    Investors seeking capital growth opportunities through a portfolio of collective investment schemes with access into equities listed in global markets, fixed income instruments such as debt securities, money market instruments and fixed deposits, issued globally may consider this fund.

Top Investment Ideas are an expression of the investment outlook in this publication. They are not recommendations made in accordance with your investment objective and risk profile. As such, we recommend that you complete a suitability assessment before purchasing your selected investment product.



This document is not intended to constitute research analysis or recommendation and should not be treated as such.

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In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question 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 a transaction or to participate in any particular trading or investment strategy.

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 statement 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.

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Lai Mun Yew (Michael)
  Vice President, Research, Wealth Management, OCBC Bank (Malaysia) Berhad

 

Global Outlook – Good Growth Prospects

 

Growth prospects look sound, but this is likely to be accompanied by more pressure on inflation and tighter monetary policy. This is typical for maturing cycle and should not involve too many hazards.

Key Points:

  • The global outlook seems benign, with a widening range of countries supporting global growth. Emerging markets are at varying stages of the economic cycle, although developed markets are generally showing cyclical maturity. Growth is likely to slow as capacity constraints start to bite, but this will not be a sudden process. Conversely, upside surprises could come from continued subdued inflation, broadening economic reform, or a rebound in multilateralism.

    Growth in the U.S. could pick up to 3 per cent from about 2.2 per cent this year if material tax cuts are approved. Labour shortages are becoming severe, with the unemployment rate at a 16-year low. The puzzle is why wages and inflation have not responded to supply shortages. The explanation seems to be a combination of technology, time lags, mis-measurement and idiosyncratic factors, with the expectation of mean reversion over the coming year.
  • Eurozone
    Growth was the strongest in a decade in 2017 thanks to a convergence of factors. Some of these – such as the lagged effects of Euro weakness, or the end of fiscal tightening – will fade in 2018, giving a slower pace of recovery. However, the region will still benefit from structural reforms and the more effective transmission of monetary policy through a healthier banking system, so the outlook is relatively positive. This is illustrated by unusually strong readings for business confidence.

    The cycle is less mature than in the U.S. or Japan, but even so the Eurozone unemployment rate is down to 7.5 per cent from a peak of 10.9 per cent in mid-2013. This is less than a point above the lows of the previous cycle.

    A year rarely goes by without elections in a major Eurozone member, and next is the turn of Italy. A vote is due by May 2018 and a fractured electorate with relatively high anti-establishment sentiment points to an unpredictable outcome. The question of Catalonian independence could also bring periods of instability.
  • United Kingdom
    The lack of progress on Brexit negotiations leaves a huge task for the U.K. in 2018, and political disarray points to more troubles ahead. The assumption that the two sides will be able to patch together a transition deal to allow time to formalise the longer-term relationship is looking more stretched. The complexity of the issues does not lend itself to the last minute deal that has characterised many negotiations.
  • Japan
    Japan is arguably at a more mature stage in its economic cycle than the US, although its overall growth rate is held back by poor demographics. Labour market tightness is extreme, with more than 15 vacancies for every 10 jobseekers and this is raising productivity by driving firms to use their scarce workers more efficiently. Corporate investment is also picking up, although firms still seem to be held back by concerns over longer-term growth prospects.

    Structural reform is still needed – especially in labour markets – but the economic rebound has eroded any sense of urgency. At the same time, constitutional reform and foreign policy are demanding more attention.

    In addition to its intractable demographics, Japan has serious longer-term risks due to weak government finances and the massive size of the Bank of Japan’s balance sheet. However, this has been the case for several years and it is hard to see a trigger that might provoke a crisis.
  • China
    Over the past year China has succeeded in slowing the pace of credit expansion without having a noticeably negative effect on economic growth. The suggestion is that it has choked off the supply of lending to the least efficient parts of the economy, without a detrimental impact on overall activity.

    However, note that the credit-to-GDP ratio is still rising – just at a slower pace than before. Similarly, the debt service ratio has been steadily climbing, which could create problems if the economy hits a soft patch. Claims that President Xi will push economic reform – especially attacking financial excesses – more aggressively in his second term seem plausible and should augur well for China in the long term.

    The risk of trade friction with the U.S. remains a key concern. Over the past year, the overall U.S. trade deficit has hit a decade-high of US$759 billion, and that with China has been US$363 billion (48 per cent). However, geopolitics and domestic U.S. issues seem to be as likely to drive trade friction as the direct trade imbalance between the two countries.
  • Emerging markets
    Many emerging markets are at an earlier stage of the economic cycle than in the developed world. Others are seeing their potential growth rate improve as a result of structural reform. This is positive for the overall global cycle as, in many cases, stronger growth is happening alongside that in the developed markets.



 

Foreign Exchange & Commodities – USD Bull-Cycle Nearing an End?

 

Improving growth outlook and firming inflation moving into 2018 could prompt tightening by other global central banks. This may lead to less attention on the Fed which could weigh on the U.S. Dollar as a consequence.

Key Points:

  • Oil
    The OPEC agreement to restrict supply held up better than expected - as a result we are increasing our 12-month price target by US$5 per barrel, to US$50/barrel for WTI and US$55 for Brent. However, we remain cautious due to lingering concern over excess supply. In particular, note that U.S. production has recovered after the hit from hurricanes and was at record levels in late November. Higher U.S. production should cap a sustained rise in prices and, in the longer term, could threaten the cohesion of OPEC, if it cannot deliver higher prices in return for production restraints.
  • Gold
    We retain a view that gold price is poised to hover between US$1,200 to $1,330 per ounce in 2018, as the tug-of-war between bearish and bullish factors neither call for a strong rally nor an aggressive sell-off. With G10 monetary tightening likely to gain steam and pressure gold prices lower, our tactical bias is to look to sell gold close to the top of the range. 2018 feels like another year for tactical trading rather than big bearish strategic positioning on gold.
  • U.S. Dollar
    Despite firmer shorter-dated U.S. bond yields and supportive yield differential dynamics, the broad U.S. Dollar continued to weaken in November. This may well persist into the end of 2017 as markets refrain from trading on major macro themes and remain defensively positioned, resulting in a lack of a coherent broad Dollar view.

    If the broad U.S. Dollar does indeed lose directionality, expect prices to react to news headlines affecting each specific currency pair. In this respect, expect some resilience in the Euro and the Pound. However, investors may also continue to remain wary of carry, with the cyclical currencies underperforming all through November. As such, we remain conscious of further polarisation within the G10 space.

    Going into 2018, the theme of global central bank policy convergence (a theme that failed to gain lasting traction in 2017) may continue to mature. This view is premised on the expectation of sustained macroeconomic growth prospects and firming inflation (and inflation expectation) dynamics, prompting greater action from global central banks (G10 as well as Emerging Markets). In this scenario, expect attention to be diverted away from the Fed (which effectively would be midway through its rate hike trajectory), resulting in increased appetite towards the other major currencies (at the expense of the U.S. Dollar).
  • Singapore Dollar
    Within Asia, net portfolio inflows have improved in recent weeks, supported in part by greater risk appetite. However, a North-South divide remains apparent at this juncture. The Singapore Dollar has continued to retain sufficient traction in terms of overall valuation - aided partially by broad U.S. Dollar weakness in recent weeks. On balance, expect the Singapore Dollar to underperform the Euro and the Pound into December, with the Singapore Dollar holding a slight advantage over the Australian Dollar, New Zealand Dollar, and Canadian Dollar.



 

Bonds – Turned Neutral on High Yielders

 

Despite a constructive macro backdrop and expectations of low corporate default rates, rising rates and challenging valuations compel us to reduce our longstanding overweight on high yield bonds to neutral.

Key Points:

  • The previous global monetary tightening cycle peaked in 2007 and provides a guide for what to expect in coming years. One lesson is that interest rates go above neutral levels before they peak, in order to slow growth down to trend. Another is that policy tightening does not level off until there is confidence (or concern) that it has been effective and the focus needs to switch to downside risks to growth.
  • United States
    How does the above help us to understand the possibilities in 2018 and beyond? First, it suggests that the Fed will need to keep raising interest rates until they are well past the 2.5 to 3 per cent that it sees as neutral. So, the rate hike cycle will not peak in 2018 but maybe in 2019. Second, it means that other G10 central banks are likely to follow the Fed’s playbook, and to tighten very carefully, but slow rate hikes does not mean no rate hikes.

    We see the Fed pushing through three more hikes in 2018. This could be faster or slower, depending on inflation readings, while a stimulative tax cut would also encourage the Fed to be more hawkish.
  • Europe
    The European Central Bank (ECB) is signalling that it will be patient in tightening policy, with asset purchases running for most of 2018 (albeit at a reduced pace). However, there is a more hawkish faction inside the ECB that might become more vocal as the economy improves, especially if there is the prospect of a German replacing ECB President Draghi when his term ends in late 2019. The first rate hike before mid-2019 seems like a reasonable expectation.
  • Japan
    Perhaps because deflationary expectations have become so entrenched after 20 years of flat or falling prices, wage growth has shown little response to the shortage of labour. Similarly, consumer prices have edged into positive territory, but have made only limited progress towards the Bank of Japan’s 2 per cent target over the past couple of years. It is hard to see much action on the policy front. Monetary policy is stuck, with little merit in further easing.
  • Cautious on developed market investment grade bonds
    Downside risks to developed market investment grade bonds are not particularly severe, but returns seem likely to be poor as the Fed hikes rates faster than the market is discounting. Market expectations have moved up again in recent months, but are still much more dovish than the Fed.
  • High yield bonds downgraded to neutral from overweight
    Despite the optimism on equities, high-yield bonds have been underperforming in recent weeks. There is no macro shock but supply considerations have been a factor. Concern about prospects for some highly leveraged borrowers may also be playing a role. High yield bonds already had a good run for the past two years. Given the strong run up in the high yield space, future credit market returns are likely to be more muted compared with the recent past. We have reduced our high yield bond calls to neutral from overweight.



 

Equities – Extended Valuations

 

Extended valuations suggest that risk-reward potential could be unattractive. This provides little support in the event of any significant equity market sell-offs.

Key Points:

  • The steadily improving global economic and corporate earnings growth outlook, relatively dovish monetary policies and limited geopolitical shocks in 2017, provided strong tailwind for risk assets and global equities. Asia ex-Japan, in particular, benefited from the robust risk-on sentiments. On the other hand, the more defensive U.S. market underperformed year-to-date.

    Given the benign global economic outlook, with growth expected to maintain a steady pace, the momentum is likely to stay supportive in the short term. However, with developed market growth maturing and central bank monetary tightening likely to pick up pace, this could turn. In particular, the markets could start to anticipate 3 to 6 months ahead of the peak in G3 central bank balance sheet, projected in 3Q 2018. The extended valuations would provide little support in any material sell-offs. U.S. inflation, which is widely unexpected to spike, is one of the key risk factors to monitor.

    Regionally, we continue to prefer Europe and the U.S. over Asia ex-Japan and Japan. We believe that Europe is poised to be supported by solid EU growth and a rotation towards relative value. We also remain positive on the U.S. which provides the defensive end of our barbell strategy.
  • United States
    While 2017’s economic growth rate for the U.S. is expected to be maintained in 2018, some of the growth drivers are expected to be front loaded. These include the acceleration in corporate capital expenditure as well as the introduction of meaningful tax reform. Unexpected spike in U.S. inflation is a key risk for both domestic U.S. and global equities. Even as the Fed, economists and investors continued to be puzzled by the disconnect between low inflation and low unemployment, consensus continues to expect modest core U.S. inflation going forward. Given where we are in the U.S. economic cycle, the Fed is unlikely to hesitate to raise rates when U.S. core inflation rise. Coupled with the low expectations, this is likely to spook the market.
  • Eurozone
    The ECB’s signal that the first rate hike will not happen until 1H2019 buoyed sentiments. Growth is expected to slow in 2018 but remains relatively positive. Perhaps more importantly, despite the improved macroeconomic growth outlook, corporate earnings growth expectations (with 2018 expected EPS growth at 8.9 per cent) remain relatively muted. Looking ahead, Europe’s geopolitical risks include an Italian election expected by May 2018. We maintain a neutral stance here.
  • Japan
    Valuations are not as demanding but sustained re-rating of the market would require more meaningful structural reform to boost restrained wages and overall growth. Japan is already at a mature stage in its economic cycle but the poor demographics continue to dampen prospects of better longer-term growth. Hence, we remain cautious here.
  • Asia ex-Japan
    Riding on the improved growth outlook and risk-on trade, Asia ex-Japan led the global equity rally in 2017. Expectations are increasingly discounting a faster growth trajectory for the region. Also, valuations gap with developed markets are narrowing. We remain neutral on China and would continue to be selective here. Macro risk factors, such as the trade war risk between China and the U.S. and potential impact of the unprecedented global central bank unwinding ahead, persist.
  • Singapore
    Following the equity market’s solid total returns in 2017 which has raised valuations above its past five year historical average, we adopt a selective stance and prefer to await better accumulation opportunities in the market. For 2018, corporate earnings growth is forecast at an improved 9 per cent versus 12 per cent for Asia ex Japan equities.



 

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The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question 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 a transaction or to participate in any particular trading or investment strategy.

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