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.

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.

Recommendations:

  • 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.

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 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.

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.

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 – 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.



 

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).

Recommendations:

  • 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.



 

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




 



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