“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”

– Teh Chi-Cheun, CEO and Executive Director, Pacific Mutual Fund Bhd; Member of OCBC Wealth Panel

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 nearterm 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%.