Equities (August 2017)
Cautious Outlook

“The combination of our view that global monetary policy environment will become tighter and the overall growth prospects which seemed to have peaked underpin our cautious stance on equity markets.”

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

 

Key Points:

  • Given our view that global monetary policy environment will become tighter, we remain cautious on equities. Also extended valuations provide limited support – even though valuations are not necessarily on its own a short-term negative catalyst.
  • In view of our cautious stance, we tactically continue to prefer the U.S., for its relatively defensive traits. We are also neutral on Europe and continue to underweight Japan and Asia ex-Japan.
  • U.S. equities had a more positive month in July as Janet Yellen raised the possibility that the Fed would consider slowing the pace of interest rate hikes if inflation remains persistently below its target. The recently started 2Q earnings season also provided a lift.
  • Fundamentally, tighter labour market and potentially higher interest rates suggest that corporate profit margins are unlikely to be sustained going forward. Nevertheless, given our overall cautious view on global equities, U.S. equities remain more defensive.
  • While Mario Draghi’s latest comments that ECB policy makers agreed to put off a formal debate on tapering provided some relief for the markets, near-term financial market movements would continue to be dictated by clues on the ECB’s move to phase out its quantitative easing. We see a less dovish ECB as the economic recovery continue to gain pace. Overall, we remain neutral on European equities.
  • On Japan, we maintain our view that there is limited progress in reform and sustained economic growth and, hence, re-rating of the market would require more meaningful structural transformations. To this end, PM Abe’s fading popularity is not encouraging. As such, we see macro factors and movements of the yen to remain key drivers for the market.
  • Asia Ex-Japan Ex-Japan could bear the brunt again as the investors’ focus on the Fed and ECB’s balance sheet exit plans gain momentum. Also, we would not completely rule out trade war risk for the region as Trump’s stance on global trade remains unclear.
  • Despite the recent outperformance, we continue to stay positive on Financials among Developed market sectors. Notwithstanding the near-term uncertainties, we continue to expect higher interest rates as central banks become increasingly more hawkish. This would, in turn, benefit the banks.
  • The other developed market sector in the limelight is the Technology sector. It remains one of the most expensive sectors. In general, we believe that valuations across the sector are reflecting rosy scenarios in new and emerging technologies. As such, we believe that investors should be cautious.
 
OCBC MoneyMonday™