“Income-bearing instruments outperform equities in these periods of moderation and that is another way to tell clients to get into strategies which pay you to wait,” Jooste said at a media briefing in Hong Kong yesterday.
Richard Jerram, the bank’s chief economist, added that the global macroeconomic environment is currently “as good as it gets”.
Richard Jerram, Bank of Singapore
For example, global growth has peaked according to a collection of economic indicators, such as the global manufacturing PMI, the economic surprise index and global trade and output. They have gone back to neutral levels, he said.
Jooste added that he is sceptical about earnings growth forecasts in global markets. The earnings per share growth forecast of the MSCI World Index, for example, is 10% this year. But last year’s average earnings for companies on the index was not more than 3%.
“Certainly, the markets surprised us in the fourth quarter last year and first quarter this year in terms of earnings, but we think this is starting to moderate and we are pretty sceptical of the market’s ability globally to continue to justify the current valuations,” he said.
During his presentation, Jooste showed that high yield bonds and dividend-paying stocks outperformed equities during periods of economic moderation.
According to him, there were nine periods of economic moderation since 2010 during which the S&P 500 returned an average of -2.8%. By comparison, emerging market high yield bonds and US dividend-yielding stocks on average returned 1.6% and 1.2%.
Although Jooste advises clients against adding new equity positions, he said that they should keep them and rotate away from sectors and markets that overvalued. For example, energy and technology have been downgraded from overweight to neutral.
Sectors to hold are financials, particularly banks because they tend to benefit when interest rates increase. He also continues to favour the healthcare sector because of its improving profitability and lower financial leverage compared to other industries.
In terms of markets, Jooste is neutral on Europe, which is an upgrade to the bank’s underweight position. It is due to the region’s macroeconomic outlook, which continues to improve, he said.
Jooste is neutral on the US markets and sees no significant upside potential that can be found in US equities.
He is underweight Asia-Pacific, noting that the position is skewed by the bank’s decision to downgrade China to neutral from overweight due to concern over the country’s credit expansion.
Cash is not king
He advises clients not to be overweight in cash.
“Cash is not king. It might be king for a day but diversification pays you a lot more than being overweight in cash and timing the market,” he said.
According to him, alternatives such as hedge funds and private equity offer diversification in a balanced portfolio.
“What you also get is the ability to earn some extra return if you are willing to sacrifice some liquidity,” he said.