BOS reduces equities allocation

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Bank of Singapore (BOS) is scaling back exposure to risky assets because of the re-escalation of US-China trade tensions, said CIO Rajeev De Mello.

“A month ago we reduced our Asia equity weighting because of the more confrontational nature of the trade dispute. We remain  cautious about equity markets in general going forward, and believe that emerging markets are especially vulnerable,”  De Mello told a recent press briefing, where he discussed BOS’s second-half market outlook.

“The US Federal Reserve’s (Fed) dovish interest rate stance, economic recovery in China prompted by fiscal and monetary stimulus measures, and indications of an early resolution of the US-China tariff war combined to improve investor sentiment and drive asset prices and their valuations higher during the first four months of the year,” he said.

The positive outlook was reflected in an equity-bias strategy with substantial Asia exposure, at the OCBC-owned wealth manager, which has $102bn of assets under management, according to its website

“That view changed significantly in early May,” said De Mello.

Although the Fed’s position is still supportive of global markets and China’s domestic consumption has been boosted by tax cuts and other policy-induced measures, the trade standoff threatens to undermine worldwide economic growth.

The menace to markets comes, despite an otherwise encouraging backdrop. Unemployment in the US, Japan and parts of Europe is low, productivity gains have been generated by the application of new technologies, inflation is benign throughout the world, and the US consumer is as confident as it was in 2005, according to the most recent Michigan survey.

“However the Huawei controversy demonstrated that the tougher US rhetoric was not simply a negotiating pose,” said De Mello.

In a more volatile environment for markets – after risk premia, as reflected in the widely-followed VIX index of volatility, collapsed in April – BOS favours US dollar investment grade bonds and defensive US equities.

De Mello emphasised that “emerging markets are in the eye of the storm of global trade tensions, and emerging market currency markets have already been buffeted by the latest headwinds”.

Defensive in China

“Meanwhile, Asia ex-Japan equities have suffered most this month, and China and Hong Kong share prices have been hit particularly hard,” said BOS’s China equity strategist, Louisa Fok, at the same press briefing.

The MSCI Asia ex-Japan index plunged by about 8% and the MSCI China by 9% in the month to 17 May, although both indices remain positive (up 5%) for the year.

Fok noted that defensive sectors, such as consumer staples, have held up well in China and Hong Kong, relative to other sectors. Her strategy retains a defensive bias, and she is positive about high dividend paying Hong Kong property developers and Mainland China banks.

“But, avoid IT hardware companies. The Huawei controversy is likely to worsen and that will likely have ramifications on the the sector as a whole,” said Fok.


MSCI Asia ex-Japan Index and MSCI China Index vs MSCI World Index

Source: FE Analytics. Returns in US dollars: 1 Jan 2019 – 27 May 2019

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