Hou Wey Fook, DBS Bank
Given a balanced client portfolio, cash has been upgraded to overweight (7%) from a neutral (5%) at the end of 2017. Investors are advised to take profit from part of their equity holdings and wait for future investment opportunities, Hou said during a media briefing in Hong Kong.
He explained the change of position is due to the increasing market volatility caused by the US-China trade conflict.
This week, the US government announced it is considering an additional 10% tariff on $200bn worth of Chinese goods, including fish and seafood, handbags and other consumer products.
But Hou believes the tariffs have a short-term impact on markets. “In a trade war, everyone is a loser,” he continued. “The Trump administration is aware of it so it is unlikely that they will initiate a full-scale trade war. It is more short-term uncertainty because the negotiations and settlement are going to create a lot of choppiness in the markets.
“Trump is still very heated on the trade topic. When market sentiment stabilises, it is time to allocate more money to risk assets,” he said.
Despite a neutral position on equities, the asset class still takes up half of the bank’s balanced client portfolio.
“What we are now suggesting to a balanced risk investor with a long-term horizon is holding 50% of equity assets in their portfolio.”
The bank has a neutral position on alternatives, including hedge funds and gold, and is underweight bonds, he added.
Current tactical allocation for a balanced portfolio
Source: DBS Bank
US equities preferred
In terms of geographic allocation, US equities is the most preferred, according to Hou.
“The nine-year bull US market is still intact. The global growth remains stable with inflation under control. In addition, the US equity market has outperformed the European market for many years,” he added.
Because of corporate tax reform in the US, he believes the companies will see extra liquidity in their balance sheets. The additional capital is expected to drive the overall capital expenditure and encourage share buybacks, leading to growth in earnings per share.
He is not concerned about the potential negative impact of interest rate hikes on the stock market. “There is fear of rising interest rates. But historically, the stock market did not necessarily go down amid a gradual interest rate hike,” he added.
Hou is bullish on US technology stocks, which have been the return driver of US equities in the first half. He advises investors to allocate to a basket of tech companies, for example through a technology fund.
However, valuations are high. The large-cap US tech companies, namely the FAANG (Facebook, Amazon, Apple, Netflix and Google) group, are collectively valued at 21.4x for 2019, more expensive than 15.9x of the average company on the S&P 500 Index, he said.
But Hou said investors should also look at the price-to-earnings to growth (PEG) ratio. When the company growth rate is taken into consideration, the FAANG companies are currently valued at a PEG of 1.04, which is more attractive than 1.21 of the broader market, he said.
Year-to-date major equity indices performance
