Investor sentiment in the first half of 2023 was dampened by debt ceiling negotiations in the US coupled with stresses in the banking sector globally, in turn putting financial markets under pressure.
Even so, risk assets seemingly stayed resilient. The S&P 500 gained roughly 20% year-on-year despite the US Federal Reserve’s (Fed’s) battle against inflation and the country narrowly avoiding a debt default.
Going forward, analysts from DBS expect moderate growth in global economies amid continued shifts in global supply chains, escalating geopolitical tension and tighter credit conditions.
In particular, they highlight six themes to watch for the quarter ahead:
1. Developed market equities: riding the US tech rally; Japan gaining momentum
While US corporate earnings have stayed resilient, with strong jobs and wage growth fuelling domestic consumption, margins are expected to head South with macro headwinds gathering pace.
“We reiterate our positive view on US tech; momentum as shown in its recent rally is likely to persist given the sharp rise of artificial intelligence (AI) and growing expectations of an eventual Fed pause. These factors will encourage greater allocation of funds to the sector,” DBS analysts explained.
In Japan, where stocks have surged to their highest level since 1990, there is hope that the upward trend in the Tokyo Stock Price Index (TOPIX) can be sustained for the long term. Buoyed by the Bank of Japan’s accommodative monetary policy and market reforms, DBS analysts believe the Asian economy has some unlocked value.
Compared with the US, Japan is perceived as a more affordable option and could serve to diversify risks stemming from a potential US slowdown and supply chain disruptions, given the escalating US-China tensions, the analysts added.
To this end, they see opportunities in several areas: firstly, value stocks, which are likely to heed to the government’s call to reform; secondly, domestic demand stocks, with strong pricing power; and, thirdly, ‘sumotoris’ or sectors such as electronics, semiconductors, automobiles and automation, which are likely to benefit from government stimulus.
Additionally, the analysts highlighted opportunities from investing in banks, which are seen as reflation beneficiaries that could potentially have rising yields.
2. Asia ex-Japan equities: quality to lead the way for China; slowing growth for Asean
The performance of Chinese equities has been concerning for market watchers given they started the year strongly, but have subsequently unperformed their global peers.
DBS’ analysts see potential in China’s state-owned banks, thanks to their sustainable and attractive yields. Other promising performers include the insurance sector, large technology platform companies and A-shares.
Meanwhile, the growth trajectories of most Asean 6 countries (except Thailand) are expected to slow, primarily due to a decline in external trade caused by downturns in commodity and electronic sectors, a normalisation of demand following the reopening boost and tighter financial conditions.
However, with favourable demographics, a growing middle class and availability of credit, private consumption growth within Asean could potentially lead to positive surprises; exposure to key themes can help to increase portfolio resilience against the backdrop of a slowing US economy, added DBS analysts.
3. Bonds: emerging opportunities in high quality emerging market (EM) bonds.
There seems to be a continued focus on high-quality assets for fixed income investors, especially as the economy teeters around an inflection point.
The only exception to the “lower” risk spectrum is EM credit, which has traditionally been associated with higher risks. Yet this space is a clear outperformer after the Fed paused its hiking cycle on the back of the peaking of US dollar strength after a Fed pause being favourable for EM foreign exchange, as well as a lower rates environment encouraging general yield-seeking opportunities abroad, DBS’ analysts highlighted.
4. Alternatives: tapping into private markets for exposure to corporate growth; further upside for gold
With private markets increasingly the epicentre of corporate growth and value creation, investor interest and participation have risen steadily.
Moreover, with the industry now recognising an imperative to embrace the private wealth segment, private markets are now more accessible than ever before. It is therefore an opportune time for investors to tap private markets for exposure to corporate growth, said DBS analysts.
Developments in the past quarter have had a double-barrelled positive impact on gold, skewing its return to the upside; heightened volatility stoked short-medium term inflows while rising growth risks and sticky inflation have bolstered the long-term demand outlook for the precious metal as a safe-haven asset.
Notwithstanding the latest bout of volatility in gold prices, there are further tailwinds for gold that have yet to be priced in; among which are challenges in the US commercial real estate sector, flows from gold ETFs and futures, and increasing central bank buying as geopolitical tensions continue to escalate.
5. Commodities: slow and steady decline since June peak
With commodity prices reaching a 50-year low relative to equity valuations, the case for the next commodity super cycle is compelling.
However, cyclical factors such as a more benign rate regime need to first be in place, DBS’ analysts said, adding that it is unlikely that commodity prices will experience sustained appreciation.
To this end, their view is for investors to stay cautious on commodities in the near-term; until there are material changes to the interest rate and growth outlook globally.
6. Thematics: the transformative power of AI
AI has been the buzz word that market watchers have been watching out for in the hope of catching the next wave of innovation to astronomically propel returns.
However, the key difficulty isn’t discerning the winners emerging from disruptive technology, but rather the scarcity of investable avenues that can truly capture the upside of the new technology given that such companies might still be privately owned.
Another concerning factor is the complexity of knowing how much of this upside is already priced into existing opportunities, DBS’ analysts said.
