“We have a preference of Europe over the US because Europe is at the early stage of economic growth, and of course, European equity valuations are lower than those of the US,” James Cheo, Singapore-based senior investment strategist at Bank of Singapore, told FSA.
European equities also tend to have higher dividend income compared to US equities, he added.
The bank has held its neutral stance on US equities since the beginning of 2017, according to Cheo, adding that it looks for sectors that are undervalued.
BoS favours banks in the US and consumer discretionary stocks, while it doesn’t like utility stocks.
Both banks and consumer discretionary companies benefit from economic growth, with banks also benefiting from rising inflation. “In an environment where bond yields are rising [because of rising inflation], banks usually benefit because they make money from interest income, so their margins will be higher as a result.”
On the flipside, utilities do not do well in an inflationary environment. “They are unable to grow dividends in a rising inflationary environment. And if they don’t have pricing power, their value would be eroded.”
Similarly, Tuan Huynh, Singapore-based head of discretionary portfolio management for Asia-Pacific and chief investment officer for Asia-Pacific at Deutsche Bank Wealth Management, said that the bank is neutral on US equities.
“The S&P 500 is trading at about 18x, but given the environment of rising interest rates and rising yields, we are thinking that this 20% premium to historical average is no longer justified.”
However, he still expects US companies to have double-digit earnings growth this year, especially with the introduction of the US tax reform.
“With the tax reform, part of the additional money will also be used to buy back shares or increase dividends,” he said.
Huynh prefers other markets to the US, particularly those that have the highest return expectation, which he believes are Asia and Europe.
Hartmut Issel, Singapore-based head of Asia-Pacific equities in UBS Wealth Management’s chief investment office, also expects US equities to continue rising in line with global equities.
“Tax reform is the icing on the cake,” he told FSA. “We look for S&P 500 profits to rise 16% in 2018, the best growth rate since the early days of the recovery from the financial crisis [in 2008].”
US equity valuations are “above average, but not excessive,” Issel noted, adding that they may be fair given low inflation and durable economic growth.
In addition, in spite of healthy balance sheets, US companies have been reluctant to invest in their businesses, even as economic conditions have improved.
However, he believes that the number of headwinds that impaired companies’ willingness to spend is slowly dissipating.
“Business optimism has risen alongside a strong economic growth outlook.”
The recent tax reform will also unleash more cash for companies. In addition, Issel believes that there is a less stringent regulatory environment since President Trump took office.
“The expectation for less red tape in the future and lower compliance costs may be enough to release pent up investment demand. As a result of these changes, we expect businesses to start investing for growth again.”
Issel expects that companies in the technology, industrial and real estate sectors will be beneficiaries of these changes.
