DBS remains “neutral” weight on equities for 4QFY2022 ended December, advocating investors to stay with quality companies with deep moats and pricing power such as those within the healthcare and luxury sectors, says CIO Hou Wey Fook.
During the media briefing for the 4QFY2022 CIO Insights report, Hou reiterates healthcare and luxury as two long-term secular themes that are beneficiaries of demographic changes and new lifestyle choices.
Despite near-term headwinds posed by supply chain disruptions, DBS believes the medical equipment segment represents a strong area of growth for healthcare. Ageing populations, the prevalence of chronic diseases and growing demand for innovative devices and services underpin the sector’s expansion potential, adds Hou.
“Structurally, healthcare devices and services have outperformed global equities. Return on capital for healthcare devices easily outstrip global equities over the last two decades, and that is reflected in the structural outperformance of this sector over global equities. We think this will continue,” he adds.
Meanwhile, companies within the luxury theme have demonstrated resilient earnings that evidence robust consumer demand. DBS presents the case for luxury to remain in vogue by being at the forefront of cutting-edge millennial trends and benefitting from multi-year tailwinds of digital lifestyles and China’s consumption.
“Despite challenges with lockdowns, China with its middle class will contribute an upsized demand for luxury products. Today’s China megacities hold more economic power than entire countries in terms of GDP. Its share of consumption of global luxury goods is expected to rise to over 40% by 2025 — two times that of Europe and the US respectively,” says Hou.
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Overweight US, China and Japan equities, underweight Europe
After Jackson Hole, US equities took a hit as the US Federal Reserve doubled down on its hawkish stance and raised the likelihood of an economic hard landing. At this juncture, DBS believes US cyclicals represent an attractive risk-reward proposition as valuations have contracted by 41% since end-2020.
In particular, it remains constructive on technology given the secular nature of digital disruption, as well as the earnings and ebitda margin resilience of the sector. “In summary, the growth trajectory for US technology is poised to outlast any temporary derailing by short-term macroeconomic changes and should be well-poised to ride the tailwinds of toppish bond yields which are expected around 1QFY2023,” says Hou.
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DBS maintains its “overweight” China call notwithstanding the selloff in Chinese equities during the past quarter, triggered by slowing corporate earnings and an ailing property sector, among others. The call is due to attractive valuations and supportive government policy, the latter of which should buoy the economy and provide catalysts for an eventual upward rerating of the stock market.
“It is worth noting that the regulators have made headway to maintain the listing of more than 200 China American Depository Receipts by availing audit working papers to be reviewed by US officials. Pending a favourable outcome, this should serve as a tailwind for the rerating of China technology stocks,” says Hou.
Japan equities continue to perform well amid a weak yen environment in 3QFY2022. In 1QFY2022, all sectors except for communications (due to Softbank) reported positive earnings surprises, Hou highlights. Domestic demand is set to receive a boost upon the easing of border controls — amid the reopening, DBS expects earnings to recover in hotels, restaurants, travel and consumer spending-related operations.
Although the weak yen will result in higher imported inflation, it also provides Japanese exporters such as machinery, autos, semiconductors and cosmetics an advantage. DBS continues to advocate long-term exposure in Japan’s Sumotoris (sumo wrestlers) or economic heavyweights with a durable global advantage.
Meanwhile, sentiment towards investing in Europe remains weak as the Russia-Ukraine crisis drags on and the euro drops below parity, Hou points out. He adds that global slowdown fears have gained traction as the region’s PMI and export numbers show signs of weakening. “We, therefore, remain cautious on European equities in general, though selective opportunities exist in oil majors, luxury, healthcare, and technology,” he concludes.
