Since 2023, DBS’s chief investment officer (CIO), Hou Wey Fook, has advocated for investors to put their cash to work. The call panned out “extremely well” and has continued to “pay off” in the 1Q2024, says Hou at a media briefing on April 1.
“Despite the shift in market expectations from seven rate cuts at the start of this year to just three cuts today, risk assets, particularly equities, continued to rally,” he says in DBS’s CIO Insights report for 2Q2024. “Our thematic favourites of technology and artificial intelligence (AI), as well as quiet luxury, scored with hefty gains. Gold was also a strong performer for our portfolios.”
While bonds, which is an interest-rate sensitive asset class, did not see capital gains, they still accrued interest income of over 5% per annum from investment-grade (IG) corporates, the CIO points out.
In 2Q2024, with the exception of an unexpected resurgence in US inflation, the expected scenario of slow rate cuts amid the DBS CIO’s base case scenario of a soft landing, “bodes well” for equities and bonds.
He recommends investors remain invested and deploy any excess cash into multi-asset portfolios.
Broadening rally in US equities
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In the months ahead, Hou sees a “broadening” rally happening within US equities brought about by “loose” financial conditions, with surging equity prices and narrowing credit spreads offsetting the impact of elevated bond yields. The low interest rate expense ratio; “favourable” portfolio positioning where investors are extremely “underweight” in sectors such as energy, tech hardware and equipment and capital goods; as well as the economic resilience in the US are other drivers behind the broadening of the current rally.
While the price surge in 2023 was mainly dominated by counters in big tech, other sectors, especially “laggards” in energy and healthcare, are set to join in the fun. US healthcare, deemed a defensive sector riding the secular global trend of an ageing population, has risen 8.4% since the lows of October 2023. “It has gone up in 2024 vis-a-vis [the] technology sector of 17.1%; there is some room for healthcare to catch up,” reasons Hou.
“Energy is our other beneficiary of a broadening market, being up just 0.4%,” he adds, noting that it will “not be surprising” to see integrated oil companies or oil services companies delivering strong earnings this year and the next, with lofty oil prices likely to remain range-bound.
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To factor in prevailing geopolitical risks, the DBS team has slightly increased its average Brent crude oil forecasts to US$77–US$82 per barrel in 2024 from US$75–US$80 per barrel previously.
“With a return on equity (ROE) expected to be at about 15% to 20%, the current price-to-book (P/B) is underrated … If one compares it to the mid-2000s, [when] ROE was in 15% to 20%, price-to-earnings (P/E) or P/B was nearer three times. Today, we are at two times, so there is a fair amount of catch-up between P/B and the current earnings that these companies are delivering,” says Hou.
“I remember 15 years ago, at a time when I was manning portfolios, energy stocks made up 15% of the S&P500. Today they are at just less than 4%. So it’s been a highly downgraded asset class or sector… [and] in terms of positioning, the US energy sector, relative to its benchmark, is at an all-time low. This is very acute. So we do think that the broadening of the market will benefit energy,” he adds.
Despite the surge in tech share prices, “tech plays” will remain popular and remain “a good play”. “If you have been following our calls … we’ve been pounding the table for this call in the past four, five years, and it has worked out extremely well,” he says.
When asked whether the optimism is similar to the dot-com bubble that ballooned in the late 1990s and peaked in March 2000, Hou sees a critical difference. “Although not inexpensive, the valuation of the tech sector today has strong support from earnings growth. Back in 2000, earnings were not there but P/E was inflated, hence that was the bubble that [eventually] burst,” he says. “Today, [the sector’s] P/E is much lower than in the 2000s, but [it is] very much supported by earnings growth.”
Partly thanks to AI innovation, big tech should maintain share buybacks and see strong earnings as well as free cash flow growth with an expected CAGR of 18.4%. “This will continue, we believe, because of AI that is going to affect every part of the economy today,” says Hou.
Bonds over income equities and cash
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With yields at around 5%, bonds provide a consistent source of cash flow to investors’ portfolios, which is why it is still preferred over cash.
“Don’t sit on cash, but deploy them to bonds,” Hou stresses. “We see total return from interest income, bonds as well as from capital gains when the Fed cuts rates. [These] will outperform returns or cash deposits.”
Hou prefers bonds over income equities due to their attractive risk-reward. Investors should also gain exposure to private assets to enhance their risk-adjusted returns, he adds.
Among the bonds, the CIO recommends investors stay with IG bonds with an average portfolio duration of between three and five years.
“When held to maturity, the yield that an investor bought the bond at, would likely be the total final return … With today’s yield to maturity of about 5% for IG bonds, unlike prior years’ [rate] of 2% during the zero-bound interest-rate environment, we believe such a yield or cashflow is very attractive for the income-generating exposure of our barbell portfolio,” he says.
He adds that investors should not buy anything that has less than 50 names at least. “Unlike stocks, you’re not paid to take concentration risks [with bonds] … We tell our clients that they have to have at least 50 names or buy into mutual funds.”
Tailwinds for gold
While gold was off to a shaky start in 2024, down 0.9% year-to-date as at Feb 29, the precious metal continues to offer a favourable risk-reward. The lower price, which came after a stellar performance in December 2023, was somewhat expected given profit-taking and further developments on the rates front.
DBS has kept its target price of US$2,250 per ounce with tailwinds such as “persistent” buying from central banks, lower rates and the weakness in the US dollar.
Gold is still resilient, with its 100-day moving average tested just once, on Feb 14, notes the DBS CIO team. Since then, gold prices have remained “comfortably” above US$2,000 per ounce, which is similar to its levels in late November 2023, even though the US dollar and rates have strengthened marginally since then.
“This resilience suggests that the consensus view for gold is still fundamentally positive and that expectations for future rate cuts are still alive and well, notwithstanding that the timing of these cuts might be later than initially expected due to the resilience of the US economy,” says the DBS team.
Meanwhile, the ongoing geopolitical tensions, which could benefit gold as a safe-haven asset, could be a potential source of supply-chain pressures, thereby leading to the risk of inflation. Should the latter happen, yields could go back up further, which would be negative for gold, the team adds.
‘Pockets of opportunities’ seen in Asia ex-Japan
In Asia, the team continues to see “pockets of opportunities” and will remain “selectively invested” in North Asia or Asia ex-Japan, says Yeang Cheng Ling, DBS’s CIO, North Asia. The team has an “overweight” rating on Asia ex-Japan equities.
“After all, this is a region with a big population size and importantly, its valuation has been low over the past few years … The cheap valuation is supported by good earnings growth in between a low- and mid-single digit for 2024 and 2025,” he says.
“For example, in 2024, [the region’s] earnings per share (EPS) growth for 2024 and 2025 is projected at between 12% and 14%,” he adds.
Some of the sectors identified by Yeang include those aligned with population spending and domestic consumption. The region continues to play an important role in the semiconductor supply chain, as seen in the rising semiconductor imports in China.
According to senior investment strategist Joanne Goh, the broadening rally in equities is expected to extend to other countries in Asia, especially Asean countries.
“If you look at the performance of the Asean countries, they’ve been lagging behind the rest of the market. [What we are] looking for is a consolidation in the US dollar. Asean markets should benefit a lot from a weakening US dollar in the second half of the year,” she says.
“So, if you look at some of the sectors in Asean, which would benefit, we include the Singapore REITs. We also include some of the Asian markets, some of the Thai markets, some of the interest rate beneficiaries like the finance companies, and also the China-plus-one strategy beneficiaries that we saw last year,” she adds.
In the second half of the year, Asean countries will stand to benefit when the expected rate cuts take place and should the US dollar weaken, she says.
Asian currencies look set to recover after a “rough start”, thanks to a rising yen and a stable renminbi against a US-led worldwide rate cut cycle and turnaround in exports.
Chinese market
China, which has been trading at a deep discount, continues to cast a shadow on the global economic outlook. “Long the key source of global demand, China’s economy has progressively slowed in recent years with mounting imbalances and associated vulnerabilities,” says the DBS team in its CIO 2Q2024 report. “Domestic sentiment has been dealt multiple blows, from regulatory, governance and pandemic-related crackdowns, to a deep and continued sell-off in asset markets.”
Despite the measures already announced by the Chinese authorities, the country’s property sector remains a “major headwind”.
“Resolving further exacerbation of the property sector remains the top priority, as it is presenting assorted headwinds, from deflationary pressures on private demand and banking system balance sheet to local government financing stress,” adds the team.
However, it recognises the recently concluded annual meetings by the National People’s Congress provided “some optimism” with several announcements focusing on resolving imbalances, boosting investment and supporting consumption.
The way the team sees it, China’s persistent downward economic pressure requires persistent easing from the Chinese policymakers. “We foresee both monetary and fiscal policies surprises to the upside in 2024 to achieve the goal of stabilisation and high-quality growth.”
