SINGAPORE (Mar 27): In what has been one of the fastest selldowns in history, the Covid-19 outbreak has single-handedly driven global equities to bear territories in the span of just a few trading sessions.
But, despite the massive market meltdown, DBS chief investment officer Hou Wey Fook believes most of the negative headwinds have already been substantially priced in.
The virus-led volatility has invoked memories of the 2008 Global Financial Crisis and the 2000 dotcom bust. Yet, Hou’s message is clear: This too shall pass.
“No doubt, the viral crisis has been disruptive. But, it is also a transitory event that has no bearing on long-term structural trends,” says Hou. “Investors should be clear-headed on what constitutes structural headwinds and what constitutes transitory headwinds.” The way Hou sees it, the US-China trade war represents a bigger long-term threat to risk assets, given that the basis of the war is driven by ideological differences between the global superpowers.
In contrast, he believes the novel coronavirus outbreak is a disaster that – despite inflicting some sharp medium-term bouts of pain — will eventually fade away. In fact, Hou has already noticed some “green shoots” on the horizon.
“The improved situation in China, which has led to the re-opening of factories, is indeed an encouraging sign, as it means a gradual normalisation of global supply chains,” says Hou. “If China succeeds in bringing its production capacity back to the 70% mark, it will mark the start of a gradual recovery.” For now, Hou is banking on a U-shaped economic recovery due to the scale of the crisis that is affecting many major economies around the world, as well as the potential difficulties that could arise from restarting global supply chains.
To this end, Hou is falling back on his goto tactic in such times of uncertainty: A Barbell Strategy, with a portfolio holding globally diversified securities in two areas of focus — income generators and growth equities.
Specifically, Hou has his eye on two key themes: technology and global infrastructure.
With central banks around the world maintaining a dovish stance given ongoing macro anxieties, Hou notes that the hunt for yield is likely to dominate in the second half of 2020.
As such, he opines that the hunger for data, and speedy and reliable communications will be more intense than ever before.
This, he says, signals a definite win for investors who choose to jump onto the tech bandwagon.
“5G will drive the development of semiconductors, communication equipment, and associated services,” says Hou, adding that the ultimate winners of this theme include integrated circuit makers and semiconductor manufacturers.
A second theme for investors to focus on in the coming year is global infrastructure, Hou shares. He adds that this is especially relevant amid evolving trends in urbanisation, digitalisation, climate change, and rising inequality.
“Given the constraints of government spending, we see increasing reliance on private capital to finance public infrastructure,” says Hou. “With strong pricing power and limited competition, there are opportunities to seek out attractive and sustainable yield plays.”
In his view, infrastructure assets today present high and sustainable dividend payouts, as well as generate respectable yields in comparison with other asset classes. On top of this, infrastructure assets have strong pricing power due to cost pass-through structures and limited competition, he says.
“Allocating a portion of investments into infrastructure will have the effect of reducing overall portfolio volatility while bolstering overall returns,” says Hou.
In addition, Hou has conviction calls on stocks with growth opportunities, such as technology, healthcare and China equities.
He also sees gold as a crucial “risk-diversifier” for investors’ portfolios. Having returned 2% over the past three months alone, the precious metal has lived up to its name as an effective portfolio hedge by outperforming all other asset classes and currencies.
“We believe recession talks will resume as soon as economic data show the impact of the outbreak. Gold price should then prove its worth once again,” says DBS strategist Joanne Goh. “Gold will continue to be supported as persistently low interest rates reduce the opportunity cost of holding gold and thus, appeal to a wide range of investors as a store of genuine wealth.”
With strong policy support and the resumption of manufacturing activities, Hou’s advice to investors — for now at least — is to stay the course.
“While some economic activities are lost during this period of time, others have merely been postponed,” says Hou. “Macro momentum will eventually rebound during the second half.”
