The global economic landscape is complex with change on the horizon. Bank of Singapore expects a recession in the US and is cautious of high inflation. The bank is positive on Japan, watchful on Europe, but its main concern is still China.
In light of these views, the question is, how can wealthy investors create the best investment mix?
Speaking to Asian Private Banker, Eli Lee, the private bank’s head of investment strategy, and chief economist Mansoor Mohi-uddin, said in equities, they are neutral on the US and Asia ex- Japan, underweight on Europe and overweight on Japan.
In terms of equity sectors, they favour healthcare, consumer staples and utilities, while in fixed income, they like developed markets investment grade bonds. The duo prefer to take a ‘barbell’ approach to duration management to capitalise on short-term yield advantages at the near end of the curve and long-term price potential with higher risk at the long end.
“In alternatives, we allocate between 20-30%, and this includes private equity, private credit, commodities, and real assets, such as infrastructure, and real estate. We primarily like direct investments, so these tend to be very long-term investments, and we also like gold,” said Lee.
“We believe that crude oil prices will stay resilient around the US$80 to US$ $90 range because the amount of infrastructure that has to be committed to the crude oil industry has been fairly limited over the previous cycle,” Lee added.
From a macro perspective, Mohi-uddin is expecting a recession in the US economy over the next few quarters, and is concerned about inflation still being well above the Federal Reserve’s 2% target.
“We thought that the recession would have started in the second half of this year, but the US economy is still strong. So, it’s likely that recession will get delayed towards the end of the year or in 2024,” he explained, while pointing to the fact that “core inflation is what the Federal Reserve’s really focused on, and unfortunately, that’s in much more elevated levels of 4.7%.”
In the US, Bank of Singapore believes that current equity prices are reasonably valued. On one side, the fiscal stimulus remains strong, and it anticipates that inflation will persistently linger going forward. Consequently, this means that in terms of nominal value, potential declines in earnings – even amid a recessionary situation – are likely to be relatively limited.
Most of the rally the bank has seen year-to-date in US equities, Lee said, has been triggered by PE multiple expansion. “So, given that interest rates continued to be fairly high, especially on the long end of the curve in terms of upside, we think that the potential for upside is probably fairly contained as well.”
“In the US, we like healthcare, consumer staples, and utilities because these sectors tend to be more resilient and more defensive, especially if inflation continues to be quite sticky. And also when we look at valuations for these sectors, we think they still appear quite competitive as well,” Lee said.
Mohi-uddin added that the Bank of Singapore holds the perspective that in the event of a recession, there will be a decrease in 10-year treasury yields. As such, their 12-month projection indicates the possibility of 10-year treasury yields receding to the level of 3.25%.
“And makes us prefer developed markets investment grade bonds. We believe the Fed isn’t likely to cut interest rates in the short term because it is worried about inflation. The Fed will become more willing to sacrifice growth to support the economy at the cost of higher inflation,” he said.
In Asia, the biggest concern for the private bank is China. Mohi-uddin believes that the world’s second-largest economy is in a recession because last year its economy only expanded by 3%. The country has unfortunately suffered due to a lack of demand in the economy.
In July, China’s consumer prices fell 0.3% compared to a year ago, and producer prices fell 4.4% year-on-year, while retail sales increased by just 2.5%. “Consumers have turned cautious again because of the lockdowns that happened over the last few years, which have had a longer-lasting impact on consumer confidence, not to mention the job insecurity,” Mohi-uddin stressed.
Furthermore, property developers are also not starting new projects, leading to decreased investment in that sector. Similarly, investment in manufacturing is also subdued due to regulatory uncertainties impacting the technology and education sectors, as well as geopolitical uncertainties including US export controls.
One big driver for China, Mohi-uddin continued, is infrastructure investment which tends to be driven by the local governments, but these governments are concerned about their debt levels, so they are prioritising debt reduction over new infrastructure.
“For Asia ex-Japan, the main reason why we are neutral is because of our call in China. We are neutral Hong Kong and China equities,” Lee said. “In China, it’s a bottom-up stock-picking game, and we like the telcos because the fundamentals are very defensive.”
“We also like selective players in the electric vehicles space given that the sector is enjoying significant policy support. We also like us selective technology names on a bottom-up basis because of their long-term ability to generate cash flow,” he added.
Japan and Europe
In Europe, Bank of Singapore is underweight. It feels valuations have rebounded a fair bit year-to-date, and the risk-reward is not that attractive at this point. Inflation is still very much a problem in Europe and uncertainties around the Russia-Ukraine situation are still ongoing.
While the rally in Japanese equities has been significant, the CIO team’s perspective is that this upward momentum is likely to continue due to accommodative monetary policy in Japan. They see growth and economic activity rebounding from low levels, and the wave of corporate reforms to continue.
“When we look at Japanese equity positioning globally, foreign investors continue to be underweight in Japan in terms of their holdings, which tells us that as they will equalise their equity weightage, and there should be more inflows coming to Japan over the longer term,” Lee said.
Within Japanese equities, Bank of Singapore favours consumer sectors, and selected industrial stocks in high-tech manufacturing, such as robotics and automation. It also likes bonds issued by Japanese megabank issuers.