Investors should expect positive, albeit lower returns and a higher scope for volatility as we transition into the mid-cycle market, write Bank of Singapore analysts Eli Lee, Conrad Tan and Chen Zhenhao, in a May 24 report.

The team, led by Lee, highlighted the example of the recent crash in cryptocurrencies, with the prices of Bitcoin and Ethereum both plunging over 50% below their respectively all-time peaks only a few weeks ago.

“While extreme volatility is par for the course in this emerging asset class, and contagion from cryptocurrencies into markets has historically been limited, what is raising eyebrows in this instance is that the market capitalization of the cryptocurrency space is now far larger,” they write.

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At its peak in April, Bitcoin’s market capitalisation exceeded US$1 trillion ($1.32 trillion) while Ethereum’s market capitalisation stood around US$500 billion.

The entire cryptocurrency market exceeded US$2 trillion in size, which is smaller than the combined value of internet stocks during the tech bubble, but larger than the US sub-prime market during the great financial crisis (GFC).

To the team, it remains too early to tell what the effects of the cryptocurrency crash would be, although they note that the spread from cryptocurrencies into markets has “historically been muted”.


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This is due to the relatively narrow cryptocurrency ownership compared to equities, US real estate and mortgages, despite the asset class’ recent expansion.

“Looking ahead, we think the two dominant drivers of markets will be the path of the post-pandemic economic recovery and the trajectory of monetary policy, as we will likely pass peak growth and monetary accommodation in 2021,” writes the team.

Tremors are already being felt in volatile asset classes, adds the team, who cites that China’s policy makers are normalising monetary policy alongside healthy momentum in its domestic economy.

“China’s credit impulse has dropped below zero since March 2021 and further declined in April, while total credit flows (measured by an indicator called total social financing) has started to contract on a 12-month rolling basis,” says the team.

“Its policy normalisation is being carefully conducted in a calibrated fashion, however, as we can see from still very low interest rates in China in contrast to previous episodes when Chinese rates, in particular the Shibor, tended to rise during a credit crunch,” it adds.

In the US, the team says it is drawing towards the peak of the US’s monetary thrust as economic growth continues to build.

“While M2 money supply and the Fed’s balance sheet will continue to grow, the pace of increase will moderate as we enter 2H2021 and move closer to FY2022,” it writes.

“Although the Fed has committed to giving plenty of warning before slowing its pace of bond buying, in the event that US inflation data proves more persistent than anticipated in the next few months, our economics team believes the Fed could potentially discuss tapering after the summer,” it adds.

Against this backdrop, the team estimates that the market is likely to start transitioning into a mid-cycle market where performance will be attributed to earnings growth instead of price-to-earnings (P/E) multiples expansion.

On this, the team expects “increased return dispersion between investments in contrast to a broad market rally driven by a rising tide of monetary easing”.

“With a positive growth outlook and still supportive policy, history suggests that we can continue to expect positive returns, albeit lower versus the initial post-pandemic recovery phase, and a higher scope for volatility,” writes the team.

“Therefore, we believe that the broad bull market will remain intact but see moderate odds that the market could see a brief consolidation as it navigates a transition into mid-cycle dynamics,” it adds.

Looking ahead, the team says it sees more legs in the cyclicals rally, including well-run companies with solid balance sheets and strong earnings profiles.

“In particular, we see value in hedging against inflation tail risks, which would include positions in beneficiaries of rising inflation,” it says.


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On this, the team remains “risk-on” through its overweight positions in equities, with a preference for the US and Asia ex-Japan, as well as Emerging Market High Yield bonds.

These, says the team, still offer “attractive carry and are a beneficiary of the global search for yield”.

On the other hand, the team is “underweight” on Emerging Market and Developed Market Investment Grade bonds, which “face headwinds from a steeper yield curve”.