(Oct 4): Stocks still look particularly attractive in a world of ultra-low bond yields, according to Southeast Asia’s largest bank DBS Group Holdings.

Equities are a better risk-reward play than bonds, which are looking expensive after this year’s big rally, Chief Investment Officer Hou Wey Fook wrote in his fourth-quarter asset allocation report. He recommends dividend shares and gold as well as hybrid European AT1 securities.

Institutional funds “have little choice but to turn to equities,” Hou wrote. “As the trend of ever-lowering bond yields continues on the back of a renewed cycle of policy easing by global central banks, other higher-yielding asset classes have risen to be the next ‘bond proxies.’”

Investors have been navigating a tricky path this year as the Federal Reserve pivoted from rate-hike plans to rate cuts, other global central banks became more dovish, geopolitics reared its head in the likes of the UK, Italy and Iran, and as the US-China trade war ramped up. Global stocks have lost US$1 trillion ($1.4 trillion) in value this week amid a stream of weak US and European economic data, with the MSCI ACWI down about 2% in the period.

Hou has been recommending a “barbell strategy” for some time now to deal with the uncertainty -- some bets for assets that do well in a downturn, some that outperform in an upswing.

Dividend stocks are favored as bond proxies because “the constant dividend stream acts as a volatility dampener,” Hou wrote. He likes Singapore real-estate investment trusts, large China banks and European oil majors, he said.

Other takeaways from the asset-allocation report include:
    •    Bear steepening of US Treasury yield curve is “on the cards.”
    •    As the US-China trade war drags on, European earnings may continue to deteriorate because of the region’s big export exposure to emerging markets.
    •    The recent pullback in Chinese stocks creates an attractive entry point.

And he sees a favorable environment for gold.

“Against the backdrop of an unpredictable tug-of-war between easy monetary policies and geopolitics, gold will be favoured as an effective portfolio diversifier and to enhance risk-adjusted returns,” he said.