Trade war won't be full blown; stay overweight on US, says DBS

Trade war won't be full blown; stay overweight on US, says DBS

By: 
Chan Chao Peh
02/07/18, 04:25 pm

SINGAPORE (July 2): Worries over trade tensions between the US versus China and Europe may have rattled markets in recent months, but DBS believes that a protracted, full-blown war is not likely to happen.

“End of the day, this will be resolved, it will not be full blown. Everyone recognises the costs,” says the bank’s chief investment officer Hou Wey Fook (photo).

Drawing reference to the biggest fallout from trade protectionism in history, the 1929 Great Depression, Hou says cooler heads will prevail this time round, and that no political leader would be so naive as to go down the same road.

“Who’s the winner? No one. Who’s the loser? Everybody,” says the CIO at DBS’s 3Q outlook media briefing earlier today.

Near-term jitters have already caused plenty of unrest, as several large emerging markets (EMs) including Turkey, Argentina, Brazil, and Indonesia have fallen by 20% in recent months on the back of such worries.

Nonetheless, DBS is recommending investors to stay overweight on US equities, given the robust economic fundamentals and continued earnings growth. A big growth driver comes from the technology sector, where disruptors are creating new business models, and new earnings drivers.

While Hou acknowledges that US technology stocks – specifically the FAANG stocks – are now trading at rather lofty valuations, he believes earnings valuations can be a rather “blunt instrument” to gauge the value of a stock.

Instead, he suggests gauging the attractiveness of a stock by further dividing its earnings valuation over earnings growth. By this measure, FAANG stocks are actually deemed as cheaper than the S&P 500.

Overweight US

DBS is shifting its stance to “neutral” on Asian stocks this 3Q compared to “overweight” for the previous quarters, in view of rising yields and stronger US dollar. The bank is now betting on longer-term fundamentals that will underpin the attractiveness of certain sectors.

For example, there are just 8% of total mainland Chinese holding passports, versus 39% of Americans. With more of Chinese tourists travelling, airlines, hotels, resorts and the likes will benefit.

Similarly, life insurance penetration is low in large market like China, compared to developed markets. As insurance companies sell more policies, these financial institutions will be good to bet on. In turn, when the insurers collect more premiums, they need to find some place to park them.

Hou, who deems Asia a fertile ground for income-generating assets, is also calling for investors to have a certain portion of their portfolio as bonds.

Under the current recommended portfolio, DBS is suggesting the investors keep 10% in emerging market bonds, 13% in developed market bonds, and 15% in developed markets government bonds.

He acknowledges that bonds tend to be available to investors here at $200,000 a pop; thus, to better diversify and manage exposure,  he believes investors should include bond funds – which invest in hundreds of bonds – as part of what they own.

“You must have a bond portfolio for that superior income over cash,” says Hou.

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