This year’s investment landscape is both “complex” and “nuanced”, yet DBS’s Chief Investment Office (CIO), under the leadership of Hou Wey Fook, advises investors to stay invested, particularly in equities.
Following the Republican sweep last November, the DBS CIO team maintains that its long-standing “barbell” strategy remains sound. With President Donald Trump’s new administration in place, they anticipate the fulfilment of his pledges for further tax cuts and expansionary fiscal policies. Additionally, to the dismay of trading partners, they expect tariff hikes that could exacerbate the ongoing trade war.
Despite inflationary pressures and other external factors, DBS views a soft landing in the US as the base case, driven by improving corporate margins and growing household wealth, which underpin resilient domestic consumption. Active investments by companies in the AI race, particularly by hyperscalers like Amazon, Google, Microsoft and Meta, are expected to sustain interest in tech and related investments.
Buy ‘extremes’
In this quarter, investors should position themselves in “extremes.” They should seek exposure to the highest beta sectors and ride the upside of Trump’s expansionary policies. However, they should also buy into the most defensive asset classes and shield their portfolios from any downsides caused by Trump’s policies.
To navigate the expansionary policies, DBS has upgraded its overall view on equities from “underweight” to “neutral”. “We have previously downgraded equities to an underweight as bonds encapsulate more favourable risk-reward, particularly from a yield gap perspective,” reads the report.
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The overall “neutral” rating, instead of a more bullish call, stems from its “underweight” rating on European equities, no thanks to the Continent’s looming recession risks and geopolitical headwinds. The likelihood of a “constrained” or “unconstrained” Trump 2.0 remains uncertain; hence, a “cautious approach is warranted”. As a result of higher US tariffs, Chinese exporters would redirect their goods to Europe instead, heightening competition along the way and adding margin pressure to European companies.
On the other hand, any expansionary policies under Trump will likely propel US equities higher. As such, the team has kept its “overweight” call on US equities, noting that any impending tax cuts will lend a “significant boost” to corporate earnings.
US exceptionalism
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The CIO team is “overweight” on US tech within the US market for two reasons. First, this sector has outperformed in the previous two presidential cycles, Trump’s first term and Biden’s, underlining its secular growth attributes. Second, the US tech sector has a high beta of 1.4 times that of global equities over a 10-year period compared to 0.8 times for Europe. “This allows investors to reap significant upside as the new administration rolls out tax cuts and deregulation policies,” the report notes.
Overall, DBS remains bullish on US stocks and expects outperformance to persist in the upcoming quarters. Apart from tax cuts, US equities will be “well supported” by the Fed’s monetary easing policy as the central bank has no plans to pause rate cuts.
Hou, a self-professed “serial bull”, observes that the benchmark S&P500 has been growing at a quicker pace since the 1980s. He concurs with Warren Buffet’s view to “never bet against America”, which boasts a depth and breadth like no other, says Hou at a briefing to the media on Jan 13.
Despite the fluidity of US politics, the best-in-class global companies happen to be listed in the US. Also, the country’s knack for drawing a “diverse pool” of foreign talent, such as Google’s Sundar Pichai, Microsoft’s Satya Nadella, Nvidia’s Jensen Huang and even Elon Musk, is “surely the reason to be structurally bullish”, he adds.
Quality names, competitive edge
That said, one still has to go for quality names, such as those with high return on equity (ROE), stable y-o-y earnings growth and low leverage. Weaker companies could reach “frothy levels” during periods of cheap money but would subsequently collapse as liquidity dries up. Not so for quality names, which “always do come back every time after a period of market drawdown,” Hou notes.
Investors ought to look for companies with strong “economic moats”, which can help stave off competitive pressures and protect the sustainability of their earnings. “Just like trenches around the castle, the deeper, the wider the moat, the stronger the company is,” he says.
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Five factors help determine such “economic moats”: ecosystem and network, tech leadership, economies of scale, scarcity and “content is king”. Individual names include Apple, Google and Microsoft under ecosystem and network; TSMC and Nvidia under tech leadership; Walmart and Amazon under economies of scale; Hermes and Ferrari under scarcity; and Netflix, Walt Disney and Sony under the content pillar.
Bonds, buy bonds
As interest rates for cash deposits in the US are holding at between 4% and 5% — a significant jump from near-zero for the better part of more than a decade — money market funds are at a record high of close to US$7 trillion ($9.6 trillion). “The availability of excess cash will be supportive of risk assets, such as bonds and equities. In other words, every time there is a selloff in the market, we will see this wall of money coming in to buy,” says Hou. Therefore, any market corrections taking place will be “relatively shallow” compared to past cycles, he reasons.
As the Fed cuts rates, the allure of cash deposits will diminish and investors will migrate what they hold in deposits and money market funds into longer-duration assets, inspiring DBS to be overweight on fixed income as an asset class.
Investors should take outsized positions in both short-term bonds — those with a one to three-year tenure, as well as longer-term issues of eight to 10 years. Short-term bonds give capital protection and reward investors with relatively high absolute yields. “Even if the Fed does a surprise U-turn by raising rates instead, [for example] in a scenario where the Fed were to hike rates by 100 basis points, the return of short-dated bonds is protected at a positive 2.9%,” says Hou.
At the same time, DBS is also positive on the very long end of the yield curve as credit spreads are at their widest. “Hence, you capture the highest absolute yield, and you would maximise total returns when interest rates fall. So you can see from here to the tune of 12% if there are 100 basis points of rate cuts,” Hou adds.
Trade war risks
With Trump back in the Oval Office, investors are steeling themselves for further escalation of trade tensions if he makes good his campaign promises to hike tariffs, targeting not just China but many other economies with a surplus against the US. Calling this an “unmistakable” risk, Hou points out that there were no winners in a trade war throughout history. “Trade wars erode comparative advantages of nations, resulting in a drag to global growth.”
When Trump slapped tariffs on Chinese goods in 2018, China responded in kind. The ensuing economic uncertainty and slower growth nudged the Fed into cutting rates further, leading to double-digit returns on bonds across the board. As such, DBS suggests that investors hedge from these risks in high-quality credit investment-grade bonds, which look set to benefit from this scenario.
With the yields across all sectors at about one standard deviation (s.d.) above their 10-year average, there is potential for bonds to give attractive total returns, Hou points out. “Even if there is no action from the Fed, investors can knock in 6% today for a mix of high-quality bonds.”
Time to buy S-REITs
Another income-generating asset recommended by DBS is Singapore REITs (S-REITs), with a basket of quality REITs yielding some 5.9%, making a “nice pickup” of 300 basis points (bps) over Singapore government bonds, says Hou. “If you are a dollar-based hedging it to [the] US dollar, you are paid about 1.4%. So, your yield in dollar terms is in excess of 7%,” he notes.
Furthermore, it is “timely” to invest more in S-REITs as their current valuations, measured by the price-to-book ratio or (P/B), are at the lowest ends of their historical range, thereby giving a decent “margin of safety”.
Hou observes that since the Global Financial Crisis (GFC), the total return of this asset class has been very impressive at 10.1% annually, coming from both dividends and capital gains. Of this 10.1%, capital gains constituted 3.7% [on an] annualised [basis]. “In other words, dividends accumulated was the lion’s share, comprising two-thirds of the total return,” he says.
Like bonds, Hou recommends that investors own a mix of high-quality REITs across various subsectors, including commercial, industrial, hospitality and retail. These REITs should have healthy financial metrics such as low gearing and high income coverage ratios (ICRs).
Asian equities near the bottom?
DBS is also “overweight” on gold, citing rising demand for safe-haven assets to offset the resurgence of expansionary fiscal policy and higher bond yields. Gold is also tipped to gain if the US deficit widens further — a possible scenario under Trump 2.0.
In addition, de-dollarisation risks remain a concern given the deteriorating fiscal state of the US. “The fear of excess supply from quantitative easing money printing programmes to fund the ever-growing deficits are indeed structural tailwinds for gold, and this is supported by the continued purchases of gold by central banks,” notes Hou, adding that gold now makes up 15% of central banks’ total reserves, a distance from the historical average of 29%, he adds.
As for Asian equities, having underperformed developed markets in the last 12 years, they now look “very cheap”. Is it time to position for a turnaround? “For sure, calling the exact timing of a turnaround is difficult, a delicate exercise, but to opine that we are near the bottom is probably not off the mark,” says Hou. Drivers of earnings growth “are in place”, with 13% projected for North Asian companies and 9% for Southeast Asia this year, he adds.
Again, Hou recommends investors be “highly selective” about individual sectors, which include S-REITs for their rich dividends, Asean banks for loan growth, and tech and software for potential capital gains.
As China’s stimulus policies gather momentum, Hou believes there will be a degree of portfolio reallocation coming back into Asia, with many large foreign investors currently having “very little exposure” to China. “Even an incremental shift from the US market, which constitutes 73% of the world market cap, compared to China at 3%, could ignite rallies in China and Asia,” he adds.
