dbs chief investment office 2q18 · but not this time. in the february sell-down, us equities...

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DBS CHIEF INVESTMENT OFFICE

CIO INSIGHTS 2Q18

CIO Insights

2Q18

Source: AFP Photo

Mind the Bends

Stay with risk assets despite higher volatilityPositive corporate earnings outlook to trump short-term concerns of rising

protectionism and higher rates. Stay engaged in equities and corporate bonds.

Global Technology, Financials, and Asia to pay offSynchronised global growth and limited rise in US Treasury yields will support

cyclical equities amid rising market volatility.

Overweight BBB/BB-rated corporate bonds and Asia dividend-focused equities,

to increase portfolio resilience from multiple recurring income sources.

Seek income-generating assets for resilience


CIO INSIGHTS 2Q18

Contents

CIO INSIGHTS

4 Executive Summary

5 Asset Allocation

23 Global Macroeconomics

36 US Equities

42 Europe Equities

47 Japan Equities

52 Asia ex-Japan Equities

57 DM Government Bonds

60 DM Corporate & EM Bonds

64 Currencies

68 Alternatives

74 Investment Theme I: Domestic Europe

81 Investment Theme II: Quality Play

86 Investment Theme III: Sustainable Investing

90 Special Feaure: Petro-CNY

PRODUCTS

99 Portfolio Counselling

109 Equities

125 Fixed Income

133 Discretionary Portfolio Management

136 Funds

Source: AFP Photo


CIO INSIGHTS 2Q18

Executive Summary

3

Dear valued clients,

The first quarter saw a sudden shift in market sentiment – from optimism in January to

extreme caution in February and March, on the back of a potentially more hawkish Federal

Reserve and growing concern of a global trade war.

But before jumping the gun and concluding that the nine-year bull has turned into a bear,

let us look at the fundamentals squarely.

One, while equities have seen a meaningful correction during the recent turbulence, credit

markets are resilient. This is reflected in stable corporate yield spreads, which point to a

continual low default rate environment. Two, bear markets have historically taken place

during periods of recession. Today, the world is enjoying synchronised growth and the

corporate earnings outlook is upbeat. Three, even with growing trade tensions between

the US and China, our base case is for an eventual resolution - albeit through heightened

negotiations.

We therefore stay constructive on risk assets of equities and corporate bonds, even though

it is likely the days of low volatility are behind us. Bouts of fear – over a quicker normalisation

of interest rates, or a tit-for-tat response to rising US protectionism – could prove destabilising

in the short term.

How should portfolios navigate these market gyrations?

We believe a targeted and long-term investment approach is paramount. Gaining exposure

to income-generating assets is essential in ensuring portfolio resilience, so stay with BBB/BB-

rated corporate bonds and Asia dividend equities. In our portfolios, we like Asia and Global

Technology stocks, given the longer-term tailwinds at their backs. We are also positioned in

high-quality companies in the Global Financials and Consumer Discretionary sectors, as well

as European companies that are beneficiaries of robust domestic recovery in Europe.

For portfolios that are under-invested, we recommend adding exposure to the above

themes. As always, it is imperative to maintain a well-diversified portfolio, with a central

allocation commensurate with your risk profile.

In addition to views on macroeconomics, rates, and currencies, we have included Hedge

Funds, Sustainable Investing and Petro-CNY themes, which in the longer term will have

profound impact on global capital flows. Do enjoy the read!

Hou Wey Fook, CFAChief Investment Officer

Asset Allocation | 2Q18

Stay pro-risk, but watch the bends

Source: AFP Photo

MarketsOutlook

Credit Maintain preference for EM credits, given improving balance sheet structure and profitability. Stay within BBB- and BB-rated credit buckets.

Thematics Gain exposure to quality cyclical sectors as volatility rises. Consider sustainable investing and ride on Europe domestic recovery.

Macro Outlook

Monetary Policy US economy not close to over-heating and gradual policy tightening to persist, with three to four rate hikes this year.

Monetary Policy

US economy not overheating and gradual policy tightening to persist, with three to four rate hikes this year.

Economic Growth

“Goldilocks” scenario of modest growth and subdued inflation remains.

Geopolitics Lingering trade war concerns dominate sentiment. Geopolitical uncertainties in Europe persist.

Fiscal Policy US fiscal policy to remain pro-growth as the government embarks on tax reform and infrastructure spending.

Inflation US inflation to stay benign, despite the effects of tax cuts and the wider fiscal effect.

Equities Equity markets to be under-pinned by robust earnings. But expect higher volatility in the coming months. Prefer Asia and US.

$ € ¥CurrenciesUS dollar to rebound in 2Q18 amid rising US growth outlook and receding pressure on ECB and BOJ to normalise monetary policies.

Rates UST yield not expected to rise sharply. Netural rate for UST 10-year yield is estimated at 3%. There is more room for normalisation of German yields.

CIO Investment ThemesDomestic Europe

Seek opportunities in the European domestic recovery story as the macro rebound in Europe boosts consumption.

New Theme | CIO Insights 2Q18

Quality Play

Add quality stocks in times of rising volatility. Consumer Discretionary and Technology are consistent outperformers.

New Theme | CIO Insights 2Q18

Global Financials

Favour global Financials on rising rates and stronger growth. US financials to benefit from deregulation and tax cuts.

Ongoing Theme | CIO Insights 1Q18

US Technological Disruption

Traditional business models are on the cusp of massive transformation, as the use of artificial intelligence and the “Internet of Things” gain dominance.

Ongoing Theme | CIO Insights 1Q18Source: AFP Photo

Mid-cycle tantrum – bigger picture remains unchangedIt was a quarter of two halves. The blistering risk rally in January took an abrupt turn, as markets underwent a “mid-cycle tantrum” The proverbial straws that broke the camel’s back were none other than the twin concerns on: 1) Fed policy normalisation; and 2) global trade tensions. Looking beyond the current panic in market sentiment, it is pertinent for us to go through these market risks squarely as we re-evaluate our tactical positionings.

Market Risk I: Fed policy normalisation - Gradualism to stay in play. US wages grew at the fastest clip since 2009 in January. Unsurprisingly, markets extrapolated the single data-point and swiftly concluded that inflation is coming back in a big way. The potential end to the “goldilocks” conditions of low inflation and loose monetary environment sent government bond yields and volatility sharply higher.

But hold on a minute. We are aware that as the output gap narrows and energy prices rebound, inflationary pressure is rising. But to argue that this marks the beginning of a secular bear market for bonds would be a stretch. Neither do we subscribe to the view that the equity bull run has died of old age. Our constructive stance is premised on three factors:

1. There are no traditional signs of stress across different asset classes 2. The sustained return of inflation remains questionable; US Treasury (UST) 10-year

yield is unlikely to cross the 3% mark on a sustained basis 3. Global synchronised recovery remains intact; this is positive for corporate earnings

and equity prices

Previous bear markets were characterised by broad-based corrections across equities and corporate bonds. This happened during the subprime crisis in 2008, which saw US high-yield bond spreads widening by 1,169 bps while the S&P 500 Index plunged 32% (from end-August until mid-December 2008). In more recent cases, similar extreme moves in equities and credit spreads were evident in 2011 and 2016.

But not this time. In the February sell-down, US equities plunged 8.5% over five trading sessions. High-yield bonds, however, barely moved as spreads widened only 27 bps (Figure 1). The same apparent calmness was evident in the volatility indices. While equity volatility


CIO INSIGHTS 2Q18


Dylan CheangStrategist

Asset Allocation

7

Current UST yields have

overpriced inflation concerns.

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S&P 500 (LHS)

US HY corporate bond spread (RHS)

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Equity vol relative to FX vol

(as proxied by the Chicago Board Options Exchange Volatility index) surged, volatility for rates and currencies barely moved. This explains why equity volatility as a ratio to rates and currency volatility has recently hit record highs, as result of huge disparities between asset classes in reaction to inflation fears (Figures 2 and 3).


CIO INSIGHTS 2Q18

8

Figure 2: Equity volatility relative to rates volatility hit a peak in February

Figure 3: Similarly, equity volatility relative to currency volatility has also peaked out

Source: Bloomberg, DBS Source: Bloomberg, DBS

Figure 1: US HY spreads barely moved despite acute sell-down in equities during the February “tantrum”

In the meantime, the sustainability of US wage growth remains to be seen, given the index has historically been volatile. Moreover, even if wage growth continues at a sustained pace, this need not necessarily translate into strong inflation growth on an immediate basis. We believe UST yields have overpriced inflation concerns and our analysis shows that the current US macro momentum implies a UST 10-year yield of 3% (DBS house view is 2.9% for 2018).

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Equity vol relative to Interest Rate vol

Source: Bloomberg, DBS

UST 10-year is no longer

expensive and further up-move

is expected to attract funds

inflows

US imposed tariffs on

~USD50b worth of Chinese

imports

Restrictions on Chinese

investments likely

Retaliatory response from

China has been measured so

far

On a valuation basis and at the current level, the UST 10-year is no longer expensive. A further up-move in yields is expected to attract funds inflows given the sub-1% yields – which is what European and Japanese government bonds are trading at. With external demand keeping a lid on yields, the UST 10-year yield is therefore not likely to cross the 3% mark on a sustained basis.

Market Risk II: Trade skirmish for now - not war. As expected, the initial salvo fired on steel and aluminium tariffs was the side act. The Trump Administration has since followed through the main act by implementing a 25% tariff on about USD50b worth of Chinese imports, a level which White House officials believe is significant enough to deter imports in these segments. Additionally, the US may also be imposing restrictions on investments by Chinese corporates amid rising concerns in intellectual property.

The immediate response from China was measured. While Chinese officials announced that they do not fear a trade war with the US, the retaliatory tariff on USD3b worth of US imports, however, pales in comparison. China is probably trying to send the message across that while it has the means to retaliate, an avoidance of a full-fledged trade war is still their preferred outcome. In any case, this is just the beginning. Given the lack of details surrounding the US tariff announcement, China will be adopting a “wait-and-see” attitude before deciding on their next move.

The road ahead: Negotiation and dialogue. It is unclear how this trade saga will pan out, given the threat of escalating retaliation from both sides. A bigger concern at this juncture will be how the trade skirmish can spill over to the digital front. According to McKinsey Global Institute, cross-border bandwidth has increased 45 times during 2005-2014. Given the significant growth of global e-commerce, the US has launched a “Section


CIO INSIGHTS 2Q18

9

Figure 4: US imports from China


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US imports from China (USD m, LHS) y/y change (RHS)

Historically, prolonged rallies

are not unprecedented; the

Nikkei 225 rally during the

1970s~1980s is one good

example

A bigger determinant of the

longevity of bull markets

lies on whether a near-term

recession is imminent; this is

currently not the case

China is in a “wait-and-see”

mode

Retaliation on the digital front

is a bigger concern

Our base case: Eventual

resolution through dialogue


CIO INSIGHTS 2Q18

10

301” investigation and the outcome would likely result in higher restrictions on Chinese investments in US technology.

In any case, given the interconnectivity of global trade flows and supply chains, there are no winners in a trade war. No question about it. China is the US’s top trading partner; it exported USD505.6b worth of goods to the US in 2017. Should this skirmish escalate into a full-fledged trade war, the implications will be huge. But this is not our base-case scenario. We believe that the lingering trade tension will be contained and eventually resolved through dialogue and negotiation.

Stay the course – Maintain Overweight on equities

Despite the volatile swings in 1Q18, our positive outlook on markets remains intact. This view is premised on the following:

• Rationale I: Stock rallies do not die of old age; fundamentals are key• Rationale II: Valuation – a poor predictor of future returns • Rationale III: Under-pricing of positive impact from US tax revamp • Rationale IV: No immediate danger to equities from yield curve inversion

Rationale I: Stock rallies do not die of old age; fundamentals are key. In recent years, much has been said and written about the age of this bull market (particularly in the US). But as Figure 5 shows, bull cycles can last for prolonged periods. For instance, the Nikkei 225 rallied for around 15 years, between November 1974 and December 1989, gaining 997% along the way. Today, the supposedly “aged” US bull-market has only been in existence for around nine years while the gains were less significant at 291%. We are not suggesting here that the US will follow the example of Japan and rally for another few years. Instead, we seek to drive home the point that such prolonged rallies are not unprecedented.

A bigger determinant of the longevity of bull markets rests on whether a near-term recession – be it economic or earnings – is imminent. This is currently not the case. Figure 6 shows the average probability of a recession for the US, Germany, the UK, France, and Japan. It is evident that recessionary risks have fallen substantially since peaking in end-2012 and right now, they stand at only 27% (vs. the long-term average of 38%). Things are similarly looking sanguine on the earnings front. Since the start of 2017, the forward earnings for both developed and emerging markets have improved substantially – this reflects growing optimism that the robust macro backdrop will boost the outlook of corporate earnings.

Earnings will be the dominant

factor in driving equity market

higher given that there is

limited scope for further

valuation multiple expansion

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CIO INSIGHTS 2Q18

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The upbeat macro momentum has been translating into positive earnings growth. Figure 8 shows the positive correlation between the Institute for Supply Management (ISM) manufacturing index and US corporate earnings, which is in the early innings of a rebound since hitting a trough in 2016. We expect earnings to stay upbeat as global reflation takes hold (see Figure 9) and this will be the dominant factor in driving equity market higher, given that there is limited scope for further valuation multiple expansion. Our survey of the latest earnings season underpinned this view. In the US, 91% of the companies have reported their numbers and the percentage of positive earnings surprises hit 78% while the proportion of companies seeing sales surprises also surged to 76% (vs. 68% previously). The improvement in sales surprises suggests that US companies are no longer generating earnings predominantly through operating cost cuts. Instead, earnings are streaming down from top-line revenue growth – a reflection of the rebounding economy.

Figure 6: Recession risks on the decline Figure 7: Forward earnings for both Developed and Emerging Markets on an upward trajectory


Figure 5: Do stock rallies necessarily die of old age? The experience of Nikkei 225 suggests otherwise



Valuation on its own does

not dictate the trajectory of

equity markets; markets that

are deemed expensive can

get more expensive in time to

come

Valuation is not a good

predictor of future returns and

our regression study confirms

that

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CIO INSIGHTS 2Q18

12

Rationale II: Valuation – a poor predictor of future returns. A common push-back on the bullish US equity call is that valuations are no longer cheap. Based on the cyclically-adjusted price-to-earnings ratio (CAPE) by Robert Shiller, the US currently trades at 33.4x price-to-earnings (P/E), putting it above the two standard deviation expensive mark. But as highlighted in “CIO Insights – The bull ain’t done”, valuations on their own do not dictate the trajectory of equity markets. Markets that are deemed expensive can get more expensive in time to come (and vice versa). For example, the CAPE ratio signalled that US equities were expensive way back in 2013, when valuations were above the one standard deviation mark. Should investors have sold down their US holdings then, they would have missed out on the entire bull market seen during the past few years. This brings us to the point that valuations are not a good predictor of future returns; our regression study confirms that. On a longer-term basis, the correlation between valuations and future returns is actually weak (Figure 10).

Figure 8: US earnings poised to trade higher as economic momentum improves

Figure 9: Rising reflation expectations a long-term driver for equities



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CIO INSIGHTS 2Q18

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Rationale III: Under-pricing of the positive impact from US tax revamp. In the sweeping tax reform that was enacted recently, the marginal tax rate for US corporates has been reduced from 35% to 21%, while the tax code was also simplified. From a market perspective, the tax cuts are going to impact equity valuations through two main channels. Firstly, the lower tax rate means lower taxation expenses for US companies, and correspondingly, higher free cashflow (FCF). Be mindful that in the US, tax is only levied on “taxable income” as opposed to “pre-tax income”. Henceforth, the effective tax rate could be meaningfully lower than the marginal tax rate. According to the Joint Committee on Tax (JCT), a reduction of the corporate tax rate to 21% would reduce taxation revenue by USD1.46t over a period of ten years; this will conversely imply an earnings boost for the S&P 500.

The second positive impact arises from the repatriation of overseas cash. US companies, especially those from the technology sector, have accumulated significant cash balances overseas. As a general rule of thumb, overseas earnings are subjected to taxation if they are remitted and used for the payment of dividends or domestic capital expenditure. However, these earnings will not be taxed if: (1) They are used for reinvestments outside the US; or (2) They are remitted and used for the purchase of US Treasuries (UST) or other fixed income instruments. Hence, with this tax revision, companies will now be incentivised to reduce their Treasury holdings and instead, use the cash for dividend payments or share buybacks. On balance, these developments are positive for equity prices.

Taken together, the combination of lower tax payments and potentially higher share buybacks will represent significant tailwinds for US equities in the year ahead.

With this tax revision,

companies are incentivised to

reduce their treasury holdings

and use the cash for dividend

payment or share buybacks

The tax cuts mean

lower taxation expense

for US companies and

correspondingly, higher free

cashflow

Figure 10: CAPE ratio indicating that US equity valuation is expensive

Figure 11: Historically, the CAPE ratio has not been a good predictor of future returns

Source: Robert J. Shiller Source: Robert J. Shiller, Bloomberg, DBS

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Figure 12: Yield curve inversion historically does not pose immediate danger to an equity rally


Historically, US equities do not

undergo correction until the

yield curve inversion is well

underway

Rationale IV: No immediate danger to equities from yield curve inversion. The broad-based flattening of the UST 10-year-2-year curve has ignited concerns that an eventual inversion will cause a sell-down in global equities, in particularly of those in the US. This is because an inversion of the yield curve has historically preceded a recession. But a closer look of previous yield curve inversion episodes during 1998-2000 and 2005-2006 suggests otherwise.

Currently, the UST 10-year-2-year spread stands at near 628 bps. Historically, when the curve flattened from around this level until the point of inversion, the S&P 500 rallied higher. For instance, when the yield curve flattened during the October 1998 and March 2000 period, US equities rose 47%. Again, when the curve flattened during May 2005 and November 2006, the US market gained 19%. No doubt, US equities eventually underwent substantial corrections after these episodes. But this did not take place until the yield curve inversion was well underway.

In any case, we are forecasting for the term structure to flatten all the way into 2019 without inversion. And even if an inversion eventually takes hold, the impact on equities will ultimately depend on the growth outlook at that juncture. As long as economic growth stays robust, the shape of term structure will matter less.

DBS is expecting the term

structure to flatten all the way

into 2019 without inversion


CIO INSIGHTS 2Q18

14

Asian equities: Still lovin’ it

We maintain 3M and 12M Overweight (OW) on Asia ex-Japan equities as the region’s valuation discount to Developed Markets remains attractive. Asian growth is expected to be stay robust this year as result of the rebound in investments. The outlook for external demand is equally upbeat and this is evident from the Nomura Asia export leading index (Figure 14), which is grinding higher since hitting a trough in end-2015. China remains the

Stay Overweight on Asian

equities given (a) Attractive

valuation (b) Robust economic

growth

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CIO INSIGHTS 2Q18

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Figure 13: Asia ex-Japan trades at substantial discount to developed markets

Figure 14: Asian export outlook remains buoyant

Source: Bloomberg, DBSSource: Bloomberg, DBS

Figure 15: Asia ex-Japan to see healthy earnings growth this year


key economic driver for the region and our economics team is forecasting 6.4% growth this year, underpinned by fiscal expansion, external demand, and domestic consumption.The corporate earnings cycle in Asia, meanwhile, is still in the early innings of a rebound. Based on the consensus forecast, earnings for the region is expected at 20% - broadly in-line with last year’s level. Non-cyclicals like Health Care and Utilities are poised to register earnings growth of 30% and 26%, respectively. However, this is due to base effects, since both sectors saw sharp earnings declines last year. The sectors that are seeing “genuine” robust earnings growth this year come from the cyclical space, namely Technology, Energy, and Consumer Discretionary (Figure 15).

Asian earnings growth

expected at 20% in 2018;

Strong momentum expected

from Technology, Energy, and

Consumer Discretionary

“Melt-up” in global bond

yields amid rising confidence

on the state of the macro

recovery

Figure 16: Combined net non-commercial position of USTs

Figure 17: Correlation between ISM Manufacturing the UST 10-year yield


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CIO INSIGHTS 2Q18

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Unless inflation ratchet up in

coming months, the UST 10-

year yield is unlikely to cross

the 3% mark on sustained

basis

Government Bonds: Temporarily reprieved after an acute selloff

Government bond yields have been on a tear, with the US Treasury 10-year yield up 46 bps year-to-date. Across the Atlantic, the German Bunds and UK Gilts 10-year yields also gained 23 bps and 33 bps, respectively. The sharp “melt-up” in bond yields reflects rising confidence on the state of the global macro recovery. Market positioning data shows that traders have gone net short on the UST 10-year bonds since December while the net short positioning for UST 2-year bonds started way earlier in May last year (Figure 16).

Given the recent rally in yields, there have been concerns that the UST 10-year may push beyond the 3% mark. But this concern will likely be unfounded. Our regression exercise shows that an Institute for Supply Management (ISM) Manufacturing level of 59.3 broadly implies a UST 10-year yield of 3.0% (Figure 17) and this is also not far from our house view of 2.9% for 2018. Unless inflation ratchets up in the coming months, there is little case for the UST 10-year yield to push past the 3% mark on a sustained basis. Moreover, at 2.866%, the 10-year US Treasuries are no longer over-valued, and this may prompt cross-asset investors to rotate some funds from equites into bonds, putting a lid on yields over the medium term. So it is very likely that bond yields may range trade in the coming months.

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CIO INSIGHTS 2Q18

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Figure 18: UST 10-year yield rises amid improving economic momentum

Figure 19: Rising crude oil price drive inflation expectations higher


Bonds remain unattractive relative to equities; Maintain Neutral

While we are calling for a near-term reprieve for government bonds, the latter remains unattractive relative to equities. The longer-term outlook stays unchanged – yields are to grind higher. Our bearish view is premised on the following factors:

1. Improving macro fundamentals: Equity markets rallied on the premise of global synchronised recovery, reflected in the outperformance of US global cyclicals over the non-cyclicals (Figure 18). Clearly, bond investors share the same view, as major government bond yields pushed higher across the board (perhaps with the exception of Japan). This marks a departure from previous years, where there appeared to have been a disconnection between macro-momentum and bond yields (which is partly the outcome of central banks’ quantitative easing).

2. Rising energy prices: West Texas Intermediate (WTI) crude prices have increased by 5% this year – marking a 38% gain since the beginning of 2H17. Energy is a key component in inflation baskets, and this explains the strong correlation between commodity and inflation expectations (Figure 19).

3. The impending end to monetary accommodation: Global monetary accommodation has already reached its inflexion point. The US has embarked on monetary tightening with three rate hikes penned in for this year and recent “Fed-speak” is becoming slightly more hawkish. The European Central Bank (ECB) is also likely to further taper its quantitative easing program as inflationary pressure gathers pace.

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CIO INSIGHTS 2Q18

18

Figure 20: Disconnect between gold and interest rates


Gold disconnected from interest rates – Why?

Gold traditionally exhibits an inverse relationship with interest rates, given that it is a non-interest-bearing asset. Therefore in an environment of rising yields, the opportunity cost of holding gold will increase; this typically reduces its attractiveness. But since the start of the year, this relationship apparently broke down, as gold traded higher in tandem with interest rates (Figure 20). We believe that the recent resilience in gold prices is underpinned by two factors: First, the dollar has remained subdued despite rising rates; and second, investors are increasingly seeking downside protection as volatility rises, through exposure to gold.

Asset Class

3-Month Basis 2Q18 12-Month Basis 2Q18

Equities Overweight Neutral

US Equities Overweight Underweight

Europe Equities Underweight Neutral

Japan Equities Neutral Neutral

Asia ex-Japan Equities Overweight Overweight

Bonds Neutral Underweight

Developed Markets (DM) Government Bonds Underweight Underweight

Developed Markets (DM) Corporate Bonds Neutral Neutral

Emerging Markets (EM) Bonds Overweight Neutral

Alternatives Neutral Overweight

Gold Neutral Neutral

Hedge Funds Neutral Overweight

Cash Underweight Neutral

Asset Class

Three-Month Basis 2Q18 12-Month Basis 2Q18

Equities Overweight Neutral

US Equities Overweight Underweight

Europe Equities Underweight Neutral

Japan Equities Neutral Neutral

Asia ex-Japan Equities Overweight Overweight

Bonds Neutral Underweight

Developed Markets (DM) Government Bonds Underweight Underweight

Developed Markets (DM) Corporate Bonds Neutral Neutral

Emerging Markets (EM) Bonds Overweight Neutral

Alternatives Neutral Overweight

Gold Neutral Neutral

Hedge Funds Neutral Overweight

Cash Underweight Neutral


CIO INSIGHTS 2Q18

19

Figure 22: TAA Breakdown by Geography within Equities (Balanced Profile – Three-month view)

Table 1: 2Q18 – Global Tactical Asset Allocation

Figure 21: TAA Breakdown by Asset Class (Balanced Profile – Three-month view)

Source: DBS

Source: DBS

Equities

54%

Fixed Income40%

Alternatives5%

Cash 1%

US46%

Asia ex-Japan24%

Japan13%

Europe17%

Source: DBS


CIO INSIGHTS 2Q18

20

Conservative

Moderate

*Only P4 risk rated UCITs Alternatives


TAA SAA Active

Equities 15.0% 15.0%

US 6.0% 6.0%

Europe 4.0% 4.0%

Japan 2.0% 2.0%

Asia ex-Japan 3.0% 3.0%

Fixed Income 75.0% 75.0%

Developed Markets (DM) 52.0% 53.0% -1.0%

DM Government Bonds 29.0% 30.0% -1.0%

DM Corporate Bonds 23.0% 23.0%

Emerging Markets (EM) 23.0% 22.0% 1.0%

Alternatives 0.0% 0.0%

Gold 0.0% 0.0%

Hedge Funds 0.0% 0.0%

Cash 10.0% 10.0%

TAA SAA Active

Equities 0.0% 0.0%

US 0.0% 0.0%

Europe 0.0% 0.0%

Japan 0.0% 0.0%

Asia ex-Japan 0.0% 0.0%


Developed Markets (DM) 80.0% 80.0%

DM Government Bonds 44.0% 44.0%


Emerging Markets (EM) 0.0% 0.0%


Gold 0.0% 0.0%


Cash 20.0% 20.0%

Source: DBS, Morningstar Investment Management Asia Limited

DM Govt Bonds 44.0%

DM Corp Bonds36.0%

Cash 20.0%


DM Govt Bonds 29.0%DM Corp

Bonds23.0%

EM Bonds 23.0%

Cash10.0%

US Equities6.0%

4.0%

Japan Equities

2.0%

AxJ Equities

3.0%

Europe Equities


CIO INSIGHTS 2Q18

21

Balanced

Dynamic



TAA SAA Active

Equities 54.0% 50.0% 4.0%

US 25.0% 22.0% 3.0%

Europe 9.0% 11.0% -2.0%

Japan 7.0% 7.0%

Asia ex-Japan 13.0% 10.0% 3.0%







Gold 2.0% 2.0%


Cash 1.0% 5.0% -4.0%

TAA SAA Active

Equities 66.0% 65.0% 1.0%

US 32.0% 30.0% 2.0%

Europe 11.0% 14.0% -3.0%

Japan 8.0% 8.0%

Asia ex-Japan 15.0% 13.0% 2.0%







Gold 4.0% 4.0%


Cash 4.0% 5.0% -1.0%



DM Govt Bonds14.0%

DM Corp Bonds14.0%

EM Bonds12.0%

US Equities25.0%

Europe Equities9.0%

Japan Equities 7.0%

AxJ Equities13.0%

Alternatives5.0% Cash

1.0%

US Equities32.0%

Europe Equities11.0%

Japan Equities 8.0%

AxJ Equities15.0%

DM Govt Bonds6.0%

DM Corp Bonds7.0%

EM Bonds7.0%

Alternatives10.0%

Cash 4.0%

Notes: 1. The above are based on 3-month views. 2. Asset allocation does not ensure a profit or protect against market loss. 3. “TAA” refers to “Tactical Asset Allocation”. “SAA” refers to “Strategic Asset Allocation”. 4. The CIO Investment Strategies were renamed to “Conservative” (previously “Defensive”), “Moderate” (previously “Conservative”), “Balanced” (no

change) and “Dynamic” (previously “Aggressive”).

Global Macroeconomics | 2Q18

Modest growth and subdued inflation

Source: AFP Photo

United States

Trump and Protectionism – a case of déjà vu. To those who think that US President Donald Trump is introducing various import tariffs based on electoral considerations, we offer the following historical factoid. In 1987, Trump, entertaining perhaps a presidential bid for the first time, took a full-page advertisement in the New York Times. In that diatribe, he railed against foreign countries – ostensible allies – taking advantage of US security protection on the one hand and stealing US jobs through cheap exports on the other. Thirty-one years later, Trump has the same convictions, willing to exempt some allies and negotiate with others the terms of market access, something he believes should cost those who enjoy US protection.

Amid the rhetoric and prognostications around the tariffs being imposed, a few critical facts have been ignored:

First, US steel production today is not materially different from what it was three decades ago. While year-to-year production figures fluctuate owing to economic cycles and idiosyncratic factors, if we average the annual output across decades, we find that the trend has been flat since the 1980s. Indeed, domestic production today makes up the same share of total US steel demand (about 80%) as it did in the early 1980s.

Second, China is by far the largest steel producer in the world today, but the US remains the third-largest. China perhaps subsidises its production and has likely played a role in pushing down global prices in recent years, but the present dynamic is quite different. Unlike President Trump, Chinese authorities recognise the need to reduce reliance on heavy industry, and are guiding producers through a sharp cut (20% by 2020) in production capacity. Indeed, steel prices bottomed out long before the 2016 US elections as China began targeting capacity reduction and global demand strengthened.


CIO INSIGHTS 2Q18

Taimur Baig, Ph.D.Chief Economist

Radhika RaoEconomist

Ma TieyingEconomist

Suvro Sarkar Analyst

Global Macroeconomics

23

Third, while production has been broadly unchanged, US employment in the steel sector has fallen sharply (and productivity has soared), owing to better usage of technology and automation. Indeed, this has been a worldwide phenomenon. Although production has not changed much, US per-capita consumption of steel has fallen nearly 50% over the last four decades as the central role of steel in the economy has been replaced by technology and services. There are early signs of this taking place in China as well.

Robust macro condition – a timely shock absorber as trade tension escalates. As trade skirmishes and tit-for-tat measures deepen, the only silver lining is that global economic conditions are robust, and are perhaps capable of absorbing some shocks. The listless performance in global markets in February and March stands in contrast to real economic indicators, which have been strong. We are, however, beginning to worry that the latter phenomenon may have peaked. Indeed, after more than a year of stellar growth and a modest pick-up in inflation, there are some signs of global growth momentum peaking and inflation pressures dissipating. US manufacturing activity, for instance, appears be strong but lacking upward momentum, with mid-50s readings forming a top for the time being. Indeed, on a year-on-year basis, the US purchasing managers’ index (PMI) is flat. Going beyond manufacturing, taking stock of growth-critical variables such as auto sales and housing, the US economy looks softer presently than it has been in a while. The Atlanta Fed’s gross domestic product (GDP) nowcasting model’s March readings show growth dipping below 2% for the first time in a year. These readings underscore the fact that a cyclical sweet-spot notwithstanding, structural hurdles (aging, weak productivity, and twin deficits) will force a ceiling on US growth, say to around 2.5%.

US economic momentum to stay strong; positive cycle prolonged modestly by stimulus measures. To be sure, concurrent and leading indicators remain consistent with a market-pleasing mix of good growth and moderate inflation. There has been a tendency among some to incorporate the tax cut and wider fiscal deficit into much higher-than-trend growth and inflation this year, but we are not in that camp. We recognise the underlying strength of the US economy and expect the cycle to be prolonged by these stimulus measures, but only modestly. The primary reason for our sober outlook is that we do not think the tax cuts or spending measures are particularly well-targeted toward areas of the economy that could provide solid returns. A tax cut aimed at the middle-and-lower middle income class.


CIO INSIGHTS 2Q18

24

Recently listless global markets

stand in contrast to strong

real economic indicators

There exists a market-pleasing

mix of good growth and

moderate inflation

Japan

Despite the monthly data volatility caused by the bitterly cold weather and the New Year holidays at the beginning of 2018, the trajectory of Japan’s growth recovery remains unchanged. We maintain our gross domestic product (GDP) growth forecasts at 1.1% for this year, lower than the 1.6% estimated for 2017, but slightly higher than the long-term average of 1.0%.

Among the key leading indicators, the January to February purchasing managers’ index (PMI) suggests that manufacturing activities will remain expansionary in 1Q18. The consumer confidence index at a five-year high also points to a sanguine outlook for domestic demand. The near-term growth prospects continue to be aided by the cyclical recovery in exports, capital spending in the tech sector, falling unemployment, and modest wage increases.

The impact of February’s financial market volatility should be limited. The Nikkei’s rally in the past five years has drawn strong interest from foreign investors – foreign ownership ratio in Japanese equities increased to 30% in 2017 from 26% in 2012. But the participation of domestic retail investors was limited – the ownership ratio fell to 17% from 20% during the same period. The stock market rally under Abenomics did not help much in lifting Japan’s consumption growth. The recent correction should not have serious depressing impact on consumption as well.

As the economy further recovers and the output gap widens, inflation has started to pick up, but the momentum is not strong. The rise in headline CPI to 1.4% in January was mainly attributed to the surge in fresh food prices amid the cold weather. Given the end of the winter season, the recent softening of oil prices and appreciation of the yen, headline CPI is likely to ease around March. The core CPI (a better gauge of the underlying, demand-side price pressures) has risen marginally to 0.4% in January 2018 from 0.3% in December 2017. We expect it to continue to inch upward through this year, but remain below the 1% mark by end-2018.

The Bank of Japan (BOJ) is not ready to normalise monetary policy or to allow the yield curve to steepen, as judged from its fixed-rate operations and increase in bond purchases in February. Meanwhile, note that Haruhiko Kuroda has been nominated by the government for a second term as the BOJ governor. The nominees for the two deputy governor positions – BOJ Executive Director Masayoshi Amamiya and Waseda University Professor Masazumi Wakatabe – are also strong supporters of Abenomics. In a bid to achieve the reflation goal, the BOJ is expected to stay the course on a loose monetary policy under the new board this year. A meaningful hike in the long-term yield targets and an end of the negative interest rate policy may only occur in the 2019-2020 period, in our view.


CIO INSIGHTS 2Q18

25

Inflation starting to pick up

as the economy recovers and

output gap widens

BOJ not ready to normalise

monetary policy or allow the

yield curve to steepen

Japan GDP growth estimated at

1.1% this year

Near-term prospects partly

aided by cyclical recovery in

exports and capital expenditure

-1

0

1

2

2013 2014 2015 2016 2017 2018

Headline CPI Core CPI Core-Core CPI

% YoY (VAT-adjusted)


CIO INSIGHTS 2Q18

26


Figure 1: Japan manufacturing PMI and GDP growth Figure 2: Japan CPI inflation

Eurozone

Eurozone continues to display a sense of economic stability among DM, with growth at a decade high and benign inflation. The currency bloc ended 2017 on a robust note, with full-year growth at 2.5%, outperforming few of its Developed Market (DM) peers. The breakdown revealed a broad-based recovery as better domestic demand was accompanied by an improving net trade balance. Marking a turnaround from 2016, net trade added to growth last year as exporters benefited from a recovery in global demand, notwithstanding a strong euro. Into 2018, notwithstanding base effects, the economy is expected to sustain its growth momentum above 2%. Industrial activity is poised to benefit from better visibility on demand, an encouraging exports order pipeline, higher investment demand, and a narrowing slack on capacity utilisation rates. Unemployment rates have also returned to near pre-crisis levels. Credit growth to households and businesses have, alongside confidence surveys and PMIs, continued to improve.

Inflation, on the other hand, remains consistently below the 2% target; CPI consolidated in a 1.3-1.5% range in 2H17. Core inflation was weaker at 0.9-1.0% for much of 2017. January 2018 inflation decelerated to 1.3% y/y as a strong euro offset imported pressures from high oil/energy prices. The European Central Bank (ECB) expects headline and core inflation to remain benign in 2018, averaging 1.4% and 1.1%, respectively.

During the ECB policy review in January, President Mario Draghi remained steadfast against heightened markets’ expectations for the central bank to hasten its normalisation process. In the ECB’s view, most European economies are early in the expansion cycle and market valuations are not stretched like those in the US. Officials also

-20

-15

-10

-5

0

5

10

15

30

35

40

45

50

55

60

1Q07 1Q09 1Q11 1Q13 1Q15 1Q17

PMI (LHS) GDP growth (RHS)

50=neutral %QoQ saar

Jan-Feb18

The Eurozone is expected to

sustain growth momentum

above 2% this year

ECB expects headline and core

inflation to remain benign in

2018

Accommodative policies will

only be withdrawn gradually


400

440

480

520

560

600

1200

1240

1280

1320

1360

1400

1440

01 03 05 07 09 11 13 15 17

Household spending - LHSCapital formation

EURbn EUR bn

86

91

96

101

106

111

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18

EUR-REER EUR-NEER

QE started in Mar -15

Index


CIO INSIGHTS 2Q18

27

feel that they have guided markets with sufficient clarity that accommodative policies will be withdrawn very gradually. While there are clear signs of a revival in activity, there is no indication of a sharp narrowing of the output gap and resultant wage/price pressures.

At the same time, the ECB has also signalled its discomfort with a strong euro. On effective exchange rate terms, the euro is back at pre-quantitative easing (QE) levels, highs last seen in 2H14. High oil prices have neutralised the disinflationary risk posed by a strong currency and the subsequent tightening in monetary conditions. However, if EUR/USD heads past 1.30, some policy clarification on the duration of accommodative policies will become necessary. The latter might be limited to a small extension in the asset purchases timeline by a quarter to December 2018, besides more verbal guidance rather than a longer extension of asset purchases.

Markets remain undeterred in expecting an expedited timetable of policy normalisation, especially with regard to the asset purchase programme. As such, the QE programme looks set to wind down in September 2018, with an eye on political developments pertaining to the Italian elections, formation of the German government, and ongoing Brexit negotiations. The ECB will also be mindful that its policy communication does not bring about an unwarranted tightening in financial conditions via higher bond yields and borrowing costs. When the time comes for the ECB to eventually raise rates, an increase in the (-0.4%) deposit facility rate (1H19) is likely to precede an outright hike in the (0%) main refinancing rate (end-2019).

Figure 3: GDP growth shows recovery on track Figure 4: EUR effective exchange rates surge


ECB has signalled its discomfort

with a strong euro



CIO INSIGHTS 2Q18

28

Asia

The global pickup in growth has pulled up Asia strongly. China, having decelerated in recent years, is presently characterised by flat momentum, with strong trade offsetting liquidity tightening and pollution curbs. Asia’s open, trade-oriented economies continue to report robust exports, while even those not substantially reliant on trade are enjoying positive spillovers. One exception is India, which has run into a series of difficulties lately, with fiscal slippage, widening trade deficit, and bank governance problems dominating headlines. We do not see any quick-fixes to these problems, unfortunately.

The persistence of a broadly weak dollar and stable rates can largely neutralise the significant drag stemming from equity markets, in our view. So far in this cycle, the US dollar’s weakness has been a source of support for Emerging Markets (EM). Typically, a US rate-hike cycle is accompanied by flows heading back to US-dollar assets, causing funding problems and foreign exchange (FX) pressures on EM, but this time has been different, with sentiment on EM remaining positive, with no funding problems so far.

We should nonetheless be aware of potential pitfalls if rates keep rising and the US dollar rallies. This scenario could cause stress in several economies and markets, as per our analysis. We approach this issue from the perspective of external funding needs in Asia.

Analysing the potential for funding problems runs into some difficulties as most Asian countries only report short-term debt data on original maturity basis. What one preferably wants to know is how much external foreign debt is falling due in a year, which would entail adding both short-term debt and long-term debt on a residual maturity basis. We have residual maturity debt data from national authorities of India, Indonesia, and the Philippines. Among the rest of Asian economies, we would ideally have the same for China and Malaysia in particular, both of which have shown potential for capital outflow and funding stress in recent years.

One way to get around this problem is to track the limited, original maturity debt data over time to discern potential lumpiness of payments due, which may mimic the larger set of residual debt. With this caveat in mind, we have estimated the 2018 external financing needs of seven key Asian economies. To do this, we add the current account balance with the debt due figures for the year. If a country is projected to run a current account surplus, it enters the aggregation as a negative entry, reducing the gross external funding needs. A useful way to compare financing needs across countries is to scale them in relation to central bank FX reserves. This underscores the buffer in place to deal with any potential tightening of external funding.

Figure 5 summarises our analysis. For the seven selected countries, we look at reserves to

Asia is benefiting from the

strong pick-up in global growth

Dollar weakness has been a

source of support for emerging

markets

0 2 4 6 8 10 12 14

Malaysia

India

Indonesia

China

Philippines

Taiwan

South Korea

2018 2013


CIO INSIGHTS 2Q18

29

Figure 5: Ratio of reserves to gross external financing

Source: Bloomberg, BIS, DBS

Residual maturity debt data available for India, Indonesia, and the Philippines, original maturity for the rest.

Gross external financing is obtained by adding projected current account balances with external debt due.

gross external financing in 2013 (actual) and 2018 (projected).

The findings are instructive. First, the estimates show that economies with ample current account surpluses and reserves, such as South Korea and Taiwan, can handle their large funding needs readily. Indeed, the funding cover of these two economies have improved, from an already comfortable position, over the last half a decade.

Second, China has considerable reserves and still runs a current account surplus, yet its funding needs are also formidable, and the cover has worsened since 2013. The decline in the reserves to external financing ratio during this period reflects the 2014/2015 phase when the People’s Bank of China (PBOC) incurred a reserves loss of about USD1t. Since then, the FX reserves position has recovered somewhat, but the current account surplus has gone down from 3% of GDP to below 1.5% of GDP. Coupled with the fact that in recent years Chinese companies have borrowed heavily in external markets, it would follow that the next episode of dollar funding crunch could be problematic for some of them, which in turn would raise pressure on the PBOC to intervene in the markets (which in turn will come with added complications and distortions).

Third, two economies that were hurt by the last dollar rally episode, India and Indonesia, will not be out of the woods this time either. While both countries’ central banks have diligently improved their reserves base in recent years, the funding cover has improved

Our analysis shows South Korea

and Taiwan can handle their

funding needs readily

China has considerable reserves

and runs a current account

surplus, yet its funding needs

are also formidable

Source: CEIC, DBS * refers to the year ending March. ** eop for CPI inflation.


CIO INSIGHTS 2Q18

30

only marginally, especially in comparison wvith the large surplus economies in the neighbourhood.

Fourth, if oil prices remain high, then Malaysia, despite its large external funding needs, could perhaps ride out a potential dollar crunch. But commodity markets could readily correct with EM economies, affecting Malaysia as well. We therefore think that India, Indonesia, and Malaysia’s fixed income and exchange rate markets will face the brunt of adjustment if dollar funding conditions were to tighten during this year.

Table 1: GDP growth and CPI inflation forecasts

GDP growth, % y/y CPI inflation, % y/y, ave

2016 2017e 2018f 2019f 2016 2017f 2018f 2019f

China 6.7 6.9 6.4 6.2 2.0 1.6 2.1 2.2

Hong Kong 2.0 3.7 2.5 2.5 2.4 1.7 2.0 2.5

India* 8.0 7.1 6.6 7.2 4.9 4.5 3.7 4.6

Indonesia 5.0 5.1 5.3 5.4 3.5 3.8 4.0 4.5

Malaysia 4.2 5.9 5.0 5.0 2.1 3.8 3.5 3.0

Philippines 6.9 6.7 6.7 6.7 1.8 3.2 3.6 3.8

Singapore 2.0 3.6 3.0 2.7 -0.5 0.6 1.0 1.8

South Korea 2.8 3.1 2.9 2.9 1.0 1.9 1.8 1.8

Taiwan 1.4 2.9 2.8 2.4 1.4 0.6 1.0 1.0

Thailand 3.2 3.9 4.0 4.0 0.2 0.7 1.5 1.5

Vietnam 6.2 6.8 6.4 6.6 2.7 3.5 3.6 3.8

Eurozone 1.8 2.5 2.2 2.2 0.2 1.5 1.3 1.4

Japan 0.9 1.6 1.1 0.9 -0.1 0.5 0.6 1.0

United States** 1.5 2.3 2.6 2.5 1.3 1.6 1.8 1.8


CIO INSIGHTS 2Q18

31

*1-year lending rate. **3M SOR. ***Prime rate.

Oil

Brent crude prices were off to a very strong start in January 2018, reaching highs of slightly more than USD70 a barrel (bbl), before a temporary global equity market slide and the subsequent flight from risky assets resulted in renewed volatility in the system, and brought prices down. The correction came faster and steeper than we had expected. Since then, however, prices have stabilised around the USD65/bbl level, in line with our expectation of Brent to average USD60-65/bbl this year. This represents a healthy 15-20% improvement over 2017 average of USD55/bbl.

Support from falling inventory levels have run out for the time being, with US crude oil inventories up 10m barrels for over the last three reporting weeks, after a 10-week streak of declines in inventory levels totalling almost 50m barrels during the recent winter months. Rise in inventory levels were mainly driven by a rebound in US oil production from shale regions, and, to a smaller extent, a seasonal slowdown in refinery runs as maintenance season draws near. Despite the overall expected oil market rebalancing, the above factors will continue to have a moderating effect on oil prices in 2018/19.

Table 2: Policy interest rates forecasts, eop

Policy interest rates, eop

1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19

China* 4.35 4.35 4.35 4.35 4.35 4.35 4.35 4.35

India 6.00 6.00 6.00 6.00 6.25 6.25 6.50 6.50

Indonesia 4.25 4.25 4.25 4.50 4.75 5.00 5.00 5.00

Malaysia 3.25 3.25 3.50 3.50 3.50 3.50 3.50 3.50

Philippines 3.25 3.50 3.75 4.00 4.25 4.50 4.50 4.50

Singapore** 1.40 1.65 1.90 2.15 2.15 2.40 2.40 2.65

South Korea 1.50 1.75 1.75 2.00 2.00 2.25 2.25 2.25

Taiwan 1.38 1.38 1.38 1.50 1.50 1.63 1.63 1.75

Thailand 1.50 1.50 1.50 1.50 1.75 2.00 2.25 2.50

Vietnam*** 6.25 6.25 6.25 6.25 6.5 6.5 6.75 6.75

Eurozone 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Japan -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10

United States 1.75 2.00 2.00 2.25 2.25 2.50 2.50 2.75

Source: DBS

Brent to average USD60-65/bbl

this year

Support from falling inventory

levels have run out for the time

being

85

90

95

100

105

1Q12 2Q13 3Q14 4Q15 1Q17 2Q18 3Q19

mmbpdWorld production (mmbpd) World consumption (mmbpd)


CIO INSIGHTS 2Q18

32

Table 3: DBS oil price forecast

Source: DBS

Overall demand-supply situation should be favourable in 2018, with global economic growth trends looking promising, inventory levels down, and the Organization of the Petroleum Exporting Countries (OPEC) production levels relatively stable. The market will continue to rebalance, given that we expect global oil demand growth in 2018 to be robust at around 1.5m barrels per day (mmbpd), while supply growth should be around 1.0mmbpd.

Figure 8: World oil production and consumption trends and forecasts (EIA)

Source: EIA, DBS

Shale oil production in the US is expected to be the main moderating factor for oil prices in 2018, with production forecast to increase from 9.3mmbpd on average in 2017 to more than 10.0mmbpd on average in 2018 by conservative estimates. Horizontal rig counts started to inch up in November/December 2017, after a brief period of decline in the early part of 2H17. Despite the US shale-led production growth, we expect oil prices to remain supported by continued gradual moderating of inventory levels worldwide in 2018.

(USD per barrel) 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19

Average Brent crude oil price 67.0 62.3 60.7 67.5 68.5 63.5 63.1 64.0

Average WTI crude oil price 63.0 58.3 56.7 63.5 64.5 59.5 59.1 60.0

Demand-supply outlook for

2018 is favourable

Despite US shale production

growth, oil prices to remain

supported by gradual

moderation of inventory levels

globally

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5


mmbbl/d


CIO INSIGHTS 2Q18

33

OPEC, led by Saudi Arabia, remains firmly committed to supporting oil prices, demonstrating compliance to the agreed production cuts, which are in place until the end of 2018. The unanimity between Saudi Arabia and Russia, two of the world’s largest oil producers in controlling supply, is critical, and they have indicated that production cuts could continue beyond 2018. Saudi Arabia has also recently guided that it will cut additional 100,000 bpd of its oil production and keep its exports below 7mmbpd in March to help rebalancing the market faster and counteract the recent oil market volatility. According to OPEC’s latest production figures, Saudi Arabia’s January production stood at 9.9mmbpd – still below its 10.1mmbpd quota.

Figure 9: US production starting to pick up again in response to higher oil prices


Inventory normalisation is the key target. The target for the countries agreeing to these production cuts totaling 1.8mmbpd from October 2016 production levels is to bring global inventories down. OPEC believes it could be well into 3Q18 before inventories have normalised, as the next two quarters are seasonal low-demand quarters.

Geopolitical wildcards abound. These include heightened tensions in the Middle East, and unpredictable responses of the US towards states like Iran and North Korea. Militant attacks on pipelines in Libya affected around 100,000bpd of supplies in end-December 2017. Over in Iran, civilian unrest and protests have been growing. There is also the possibility of renewed US sanctions on Iran by May 2018 if Iran fails to comply with several conditions laid down in earlier agreement.

Despite US shale production

growth, oil prices to remain

supported by gradual

moderation of inventory levels

globally

OPEC believes that it could

be well into 3Q18 before

inventories are normalised


CIO INSIGHTS 2Q18

34

Downside risks are limited in our view. Plateauing of US shale productivity levels and a reversal in the US shale breakeven prices trend helps put a higher floor to oil prices of around USD55/bbl for Brent, below which shale profitability and investments hold no sheen, and rig counts will fall off. As highlighted earlier, our forecast for 2018, and the long-term as well, remains USD60-65/bbl for Brent crude, with a bias toward the higher end of that range.

US Equities | 2Q18

Momentum underpinned by earnings

Source: AFP Photo

US earnings story stays intact

The S&P 500 Index underwent a swift rebound after the February “flash crash” as the refocus on fundamentals drove equity prices higher. We stay constructive on US equities with a three-month Overweight as we believe that the market will continue to be underpinned by supportive macro conditions and robust corporate earnings.

The recent 4Q17 earnings season reaffirmed our view that corporate earnings in the US remained in the pink of health, as 77% and 78% of the companies reported positive revenue and earnings surprises, respectively. The broad-based rebound in global energy/commodities has also underpinned robust earnings growth in the Energy (+166% y/y) and Materials (+31% y/y) sectors. Technology is another standout performer as earnings rose 28% y/y. And despite the recent uptick, overall financial conditions in the US have remained loose and this is in part due to the lingering dollar weakness (Figure 1).

But heading into the second quarter, we are cognisant that rising wages (and by extension, rising inflation) could pose potential headwinds to US equities should they came in vastly stronger than market expectations. To recap, the February equity sell-down was triggered by investors’ concerns over wage pressure in the US after the January jobs report. Rising wages could negatively impact equity prices via two channels:

a) Corporate operating margins b) Inflation and monetary tightening

Impact of wage growth on US operating margins. Should the US output gap continue to narrow, wage pressure will build and the widely-held assumption is that this would lead to the contraction of US operating margins. But in reality, wages form only one part of the equation as gross domestic product (GDP) growth matters as well.

Corporate profitability will only take a hit if the growth in wages exceeds GDP (a proxy for top-line revenue). However, should economic growth exceed the rise in wages, companies will enjoy margin expansion.

This is evident in Figure 2, which shows the long-term growth differential between wages and GDP and its impact on US operating margins. Whenever wage growth exceeds GDP, operating


CIO INSIGHTS 2Q18


US Equities

36

75

80

85

90

95

100

105-1.5

-1.0

-0.5

0.0

0.5

1.0


US financial conditions (LHS) US Dollar Index (DXY, Inversed scale, RHS)

Figure 1: Financial conditions in the US have remained loose and this is in part due to lingering dollar weakness

margins will start to trend south. Conversely, during periods when wage growth lags GDP, US operating margins will trend to trend higher.


CIO INSIGHTS 2Q18

37

Figure 2: Long-term relationship between wage/GDP growth differential and US operating margins



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US wage and GDP growth differential (%pts, LHS)

US operating margin (RHS)

-6

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-2

0

2

4

6

8

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-2

-1

0

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2

3

4

5

6

Mar-00 Mar-03 Mar-06 Mar-09 Mar-12 Mar-15

US inflation (y/y, %, LHS) US wage growth (y/y, %, RHS)

1.3

1.5

1.7

1.9

2.1

2.3

2.5

2.7

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3.1

0.6

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1.0

1.1


US Financials rel. to Utilities (LHS) UST 10-yr yield (%, RHS)

US margin expansion in the cards; consensus expecting EBIT margin to rise 2.6 percentage points. Currently, the gap between wage/GDP growth remains negative and it is unlikely to turn positive anytime soon given: (a) Robust US growth momentum; and (b) Patchy US wage growth. This augurs well for the outlook of US margins. Based on the consensus forecast, the earnings before interest and taxes (EBIT) margin for the S&P 500 is expected to increase from 13.8% in 2017 to 15.9% in 2018. We concur.

Rising disconnect between wages and inflation. A widely held assumption is that rising wages will translate into stronger inflation, which in turn warrants monetary tightening by central banks. But this is not necessarily always the case. Figure 3 shows the long-term relationship between US wages and inflation (on quarterly basis). It is evident that the traditional link between wages and inflation has weakened/broken down in recent years. During 2000-2013, the correlation between them stands at a high of 0.616. However, this has since plunged to 0.156 since 2014. In other words, given the recent surge in the US Treasury (UST) 10-year yield after January’s wages data, we believe that markets may have been overpricing inflation risks. A pullback in UST yields will be positive for US equities.

Embrace a more targeted approach; hedge against potential yield surge with concentrated exposure to Financials. The single biggest risk factor facing US equities in the second quarter is rising government bond yields. While we maintain the view that the UST 10-year yield should trade in the 3% range given prevailing economic conditions, short-term intermittent spikes above the 3% mark should not be ruled out. Therefore, to hedge against the negative impact from rising rates, we advocate a more targeted approach for US equity exposure. Increase portfolio weights on Financials as the sector is poised to benefit from rising rates. In fact, Figure 4 shows that the Financials sector typically outperforms rates-sensitive sectors like Utilities when government bond yields are on the rise.


CIO INSIGHTS 2Q18

38

US EBIT margin is poised to

expand by 2.6 percentage

points this year

Figure 3: Correlation between wages and inflation has broken down in recent years

Figure 4: US Financials benefit from rising yields


The traditional link between

wages and inflation has

weakened/broken down in

recent years

Markets may have been

overpricing inflation risks

To hedge against rising rates,

we advocate bigger exposure

to US Financials


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US Global Cyclicals vs. Non-Cyclicals (LHS)

ISM Manufactuirng (RHS)

US Sectors

Overweight Neutral Underweight

Technology Energy Telecom

Industrials Cons. Staples Utilities

Cons. Discretionary Materials Real Estate

Financials Heath Care


CIO INSIGHTS 2Q18

39

Figure 5: Technology and Consumer Discretionary have performed strongly

Figure 6: Outperformance of US global cyclicals is to continue


Source: DBS

On balance, our Overweight

calls have outperformed

our Underweight calls by 8

percentage points so far

Table 1: US Sector Allocation

US Sector Allocation: Stay pro-cyclical

We have, in our 1Q18 US sector allocation, advocated Overweight positioning on Technology, Industrials, Consumer Discretionary, and Financials, while going Underweight on Telecom, Utilities, and Real Estate. So far, the strategy has paid off. On a dollar-based total returns basis, Technology (+4.6%), Consumer Discretionary (+4.0%), Financials (-0.6%), and Industrials (-2.2%) have registered average returns of 1.5% (as of 22 March). This contrasts markedly to average losses of 6.8% for Telecom (-8.8%), Real Estate (-6.7%), and Utilities (-4.8%) (Figure 5). On balance, our Overweight calls registered 8 percentage points of outperformance over our Underweight calls.

Heading into 2Q18, there is no change to our pro-growth sectoral strategy as we expect cyclicals to continue outperforming non-cyclicals as the US economy continues to expand at a healthy pace (Figure 6).

In 2Q18, we expect cyclicals to

continue outperforming non-

cyclicals

US Sectors


Technology Energy Telecom

Industrials Cons. Staples Utilities

Cons. Discretionary Materials Real Estate

Financials Heath Care


CIO INSIGHTS 2Q18

40

Source: Bloomberg

Table 2: US Sector key financial ratios

Forward P/E (x)

P/Book (x)

EV/EBITDA (x)

ROE (%)

ROA (%)

OPM (%)

S&P 500 17.6 3.4 13.5 13.5 2.9 13.8

S&P 500 Financials 14.0 1.6 - 8.4 1.0 28.8

S&P 500 Energy 19.8 1.9 13.5 5.9 2.7 3.1

S&P 500 Technology 19.0 6.1 15.1 17.0 7.1 22.8

S&P 500 Materials 17.7 2.9 14.3 13.5 5.4 10.8

S&P 500 Industrials 18.3 4.9 14.0 19.8 5.3 11.7

S&P 500 Cons. Staples 18.4 5.1 13.9 23.8 7.5 9.2

S&P 500 Cons. Dis. 20.6 5.6 13.1 25.4 6.7 11.2

S&P 500 Telecom 10.8 2.1 7.2 32.5 7.9 16.5

S&P 500 Utilities 16.4 1.9 11.2 9.0 2.3 17.8

S&P 500 Real Estate 37.7 3.1 20.1 9.1 3.7 24.9

S&P 500 Health Care 16.3 4.1 14.7 12.0 4.5 10.3

Europe Equities | 2Q18

Earnings and currency headwinds

Source: AFP Photo

Headwinds ahead: Evolving European equities and euro dynamics

The euro’s strength has often been associated with weaker European equities and this view is based on the simplistic assumption that a stronger currency will weigh on the competitiveness of domestic exporters. But in truth, the correlation has been inconsistent over the years (Figure 1). There were periods where European equities rallied despite euro strength and this was precisely what happened in late-2017 – the region’s economic momentum was the main driving force behind the trajectory of European equities during that period.

Now as we head into the second quarter, it is evident that European equities are trending lower in tandem with the region’s economic momentum (Figure 2). And indeed, the Citi Economic Surprise index for Eurozone has plunged from a peak of 92.9 in 24 November to the current -5.0 while the manufacturing purchasing managers’ index (PMI) is also down from 60.6 in December 2017 to 58.5 in February 2018. It appears that the region’s economic momentum has hit an interim peak and this does not augur well for the near-term trajectory of domestic equities.


CIO INSIGHTS 2Q18


Europe Equities

42

Figure 1: Inconsistent relationship between the euro and European equities

Figure 2: European equities appear to be tracking the downshift in economic momentum


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Mar-13 Mar-14 Mar-15 Mar-16 Mar-17

3-month correlation between Europe equities and USD/EUR

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Citi Economic Surprise Index - Eurozone (LHS) Europe Equities (RHS)

0.045

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0.065

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0.085

0.095


Europe equities rel. to US equities (x)

-60

-40

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0

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40

60

80


Citi Inflation Surprise (US) Citi Inflation Surprise (Eurozone)

Europe’s earnings momentum remains lacklustre despite the rebounding economy. In the recent reporting season, the proportion of companies announcing earnings surprise came at a low of 63% (compared to 78% for the US). Except for Consumer Discretionary, Technology, and Energy, the remaining sectors reported generally weak numbers. The outlook is equally dismal in terms of actual sales and earnings growth, standing at 63% and 58%, respectively (vs. 87% and 80% for the US).

US outperformance over Europe to persist in 2Q18. European equities have underperformed their US counterparts by about 5 percentage points year-to-date and this marks a continuation of the longer-term trend which saw European equities underperforming since 2007. As corporate earnings in the region remains lacklustre, we expect the weakness seen in European markets to persist in 2Q18. Adding further to the headwinds is rising inflationary pressure in the region. Indeed, European inflation surprise is currently higher than that in the US and this suggests that the European Central Bank may remove its monetary accommodation earlier than what market is expecting (Figure 4).


CIO INSIGHTS 2Q18

43

European headwinds:

(a) Weak corporate earnings;

(b) Potential end to monetary

accommodation

Figure 3: European equities have been underperforming the US

Figure 4: Inflation surprise in Europe is higher than the US


Stick to domestic consumption plays in Europe. Within the European market, we recommend exposure to the domestic consumption plays, as the ongoing euro strength will likely result in the outperformance of this segment over the global plays. And besides, developments on the macro front also favour the domestic consumption-focused companies. For instance, the unemployment rate in Europe has fallen from a peak of 12.1% in July 2013 to the current 8.7%. The revival of jobs has in turn buoyed consumer confidence, which rebounded from -22.2 to -1.2 during this period (Figure 5). Rising confidence amongst consumer has also been a boon for retail sales, which has been trending north since late-2012 (Figure 6).

The euro’s strength and the

rebounding jobs market

will favour the domestic

consumption plays in Europe


CIO INSIGHTS 2Q18

44

Our “European Domestic

Consumption” basket has

outperformed

Figure 5: European consumer confidence rebounds as the unemployment rate falls

Figure 6: European retail sales on the rebound since late-2012


Domestic consumption stocks have been outperforming. To validate our investment thesis, we have back-tested the performance of our “European Domestic Consumption” thematic basket which consists of five European names. It is evident that during the recent bout of euro strength since the start of 2017, the thematic basket has managed to register substantial outperformance over the broader European market over this period.

Figure 7: Vast outperformance of the European thematic basket


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-31

-26

-21

-16

-11

-6

-1

4

7

8

9

10

11

12

Apr-98 Apr-02 Apr-06 Apr-10 Apr-14

Eurozone unemployment rate (LHS)

European consumer confidence (RHS)

-5

-4

-3

-2

-1

0

1

2

3

4

5

Dec-01 Dec-04 Dec-07 Dec-10 Dec-13 Dec-16

Eurozone retail sales (y/y, %) 12mma

98

103

108

113

118

123

Jan-17 Apr-17 Jul-17 Oct-17 Jan-18

"European Domestic Consumption" thematic basket

Europe Equities


CIO INSIGHTS 2Q18

45

Table 1: European Sector key financial ratios

Forward P/E (x)

P/Book (x)

EV/EBITDA

(x)

ROE (%)

ROA (%)

OPM (%)

MSCI Europe 14.5 1.8 9.3 11.7 1.4 11.1

MSCI Europe Financials 11.9 1.1 - 7.0 0.4 18.3

MSCI Europe Energy 14.2 1.3 6.5 7.0 3.0 5.9

MSCI Europe Technology 21.5 3.5 17.4 7.6 3.6 9.4

MSCI Europe Materials 14.6 2.0 8.5 14.8 6.0 10.1

MSCI Europe Industrials 17.1 3.2 10.9 16.3 4.5 8.4

MSCI Europe Cons. Discretionary 12.5 2.1 7.2 15.6 5.0 9.0

MSCI Europe Cons. Staples 18.3 3.0 14.5 32.4 11.5 10.5

MSCI Europe Telecom 14.2 1.6 6.2 6.6 2.1 13.1

MSCI Europe Utilities 13.1 1.5 8.0 10.0 2.3 5.9

MSCI Europe Health Care 15.4 3.3 12.4 18.4 7.4 17.4

MSCI Europe Real Estate 18.3 1.0 10.0 13.0 6.2 144.7

Source: Bloomberg

Japan Equities | 2Q18

In need of catalysts

Source: AFP Photo


CIO INSIGHTS 2Q18

47

Japan Equities

Japan equities have generally underperformed global equities (local-currency terms) in recent months as global indices sold off in early February. The strengthening of the yen, by about 4% against the dollar since the start of year to mid-February, partially explains this underperformance. Valuations are now more reasonable. Earnings are still on track but earnings beats are no longer as high as before. Japan’s economy grew for the eighth consecutive quarter, albeit at a slower-than-expected pace. The labour market remains tight while domestic growth is still supportive. That said, low inflation remains a perpetual concern for the Bank of Japan (BOJ). We maintain our Neutral view on Japan equities.

Underperformance of Japan equities in 1Q18

After outperforming global equities late last year, Japan equities underperformed in the month-to-mid February, as global equity indices sold off on fears of higher inflation and rates. JPY’s strength, especially at the start of February amid the global stock selloff, did Japan equities no favours (Figure 1).

Jason Low, CFAStrategist

Figure 1: Stronger JPY did Japan equities no favours year-to-date


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Japan Equities USDJPY (RHS)

-2

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Japan Population above age 65 (%)

Japan


CIO INSIGHTS 2Q18

48

Japan’s economy grew for the

eighth consecutive quarter

but below expectations.

Recent slower growth and

JPY strength likely weakened

inflation expectations. BOJ

expected to keep loose

monetary policy in 2018

BOJ intervened in bond

markets to keep bond yields

low – sending strong signal

about easy monetary policy

Figure 2: Structurally low inflation a concern given ageing population

Japan economy growing less than expected. The Japan economy grew for the eighth consecutive quarter, but its recent quarter’s growth fell short of consensus expectations. 4Q17 gross domestic product (GDP) grew a mere 0.5% on an annualised basis, below consensus expectations of 1%. This was the weakest in eight quarters, driven mainly by the downside surprise in net exports. Private consumption came in better than expected while business spending rose, but below expectations. DBS continues to expect slightly-above-trend GDP growth of 1.1% this year. The recent slower growth and strength in JPY have likely weakened inflation expectations, as BOJ continues to wait for its 2% inflation target to be attained. With nearly 27% of its population at above age 65, structurally low inflation continues to be a perpetual concern for the BOJ (Figure 2). DBS expects inflation to inch upward through this year, but remain well below the 1% mark by end-2018. This also implies BOJ is expected to stay the course on a loose monetary policy in 2018.

Strong signal from BOJ. In early February, BOJ sent a strong signal that it will not allow market rates to deviate from its target levels of around 0% for its 10-year government bond yield. Indeed, it launched an emergency bond-buying operation to counteract the effects of rising US Treasury (UST) yields. The central bank conducted fixed-rate operations – the first time since September 2016 when the program was put into place – on 2 February to stem the rise in long-term Japanese Government Bond (JGB) yields, by offering to buy an unlimited amount of 10-year JGBs at 0.11%. This shows the strong intent of BOJ in keeping up with its loose monetary policy, despite market forces (Figure 3). Further, news that Haruhiko Kuroda has been nominated for a second term as the governor of BOJ after his current term expires in April strengthens the case for BOJ to stay the course. We expect BOJ to maintain its loose monetary policy in 2018, in order to achieve its reflation goal with utmost effort.



CIO INSIGHTS 2Q18

49

Governance is improving in

Japan. Increasing return of

capital and improving board

governance are positives

Figure 3: BOJ intervened to counter effects of rising UST yields


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Jan-2017 Mar-2017 May-2017 Jul-2017 Sep-2017 Nov-2017 Jan-2018

Earnings momentum continues, but at a slower pace

The strong momentum in Japan earnings since 2011 looks set to continue, albeit at a slower pace. With the majority of Japanese corporates having already reported their 4Q17 earnings, Japanese corporates have continued their earnings momentum. Slightly more than half of reported companies have beaten their profit estimates while two-thirds have outperformed their sales estimates. That said, earnings beats were not as high as in previous quarters.

Improving governance a step forward

While Japan’s equity market has been one of the best performing in 2017, global investors would also be heartened to know that governance in Japan is indeed improving. Dividends and share buybacks have been increasing over the years and are at record highs. There is also better governance at the board level, with independent directors now making up at least one third of board at 30% of Japanese listed corporates. Eyes will be on a revised corporate governance code expected middle of this year (2018), which investors hope will bring governance to a whole new level in Japan.

Japan valuations are not

expensive


CIO INSIGHTS 2Q18

50

Figure 4: Japan equities not expensive on a relative basis


Reasonable valuations

MSCI Japan now trades at reasonable valuations of 14x forward price-to-earnings (P/E), which is slightly below its seven-year historical average of 14.6x forward P/E. On a relative basis, Japan equities are not expensive compared to the rest of Developed Markets. (Figure 4).

0.5

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2010 2011 2012 2013 2014 2015 2016 2017

Relative Forward P/E - MSCI Japan relative to Developed MarketsAverage+1SD-1SD

Asia ex-Japan Equities | 2Q18

Favour HK/China & emerging ASEAN

Source: AFP Photo

Asia outperformance to persist

After underperforming Developed Markets (DM) since 2010, Asia equities began to outperform in late-2016 and have continued this trend year-to-date (as of 19 February), despite the sharp and swift correction in early February. Macro and corporate fundamentals remain solid. Asia earnings are still in the mid-cycle at a time when economic growth backdrop remains robust. Valuations are attractive both on an absolute and relative basis. With a gradual US rate hike outlook still in place, despite fears of rising inflation, we continue to believe Asia equities are well poised for further outperformance. We prefer exposure to Hong Kong/China and emerging ASEAN (Indonesia, Thailand, and Philippines).

Still in a sweet spot. Synchronised global growth, rising earnings, undemanding valuations, and relatively accommodative monetary policies from major central banks place Asia equities in a sweet spot. While inflation fears have surfaced and could potentially adversely affect risk appetite for Asia equities, we believe as long as global growth continues above trend, they could take on a relatively higher US interest rate environment on the back of favourable economic fundamentals, abundant liquidity, strong earnings,


CIO INSIGHTS 2Q18

52

Figure 1: Post-correction valuations are now slightly above the long-term average


Asia ex-Japan Equities


Joanne GohStrategist

7

9

11

13

15

17

19

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Forward P/E Average +1SD -1SD

0

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10

15

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25

80 82 84 86 88 9290 94 96 98 00 02 04 06 08 10 12 14 16 18

Fed Funds Target Rate (Upper Bound, %)

%


CIO INSIGHTS 2Q18

53

Asian economic fundamentals

remain strong and output gaps

generally negative with room

to grow

Still expecting gradual rate hike

outlook which is supportive of

Asian equities

and relatively stable currencies. The recent sharp correction - caused by inflation concerns and exacerbated by forced liquidation from strategies that were leveraged to low volatility - has made it easier to find value. Indeed valuations, post-correction, are now 13.3x forward price-to-earnings (P/E), which is slightly above the long-term average valuation of 12.9x (Figure 1).

Positive macro backdrop. Asia economic fundamentals remain strong. After suffering an extended period of slowdown in investment growth, the region’s prospects are now brighter – led by China’s above-consensus 6.9% full year gross domestic product (GDP) growth in 2017. In the world’s second-largest economy, investment by private firms rose 6% in 2017 – a sign that the private sector outlook could be improving. Asia’s other economic giant, India, is poised to grow 7.2% for the fiscal year ending March 2019, according to our estimates. Indeed, Asia’s output gaps are generally negative with growth potential, and without concerns of overheating.

Gradual rate hike outlook supportive of Asia equities. While there have been recent fears over inflation surprise on the upside that would force the Federal Reserve to raise rates faster than expected, consensus is still expecting three rate hikes in 2018, which is very gradual in our view. New Fed Chairman Jerome Powell is expected to bring about a relatively high degree of continuity and gradual monetary normalisation (Figure 2). The risk here is if inflation were to surprise significantly on the upside and US Treasury (UST) 10-year yields were to break and stay above 3% for an extended period. We would then review our positive stance on Asia equities. For now, that is not our base case.

Figure 2: Gradual rate hike outlook


5

10

15

20

25

2005 2007 2009 2011 2013 2015 2017

MXASJ Index HSCEI Index HSI Index

Cheap valuations and stable

growth environment helpful

for Hong Kong/China equities.

Favour Banks, Insurance, and

e-Commerce

Favour emerging ASEAN.

We like ASEAN banking and

property sectors


CIO INSIGHTS 2Q18

54

Positive case for Hong Kong/China

The investment case for Hong Kong/China continues to be strong. Investors continue to have confidence in China’s leadership. The economy grew at above-consensus 6.9% (full-year GDP) in 2017 and is expected to grow at a stable 6.4% in 2018. Policies are expected to be flexible to manage liquidity and financial sector reform. Both the Hang Seng Index and Hang Seng China Enterprises Index (HSCEI) are trading at very inexpensive levels at 12.0x and 7.9x forward P/E, respectively (Figure 3). Indeed, these markets offer value and decent earnings growth prospects relative to other equity markets in the region. We favour Banks, Insurance, and e-Commerce sectors as these continue to benefit from liquidity, reforms, and rising consumerism amid growth and leadership stability.

Figure 3: Hong Kong/China trading at attractive valuations


ASEAN provides growth opportunities, especially in emerging countries

We continue to like ASEAN, in particular emerging ASEAN, given strong demographics, pro-growth policies, ongoing urbanisation, and rising incomes. ASEAN economies have been relatively resilient over the last few years and stand to benefit from stronger global growth through exports (Thailand and Singapore) and higher commodity prices (Indonesia). Indeed, the export-driven recovery is now spilling over to broader demand dynamics. Positive domestic sentiments from election chatter and reform news flow in Indonesia, Thailand, and the Philippines would likely support their respective equity markets. In terms of country allocation, we are relatively more positive on Thailand, the Philippines, and Indonesia. We favour the ASEAN banking sector on an uptick in economic activities and the region’s property sector on higher wage growth and employment. While


Hong Kong/ China Singapore Taiwan

Indonesia South Korea Malaysia

Philippines India

Thailand


CIO INSIGHTS 2Q18

55

Figure 4: Asian country ratings

Source: DBS

we are Neutral on Singapore, it remains a valuation and performance laggard. We see sustainable earnings recovery, stable currency outlook, and high dividend yields attracting liquidity to the market. This should drive a multi-year valuation re-rating.


Hong Kong/China Singapore Taiwan

Indonesia South Korea Malaysia

Philippines India

Thailand

DM Government Bonds | 2Q18

Gradualism stays in play

Source: AFP Photo

Swift selloff in G-10 government bonds amid rising concern about inflationary risks. The selloff in G-10 government bonds has been swift. US Treasury (UST) 10-year yields were below 2.40% at the end of last year. Now, they are just shy of 3%. It is pretty much the same picture across the G-10 space (10-year yields are up by at least 20 bps) with the glaring exception of Japan. Japanese Government Bonds (JGB) were spared as the Bank of Japan (BOJ) indicated its desire to keep the yield target at 0% even when 10-year yields touched 0.1%. The pace of yield increases across the world is sufficient to unnerve risky assets with implied volatilities for equities and rates spiking. Clearly, there is a whiff of panic over inflationary risks. It would be more prudent to let the dust settle first.

Fundamentally, there are no changes to our assumptions for the US economy, and we caution against reading too much into January’s CPI beat (a single data point). In any case, February’s figure showed moderating price pressures.

3% as neutral rate for UST 10-year yield. Going forward, inflation and budget data will be critical. In March, the Fed hiked by 25 bps - as widely expected - and guided the market toward a slightly more hawkish stance. The Fed adjusted to a steeper rate hike profile for 2019 and 2020, but notably left the projection unchanged at three hikes for 2018. The longer-term neutral Fed funds rate is also stable around 3%. Despite the increase in hawkishness, longer-term USD rates were stable. It would


CIO INSIGHTS 2Q18

Eugene Leow Strategist

DM Government Bonds

57

Figure 1: G-3 government curves Figure 2: UST curve has adjusted


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% paUST

German Bund

JGB

1.50

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3.00

1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y

% pa

Spot

end-2017

require much stronger price pressures and a deterioration in the budget before USD rates push higher again.

Gains in German Bund yields to be capped. German Bunds also sold off aggressively over the past two months, but yield increases are likely to be capped in the immediate term. To be sure, we think that German yields are still facing significant distortions to the downside and have a lot more room to normalise. Real 10-year yields are still deep in negative territory. Assuming quantitative easing ends in September and the market braces for short-term rate increases, 10-year yields can touch 1.5% by end-2019.

Little risks of a JGB selloff as the BOJ stays dovish. JGBs have been the best performers (among the G-3) over the past few months. Ten-year yields are essentially unchanged since the start of the year (0.05%) and are down modestly from January. Five-year and 20-year yields also behaved similarly. With the Bank of Japan (BOJ) keeping firm to the 0% yield target, there appears to be little risk of a sharp selloff in JGBs. In any case, the strength of the JPY (the yen has strengthened by more than 5% against the USD this year) is probably still a source of concern. With Kuroda reappointed for a second term, we can expect a very dovish path ahead as the BOJ trails the Fed and the European Central Bank (ECB) in normalising policy.

Outperformance of longer-term UST yields on the cards. Assuming moderate inflation pressures amid a constructive global economic backdrop, longer-term US Treasuries (UST) may start to outperform peers. Yields are no longer overly low. Assuming an extended topping out process, total returns on USTs may turn out to be better than JGBs or German Bunds. Over the longer term, German Bunds are likely to be the worst performer as yields catch up to inflation. Lastly, JGB returns are likely to be muted with yields stable at a very low absolute rate.


CIO INSIGHTS 2Q18

Longer term, German Bunds

are likely to underperform as

yields catch up to inflation

58

Figure 3: 10-year German real yields are still very negative

Figure 4: 10-year JGB yields not crossing 0.1%


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helm, the BOJ will tread a

dovish path ahead

DM Corporate & EM Bonds | 2Q18

Favour Emerging Market credits

Source: AFP Photo

25

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145


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75

175

275

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Overweight Corporate over Government; EM over DM

Prefer Corporate over Government; EM over DM. Credit spreads found in corporate bonds would help mitigate the impact of the Federal Reserve’s rate hikes as compared to Treasury or government securities. This is because of the coupon carry, which is expected to contribute to the larger proportion of the total return of this asset class of bonds in 2018.

We are Overweight Emerging Market (EM) credits given the brighter macro growth story and buoyant trade picture among EM economies. From a bottom-up perspective, we observe that EM corporates have bolstered their balance sheet structures and that their overall profitability is expected to improve alongside global growth. In addition, EM High Yield remains characterised by modest default rates and having less credits of CCC ratings as compared to the Developed Market (DM) High Yield.


CIO INSIGHTS 2Q18

60

DM Corporate & EM Bonds


Willie Keng, CFAFixed Income

Figure 1: EM relative to US investment grade spread Figure 2: EM relative to US high yield spread

Source: Bank of America Merrill Lynch Source: Bank of America Merrill Lynch

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61

Stay within BBB- and BB-rated credit buckets. Amid yield spread compressions in favour of lower-risk rated credits in the past months, we continue to argue our preference for bonds of BBB over A ratings as well as for bonds of BB over B ratings, as they reflect better risk-adjusted returns. On an opportunistic basis, we would seek out credits at the lower end of the credit curve when they have either been temporarily overshadowed by idiosyncratic events, or when the market has placed unduly pessimism over their credit fundamentals.

Favour Investment Grade (IG) bonds in Asia. Since late last year, credit spreads of Asia over DM Investment Grade (IG) bonds have widened on the back of the huge supply of new Asian issuances such as the USD5b issue by Tencent Holdings Limited and the USD1.8b issue by Tsinghua University. However, we have observed correspondingly strong demand from institutional buyers including Chinese banks, asset managers, as well as regional private banks and insurance companies. Over time this should provide scope for credit spreads of Asia IG to come back in.

Figure 3: EM relative to US BB spread (bps) Figure 4: Asia Investment Grade relative to US Investment Grade spreads

Source: Bank of America Merrill Lynch Source: Bank of America Merrill Lynch

We favour credits of financial sector issuers. Riding the tailwind of an improving macro outlook, credit fundamentals of financial sector issuers are expected to improve. While banks across regions tend to dovetail some of the political and regulatory risks in their respective geographies, we argue that most financials remain in a strong position, holding adequate capital ratios and generally well supported by their respective government and regulators.

Overall, we continue to like continental Western European banks, particularly the French and Swiss banks, given their lower operational risk and modest Brexit risk. We also like some of the non-Asian financials such as Turkish banks given their solid fundamentals, despite volatility arising from country’s macroeconomic and geopolitical situations. We think some of these senior notes still offer meaningful yield pickup vs. their peers.

Seek out credits at the lower

end of the credit curve on an

opportunistic basis

Strong demand for Asia IG

from institutional buyers

Most financials remain in

a strong position, holding

adequate capital ratios

Favour French, Swiss, and

Turkish banks


CIO INSIGHTS 2Q18

62

Diversification benefits across geography is an attractive proposition. We argue that investors should meaningfully gain exposure outside Asia to enjoy diversification benefits, through picking up solid benchmark names in Emerging Europe, Latin America, and Africa. Maintaining a heterogeneous bond portfolio also mitigates the idiosyncratic risks of political and regulatory risks largely present in EM.

Over the past two years, non-Asia EM regions have also traded wider, in part due to lower corporate credit ratings that have been capped by lower sovereign ratings in these regions. As a result, a well-diversified portfolio of credits across all these regions would have the potential to do better compared to an Asia-centric one.

Figure 5: EM credit spreads by geography Figure 6: EM default rates

Source:JP Morgan

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2005 2007 2009 2011 2013 2015 2017Asia Emerging Europe Latin AmericaMiddle East & Africa %EM HY bonds stock

Diversify outside Asia to

Emerging Europe, Latin

America and Africa

Currencies | 2Q18

Currency crosscurrents in play

Source: AFP Photo

The factors responsible for the US dollar’s depreciation over the past year have started to reverse. The US Treasury (UST) 10-year yield has been rising toward 3% since the start of 2018, well above the 2.60% the same time last year when the US Dollar Index (DXY) was above 100. Unlike 2017, we now have a Federal Reserve that is looking for US inflation to rise towards its 2% target this year. Corporate tax cuts and a new Fed Chairman in favour of expanding bank credit to families/businesses should be net positive for growth. With the DXY at lows around 90 and “America open for business”, US President Donald Trump has stopped complaining about a strong greenback. Hence, we have upgraded our US growth outlook and brought forward our Fed hikes call by a quarter to March and June.

The pressures on the Eurozone and Japan to bring forward monetary policy normalisation have receded after the market volatility in early-February. The Bank of Japan has pushed back against “stealth tapering” allegations and reaffirmed its commitment to its quantitative and qualitative easing and yield curve control policies. Unless the euro surprises with more appreciation, say to 1.30, the European Central Bank (ECB) will end its asset purchase programme in September to December.

For now, we assume that the euro has graduated into a higher “pre-normalisation range” of 1.15-1.25 from its previous 1.05-1.15 band set after the ECB launched quantitative easing in 2015. As the focus on normalisation turns from the ECB to the Fed, the euro should start to retreat from the ceiling of its new range. Don’t expect a repeat of last year’s political/economic surprises. Eurozone growth has started to moderate from its six-year peak of 2.8% y/y in 3Q17. German Chancellor Angela Merkel has finally formed a grand coalition but she and her allies have been weakened by the process. An increase in Euroscepticism was evident at the Italian elections on 4 March, but this was more about voters rejecting establishment parties than about exiting the EU. The yen should also weaken back into its 110-115 range as rate differentials reassert themselves again, on the precondition that global equities do not falter and result in a flight to safety into the yen.

The next Fed hike in March has scope to hurt the Australian dollar, the Korean won and the Thai baht, the currencies with the same policy rate as the US. Despite their more optimistic growth outlook, inflation in these three countries are subdued below their official targets. More importantly, the Reserve Bank of Australia does not see a need


CIO INSIGHTS 2Q18

Philip Wee Strategist

Currencies

64

3.6 3.32.6

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% YTD vs USD, as of 21 Feb 2018

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-4.3

to follow other central banks in hiking rates. The Thai finance ministry has upgraded its growth outlook on the assumption for no rate hikes this year. The Bank of Korea is not in a hurry to follow through on its last rate hike in November.

The reflation-led rally in Asian currencies was tripped by the global market volatility in early-February. By 21 February, the Korean won, Indian rupee, and Indonesian rupiah have joined the Philippine peso in depreciating for the year. The rupee, rupiah and the peso are the only three Asian currencies (that we track) with twin current account and fiscal deficits. The peso remains weak from overheating risks; inflation is set


CIO INSIGHTS 2Q18

65

Figure 1: US dollar is oversold compared to a year ago

Figure 2: EUR/USD moves into a higher “pre-normalisation” band


Figure 3: More Asian currencies have depreciated this year

Figure 4: South and Southeast Asia countries with widening twin deficits are more vulnerable to rising US rates


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CA Budget CA Budget CA Budget Budget Budget

CA CA

Going forward, the rupee and

rupiah will be less immune to

Fed hikes amid rising inflation

and UST 10-year yields

Exchange rates, eop

1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19

China 6.39 6.49 6.60 6.56 6.52 6.48 6.44 6.40

Hong Kong 7.82 7.83 7.83 7.82 7.82 7.81 7.81 7.80

India 64.7 65.9 67.0 67.2 67.4 67.6 67.8 68.0

Indonesia 13,596 13,747 13,900 13,960 14,019 14,079 14,140 14,200

Malaysia 3.95 4.08 4.20 4.18 4.16 4.14 4.12 4.10

Philippines 52.6 53.3 54.0 54.4 54.8 55.2 55.6 56.0

Singapore 1.32 1.35 1.38 1.37 1.37 1.36 1.36 1.35

South Korea 1,082 1,121 1,160 1,148 1,136 1,124 1,112 1,100

Thailand 31.8 32.8 33.9 33.6 33.3 33.1 32.8 32.5

Vietnam 22,745 22,832 22,920 22,970 23,020 23,069 23,120 23,170

Australia 0.78 0.76 0.74 0.75 0.76 0.76 0.77 0.78

Eurozone 1.23 1.19 1.16 1.17 1.19 1.20 1.22 1.23

Japan 108 112 116 115 114 112 111 110

United Kingdom 1.39 1.37 1.35 1.37 1.38 1.40 1.41 1.43

Australia, Eurozone, and United Kingdom are direct quotes.


CIO INSIGHTS 2Q18

66

to exceed its official target amidst a record-wide trade deficit this year. Unlike 2017, the rupee and the rupiah will be less immune to Fed hikes due to rising inflation and higher 10-year bond yields in the US. Between the two, higher oil prices are more negative for the rupee, which is starting to feel the spillover effects from the sell-off in India’s bond market.

Conversely, the Vietnamese dong is likely to remain the most stable Asian currency as long as its trade/current account surpluses are intact. Some volatility could return if equities falter and hurt the government’s privatisation plans to support growth. As for the undervalued Malaysian ringgit, it has not been known to buck the trend when Asia’s currencies depreciate. On a positive note, its current account surplus has stopped narrowing for the first time in three years, thanks in part also to higher oil prices. Overall, 2018 will be a challenging year for Asian currencies. Gross domestic product (GDP) growth expected to moderate with the external sector, not helped by last year’s strong currency appreciation, which also kept inflation below target in many countries. The scope to turn to monetary and fiscal policies to support growth is lesser this year if equities fail to rally amid rising US rates.

Table 1: Exchange rates forcasts, eop

Source: DBS

2018 a challenging year for

Asian currencies

Alternatives | 2Q18

Hedging of downside risks

Source: AFP Photo

Hedge Funds: Alternatives in a changing world

Since the Global Financial Crisis, with central banks focused on reflating the economy, few assets have been allowed to fail. So simply owning the most optimal returning asset and applying leveraging would have been a great strategy. Leverage has been the free lunch and diversification has been a distraction.

But markets are now changing. After years of loosening, central banks are now tightening liquidity, and, where interest rates were long in free-fall, they are now rising. This has led to considerable volatility, and diversification is back in fashion with a vengeance. This is when Alternative Investments come in and can play an important part in your portfolio (Figure 1).

Hedge Funds’ ABCsTo understand why Alternative Investments are such an important asset class, a quick primer is useful to understand three components of portfolio returns: Alpha, Beta, and Correlation. Investment returns from an asset are composed of Alpha, a unique return, and Beta, a systematic return.

For example: If there is a poor harvest doubling apple prices, the doubling is Beta. Alpha is the unique component of return, the difference in the price of the shiniest apple relative to all others. It is the added-value over and above the expected benchmark.

Finally, Correlation is how the assets in your portfolio behave together. If two assets tend to move in the same direction, they are said to be correlated. If they are uncorrelated they behave independently. If the prices of apple are independent of price changes in cheese, they are described as uncorrelated.

Leverage and Diversification In a world with highly-correlated assets and suppressed interest rates, leverage may work well. But as rates rise and volatility increases, dispersion between winners and losers occur. Alternative Investments can hence play an important role because they can deliver uncorrelated returns. When correlations decline, diversifying assets can start to really add value (Figure 2).

Unlike traditional strategies which primarily harness Beta (the market direction), alternative strategies are focused on Alpha, with an ability to add a little “oomph” when other assets decline.

Alternatives


CIO INSIGHTS 2Q18

68


Pierre DeGagné, CFAFund Selection Team

0.33

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Annualized R

etu

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tility

0% Hedge Funds 15% Hedge Funds 30% Hedge Funds

Figure 1: Alternatives play an important role in a portfolio to improve Risk Adjusted Returns

Source: GSAM

Hedge Funds: A Primer

There is Bottom-up Alpha and Top-down Alpha, as well as Momentum and Arbitrage strategies. A summary of hedge fund strategies can be found below.

The Alpha Trade: Long/Short from Bottom-up. Long/Short investing has been around since the 1950s. Rather than just buying an asset in the hopes that its price would rise, with a long/short trade, you borrow a poor asset and sell it (the “short”), to finance the purchase of a better investment (the “long”).

With a Long/Short strategy, you are exposed (mainly) to the change in value between the two assets. So, you can be rewarded both for selling underperforming companies and by buying performing companies. For example, with more online shopping, you can benefit by selling a company which is over-reliant on brick and mortar sales, and buy a company which is embracing the online technology. You can therefore benefit regardless of rising or falling asset values overall, provided you pick the right companies.

Of course, that is not easy; skill and luck can look very similar. In its purest form, Long/Short extracts Alpha – a pure source of diversification.

Macro Strategies: The Top-down Alpha Trade. A Long/Short can also be applied to Top-down global trends. These are called Macro Strategies. While getting in and out of markets is Market-Timing, going Long and Short in different parts is a Macro-strategy.

Long/short extracts

uncorrelated alpha

Macro strategies are top-

down and a good diversifier to

portfolios


CIO INSIGHTS 2Q18

69

0 0.2 0.4 0.6 0.8

Systematic Trend-Following

Long / Short Market Neutral

Merger Arbitrage

Barclays Global Aggregate Index

Global Macro Fixed Income

Distressed Securities

Global Macro Equity

Event Driven

Multi - Strategy

Long / Short Directional

BarclayHedge Hedge Fund Index

BarclayHedge Indices: 5Y Correlation with MSCI World

This creates Alpha, regardless of market direction.

For example, a Macro manager buys S&P500 futures (is long) and sells US Treasury bond futures (is short), with a view that the US economy is strong and bonds will fall as the Federal Reserve raises rates. Even if equities technically sell off though, this strategy can still produce a positive (absolute) return if the short US Treasury bond futures position profits more than the long S&P500 equity futures.

Again, this strategy captures Alpha, but course, the line can easily be blurred between Market-Timers (often luck-based), and skill-based Macro Hedging.

Systematic Trend-following: In addition to the above two strategies, we highlight one more – Systematic Trend-following. Unlike Long/Short or Macro managers, however, these strategies harvest market momentum rather than alpha. These computer-based trading systems deliver returns based on momentum. This is very useful as these funds can have positive returns when most markets are trending down.

When there are clear trends in markets, regardless of up or down, these funds add value. However, they can be caught out when markets are directionless and may use considerable leverage, which can amplify gains and losses. As such, it is important to select managers with excellent risk controls and experience.

Depending on an investor’s risk appetite, there could be a place for these strategies as they are fundamentally different from other strategies, and thus can be an important source of diversification.

Other Strategies. There are a myriad of other strategies, but for simplicity’s sake, most of these use arbitrage and create value using leverage or harnessing illiquidity premium.

Systematic trend-following

strategies harvest market

momentum, rather than alpha

Figure 2: We prefer Hedge Funds Strategies that can deliver lower correlation vs equities

Source: Barclayhedge, Lyxor AM, DBS Fund Selection Team


CIO INSIGHTS 2Q18

70

Overall, these strategies tend to be more complex or illiquid. At DBS, we are generally most focused on the more liquid strategies of Long/Short, Macro & Systematic, or some combination of these in a Multi-strategy. But that does not mean these strategies do not have risks.

Risks of Hedge Funds and What Investors Can Do About Them. As much as we advocate the increasing importance of buying assets for diversification, clients need to understand the risks. Knowing how a strategy works and the risks involved are critical to making an informed investment, and also staying the course when experiencing turbulence.

Without being exhaustive, we highlight a couple key risks/drawbacks common to Hedge Fund strategies. • Complexity: Hedge Funds are complex strategies. These complex strategies can be

opaque and may cause sudden losses. In addition, counterparties may fail to pay, derivatives may have negative asymmetric pay-offs losses, and hedges meant to protect the portfolio may fail.

• Leverage: Leverage can be direct or implicit via derivatives. Leverage can accelerate and/or increase the magnitude of losses (of course it can increase returns as well, but investors should be mindful of the risks).

• Illiquidity: Illiquid assets trade at a discount and can increase returns, but it can also come with a very high price if investors need to raise cash urgently – most often in way of significant haircuts.

• Structures and Fees: Hedge funds can often be unregulated and provide investors with little recourse. Often these strategies have high fee structures which may impact performance – visibly so if the returns are low.

How to mitigate risks of hedge funds? To mitigate the risks of Complexity, Leverage, Illiquidity, and Structures and Fees, at DBS we primarily focus on subset of hedge funds which we refer to as Liquid Alternatives.

Liquid AlternativesTypically, these are daily/weekly-dealing funds that can demonstrate higher levels of liquidity. To qualify in this category, the assets must be structured under the European-regulated UCITS (Undertakings for Collective Investment in Transferable Securities) framework. This provides us with a higher level of comfort about vehicle structures and the extent of counter-party risk, leverage, and management of derivative exposures.

Increasing exposure to diversifying strategies can add value in challenging market conditions. As such, finding skilled managers running Liquid Alternative strategies in the Long/Short, Macro, and Systematic spaces are very suitable for this purpose, as they do not rely on beta for returns. These can be very important sources of returns for clients as market volatility returns.

Liquid Alternatives are typically

daily/weekly-dealing funds

that offers higher liquidity and

structured under the UCITS

framework

Risks of investing in hedge

funds include complexity,

leverage, illiquidity, and fees


CIO INSIGHTS 2Q18

71

Figure 3: Summary of Hedge Fund strategies

Source: DBS Fund Selection Team

*Dependent on underlying strategies

Strategy Basic Implementation Low Correlation

Higher Market

Dispersion Can Help Returns

Typically Illiquid

Typically More

Complex & Opaque

Long / Short Market Neutral Fully hedged equity: longs ≈ shorts ü ü

Global Macro Fixed Income Fixed Income Allocation & Rel. Value ü ü

Systematic Trend-Following Futures & forwards harness Vol. ü ü ü

Long / Short Directional Long biased equities with shorting ü

Global Macro Equity Equity Allocation & Rel. Value ü

Event Driven Investing in restructurings & corp actions ü ü

Merger Arbitrage Long the acquiree, short the acquirer ü

Distressed Securities Investing in bankruptcies & restructuring ü ü ü

Multi - Strategy Combination of several strategies * * * *


CIO INSIGHTS 2Q18

72

Investment Theme | 2Q18

Domestic Europe

Source: AFP Photo

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Opportunities in the European domestic recovery story

Since the Global Financial Crisis, the Europe economy has shown signs of a steady recovery, aided no less by the massive amount of asset purchases conducted by the European Central Bank. Despite initial scepticism about the effectiveness of monetary easing, gross domestic product (GDP) in the Euro Area has managed to rebound from a trough of -1.2% y/y in 1Q13 to +2.7% y/y in 4Q17 (Figure 1). While a broad-based recovery is evident in Europe, we also realise the region’s equity markets will face headwinds, given lingering euro strength and the moderation of positive macro data surprises. This explains our near-term preference for US over European equities on a three-month basis. Still, within Europe, we see ample opportunities in the domestic recovery story.


CIO INSIGHTS 2Q18


Investment Theme I: Domestic Europe

74

Figure 1: The European economy has been in recovery mode


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CIO INSIGHTS 2Q18

75

Why do we like Domestic Europe? We like the European domestic recovery story for the following reasons:

1. Macro recovery translating into consumption rebound: The broad-based recovery in Europe is translating into a falling unemployment rate (at 8.7% currently) and by extension, rising consumer confidence (Figure 2). Indeed, the rise in consumer confidence has been a boon for retail sales, which has been trending up since the last financial crisis (Figure 3). As jobs and consumption in the region improve, the multiplier effects will be substantial given the positive bearings on the financials, construction/properties, and leisure sectors.

Figure 2: European consumer confidence on the mend

Figure 3: …And this is driving retail sales


2. Domestic plays less negatively impacted by euro strength: Euro strength is no doubt negative for European exporters, as it weighs on their competitiveness. Similarly, it is also negative for companies that garner a huge proportion of their income from outside of Europe, given translation effects on overseas revenues. But on the flip side of the coin, euro strength is positive for domestic consumption as a stronger currency reduces the cost of imports.

Since 2013, European domestic exposure stocks have vastly outperformed the broader European market (Figure 4), tying in with the broad-based rebound in consumption.

Rising consumption is

positive for the financials,

construction/properties, and

leisure sectors

Euro strength positive for

domestic consumption as it

reduces the cost of imports


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76

Figure 4: Vast outperformance of European domestic exposure stocks


From a segmental perspective, beneficiaries of the European domestic recovery story include:

1. Property & Construction: Construction as a percentage of GDP in the Euro Area has been trending south since the subprime crisis. From a peak of 5.7% in 1Q09, it fell all the way before hitting a trough at 4.4% in 3Q15 (Figure 5). Since then, however, a revival has evidently been taking place. Figure 6 shows that construction confidence in the region has been trending higher in tandem with the level of construction production. Similarly, housing prices in the Euro Area are also recovering (Figure 7).

Beneficiary of potential fiscal QE: On a longer-term basis, we expect the construction industry to be a viable thematic play on the region. With interest rates languishing near historical lows, fiscal quantitative easing (QE) could be a likely option for developed economies in the next economic downturn and the construction space will be a geared beneficiary.

2. Financials: Another geared beneficiary of a domestic recovery in Europe will be financials. By and large, banking is a domestically-focused industry, and so the prevailing euro strength will have limited impact on this space. As domestic consumption in the region rebounds, household loans growth will also grow in tandem. Figure 8 shows that household loans growth has turned positive since May 2015 and it has since

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Area; housing prices on the

rebound

Limited impact of euro strength

on the Financials sector. Rising

domestic consumption drives

household loans growth.

Financials also benefit from

rising rates


CIO INSIGHTS 2Q18

77

Figure 5: Euro Area construction as percentage of GDP has troughed


Figure 6: Construction confidence on the rebound Figure 7: Home prices are recovering as well….


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risen to 3.2% y/y in January this year. The same positive momentum is evident in the non-Financial corporate space, with growth standing at +2.2% y/y.

Apart from sector-specific factors, the Financials space is also a beneficiary of rising rates in the region, given the positive impact of higher rates on banks’ net interest margins (NIMs). Valuation-wise, European Financials continue to trade at an attractive discount to 22% to Developed Markets Financials on a price-to-book basis.

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0.65

0.75


Euro STOXX Travel & Leisure rel. to Euro STOXX


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78

Figure 8: European loans growth on the rebound Figure 9: European Financials trading at a discount


Figure 10: Travel & Leisure stocks have been outperforming in Europe

Figure 11: But valuation remains attractive….


3. Travel & Leisure: Lastly, the rise in domestic consumption will also benefit the Travel and Leisure space in Europe. Since mid-2008, this segment has broadly outperformed the European market. Despite the robust performance, valuation remains undemanding at 13x forward price-to-earnings (P/E), which puts it below the 1 standard deviation “cheap” mark.

-4

-2

0

2

4

6

8

10

12

14

16


Euro Area household loan growth (%)

Euro Area non-financial corp loan growth (%)

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4


Europe Financials rel. to DM Financials - P/Book (x)

Forward P/E (x)

P/Book (x)

EV/EBITDA

(x)

ROE (%)

ROA (%)

OPM (%)

STOXX Europe 600 14.7 1.8 9.5 12.2 1.5 11

STOXX Europe 600 Travel & Leisure 14.1 2.7 9.5 15.6 5.1 7.7

STOXX Europe 600 Real Estate 18.5 1 10.3 13.5 6.6 144

STOXX Europe 600 Construction & Materials 16.4 2.1 10.3 8.9 2.9 6.3

STOXX Europe 600 Financial Services 16.7 2 6.8 11.2 0.9 10.1


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Table 1: European domestic Sector key financial ratios



Quality Play

Source: AFP Photo

The February equity “flash crash”, coupled with a sharp spike in volatility, has without a doubt rekindled memories of the subprime crisis (Figure 1). Such concerns are warranted as global risk assets have rallied across the board since 2008 given the timely mix of monetary accommodation and rebounding macroeconomic backdrop. Today, valuations are no longer cheap and assets are deemed “priced-for-perfection”. Therefore, it would not take many negative catalysts for portfolio allocators to de-risk and undertake the flight to safety. However, before jumping the gun, a couple of pertinent questions one should answer are: Is the February fiasco a harbinger of things to come? Or it is just another mid-cycle correction?

We assign greater probability to the second scenario.

Historically, bear markets do not happen without a recession. Previous episodes of massive correction on the S&P 500 Index occurred when there were probabilities of recessions in the US. But this is currently not the case as the Federal Reserve Bank of New York is assigning only a low probability of a recession for the US (Figure 2). More importantly, corporate earnings stay robust and the sustainability of earnings momentum at the current level means that valuations have become cheaper after the recent pullback. Hence mid-cycle corrections typically provide attractive entry points for longer-term investors.


CIO INSIGHTS 2Q18


Investment Theme II:Quality Play

81

Figure 1: Correction in equities as volatility spiked Figure 2: Bear markets do not happen without a recession


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Global equities


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82

Our “Quality Play“ thematic

basket I has outperformed

global equities by 30

percentage points

Go back to fundamentals

and accumulate “quality”

stocks in times of uncertainty

Back to fundamentals: Pick up “quality” stocks in times of rising volatility. Market volatility is expected to stay elevated should concerns on rising government yields continue to dominate sentiment in the coming months. Amid the lingering uncertainties, we recommend investors go back to fundamentals and focus on accumulating “quality” stocks. We define “quality” as companies encompassing the following attributes:

a) Strong balance sheet with low gearing b) Fair valuation with attractive earnings growth outlook c) Strong market positioning with attractive growth outlook

“Quality” stocks have historically outperformed when purchased on dips. We constructed a basket of “quality” stocks from US, Europe, and selective Asian markets. Our screening criterion are: (a) Market cap of USD50b and above; (b) Price-to-earnings/growth (PEG) ratio of 1.50x and below; and (c) Net debt-to-equity ratio of 50.0% and below. We subsequently tracked the performance of our “quality” basket from the troughs in mid-2011 and early-2016 – periods which saw a correction in global equities (Figure 3).

Figure 3: Periods when global equities underwent sell-downs

For the 2011 “Quality Play“ thematic basket I (ex-Financials), 31 stocks passed through our screening criterion. The average PEG ratio was 0.9x while average net debt-to-equity was -7.4% (net cash). In terms of sector composition, Technology and Energy accounted for 29% and 23%, respectively. From the trough in early-2011, the thematic basket rallied 123% and outperformed global equities by 30 percentage points during the period. The best performers are Consumer Discretionary (+251%), Technology (+208%), and Health Care (+194%). At the other end of the spectrum are Utilities (-44%) and Energy (flat).


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"Quality Play" Thematic Basket I Global Equities

(Normalised)

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"Quality Play" Thematic Basket II Global Equities

(Normalised)


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Figure 4: “Quality Play” thematic basket I outper-formed global equities by 30 percentage points since late-2011 trough

Figure 5: In the “Quality Play” thematic basket I, the best performers are Consumer Discretionary, Health Care, and Technology


Again, for the 2016 “Quality Play“ thematic basket II (ex-Financials), 20 stocks passed through our screening criterion. This time around, the average PEG ratio was slightly higher at 1.2x. The average net debt-to-equity, however, was slightly better at -15.3% (net cash). Sector composition-wise, Technology accounted for the lion’s share of 40% exposure. Consumer Discretionary and Health Care exposure were equal, at 20% each. Since late-2016, this thematic basket has gained 75% and this represents a 27-percentage-point outperformance relative to global equities. In terms of individual

Figure 6: “Quality Play” thematic basket II outper-formed global equities by 27 percentage points since early-2016 trough

Figure 7: For the “Quality Play” thematic basket II, the best performers are Industrials, Technology, and Consumer Discretionary


Our “Quality Play“ thematic

basket II has outperformed

global equities by 27

percentage points

0

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Technology Health Care Cons. Dis. EnergyIndustrials Materials Utilities

(Normalised)

75

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Feb-16 Aug-16 Feb-17 Aug-17 Feb-18

Technology Health Care Cons. Dis.Energy Industrials Cons. Staples

(Normalised)


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Cyclicals like Consumer

Discretionary and Technology

have been consistent

outperformers when bought

during market pullbacks

sector performance, Industrials was the standout performer with a 143% gain, while Technology and Consumer Discretionary rose 92% and 79%, respectively. Consumer Staples was the key underperformer as the sector lost 7%.

“Quality Play” strategy: Cyclicals tend to perform better than non-cyclicals. Our back-testing exercise shows that buying “quality” companies during periods of market pullbacks is a viable strategy, given that our thematic baskets have consistently outperformed the broader market. Consumer Discretionary and Technology have been the consistent outperformers while the underperformers are typically the non-cyclical ones like Utilities and Consumer Staples.

These sectoral characteristics broadly tie in with our US sector allocation views whereby we are Overweight on Technology, Consumer Discretionary, and Industrials.


Sustainable Investing

Source: AFP Photo

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of E

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M (U

SDb)

2013 2014 2015 2016 2017

Number of ESG Funds AUM (USDb RHS)

Environmental, Social, and Governance (ESG) investing is becoming a pivotal part of investing. While sustainable investing may not be as well practiced in Asia – compared to in the US or Europe – interest is clearly picking up. Indeed, there has been a notable increase in the number of investors enquiring about incorporating ESG factors into their investments. Globally, the number of ESG funds and assets under management (AUM) tracked by Bloomberg have been rising steadily. (Figure 1)


CIO INSIGHTS 2Q18

Jason Low, CFA Strategist

Pierre DeGagné, CFA Fund Selection Team

Investment Theme III: Sustainable Investing

86

Figure 1: Number of ESG Funds and AUM

Source: Bloomberg

Investing Well and Doing Good

At DBS, we see our responsibilities to our clients and the communities we serve as instrumental to our success. This is core to our DNA, extending beyond the responsibility of simply safekeeping your money, to being invested in our community and being a force for good. Or, in our words, to help you “Live More, Bank Less”.

Being invested in our

community and being a force

for good is in our DNA


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87

A little over a year ago, the bank took a closer look at how we could achieve even greater impact through activities which increase engagement, transparency, and accountability to help us elevate our business to the next level. In answer to this, we launched the DBS Socially Responsible Innovation platform.

The United Nations Sustainable Development Goals

There have been a lot of buzzwords on sustainable investing lately: ESG Investing, Impact Investing, Community Integration, Sharing Economy. But let’s start with the UN Sustainable Development Goals.

In late 2015, UN signatory countries adopted a set of goals to end poverty, protect the planet, and ensure prosperity for all, as part of a new sustainable development agenda. Each of the 17 goals has specific targets to be achieved by 2030 (Figure 2) .

Figure 2: United Nations’ Sustainable Development Goals

Source: United Nations

These goals straddle the following areas: Health & Educational (with targets of universal education and increased access to health services); Environmental (access to clean water and sanitation, as well as affordable clean energy); and Social issues (gender equality and sustainable communities).

While some of these goals can only be achieved through political will and governmental effort, the private sector and individual investors can also play an important part.

Private sector and individual

investors can play a part in

achieving the Sustainable

Development Goals


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88

Socially Responsible Innovation

SRI is a common term that stands for Socially Responsible Investing. We believe this type of investing, which engages positive social outcomes, will become a core growth area for the bank. SRI is not charity, and as we emphasise in our first obligation to investors, it should not compromise commercial returns.

To tackle many of the world’s pressing issues, we need stewardship and technology that will come with capital rewards. That is why we are focused on Innovation as the key ingredient to responsible investing. For DBS, SRI represents not socially responsible investing in a narrow sense, but socially responsible innovation.

Three Pillars of Socially Responsible Innovation

SRI and ESG investing are often used interchangeably, and we use the former as our foundational principle. With that, we have three pillars of focus, i.e. Environment, Social, and Governance.

“E” Environmental Strategies: These are strategies that focus on technological advances which benefit the environment. They make investments in companies that address problems in our physical world, either through efficiency or innovation.

“S” Social Impact Strategies: These are strategies that focus on individual (often women-related) empowerment, and alleviate poverty, hunger, and health problems. Again, the secret ingredient is innovative companies that build personal and social capital.

“G” Governance Strategies: This approach integrates good governance practices such as diversity in management, accountability, and transparency into responsible investing. While not always directly linked to specific UN goals, this approach highlights governance as a critical building block in the foundation of investment decisions, because it is only with good governance that capital can be sustainable.

At DBS we believe that private enterprises can contribute to the achievement of UN Sustainable Development Goals by harnessing their most dynamic trait: Innovation. We need change. And we can be the change.

We have responsibilities to our shareholders, but this is complemented by responsibilities to the communities we serve.

Socially responsible innovation

is key to tackling the world’s

most pressing issues

E: Technological advances that

can benefit the environment

S: Individual empowerment

and the alleviation of poverty

and hunger

G: Good governance practices

Private enterprises can

contribute to the achievement

of UN Sustainable Development

Goals.

Source: AFP Photo

Special Feature | 2Q18

Petro-CNY

Source: AFP Photo


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90

Special Feature: Petro-CNY: Timing, Reach, Geopolitics, and Implications

Chris LeungEconomist

A Petro-CNY system backed by gold and Chinese bonds is coming forth

One of our predictions after the nineteenth Party Congress was the impending establishment of a Petro-CNY system backed by gold. Evolving economic and geopolitical forces may well hasten this dynamic.

Not only is China the largest exporter in the world, its imports are the second-largest as well. It is the biggest net importer of oil in the world, surpassing the US and Germany in 2016. For oil producers, such as the Gulf states, Russia, and Venezuela, there is hardly any buyer as important as China. Settlement of oil in Chinese yuan (CNY) is a natural course of development, from Beijing’s perspective.

The Russian Angle

Sanctions on Russia by the US since the Ukraine crisis led to one important unintended consequence: it sped up wider acceptance of CNY by Russian energy companies. Russia’s fourth-largest oil producer in 2017, Gazprom Neft (the oil arm of state gas giant, Gazprom), has been settling its entire crude sales (a third of total oil sale) to China in CNY since 2015. Since the start of that year, it has been selling all of its oil exports through the East Siberia Pacific Ocean (ESPO) pipeline to China in renminbi (RMB). The second ESPO pipeline will be in operation by end-2018, with an annual capacity of 15m tonnes.

China is also exerting its influence via an acquisition strategy. CEFC China Energy recently acquired 14.2% of Russia’s largest oil producer, Rosneft, for about USD9b. As part of the deal, 13m tonnes of Russian crude will be sold to the Chinese conglomerate per year, starting in 2018. That equates to 260,000 barrels per day (bpd), about 5% of Rosneft’s output and a quarter of China’s monthly imports from Russia. And the deal will eventually rise to 42m tonnes (840,000 bpd). We believe a substantial part of these crude sales, if not all, will be settled in CNY, given the growing alliance between Beijing and Moscow.


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91

In fact, a closed loop Petro-CNY system has already been working between China and Russia for some time, with Russian companies delivering oil products to China and using CNY as the settlement currency. Russian companies either save or spend CNY on Chinese goods and services. This system helps to relieve industrial overcapacity by creating long-term demand for China-made capital goods. For instance, China Railway Group won the contract for the construction of the Moscow-Kazan rail in 2017.

Moscow’s alienation from the West will only strengthen its ties with Beijing. Bilateral trade settled in CNY may easily extend into natural gas and agricultural products. The “Power of Siberia”, a 3,000-kilometre gas pipeline, will reach Russia’s border with China in December 2019. The pipeline is the realisation of a 30-year, USD400b deal that will deliver more than 1.16t cubic metres of gas. The sheer size of consumption, which currently ranks third-largest in the world in 2017, provides Beijing with considerable bargaining power over the choice of currency settlement. The International Energy Agency projects global gas demand growing 1.6% annually until 2022, with China making up 40% of the growth.

Figure 1: China’s natural gas demand and supply

Sources: International Energy Agency and DBS

Now comes the Middle East

The next tactical move for China is to enlarge the closed loop with more prominent members. The best is to persuade Saudi Arabia to accept settlement of oil exports in CNY. The prevailing economic and political situation is also driving them to deepen ties with Beijing as a strategic hedge. Presently, China’s three top oil suppliers are Russia, Saudi Arabia, and Angola. They are followed by Iran, Iraq, and Oman. In the past few years, Russia’s oil exports to China have risen from 5% to 15% of total exports, primarily because transactions are already settled in CNY. To compare, Saudi’s share of Chinese imports has dropped from over 20% in 2008 to 12% now. In fact, oil imports from Saudi Arabia only increased 0.1% year-to-date (YTD) November 2017, and fell 7.8% y/y. Given

2015 2017 2019 2021

Demand (bcm) 190 228 273 320

Residential-Commercial 52 63 72 79

Industry 57 66 80 94

Power Generation 37 48 63 79

Supply (bcm) 138 153 168 185

Implied Imports (bcm) 52 75 105 135

Implied Imports at USD350/tcm (b) 18.2 26.3 36.8 47.3


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92

its acute fiscal difficulties, Saudi Arabia would be keen to secure stronger oil trading ties with China, in our view.

Saudi Arabia lost export share to China for several reasons. Firstly, it must comply with the Organization of the Petroleum Exporting Countries’s (OPEC) production cut agreement. Secondly, the proximity of Russian export capacity in Eastern Siberia to Asian markets is

Figure 2: Share of Chinese oil imports from Saudi Arabia and Russia; foreign reserves of Saudi Arabia

Sources: Bloomberg, CEIC, and DBS

advantageous. Lastly, lighter crudes produced by Russia have become more competitive against heavy crudes from Saudi. These challenges are structural in nature.

Reversing such a trend is difficult, but what if Saudi Arabia begins settling some of their oil transactions in CNY with Beijing? This is a looming possibility. As early as 2012, the People’s Bank of China and the United Arab Emirates Central Bank set up a USD5.5b currency swap, setting the stage for footing the bill of Chinese oil imports from Abu Dhabi in CNY.

Indeed, diplomatic and economic ties between China and Saudi Arabia have been strengthening since 2016. Leaders of both countries have already made no less than four official visits in the past two years. While this may be largely rhetoric, there seems to be synergy between China’s Belt and Road Initiative (BRI) and the “Saudi Vision 2030” roadmap. This potential bilateral deal is reportedly worth as much as USD70b with a strong focus on oil.

Saudi Aramco is currently preparing what is potentially the largest initial public offering (IPO) in financial history. The valuation of it ranges from USD1-2t. Offering 5% of the company for IPO is equivalent to USD50-100b. Potential Chinese strategic investors include

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CIO INSIGHTS 2Q18

93

PetroChina and Sinopec, which were reportedly interested in acquiring the complete offer. If this happens, this could possibly lead to the cancellation of the IPO. Elsewhere, Saudi Aramco looks set to work with Chinese state enterprises – such as Norinco and Aerosun Corp – in projects spanning oil refinery, construction of chemical plants, oil pipelines, etc. Saudi Arabia and the Emirate of Sharjah have also recently announced plans to raise funds directly in China’s onshore Panda bond market.

The role of gold

Gold is a key element of the Petro-CNY system. It is important to make offshore yuan convertible into gold since the availability of investible assets is vital in safeguarding the interest of CNY recipients. That partially explains the tactful accumulation of gold reserves by China, which has jumped almost threefold since 2007 in tandem with the growing bilateral oil trade.

Russia has already set up a branch of the Bank of Russia in Beijing. Technically, Russia can use its yuan proceeds to buy gold via the Shanghai Gold Exchange. It is also reported that China will soon launch crude oil future contracts priced in CNY.

Figure 3: Chinese oil trade deficit against Russia; Chinese and Russian gold reserves

Source: Bloomberg, CEIC, DBS

If China succeeds in getting Russia and Saudi Arabia to join its petro-CNY initiative, the implication for global economies and markets could be profound. Not only would this be a game changer for the dynamics of oil trade, but the geopolitical balance could tilt as well. Some countries may be able to bypass economic sanctions under the US dollar system, thereby weakening the US’s economic prowess.


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94

Related to this, alternative settlement systems are being deepened. China launched the Cross-border Interbank Payment System (CIPS) in 2015 as an alternative to the SWIFT (Society for Worldwide Interbank Financial Telecommunication). The system has become the main channel of cross-border CNY payment in the past two years. As of end-2017, CIPS direct participants reached 31 and its indirect participants stood at 677, covering 87 countries and regions. That includes VTB Bank, the second-largest bank in Russia.

Moreover, the key elements of the requisite institutional infrastructure are already in place. The USD40b Silk Road Fund backed by China’s foreign exchange reserves, the Export-Import Bank of China, and China Development Bank are all such platforms. The aim is to encourage Chinese state-owned enterprises (SOEs) to predominantly invest in infrastructure projects in Eurasia, while nudging participating countries toward using CNY as the currency of settlement.

It is reported that Pakistan, an important strategic partner of BRI, is taking related measures to establish CNY as the settlement currency for bilateral trade and investment transactions with China. In recent months, the State Bank of Pakistan has introduced regulations pertaining to letter of credit issuances, and granted authorisation for local banks to open CNY accounts – moves that improve facilitation of CNY settlements. The Bank of China recently opened its first branch in Karachi, Pakistan’s largest city. Likewise, the Industrial and Commercial Bank of China’s Karachi branch has also been allowed to set up local CNY settlement and clearing platforms.

Conclusion

The building blocks are in place for CNY’s internationalisation. The petro-CNY system backed by gold or sovereign bonds does not require full CNY convertibility to function. As such, China always retains full control of the capital account while effectively accelerating the pace of RMB internationalisation. In the initial phase, the new architecture primarily serves the interest of SOEs within the system. It will take a longer time for the private sector to completely accept RMB as a settlement currency. Another challenge is the adequacy of gold reserves to sustain the system over time.

Gold is meant to be insurance for CNY recipients in the initial phrase of building the new architecture. For the operation of the petro-CNY system to run more smoothly over time, recipients will be hungry for “investible assets” for the CNY on their hands. Thus, China should also concurrently accelerate the pace of liberalising the domestic bond market.

While the launch of Bond Connect last year provides overseas investors with a more efficient channel to invest onshore, the responses have been lukewarm due to perceived high credit risk, and the absence of hedging instruments such as access to onshore bond futures and interest rate swaps. Meanwhile, block trades are not allowed under Bond Connect. This may pose a constraint for sovereign wealth funds looking to do sizeable trades for portfolio allocation purposes.


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Yet, this is precisely the point that higher risks translate into higher rates. Bond yields in China must be notably higher than those offered by the US, European Union, and Japan. The key is to leverage foreign participation in the domestic bond market, to impose better credit discipline on issuers such as SOEs and debt-ridden local governments.

Some may argue that the whole CNY internationalisation agenda is an elusive concept. But the fact is that it is proceeding swiftly. After all, the greatest constant in history is that everything changes.


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The information herein is published by DBS Bank Ltd. (“DBS Bank”) and is for information only. This publication is intended for DBS Bank and its subsidiaries or affiliates (collectively “DBS”) and clients to whom it has been delivered and may not be reproduced, transmitted or communicated to any other person without the prior written permission of DBS Bank.

This publication is and does not constitute or form part of any offer, recommendation, invitation or solicitation to subscribe to or to enter into any transaction; nor is it calculated to invite, nor does it permit the making of offers to the public to subscribe to or enter into, for cash or other consideration, any transaction, and should not be viewed as such. This publication is not intended to provide, and should not be relied upon for accounting, legal or tax advice or investment recom-mendations and is not to be taken in substitution for the exercise of judgment by the reader, who should obtain separate legal or financial advice. DBS does not act as an adviser and assumes no fiduciary responsibility or liability (to the extent permitted by law) for any consequences financial or otherwise.

This publication does not have regard to the investment objectives, financial situation or particular needs of any specific person. Before entering into any transaction or making a commitment to pur-chase any product mentioned in this publication, the reader should take steps to ensure that the reader understands the transaction and has made an independent assessment of the appropriate-ness of the transaction in the light of the reader’s own objectives and circumstances and without relying in any way on DBS or any position that DBS may have expressed in this publication. In par-ticular, the reader should read all relevant documentation pertaining to the product (including but not limited to product sheets, prospectuses or other similar or equivalent offer or issue documents, as the case may be) and may wish to seek advice from the reader’s own independent financial or other professional adviser or make such independent investigations as the reader considers neces-sary or appropriate for such purposes. If the reader chooses not to do so, the reader should consider carefully whether any product mentioned in this publication is suitable for him.

The information and opinions contained in this publication has been obtained from sources be-lieved to be reliable but DBS makes no representation or warranty as to its adequacy, completeness, accuracy or timeliness for any particular purpose. Opinions and estimates are subject to change without notice. Any past performance, projection, forecast or simulation of results is not necessar-ily indicative of the future or likely performance of any investment. There is no assurance that the credit ratings of any securities mentioned in this publication will remain in effect for any given pe-riod of time or that such ratings will not be revised, suspended or withdrawn in the future if, in the relevant credit rating agency’s judgment, the circumstances so warrant. The value of any product and any income accruing to such product may rise as well as fall. Foreign exchange transactions involve risks. The reader should note that fluctuations in foreign exchange rates may result in losses in foreign exchange. To the extent permitted by law, DBS accepts no liability whatsoever for any direct indirect or consequential losses or damages arising from or in connection with the use or reliance of this publication or its contents.

Disclaimers and Important Notice


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97

DBS or the directors and/or employees of DBS or persons/entities connected to them may have posi-tions or other interests in, and may effect transactions in the product(s) mentioned in this publica-tion. DBS may have alliances or other contractual agreements with the provider(s) of the product(s) to market or sell its product(s). Where DBS is the product provider, DBS may be receiving fees from investors. In addition, DBS or the directors and/or employees of DBS may also perform or seek to perform broking, investment banking and other banking or financial services to the companies or affiliates mentioned herein.

The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.This publication has not been reviewed or authorised by any regulatory authority in Singapore, Hong Kong, Dubai International Financial Centre, United Kingdom or elsewhere. The information is provided to you as an “Accredited Investor” (defined under the Securities and Futures Act of Singapore) and/or a “Professional Investor” (defined under the Securities and Futures Ordinance of Hong Kong) for your private use only and may not be passed on or disclosed to any person nor copied or reproduced in any manner. If this publication has been distributed by electronic transmission, such as e-mail, then such trans-mission cannot be guaranteed to be secure or error-free as information could be intercepted, cor-rupted, lost, destroyed, arrive late or incomplete, or contain viruses. The sender therefore does not accept liability (to the extent permitted by law) for any errors or omissions in the contents of this publication, which may arise as a result of electronic transmission. If verification is required, please request for a hard-copy version.

Restrictions on Distribution

Singapore This publication is being provided to you in Singapore by DBS Bank Ltd (Company Registration. No.: 196800306E) which is an Exempt Financial Adviser as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore.

Hong Kong This publication is being provided to you in Hong Kong by DBS Bank (Hong Kong) Limited (CE Number: AAL664) which is regulated by the Hong Kong Monetary Au-thority and the Securities and Futures Commission. Where this publication relates to a research report, unless otherwise stated in the research report(s), DBS Bank (Hong Kong) Limited is not the issuer of the research report(s). This publication including any research report(s) is/are distributed on the express understanding that, whilst the information contained within is believed to be reliable, the information has not been independently verified by DBS Bank (Hong Kong) Limited

Dubai This information/publication is being distributed by DBS Bank Ltd, (DIFC Branch) having its office at PO Box 506538, 3rd Floor, Building 3, Gate Precinct, DIFC, Dubai, United Arab Emirates. DBS Bank Ltd, (DIFC Branch) is duly licensed and regulated by the Dubai Financial Services Authority (DFSA). This document is intended only for Professional Clients and Market Counterparties (as defined in the DFSA Rulebook) and no other person may act upon it.

dbs chief investment office 2q18 · but not this time. in the february sell-down, us equities...

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