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Investment Outlook H2 2018 Personal Financial Services
UOB Investment Outlook H2 2018 Life is a series of natural and spontaneous changes. —Lao Tze
Contents 4
5
Editorial 06
2018 Mid-Year Review 08
Review of H1 2018
Performance Review in H1 2018
Calls Review H1 2018
Macro Outlook and Risks for H2 2018 16
Macro Outlook for H2 2018
Key Risk Drivers H2 2018
Asset Class Outlook and Strategy 24
Our Strategy H2 2018
Asset Class Focus
Equities
Fixed Income
Foreign Exchange
Regional Macro Summaries
Editorial Team Regional
Chung Shaw Bee Calvin Nico
Contributors
Singapore and Herlambang, CFA
Regional Head, Singapore and Leong Wei Ji
Deposits and Regional Head, Malaysia
Wealth Management Investment Strategy
and Communications Suwiwan Hoysakul
Joyce Lim, CFA, CAIA Thailand
Regional Head, Grace Qu, CFA
Funds and Advisory Investment Strategist Louis Linardo
Indonesia
Abel Lim
Singapore Head, Lily Huang
Wealth Management China
Advisory
Editorial
Editorial 06
After a buoyant 2017, we started 2018 Earth — the macro backdrop
with confidence. Synchronised global for investments
economic growth, modest inflation, Sifting through these concerns, the
and robust corporate fundamentals macro situation remains supportive
underpinned such confidence. We expect with above trend global growth,
that equities, out of all the asset classes, modest inflation and still relatively
to continue to offer attractive opportunities. accommodative monetary conditions.
Reflation in developed markets and This backdrop is favourable for earnings.
structural opportunities set the stage
for some sector plays, stable growth in Metal — fundamentals
emerging markets offered window of that underpin the strength
investment opportunities for EM assets. of an economy
Quality fixed income instruments also Heading into the second half of the year,
offered good cash income and yield- the increasingly hawkish stance of major
enhancement opportunities. central banks may dampen market’s
return expectation.
The financial markets however
experienced significant volatility in the However the fundamental drivers such
first half of 2018, driven from various as strong domestic consumption and
fronts – the pace of normalizing monetary global growth should continue to support
policies across the world, trade war fears corporate earnings growth. This enables
emanated from Trump administration’s equity earning yields, which measure the
approach towards tariffs, geopolitical valuation of companies, to remain
concerns including new leadership in attractive relative to government bond
Italy and Spain, and the strength of yields, and provide buffer in a rising
USD weighing down on EM assets. interest rate environment.
Does this surge in volatility mean that Fire — parallels to risk
the positive macro drivers and the strong Ongoing geopolitical developments
corporate fundamentals have ended? and the rising interest rate environment
Certainly not. In fact, the Q1 strong are likely to affect the performance of
corporate earnings continue to suggest financial markets in the second half.
continued strength in global growth, The USD could strengthen on the back
further propelled by the boost from of an acceleration of rate hikes and this
the tax-cuts in US. could put pressure on EM central banks
to respond. We expect geopolitical
As we navigate through the rest of events to dominate 2018 and may impact
2018, several headwinds will put a lid investment decisions – the keenly
on investors’ sentiments. Unpredictable watched US-North Korea Summit does
US administration, policy missteps in suggest the start of easing tensions
tightening interest rates too quickly, on the Korean peninsula, but trade
geopolitical tensions including Europe’s tensions between the US and China
tense political climate could further have escalated.
exacerbate volatility across asset classes.
UOB’s risk first approach weighs the Wood — opportunities
risks associated with the preferred from asset classes
investment asset class(es). Here’s We maintain our positive view on
a summary of our view of the world: equities. This asset class should
Investment Outlook H2 2018 07
continue to offer investors potentially in Italy. In the fixed income space,
attractive returns, especially since investment-grade (IG) bonds have
valuations have now come down attracted more inflows than other
to more reasonable levels. subclasses such as high-yield. EM
assets have registered strong inflows.
In fixed income, we advocate selectivity,
preferring instruments that are less Weighing the balance between
sensitive to interest rates. In this regard, the drivers of returns and the risks,
high-quality bonds now offer attractive selective investment opportunities are
yields following the technical correction still abound at more attractive valuation
in the first half of the year. levels. Thus, this is also an opportune
window for one with the risk appetite
Water — investor sentiment to adjust their investment portfolios
and the flow of funds to meet their long-term goals.
Fund flows, which reflect global
investor sentiment in general, remain
positive towards equities compared
to bonds. Flows to Japanese equities Chung Shaw Bee
remained resilient, whereas flows to Personal Financial Services
European equities have been relatively Singapore and Regional Head,
muted given the political situation Deposits and Wealth Management08
09 2018 Mid-year Review We review the key events that have unfolded in H1 2018 and examine the impact these events have had on the markets. He who knows himself is enlightened. —Lao Tze
Review of H1 2018
Review of H1 2018 10
First half of the year was marked by concerns
over the trajectory of interest rates, US-China
trade tensions, political developments in the
eurozone and the Korean peninsula, conflict
in the Middle East as well as the fallout of
the tech sector.
Rising US Treasury Yields US-China Trade Tensions European Politics
US Treasury yields, have been steadily Fears of rising trade protectionism have Following last year’s inconclusive
climbing higher since the beginning of cast a shadow on investor sentiment. elections, Germany emerged from its
the year, with the 2-year yield topping The US and China has remained locked political gridlock in the first quarter of
2.5%, the highest since September in a trade stand-off with both countries the year. Angela Merkel’s conservatives
2008. Meanwhile, the benchmark issuing tit-for-tat tariffs. Following – the centre-right Christian Democratic
10-year yield has hit 3%, a level not the US’ tariffs on steel and aluminium Union and its right-wing counterpart
seen since 2013. imports, it proposed further tariffs on the Christian Social Union – finally
US$50b worth of Chinese imports. It reached a coalition agreement with the
The hawkish stance of the US Federal has also taken a tougher line on China’s centre-left Social Democratic Party.
Reserve (Fed) has been a major investments in US technology firms to The formation of this “grand coalition”
factor behind the uptick in yields. The prevent the latter’s access to sensitive government paves the way for a more
Fed has been hiking interest rates on and critical technologies. In response, expansionary stance in Germany as well
expectations of a stronger economy as China has threatened retaliatory tariffs a further push for eurozone reforms.
well as increased inflationary pressures. on US products.
Since December 2015, it has raised Meanwhile, Italy’s deepening political
rates six times with the latest in March The trade situation between the US and crisis has put significant pressure
and has signaled that it could raise China remains fluid, with both countries on its government bonds and stocks.
rates a further two times this year. open to further negotiations to prevent Populist far-left Five Star Movements
a further escalation of trade frictions. (5SM) and the far-right League party
Concerns of a supply glut of US While a full-blown trade war seems have formed a coalition government.
Treasuries, as the government seeks unlikely, for now, any news of hard- The new Italian government, populist
to cover a yawning budget deficit by hitting trade measures could trigger in nature, is likely to take an antagonistic
issuing more debt, has also led to the a knee-jerk risk-off market reaction. stance against EU.
rise in yields. Although fixed income
markets came under pressure, equity
markets have held up relatively well.Investment Outlook H2 2018 11
!!
Inter-Korea Summit Middle East Conflict Tech Sector Fallout
A historic inter-Korean summit between Middle East tensions have remained After strong share price gains in the
South Korean President Moon Jae-In heightened due to a confluence of current bull market, tech-related
and North Korean Leader Kim Jung Un factors. The ongoing Syrian conflict companies lost some of their lustre
took place in April. The meeting between between US-backed rebel factions and towards the end of the first quarter.
the two Koreas – the first in more than the Russian-backed Assad regime is Sentiment nosedived due to data
a decade – concluded with a pledge for seen as a proxy for US-Russia relations privacy concerns and this sparked a
“complete denuclearisation” in North and US missile attacks on Syria in April sell-off in tech stocks such as Facebook,
Korea. However, the declaration did have further strained the relationship Twitter and Alphabet (Google’s parent
not include concrete steps on how to between the US and Russia. To make company). Elsewhere, concerns
dismantle the country’s nuclear weapons matters worse, Israel has also entered over the safety of self-driving vehicle
and ballistic missile programme. into the fray by launching missiles on technology put a drag on the share
Iranian targets in war-torn Syria in May. prices of Uber and Tesla. In addition,
The landmark US-North Korea summit in US President Trump has attacked
Singapore concluded successfully. Both Meanwhile, US-Iran tensions have led Amazon’s tax practices and business
countries agreed to a broad framework to higher oil prices. The US’ withdrawal methods for hurting traditional retailers.
for a nuclear deal even though the details from a nuclear deal with Iran in May
of implementation were not specified. and prospects of fresh sanctions on Iran These high-profile tech fallouts have
The fruitful talks between the US and could reduce global oil supplies. This, led to calls for tougher regulations
North Korea could hopefully boost the coupled with a cut in oil output by major on the industry. Worries over costly
security in the region and remove a oil producers, has caused oil prices to and restrictive growth measures have
key cause for the geopolitical tension. surge to US$70 per barrel, levels not dimmed the allure of tech stocks that
This could also pave a way for more seen since November 2014. were once market darlings.
constructive US-China trade talks.Performance
Performance Review in H1 2018 12
Review in H1 2018
Higher US Treasury yields and geopolitical
tensions were the main drivers of investment
markets in the first half of 2018.
Equities Fixed income
Global equities have entered into a Perceptions of rising inflationary
consolidation phase after the strong rally pressures pushed Treasury yields higher.
last year. Although geopolitical tensions, The rise in bond yields has kept most
higher yields and tighter regulations on fixed income classes under pressure.
tech stocks led to heightened volatility, The US high-yield has weathered
global equity markets have remained the recent rate rises relatively well.
relatively resilient given strong earnings However, US investment grade (IG)
momentum. The returns for regional bonds and EM hard currency bonds
equities have been more divergent, have underperformed due to higher
unlike in 2017. US equities outperformed, yields and wider spreads.
as tech led the gains. European equities
gave up their market leadership in the Foreign exchange
last week of May as Italian political Following weakness in the first
turmoil took a toll on the performance. quarter of 2018, the USD bounced
EM equities advanced in the first back on robust economic data and the
quarter but gave up their gains in the unwinding of USD shorts. The easing
second quarter, as higher rates and a of trade frictions between the US and
strong USD weighed on sentiment. China lifted pressure on the USD.
A strong JPY put downward pressure Other regional risks such as the Italian
on Japanese equities. political situation and uncertainty over
Brexit have undermined the EUR and
GBP. The AUD weakened as the
Reserve Bank of Australia (RBA)
stayed its hand on interest rates.
Figure 01—Global equity markets performances YTD
Price Key Event US
(rebased to 100) MSCI World Net Total Global Equities
Return USD Index Europe
Asia (excluding Japan)
Heightened tension EM
between the US and Japan
Equity markets sold
Russia weighed on
off on concerns over
sentiments
rising Treasury yields
Fears over
US-China trade Italy’s political 1.8
106.00 war and Tech turmoil
stocks rout led dampened
to soft equity 0.5
104.00 sentiments
performance
0.2
102.00
0.0
100.00
(2.6)
98.00
(3.1)
2018
Jan 15 Jan 31 Feb 14 Feb 28 Mar 15 Mar 30 Apr 16 Apr 30 May 15 May 31 (3.0) (2.0) (1.0) 0.0 1.0 2.0
YTD Net Total Return (%)
Source: Bloomberg, 31 May 2018Investment Outlook H2 2018 13
Figure 02—Global fixed income markets performances YTD
Bullish remarks
Price by Jerome Powell Trade war concerns led Key Event US HY
(rebased to 100) and strong wage to typical risk-off moves Bloomberg Barclays Global Bonds
growth data in Global-Aggregate US Government
the US triggered Total Return Index (0.2)
102.00 (Unhedged USD) Asian IG
bonds sell-off
Asian HY
(1.0)
EMD LCY
US IG
101.00 Treasury continued
EMD USD (1.1)
the uptrend on higher
inflation expectations
and heavy issuance. (1.7)
100.00
(3.0)
(3.0)
99.00
(3.5)
98.00 (4.3)
2018
Jan 15 Jan 31 Feb 14 Feb 28 Feb 15 Mar 30 Apr 16 Apr 30 May 15 May 31 (5.0) (4.0) (3.0) (2.0) (1.0)
YTD Total Return (%)
Source: Bloomberg, 31 May 2018
Figure 03—Foreign exchanges performances YTD
Price Key Event JPY
Dollar Index Dollar Index
CNY
Robust US economic
data and covering SGD
USD weakened as Trump
95.000 of short-positioning GBP
was ramping up protectionist 3.6
rhetoric. Concerns of larger fueled strong EUR
government deficits due to tax rebound in USD AUD
94.000
reforms also weighed on USD. 2.0
93.000
1.6
92.000
(0.1)
91.000
(1.6)
90.000
(2.6)
89.000
(3.1)
2018
Jan 15 Jan 31 Feb 14 Feb 28 Mar 15 Mar 30 Apr 16 Apr 30 May 15 May 31 (4.0) (2.0) 0.0 2.0 4.0
YTD Movement against USD (%)
Source: Bloomberg, 31 May 2018Calls Review
Calls Review H1 2018 14
H1 2018
We revisit the calls that we made at
the beginning of the year and review
how our calls have performed thus far.
Jan (%) Feb (%) Mar (%) Apr (%) May (%) *YTD (%)
Theme 1:
Developed Markets
(DMs) Reflation 6.4 -2.8 -4.4 -0.4 -1.0 0.2
Heightened valuations and
reflationary impulses in DMs
mean it is timely to rotate out
of expensive, late-cycle markets
and interest rate-sensitive sectors. 1.6 -3.9 -2.0 4.6 0.1 1.4
1.3 -3.7 -2.4 3.6 -1.7 -0.5
Theme 2:
EM Assets 8.3 -4.6 -1.9 -0.4 -3.5 -0.8
Synchronised global growth
provides a stable backdrop for
capitalising on higher growth
opportunities in EM economies.
4.5 -1.0 1.0 -3.0 -5.0 -4.7
Theme 3:
Structural Opportunities
Secular developments could
5.6 -4.5 -2.1 1.0 0.5 2.7
drive long-term growth in specific
industries, even in times of slower
global expansion.
Theme 4:
Yield Enhancer
0.5 -0.1 0.0 0.5 0.3 1.6
Short-duration and higher income could
cushion against rising interest rates.
Source: Morningstar, 12 June 2018
*YTD figures include returns from 1/1/18 to 12/6/18Investment Outlook H2 2018 15
US • US financials underperformed • However, credit growth has started
Financials the overall US market. to bottom out and net interest margins
Equities • Tepid loan growth in Q1 2018 and have improved as short-term interest
yield-curve flattening weighed on rates continue to climb higher.
the sector’s performance.
European • European equities delivered positive • Despite the several political events
Equities return YTD. Their market leadership over the past two years, including
was lost in the last week of May due Brexit, European equities have been
to political uncertainty in Italy. resilient and tended to recover quickly.
Japanese • Japanese equities underperformed pressure on Japanese equity.
Equities relative to other DM markets. • Initial basis for the call, including
• Investors maintained their wait-and- solid economic fundamentals, positive
see stance given domestic political earnings growth and higher dividend
issues. Strong JPY also put downward payouts, remain valid.
EM Equities • After a strong start in January, exceptionally strong rally last year.
EM equities pulled back on a strong • Given strong fundamentals and
USD and higher US Treasury yields. improved valuations, the sell-off
This correction came after an looks overdone.
EM Local • Geopolitical tensions, USD strength account and budget deficits and
Currency and rising US Treasury yields remain are dependent on foreign funding
Bonds as headwinds to this asset class. have started to show signs of stress.
• Even though the broad EM economy • We are less optimistic on EM
stayed on strong footing, EM local currency bonds.
countries that have current
Global • Global healthcare managed to sector has started to outperform
Healthcare hold onto gains. post-announcement.
• US President Trump’s plans to • M&A activities have picked up YTD,
lower drug prices in May appear providing support to small-to-mid
to be significantly less disruptive cap companies.
to the industry. After tepid trading
in the last few months, the healthcare
Short • While the environment for fixed • Credit spreads stayed tight as
Duration income was very challenging in the economic outlook remains robust.
High Yield H1 2018, short-duration high yield Attractive yields offset the capital
Bonds bonds managed to perform. loss from higher rates, resulting
in positive total returns.16
17 Macro Outlook and Risks for H2 2018 Our investment views are grounded on the understanding of the key drivers of the macro environment and identification of potential risk sources. We draw on these insights to form the basis of our strategies. At the centre of your being you have the answer; you know who you are and you know what you want. —Lao Tze
Macro Outlook
Macro Outlook for H2 2018 18
for H2 2018
Inflationary Central banks move
pressures have away from QE, led
built up by the Fed
Monetary Policy
Normalise gradually
Supported
Reduced commodity
output gap prices
Economy Labour markets Fiscal stimulus and
Stabilise in H2 remain healthy positive business
sentiments support
capex spending
Conclusion
Economic and
equity reflation
are likely to
continue
H1 H2
Markets
Offer better valuations
Corporate earnings Valuations are less
growth continues to stretched after price
be strong consolidationInvestment Outlook H2 2018 19
Economic growth to
stabilise in H2 2018
Key takeaways Global economic growth momentum spending, while healthy corporate
The pace of economic growth moderated in H1 2018, as the Global profits and tighter capacity utilisation
should pick up in the H2 2018, on Composite PMI decreased from 54.8 will provide a favourable climate for
the back of strong consumer and in February to 53.8 in April amidst business investment.
business spending in developed escalating concerns over a trade war
markets and higher commodity between the US and China and higher The Japanese economy softened in
prices in emerging markets. interest rates. However, this is unlikely H1 2018 after a peak in exports and
to mark the start of a downturn. The an unwinding of inventory. Despite
Central banks are expected to global economy has demonstrated its a stronger JPY, we expect a brighter
gradually normalise monetary resilience thus far and in the absence economic outlook in the second half,
policy by hiking rates to of a significant catalyst for a recession, given better business confidence and
tame inflation. global growth is likely to stabilise supportive monetary conditions.
in H2 2018.
Equity valuations are now less Strengthening structural
demanding and the outlook for According to International Monetary reforms in emerging markets,
corporate earnings remains Fund forecasts, global real gross despite higher risks
positive. Hence, the equity domestic product (GDP) growth is The Chinese economy grew 6.8% in
markets could be more resilient expected to inch up to 3.9% in 2018, the first quarter, beating consensus
to higher interest rate scenario. slightly higher than in 2017, buoyed by forecasts of 6.7%, as strong consumer
strong consumer and business spending spending made up for a sluggish
given solid income fundamentals. manufacturing sector. The economy’s
strong shape as well as low inflationary
Growth in developed markets to pressures gave the government leeway
stabilise after slower momentum to unwind excess capacity and rein in
We expect solid growth in developed corporate debt, even while stimulating
markets, driven by strong domestic consumption.
consumption, higher capex spending
and expansionary fiscal policies. Other emerging markets – notably
India, Brazil, Russia, Mexico and South
Despite moving into the slow lane Africa – are on track to achieve healthy
at the beginning of the year, the US growth rates in 2018. Despite worries
economy’s underlying fundamentals over trade protectionism, a revival in
remain robust. Strong consumer commodity prices is likely to lift these
spending, as well as a pick-up in capex economies, with the exception of India,
spending as a result of higher fiscal which is dependent on oil imports.
stimulus, should fuel growth in H2 2018.
While the global economy is expected
Europe’s economy was off to a sluggish to grow at a healthy clip, geopolitical
start mainly due to cyclical factors risks remain. The ongoing US-China
such as a shorter inventory cycle and trade dispute continues to cast a pall
bad weather which hit crop production. over sentiment. Still, we are of the
However, the core drivers of demand view that both countries will be willing
are likely to prop up the economy. We to negotiate to prevent the trade row
expect strong labour income and falling from imploding. In H2 2018, key events
unemployment to shore up consumer to look out for include the direction ofMacro Outlook for H2 2018 20
Investment Outlook H2 2018 21
US-Russia relations, the outcome of the At 1.2% as of April 2018, inflation
North American Free Trade Agreement in Europe has remained persistently
(NAFTA) talks as well as the results low. However, it is likely to inch higher
from elections in Mexico and Brazil. on the back of continued growth and
higher commodity prices. In the third
quarter of 2018 (Q3 2018), the
Central banks to adopt European Central Bank (ECB) is
gradual normalisation expected to unveil its plans to scale
of monetary policy back and eventually stop its asset
With inflation creeping up, central purchases by the end of the year.
banks are expected to gradually
normalise monetary policy by raising The Bank of Japan (BoJ) should
interest rates to quell price pressures. maintain its accommodative monetary
This is unlikely to put a major dent in policy, as inflation is still very benign
the global economy. (below its 2% target).
US Fed on track to hike rates Are worries over higher
With a tighter labour market and higher rates warranted?
commodity prices fueling inflation, The global economy has remained
signs point to the Fed raising interest surprisingly resilient. The deleveraging
rates. The current Fed funds rate of the US and European economies,
stands at 1.75%. The Fed is expected coupled with China’s shift towards
to hike rates an additional two times domestic-driven growth, means that
this year – in June and in December. major economies should be able to ride
In 2019, it is expected to hike rates out the effects of higher interest rates.
another three times. Meanwhile, the
Fed is still continuing its balance sheet
reduction programme. However, in its
Market valuations
latest Federal Open Market Committee more reasonable
(FOMC) meeting, the Fed has indicated amidst robust earnings
that it will take a prudent approach in Equity valuations have dropped back
hiking rates so as not to put economic to more attractive levels, given good
growth at risk. earnings growth and price consolidation.
Most markets have revised earnings
Other central banks to expectations upwards, particularly for
take cue from Fed the energy sector. Robust earnings will
Unlike the Fed, other central banks help to cushion the equity markets from
have adopted a more dovish stance any macroeconomic cross-currents.
so far, due to a combination of softer
economic growth and low inflationary Expectations of a higher interest rate
pressures. Going forward, we expect environment are unlikely to cast a pall
other central banks to follow in the Fed’s over the earnings outlook and investor
footsteps by normalising policies, albeit confidence should remain high.
at a much-slower pace.Key Risk Drivers
Key Risk Drivers 22
in H2 2018
It is critical to map out key risk drivers which can
take the form of both upside and downside catalysts.
Understanding the impact of these risks is critical
to making informed investment decisions.
Key takeaways
While the global economy
continues to chug along
nicely, perhaps the greatest
threat that could derail the
economic momentum is a
sudden increase in yields.
The market will also need to
keep close tabs on the impact
of geopolitical tensions,
the results of US mid-term
elections and political
developments in Europe.
Spike in yields US domestic politics
Yields are likely to head north in H2 The stakes are high as the US heads
2018 due to a combination of factors. into mid-term elections in November.
A tight US jobs market, rising wages Policy risk could rear its head should
and strengthening commodity prices the Democrats attain the House but the
could stoke inflation. In addition, the Republicans retain control of the Senate.
US government is expected to flood A divided Congress could lead to a policy
the market with US Treasuries to cover gridlock, which could have a detrimental
larger budget deficits. Any spike in effect on sectors such as industrial
yields, as a result, could spark a rout and materials that are dependent on
in the equities and bond markets. government spending. Failure to seal any
bipartisan deal could eventually lead to
Geopolitical tensions pressures to tighten fiscal policy. This
Market sentiment remains vulnerable could, in turn, negatively impact US
to geopolitical risks, particularly economic growth and market sentiment.
heightened trade tensions and a
worsening Middle East conflict. An European politics
extreme protectionist stance from The worsening Italian political crisis has
Washington could undermine corporate sparked fears of a sell-off in European
confidence though we maintain our markets. Even though the two anti-
base-case scenario that a trade war is establishment parties managed to form
unlikely to happen. Rising geopolitical a government in Italy, uncertainties still
tensions in oil-producing nations remain. The relationship with European
including Iran, Venezuela, Saudi Arabia, Union (EU) could deteriorate as the
Libya and Nigeria could threaten new Italian government adopts a more
production. Any sharp increase in oil confrontational approach. Our base
prices could cloud the inflation outlook case scenario is for Italy to remain in
and dampen consumer spending. the EU as the stakes for an exit are far
too high. European assets are likely to
see increased volatility, until the Italian
political situation has settled down.23
July
1 Jul
Mexico General Election July 26
ECB Meeting
30–31 July
BOJ Meeting
August 31 Jul–1 Aug
FOMC Meeting
Global Key
Events Calendar
Key Event
Central Banks September
Political Events
13 Sep
ECB Meeting
ECB may exit the bond buying
program in September.
18–19 Sep
BOJ Meeting
Sep TBC
Liberal Democratic Party (Japan) 25–26 Sep
leadership election October FOMC Meeting
Abe Cabinet’s support rate plummeted and the
chances of Abe winning reelection in September
looks less certain. Our base case is that Abe
to remain in power for another term.
25 Oct
ECB Meeting
Oct TBC
Brazil General Election
30–31 Oct
BOJ Meeting
Oct TBC
UK-EU exit negotiation to end with Publication of
November
“Withdrawal agreement” and political declaration
on “Framework for the Future Relationship”.
6 Nov
7–8 Nov
US Mid-term Election
FOMC Meeting
Given the low approval rating for Trump,
the mid-term election is likely to be rocky. December
13 Dec
ECB Meeting
18–19 Dec
FOMC Meeting
The Fed is expected to hike
rates by 25 bps in the meeting.
19–20 Dec
BOJ Meeting24
25 Asset Class Outlook and Strategy To devise our asset class outlook, we focus on the wider macroeconomic picture as well as asset-specific attributes. This helps us to develop our investment strategies and identify compelling opportunities. In the world there is nothing more submissive and weak than water. Yet for attacking that which is hard and strong nothing can surpass it. —Lao Tze
Our Strategy
Asset Class Outlook 26
and Strategy
H2 2018
We expect H2 2018 to be dominated by a rising
interest rate environment as central banks look
to hike rates. We prefer opportunities that have
relatively attractive valuations and that are
underpinned by robust fundamentals.
Equities
Equities remain our preferred
asset class. Despite some volatility,
we expect equity returns to be
positive in H2 2018.
Prefer Japanese equities
We maintain a favourable
outlook for Japanese equities
given a strong corporate earnings
landscape and progress on
corporate governance reforms.
US Prefer EM equities
Broad EM equities are supported
by strong fundamentals and
attractive valuations. Countries
Prefer US financials
that have current account surpluses
Attractive valuations and higher
are less vulnerable to foreign fund
earnings due to rate hikes make
outflows. We turn constructive
US financials our preferred sector
on China.
play in the US equity markets.
EU
Prefer European equities Prefer global healthcare
We are positive on European We expect drug approvals and
equities based on reasonable an increase in M&A activity to
valuations and a robust eurozone be catalysts for a sector re-rating.
economy that is supported by Less negative announcements on
strong domestic consumption. drug pricing could boost sentiment.
However, political developments
in Italy may dampen sentiment
in the near term.Investment Outlook H2 2018 27
Fixed Income Foreign Exchange
Expectations of further Fed rate hikes The USD is expected to
could lead to an increase in yields soften against its Group of
and will keep bond markets on the Ten (G10) counterparts but
tenterhooks. Short-duration, high- gain the upper hand against
yielding debt is the preferred option Asian currencies in H2 2018.
to cushion against any rate rise.
Prefer short duration and
high-yielding fixed income
For better risk-adjusted return,
we prefer short-duration but
higher-yield fixed income
instruments.
Asian IG
EUR
Prefer Asian IG bonds Prefer EUR
Higher Post-correction, valuations of Continued monetary
Yield Asian IG bonds have become normalisation by the ECB
more attractive. A sound global and a robust eurozone
economy will provide support economy should lead to a
for Asian IG bonds. strengthening of the EUR.
Short Prefer floating rate bonds
Duration Floating rate bonds are
attractive in the current interest
rate environment because they
offer the “sweet spot” of low
duration risk and attractive
income levels.
AUD
Prefer AUD
The AUD is likely to continue
to firm on the back of resilient
commodity prices.Equities
Asset Class Outlook 28
and Strategy
Equities remain our preferred asset class.
Despite some volatility, we expect equity
returns to be positive in H2 2018.
Key takeaways Regional views
Within developed markets, Neutral on US equities, with
we are neutral on the US market, a preference for financials
though financials offer a bright We maintain a neutral outlook on US
spot. We maintain a favourable equities for H2 2018. Despite a positive
view on European and Japanese earnings momentum, relatively rich
equities. Undemanding valuations valuations and a spike in yields could
and a robust earnings outlook are put a cap on gains.
positives for European equities
while strong corporate earnings However, we are upbeat over the
and progress on reforms should financial sector. Fears that weaker loan
support Japanese counters. growth and a global risk spillover could
However, political concerns, hurt banking stocks are overblown.
particularly in Europe, may
continue to hog the spotlight in Valuations for financials are still
H2 2018, leading to increased attractive, especially when considered
market volatility. over a 25-year span. Trading at a 30%
discount to the benchmark, the sector’s
forward price-to-earnings multiple, is
not elevated. Similarly, the sector’s
Overview price-to-book ratio, which is trading at
The macro environment remains a 55% discount to the broader market,
constructive for equities. Despite losing is undemanding.
some steam in H1 2018, we expect the
global economy to stabilise in H2 2018. The US Federal Reserve has shifted
Fundamentals remain supported by to a hawkish stance and is expected
central banks’ relatively accommodative to hike interest rates twice more in
policies and a solid earnings outlook. H2 2018, and possibly a further 3 to 4
times in 2019. With short-term rates
Due to corrective price pressures and on the rise, banks will be able to lend
continued earnings growth, valuations at higher rates, providing a tailwind to
have become less elevated. Therefore, their earnings.
equities remain our preferred asset
class in H2 2018. The banking sector is also likely to get
a profitability boost from deregulation,
We expect some volatility in global tax reform and better credit growth.
equity markets in the near term, given Banks should be able to ride out any
moderating global growth momentum, short-term weakness in loan volumes
increasing bond yields and higher given their rising net interest margins,
political uncertainty in Europe. Beyond strong credit quality and tight rein
that, there is room for further upside over expenses.
in the equity markets as the global
economy should continue to thrive Hopes that a positive outcome from
heading into 2019. stress test results in June could lead to
increased shareholder payouts is likely
to boost sentiment for financial stocks.
A key risk to financials as our top US
sector pick is that the Fed turns out toInvestment Outlook H2 2018 29
be more dovish. Any delay in expected EU could sour if the new Italian
rate hikes could put a dent on the government may take a confrontation
performance of US financials. approach against EU. Our base case
scenario is for Italy to remain in the EU.
Positive on European equities,
but close watch needed on Positive on Japanese equities,
political developments with an eye on the LDP
We maintain a favourable view on Presidential election
European equities, even though We expect Japanese equities to
the political developments in Italy have a good run in H2 2018, with
could dampen sentiment in the near upside potential given that valuations
term. Valuations are not excessive, are currently at attractive levels.
with European equities underpriced
compared to their US counterparts. Strong corporate earnings and progress
This coupled with a robust earnings on reforms could provide the impetus
outlook, means that there is still further for further gains. Corporate earnings
upside for European equities. will remain supported by strong
domestic consumption and robust
More than half of Stoxx 600 index exports. Reform-minded Japanese
companies have reported stronger-than- Prime Minister Shinzo Abe’s drive
expected earnings. This translates to a to improve corporate governance
strong earnings-per-share (EPS) growth could also encourage companies to
of more than 10%. In addition, top-line return cash to investors in the form
growth came in at a respectable 5% of dividends or share buybacks.
year-on-year. This will boost investor confidence.
Although the eurozone economy cooled The pro-cyclical Japanese stock
in the beginning of the year, recent data market usually moves in tandem with
indicate that growth momentum could the state of the economy. Cyclical
still enjoy an upswing as downside stocks – consumer discretionary,
surprises fizzle out. The healthy financial, technology and industrial
labour market bodes well for domestic – make up about two-thirds of the
consumption and this will hold up the total market capitalisation. Continued
economy for the rest of the year. global economic expansion will sustain
operating earnings and this will support
Despite the positive outlook for the Japanese equities.
eurozone, investors need to be wary
of political risks in Italy. Even though Inflows into Japanese equity funds have
the two anti-establishment parties swelled, a sign of strong appetite for
have formed a new government, some Japanese shares. Inflows should remain
concerns remain. The new Prime well-supported, barring any major
Minister Giuseppe Conte promised negative news.
“radical changes”, including cutting
taxes and expanding welfare benefits. Although indicators reveal that the
The new fiscal plan, if implemented, economy hit a rough patch in Q1 2018,
could lead to higher public debt and this is likely only a blip. Growth is likely
potential ratings downgrade. The to remain resilient in the latter half of
relationship between the Italy and the year. Meanwhile BoJ governorAsset Class Outlook 30
and Strategy
Key takeaways Haruhiko Kuroda’s reappointment The various tailwinds driving EM growth
Broad EM equities remain suggests that Japan is likely to maintain include a pick-up in global trade as well
supported by sound economic its easy monetary policy. as solid domestic growth fueled by high
fundamentals. However, we consumer spending power. Stronger
have become more selective, However, political risk is on the rise commodity prices will continue to be a
given the outlook for rising given dwindling support for Abe. We boon for EM growth and we expect EM
yields and a possibly stronger expect Abe to clinch a third term as equities to continue racking up gains,
USD. We prefer EM countries leader of the ruling Liberal Democratic as a result.
that have current account Party (LDP) this September. Should he
surpluses and that are less fail to defend his position, his successor External risks, however, remain high in
dependent on foreign funding. will still be likely to continue with pro- H2 2018. An unexpected surge in USD
We are constructive on the growth policies. strength could cause a retreat from EM
China market and the inclusion equities. A stronger USD makes it more
of A-shares into the MSCI is Positive on emerging market expensive for EM economies to service
positive for sentiment. equities, selective strategy is key US dollar-denominated debt and could
EM equities continue to offer investors crimp credit capacity. A worsening of
The healthcare sector is our appealing valuations. From a price-to- US-China trade tensions could also
preferred sector play. Increased book and price-to-earnings perspective, lead to higher market volatility.
M&A activity will increase the EM equities are undervalued, trading
sector’s attractiveness. at a 25% discount to their DM peers. We turn more constructive on the China
Consensus estimates point to EPS market. China continues to offer stable
growth of 20% and 10% in 2018 and economic growth and high corporate
2019 respectively, driven by robust global profit levels. The government’s fresh
growth and rising commodity prices. push for more reforms to further
open up the economy is positive for
Portfolio exposure to EM equities is investor confidence. The ramping up of
still relatively low, with allocation to EM deleveraging and rebalancing measures
equities estimated to be around 8% of will bode well for the economy in the
total assets under management. As an long run.
asset class, EM equities show strong
potential. We are likely to see further Meanwhile, valuations of Chinese
inflows and increasing exposure to EM equities, in particular for H-shares, are
equities, as macroeconomic indicators still undemanding compared to regional
remain strong. or global peers. The phased addition
of China’s A-shares into the MSCI
Economic fundamentals in emerging Emerging Markets Index this year could
markets remain intact. Concerns over improve investor appetite for Chinese
increasing trade protectionism are offset equities and spark further inflows into
by resilient domestic consumption. market. The inclusion is likely to lead
to a re-rating of the market this year.
We can see several themes at play in
the EM space. For one, interest rates in Risks are subsiding at the macro level.
emerging markets are likely to mirror the But a tightening of liquidity conditions
upward trajectory of rates in developed as well as a possible slump in property
markets due to central bank tapering. sales could put a drag on the market.
Rising rates will bode well for EM
financial and insurance equities.Investment Outlook H2 2018 31
Structural opportunities repatriate cash could pour money
in healthcare into acquisitions.
Global healthcare equities are now
priced at attractive levels, having The additional funds could also be
missed out of the broader market’s used for dividend payments or share
winning streak last year. It’s not too repurchases. This move would also
late to join the party though, given boost the sector’s outlook. Attractive
bright spots on the horizon. dividend yields will sustain interest
in the sector.
The healthcare sector is trading at
a discount to the long-term average Policy uncertainty could weigh on
price-to-earnings ratio and this offers sentiment for the sector, given scrutiny
a good entry point to gain exposure on drug prices especially in the
to the sector. specialty care areas. However, large-
scale structural reform on drug pricing
Positive news in the form of innovative is unlikely, at least in the near term.
drug approvals and frenzied M&A
activity in the industry could drive a In terms of other risks, we are likely
re-rating of the sector. Thanks to US tax to see a continued increase in generic
reform, US corporates now have access utilisation, with biosimilar threats
to a stockpile of overseas cash. This flooding the market. As healthcare is
could turn out to be a blockbuster deal- a relatively defensive sector, any rise
making season for the pharmaceutical in interest rates as well as a cyclical
industry. We are likely to see a ramp recovery could take the shine off
up in M&A activities as larger cap the sector.
healthcare companies looking to
Figure 04—Equity earnings yield still offer attractive pick up over bonds Equity earning yield
10-year Government bond yield
10-year Government bond yield (%)
Equity earning yield (%)
7.18 6.94
2.99
6.17
0.62
0.05
Japan Europe US
Source: Bloomberg, UOB PFS Investment Strategy, 22 May 2018Fixed Income
Asset Class Outlook 32
and Strategy
Expectations of further Fed rate hikes could
lead to an increase in yields and will keep bond
markets on the tenterhooks. Short-duration,
high-yielding debt is the preferred option
to cushion against any rate rise.
Key takeaways
Short duration high-yielding
fixed income instruments offer
higher yields and have lower
sensitivity to interest rates.
Asian IG bonds are back to
attractive valuation levels
following a technical correction.
Floating rate bonds are an
attractive option, providing
a buffer against rate hikes
without sacrificing income.
Overview
With the consolidation of US Treasury continue its upward trajectory beyond
yields, headwinds to fixed income that. The 10-year US bond is currently
assets could moderate in H2 2018. oversold and there is a lingering chill
However, the tight US labour market over long-term bonds. The excessive
means that the upside for yields unwinding of positions could rein in
remains. As such, our preference upward pressure on yields – for now.
is for short-duration, high-yielding However, with inflationary pressures
fixed income instruments. on the rise and the dialing back of loose
monetary policies globally, long-term
Corporate credits, in particular IG rates are likely to trend higher over
bonds, experienced a sell-off in H1 a longer-term horizon.
2018. Despite the weakness in the
credit markets, there are still selective For better risk-adjusted returns, we
opportunities in USD-denominated prefer shorter-duration but higher-
Asian IG bonds as yields become yielding fixed income instruments. After
more attractive. repricing, short-term corporate bonds
offer a more appealing alternative than
Given expectations of further Fed rate longer-term bonds. They can offer
hikes and rising LIBOR rates, floating positive total returns as the income from
rate notes offer investors the “sweet higher yields should be able to cushion
spot” with their low duration risk and any capital losses from price decreases
attractive income levels. due to higher rates.
Prefer short-duration USD-denominated Asian IG bonds
high-yielding fixed income Asian IG bonds suffered a wave of
Although duration risk remains, the losses in H1 2018. This was due to
outlook for US Treasuries is not as dim a technical correction rather than
compared to the beginning of the year. worsening credit fundamentals. Supply
We expect the 10-year US Treasury yield from Chinese issuers outstripped
to hit 3.2% by the end of the year and demand as offshore appetite for IGInvestment Outlook H2 2018 33
bonds waned and this triggered the Floating rate notes
sell-off. Chinese issuers have turned to Given the uncertainty over the outlook
the offshore bond market for funding for interest rates, floating rate bonds
instead of tapping the onshore market offer protection against the effect of rate
given the latter’s current weakness. hikes without sacrificing income. A low
duration fixed income security, floating
Following the correction, valuations rate bonds feature variable coupons that
have come down to more attractive are tied to benchmarked rates such as
levels in certain segments of the market. the LIBOR. Should the benchmarked
This offers an opportunity for investors rates increase, the coupons will revised
to snap up selected issues at cheap upwards accordingly, buffering investors
prices. If the excess supply is not against rising interest rates.
mopped up, technicals could remain
weak in the immediate term. However,
the higher yields are likely to entice
investors from the sidelines and this
will provide some support to the market.
The global economic growth story
remains intact. And with the Chinese
economy also on firm footing, the
fundamentals for Asian credit are
still looking bright.
Figure 05—Short duration and higher quality bonds are preferred
High grade
• Lower yield
Upper medium
grade
Lower medium
grade
Non-investment
grade speculative
Highly • More volatile
Quality
speculative
returns
Duration
Short Medium Long
(0 – 3 years) (3– 7 years) (beyond 7 years)
Source: UOB PFS Investment Strategy, 22 May 2018Foreign Exchange
Asset Class Outlook 34
and Strategy
The USD is expected to soften against its
G10 counterparts but gain the upper hand
against Asian currencies in H2 2018.
Overview
Key takeaways The USD has bounced back from JPY buffered by
The USD is expected to remain its earlier setback and a strong US safe-haven status
sluggish against G10 currencies. economic backdrop should continue With the reappointment of Haruhiko
to lend support to the USD. However, Kuroda as BoJ Governor, the BoJ
The EUR should strengthen the picture is mixed over the next 12 is likely to maintain a loose monetary
as ECB prepares to exit from months. We expect the USD to ease policy given that Japan has yet to meet
quantitative easing, commodity against its G10 counterparts but gain its 2% inflation target. However, any
prices could fuel gains in the ground against other EM currencies. global risk aversion is likely to prompt
AUD, while a flight to safety Potential factors that could weigh on a flight to safety to the JPY and trigger
will keep the JPY supported. the USD include a flattening of the yield a JPY rally. H2 2018 should see
However, the GBP could weaken curve as well as a gradual tightening increased political risks with ruling
amidst continued uncertainty of monetary policy by major central party elections and mid-term elections
over Brexit. banks, including the Fed. in Japan and US respectively. Given
these events, 110 is a key resistance
Singapore’s normalisation of level for the USD/JPY pair.
monetary policy is likely to cast
G10 currencies
a pall on the SGD. Meanwhile, against USD GBP to soften on Brexit fears
other emerging market Asian EUR to climb on The GBP weakened in H1 2018, amidst
currencies are also likely to quantitative tapering growing concerns over Brexit and the
experience a mild depreciation The EUR has weakened, given the Bank of England’s (BoE) procrastination
against the USD. moderating pace of economic growth in hiking rates. The BoE is expected to
in Europe and uncertainty surrounding make its move in August, but continued
Italian politics. Going forward, the uncertainty over Brexit, a gloomy UK
EUR is likely to make further gains on economic outlook and a widening
the back of a strengthening eurozone current account deficit could cast a pall
economy, healthy trade and ECB over the GBP. As such, we expect the
normalisation. In its latest forecasts, GBP to remain soft with a GBP/USD
the ECB left its growth and inflation ceiling of 1.40 for the rest of the year.
projections largely unchanged at
2.4% and 1.4% respectively. In H2
2018, the ECB will be winding down Asian currencies
its quantitative easing policy and is against USD
expected to end its asset purchase SGD to ease on monetary policy
programme by the end of the year. This normalisation
should provide support to the EUR. As expected, the Monetary Authority
of Singapore (MAS) normalised its
AUD supported by monetary policy in April, marking the
commodity prices first time it has tightened policy in
Although the Australian economy six years. Singapore’s slowing export
has shown signs of cooling and the growth coincides with the Fed’s
RBA has been keeping interest rates monetary normalisation policy as the
on hold, we believe that the AUD will US continues to increase rates gradually
continue to hold firm. Strong commodity and unwind its balance sheet. Given
prices should drive gains in the AUD. this, we expect the SGD to lose steam
We see a mild strengthening of the going forward. The USD/SGD is likely
AUD against the USD for H2 2018. to head higher for H2 2018.Investment Outlook H2 2018 35
Other Asian currencies to The MYR may experience some
depreciate against USD consolidation in H2 2018. The USD’s
We expect most EM currencies to advance on the back of US rate hikes
weaken against the USD in H2 2018. as well as uncertainty over the pace
of reforms in Malaysia could cap
The RMB is likely to hold its ground the MYR’s strength. Still, we expect
against the USD given improving the MYR to gradually strengthen
sentiment due to easing US-China as the macroeconomic situation
trade tensions. We expect only a mild in Malaysia improves.
weakening of the RMB against the
USD for the rest of the year. The IDR has declined against
the USD as the Fed’s rate hikes have
Although the THB eased slightly dimmed the allure of Asian currencies.
against the USD, prospects for the The IDR’s slump is likely to continue
Thai economy remain bright, buoyed given Indonesia’s widening current
by robust exports and a strong tourism account and fiscal deficits. The
sector. The Fed’s gradual rate hikes unwinding of carry trades will
could put a cap on THB gains. Given continue to hurt the IDR.
this, we expect the THB to be range
bound in H2 2018.
Figure 06—G4 central bank rates at a glance
Interest
Rate (%)
2.5
2.0
1.75%
1.5
1.0
0.5
0.5%
0.0
0.0%
-0.1%
-0.5
BOJ ECB BOE FED
Source: UOB PFS Investment Strategy, 22 May 2018Regional Macro
Regional Countries 36
Summaries
Key takeaways
Generally, Asian equities
should remain supported by
strong economic growth and
robust investor sentiment.
We are positive on Singapore
and China equities.
Fixed income markets should
hold up but investors need
to keep a close watch on the
effects of the rate tightening
by the Fed.
Asian currencies are likely
to depreciate against the USD,
given the Fed’s tightening
stance. Long term, we are
positive on MYR as structural
reforms improve.
Malaysia Indonesia
Stocks Stocks
Selective on Malaysian equities. Short-lived Cautiously optimistic on Indonesian equities.
knee-jerk reaction and increased volatility Attractive valuations after recent rout, above 5%
following the unexpected election results. GDP growth and manageable current account
Stocks should recover following greater deficits. Lingering uncertainty from higher oil prices,
clarity on government and economic policy. negative trade balance and external headwinds.
Selectiveness is key.
Bonds
Bonds Headwinds from higher US rates and a stronger
Concerns over a larger budget deficit remain, USD may trigger an unwinding of Indonesian
but outflows of MYR-denominated government carry trades. Bank Indonesia has heavily intervened
bonds likely contained by strong foreign in the currency and secondary bonds markets.
reserves and robust domestic liquidity. Expect Rate hike expected.
sensible macro and fiscal policy to prevail.
Foreign Exchange
Foreign Exchange The IDR may face some volatility. With current
Temporary weakness of MYR due to account and fiscal deficits, IDR could come
domestic uncertainties and USD technical under pressure as the Fed hikes rates. However,
rebound. Long-term positive due to structural the attractive interest rate differential may
reforms and efforts to improve governance, provide some buffer.
transparency and accountability.Investment Outlook H2 2018 37
China
Stocks
Positive on China equities. Improving sentiment
supported by solid GDP growth, greater
regulation certainty, earnings improvement, and
A-share inclusion into the MSCI. Favour growth
stocks in banking, consumption, healthcare and
advanced manufacturing.
Bonds
Better-than-expected performance from local
fixed income, driven by lower total financing
Singapore demand and the People’s Bank of China’s neutral
policy stance. Default risk remains on corporate
Stocks credits. Favour high quality bonds.
Constructive on Singapore equities. Valuations
are fair, despite the H1 2018 rally. Rising yields, Foreign Exchange
a housing recovery and higher oil prices will boost RMB may face a moderate depreciation against
the banking, real estate and oil services sectors. the USD in H2 2018, given concerns of trade
frictions between China and the US, as well
Bonds as the Fed’s tightening path this year.
Local rates are expected to drift higher, led by
the tightening cycle in the US. However, less
issuance and robust demand are likely to Thailand
support the local bond market.
Stocks
Foreign Exchange Neutral on Thai equities. Economic growth
SGD likely to weaken against the USD in supported by exports, tourism and private
H2 2018, amidst moderating exports and the expenditure but downward revisions to
Fed’s expected moves to hike rates and reduce earnings and heftier valuations could cloud the
the balance sheet gradually. picture. Banking, commerce, and healthcare
sectors to shine.
Bonds
Expected slight steepening in the yield curve,
as Thai inflation shows signs of rising
gradually, albeit from low levels. Volatility
capped as only less than 10% of bonds are
in foreign holdings.
Foreign Exchange
After recent USD strength, THB likely
to be range bound. The THB should regain
its footing in H2 2018 as the current account
surplus improves. Expect a rate hike from
the Bank of Thailand.You can also read
