Investors are advised to remain vigilant by holding more cash, reducing leverage and adding diversifiers to portfolios in 2017, according to Johan Jooste, chief investment officer of Bank of Singapore.
'Trump’s uncertain world is poised to create winners and losers,' he stated in an investment outlook, ahead of the 45th US president's swearing-in ceremony on January 20.
He elaborated: 'With Trump’s policies tilted to benefit the US, we expect the US to outperform, and maintain an unchanged underweight rating on Europe, Japan and Asia. The bank also has raised US equities to neutral from underweight.'
The president-elect has made his pro-domestic stance on trade and investment evident through his social media posts and backdoor negotiations. Investors are expecting US small-and mid-cap companies to benefit from his intended corporate tax cuts.
On equities, the Singapore-headquartered private bank is looking for opportunities in sectors such as healthcare, financials and new China, and it is avoiding Asian exporters.
Bank of Singapore has identified two extremes 'at the heart of Trumponomics': fiscal thrust and deregulation on one hand, and the risk of recession under a boom-bust policy mix on the other.
'We are moderately defensive in our asset allocation and continue to prefer credit over equity. As we do not foresee credit spreads to widen significantly, we are turning less bearish on developed market high yield bonds,' Jooste said.
Additionally, the bank highlighted the importance of adding portfolio diversifiers such as hedge funds and private equity to increase portfolio diversification.
'We suggest holding more cash as it can be deployed if there is a good opportunity ahead and can mitigate any negative outcome from an unexpected scenario,' Jooste concluded.
An underweight stance in Asia is due to risk from higher US interest rates and tariffs on exports.
'With restrictions on US imports from China, emerging Asia would be affected by the
impact on extended supply chains,' Richard Jerram, chief economist, added.
'Looking into China, the credit bubble is expanding rapidly, which makes it vulnerable to the impact of US trade barriers.
'Rapid lending, high investment rates and slowing economic growth suggest an inefficient allocation of credit and an eventual bad debt crisis.'
Bank of Singapore expects seven 0.25% rate hikes in the following two years - with three in 2017 and four in 2018.