Uncertainty was a key word at DBS Private Bank’s client luncheon held in Singapore on Wednesday. Inflation was another.
Giving the keynote presentation, titled ‘All Change! Investment ideas amidst market disruption’, Lim Say Boon, CIO, consumer banking group and wealth management said: ‘What we see ahead of us is fiscal stimulus and inflation. The Opec production cuts point to inflation. Donald Trump’s promise of tariffs – no matter how he proposes it, be it anti-dumping measures or across the board tariffs – are also inflationary.
'So my two investment choices for this year are the US dollar and banking stocks.’
These are the ten investment ideas Lim outlined in his presentation:
1) Bullish US equities (short-term)
DBS Private Bank has a three-month overweight on US equities.
Commented Lim: ‘Rates are still historically low, hence the system is still flushed with cash.
‘The US economy has already started to regain its growth momentum and US companies are just emerging from the corporate earnings recession of 2015 and2016. Government spending will accelerate both trends.
‘Most importantly, the market believes we are seeing a profound pro capitalist shift in America.’
2) Neutral US equities (long-term)
However, DBS is neutral on US equities in the long-term because of the many uncertainties around the economy at this point.
‘S&P 500 valuations are approaching two standard deviations. In 1929, we saw the market roar past this and then we got the Great Depression market crash,’ said Lim.
‘In 1999, we saw the same phenomenon again and then we got the Nasdaq crash.
‘Currently, we are not at two standard deviations, but we are approaching it. I believe we might even blow past it on the counter-intuitive optimism around Trump. But that is a dangerous area.’
3) Bullish bank shares
Lim gave deregulation and higher yields as the reasons for this play.
‘Firstly, there could be a possible repeal or dilution in the Dodd-Frank Act.
‘Secondly, where the 10-year US treasury yields goes, US bank stocks follow. As I see it, higher yields, higher inflation will probably drive US bank prices higher.’
4) Bearish EMs
On the other hand, rising US Treasury yields are toxic for emerging markets as the dollar strengthens, said Lim.
‘As a result, there will be dollar funding stress and more stress for corporate debt on local currency terms.’
He pinpointed the 2013 taper tantrum and the normalisation of US inflation expectations in 2015 as examples.
‘We are now at the beginning of, what I believe will be called in the coming months, the Trump tantrum.’
5) Neutral European stocks
Continued quantitative easing will be good for European stocks and the EURUSD. Indeed, Lim expects the euro to weaken to 102 by year-end, which in turn will spur the economy and boost corporate profits.
However, Europe is in for a year of political risks, be it Brexit or the risk of another spike in refugees from Turkey.
‘So between the push and pull of these factors, we prefer to be neutral European equities.’
6) Overweight Japanese equities
Widening yield differentials between the 10-year US Treasury yields and Japan’s yield curve will make the yen weaker against the dollar, said Lim.
‘Another relationship kicks in at that point – between the USDJPY and the Nikkei 225.
‘So we are bullish Japanese equities, bearish yen.’
7) Bearish on bonds
Aside from the yen, Lim has also been bearish on bonds for some time.
‘The US economy is at risk of overheating as a result of Trump’s promise to further stimulate an economy that is already running close to full capacity.’
Explaining the position, he said the US economy has hit the level of unemployment below which the level of inflation in an economy starts to accelerate.
‘We are seeing inflation trends in Europe and China as well.’
8) High yield
‘Notice how high yield has reversed the losses from the post-Trump sell-off, while investment grade bonds have gone lower,’ said Lim.
‘Investors moving out of rates are going into corporate credits and within corporate credits, high yield has more spreads to play with compared to investment grade.’
If the US economy continues to strengthen on tax cuts and fiscal stimulus, that will help the credit records of high yield, he said.
9) Bearish on gold
‘We have been gold bugs for quite some time,’ said the investment chief.
‘But we turned neutral, and now we are bearish on gold. The reason is the inverse relationship between 10-year US Treasuries and gold.’
10) USD bulls
‘At the start of 2016, I remember saying that this will be the last year of the USD bull… until Trump came along,’ Lim noted.
‘That changed it all. Inflation is rising, the 10-year US Treasury has surged and along with that the dollar index.
‘We expect the USD to continue higher – not in a straight line – but to continue higher.'