For the first quarter of 2019, DBS’ chief investment office continues to be neutral on equities, is positive on the dollar, and is overweight alternatives.
What’s more, the Singapore lender prefers equites over bonds, as the asset class offers more attractive medium term risk-reward.
The bank is advising investors to construct portfolios that are heavily weighted at both ends of the risk spectrum, with long-term growth themes at one end, and stable income-generating assets on the other.
Here are four investment takeaways from DBS' Q1 investment outlook.
1. Equities over bonds
DBS said it expects stock market indices to gyrate in a big range, similar to 2018. Recession risks remain low, and unlike in previous bear markets, the yield gap is currently in positive territory at 2.7%.
The combination of steady macro conditions and well controlled inflation will be supportive of equity prices, the bank noted, adding ‘Government bonds, however, will continue to face headwinds from monetary normalisation by the major central banks in 2019.’
2. US growth, Asian value
DBS continues to like US equities as it offers stronger earnings momentum compared with other markets. The bank is overweight technology, communications, healthcare and consumer staples.
Hong Kong and China equities could stay volatile in the short to medium term, DBS warned, but offer longer-term value.
‘While a growth slowdown is still expected in China, we do not foresee a hard-landing scenario. Singapore offers attractive dividend yield, while Thailand offers growth recovery,’ it said.
3. Positive dollar
This year the US dollar is well-positioned to appreciate, according to the Singapore-headquartered bank.
It said the US economy is set to outperform its developed market peers for a second straight year in 2019, thanks to wage inflation and the Fed’s narrowed balance sheet.
‘Softer growth and hard politics will drive the euro below 1.10. The Eurozone’s preliminary sub-2% growth for Q3 2018 is likely to be downgraded, after Germany’s growth declined quarter on quarter for the first time since Q1 2015.’
DBS warned investors to brace for more volatility in Asia ex-Japan currencies in 2019. It said the same risks that hurt emerging markets since Q2 2018 – a stronger US dollar on rising US rates and an escalation in global trade tensions – may worsen in 2019.
4. Overweight alternatives
DBS is backing private equity and hedge funds, and is overweight on cash and neutral on gold. Hedge fund, the bank said, strategies have historically outperformed the broader global equity market during past crises.
‘Gold, on the other hand, will likely see a modest rebound in the first quarter on the back of rising inflation. Historically, gold’s price shows a positive correlation with US inflation,’ it added.