Experts still bullish on equities


Equity investors have endured a hair-raising ride in recent weeks, what with plunging markets in China, Greece's dramatic debt impasse and an impending interest rate rise in the United States. Against this turbulent backdrop, The Sunday Times provides an outlook for the rest of the year.

After being bullish on equities for more than a year, the mood has turned somewhat cautious among financial experts, given increasing uncertainties. But before you take any drastic action on your financial portfolio, bear in mind that while markets continue to be volatile in the near term, experts still believe equities will outperform over the longer term.

Mr Steve Brice, Standard Chartered Bank's chief investment strategist, group wealth management, said that encouraging macro developments include the recovering US economy and improved data from Europe and Japan.

While China's economic outlook is worrying, he noted that at least the country's authorities are easing policy to support the economy.

Overall, these developments point to a constructive outlook for bullish global equities, a diversified income basket and alternative strategies on a six- to 12-month horizon.

On a positive note on the Greek debt crisis, most experts agree that there is minimal risk of contagion. In fact, Bank of Singapore's chief economist Richard Jerram stated tongue-in-cheek in his research report that "the Greek crisis is looking more like the millennium bug and less like the Lehman shock" - referring to the collapse of Lehman Brothers in 2008 that helped spark the global financial crisis.

Experts are hopeful that the Greek drama will not derail recovery in the euro zone where there has been improvement in the growth outlook.

After all, most Greek debt is held by institutions such as the International Monetary Fund, European Union and European Central Bank, with limited debt held by the private sector and European banks.

Besides, the euro zone banking system is in a much healthier shape today, with better-capitalised banks which have started lending again.

And this is a good sign because the banking system is the heart of the economy, said Mr Vasu Menon, OCBC Bank's vice-president of wealth management, Singapore.

Closer to home, China's markets have faced three weeks or so of heavy losses - and are down around 30 per cent since they started falling on June 12.

However, experts say the world's second-largest economy is unlikely to suffer a hard landing.

Mr Menon said: "Despite the sell-off in the Chinese stock markets, China is unlikely to experience a hard landing or fuel another financial crisis in the near future as the government has the means to defend the economy and financial system if things worsen further.

"Another positive factor is that the share of equities in Chinese household wealth is low, so the stock market sell-off should not have a significant wealth effect on the economy."


Despite the Greek crisis, European equities are still the top pick for Amundi Asset Management, OCBC and Standard Chartered Bank.

This is because fundamentally, the macroeconomic environment continues to improve.

For instance, the combination of easier credit, more relaxed fiscal policies and quantitative easing from the European Central Bank, points to sustainability in the economic recovery for the region.

For Asia markets, DBS group research is overweight on the Hong Kong HSI and H-shares where it sees value, while it is underweight on Indonesia, Malaysia and India.

It is neutral on the rest of the region while it believes stocks with high dividend yields, earnings visibility and lower valuations should be safe havens in this environment.


Experts generally agree that investors with diversified portfolios should always have some bonds as they are less volatile than equities. UOB Asset Management (UOBAM) said that fixed-income investments are likely to continue to provide reasonable returns.

And in an environment of rising interest rates, Mr Menon recommended that investors buy shorter-dated bonds with tenors of four years or less.

Given the expectation that the US Federal Reserve will start hiking interest rates later this year, Mr Brice is generally cautious on US-dollar bonds. He likes emerging market investment-grade sovereign bonds, which he believes are best protected against significant volatility.


Looking ahead, the start of the US Federal Reserve's rate hikes in the second half of this year - the first rise after more than six years - is likely to cause jitters in the markets, translating into greater financial market volatility.

Still, the rate increases are expected to be modest and gradual and investors are encouraged to see this volatility as a buying opportunity as the outlook for equities is still positive for those with a two- to three-year horizon.

Mr Menon explained that the Fed is raising rates because the US economy is on a firm recovery path and the higher wage growth should benefit consumption spending.

As such, there is no reason for investors to get "too spooked" because a stronger US economy is good news for stock markets.

"Investors who are able to look beyond the short-term turbulence that may accompany the Fed rate hikes stand to benefit by buying gradually on dips," he said.

Mr Brice said that in the longer term, investors should take advantage of any weakness in global equities or income-generating assets.

"We expect the equity bull market to continue for another 12 to 24 months until inflation becomes an increasing threat, forcing global monetary policy settings to tighten significantly," he said. "Therefore, we see weakness as an opportunity to raise exposure to these areas."

UOBAM advised that it will be "helpful" to have spare cash on hand in order to take advantage of market corrections.


In the coming weeks, OCBC investment research head Carmen Lee believes the Singapore market will experience some volatility and trade cautiously between the 3,250 and 3,360 levels.

For the rest of this year, DBS group research expects the Singapore equity market to be influenced by external events ranging from a more volatile China equity market, developments in Greece, oil price fluctuations and shifts in expectations to the timing of the rate hike in the United States. "We peg a range from 3,150 to 3,550 for the Straits Times Index for the remainder of the year," it said.

Ms Lee highlighted that valuations are starting to look attractive again, especially for local blue chips that have borne the brunt of recent selling. Investors can take this opportunity to look out for quality stocks for longer-term investment.

Banks are likely to benefit from a higher interest rate environment and Ms Lee's top pick in this sector is DBS. She also favours the property counters, which are looking less expensive. Among the telcos, she has a buy call on M1 with a target price of $3.66.

Amid the weak earnings trend and macro uncertainties, DBS recommends that investors stick to more defensive stocks such as Sheng Siong (with a target price of 90.5 cents), Del Monte (50 cents target), Yangzijiang ($1.62 target) and ST Engineering ( $3.80 target).

On the flip side, Ms Lee suggests investors be cautious about the aviation industry.

She has a hold on Singapore Airlines and a sell on TigerAir.

A version of this article appeared in the print edition of The Sunday Times on July 12, 2015, with the headline 'Experts still bullish on equities'. Print Edition | Subscribe