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Smart money sidesteps volatile markets

Private bank clients cut equity-overweight positions before this week's rouble collapse

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An employee counts Russian ruble banknotes at a private company's office in Krasnoyarsk, Siberia on Dec 17, 2014.

Singapore

THERE'S a reason why the rich are called the smart money - some of them managed to avoid the most recent market wobbles by heeding their private bankers' advice to reduce equity-overweight positions ahead of the collapse of the Russian rouble at the beginning of the week.

It wasn't that the banks were prescient about the rouble's troubles precipitated by the roughly 50 per cent plunge in the price of oil since June; one advice was premised on a sooner-than-expected hike in US interest rates next year, while another anticipated profit-taking towards year-end.

Equity markets' movements these past few days have not been for the faint-hearted. Case in point is the Straits Times Index's rollercoaster ride this week; it fell 110 points on Monday and Tuesday, before recovering 64 points by Friday.

Bank of Singapore chief investment officer Hou Wey Fook said that the recent heightened volatility, triggered by the speed at which the oil price plummeted, has sparked fears in regions and sectors that are oil-related.

"The sell-offs of stocks, bonds and currencies particularly in emerging market (EM) countries have also spread to the broad market including developed markets," he said. "In our December Monthly Investment Guide (MIG), we had reduced our year-long overweight in equities to neutral due to our belief that the US Federal Reserve will be raising rates sooner than expected by the market."

The MIG was issued in the first week of December.

"This turned out to be a timely call as the global stock market index fell 4 per cent month-to-date," Mr Hou told The Business Times on Friday. "We would reiterate that going to a neutral does not mean we are bearish on the asset class of equities. It means that for a balanced risk investor, he should have a 35 per cent neutral weighting (or 15 per cent for a conservative investor and 50 per cent for an aggressive risk investor)."

The Credit Suisse Investment Committee recommended moving to neutral on global equities on Dec 11, adding "but we think steep equity-market declines related to further oil and credit volatility should be seen as possible global equity entry opportunities for this medium-term macro scenario".

"We anticipated profit-taking towards the end of the year," said Fan Cheuk Wan, chief investment officer, Asia Pacific, Credit Suisse Private Banking & Wealth Management, as the reason for the advice. "We still regard equity as the most attractive market in 2015. It remains our most favourite asset class."

Private bank clients took the market volatility in their stride, and are able to discern that certain markets' stress is due to specific factors, she said. "Based on contacts with clients in the region, we didn't see panic selling by clients. We observe that investors reckon that stress faced by certain economies are driven by specific factors."

US Federal Reserve chairwoman Janet Yellen on Wednesday restored calm to markets when she said that the Fed could afford to take a patient approach to "normalising policy" - which analysts took to mean that the central bank was leaning towards hiking rate but was in no hurry to do so.

At a media conference later, she said that the Fed's rate-setting committee had determined that the impact of the crisis in Russia was likely to be "small" on the US economy.

Next year will continue to be volatile, although a stronger US economy is likely to provide relief.

Bank of Singapore's Mr Hou said: "The outlook for 2015 is likely to be a tale of two halves, the first being more volatile as markets anticipate the first (US) rate hike. But the second period will be positive as investors come to realise that US growth is indeed strong enough to withstand a monetary tightening regime.

"Our other asset allocation call is to be overweight cash, funded by the underweight investment-grade bond asset class," he added. On high yield/EM bonds, "we hold a neutral stance".

Credit Suisse continues to favour the US dollar and USD-denominated bonds and equities generally. "The USD is likely to perform as a safe-haven asset as long as credit risks remain elevated," it said.

For SGD-based investors, Credit Suisse's Ms Fan said that the bank recommends dividend stocks such as CDL Hospitality Trust, Mapletree Commercial Trust, Mapletree Industrial Trust and OCBC Bank.

Overall, Singapore equities will "deliver neutral performance" because of the ongoing restructuring of the economy, she said. "We believe the overall market return is likely to be uninspiring in 2015 in view of negative policy drivers and falling liquidity, unless they ease up government property measures."

Mario Christoph Becker, Standard Chartered Private Bank head of investment advisory, SEA, said: "The traditional safe havens are USD cash as well as investment-grade bonds, preferably also denominated in USD."