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The bull market seen maintaining momentum
THIS biannual edition of The Business Times Investment Guide comes at a time when analysts do not foresee the current market bull run ending anytime this year.
The optimism is due to a combination of global growth staying steady, companies beating earnings expectations and muted interest rates resulting from a lack of inflation.
As Mark Schofield, managing director of Citi's global strategy and macro group, said in a note last week: "The economy remains on track and we think downside risks have diminished."
Mr Schofield increased the house's equity overweights on emerging market Asia and Latin America at the expense of the United States.
"Emerging market valuations remain attractive and flows are returning," he noted.
Risks come from a withdrawal of central bank accommodation, but policymakers are unlikely to let financial conditions tighten, he felt.
A DBS update last week similarly said central bankers do not want to tighten monetary policy prematurely. It added that 81 per cent of US companies that reported earnings so far have surprised positively.
Dovish central bankers, combined with an improving global economy, make for high asset valuations.
Fund manager Fidelity said in a Q3 2017 outlook report that favourable business conditions are resulting in better earnings, which can underpin high single-digit total returns for equities.
Markets have stayed bullish for so long, because many investors remain cautious and uncommitted, it said.
"Bull markets usually end only after the last buyers are flushed out, but there is abundant cash on the sidelines. We are certainly not seeing the kind of 'cult of equity' or FOMO (fear of missing out) behaviour evident in previous market tops," it added.
TWO LIKELY SCENARIOS
Thinking ahead, the bull run can end in two ways, according to Fidelity.
One is a euphoric finale that might take 12 to 18 months to establish, which in the past has centred around an investment thesis like the emergence of China or the impact of the Internet.
Disruptive technology can be the defining theme this time, with signs of froth already evident in some tech companies.
A second way out is more benign.
"We could see a long period of consolidation - a sideways market in terms of average market levels, but with differentiation between sectors and between individual stocks," Fidelity explained.
In this environment, stock-picking strategies around valuations and earnings could work better than approaches based on market momentum, the fund manager said.
Where the economic cycle is concerned, prospects for a US recession over a six- to 12-month period are at 10 per cent or less based on quantitative models, said a June note by bond manager Pimco.
Though the economic expansion is ageing, there are no obvious imbalances like overconsumption, overheating or overkill from monetary policy, it said.
Politics in the US might be in chaos but that reduces the risk of a boom-bust cycle caused by fiscal stimulus, or protectionist policies that will spark a trade war.
Nevertheless, investors should protect themselves by focusing on valuation, capital preservation, looking for relative value and a global opportunity set, it advised.
Goldman Sachs Asset Management, meanwhile, said in its Q3 outlook that the positive data surprises could taper off looking ahead.
Yet it is too early to take risk off the table, it felt. "We think the data is consistent with an expansion that could continue for another two years rather than one facing a more immediate turnaround."
Inflation is lacking because the global labour market is still not as tight as the best-performing economies suggest, the house said.
Persistently low inflation could also be self-reinforcing as workers focus more on job security than wage growth, it added.
Bond managers like Clifford Lau, Columbia Threadneedle Investment's head of fixed income for Asia and one of those featured today, have concluded that bond-killing inflation is not likely to rise in the near future.
Relative to the global opportunity set, Asian investment-grade bonds offer decent returns relative to their risk, he said.
With investment flows strong and sentiment positive, wealth managers big and small continue to lay the groundwork for expanding in Singapore. We feature two today.
Jason Lai, founder and chief executive officer of financial services group Thirdrock, said the group has added four client advisors in recent months.
Tho Gea Hong, Royal Bank of Canada's head of wealth management for South-east Asia, said the bank is in the region to grow.
"There are still a number of countries where high net worth individuals have to worry about the political environment and feel safer investing in a stable environment," she explained.