DBS overweight on China, US equities; sees S-Reits as attractive investment

Singapore

EQUITY indices are unlikely to break out to new highs in the near term as the "tug of war" between bulls and bears in the market shows no signs of abating, said DBS Bank's chief investment officer (CIO), Hou Wey Fook.

Speaking at the DBS CIO insights Q2 media roundtable on Monday, Mr Hou added that the current non-trending and volatile market environment is likely to persist until a comprehensive US-China trade deal which includes the full lifting of existing tariffs is reached.

The recent US yield curve inversion had sent investors and market watchers worrying of an impending US recession.

"The recession-risk remains low on the back of central banks and governments introducing policy stimulus", Mr Hou explained.

As such, DBS does not expect a US recession this year.

Like the first quarter, DBS has weighted equities as "neutral", bonds as "underweight", and is "overweight" on alternative investments and cash for the second quarter.

On second quarter equity picks in developed markets, Mr Hou said that the bank remains "overweight" on the US due to its earnings superiority over the Japan and Europe economies.

Among emerging markets, Chinese and Asia ex-Japan equities in North Asia which the bank posits as key markets for growth.

Of the lot, China is the market to watch for this quarter, as fiscal stimulus measures by the Chinese government should boost the economy and it is also defensively positioned due to a strong domestic demand.

Among fixed income assets, the bank has upgraded emerging market corporate bonds to "overweight" as they are expected to outperform developed market government and corporate bonds.

In light of the recent dovish stance by many central banks, which were kickstarted by the US Federal Reserve, gold is also "overweight", to improve portfolio resistance.

DBS also has three investment themes for the second quarter.

These themes fit into the "barbell" approach, which the bank has advised their clients to adopt when constructing their investment portfolios in the first quarter.

The approach sees investments that are heavily weighted at both ends of the risk spectrum, with growth assets on one end and stable income-generating assets on the other.

Mr Hou said: "In the past, when markets were in a non-trending and volatile environment, barbell strategies outperformed."

The first of these themes is the China A-Share market, which has seen a growth of growth of foreign inflows.

Mr Hou said that with index compiler MSCI increasing the weighting of A Shares - stocks in Chinese-listed companies - in the MSCI EM Index, presents unique investment opportunities for those interested in Chinese growth companies.

Singapore real estate investment trusts (S-Reits), which continue to be an attractive income-generating investment, was another theme.

Mr Hou said: "S-Reits have the highest dividend yields compared to global peers and will continue to offer an attractive opportunity to investors."

He added that on top of high dividend yields, S-Reits still possess the potential for distribution per unit (DPU) growth. Among S-Reits, DBS is overweight on suburban retail, and industrial Reits.

The bank's third investment theme was on the eating habits of millenials, who often prefer food delivery services and restaurant cooked meals. This has led restaurants to be one of the Russell 3000's best performing outperforming sectors. The earnings growth has also driven down valuations.