Defensive equities, high-grade fixed income, gold to outperform amid US banking system concerns

MARKET analysts expressed fresh concerns about uncertainties in US’ banking system, following US Treasury Secretary Janet Yellen’s comments about not considering any plans to insure all US bank deposits. Yellen’s comments overshadowed a dovish 25-basis-point rate hike by the Federal Open Market Committee (FOMC), sending riskier assets down.

“We see stock market choppiness as investors contemplate between a likely peak in interest rates soon and the Straits Times Index’s low forward price-to-earnings valuation, offset by concerns over the stability of the US banking system,” DBS analysts said in a note on Thursday (Mar 23).

DBS noted a fall in two-year treasury yields to 3.94 per cent, which suggests markets believe interest rates are peaking. Federal fund futures show 50:50 odds for one final rate hike at the next FOMC meeting in May.

The analysts expect the Singapore market to mirror a retreat in US equity indices as banks such as UOB and OCBC drag on markets. Rate-sensitive sectors including real estate investment trusts (Reits) may trade sideways as 10-year US Treasury’s decline.

“A possible end to the current rate hike cycle soon also brings forth an earlier end to net interest margin expansion,” DBS equity market strategist Yeo Kee Yan said.

CGS-CIMB’s Andrea Choong noted that local banks could trade “rangebound” in the near term as they see limited earnings upside and even some potential downside if credit conditions tighten.

General jitteriness on banks may also dent sentiment, although she believes that Yellen’s comments may impact consumer confidence in regional and smaller banks in the US rather than all banks.

However, Phillip Securities head of research Paul Chew said that the Fed’s rate hikes would keep local banks’ margins elevated as they tend to provide variable interest rate loans.

He added that investors could look to Singapore Reits to shelter against the slowdown in global growth as interest rates are expected to fall in 2024.

The FOMC’s latest Summary of Economic Projections show that officials expect rates to fall to 4.3 per cent in 2024.

DBS’ Yeo said that defensive sectors such as consumer staples, defence, green transformation and telecoms may also see investor interest amid ongoing market volatility.

JPMorgan Asset Management Asia-Pacific market strategist Tai Hui suggested that investors take a more defensive approach in asset allocation, and focus on high-quality fixed income – such as developed market government bonds and high-grade US corporate credit.

“On equities, the outperformance of the Chinese economy in (the) months ahead due to reopening should provide a window of opportunity for both Chinese and Asian companies that are less dependent on exports,” he said.

Similarly, Abrdn investment director of multi-asset investment solutions Ray Sharma-Ong said positive Chinese economic data should be supportive for Asia markets as investors refocus on growth.

“With the Fed event risk out of the way, and President Xi’s visit to Moscow focusing on economic cooperation, we do see focus shifting back to Asia and the positive spillover effects from China’s reopening,” he said.

Furthermore, Sharma-Ong foresees the US dollar (USD) softening as the banking system issues have led to the provision of liquidity through USD swap lines.

“With increased USD liquidity in the system, slower US economic growth on the horizon, along with the Fed pausing soon, we expect the USD to moderate,” he added.

Still, head of FX analysis at commercial foreign exchange specialist MonFX Simon Harvey said Yellen’s latest comments suggest that confidence in regional banks could take another hit.

“A renewed rout in US banking stocks, especially to the extent that it impacts the flagship names, will likely keep risk conditions on a tentative footing, which should continue to support the dollar on a tactical basis,” he noted.

Oanda senior market analyst Edward Moya noted that Yellen’s comments, coupled with expectations of further Fed rate cuts later this year, could lead to a rally in gold prices.

“Wall Street will have to deal with further banking turmoil, and that should keep safe-haven flows coming to gold,” he said, adding that gold could rise to record levels above US$2,000.