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Strategists betting on safe-haven assets amid market swings

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US-China trade tensions have brought market volatility back into the picture, and with it, the need take up more safe-haven asset allocations.

Singapore

US-CHINA trade tensions have brought market volatility back into the picture, and with it, the need take up more safe-haven asset allocations.

Bank of Singapore head of investment strategy, Eli Lee, expects volatility to continue in the near term, "particularly as a key driver for the market rally this year has been trade optimism".

But while volatility presents opportunities, he assessed it as being still "too early to be bargain hunting in equities, though investors can switch from high-beta names to high-quality names as a defensive move".

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Last Wednesday, the private bank reduced its overall risk exposure and is now neutral on global equities. It remains overweight in both developed and emerging market high-yield bonds, which Mr Lee said has healthy valuations and fundamentals.

Investors can also look to add some gold to their portfolios at this point as a hedge against turbulence. The Bank of Singapore has forecast it to hit US$1,380 an ounce in a year, he added. (It was at US$1,296.34 late on Tuesday.)

Since the start of the year, DBS Bank chief investment officer Hou Wey Fook has informed clients to adopt a "barbell portfolio" - one in which overweight positions occupy both ends of the risk spectrum.

One end would include income-generating assets such as real estate investment trusts (Reits) and BB/BBB-rated corporate bonds, together with exposures to gold, hedge funds and cash.

On the other end of the risk spectrum are equities of companies and sectors that ride secular trends; these include tech and healthcare, among others.

Mr Hou told The Business Times on Tuesday that despite the recent dip in global equity markets, the strategy has stayed resilient on the back of a good showing from holdings in gold and bonds.

Last week, Tan Min Lan, the Asia-Pacific head of UBS' Chief Investment Office, advised investors to look into rebalancing their Asian equity portfolios amid volatility, and to switch to high-quality or defensive segments such as Singapore equities, Asian large caps, Asian financials and stocks with high dividend yields.

On Monday, China retaliated against US tariff hikes in kind, raising the tariff rate for US$60 billion of US goods to 25 per cent from June.

Even though market watchers noted that China's retaliation was relatively light, it still sent the US market into a selling frenzy; the Dow Jones and S&P fell 2.4 per cent, and the Nasdaq, 3.4 per cent.

The sell-off also led to Asia markets opening lower, though they managed to recover partially because of optimism that the US and China would reach a trade deal.

Australia's ASX 200 slid 0.9 per cent, China's Shanghai Composite Index fell 0.7 per cent, Hong Kong's Hang Seng Index dropped 1.5 per cent, and Japan's Nikkei 225 dipped 0.6 per cent.

Singapore's Straits Times Index and Malaysia's Kuala Lumpur Composite Index closed 0.3 per cent lower.

Meanwhile, Indonesia's Jakarta Composite Index dropped one per cent, to be the region's first benchmark index to lose all gains from this year's rally.

Bucking the trend was South Korea's Kospi, which edged up 0.1 per cent.

With market volatility rising in tandem on the back of a slight indication of growing US-China trade tensions, DBS Bank's regional head of research, Janice Chua said that among equity plays, investors should steer away from cyclical sectors like technology, manufacturing, commodities and oil and gas (O&G).

Instead, they can look to switching to defensive and yield counters like Singtel, Netlink NBN Trust, SATS, ST Engineering and Keppel-KBS REIT, she added.

KGI Securities' head of research, Joel Ng said if the talks break down, trade diversion may end up being a boon to manufacturing firms with operations in South-east Asia. This could benefit firms with operations in Thailand, Malaysia and Singapore, such as Venture Corp, Frencken and Innotek, he said.

While the brokerage favours Reits, due to the low interest rate environment, Mr Ng said investors should be patient and look to buying opportunities in the second half of the year.

Azure Capital's chief executive officer and founder Terence Wong, has a different take: He sees market volatility contributing to select opportunities to accumulate cyclical sector stocks as orders by businesses will still be taken during an escalation of the trade war.

He has Malaysian-listed conglomerate SuperMax as a consumer play, Hibiscus Petroleum as an O&G play and semiconductor firm MI Equipment as a tech pick.