Market Insights

Market Outlook

Stay updated with Market Outlook articles which consolidate key market indices and information each month. We hope you will find these insights and recommendations useful when deciding how best to manage your investment portfolio.

Stay Defensive and Diversify

 

Given the uncertainties and volatility ahead, asset allocation should be the key consideration in managing and building one’s core portfolio.

We are moderately defensive in our asset allocation and continue to prefer credit over equity.

On equities, we are cautious on Europe, Japan and Asia ex-Japan but we have upgraded the U.S. to a neutral stance given its defensive traits.

Among bond markets, we are positive on Emerging Market high yields and have upgraded Developed Market high yields to neutral as well.

Recommendations:

  • Unit Trust: Investors seeking steady income stream over the medium to long-term period through investment primarily in bonds and other fixed income securities could consider the Affin Hwang Select Bond Fund (Risk rating: C – High). This fund invests into a portfolio of diversified global fixed income instruments with an Asian tilt.
  • Unit Trust: Investors seeking to invest in an income-driven, absolute return focused fund may consider the Affin Hwang Select Income Fund(Risk rating: B-Moderate). This fund also targets to provide a high level of cash flow as well as growth by investing at least 70% of its NAV into fixed income instruments and a maximum of 30% NAV into equities globally with an Asian focus.
  • Unit Trust: Investors seeking income and capital growth over the medium- to long-term via an active allocation strategy could consider the RHB Asian Income Fund(Risk rating: B-Moderate) which invests in one target fund, the Schroder Asian Income fund. Exposure in Asia is opportunistic as we view Asia being in a relatively strong position with a high level of foreign reserves, limited external debt, undervalued exchange rates and plenty of policy flexibility.
  • Unit Trust: Investors seeking capital growth opportunities through a portfolio of collective investment schemes with access into equities listed in global markets, fixed income instruments such as debt securities, money market instruments and fixed deposits, issued globally may consider the Affin Hwang Global Balanced Fund(Risk rating: B-Moderate).

Top Investment Ideas are an expression of the investment outlook in this publication. They are not recommendations made in accordance with your investment objective and risk profile. As such, we recommend that you complete a suitability assessment before purchasing your selected investment product.



This document is not intended to constitute research analysis or recommendation and should not be treated as such.

We recommend that you read and understand the content of the Master Prospectus for the Affin Hwang Select Bond Fund dated 18 July 2016 and expires on 17 July 2017 by Affin Hwang Asset Management Berhad (formerly known as Hwang Investment Management Berhad). Investments in the Fund are exposed to credit (default) risk, interest rate risk, structured products risk, country risk and others as disclosed in the prospectus.

We recommend that you read and understand the Master Prospectus for the Affin Hwang Select Income Fund dated 18 July 2016 and expires on 17 July 2017 by Affin Hwang Asset Management Bhd (formerly known as Hwang Investment Management Berhad). Investments in the Fund are exposed to specific risks including equity investment risk, equity-linked securities investment risk, credit/default risk, interest rate/price risk, structured products risk, country risk, currency risk, regulatory risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Master Prospectus for the RHB Asian Income Fund dated 6 October 2016 and expire on 5 October 2017, by RHB Asset Management Sdn Bhd. Investments in the Fund are exposed to management risk, liquidity risk, foreign investment risks such as currency risk and country risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Prospectus for the Affin Hwang Global Balanced Fund dated 1 September 2016 and expire on 31 August 2017, by Affin Hwang Asset Management Berhad. Investments in the Fund are exposed to collective investment schemes risk, credit and default risk, interest rate risk, currency risk, liquidity risk, related parties transaction risk, country risk and others as disclosed in the prospectus.

Product Risk Rating and Suitability Determination Matrix:

Rating Severity of Loss Product Risk Rating Customer Risk Profile
B Partial loss of full principal investment amount possible, total loss unlikely.
(‘Partial loss’ means the loss suffered by the investor can be up to 15% of the original investment principal)
Moderate
  • Balanced
  • Growth
  • Aggressive
C Client may suffer substantial or 100% loss of principal investment amount.
(‘Substantial loss’ means the loss suffered by the investor can be more than 15% of the investment principal)
High
  • Growth
  • Aggressive


Unit Trust investments are not bank deposits and are not obligations of or guaranteed or insured by OCBC Bank (Malaysia) Berhad. Unit Trust investments are not guaranteed and are subject to investment risk unless otherwise specified. The investment risk includes general risks as described in the Information Memorandum/Prospectuses for Unit Trust investment funds (“Information Memorandum/Prospectuses”) and specific risks which may be different for each Unit Trust investment. Description of specific risks and general risks are published in the Information Memorandum/Prospectuses. With respect to Unit Trust investment, past performance is not indicative of future results; the net asset value can go up or down. Investors should also note that the net asset value per unit and distributions payable, if any, may go down as well as up.

Where unit trust loan financing is available, investors are advised to read and understand the contents of the unit trust loan financing risk disclosure statement before deciding to borrow to purchase units. Where a unit split/distribution is declared, investors are advised that following the issue of additional units/distribution, the NAV per unit will be reduced from pre-unit split NAV/cum-distribution NAV to post-unit split NAV/ex-distribution NAV; and where a unit split is declared, investors should be highlighted of the fact that the value of their investment in Malaysian ringgit will remain unchanged after the distribution of the additional units.

The Information Memorandum/Prospectuses have been registered with the Securities Commission Malaysia, which takes no responsibility for its content. A copy of the Information Memorandum/Prospectuses can be obtained at OCBC Bank’s branches. Units will only be issued upon the receipt of application form referred in, and accompanying the Information Memorandum/Prospectuses. Investors are advised to read and understand the contents of the Information Memorandum/Prospectuses, and if necessary consult their adviser(s), as well as consider the fees and charges involved before investing in the Unit Trust.

This document has been prepared without taking account of the objectives, financial situation or needs of any specific person or organisation who may receive this document. Accordingly prior to making an investment decision, you should conduct such investigation and analysis regarding the product described herein as you deem appropriate and to the extent you deem necessary obtain independent advice from competent legal, financial, tax, accounting and other professionals, to enable you to understand and recognise fully the legal, financial, tax and other risks arising in respect of the product and the purchase, holding and sale thereof.

You should obtain and read the Product Highlight Sheet of the product before you make a decision to acquire the product. All information provided in this document is general and does not take into account your individual objectives, financial situation or specific needs.

You are required to read and understand the terms and Product Highlight Sheet of the product carefully before executing any transaction relating to the product with us. You may request for a copy of the Product Highlight Sheet at OCBC Banks’ branches.

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question is suitable for you. This does not constitute an offer or solicitation to buy or sell or subscribe for any security or financial instrument or to enter into a transaction or to participate in any particular trading or investment strategy.

All information presented is subject to change without notice. OCBC Bank shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein. The information provided herein may contain projections or other forward looking statement regarding future events or future performance of countries, assets, markets or companies. Actual events or results may differ materially. Past performance figures are not necessarily indicative of future or likely performance. Any reference to any specific company, financial product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the same.

OCBC Bank and its respective associated and connected corporations together with their respective directors and officers may have or take positions in any securities mentioned in this report (which positions may change from time to time without notice) and may also perform or seek to perform broking and other investment or securities related services for the corporations whose securities are mentioned in this report as well as other parties generally.

The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.




Lai Mun Yew (Michael)
  Vice President, Research, Wealth Management, OCBC Bank (Malaysia) Berhad

 

Global Outlook – Unusual Uncertainty in 2017

 

Political turbulence means that there is more uncertainty over the global economic outlook than there has been this decade. The risk of recession – perhaps due to “boom-bust” – has risen.

Key Points:

  • Previously, there was no prospect of a U.S. recession within a realistic time frame. Mildly-loose policy was allowing a gradual absorption of excess capacity. This no longer seems to be an appropriate framework.
  • The two factors that usually cause a downturn are an exogenous shock or domestic overheating that leads to monetary tightening which hurts growth. Both are possible now. The former could stem from tariffs that damage global trade, the latter from fiscal stimulus into an economy already near to full capacity. There is now a realistic risk of a recession in Trump’s first term in office, perhaps by 2019.
  • More positive outcomes are also possible. Judicious deregulation and targeted fiscal spending could raise the potential growth rate, especially if accompanied by restraint on trade policy. This could produce a “stronger for longer” expansion. This outlook will need to be revised as the policy direction of the new Trump administration becomes clearer.
  • The Eurozone is at risk of the disruption seen in the U.K. and U.S. in 2016, with several important political elections and events in the coming year. Rising anti-EU sentiment in the founding members of the EU is a particular concern. Even if the survival of the EU is not seriously threatened, it is becoming harder to implement reforms that would improve the stability of the region.
  • More positively, the anti-EU sentiment seems to have contributed to the acceptance of a slight loosening of fiscal policy, which will help to support growth in 2017 and 2018. Unlike the U.S. and Japan, the Eurozone still has significant excess capacity.
  • Japan’s economy is around full employment even though growth has averaged just 0.7 per cent over the past five years. Economic activity is only slightly greater than pre-crisis levels in 2008 which is a useful indication of the drag that demographics is having on productive capacity. Growth is set to be a little more rapid in 2017 due to fiscal stimulus and the weaker exchange rate, but this will just be a short-term lift.
  • In Asia, China remains a significant medium-term risk. Rapid lending, high investment rates and slowing economic growth are a combination that suggests an inefficient allocation of credit and an eventual bad debt crisis. In China, the process is largely internal – so no Lehman shock – and dominated by the state, which implies the consequence is that the growth rate grinds lower, rather than the system explodes.
  • After Mexico, Asia is the most exposed to U.S. tariffs. Restrictions on U.S. imports from China would affect the entire region through the impact on the extended supply chains. Moreover, the U.S. has large trade deficits with many other Asian economies, even before we consider their exports that go to the U.S. via China.



 

Foreign Exchange & Commodities – Making the US dollar great again?

 

In the event trade tension between China and the U.S heighten, trade-exposed Asian currencies stand to lose the most, given that they have been major beneficiaries of globalisation.

Key Points:

  • The possibility of stronger economic growth and higher interest rates in the U.S. should augur well for the U.S. dollar and there are good reasons to be positive about the currency. However, there is insufficient information so far on the Trump’s administration’s priorities and the magnitude of its intended policies. Until we get more clarity, it’s hard to say with a great deal of conviction that the U.S. dollar could surge significantly against other major currencies like the Yen and the Euro.
  • Two other considerations complicate the path of the U.S. dollar against reserve currencies. First, is the lurking fear that if trade disruption becomes a first-order issue, this would help the Euro and Yen while undermining Asian currencies. Second, if the drag on U.S. growth from the stronger greenback and higher yields manifests before the boost from fiscal policy, then we may see additional market volatility as positioning and investor expectations get revised. The U.S. dollar could then struggle as the markets reassess “Trumponomics”.
  • Trade-exposed Asian currencies stand to lose most from an escalation of trade tension between China and the U.S. So far, China has not reacted to the U.S. election. The Chinese currency has been weakening against the U.S. dollar but the currency has actually been stable-to-slightly stronger against a basket. Whether the Chinese currency will continue to remain stable against its basket is a risk that we will have to remain vigilant over, as an acceleration of its weakness would create adverse spillovers on other Asian currencies.
  • Low oil prices in 2016 had put a strain on a range of oil producing countries. This lends some credibility to the OPEC deal to cut output, even though enforcement will be a problem, as usual. OPEC still accounts for over one-third of global production. Unfortunately for OPEC, shale has changed the dynamics of oil production as supply can quickly respond to a rise in prices. The U.S. rig count is already up nearly 50 per cent from the lows of May 2016 as producers respond to the prospect of higher profitability. This will limit the upside to prices.
  • We are not long-term gold bulls but there are enough uncertainties ahead – from politics to potential policy impact on growth and inflation – to support gold prices going into early 2017. However, the Trump victory in the U.S. elections has repriced the U.S. dollar and interest rate expectations higher, both of which are headwinds for gold prices. Consequently, we have lowered our gold price forecasts. However, gold should still offer protection to portfolios in risk-averse periods, especially after its recent sharp fall; gold prices should rise fast when risky assets run into trouble.



 

Bonds – Shift in Outlook for U.S. Rates

 

A Trump Presidency could mean a faster pace of rate hikes in the next two years. Previously, we had expected five 25 basis point rate hikes in 2017-2018 but now we provisionally raise this to seven rate hikes.

Key Points:

  • Trump will inherit an economy in its eighth year of expansion (admittedly a slow-paced one) and near to full capacity. Inflation is increasingly evident, in both consumer prices and wages. In this situation, the planned fiscal stimulus and a more restrictive approach to immigration will heighten inflationary pressures, as would tariffs on imports.
  • This implies a faster pace of Fed tightening over the next couple of years, although much depends on the policy choices of the Trump administration. However, as financial markets anticipate this change, through a firmer U.S. dollar and higher bond yields, these act as a drag on activity and reduce the need for the Fed to be too aggressive.
  • The Fed seems happy to allow the economy to “run hot” in order to pull away from deflation risk and perhaps repair some of the damage to the labour market. However, core inflation is already at 1.7 per cent, so there is not much room before it breaches the Fed’s 2 per cent target.
  • Also, remember that at some point the Fed is likely to let the size of its balance sheet shrink. It has been stable for the past two years as the proceeds of maturing bonds are being re-invested. We doubt that the Fed would run down its balance sheet before interest rates are over 1 per cent which probably rules out 2017. However, it could announce its future policy intentions at any point and there is a risk that this has an impact akin to former Fed Chair Bernanke’s infamous “tapering” remark in May 2013.
  • The bond market has already started to respond to the new outlook for U.S. policy. After the initial jump, yields could stabilise until the Trump’s policy priorities become clearer, hopefully in 1Q2017. After that, we can see Fed tightening pushing up the curve, with 10-year US Treasury yields approaching 3 per cent by end-2017. Investment grade returns will be dull in this environment – barely better than cash.
  • We are moderately defensive in our asset allocation and continue to prefer credit over equity. On credit, we do not foresee credit spreads widening significantly, as any fiscal stimulus would delay recession risk. As a result, we are turning less bearish on developed market high yield bonds. However, we are careful not to take on too much bond duration risk because higher inflation expectations will push long-dated bond yields higher.
  • We recently lowered our positive stance on Emerging Market high yield bonds given expected headwinds emanating from anticipated changes under a Trump administration, which moderates our expected 2017 return for the aggregate asset class. However, given our expectation of modest spread tightening going forward, the higher coupon of High Yield should help buffer and insulate returns to at least some extent from rising U.S. Treasury yields and place it in a position to outperform Emerging Market investment grade bonds.
  • Given the potential risks posed by Trump’s policies, there will be greater differentiation among Emerging Market bonds with those operating in countries and sectors which are less affected by global trade and with relatively strong external balances, showing more resilience. On the other hand, Emerging Market bonds with a bigger exposure to external trade and poorer economic fundamentals would probably be more vulnerable.



 

Equities – Remain Cautious on Equities

 

We expect volatility to remain elevated in 2017 as markets continue to discover what a Trump presidency really represents. As such, we remain cautious on equities but have upgraded US equities to Neutral from Underweight for its defensive traits.

Key Points:

  • Markets dived onto a reflationary trade even as the Republican’s sweep has widened the range of possible global growth and geopolitical outcomes. At the same time, the pace of Fed rate hikes is likely to accelerate. Further, ahead of the busy political agenda, European political risks lurk. Coupled with extended valuations, risk-reward remains unattractive. Hence, we remain cautious on equities. Regionally, we are neutral on the U.S. and cautious on Europe, Japan and Asia ex-Japan.
  • The post-U.S. election rally to record levels - notwithstanding the rise in yields - suggests that the market sees growth acceleration outweighing the impact from higher rates. Clearly, there is not enough information at this stage to arrive at such a conclusion with conviction. Further, with the recent rise, valuations have become extended. Without more concrete details, the Trump reflation trade could run out of steam. Nevertheless, U.S. equities remain more defensive on a relative basis.
  • Going into 2017, the risk of political contagion remains a potential overhang in Europe given the busy political calendar. In the meantime, negotiations between the U.K. and the EU are expected to kick-off. Also, consensus earnings growth for 2017 seems to be optimistic again. Combined with the region’s above-average price-to-earnings ratio, we remain cautious in European equities.
  • In Japan, we maintain the view that investors would see beyond short-term stimulus, whether from monetary or fiscal policy and more sustained re-rating of Japanese equities would require more meaningful structural reforms that would boost Japan’s growth potential. Meanwhile, near-term, the market would continue to be driven mainly by movements of the Yen. Although valuations are not demanding, we remain cautious on Japanese equities.
  • Asia ex-Japan equities bore the brunt of Trump’s victory. Besides fears of Trump-triggered trade war, growing expectations of faster Fed tightening also weighed on regional currencies. If Trump pursues his anti-trade policies, it is highly negative for Asia’s growth. Also, an accelerated Fed tightening phase would weigh on the region. Hence, although Asia Ex-Japan markets continue to trade at a discount to their Developed Market peers, risk-reward for the region has deteriorated.



 

Important Information

 

Any opinions or views expressed in this material are those of the author and third parties identified, and not those of OCBC Bank (Malaysia) Berhad (“OCBC Bank”, which expression shall include OCBC Bank’s related companies or affiliates).

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question is suitable for you. This does not constitute an offer or solicitation to buy or sell or subscribe for any security or financial instrument or to enter into a transaction or to participate in any particular trading or investment strategy.

OCBC Bank, its related companies, their respective directors and/or employees (collectively ‘Related Persons’) may have positions in, and may effect transaction in the products mentioned herein. OCBC Bank may have alliances with the product providers, for which OCBC Bank may receive a fee. Product providers may also be Related Persons, who may be receiving fees from investors. OCBC Bank and the Related Person may also perform or seek to perform broking and other financial services for the product providers.

All information presented is subject to change without notice. OCBC Bank shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein. The information provided herein may contain projections or other forward-looking statements regarding future events or future performance of countries, assets, markets or companies. Actual events or results may differ materially. Past performance figures are not necessarily indicative of future or likely performance. Any reference to any specific company, financial product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the same.

The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.


 


Asset Allocation Key Amid Greater Uncertainty

 

We expect greater volatility ahead with President Trump’s increasingly anti-trade -- rather than the highly-anticipated reflationary -- posture.

Given the uncertainties and volatility ahead, asset allocation should be the key consideration in managing and building a core portfolio. We are moderately defensive in our asset allocation and continue to prefer credit over equity.

On equities, we are negative on Europe, Japan and Asia ex-Japan but with a preference for the U.S., given its defensive traits.

Among bond markets, we are positive on Emerging Market and Developed Market high yield bonds.

Top Investment Ideas:

  • Unit Trust: Pacific Asian Income Fund (Risk rating: High)
    Eligibility: High Net Worth Investors Only
    This fund invests in a target fund, the Lion Capital Funds II – LION-BOS Asian Income Fund – MYR and is suitable for investors seeking capital growth and income in the medium to long term via a dynamic and flexible asset allocation strategy. Income would be derived from well diversified sources such as equity dividend, bond coupons and option premiums.
  • Unit Trust: Affin Hwang Select Income Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    Suitable for investors seeking to invest in an income-driven, absolute return focused fund. This fund also targets to provide a high level of cash flow as well as growth by investing at least 70% of its NAV into fixed income instruments and a maximum of 30% NAV into equities globally with an Asian focus.
  • Unit Trust: RHB Asian Income Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    This fund invests in one target fund, the Schroder Asian Income fund and is suitable for investors seeking income and capital growth over the medium- to long-term via an active allocation strategy. Exposure in Asia is opportunistic as we view Asia being in a relatively strong position with a high level of foreign reserves, limited external debt, undervalued exchange rates and plenty of policy flexibility.
  • Unit Trust: Affin Hwang Global Balanced Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    Investors seeking capital growth opportunities through a portfolio of collective investment schemes with access into equities listed in global markets, fixed income instruments such as debt securities, money market instruments and fixed deposits, issued globally may consider this fund.

Top Investment Ideas are an expression of the investment outlook in this publication. They are not recommendations made in accordance with your investment objective and risk profile. As such, we recommend that you complete a suitability assessment before purchasing your selected investment product.



Any opinions or views expressed in this material are those of the author and third parties identified, and not those of OCBC Bank (Malaysia) Berhad (“OCBC Bank”, which expression shall include OCBC Bank’s related companies or affiliates).

We recommend that you read and understand the contents of the Information Memorandum for the Pacific Asian Income Fund dated 12 January 2017, by Pacific Mutual Fund Bhd. Investments in the Fund are exposed to market risk, target fund risk, currency risk, country/foreign securities risk, regulatory risk, external fund manager’s risk and others as disclosed in the Information Memorandum. This fund is eligible to be purchased by High Net Worth Individuals only, the criteria of High Net Worth Individuals as per stated in Schedules 6 and 7 of Capital Market and Services Act (CMSA) 2007.

We recommend that you read and understand the Master Prospectus for the Affin Hwang Select Income Fund dated 18 July 2016 and expires on 17 July 2017 by Affin Hwang Asset Management Bhd (formerly known as Hwang Investment Management Berhad). Investments in the Fund are exposed to specific risks including equity investment risk, equity-linked securities investment risk, credit/default risk, interest rate/price risk, structured products risk, country risk, currency risk, regulatory risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Master Prospectus for the RHB Asian Income Fund dated 6 October 2016 and expire on 5 October 2017, by RHB Asset Management Sdn Bhd. Investments in the Fund are exposed to management risk, liquidity risk, foreign investment risks such as currency risk and country risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Prospectus for the Affin Hwang Global Balanced Fund dated 1 September 2016 and expire on 31 August 2017, by Affin Hwang Asset Management Berhad. Investments in the Fund are exposed to collective investment schemes risk, credit and default risk, interest rate risk, currency risk, liquidity risk, related parties transaction risk, country risk and others as disclosed in the prospectus.

Product Risk Rating and Suitability Determination Matrix:

Product Risk Rating What this rating could mean to your principal amount Suitable for risk profiles:
Moderate Partial loss of full principal investment amount possible, total loss unlikely.
(‘Partial loss’ means the loss suffered by the investor can be up to 15% of the original investment principal)
  • Balanced
  • Growth
  • Aggressive
High Client may suffer substantial or 100% loss of principal investment amount.
(‘Substantial loss’ means the loss suffered by the investor can be more than 15% of the investment principal)
  • Growth
  • Aggressive


Unit Trust investments are not bank deposits and are not obligations of or guaranteed or insured by OCBC Bank (Malaysia) Berhad. Unit Trust investments are not guaranteed and are subject to investment risk unless otherwise specified. The investment risk includes general risks as described in the Information Memorandum/Prospectuses for Unit Trust investment funds (“Information Memorandum/Prospectuses”) and specific risks which may be different for each Unit Trust investment. Description of specific risks and general risks are published in the Information Memorandum/Prospectuses. With respect to Unit Trust investment, past performance is not indicative of future results; the net asset value can go up or down. Investors should also note that the net asset value per unit and distributions payable, if any, may go down as well as up.

Where unit trust loan financing is available, investors are advised to read and understand the contents of the unit trust loan financing risk disclosure statement before deciding to borrow to purchase units. Where a unit split/distribution is declared, investors are advised that following the issue of additional units/distribution, the NAV per unit will be reduced from pre-unit split NAV/cum-distribution NAV to post-unit split NAV/ex-distribution NAV; and where a unit split is declared, investors should be highlighted of the fact that the value of their investment in Malaysian ringgit will remain unchanged after the distribution of the additional units.

The Information Memorandum/Prospectuses have been registered with the Securities Commission Malaysia, which takes no responsibility for its content. A copy of the Information Memorandum/Prospectuses can be obtained at OCBC Bank’s branches. Units will only be issued upon the receipt of application form referred in, and accompanying the Information Memorandum/Prospectuses. Investors are advised to read and understand the contents of the Information Memorandum/Prospectuses, and if necessary consult their adviser(s), as well as consider the fees and charges involved before investing in the Unit Trust.

This document has been prepared without taking account of the objectives, financial situation or needs of any specific person or organisation who may receive this document. Accordingly prior to making an investment decision, you should conduct such investigation and analysis regarding the product described herein as you deem appropriate and to the extent you deem necessary obtain independent advice from competent legal, financial, tax, accounting and other professionals, to enable you to understand and recognise fully the legal, financial, tax and other risks arising in respect of the product and the purchase, holding and sale thereof.

You should obtain and read the Product Highlight Sheet of the product before you make a decision to acquire the product. All information provided in this document is general and does not take into account your individual objectives, financial situation or specific needs.

You are required to read and understand the terms and Product Highlight Sheet of the product carefully before executing any transaction relating to the product with us. You may request for a copy of the Product Highlight Sheet at OCBC Banks’ branches.

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question is suitable for you. This does not constitute an offer or solicitation to buy or sell or subscribe for any security or financial instrument or to enter into a transaction or to participate in any particular trading or investment strategy.

All information presented is subject to change without notice. OCBC Bank shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein. The information provided herein may contain projections or other forward looking statement regarding future events or future performance of countries, assets, markets or companies. Actual events or results may differ materially. Past performance figures are not necessarily indicative of future or likely performance. Any reference to any specific company, financial product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the same.

OCBC Bank and its respective associated and connected corporations together with their respective directors and officers may have or take positions in any securities mentioned in this report (which positions may change from time to time without notice) and may also perform or seek to perform broking and other investment or securities related services for the corporations whose securities are mentioned in this report as well as other parties generally.

The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.




Lai Mun Yew (Michael)
  Vice President, Research, Wealth Management, OCBC Bank (Malaysia) Berhad

 

Global Outlook – Faster Growth but Rising Risks

 

Economic growth has picked up, but the early days of the Trump presidency have highlighted the risks to a liberal world order led by the United States.

Key Points:

  • The rebound in business confidence began ahead of the U.S. election and has been a global occurrence, so it does not appear to be driven by Trump’s victory. However, in the U.S., hopes of fewer regulations and lower taxes might be behind a post-election spike in confidence, especially for small firms.
  • Deregulation, tax reform and infrastructure investment in the U.S. all have the potential to raise the U.S. growth rate, but passing the legislation will take time, and the economic impact will be gradual. A more immediate concern is that cutting taxes when the economy is already running hot is likely to boost inflation and widen the trade deficit.
  • Protectionism is our greatest concern. Tariffs would threaten to reverse the globalisation that has been at the heart of the success story of many emerging markets – especially Asia – in recent decades. The U.S. would also suffer from distortions to resource allocation and higher prices to consumers, even before we consider the risk of retaliation by major trading partners.
  • In Europe, elections in Netherlands, France and Germany, imply continued uncertainty in 2017, especially in the wake of the political surprises of 2016. Unavoidably, the focus is on downside risks, including the survival of the Euro. However, there is also the possibility of positive outcomes, such as the election of a reformist right-of-centre president in France.
  • The U.K. is treading a perilous path towards Brexit and there is a danger that it leaves the European Union without securing any form of preferential access for trade relations. Large budget and external deficits limit the room for manoeuvre and leave the U.K. exposed to damage from Brexit.
  • In Japan, exports and output were already benefitting from the bounce in world trade seen in late 2016, and the drop in Yen should sustain that momentum. This will compound the tightness in labour markets which are already the best in 25 years.
  • Unfortunately, (from the Bank of Japan’s point of view) deflationary expectations appear to be so entrenched that wages have shown very little response to labour shortages. Similarly, prices are stable and although inflation will be boosted by the weak exchange rate, the BOJ’s 2 per cent target is still far in the distance.
  • China could be the target for U.S. protectionist policies. Trump’s appointment of related officials supports this view. Japan and Mexico have also found themselves under scrutiny, but the deficit with China is five times as large as either of them.
  • Any Chinese response to U.S. tariffs is likely to target specific U.S. firms. The hope is that this leads to more moderate behaviour from the U.S. side, but the risk is that it is viewed as provocation that leads to an escalating trade war. The unpredictability and inexperience of the U.S. administration makes this a realistic concern.
  • All emerging markets – not just China – are at risk from U.S. protectionism. Even if China is the primary focus, many of Asia’s regional production networks depend on assembly in China for eventual export to the United States. Moreover, if the (probably unachievable) objective is to create millions of new manufacturing jobs in the U.S., penalising China only to see the trade deficit shift to other countries is likely to provoke similar measures on other exporters.



 

Foreign Exchange & Commodities – U.S. Dollar Rally Stalling?

 

The U.S. Dollar has reached a new cycle high and valuation is relatively stretched compared to its fair value. This is given that markets have priced in much of the fiscal optimism but insufficient trade protectionism risk.

Key Points:

  • The greenback’s rally has been hampered as President Trump takes office. The U.S. dollar has corrected amid concerns of a possible delay on the delivery of growth-positive fiscal measures. Growing signs that reflation is a global, not just an American-only, phenomenon also challenges the idea that U.S. dollar should be exceptionally stronger.
  • Recent comments by Trump that the U.S. dollar is “too strong”, has also undermined the currency. Expectations that Trump will tone down the trade protectionist rhetoric that got him elected appears false. Global risk sentiment, which is approaching “complacency” territory, could sour if trade tension escalates as the U.S. threatens import tariffs. Emerging market currencies are vulnerable to higher risk aversion and are likely to underperform reserve assets such as Gold, the Euro and Japanese Yen.
  • Given that the medium-term trend of a weaker Renminbi is still intact and the non-negligible risk of U.S. trade protectionist policies targeting China, we maintain our bearish view on trade-exposed Asian currencies. The clear risk to our view of weaker Asian currencies is the Chinese central bank attempting to hold the Renminbi stable for longer than we forecast to reduce risk of trade friction with the United States.
  • The Pound rebounded after U.K. Prime Minister Theresa May confirmed intentions to leave the EU single market. However, we remain worried that the heavy political calendar in Europe this year will lead the EU towards a tough negotiating position and the market could start pricing “hard Brexit” again.
  • We continue to see Gold as a valid asset to hold as a diversifier and hedge against concerns that a potential escalation of trade tension between the U.S. and China could threaten the global recovery. Safe haven buying has been a feature of the Gold market since the start of 2017 and we expect this to continue as Trump moves quickly to initiate his campaign policies. A decline in U.S. real interest rates and consequently the possibility of a weaker U.S. dollar could add to Gold's appeal over the next few months.
  • OPEC seems to be successful in reducing output, which is allowing prices to push above the US$50 per barrel level. The main impact of the OPEC deal is to limit downside risk, as it reduces the threat of extreme over-supply. Upside remains limited by alternative (higher cost) supply becoming more viable as prices rise. This is already evident in the U.S., where the rig count is up 70 per cent from the lows of May 2016.



 

Bonds – Positive on High Yield Bonds

 

In the face of potentially improving fundamentals and a lower default rate, the downside for high yield bonds looks limited - even as the Fed raises interest rates.

Key Points:

  • The deflation risk of recent years that has had central banks in developed economies pursuing ever-more radical policies is fading. Firmer growth and a rebound in commodity prices are pushing inflation higher, so attention is turning to when stimulus will be withdrawn. This will become an issue for Europe and Japan as the year progresses, but the United States is leading the shift.
  • We continue to expect the Fed to raise interest rates three times this year and another four in 2018. The economy is at full employment and inflation is only marginally below the 2 per cent target, so the Fed should be uncomfortable with interest rates around 2.5 per cent below neutral levels.
  • Of course the Fed does not operate in a policy vacuum and must be sensitive to any changes from the new Trump administration. The most obvious risk is that fiscal stimulus boosts growth and raises inflationary pressure, which would demand a more aggressive response from the Fed.
  • The bond market has already started to respond to this new outlook for policy, and we can expect yields to push higher as the Fed gradually tightens. We see 10-year U.S. Treasury yields at around 3 per cent by end-2017. Investment grade bond returns will be dull in this environment and we have cut our stance to neutral, preferring to take some credit risk in high yield bonds.
  • Despite higher interest rates, we continue to see opportunities in bond markets but returns will not be as high as in 2016. High yield bonds should remain in vogue as the search for yield continues. Ageing demographics and surplus savings should support the continued search for yield.
  • Valuations on neither High Yield nor Investment Grade look particularly compelling currently. However, in a reflationary environment with higher rates, we believe that coupon or carry will become an increasingly important component of total return. With its higher corporate spread component, High Yield bonds should be somewhat better insulated from the adverse impact of higher rates. Furthermore, High Yield is better positioned to benefit from a decline in overall default rates in 2017 versus 2016.
  • There are three things to bear in mind when investing in bond markets to reduce risk. Firstly, given the potential for higher U.S. interest rates, investors should focus on bonds with a shorter tenor as such bonds are less affected by higher interest rates compared with longer dated bonds. Secondly, consider investing in a portfolio of bonds through a unit trust rather than buying individual bonds as many individual bonds require a significant investment outlay and can expose investors to concentration risk. Finally, it is absolutely imperative to buy only into bonds with decent credit fundamentals to reduce default risk.



 

Equities – From Reflation to Anti-trade?

 

We expect volatility to remain elevated in 2017 as President Trump’s push for anti-trade seems to be intensifying instead of the highly-anticipated reflationary stance.

Key Points:

  • Equity markets have defied expectations and done well despite Trump's victory. The reason for the run up is because investors chose to focus on the reflation theme and are hopeful that Trump could boost the U.S. economy through expansionary fiscal policy.
  • Meanwhile, Trump’s increasingly brazen protectionist push could derail global growth. Furthermore, the pace of Fed’s interest-rate normalisation is likely to pick up. Also, given the busy political agenda, European political risks lurk. Coupled with extended valuations, risk-reward remains unattractive. We maintain our Underweight stance on equities. Regionally, we are neutral on the U.S. for its relatively defensive traits and underweight Europe, Japan and Asia ex-Japan.
  • Without a clearer roadmap, the Trump reflation trade could run out of steam. The increasingly protectionist approach to trade by Trump could also impact U.S. corporate earnings growth and profitability as a result of higher costs and/or lower revenues. Despite our cautious view on equities, U.S. equities remain more defensive on a relative basis.
  • In Europe, Theresa May’s decision not to pursue partial EU membership will force the U.K. to leave the single market and this has raised more questions than answers. Even as earnings are expected to recover from the sharp decline last year, consensus 2017 earnings growth of 13.7 per cent remains optimistic, in our view. Meanwhile, the risk of political contagion remains, given the busy political calendar. Hence we remain cautious on European equities.
  • We maintain our view that a sustained re-rating of Japanese equities would require more meaningful structural reforms that would boost Japan’s growth potential. The weakened Yen would provide a boost to corporate earnings but the rebound in share prices would have largely discounted the consensus 2017 earnings growth of 10.9 per cent. After China, Japan accounts for a substantial share of U.S. trade deficit and is vulnerable to potential trade pressure.
  • Asia ex-Japan equities rebounded in January, after bearing the brunt of the post U.S. election market response. The “America First” rhetoric during Trump’s inauguration speech does not augur well for the region. China accounts for more than one-third of the overall U.S. trade deficit and will be the focus of any U.S. anti-trade policies. But given the highly connected intra-Asia as well as U.S.-Asia trade links, it is unlikely that any of the Asian markets would go unscathed if the situation turns ugly.



 

Important Information

 

Any opinions or views expressed in this material are those of the author and third parties identified, and not those of OCBC Bank (Malaysia) Berhad (“OCBC Bank”, which expression shall include OCBC Bank’s related companies or affiliates).

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question is suitable for you. This does not constitute an offer or solicitation to buy or sell or subscribe for any security or financial instrument or to enter into a transaction or to participate in any particular trading or investment strategy.

OCBC Bank, its related companies, their respective directors and/or employees (collectively ‘Related Persons’) may have positions in, and may effect transaction in the products mentioned herein. OCBC Bank may have alliances with the product providers, for which OCBC Bank may receive a fee. Product providers may also be Related Persons, who may be receiving fees from investors. OCBC Bank and the Related Person may also perform or seek to perform broking and other financial services for the product providers.

All information presented is subject to change without notice. OCBC Bank shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein. The information provided herein may contain projections or other forward-looking statements regarding future events or future performance of countries, assets, markets or companies. Actual events or results may differ materially. Past performance figures are not necessarily indicative of future or likely performance. Any reference to any specific company, financial product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the same.

The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.


 


Rebalance in Times of Uncertainty

 

We expect greater volatility ahead with President Trump increasingly pushing anti-trade policy rather than the highly-anticipated reflationary one.

Given the uncertainties and volatility ahead, asset allocation is key to navigating the markets.

We prefer credit over equity.

On equities, we are still negative on Europe, Japan and Asia ex-Japan but neutral on the US given its defensive traits.

Among bond markets, we are positive on Emerging Market and Developed Market high yield bonds.

Recommendations:

  • Unit Trust: Pacific Asian Income Fund (Risk rating: High)
    Eligibility: High Net Worth Investors Only
    This fund invests in a target fund, the Lion Capital Funds II – LION-BOS Asian Income Fund – MYR and is suitable for investors seeking capital growth and income in the medium to long term via a dynamic and flexible asset allocation strategy. Income would be derived from well diversified sources such as equity dividend, bond coupons and option premiums.
  • Unit Trust: Affin Hwang Select Income Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    Suitable for investors seeking to invest in an income-driven, absolute return focused fund. This fund also targets to provide a high level of cash flow as well as growth by investing at least 70% of its NAV into fixed income instruments and a maximum of 30% NAV into equities globally with an Asian focus.
  • Unit Trust: RHB Asian Income Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    This fund invests in one target fund, the Schroder Asian Income fund and is suitable for investors seeking income and capital growth over the medium- to long-term via an active allocation strategy. Exposure in Asia is opportunistic as we view Asia being in a relatively strong position with a high level of foreign reserves, limited external debt, undervalued exchange rates and plenty of policy flexibility.
  • Unit Trust: Affin Hwang Global Balanced Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    Investors seeking capital growth opportunities through a portfolio of collective investment schemes with access into equities listed in global markets, fixed income instruments such as debt securities, money market instruments and fixed deposits, issued globally may consider this fund.

Top Investment Ideas are an expression of the investment outlook in this publication. They are not recommendations made in accordance with your investment objective and risk profile. As such, we recommend that you complete a suitability assessment before purchasing your selected investment product.



This document is not intended to constitute research analysis or recommendation and should not be treated as such.

We recommend that you read and understand the contents of the Information Memorandum for the Pacific Asian Income Fund dated 12 January 2017, by Pacific Mutual Fund Bhd. Investments in the Fund are exposed to market risk, target fund risk, currency risk, country/foreign securities risk, regulatory risk, external fund manager’s risk and others as disclosed in the Information Memorandum. This fund is eligible to be purchased by High Net Worth Individuals only, the criteria of High Net Worth Individuals as per stated in Schedules 6 and 7 of Capital Market and Services Act (CMSA) 2007.

We recommend that you read and understand the Master Prospectus for the Affin Hwang Select Income Fund dated 18 July 2016 and expires on 17 July 2017 by Affin Hwang Asset Management Bhd (formerly known as Hwang Investment Management Berhad). Investments in the Fund are exposed to specific risks including equity investment risk, equity-linked securities investment risk, credit/default risk, interest rate/price risk, structured products risk, country risk, currency risk, regulatory risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Master Prospectus for the RHB Asian Income Fund dated 6 October 2016 and expire on 5 October 2017, by RHB Asset Management Sdn Bhd. Investments in the Fund are exposed to management risk, liquidity risk, foreign investment risks such as currency risk and country risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Prospectus for the Affin Hwang Global Balanced Fund dated 1 September 2016 and expire on 31 August 2017, by Affin Hwang Asset Management Berhad. Investments in the Fund are exposed to collective investment schemes risk, credit and default risk, interest rate risk, currency risk, liquidity risk, related parties transaction risk, country risk and others as disclosed in the prospectus.

Product Risk Rating and Suitability Determination Matrix:

Product Risk Rating What this rating could mean to your principal amount Suitable for risk profiles:
Moderate Partial loss of full principal investment amount possible, total loss unlikely.
(‘Partial loss’ means the loss suffered by the investor can be up to 15% of the original investment principal)
  • Balanced
  • Growth
  • Aggressive
High Client may suffer substantial or 100% loss of principal investment amount.
(‘Substantial loss’ means the loss suffered by the investor can be more than 15% of the investment principal)
  • Growth
  • Aggressive


Unit Trust investments are not bank deposits and are not obligations of or guaranteed or insured by OCBC Bank (Malaysia) Berhad. Unit Trust investments are not guaranteed and are subject to investment risk unless otherwise specified. The investment risk includes general risks as described in the Information Memorandum/Prospectuses for Unit Trust investment funds (“Information Memorandum/Prospectuses”) and specific risks which may be different for each Unit Trust investment. Description of specific risks and general risks are published in the Information Memorandum/Prospectuses. With respect to Unit Trust investment, past performance is not indicative of future results; the net asset value can go up or down. Investors should also note that the net asset value per unit and distributions payable, if any, may go down as well as up.

Where unit trust loan financing is available, investors are advised to read and understand the contents of the unit trust loan financing risk disclosure statement before deciding to borrow to purchase units. Where a unit split/distribution is declared, investors are advised that following the issue of additional units/distribution, the NAV per unit will be reduced from pre-unit split NAV/cum-distribution NAV to post-unit split NAV/ex-distribution NAV; and where a unit split is declared, investors should be highlighted of the fact that the value of their investment in Malaysian ringgit will remain unchanged after the distribution of the additional units.

The Information Memorandum/Prospectuses have been registered with the Securities Commission Malaysia, which takes no responsibility for its content. A copy of the Information Memorandum/Prospectuses can be obtained at OCBC Bank’s branches. Units will only be issued upon the receipt of application form referred in, and accompanying the Information Memorandum/Prospectuses. Investors are advised to read and understand the contents of the Information Memorandum/Prospectuses, and if necessary consult their adviser(s), as well as consider the fees and charges involved before investing in the Unit Trust.

This document has been prepared without taking account of the objectives, financial situation or needs of any specific person or organisation who may receive this document. Accordingly prior to making an investment decision, you should conduct such investigation and analysis regarding the product described herein as you deem appropriate and to the extent you deem necessary obtain independent advice from competent legal, financial, tax, accounting and other professionals, to enable you to understand and recognise fully the legal, financial, tax and other risks arising in respect of the product and the purchase, holding and sale thereof.

You should obtain and read the Product Highlight Sheet of the product before you make a decision to acquire the product. All information provided in this document is general and does not take into account your individual objectives, financial situation or specific needs.

You are required to read and understand the terms and Product Highlight Sheet of the product carefully before executing any transaction relating to the product with us. You may request for a copy of the Product Highlight Sheet at OCBC Banks’ branches.

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question is suitable for you. This does not constitute an offer or solicitation to buy or sell or subscribe for any security or financial instrument or to enter into a transaction or to participate in any particular trading or investment strategy.

All information presented is subject to change without notice. OCBC Bank shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein. The information provided herein may contain projections or other forward looking statement regarding future events or future performance of countries, assets, markets or companies. Actual events or results may differ materially. Past performance figures are not necessarily indicative of future or likely performance. Any reference to any specific company, financial product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the same.

OCBC Bank and its respective associated and connected corporations together with their respective directors and officers may have or take positions in any securities mentioned in this report (which positions may change from time to time without notice) and may also perform or seek to perform broking and other investment or securities related services for the corporations whose securities are mentioned in this report as well as other parties generally.

The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.




Lai Mun Yew (Michael)
  Vice President, Research, Wealth Management, OCBC Bank (Malaysia) Berhad

 

Global Outlook – Global Monetary Policy at Turning Point

 

Faster global growth and reflation implies that the next move in monetary policy in the Eurozone and Japan is likely to be towards tightening, even as the Fed prepares to hike rates further.

Key Points:

  • Global economic growth continues to improve and, together with firmer commodity prices, this is reducing the risk of deflation. Headline inflation rates have picked up across the developed world, although core inflation has been slower to respond as it typically excludes the effect of higher oil prices.
  • Faster growth and higher inflation spells a turning point in global monetary policy. Of course the US is already tightening and various emerging markets seem to have stopped cutting rates, so the focus is on other developed markets. In the second half of 2017, we can expect to see the Eurozone planning to taper asset purchases and Japan start to increase the target yield for bonds.
  • In the US, the “America First” attitude will be a persistent risk. With the trade deficit already at 4 per cent of GDP and set to expand due to the strong US dollar and tight domestic capacity, tariff protection will be a constant threat.
  • In Europe, the dichotomy continues between an increasingly solid economic performance and continued political turmoil and uncertainty. PMI readings show Eurozone business confidence at the highest level since 2011 while unemployment has been falling steadily for over three years.
  • The improving economy seems to have done little to reduce public dissatisfaction with the political status quo. This should not be too much of a surprise, as the UK and US both enjoyed a stronger recovery than the Eurozone from the recession of 2008-09, but were not immune to unexpected election outcomes last year.
  • The UK is treading a perilous path towards Brexit and there is the danger that it leaves the European Union without securing any form of preferential access for trade relations. Large budget and external deficits limit the room for manoeuvre and leave the UK exposed to damage from Brexit.
  • In Japan, the pick-up in regional trade has boosted Japan’s exports in recent months, even before we see the likely benefits of the recent currency weakness. In turn, this is driving a rebound in industrial output that will feed through to corporate profits.
  • As in Europe, solid economic growth means that discussion is turning to the question of when the Bank of Japan (BOJ) might start to tighten monetary policy. Assuming that inflation picks up a little in coming months and the exchange rate remains soft, the BOJ could look at raising the target for 10-year bond yields around the middle of the year. This could bring the benefit of reducing a source of potential friction with the US as well as reducing the pressure for the BOJ to expand its balance sheet so rapidly.
  • In China, concern over the overheating housing market has brought some macro-prudential policy tightening, as well as a slight squeeze on liquidity. This points to slower growth in coming months, but it seems unlikely to risk a serious undershoot of targets.
  • Policy-makers’ priorities have been clear in recent years, with the determination to deliver solid growth taking precedence over efforts to control the credit bubble. As a consequence, the debt service burden is rising, bringing the risk of a rise in non-performing loans. However, most of the debts are in local currency so the government should be able to prevent abrupt systemic disruption.
  • The recovery in emerging markets is threatened by higher US interest rates and trade protectionism. Asia is relatively less exposed to a rise in borrowing costs, as most economies run a current account surplus, so are exporters of capital.
  • Conversely, Asia is badly exposed to a reversal of the globalisation of the past few decades. Even if America’s protectionist focus is on China, the rest of the region is indirectly threatened as much of its trade with China is ultimately dependent on demand from the United States.



 

Foreign Exchange & Commodities – Greenback Awaiting Policy Clarity

 

We expect Trumponomics to keep the Dollar good, although great is not very likely, especially against reserve currencies such as the Yen, Swiss Franc and the Euro.

Key Points:

  • The unwinding of post-election US dollar strength appears mature but the US dollar will likely remain difficult to trade. The greenback’s struggle to rally was disappointing following the slightly hawkish rhetoric from Fed officials and a solid set of upside US data surprises. We expect the US dollar to move sideways until we see the greater details of the Trump fiscal plans.
  • Elsewhere, oil prices remain resilient despite continued high inventory levels and signs that non-OPEC production is already rising in response to the rebound in prices over the past year. This should limit the upside.
  • Oil prices have been surprisingly resilient in the face of two factors that threaten a reversal. First, inventories remain at unusually high levels, even as we start to come out of the winter season. Demand continues to grow at a steady pace around 2 per cent but it is not strong enough to make inroads into inventory levels.
  • Second, supply is quickly rebounding even though prices are still relatively subdued. The US rig count has almost doubled from the lows of May 2016 and production is already responding. Moreover, the Trump administration’s apparent determination to reduce environmental protection implies an increase in supply of both oil and other fossil fuels.
  • The combination of OPEC controls on excess supply and simultaneously the promise of non-OPEC production increasing as prices rise mean that oil prices could be set for a period of relative stability. It looks as though the longer-term equilibrium price where supply and demand is in balance is lower than previously thought. It is perhaps in the US$50-60 per barrel range, which implies prices should be stable around current levels.
  • European political risks (e.g. French elections) and uncertainty around US fiscal and economic policy under Trump have supported safe haven buying of gold. Safe-haven buying of gold can be strong during periods of geopolitical upheaval and policy uncertainty. The higher near-term gold price backdrop is consistent with our view of gold as a valid asset to hold as a diversifier and hedge.
  • The break of gold price above US$1,250 per ounce is bound to attract attention. The risk that market participants will have to play catch-up is increasing and this could extend the upside to gold. Stronger gold price is likely to attract interest out of China, where participants tend to buy into momentum. However, on a twelve month outlook, we are cautious on gold given the risk of a pullback as political risks subside and as Fed steps up rate hikes further out.



 

Bonds – Stay Positive High Yield Bonds

 

Valuations on High Yield bonds do not look compelling currently. However, in a reflationary environment, High Yield bonds should be better insulated from the adverse impact of higher rates.

Key Points:

  • U.S. bond yields have stalled as the market awaits more clarity on the direction of policy. The Fed seems likely to raise rates again by June, but uncertainty is greatest on fiscal policy where details of planned reforms are sparse.
  • We continue to expect the Fed to raise interest rates three times this year and another four in 2018. The economy is at full employment and inflation is only marginally below the 2 per cent target, so the Fed should be uncomfortable with interest rates around 2.5 per cent below neutral levels.
  • However, the minutes of the most recent Fed policy meeting suggests they are not worried about the risk of overshooting targets for unemployment and inflation. As such, gradual tightening still seems like the most likely scenario.
  • The minutes of the most recent policy meeting also show that the Fed is preparing for a formal discussion on shrinking its balance sheet – quantitative tightening. Initially this will happen by ending the reinvestment of proceeds from maturing bonds and it seems likely to start in 2018. A smaller Fed balance sheet implies a higher risk premium for US Treasuries and there is a risk that this has an impact akin to former Fed Chair Bernanke’s infamous “tapering” remark in May 2013.
  • Despite higher interest rates, we continue to see opportunities in bond markets. We stay positive on Developed Market and Emerging Market high yield bonds. The pick-up in growth bodes well for high yield bond issuers and if Trump were to enact his expansionary fiscal policies, it would be conducive for high yield bonds. Besides, oil prices are now less of a drag on the sector.
  • In the face of potentially improving fundamentals and a lower default rate, the downside for high yield looks limited - even as the Fed proceeds to raise rates - given the spread cushion it enjoys. High yield bonds still offers investor good carry to tide through this period of uncertainty.
  • Finally, we reiterate that there are three things to bear in mind when investing in bond markets to reduce risk. Firstly, given the potential for higher US interest rates, investors should focus on bonds with a shorter tenor as such bonds are less affected by higher interest rates compared to longer dated bonds. Secondly, consider investing in a portfolio of bonds through a unit trust rather than buying individual bonds as many individual bonds require a significant investment outlay and can expose investors to concentration risk. Finally, it is absolutely imperative to buy only into bonds with decent credit fundamentals to reduce default risk.



 

Equities – Cautious on Equities

 

Uncertainties surrounding Trump’s policies direction and impact, Fed rate hikes, political risk in the European region as well as extended valuations underpin the unattractive risk-reward profile for equities at this juncture.

Key Points:

  • Positive global growth momentum and hope of clearer US fiscal stimulus and tax reform plans continued to drive global equities higher in February. The first month of President Trump’s administration has been typified by drama in Washington. It remains to be seen how much longer the market’s patience last. In addition, the pace of Fed interest-rate normalisation is likely to pick up and political risk in Europe remains an issue. Coupled with extended valuations, risk-reward remains unattractive. Hence, we maintain our cautious stance on equities.
  • In the US, the stronger than expected quarterly earnings season has ignited 2017 earnings growth expectations. Looking ahead, the stronger US dollar, higher interest rates and tighter labour market suggest that corporate profit margins are unlikely to be sustained. Also, the intricacies and time involved in pushing through tax reforms means that the Trump reflation trade could lose steam. Nevertheless, given our overall cautious view on global equities, US equities remain more defensive on a relative basis.
  • In Europe, equities underperformed other regions as concerns with political risk re-merged with hustling of the French presidential election gaining momentum, even as uncertainty hangs over UK’s departure of the EU market. Although firmer economic growth on loose monetary policy and fiscal austerity is expected to provide a boost, consensus CY2017 earnings growth of 13.7 per cent remains optimistic. Meanwhile, risk of political contagion remains, given the busy political calendar. Hence, we remain cautious on European equities.
  • Japanese equities continued to mirror movements of the Yen. We maintain our view that a sustained re-rating of the market would require more meaningful structural reforms. After China, Japan accounts for a substantial share of the US trade deficit and is vulnerable to potential trade pressure. Near-term, the market would continue to be driven mainly by macro factors and movements of the Yen, which is expected to stay volatile. Valuations, however, are not cheap.
  • In Asia ex-Japan, Trump’s “America First” posture does not augur well for China and the region. While it would be highly negative for Asia’s growth if Trump pursues his anti-trade policies, investors seem surprisingly sanguine. Coupled with potential impact of faster-than-expected US interest-rate normalisation and currency vulnerability, we remain cautious on Asia Ex-Japan.



 

Important Information

 

Any opinions or views expressed in this material are those of the author and third parties identified, and not those of OCBC Bank (Malaysia) Berhad (“OCBC Bank”, which expression shall include OCBC Bank’s related companies or affiliates).

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question is suitable for you. This does not constitute an offer or solicitation to buy or sell or subscribe for any security or financial instrument or to enter into a transaction or to participate in any particular trading or investment strategy.

OCBC Bank, its related companies, their respective directors and/or employees (collectively ‘Related Persons’) may have positions in, and may effect transaction in the products mentioned herein. OCBC Bank may have alliances with the product providers, for which OCBC Bank may receive a fee. Product providers may also be Related Persons, who may be receiving fees from investors. OCBC Bank and the Related Person may also perform or seek to perform broking and other financial services for the product providers.

All information presented is subject to change without notice. OCBC Bank shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein. The information provided herein may contain projections or other forward-looking statements regarding future events or future performance of countries, assets, markets or companies. Actual events or results may differ materially. Past performance figures are not necessarily indicative of future or likely performance. Any reference to any specific company, financial product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the same.

The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.


 


The Reflationary Environment has Further to Go

 

We prefer high yielding bonds where higher income can provide a cushion against rising interest rates and heightened uncertainty.

s Given prevailing uncertainties and potential volatility ahead, asset allocation is key to navigating the markets.

A consolidation phase is probable following the earlier run-up, especially as risk assets seem over-extended in the aftermath of the U.S. election. We are not bearish on risk assets because the medium-term economic outlook remains moderately constructive with corporate margins improving.

On equities, we are still negative on Europe, Japan and Asia ex-Japan but neutral on the U.S. given its defensive traits.

On bonds, we remain positive on Emerging Market and Developed Market high yield.

Recommendations:

  • Unit Trust: Pacific Asian Income Fund (Risk rating: High)
    Eligibility: High Net Worth Investors Only
    This fund invests in a target fund, the Lion Capital Funds II – LION-BOS Asian Income Fund – MYR and is suitable for investors seeking capital growth and income in the medium to long term via a dynamic and flexible asset allocation strategy. Income would be derived from well diversified sources such as equity dividend, bond coupons and option premiums.
  • Unit Trust: Affin Hwang Select Income Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    Suitable for investors seeking to invest in an income-driven, absolute return focused fund. This fund also targets to provide a high level of cash flow as well as growth by investing at least 70% of its NAV into fixed income instruments and a maximum of 30% NAV into equities globally with an Asian focus.
  • Unit Trust: RHB Asian Income Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    This fund invests in one target fund, the Schroder Asian Income fund and is suitable for investors seeking income and capital growth over the medium- to long-term via an active allocation strategy. Exposure in Asia is opportunistic as we view Asia being in a relatively strong position with a high level of foreign reserves, limited external debt, undervalued exchange rates and plenty of policy flexibility.
  • Unit Trust: Affin Hwang Global Balanced Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    Investors seeking capital growth opportunities through a portfolio of collective investment schemes with access into equities listed in global markets, fixed income instruments such as debt securities, money market instruments and fixed deposits, issued globally may consider this fund.

Top Investment Ideas are an expression of the investment outlook in this publication. They are not recommendations made in accordance with your investment objective and risk profile. As such, we recommend that you complete a suitability assessment before purchasing your selected investment product.



This document is not intended to constitute research analysis or recommendation and should not be treated as such.

We recommend that you read and understand the contents of the Information Memorandum for the Pacific Asian Income Fund dated 12 January 2017, by Pacific Mutual Fund Bhd. Investments in the Fund are exposed to market risk, target fund risk, currency risk, country/foreign securities risk, regulatory risk, external fund manager’s risk and others as disclosed in the Information Memorandum. This fund is eligible to be purchased by High Net Worth Individuals only, the criteria of High Net Worth Individuals as per stated in Schedules 6 and 7 of Capital Market and Services Act (CMSA) 2007.

We recommend that you read and understand the Master Prospectus for the Affin Hwang Select Income Fund dated 18 July 2016 and expires on 17 July 2017 by Affin Hwang Asset Management Bhd (formerly known as Hwang Investment Management Berhad). Investments in the Fund are exposed to specific risks including equity investment risk, equity-linked securities investment risk, credit/default risk, interest rate/price risk, structured products risk, country risk, currency risk, regulatory risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Master Prospectus for the RHB Asian Income Fund dated 6 October 2016 and expire on 5 October 2017, by RHB Asset Management Sdn Bhd. Investments in the Fund are exposed to management risk, liquidity risk, foreign investment risks such as currency risk and country risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Prospectus for the Affin Hwang Global Balanced Fund dated 1 September 2016 and expire on 31 August 2017, by Affin Hwang Asset Management Berhad. Investments in the Fund are exposed to collective investment schemes risk, credit and default risk, interest rate risk, currency risk, liquidity risk, related parties transaction risk, country risk and others as disclosed in the prospectus.

Product Risk Rating and Suitability Determination Matrix:

Product Risk Rating What this rating could mean to your principal amount Suitable for risk profiles:
Moderate Partial loss of full principal investment amount possible, total loss unlikely.
(‘Partial loss’ means the loss suffered by the investor can be up to 15% of the original investment principal)
  • Balanced
  • Growth
  • Aggressive
High Client may suffer substantial or 100% loss of principal investment amount.
(‘Substantial loss’ means the loss suffered by the investor can be more than 15% of the investment principal)
  • Growth
  • Aggressive


Unit Trust investments are not bank deposits and are not obligations of or guaranteed or insured by OCBC Bank (Malaysia) Berhad. Unit Trust investments are not guaranteed and are subject to investment risk unless otherwise specified. The investment risk includes general risks as described in the Information Memorandum/Prospectuses for Unit Trust investment funds (“Information Memorandum/Prospectuses”) and specific risks which may be different for each Unit Trust investment. Description of specific risks and general risks are published in the Information Memorandum/Prospectuses. With respect to Unit Trust investment, past performance is not indicative of future results; the net asset value can go up or down. Investors should also note that the net asset value per unit and distributions payable, if any, may go down as well as up.

Where unit trust loan financing is available, investors are advised to read and understand the contents of the unit trust loan financing risk disclosure statement before deciding to borrow to purchase units. Where a unit split/distribution is declared, investors are advised that following the issue of additional units/distribution, the NAV per unit will be reduced from pre-unit split NAV/cum-distribution NAV to post-unit split NAV/ex-distribution NAV; and where a unit split is declared, investors should be highlighted of the fact that the value of their investment in Malaysian ringgit will remain unchanged after the distribution of the additional units.

The Information Memorandum/Prospectuses have been registered with the Securities Commission Malaysia, which takes no responsibility for its content. A copy of the Information Memorandum/Prospectuses can be obtained at OCBC Bank’s branches. Units will only be issued upon the receipt of application form referred in, and accompanying the Information Memorandum/Prospectuses. Investors are advised to read and understand the contents of the Information Memorandum/Prospectuses, and if necessary consult their adviser(s), as well as consider the fees and charges involved before investing in the Unit Trust.

This document has been prepared without taking account of the objectives, financial situation or needs of any specific person or organisation who may receive this document. Accordingly prior to making an investment decision, you should conduct such investigation and analysis regarding the product described herein as you deem appropriate and to the extent you deem necessary obtain independent advice from competent legal, financial, tax, accounting and other professionals, to enable you to understand and recognise fully the legal, financial, tax and other risks arising in respect of the product and the purchase, holding and sale thereof.

You should obtain and read the Product Highlight Sheet of the product before you make a decision to acquire the product. All information provided in this document is general and does not take into account your individual objectives, financial situation or specific needs.

You are required to read and understand the terms and Product Highlight Sheet of the product carefully before executing any transaction relating to the product with us. You may request for a copy of the Product Highlight Sheet at OCBC Banks’ branches.

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question is suitable for you. This does not constitute an offer or solicitation to buy or sell or subscribe for any security or financial instrument or to enter into a transaction or to participate in any particular trading or investment strategy.

All information presented is subject to change without notice. OCBC Bank shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein. The information provided herein may contain projections or other forward looking statement regarding future events or future performance of countries, assets, markets or companies. Actual events or results may differ materially. Past performance figures are not necessarily indicative of future or likely performance. Any reference to any specific company, financial product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the same.

OCBC Bank and its respective associated and connected corporations together with their respective directors and officers may have or take positions in any securities mentioned in this report (which positions may change from time to time without notice) and may also perform or seek to perform broking and other investment or securities related services for the corporations whose securities are mentioned in this report as well as other parties generally.

The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.




Lai Mun Yew (Michael)
  Vice President, Research, Wealth Management, OCBC Bank (Malaysia) Berhad

 

Global Outlook – As Good As It Gets?

 

It looks hard for the recent growth surge to continue to accelerate while central banks in various developed markets are preparing to signal policy tightening. Optimism over reforms in the U.S. seems to have peaked.

Key Points:

  • The overall macroeconomic situation looks encouraging. Growth has improved, deflation risk has fallen and the need for emergency monetary policy has faded. However, this makes it hard to see where the next incremental positive surprise might come from and as a result, this might be as good as it gets.
  • Economic data has consistently surprised on the upside for several months, which has boosted investor confidence and supported strong corporate earnings upgrades over the past year. Yet, economic surprise indexes are at elevated levels and may moderate in the months ahead. This means that we could be near to a point of maximum optimism on macroeconomic drivers and we could see a pause in the recent acceleration.
  • In the U.S., measures of consumer and small business confidence are showing exceptional strength. However, optimism about the scale and timing of major economic policies from the Trump Administration is prone to disappointment. Overhauling the U.S. health care system has stalled. Enacting corporate tax reform and approving large-scale infrastructure programmes may run into hurdles given legislative and economic realities. An additional concern is that if Trump fails to move his economic agenda forward, then he might move backwards through the use of trade protectionism to distract attention from domestic difficulties.
  • In the Eurozone, it looks like 2017 could produce the strongest growth in a decade. The transmission of monetary policy has improved in response to a healthier financial system, which is supporting economic activity. Purchasing Manager Index (PMI) readings are showing the best business conditions since before the start of austerity programmes in 2011.
  • However, it might also be as good as it gets for European politics, as confidence grows that the French elections will not be disruptive. Before long, the focus will shift to Germany, and then to Italian elections which appear to involve far more hazards, with much greater support for anti-Euro parties.
  • In Japan, inflation is gradually starting to lift, and the Bank of Japan is expected to start to increase its target for 10-year bond yields in the second half of 2017 in response. Unfortunately, structural problems remain and reform is making only limited progress. Labour markets are very tight and would benefit from reform that improves flexibility and productivity, but this does not seem likely.
  • In China, a solid growth outlook for 2017 means that protectionism, rather than a burst of stress in the domestic financial system, is the greater threat to stability in China. So far, the Trump administration has been surprisingly quiet on trade relations with China, compared to its pre-election rhetoric, but America’s huge bilateral deficit means that tensions could easily surface.



 

Foreign Exchange & Commodities – U.S. Dollar Down but Not Out

 

The U.S. dollar is likely to increase gradually instead of a sharp rise, supported against a backdrop of strong US economy and further Fed tightening.

Key Points:

  • Markets are worried that Trump will keep struggling to get any of his agenda through Congress this year following his failure to pass this healthcare bill. This has dampened expectation about tax reforms and large-scale infrastructure programs. We think the de-pricing of the Trumpflation trade is already at a mature stage and continue to expect the U.S. dollar to be “not great, not bad but just good”.
  • Political risks in Europe seem to be abating and the PMI indicators surprised strongly to the upside, keeping European reflation in focus. If the French election tail risk is avoided, strengthening economic momentum suggests further upside potential for the Euro.
  • In the month that follows the Article 50 trigger, the EU will publish the “Brexit directives” that will set the tone for the EU negotiation. Markets will scrutinise the details to assess the probability that the trade negotiations could happen alongside the divorce deal (citizens’ rights, UK’s Brexit bill). It is likely that the EU will seek to limit initial talks to the latter. The market is pricing increasing probability of a Bank of England hike, which seems premature. With valuations for the currency extremely cheap and speculative positioning still short, there is a risk that Pound rallies become more frequent. But we still struggle to justify turning bullish on the Pound at above US$1.20.
  • Although political risk in Europe has receded following the first French presidential debate, hopes of a gradual Fed rate hike and worries over Trump policy delays have benefitted gold price. Gold's reaction thus far should help assert its role as a portfolio diversifier and this could gain further traction should the reflationary ‘Trump Trade’ stall further.
  • In March, concern over inventories and the supply discipline of OPEC producers sent oil prices lower, with speculative short positions increasing sharply. This is the type of moderate short-term volatility that we can expect as prices are constrained on the upside by the threat of output rising as more of the marginal producers become profitable. Meanwhile, prices are limited on the downside by OPEC controls on excess supply and inefficient producers being squeezed out of the market. It looks as though the longer-term equilibrium price where supply and demand is in balance is perhaps in the US$50-60 per barrel range, which implies prices should be relatively stable around current levels.



 

Bonds – Prefer High Yield Bonds

 

We prefer high yielding bonds where higher income can provide a cushion against rising interest rates and heightened uncertainty. High yield credit offers an interesting opportunity given the recent widening of credit spreads.

Key Points:

  • Stronger growth brings the prospect of monetary policy tightening. This is most apparent in the U.S. where we think the Fed is set to raise interest rates six more times by the end of 2018. However, it also applies to China, which is trying to cool down the housing market, and even to Europe and Japan which are likely to be signalling a shift in monetary policy before the end of 2017. In a year’s time, G3 monetary policy will still be very loose, but the lengthy era of zero interest rates and abundant liquidity is slowly drawing to a close.
  • There is the risk that an aggressive tax reform programme by the Trump administration may intensify concerns about overheating and drives the Fed to be more hawkish. However, the current political timetable implies that this is more likely to be an issue for 2018 rather than this year, and it is unclear whether tax reform will provide a significant fiscal boost. The collapse of healthcare reform suggests that the fiscal conservatives in the Republican Party could block policies that increase the budget deficit.
  • Despite the prospects for higher interest rates, we continue to be positive on high yield bonds. Bonds as an asset class arguably benefits more directly from strong underlying growth than equities. Equity markets have high growth expectations to live up to; bonds only have to remain creditworthy. That is much less of a challenge in a benign economic environment.
  • Valuations on both high yield and investment grade bonds currently are rich by historical standards. However, in a reflationary environment with higher rates, we believe that income from coupons will become an increasingly important component of total return. With its higher corporate spread component, high yield bonds should be somewhat better insulated from the adverse impact of higher rates. Furthermore, high yield bonds are better positioned to benefit from a decline in overall default rates in 2017 versus 2016.
  • Finally, we reiterate three key things to bear in mind when investing in bond markets to reduce risk. Firstly, given the potential for higher U.S. interest rates, investors should focus on bonds with a shorter tenor (preferably five years or less) as such bonds are less affected by higher interest rates compared with longer dated bonds. Secondly, consider investing in a portfolio of bonds through a unit trust rather than buying individual bonds as many individual bonds require a significant investment outlay and can expose investors to concentration risk. Finally, it is absolutely imperative to buy only into quality bonds with decent credit fundamentals to reduce default risk.



 

Equities – Is the Equity Rally Stalling?

 

With Trump approaching his first 100 days in office mark, the lack of concrete evidence on Trump’s ability to deliver on his promises and the failure of the Republicans to replace Obamacare are triggering fear that the reflationary trade might not materialise as easily as the market has come to expect since November.

Key Points:

  • Global equities had a more difficult month in March as doubts about Trump and the Republicans’ ability to push through reflationary and growth boosting policies brew. Investor sentiment continued to be underpinned by U.S. macro and political events. While the more dovish than expected Fed buoyed risk appetite, the Republicans’ failure to replace Obamacare dented confidence. It remains to be seen how much longer the market’s patience can last.
  • We remain cautious on equities given the concerns cited above and also because of the extended valuations and the unattractive risk-reward trade off. Regionally, we continue to prefer the U.S. for its relatively defensive traits, and stay cautious on Europe, Japan and Asia ex-Japan for now.
  • The Trump reflation trade will start to run out of steam unless there is clearer signs that Trump’s tax reform plans, a key component of his growth boosting agenda, remains on track. Fundamentally, a stronger U.S. dollar, higher interest rates and tighter labour market suggest that corporate profit margins are unlikely to be sustained going forward. Nevertheless, given our overall cautious view on global equities, U.S. equities remain more defensive on a relative basis.
  • Although firmer economic growth on loose monetary policy and fading fiscal austerity is expected to provide a boost in the Eurozone, consensus 2017 earnings growth of 16.1 per cent remains optimistic. At the same time, forward Price-to-Earnings (PE) valuation of 15.4 times, versus the 5-year historical average PE of 14.4 times, is not undemanding. Le Pen’s odds of winning declined but European political risks remain, especially given the busy political calendar ahead. For these reasons we remain cautious on European equities.
  • On Japanese equities, we maintain our view that a sustained re-rating of the market would require more meaningful structural reforms. After China, Japan accounts for a substantial share of U.S. trade deficit and is vulnerable to potential trade pressure. Near-term, the market would continue to be driven mainly by macro factors and movements of the Yen. Valuations, at forward PE of 15.8 times versus the 5-year historical average of 14.6 times, are not undemanding.
  • It would be highly negative for Asia’s growth if Trump pursues his anti-trade policies, but investors seem surprisingly sanguine. It remains to be seen if the failure in healthcare reforms would push the Trump administration to accelerate its tax reform agenda or pursue trade protectionism. Coupled with the potential impact of faster-than-expected U.S. interest-rate normalisation and currency vulnerability, we remain cautious on Asia Ex-Japan.



 

Important Information

 

Any opinions or views expressed in this material are those of the author and third parties identified, and not those of OCBC Bank (Malaysia) Berhad (“OCBC Bank”, which expression shall include OCBC Bank’s related companies or affiliates).

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question is suitable for you. This does not constitute an offer or solicitation to buy or sell or subscribe for any security or financial instrument or to enter into a transaction or to participate in any particular trading or investment strategy.

OCBC Bank, its related companies, their respective directors and/or employees (collectively ‘Related Persons’) may have positions in, and may effect transaction in the products mentioned herein. OCBC Bank may have alliances with the product providers, for which OCBC Bank may receive a fee. Product providers may also be Related Persons, who may be receiving fees from investors. OCBC Bank and the Related Person may also perform or seek to perform broking and other financial services for the product providers.

All information presented is subject to change without notice. OCBC Bank shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein. The information provided herein may contain projections or other forward-looking statements regarding future events or future performance of countries, assets, markets or companies. Actual events or results may differ materially. Past performance figures are not necessarily indicative of future or likely performance. Any reference to any specific company, financial product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the same.

The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.


 


Moderately Defensive, In Favour of High Yield Bonds

 

Growth is likely to moderate for the next few quarters; considering that valuations are stretched to the point where all the good news the market has to offer has been more or less priced in, we maintain our broadly cautious stance in equity markets.

Markets, which have been on the rise since November last year due to improving economic cycles, are now in a consolidation phase as the economic momentum moderates. Such an environment favours asset classes that offer income and rely less on growth acceleration, as equity start to moderate.

In anticipation of some market volatility, we maintain our moderately defensive investment stance, preferring high yield bonds as they offer higher returns.

We remain cautious on equities, focusing on high quality dividend plays to get additional returns in a sideways market.

By markets, we are still negative Japan and Asia ex-Japan but neutral on the U.S. and Europe.

On bonds, we remain positive on Emerging Market and Developed Market high yields.

Recommendations:

  • Unit Trust: Pacific Asian Income Fund (Risk rating: High)
    Eligibility: High Net Worth Investors Only
    This fund invests in a target fund, the Lion Capital Funds II – LION-BOS Asian Income Fund – MYR and is suitable for investors seeking capital growth and income in the medium to long term via a dynamic and flexible asset allocation strategy. Income would be derived from well diversified sources such as equity dividend, bond coupons and option premiums.
  • Unit Trust: Affin Hwang Select Income Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    Suitable for investors seeking to invest in an income-driven, absolute return focused fund. This fund also targets to provide a high level of cash flow as well as growth by investing at least 70% of its NAV into fixed income instruments and a maximum of 30% NAV into equities globally with an Asian focus.
  • Unit Trust: RHB Asian Income Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    This fund invests in one target fund, the Schroder Asian Income fund and is suitable for investors seeking income and capital growth over the medium- to long-term via an active allocation strategy. Exposure in Asia is opportunistic as we view Asia being in a relatively strong position with a high level of foreign reserves, limited external debt, undervalued exchange rates and plenty of policy flexibility.
  • Unit Trust: Affin Hwang Global Balanced Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    Investors seeking capital growth opportunities through a portfolio of collective investment schemes with access into equities listed in global markets, fixed income instruments such as debt securities, money market instruments and fixed deposits, issued globally may consider this fund.

Top Investment Ideas are an expression of the investment outlook in this publication. They are not recommendations made in accordance with your investment objective and risk profile. As such, we recommend that you complete a suitability assessment before purchasing your selected investment product.



This document is not intended to constitute research analysis or recommendation and should not be treated as such.

We recommend that you read and understand the contents of the Information Memorandum for the Pacific Asian Income Fund dated 12 January 2017, by Pacific Mutual Fund Bhd. Investments in the Fund are exposed to market risk, target fund risk, currency risk, country/foreign securities risk, regulatory risk, external fund manager’s risk and others as disclosed in the Information Memorandum. This fund is eligible to be purchased by High Net Worth Individuals only, the criteria of High Net Worth Individuals as per stated in Schedules 6 and 7 of Capital Market and Services Act (CMSA) 2007.

We recommend that you read and understand the Master Prospectus for the Affin Hwang Select Income Fund dated 18 July 2016 and expires on 17 July 2017 by Affin Hwang Asset Management Bhd (formerly known as Hwang Investment Management Berhad). Investments in the Fund are exposed to specific risks including equity investment risk, equity-linked securities investment risk, credit/default risk, interest rate/price risk, structured products risk, country risk, currency risk, regulatory risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Master Prospectus for the RHB Asian Income Fund dated 6 October 2016 and expire on 5 October 2017, by RHB Asset Management Sdn Bhd. Investments in the Fund are exposed to management risk, liquidity risk, foreign investment risks such as currency risk and country risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Prospectus for the Affin Hwang Global Balanced Fund dated 1 September 2016 and expire on 31 August 2017, by Affin Hwang Asset Management Berhad. Investments in the Fund are exposed to collective investment schemes risk, credit and default risk, interest rate risk, currency risk, liquidity risk, related parties transaction risk, country risk and others as disclosed in the prospectus.

Product Risk Rating and Suitability Determination Matrix:

Product Risk Rating What this rating could mean to your principal amount Suitable for risk profiles:
Moderate Partial loss of full principal investment amount possible, total loss unlikely.
(‘Partial loss’ means the loss suffered by the investor can be up to 15% of the original investment principal)
  • Balanced
  • Growth
  • Aggressive
High Client may suffer substantial or 100% loss of principal investment amount.
(‘Substantial loss’ means the loss suffered by the investor can be more than 15% of the investment principal)
  • Growth
  • Aggressive


Unit Trust investments are not bank deposits and are not obligations of or guaranteed or insured by OCBC Bank (Malaysia) Berhad. Unit Trust investments are not guaranteed and are subject to investment risk unless otherwise specified. The investment risk includes general risks as described in the Information Memorandum/Prospectuses for Unit Trust investment funds (“Information Memorandum/Prospectuses”) and specific risks which may be different for each Unit Trust investment. Description of specific risks and general risks are published in the Information Memorandum/Prospectuses. With respect to Unit Trust investment, past performance is not indicative of future results; the net asset value can go up or down. Investors should also note that the net asset value per unit and distributions payable, if any, may go down as well as up.

Where unit trust loan financing is available, investors are advised to read and understand the contents of the unit trust loan financing risk disclosure statement before deciding to borrow to purchase units. Where a unit split/distribution is declared, investors are advised that following the issue of additional units/distribution, the NAV per unit will be reduced from pre-unit split NAV/cum-distribution NAV to post-unit split NAV/ex-distribution NAV; and where a unit split is declared, investors should be highlighted of the fact that the value of their investment in Malaysian ringgit will remain unchanged after the distribution of the additional units.

The Information Memorandum/Prospectuses have been registered with the Securities Commission Malaysia, which takes no responsibility for its content. A copy of the Information Memorandum/Prospectuses can be obtained at OCBC Bank’s branches. Units will only be issued upon the receipt of application form referred in, and accompanying the Information Memorandum/Prospectuses. Investors are advised to read and understand the contents of the Information Memorandum/Prospectuses, and if necessary consult their adviser(s), as well as consider the fees and charges involved before investing in the Unit Trust.

This document has been prepared without taking account of the objectives, financial situation or needs of any specific person or organisation who may receive this document. Accordingly prior to making an investment decision, you should conduct such investigation and analysis regarding the product described herein as you deem appropriate and to the extent you deem necessary obtain independent advice from competent legal, financial, tax, accounting and other professionals, to enable you to understand and recognise fully the legal, financial, tax and other risks arising in respect of the product and the purchase, holding and sale thereof.

You should obtain and read the Product Highlight Sheet of the product before you make a decision to acquire the product. All information provided in this document is general and does not take into account your individual objectives, financial situation or specific needs.

You are required to read and understand the terms and Product Highlight Sheet of the product carefully before executing any transaction relating to the product with us. You may request for a copy of the Product Highlight Sheet at OCBC Banks’ branches.

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question is suitable for you. This does not constitute an offer or solicitation to buy or sell or subscribe for any security or financial instrument or to enter into a transaction or to participate in any particular trading or investment strategy.

All information presented is subject to change without notice. OCBC Bank shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein. The information provided herein may contain projections or other forward looking statement regarding future events or future performance of countries, assets, markets or companies. Actual events or results may differ materially. Past performance figures are not necessarily indicative of future or likely performance. Any reference to any specific company, financial product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the same.

OCBC Bank and its respective associated and connected corporations together with their respective directors and officers may have or take positions in any securities mentioned in this report (which positions may change from time to time without notice) and may also perform or seek to perform broking and other investment or securities related services for the corporations whose securities are mentioned in this report as well as other parties generally.

The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.




Lai Mun Yew (Michael)
  Vice President, Research, Wealth Management, OCBC Bank (Malaysia) Berhad

 

Global Outlook – Economic Momentum is Slipping

 

We see early signs that economic momentum is slipping. The lack of progress on economic policy in the U.S. is more of a concern, where the first 100 days of the Trump presidency have not delivered much change and tax reform looks increasingly difficult.

Key Points:

  • Last month we asked if this was “as good as it gets?”. That concept has been supported by the softer flow of data and policy news. Any loss of momentum is unlikely to be very troubling, but it is increasingly difficult to see where the next piece of good news will come from.
  • The theme of “as good as it gets” extends to the policy arena, where hopes for significant economic reform in the U.S. has faded. On the monetary side, the Fed seems intent on tightening policy much faster than expected, while the ECB is also starting to look for an exit.
  • The hope was that the first 100 days of the Trump presidency would offer some clarity on policy priorities. Unfortunately, despite all of the political activity and controversy, we have not learned very much about the plans for economic policy.
  • Japan has mirrored the rest of the Asian region – indeed, the world – in seeing a pick-up in trade flows and business confidence over the past six months. This was pointing towards higher inflation and the Bank of Japan starting to raise its target for 10-year bond yields in 2H2017, but that seems likely to be delayed after the recent spike in the exchange rate.
  • Structural problems remain in Japan and reform is making only limited progress. Labour markets are very tight and would benefit from reform that improves flexibility and productivity, but this does not seem likely.
  • China’s economy recorded impressively rapid growth in 1Q2017, with GDP up 6.9 per cent and the strongest industrial production growth since 2014. This fits with the “as good as it gets” outlook for the world economy, with policy tightening likely to produce a moderate slowdown as the year develops.
  • China’s huge trade surplus with the U.S. implies a persistent risk of trade friction. So far, the Trump administration has been surprisingly quiet on trade relations, compared to its pre-election rhetoric, highlighted by declining to label China a currency manipulator. However, there is low confidence that this will continue.
  • The European economy is looking similar to the performance seen in the U.S. earlier in the cycle. Growth is solid, unemployment is falling, credit transmission is improving, but underlying inflation is still very subdued. This creates a challenge for the central bank in terms of judging how long to wait before starting to cut back on monetary support.
  • Elsewhere, most emerging markets continue to look healthy, buoyed by the pick-up in global trade and commodity prices as well as the domestic policy improvements of the past few years.
  • We can expect pressure on some deficit countries in emerging markets as U.S. interest rates continue to rise and the cost of attracting capital becomes more expensive, but this does not seem likely to become a systemic problem.



 

Foreign Exchange & Commodities – Don’t Write Off the U.S. Dollar

 

It is too early to discard the likelihood of tax reform arising again. If it does, it could include some fiscal stimulus. The markets also seem too dovish on Fed rate hikes and the extent of its balance sheet normalisation. As such, the current low levels present an opportunity to build up positions in the greenback.

Key Points:

  • Political gridlock in Washington has fuelled pessimism over the highly anticipated U.S. tax reform. This, along with the perception that the U.S. economy is weakening, have weighed on the U.S. Dollar.
  • We are in one of those many mini-periods where political noise and risk temporarily trump economic signals. Amid worries over under-delivery of fiscal stimulus in the U.S., French presidential election jitters and tensions in the Korean peninsula, there has been a lack of clear U.S. dollar trend recently. Political noise should not be ignored but, most of the time, will fade sooner than later. Our approach to FX positioning is almost always to focus on the economic fundamentals.
  • It is too early write-off the greenback. Tax reform in the U.S. does still seem likely to return and may involve some element of fiscal stimulus. The interest rates market is also pricing too little in terms of Fed rate hike and the extent of Fed balance sheet normalisation in our view, particularly if fiscal reforms go ahead. The well-known seasonal adjustment bias in the US GDP data has resulted in weak 1Q2017 US GDP growth. But we have seen this move before as growth picks up anew in in the second quarter.
  • Political events have also taken centre-stage in the U.K. with Prime Minister May calling for early elections on 8 June. The initial bullish reaction of the Pound to an early U.K. election seems overdone. It is not clear that early elections will lead to softer Brexit stance or make the EU give the UK a better Brexit deal. We wouldn’t chase the Pound rally.
  • In Europe, the Eurozone’s improving economic fundamentals strengthens our conviction that the downtrend in Euro is gradually turning as European Central Bank comes under pressure to exit from extremely accommodative stance of monetary policy.
  • In commodity markets, gold remains a valid asset to hold against political and macro uncertainties. Jitters over geopolitical escalation in North Korea, worries over flagging U.S. economic growth and rich U.S. stock market valuation should keep gold prices supported in the near-term. However, in the medium term, real U.S. interest rates could firm back up, which once again could be gold negative.
  • In the oil markets, OPEC’s efforts appear to have put a floor under prices, but they face the headwind from rising U.S. output, which is adding to already-high inventory levels. The U.S. rig count has more than doubled from the lows of April 2016 as enough producers find it profitable to drill at current prices and output is already recovering.
  • Short-term volatility is inevitable, but oil prices are constrained on the upside by the threat of output rising as more of the marginal producers become profitable. Meanwhile, prices are limited on the downside by OPEC controls on excess supply and inefficient producers being squeezed out of the market. It looks as though the longer-term equilibrium price where supply and demand is in balance is perhaps in the US$50-60 per barrel range, which implies prices should be relatively stable around current levels.



 

Bonds – High Yield Bonds Still Preferred

 

Valuations on both high yield and investment grade bonds are near post Lehman tights. However, in a reflationary environment with higher rates, we believe that coupon will become an important component of returns, hence we prefer high yield bonds.

Key Points:

  • The market seems to have taken the Fed signalling that running down its balance sheet from the end of the year as an indication that interest rates will not need to rise as much as suggested in the “dot chart”. However, the balance sheet discussion took place in the same policy meeting that produced the dot chart. It is not a choice of either raising rates or shrinking the balance sheet – the Fed intends to do both.
  • In our view, the balance of risks has changed substantially, which points to a steady normalisation of policy. The jobless rate is already below the Fed’s estimate of full employment, while inflation is close to target. Even allowing for an apparent readiness to accept inflation overshooting the 2 per cent target, the Fed needs to be sensitive to the idea that interest rates are about 2 per cent below neutral levels.
  • As a result, we expect two more rate hikes this year (June and September). After the start of balance sheet reduction in December, we see another four hikes in 2018, to take policy close to neutral. This path for tightening would be much slower and much later in the cycle than normal, which reflects the unusual challenges that have faced the economy.
  • So far, the Fed has not responded to news on fiscal policy as there is still no credible plan. However, it must be sensitive to the risk that a debt-funded tax cut will be inflationary at this stage in the economic cycle. Even if tax cuts are not scheduled until 2018, monetary policy works with a lag and needs to be forward-looking, so it could influence Fed policy before the end of this year.
  • Investment grade bonds have lacked strong drivers in recent months as the reflation trade has faded. However, we see yields rising through for the remainder of this year as the Fed pushes through two more rate hikes and offers details on how it will shrink its balance sheet. Consequently, we have turned cautious on developed market investment grade bonds.
  • We continue to prefer High Yield bonds which should be somewhat better insulated from the adverse impact of higher interest rates. Furthermore, High Yield bonds are better positioned to benefit from a substantial decline in overall default rates thus far in 2017 versus 2016.
  • Finally, we reiterate that there are three things to bear in mind when investing in bond markets to reduce risk. Firstly, given the potential for higher U.S. interest rates, investors should focus on bonds with a shorter tenor (preferably five years or less) as such bonds are less affected by higher interest rates compared with longer dated bonds. Secondly, consider investing in a portfolio of bonds through a unit trust rather than buying individual bonds as many individual bonds require a significant investment outlay and can expose investors to concentration risk. Finally, it is absolutely imperative to buy only into bonds with decent credit fundamentals to reduce default risk.



 

Equities – Remain Cautious on Equities

 

We prefer to remain cautious in the equity space as valuations remain stretched. There is also a good chance for market pullbacks on policy delivery disappointments, toppish global growth and uncertainties surrounding the timing and pace of Fed’s balance sheet reduction.

Key Points:

  • Given the potential for a slowdown in the global growth outlook and disappointments on the policy and political fronts as well as limited support from the extended valuations, we remain cautious on equities and prefer to hold back for a better entry opportunity.
  • Another concern for equities is the impact of Fed policy. Given indications from the Fed that it would start to shrink its balance sheet towards the end of the year, the market is likely to start anticipating the timing and pace of the reduction which could cause jitters in markets.
  • Regionally, we have tactically raised Europe to a neutral weighting and continue to prefer the U.S., for its relatively defensive traits. We remain underweight Japan and Asia ex-Japan.
  • Given the run-up in U.S. equity markets since November, investors need to see clearer signs that the Republican sweep can indeed make a meaningful difference for corporate America. At the same time, extended valuations provide limited downside support. Fundamentally, the tighter labour market and potentially higher interest rates suggest that corporate profit margins are unlikely to be sustained going forward. Nevertheless, given our overall cautious view on global equities, U.S. equities remain more defensive on a relative basis.
  • On Europe, we have turned more positive tactically as tail-risk of the French election has receded. We prefer now to focus on fundamentals, particularly Europe’s improving growth outlook. European valuations are not compelling but more attractive when compared with other markets like the United States. In addition, European equities have higher dividend yield compared to other markets which provides a good source of carry.
  • While the ECB continues to reiterate its dovish stance, the debate on when the central bank would start to end its quantitative easing program is expected to pick up pace. Further ahead, the political calendar in Europe remains eventful.
  • Near-term, the Japanese market continues to be driven mainly by macro factors and movements of the Yen. Fundamentally, we maintain our view that a sustained re-rating of the market would require more meaningful structural reforms. Valuation, at a forward PE ratio of 14 times versus the 5-year average of 14.6 times is not demanding.
  • Although it would be highly negative for Asia’s growth if Trump pursues his anti-trade policies, recent Trump manoeuvres have helped to allay any such concerns. However, we would not completely rule out trade war risk for the region as Trump’s stance on global trade remains unclear. Perhaps more importantly, Asia Ex-Japan could bear the brunt again as the investors start focusing on the Fed and ECB’s tightening plans. Seasonally, the region has suffered negative returns in the month of May in 6 of the past 7 years.
  • After a strong start to the year, Singapore equities saw some profit taking pressures in April largely as a result of rotations in regional fund flows and profit taking pressures after valuations of the equity market reached one standard of its past 5-year historical average PER.



 

Important Information

 

Any opinions or views expressed in this material are those of the author and third parties identified, and not those of OCBC Bank (Malaysia) Berhad (“OCBC Bank”, which expression shall include OCBC Bank’s related companies or affiliates).

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question is suitable for you. This does not constitute an offer or solicitation to buy or sell or subscribe for any security or financial instrument or to enter into a transaction or to participate in any particular trading or investment strategy.

OCBC Bank, its related companies, their respective directors and/or employees (collectively ‘Related Persons’) may have positions in, and may effect transaction in the products mentioned herein. OCBC Bank may have alliances with the product providers, for which OCBC Bank may receive a fee. Product providers may also be Related Persons, who may be receiving fees from investors. OCBC Bank and the Related Person may also perform or seek to perform broking and other financial services for the product providers.

All information presented is subject to change without notice. OCBC Bank shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein. The information provided herein may contain projections or other forward-looking statements regarding future events or future performance of countries, assets, markets or companies. Actual events or results may differ materially. Past performance figures are not necessarily indicative of future or likely performance. Any reference to any specific company, financial product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the same.

The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.




 


Carry Strategies Tend to Succeed in a Sideways Market

 

Carry strategies are designed to pay income in the form of coupon or dividend, and are less exposed to outright equity market risk. Examples of this strategy include more defensive dividend ideas, rotating out of outperformers into laggards or the simple fixed income strategies around high yield and emerging market bonds.

To capture value in a fully-valued world, the strategy is to look for returns through carry. At the same time, manage risk by lowering bond duration and diversifying.

We maintain our moderately defensive investment stance, preferring high yield bonds as they offer potentially higher returns. On regional equity markets, we are still negative Japan and Asia ex-Japan but neutral on the U.S. and Europe.

On bonds, we remain positive on Emerging Market and Developed Market high yields.

Recommendations:

  • Unit Trust: RHB Asian High Yield Fund – RM (Risk rating: High)
    Eligibility: High Net Worth Investors Only
    This fund invests in a target fund, the Fidelity Funds – Asian High Yield Fund and is suitable for investors seeking capital growth and income and long term capital growth. The fund invests primarily in high yielding bond issuers which have principal business activities in the Asian region. Asian high yield bonds feature higher yield and better potential upside with lower default rate and duration compared to other high yield markets. This high yield feature also entails a higher spread which should provide a buffer against spread compression in a rising interest rate environment.
  • Unit Trust: Affin Hwang Select Income Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    Suitable for investors seeking to invest in an income-driven, absolute return focused fund. This fund also targets to provide a high level of cash flow as well as growth by investing at least 70% of its NAV into fixed income instruments and a maximum of 30% NAV into equities globally with an Asian focus.
  • Unit Trust: RHB Asian Income Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    This fund invests in one target fund, the Schroder Asian Income fund and is suitable for investors seeking income and capital growth over the medium- to long-term via an active allocation strategy. Exposure in Asia is opportunistic as we view Asia being in a relatively strong position with a high level of foreign reserves, limited external debt, undervalued exchange rates and plenty of policy flexibility.
  • Unit Trust: Affin Hwang Global Balanced Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    Investors seeking capital growth opportunities through a portfolio of collective investment schemes with access into equities listed in global markets, fixed income instruments such as debt securities, money market instruments and fixed deposits, issued globally may consider this fund.

Top Investment Ideas are an expression of the investment outlook in this publication. They are not recommendations made in accordance with your investment objective and risk profile. As such, we recommend that you complete a suitability assessment before purchasing your selected investment product.



This document is not intended to constitute research analysis or recommendation and should not be treated as such.

We recommend that you read and understand the contents of the Information Memorandum for the RHB Asian High Yield Fund – RM dated 8 June 2015, by RHB Asset Management Sdn Bhd. Investments in the Fund are exposed to management risk, lower rated / unrated securities, qualified foreign institutional investors, emerging and frontier market risk, currency risk, distribution out of capital risk, securitised of structured debt instruments, derivatives related risk, risks relating to specific derivative instruments and others as disclosed in the Information Memorandum. This fund is eligible to be purchased by High Net Worth Individuals only, the criteria of High Net Worth Individuals as per stated in Schedules 6 and 7 of Capital Market and Services Act (CMSA) 2007.

We recommend that you read and understand the Master Prospectus for the Affin Hwang Select Income Fund dated 18 July 2016 and expires on 17 July 2017 by Affin Hwang Asset Management Bhd (formerly known as Hwang Investment Management Berhad). Investments in the Fund are exposed to specific risks including equity investment risk, equity-linked securities investment risk, credit/default risk, interest rate/price risk, structured products risk, country risk, currency risk, regulatory risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Master Prospectus for the RHB Asian Income Fund dated 6 October 2016 and expire on 5 October 2017, by RHB Asset Management Sdn Bhd. Investments in the Fund are exposed to management risk, liquidity risk, foreign investment risks such as currency risk and country risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Prospectus for the Affin Hwang Global Balanced Fund dated 1 September 2016 and expire on 31 August 2017, by Affin Hwang Asset Management Berhad. Investments in the Fund are exposed to collective investment schemes risk, credit and default risk, interest rate risk, currency risk, liquidity risk, related parties transaction risk, country risk and others as disclosed in the prospectus.

Product Risk Rating and Suitability Determination Matrix:

Product Risk Rating What this rating could mean to your principal amount Suitable for risk profiles:
Moderate Partial loss of full principal investment amount possible, total loss unlikely.
(‘Partial loss’ means the loss suffered by the investor can be up to 15% of the original investment principal)
  • Balanced
  • Growth
  • Aggressive
High Client may suffer substantial or 100% loss of principal investment amount.
(‘Substantial loss’ means the loss suffered by the investor can be more than 15% of the investment principal)
  • Growth
  • Aggressive


Unit Trust investments are not bank deposits and are not obligations of or guaranteed or insured by OCBC Bank (Malaysia) Berhad. Unit Trust investments are not guaranteed and are subject to investment risk unless otherwise specified. The investment risk includes general risks as described in the Information Memorandum/Prospectuses for Unit Trust investment funds (“Information Memorandum/Prospectuses”) and specific risks which may be different for each Unit Trust investment. Description of specific risks and general risks are published in the Information Memorandum/Prospectuses. With respect to Unit Trust investment, past performance is not indicative of future results; the net asset value can go up or down. Investors should also note that the net asset value per unit and distributions payable, if any, may go down as well as up.

Where unit trust loan financing is available, investors are advised to read and understand the contents of the unit trust loan financing risk disclosure statement before deciding to borrow to purchase units. Where a unit split/distribution is declared, investors are advised that following the issue of additional units/distribution, the NAV per unit will be reduced from pre-unit split NAV/cum-distribution NAV to post-unit split NAV/ex-distribution NAV; and where a unit split is declared, investors should be highlighted of the fact that the value of their investment in Malaysian ringgit will remain unchanged after the distribution of the additional units.

The Information Memorandum/Prospectuses have been registered with the Securities Commission Malaysia, which takes no responsibility for its content. A copy of the Information Memorandum/Prospectuses can be obtained at OCBC Bank’s branches. Units will only be issued upon the receipt of application form referred in, and accompanying the Information Memorandum/Prospectuses. Investors are advised to read and understand the contents of the Information Memorandum/Prospectuses, and if necessary consult their adviser(s), as well as consider the fees and charges involved before investing in the Unit Trust.

This document has been prepared without taking account of the objectives, financial situation or needs of any specific person or organisation who may receive this document. Accordingly prior to making an investment decision, you should conduct such investigation and analysis regarding the product described herein as you deem appropriate and to the extent you deem necessary obtain independent advice from competent legal, financial, tax, accounting and other professionals, to enable you to understand and recognise fully the legal, financial, tax and other risks arising in respect of the product and the purchase, holding and sale thereof.

You should obtain and read the Product Highlight Sheet of the product before you make a decision to acquire the product. All information provided in this document is general and does not take into account your individual objectives, financial situation or specific needs.

You are required to read and understand the terms and Product Highlight Sheet of the product carefully before executing any transaction relating to the product with us. You may request for a copy of the Product Highlight Sheet at OCBC Banks’ branches.

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question is suitable for you. This does not constitute an offer or solicitation to buy or sell or subscribe for any security or financial instrument or to enter into a transaction or to participate in any particular trading or investment strategy.

All information presented is subject to change without notice. OCBC Bank shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein. The information provided herein may contain projections or other forward looking statement regarding future events or future performance of countries, assets, markets or companies. Actual events or results may differ materially. Past performance figures are not necessarily indicative of future or likely performance. Any reference to any specific company, financial product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the same.

OCBC Bank and its respective associated and connected corporations together with their respective directors and officers may have or take positions in any securities mentioned in this report (which positions may change from time to time without notice) and may also perform or seek to perform broking and other investment or securities related services for the corporations whose securities are mentioned in this report as well as other parties generally.

The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.




Lai Mun Yew (Michael)
  Vice President, Research, Wealth Management, OCBC Bank (Malaysia) Berhad

 

Global Outlook – Pressure on Profits

 

Rising wages and poor productivity growth are combining to put pressure on corporate profit margins. Firms could try to pass on higher costs through price increases, but that would risk provoking a faster pace of Fed rate hikes.

Key Points:

  • Despite the political turmoil, the U.S. economic recovery remains on track. However, various economic or policy indicators are showing signs of being “as good as it gets” and this also applies to profits in America. Margins are under pressure as labour markets tighten, which is normal as the economic cycle matures. Earnings at large listed firms should be more resilient, and could be helped by tax cuts, but need some attention.
  • The question of peak profits should be less of an issue for Europe or Japan. In Europe’s case, it is at a much earlier stage in the economic cycle, with more slack in the labour market. Unlike the U.S., EPS in Europe is still well below the previous peak. Japan’s cycle is more mature, but the prospect of a slow, structural improvement in corporate governance could lead to firms squeezing higher earnings out of their business and improving returns to shareholders.
  • Economic recovery in Europe has been sensitive to policy swings in recent years – both fiscal and monetary – but notably unaffected by political risk. Financial markets are relieved about the outcome of the French election – at least until they start worrying about Italy – but the economic impact seems low.
  • Growth in Europe seems to fit with the theme of “as good as it gets”, with composite PMIs flat-lining in May. However, the current readings are the best in six years, and this burst of growth has helped to pull the region away from the risk of deflation.
  • Japan’s battle with deflation continues, even four years after Governor Kuroda shocked the Bank of Japan into action. Demographic problems are biting and labour markets are the tightest in a generation, with 15 vacancies for every 10 people looking for work, but this is failing to drive any meaningful wage growth. Similarly, inflation is barely in positive territory.
  • However, economic growth has been beating expectations, in part due to the benefits from the pick-up in global trade. The main blockage to faster progress seems to lie in the corporate sector, which is using healthy cash flows to further improve its balance sheet, rather than boosting investment or wages.
  • A China hard-landing remains one of the key risks to the world economy, as such extreme credit expansions are typically followed by financial crisis and a sharp growth slowdown. However, most of the debt is domestic and there is significant government influence over credit allocation, which leads to expectations of a slow and disciplined work-out. The risk of a more disruptive outcome would increase if there was an abrupt shock to the economy, such as from US trade protectionism. At the moment, US policy-makers have been relatively conciliatory, but the scale of the trade imbalance means that could change at any time.
  • Most emerging markets look more resilient to the threat from higher US interest rates than during the “taper tantrum” of 2013. India and Indonesia would probably no longer qualify to be members of the “fragile five” discussed at the time – with the latter recently boosted to investment grade by S&P.
  • South East Asian economies continue to prosper. Reforms have pulled most of the lower income economies up the competitiveness rankings, which has helped to boost investment levels and growth. India, Indonesia, the Philippines and Vietnam stand out for their progress in recent years, and in each case this looks set to continue.



 

Foreign Exchange & Commodities – Greenback is Not on a Downtrend

 

The U.S. Dollar may only weaken on a continued basis if markets remain pessimistic over Trump’s ability to deliver campaign promises to the extent that it stops the Fed from continuing monetary policy tightening instead of political noise.

Key Points:

  • Uncertainty surrounding the Trump Administration’s policy agenda has undermined the U.S. Dollar since the start of 2017. However, we find it difficult to see the U.S. Dollar trending down significantly when U.S. yields are higher than the euro area’s or other countries.
  • Fed hikes for this year are under-priced and neither the ECB nor the BOJ would tighten quickly. With the possibility of no policy implementation by the Trump administration already priced by the market, the risks are tilted towards the consensus being too pessimistic on the chances for U.S. tax reform.
  • Declining volatility should continue to draw investors to Emerging Market carry trades in the short-term. The recent scandal in Brazil is unlikely to impact Emerging Markets more broadly.
  • The unwinding of the post-election Trump-trade, which has led to a weaker U.S. Dollar and lower U.S. Treasury yields, has supported gold’s relatively strong performance this year. We also recognise that heightened political risks, ranging from speculation around a potential Trump impeachment to escalation of North Korean tension, can also give gold some temporary support.
  • We are not bullish on the gold price over a 12-month timeframe. But we recognise the value of the ‘hedge’ trade and believe holding gold as an ‘insurance policy’ on global growth/geopolitical risks is prudent.
  • OPEC has agreed to extend its production cuts for another nine months, but enforcing the deal could become more difficult if prices fail to respond. Inventories remain at very high levels, so even a moderate improvement in the supply/demand balance is not necessarily going to have much of an impact on prices.
  • OPEC’s problem is that the increased efficiency of U.S. shale producers means that the U.S. rig count has more than doubled from the lows of April 2016, and is back to levels last seen in early 2015. U.S. output has already recovered close to peak levels.
  • Short-term volatility is inevitable, but prices are constrained on the upside by the threat of output rising as more of the marginal producers become profitable. Meanwhile, prices are limited on the downside as long as OPEC can enforce controls on excess supply. It looks as though the longer-term equilibrium price where supply and demand is in balance is around US$50, which implies prices should be relatively stable around current levels.



 

Bonds – Income Is Key To Returns

 

Credit markets look fully valued, which leaves us to believe that future total returns will be more modest than in past years, and will be dominated by carry – or the income component – rather than by further spread tightening.

Key Points:

  • With the U.S. unemployment rate down sharply, the Fed gradually needs to guide interest rates back towards neutral levels, even if the process takes another couple of years. Further moves in June and September are set to be followed by a pause in December when the Fed announces details of a plan to shrink its balance sheet. We see four further hikes in 2018 – much slower than previous cycles, but faster than the market expects.
  • Considering that the Fed’s quantitative easing (QE) programme helped to pull down bond yields, reversing QE should have an effect similar to rate hikes. We expect the Fed to drain about US$200-250 billion per year, but if it decides to move faster then it will probably see the need for fewer rate hikes.
  • The Fed has not been making any big assumptions about fiscal policy when setting out its projections for interest rates. This looks increasingly prudent, as political troubles seem likely to lead to the delay, or watering down, of tax reform plans. Modest corporate and income tax cuts seem more likely than significant reform, but this might not come until 2018.
  • Elsewhere, strong growth in Europe means that we expect the ECB to signal tapering in coming months, with a cut-back in asset purchases in 1H 2018, followed by higher interest rates. Japan’s exit from extreme monetary policy settings is less predictable due to its struggle to beat deflation, and it now looks as though a rise in the target for 10-year bond yields might be pushed into 2018.
  • The bond rally in recent years has depressed long-term yields to a level that makes long-dated developed market government bonds highly vulnerable to a market reversal. Market expectations for the Fed funds rate are far too benign. This makes bond markets vulnerable to a re-rating of the path for the Fed funds rate. Investors should manage risk by lowering bond duration.
  • Within riskier fixed income areas, we believe high yield bonds remain attractive for their carry and are likely to stay resilient in the early part of a hiking cycle. This is because recession risk and credit default risk remain low.
  • Valuations on both high yield and investment grade currently are near post Lehman tights. However, in a reflationary environment, we believe that coupon or carry will become an increasingly important component of total return. With its higher corporate spread component, high yield bonds should be somewhat better insulated from the adverse impact of higher interest rates. Furthermore, they are better positioned to benefit from a thus far substantial decline in overall default rates in 2017 versus 2016.



 

Equities – Maintain Caution on Equities

 

We believe market consolidation will continue as the current pace of earnings will be difficult to sustain on the back of stalling growth momentum.

Key Points:

  • Our views on equity markets remain unchanged from last month. Valuations are stretched to the point where it is pricing in more or less all the good news and this leads us to maintain our broadly cautious stance in equity markets.
  • Concerns about valuation are likely to return to the fore, after the mark up in earnings estimates over the past few months. Since the beginning of the year, analysts have increased their estimates of next year’s corporate earnings by almost 10 per cent for U.S. stocks, 12 per cent for the Euro Area and Japan, and a whopping 18 per cent for emerging markets. To be sure, forward earnings expectations have a dismal track record of hitting the mark, with overoptimistic forecasts often ratcheted down as the year drags on.
  • Given the potential for a slowdown in the global growth outlook and disappointments on the policy and political fronts as well as limited support from the extended valuations, we prefer to hold back for a better entry opportunity.
  • Another concern for equities is the impact of Fed policy. Given indications from the Fed that it would start to shrink its balance sheet towards the end of the year, the market is likely to start anticipating the timing and pace of the reduction which could cause jitters in markets.
  • We are neutral on U.S. and Europe equities and underweight Japan and Asia ex-Japan. We do not see significant upside potential for U.S. equities at current valuations in the absence of a breakthrough on corporate tax reform in the U.S. Nevertheless, we tactically continue to prefer the U.S., for its relatively defensive traits.
  • Diminished political risk coupled with positive economic and earnings growth outlook continued to boost investor confidence in Europe. Indicators for France and Germany suggest that the recovery is broadening and the results season continues to surprise positively. Looking ahead, the ECB is expected to be less dovish as the economic recovery gains pace. In particular, the debate on when the central bank would start to end its quantitative easing program is likely to come into focus.
  • Japanese equities had another relatively muted month in May despite the positive financial year (FY) 2017 results season. New management’s FY2018 net profit guidance came in below consensus expectations. Near-term, the market continues to be driven mainly by macro factors and movements of the Yen. Fundamentally, we maintain our view that sustained re-rating of the market would require more meaningful structural reforms.
  • Asia ex-Japan equities continued to benefit from the much stronger than expected first quarter results season and elevating investor risk appetite. Looking forward, the positive economic growth momentum has started to moderate. China’s growth outlook, in particular, has started to decelerate in-line with falling policy support. Asia ex-Japan could bear the brunt again as the investors start focusing on the Fed and ECB’s exit plans. Also, we would not completely rule out trade war risk for the region as Trump’s stance on global trade remains unclear.



 

Important Information

 

Any opinions or views expressed in this material are those of the author and third parties identified, and not those of OCBC Bank (Malaysia) Berhad (“OCBC Bank”, which expression shall include OCBC Bank’s related companies or affiliates).

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question is suitable for you. This does not constitute an offer or solicitation to buy or sell or subscribe for any security or financial instrument or to enter into a transaction or to participate in any particular trading or investment strategy.

OCBC Bank, its related companies, their respective directors and/or employees (collectively ‘Related Persons’) may have positions in, and may effect transaction in the products mentioned herein. OCBC Bank may have alliances with the product providers, for which OCBC Bank may receive a fee. Product providers may also be Related Persons, who may be receiving fees from investors. OCBC Bank and the Related Person may also perform or seek to perform broking and other financial services for the product providers.

All information presented is subject to change without notice. OCBC Bank shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein. The information provided herein may contain projections or other forward-looking statements regarding future events or future performance of countries, assets, markets or companies. Actual events or results may differ materially. Past performance figures are not necessarily indicative of future or likely performance. Any reference to any specific company, financial product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the same.

The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.




 


Carry Strategies Tend to Succeed in a Sideways Market

 

There are still opportunities despite stretched valuations. More to the point is whether or not, as equity investors, we should be fearful of significant downside risk from here on in. The numbers are reassuring to some extent: past history does not contain too many instances where the market drops appreciably, apart for the summer of 2010 when it declined sharply. The broad conclusion is that carry strategies perform better than a blanket exposure to US stocks. The comparison is with high yield (HY) bonds and US high dividend equities. The message: stay cautious, but don’t panic. A period of moderation is different from a recession, and we are not calling for a recession.

We maintain our moderately defensive investment stance, preferring high yield bonds as they offer potentially higher returns. On regional equity markets, we are still negative Japan and Asia ex-Japan but neutral on the U.S. and Europe.

On bonds, we remain positive on Emerging Market and Developed Market high yields.

Recommendations:

  • Unit Trust: RHB Asian High Yield Fund – RM (Risk rating: High)
    Eligibility: High Net Worth Investors Only
    This fund invests in a target fund, the Fidelity Funds – Asian High Yield Fund and is suitable for investors seeking capital growth and income and long term capital growth. The fund invests primarily in high yielding bond issuers which have principal business activities in the Asian region. Asian high yield bonds feature higher yield and better potential upside with lower default rate and duration compared to other high yield markets. This high yield feature also entails a higher spread which should provide a buffer against spread compression in a rising interest rate environment.
  • Unit Trust: Affin Hwang Select Income Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    Suitable for investors seeking to invest in an income-driven, absolute return focused fund. This fund also targets to provide a high level of cash flow as well as growth by investing at least 70% of its NAV into fixed income instruments and a maximum of 30% NAV into equities globally with an Asian focus.
  • Unit Trust: RHB Asian Income Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    This fund invests in one target fund, the Schroder Asian Income fund and is suitable for investors seeking income and capital growth over the medium- to long-term via an active allocation strategy. Exposure in Asia is opportunistic as we view Asia being in a relatively strong position with a high level of foreign reserves, limited external debt, undervalued exchange rates and plenty of policy flexibility.
  • Unit Trust: Affin Hwang Global Balanced Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    Investors seeking capital growth opportunities through a portfolio of collective investment schemes with access into equities listed in global markets, fixed income instruments such as debt securities, money market instruments and fixed deposits, issued globally may consider this fund.

Top Investment Ideas are an expression of the investment outlook in this publication. They are not recommendations made in accordance with your investment objective and risk profile. As such, we recommend that you complete a suitability assessment before purchasing your selected investment product.



This document is not intended to constitute research analysis or recommendation and should not be treated as such.

We recommend that you read and understand the contents of the Information Memorandum for the RHB Asian High Yield Fund – RM dated 8 June 2015, by RHB Asset Management Sdn Bhd. Investments in the Fund are exposed to management risk, lower rated / unrated securities, qualified foreign institutional investors, emerging and frontier market risk, currency risk, distribution out of capital risk, securitised of structured debt instruments, derivatives related risk, risks relating to specific derivative instruments and others as disclosed in the Information Memorandum. This fund is eligible to be purchased by High Net Worth Individuals only, the criteria of High Net Worth Individuals as per stated in Schedules 6 and 7 of Capital Market and Services Act (CMSA) 2007.

We recommend that you read and understand the Master Prospectus for the Affin Hwang Select Income Fund dated 18 July 2016 and expires on 17 July 2017 by Affin Hwang Asset Management Bhd (formerly known as Hwang Investment Management Berhad). Investments in the Fund are exposed to specific risks including equity investment risk, equity-linked securities investment risk, credit/default risk, interest rate/price risk, structured products risk, country risk, currency risk, regulatory risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Master Prospectus for the RHB Asian Income Fund dated 6 October 2016 and expire on 5 October 2017, by RHB Asset Management Sdn Bhd. Investments in the Fund are exposed to management risk, liquidity risk, foreign investment risks such as currency risk and country risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Prospectus for the Affin Hwang Global Balanced Fund dated 1 September 2016 and expire on 31 August 2017, by Affin Hwang Asset Management Berhad. Investments in the Fund are exposed to collective investment schemes risk, credit and default risk, interest rate risk, currency risk, liquidity risk, related parties transaction risk, country risk and others as disclosed in the prospectus.

Product Risk Rating and Suitability Determination Matrix:

Product Risk Rating What this rating could mean to your principal amount Suitable for risk profiles:
Moderate Partial loss of full principal investment amount possible, total loss unlikely.
(‘Partial loss’ means the loss suffered by the investor can be up to 15% of the original investment principal)
  • Balanced
  • Growth
  • Aggressive
High Client may suffer substantial or 100% loss of principal investment amount.
(‘Substantial loss’ means the loss suffered by the investor can be more than 15% of the investment principal)
  • Growth
  • Aggressive


Unit Trust investments are not bank deposits and are not obligations of or guaranteed or insured by OCBC Bank (Malaysia) Berhad. Unit Trust investments are not guaranteed and are subject to investment risk unless otherwise specified. The investment risk includes general risks as described in the Information Memorandum/Prospectuses for Unit Trust investment funds (“Information Memorandum/Prospectuses”) and specific risks which may be different for each Unit Trust investment. Description of specific risks and general risks are published in the Information Memorandum/Prospectuses. With respect to Unit Trust investment, past performance is not indicative of future results; the net asset value can go up or down. Investors should also note that the net asset value per unit and distributions payable, if any, may go down as well as up.

Where unit trust loan financing is available, investors are advised to read and understand the contents of the unit trust loan financing risk disclosure statement before deciding to borrow to purchase units. Where a unit split/distribution is declared, investors are advised that following the issue of additional units/distribution, the NAV per unit will be reduced from pre-unit split NAV/cum-distribution NAV to post-unit split NAV/ex-distribution NAV; and where a unit split is declared, investors should be highlighted of the fact that the value of their investment in Malaysian ringgit will remain unchanged after the distribution of the additional units.

The Information Memorandum/Prospectuses have been registered with the Securities Commission Malaysia, which takes no responsibility for its content. A copy of the Information Memorandum/Prospectuses can be obtained at OCBC Bank’s branches. Units will only be issued upon the receipt of application form referred in, and accompanying the Information Memorandum/Prospectuses. Investors are advised to read and understand the contents of the Information Memorandum/Prospectuses, and if necessary consult their adviser(s), as well as consider the fees and charges involved before investing in the Unit Trust.

This document has been prepared without taking account of the objectives, financial situation or needs of any specific person or organisation who may receive this document. Accordingly prior to making an investment decision, you should conduct such investigation and analysis regarding the product described herein as you deem appropriate and to the extent you deem necessary obtain independent advice from competent legal, financial, tax, accounting and other professionals, to enable you to understand and recognise fully the legal, financial, tax and other risks arising in respect of the product and the purchase, holding and sale thereof.

You should obtain and read the Product Highlight Sheet of the product before you make a decision to acquire the product. All information provided in this document is general and does not take into account your individual objectives, financial situation or specific needs.

You are required to read and understand the terms and Product Highlight Sheet of the product carefully before executing any transaction relating to the product with us. You may request for a copy of the Product Highlight Sheet at OCBC Banks’ branches.

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question is suitable for you. This does not constitute an offer or solicitation to buy or sell or subscribe for any security or financial instrument or to enter into a transaction or to participate in any particular trading or investment strategy.

All information presented is subject to change without notice. OCBC Bank shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein. The information provided herein may contain projections or other forward looking statement regarding future events or future performance of countries, assets, markets or companies. Actual events or results may differ materially. Past performance figures are not necessarily indicative of future or likely performance. Any reference to any specific company, financial product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the same.

OCBC Bank and its respective associated and connected corporations together with their respective directors and officers may have or take positions in any securities mentioned in this report (which positions may change from time to time without notice) and may also perform or seek to perform broking and other investment or securities related services for the corporations whose securities are mentioned in this report as well as other parties generally.

The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.




Lai Mun Yew (Michael)
  Vice President, Research, Wealth Management, OCBC Bank (Malaysia) Berhad

 

Global Outlook – Still far from a recession

 

Even though growth momentum is fading, the next recession is still some way in the distance. Meanwhile, policy settings are supportive for growth, with monetary tightening still in its infancy, while fiscal policy is neutral.

Key Points:

  • In recent months, we have argued that the economic and policy news flow is “as good as it gets”. However, this is far from suggesting that the world is heading back into recession. The current U.S. economic recovery began in June 2009 and is now entering its ninth year. It is already the third longest on record. Inevitably, this raises questions about how much longer it can continue.
  • History shows that cycles die due to policy tightening (often in response to inflationary overheating or weak government finances) or external shocks. By their nature, shocks are unpredictable. Aside from geopolitics, a surge in protectionism looks like the best candidate at the moment, but news on that front has been reassuringly quiet, despite the pre-election rhetoric of President Trump.
  • Geopolitics nearly always feels frightening as we tend to lack historical perspective in remembering how uncertain things were in the past. Risks are probably higher than before with the U.S. abandoning its global leadership role under Trump’s “America First” policy.
  • Policy tightening can lead to recession but is in its early stages. America is leading the way on monetary policy, but even there it is set to be 2019 before interest rates reach neutral levels – even on the Fed’s hawkish projections. Until then, the support offered to the economy will be diminishing as interest rates rise but the impact will still be positive and should help to keep growth above trend. Central banks in other major developed economies are likely to be much slower than the Fed in tightening policy.
  • Fiscal support was reversed in 2011-13, which slowed growth and led to a renewed downturn in some peripheral European countries. Government finances have now stabilised and there is no pressure for further austerity – if anything, fiscal policy might be slightly positive for growth.
  • Economic recovery in Europe continues to pull down the unemployment rate and this might be contributing to the declining vote for populist parties. The jobless rate in the Eurozone is down nearly 3 percentage points to 9.3%, and in Spain it has been much more striking. However, Italy continues to lag, which implies continued concern over elections that must be held by second quarter of 2018.
  • China remains on its “stop/go” policy path, with a liquidity squeeze in response to a solid period of growth and another surge in the housing market. Tightening credit conditions should be effective in slowing growth in such a highly indebted economy, and policy-makers will need to ensure they do not hit the brakes too hard in such a politically sensitive year.
  • South East Asian economies continue to prosper. Reforms have pulled most of the lower income economies up the competitiveness rankings, which has helped to boost investment levels and growth. India, Indonesia, the Philippines and Vietnam stand out for their progress in recent years, and in each of this case, looks set to continue.



 

Foreign Exchange & Commodities – Don’t Write Off The U.S. Dollar

 

The U.S. Dollar softness owing to unwinding of Trump trades since the beginning of this year seems to have been overdone. The Fed’s recent rate hike and intention to continue with policy normalisation are expected to be supportive of the U.S. Dollar strength.

Key Points:

  • The era of strong U.S. dollar is close to an end. However, the greenback’s descent will take time to play out and will not be in a straight line. Its weakness sparked by an unwinding of Trump trades since the start of 2017 seems to have gone a bit too far. The Fed hiked in June and its intention to look through low inflation and continue normalising policy should fuel modest renewed U.S. dollar strength.
  • The markets seem nervous that the Fed is making a policy error by tightening too quickly and/or planning to reduce its balance sheet too passively and automatically, given the doubts that persist about whether inflation will rise amid weakness in oil prices. But the core Fed leadership’s confidence in inflation picking up continues to underpin our view that markets are materially under-pricing the Fed’s rate path.
  • We expect gold to remain range bound in the next few months. Following the June Fed rate hike, gold retreated in response to the hawkish tilt in the Fed’s tone despite soft inflation data. Discussion around unwinding of the Fed's balance sheet likely also dismayed gold bulls. The decline in oil prices probably also drove the down move in gold by pressuring down inflation expectations and pushing up real yields.
  • We are not bullish on the gold price over a 12-month timeframe. We remain relatively comfortable with the view that U.S. GDP growth will accelerate from a depressed 1.2 per cent pace in the first quarter of 2017 and the market is under-pricing the extent of Fed hikes.
  • Nevertheless, we recognise the value of the “hedge” trade and still believe holding gold as an “insurance policy” on global growth/geopolitical risks is prudent.
  • On oil, supply has been dragging prices lower. OPEC seems to be fighting a losing battle in its efforts to hold down supply and boost prices. Tension with Qatar casts doubts on the ability of the cartel to maintain discipline while inventories remain at unusually high levels. To make matters worse, demand is growing at the slowest pace in over two years.
  • The increased efficiency of U.S. shale producers means that they are profitable at ever lower prices. As a result, the U.S. rig count has more than doubled from the lows of April 2016, and is back to levels last seen in early 2015. U.S. output has already recovered close to peak levels.
  • Short-term volatility is inevitable but prices are constrained on the upside by the threat of output rising as more of the marginal producers become profitable. Meanwhile, prices are limited on the downside as long as OPEC can enforce controls on excess supply. It looks as though the longer-term equilibrium price where supply and demand is in balance is around U$50 per barrel, which implies prices should be relatively stable around current levels.



 

Bonds – Will the end of QE hurt bonds?

 

Nine years of quantitative easing is slowly drawing to an end. The Fed will start to shrink its balance sheet before year-end, while the ECB is set to announce plans for tapering and BOJ purchases have slowed.

Key Points:

  • The U.S. economic recovery remains on track, but the lack of inflation threatens to cause a dilemma for the Federal Reserve. The jobless rate is already well-below the Fed’s estimate of full employment, so it has fulfilled half of its mandate. Job growth has been slowing in 2017 – apparently due to a shortage of workers – but is still fast enough to pull the unemployment rate even lower. The Fed’s analysis is that, at some point, tight capacity will lead to higher inflation.
  • However, so far prices have been slow to respond. In fact, core inflation has even ticked lower in recent months although this is partly due to technical factors. Some Fed officials are already voicing doubts about the wisdom of further rate hikes if there is no sign of inflation. There are competing explanations for the lack of price pressures. One observable trend is that firms are allowing rising costs to eat into historically high levels of profitability rather than raise prices.
  • It looks premature for the Fed to have a radical re-think of policy, so we continue to expect one more rate hike this year as well as the announcement of balance sheet reduction. Looking into 2018, we expect a gradual normalisation with one hike every quarter until the rate hits neutral at about 3 per cent. However, we recognise that this would need to be reassessed if inflation does not respond or if President Trump can find a more dovish candidate to replace Chair Yellen (which looks difficult).
  • Later this year, the European Central Bank (ECB) is likely to respond to the stronger economic performance by setting out plans to taper its asset purchases in 2018. That would leave open the possibility of a rate hike before the end of next year. Meanwhile in Japan, an exit from the current policy still looks some distance away, but asset purchases have slowed since policy shifted to focus on targeting bond yields rather than raw balance sheet expansion. By the middle of next year, it looks like the expansion of balance sheets of major central banks in developed economies will be over.
  • No doubt, bond markets will face headwinds when quantitative easing (QE) among the major central banks comes to an end. Most credit markets look fully valued at this juncture. We believe this implies future total returns will be more modest than last year and will be dominated by carry – or the income component – rather than by further spread tightening.
  • Valuations on both High Yield and Investment Grade bonds are currently are near post Lehman tights. However, in an environment of Fed policy normalisation, we believe that coupon/carry will become an increasingly important component of total return. With its higher corporate spread component, High Yield bonds should be somewhat better insulated from the adverse impact of higher rates. Furthermore, High Yield bonds are better positioned to benefit from a thus far substantial decline in overall default rates in 2017 versus 2016.



 

Equities – Still cautious on equities

 

We remain cautious and prefer to hold back for better entry opportunity against a backdrop of stretched valuations, continued moderation in global growth and potential policy disappointments.

Key Points:

  • With markets hitting new highs and most markets looking fully valued to us, we are sceptical that markets can continually go much higher. The rally in risky assets since the end of last year was largely due to the improvement in the economic cycle. However, with economic growth stalling and the increasing likelihood that Trump cannot enact big economic reforms, it is difficult for markets to go much higher.
  • On whether equity investors should be fearful of significant downside risk from here on in - the numbers are reassuring to some extent. Past history does not contain too many instances where the market drops appreciably, apart for the summer of 2010 when it declined sharply.
  • Finding value in a fully-valued market is a challenge. To ensure a safe outcome in the long run, diversification is much more important than timing the market. By holding too much cash as a defensive strategy, investors risk long-term harm by being under-invested.
  • The actual policy outcomes of the Trump presidency cannot be predicted in full – the man is just too temperamental for that – but we can make a good guess that mostly, it will fail to live up to the promises he made for bold changes.
  • Infrastructure spending will likely prove to be the biggest disappointment to his support base. He has been slow to move on proposals, and it has become clear that the path to much higher infrastructure spend will be a tortuous one. It is entirely likely that he will give up on the notion entirely once the scope of the problem becomes clear.
  • The surge and recent drop in technology needs to be viewed through a prism, which is: As investors have reconsidered the “Trump trade”, they have reverted to two investment themes – yield and growth. While tech valuations may not be in bubble territory, large cap U.S. technology companies are trading at the highest level since late 2007.
  • We are neutral on U.S. and Europe equities. We do not see significant upside potential for U.S. equities at current valuations in the absence of a breakthrough on corporate tax reform in the U.S. In Europe, political risk was mitigated when Macron won the French presidency. We do not see much risk for markets lurking in the German election. Italian elections could be troublesome, but that is a story for next year.
  • Asia Ex-Japan equities continued to benefit from the positive earnings upgrades. Looking forward, the positive economic growth momentum has started to moderate. China’s growth outlook, in particular, has started to decelerate in-line with falling policy support. Asia Ex-Japan could bear the brunt again as the investors’ focus on the Fed and ECB’s exit plans gain momentum. Also, we would not completely rule out trade war risk for the region as Trump’s stance on global trade remains unclear.
  • Japanese equities lack a catalyst. We maintain our view that a sustained re-rating of the market would require more meaningful structural reforms. Valuations, at forward PE of 14.5 times versus the 5-year average of 14.7 times, remain in neutral territory.



 

Important Information

 

Any opinions or views expressed in this material are those of the author and third parties identified, and not those of OCBC Bank (Malaysia) Berhad (“OCBC Bank”, which expression shall include OCBC Bank’s related companies or affiliates).

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question is suitable for you. This does not constitute an offer or solicitation to buy or sell or subscribe for any security or financial instrument or to enter into a transaction or to participate in any particular trading or investment strategy.

OCBC Bank, its related companies, their respective directors and/or employees (collectively ‘Related Persons’) may have positions in, and may effect transaction in the products mentioned herein. OCBC Bank may have alliances with the product providers, for which OCBC Bank may receive a fee. Product providers may also be Related Persons, who may be receiving fees from investors. OCBC Bank and the Related Person may also perform or seek to perform broking and other financial services for the product providers.

All information presented is subject to change without notice. OCBC Bank shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein. The information provided herein may contain projections or other forward-looking statements regarding future events or future performance of countries, assets, markets or companies. Actual events or results may differ materially. Past performance figures are not necessarily indicative of future or likely performance. Any reference to any specific company, financial product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the same.

The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.




 


Finding Sensible Carry

 

Our preference for a carry strategy continues amid the positive outlook for credit assets, although gains surpassing that of the last one and half years will be difficult to achieve. The default outlook for higher-yielding papers remains benign, but investors are better advised to move up in terms of credit quality.

Our moderately defensive investment stance favours high yield bonds for potentially higher returns. On bonds, we remain positive on Emerging Market and Developed Market high yields. We are however, negative of Emerging Market Investment Grades (from Neutral previously).

We are still negative Japan and Asia ex-Japan equities, but neutral on the U.S. and Europe equities markets.

Recommendations:

  • Unit Trust: RHB Asian High Yield Fund – RM (Risk rating: High)
    Eligibility: High Net Worth Investors Only
    This fund invests in a target fund, the Fidelity Funds – Asian High Yield Fund and is suitable for investors seeking capital growth and income and long term capital growth. The fund invests primarily in high yielding bond issuers which have principal business activities in the Asian region. Asian high yield bonds feature higher yield and better potential upside with lower default rate and duration compared to other high yield markets. This high yield feature also entails a higher spread which should provide a buffer against spread compression in a rising interest rate environment.
  • Unit Trust: Affin Hwang Select Income Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    Suitable for investors seeking to invest in an income-driven, absolute return focused fund. This fund also targets to provide a high level of cash flow as well as growth by investing at least 70% of its NAV into fixed income instruments and a maximum of 30% NAV into equities globally with an Asian focus.
  • Unit Trust: RHB Asian Income Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    This fund invests in one target fund, the Schroder Asian Income fund and is suitable for investors seeking income and capital growth over the medium- to long-term via an active allocation strategy. Exposure in Asia is opportunistic as we view Asia being in a relatively strong position with a high level of foreign reserves, limited external debt, undervalued exchange rates and plenty of policy flexibility.
  • Unit Trust: Affin Hwang Global Balanced Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    Investors seeking capital growth opportunities through a portfolio of collective investment schemes with access into equities listed in global markets, fixed income instruments such as debt securities, money market instruments and fixed deposits, issued globally may consider this fund.

Top Investment Ideas are an expression of the investment outlook in this publication. They are not recommendations made in accordance with your investment objective and risk profile. As such, we recommend that you complete a suitability assessment before purchasing your selected investment product.



This document is not intended to constitute research analysis or recommendation and should not be treated as such.

We recommend that you read and understand the contents of the Information Memorandum for the RHB Asian High Yield Fund – RM dated 8 June 2015, by RHB Asset Management Sdn Bhd. Investments in the Fund are exposed to management risk, lower rated / unrated securities, qualified foreign institutional investors, emerging and frontier market risk, currency risk, distribution out of capital risk, securitised of structured debt instruments, derivatives related risk, risks relating to specific derivative instruments and others as disclosed in the Information Memorandum. This fund is eligible to be purchased by High Net Worth Individuals only, the criteria of High Net Worth Individuals as per stated in Schedules 6 and 7 of Capital Market and Services Act (CMSA) 2007.

We recommend that you read and understand the Master Prospectus for the Affin Hwang Select Income Fund dated 18 July 2017 and expires on 17 July 2018 by Affin Hwang Asset Management Bhd (formerly known as Hwang Investment Management Berhad). Investments in the Fund are exposed to specific risks including equity investment risk, equity-linked securities investment risk, credit/default risk, interest rate/price risk, structured products risk, country risk, currency risk, regulatory risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Master Prospectus for the RHB Asian Income Fund dated 6 October 2016 and expire on 5 October 2017, by RHB Asset Management Sdn Bhd. Investments in the Fund are exposed to management risk, liquidity risk, foreign investment risks such as currency risk and country risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Prospectus for the Affin Hwang Global Balanced Fund dated 1 September 2016 and expire on 31 August 2017, by Affin Hwang Asset Management Berhad. Investments in the Fund are exposed to collective investment schemes risk, credit and default risk, interest rate risk, currency risk, liquidity risk, related parties transaction risk, country risk and others as disclosed in the prospectus.

Product Risk Rating and Suitability Determination Matrix:

Product Risk Rating What this rating could mean to your principal amount Suitable for risk profiles:
Moderate Partial loss of full principal investment amount possible, total loss unlikely.
(‘Partial loss’ means the loss suffered by the investor can be up to 15% of the original investment principal)
  • Balanced
  • Growth
  • Aggressive
High Client may suffer substantial or 100% loss of principal investment amount.
(‘Substantial loss’ means the loss suffered by the investor can be more than 15% of the investment principal)
  • Growth
  • Aggressive


Unit Trust investments are not bank deposits and are not obligations of or guaranteed or insured by OCBC Bank (Malaysia) Berhad. Unit Trust investments are not guaranteed and are subject to investment risk unless otherwise specified. The investment risk includes general risks as described in the Information Memorandum/Prospectuses for Unit Trust investment funds (“Information Memorandum/Prospectuses”) and specific risks which may be different for each Unit Trust investment. Description of specific risks and general risks are published in the Information Memorandum/Prospectuses. With respect to Unit Trust investment, past performance is not indicative of future results; the net asset value can go up or down. Investors should also note that the net asset value per unit and distributions payable, if any, may go down as well as up.

Where unit trust loan financing is available, investors are advised to read and understand the contents of the unit trust loan financing risk disclosure statement before deciding to borrow to purchase units. Where a unit split/distribution is declared, investors are advised that following the issue of additional units/distribution, the NAV per unit will be reduced from pre-unit split NAV/cum-distribution NAV to post-unit split NAV/ex-distribution NAV; and where a unit split is declared, investors should be highlighted of the fact that the value of their investment in Malaysian ringgit will remain unchanged after the distribution of the additional units.

The Information Memorandum/Prospectuses have been registered with the Securities Commission Malaysia, which takes no responsibility for its content. A copy of the Information Memorandum/Prospectuses can be obtained at OCBC Bank’s branches. Units will only be issued upon the receipt of application form referred in, and accompanying the Information Memorandum/Prospectuses. Investors are advised to read and understand the contents of the Information Memorandum/Prospectuses, and if necessary consult their adviser(s), as well as consider the fees and charges involved before investing in the Unit Trust.

This document has been prepared without taking account of the objectives, financial situation or needs of any specific person or organisation who may receive this document. Accordingly prior to making an investment decision, you should conduct such investigation and analysis regarding the product described herein as you deem appropriate and to the extent you deem necessary obtain independent advice from competent legal, financial, tax, accounting and other professionals, to enable you to understand and recognise fully the legal, financial, tax and other risks arising in respect of the product and the purchase, holding and sale thereof.

You should obtain and read the Product Highlight Sheet of the product before you make a decision to acquire the product. All information provided in this document is general and does not take into account your individual objectives, financial situation or specific needs.

You are required to read and understand the terms and Product Highlight Sheet of the product carefully before executing any transaction relating to the product with us. You may request for a copy of the Product Highlight Sheet at OCBC Banks’ branches.

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question is suitable for you. This does not constitute an offer or solicitation to buy or sell or subscribe for any security or financial instrument or to enter into a transaction or to participate in any particular trading or investment strategy.

All information presented is subject to change without notice. OCBC Bank shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein. The information provided herein may contain projections or other forward looking statement regarding future events or future performance of countries, assets, markets or companies. Actual events or results may differ materially. Past performance figures are not necessarily indicative of future or likely performance. Any reference to any specific company, financial product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the same.

OCBC Bank and its respective associated and connected corporations together with their respective directors and officers may have or take positions in any securities mentioned in this report (which positions may change from time to time without notice) and may also perform or seek to perform broking and other investment or securities related services for the corporations whose securities are mentioned in this report as well as other parties generally.

The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.




Lai Mun Yew (Michael)
  Vice President, Research, Wealth Management, OCBC Bank (Malaysia) Berhad

 

Global Outlook – Good Global Growth Prospects

 

The world economy is entering a new phase, where monetary policy normalisation will follow the stabilisation that we are seeing in the real economies of many developed markets.

Key Points:

  • Stronger economic growth has led to developed economies absorbing excess capacity, which naturally reduces deflationary risks and pushes central banks to start moving away from the exceptionally loose monetary policy of recent years. However, there is no urgency, so it is likely to be a gentle stroll for the exit, not a rush.
  • The U.S. economy is in the later stages of expansion, but showing none of the signs that would lead us to fear that a downturn is imminent. Poor productivity growth is a medium-term challenge, but not one that is unique to America.
  • Hopes for substantial economic reform or tax cuts have faded, with continued acrimony and division in U.S. politics. Raising the debt ceiling in September is set to be the next area of controversy and has a serious chance of being disruptive.
  • Trade conflict could become more of a threat in coming months, with renegotiation of NAFTA and growing friction with China. This could also be used to distract attention from the administration’s difficulties in other areas.
  • The scale of Europe’s recovery from the systemic crisis earlier in the decade was illustrated by Greece’s return to the bond market, issuing five-year paper with a yield below 5 per cent.
  • Growth across the Euro-zone region remains impressive, with PMIs showing only limited slippage from recent six-year highs. Similarly, the Eurozone unemployment rate has fallen from a peak of 12.1 per cent to 9.3 per cent, the lowest since 2009.
  • In Japan, the country is facing an extreme version of the situation in America, where economic recovery has produced unusually tight labour markets, but without much impact on either wages or price inflation. The expectation is that, in the end, supply shortages will lead to prices moving higher, but after two decades of deflation, behaviour is proving to be very slow to change.
  • The improvement in China’s growth momentum extended into 2Q2017, with GDP expanding at 6.9 per cent for a second consecutive quarter. Moreover, the implicit quality of the growth has improved, perhaps due to a credit squeeze, as the gap between lending and nominal GDP growth has narrowed.
  • Nevertheless, credit is still rising as a share of GDP, so the vulnerability of the system continues to increase. Financial stability is an increasingly important policy concern, but it is secondary to maintaining an adequate growth rate. Tension between the two gives us the stop-go cycle of recent years.
  • Most emerging markets continue to look healthy, buoyed by the pick-up in global trade and commodity prices, as well as the domestic policy improvements of the past few years. Even compared to four years ago, when we saw a sharp adverse reaction to then-Fed Chair Bernanke’s “taper tantrum”, the situation looks much more solid.



 

Foreign Exchange & Commodities – Gold To Remain Range-Bound

 

Gold may be supported by the latest FOMC which was perceived as dovish, uncertainty about inflation and U.S. political uncertainty. However, rising interest rates could also cap gains.

Key Points:

  • The past month has been difficult for gold, having been sold off initially to nearly US$1,200 per ounce as several G10 banks shifted noticeably more hawkish. But gold prices later rebounded in tandem with a pullback in U.S. real yields Fed Chair Yellen appeared less confident about inflation softness being “temporary” and as U.S. political uncertainties dimmed prospects of a meaningful fiscal boost and contributed to heightened worries over the U.S. debt ceiling.
  • Gold bulls were further encouraged by the latest FOMC statement, which was perceived as dovish on the policy rate outlook. Given the Fed’s slightly more cautious tone with respect to inflation, it may increasingly become a notion that muted price developments are not regarded any longer as transitory.
  • We are not bullish on the gold price over a 12-month timeframe given the rising rate headwinds. Our broader view on gold is that prices will remain largely range-bound over the next 3 months, hovering between US$1,200 to US$1,300 per ounce. While we remain neutral on gold, we recognise the value of the ‘hedge’ trade and still believe holding gold as an ‘insurance policy’ on global growth/geopolitical risks is prudent. We are not bullish on the gold price over a 12-month timeframe given the rising rate headwinds.
  • On oil, concern over excess supply has prevented gains in oil prices so far in 2017 and the risk is that this intensifies. Technological advances are relentlessly bringing down costs for shale producers, and drilling is up 136 per cent even with prices stuck around US$50 per barrel, with output already close to 2015 highs. Meanwhile, OPEC could struggle to maintain the discipline over output controls as political tensions rise.
  • Demand for oil offers no relief. It is not responding to faster global growth and so far in 2017 has been rising slightly more slowly than the previous couple of years.
  • The U.S. dollar has been under pressure and is now attempting to test the 2016 lows despite expectations that the Fed will announce its balance sheet tapering at its September policy meeting. The latest Fed policy meeting (which was perceived as dovish on the rate outlook), uncertainty about the prospects for inflation and Trump-related U.S. political uncertainty means that the greenback could continue to remain under pressure in the short term at least.
  • Elsewhere, usually dovish central banks like the ECB, BOE and BOC have turned to a more neutral stance since late June and this has further weighed on the U.S. dollar. The BOE has taken on a hawkish slant, the BOC is expected (by the markets) to hike rates again this year, while the ECB is widely expected to announce its balance sheet tapering intentions in the coming months. On the ECB, we are on watch for further verbal cues from Draghi in August, when he is expected to attend the Kansas Fed’s symposium in Jackson Hole. On this front, any sudden hawkishness from the Fed at this event may put a floor on U.S. dollar weakness as well.
  • On the Singapore dollar, we won’t be surprised if it continues to appreciate against the U.S. dollar given the latter’s weakness. However too strong a Singapore dollar could hurt the local economy and so expectations of official intervention may prevent the currency from rising too sharply.



 

Bonds – Markets Underestimating The Fed

 

We think the markets are under-pricing rate hikes by the Fed and bond investors should stay protected by not extending duration beyond the benchmark fixed out to five years but not longer.

Key Points:

  • The market seems comfortable with the idea that the Fed will start to shrink its balance sheet and raise interest rates again before the end of the year. However, it is doubtful that there will be more than one rate hike in both 2018 and 2019. We think the Fed will be more aggressive.
  • Even though the Fed has raised rates much faster than the market expected a year ago the basic approach still prevails where the Fed’s outlook is seen as overly hawkish. This view served the market well for many years, but has not adjusted to the reality of the policy tightening cycle. Interest rates are likely to rise faster than the market is projecting and this is set to put some upwards pressure on bond yields.
  • Considering overall financial conditions, rather than just the level of real interest rates, should add to our understanding of policy. One of the reasons the Fed was slow to hike in 2014-16 was that the strong U.S. dollar was acting as a drag on growth and so reducing the need for monetary policy tightening. In contrast, financial conditions have loosened over the past nine months, despite three rate hikes, as capital markets and the U.S. dollar have become more supportive of growth. This means that the Fed needs to keep pushing interest rates higher if it wants to slow down the economy.
  • We have been looking for four rate hikes in 2018, after the one in December. Admittedly, that looks dubious in the light of lower inflation readings, but not if you accept the view that much of the hit to prices is temporary, and especially if you look at the looser financial conditions.
  • The coming months will see the nomination of a new Fed Chair. It is hard to see a credible candidate who is more dovish than Janet Yellen. A low-credibility nomination would have limited ability to influence the rest of the committee. Any candidate who favours a more “rule-based” approach would be more hawkish than the current stance. Assuming that the pro-growth administration favours low interest rates, reappointing Yellen looks like the line of least resistance.
  • We continue to favour a carry strategy. We think that the outlook for corporate bonds remains positive, but further gains after the bonanza of the last one and half years will be difficult to achieve. We continue to advocate higher-yielding paper in the expectation that the default outlook is still benign enough; however, we would caution investors to move up in credit quality.
  • Thus far this year, longer maturity corporate bonds outperformed as U.S. Treasuries rallied and the yield curve flattened. With the Fed expected to begin balance sheet reduction later this year and raise rates multiple times next year, we would now look to reduce overall portfolio duration to below 5 years and focus largely on the short end and belly of the curve.
  • Within the bond space, we continue to prefer Emerging Market High Yield bonds. In an environment of Fed policy normalisation, we believe that coupon/carry will become an increasingly important component of total return. With its higher corporate spread component, High Yield bonds should be somewhat better insulated from the adverse impact of higher rates.



 

Equities – Cautious Outlook

 

The combination of our view that global monetary policy environment will become tighter and the overall growth prospects which seemed to have peaked underpin our cautious stance on equity markets.

Key Points:

  • Given our view that global monetary policy environment will become tighter, we remain cautious on equities. Also extended valuations provide limited support – even though valuations are not necessarily on its own a short-term negative catalyst.
  • In view of our cautious stance, we tactically continue to prefer the U.S., for its relatively defensive traits. We are also neutral on Europe and continue to underweight Japan and Asia ex-Japan.
  • U.S. equities had a more positive month in July as Janet Yellen raised the possibility that the Fed would consider slowing the pace of interest rate hikes if inflation remains persistently below its target. The recently started 2Q earnings season also provided a lift.
  • Fundamentally, tighter labour market and potentially higher interest rates suggest that corporate profit margins are unlikely to be sustained going forward. Nevertheless, given our overall cautious view on global equities, U.S. equities remain more defensive.
  • While Mario Draghi’s latest comments that ECB policy makers agreed to put off a formal debate on tapering provided some relief for the markets, near-term financial market movements would continue to be dictated by clues on the ECB’s move to phase out its quantitative easing. We see a less dovish ECB as the economic recovery continue to gain pace. Overall, we remain neutral on European equities.
  • On Japan, we maintain our view that there is limited progress in reform and sustained economic growth and, hence, re-rating of the market would require more meaningful structural transformations. To this end, PM Abe’s fading popularity is not encouraging. As such, we see macro factors and movements of the yen to remain key drivers for the market.
  • Asia Ex-Japan could bear the brunt again as the investors’ focus on the Fed and ECB’s balance sheet exit plans gain momentum. Also, we would not completely rule out trade war risk for the region as Trump’s stance on global trade remains unclear.
  • Despite the recent outperformance, we continue to stay positive on Financials among Developed market sectors. Notwithstanding the near-term uncertainties, we continue to expect higher interest rates as central banks become increasingly more hawkish. This would, in turn, benefit the banks.
  • The other developed market sector in the limelight is the Technology sector. It remains one of the most expensive sectors. In general, we believe that valuations across the sector are reflecting rosy scenarios in new and emerging technologies. As such, we believe that investors should be cautious.



 

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Any opinions or views expressed in this material are those of the author and third parties identified, and not those of OCBC Bank (Malaysia) Berhad (“OCBC Bank”, which expression shall include OCBC Bank’s related companies or affiliates).

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

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The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.




 


Rich Asset Price Valuations Remain A Worry

 

We continue to maintain a defensive portfolio stance, one that is overweight cash and underweight equity. Furthermore, we are rotating out of overvalued technology counters and into undervalued sectors to reduce portfolio risk.

Investors are still being paid to take risk/carry but there are reasons to be selective within credit markets as future credit market returns are likely to be more muted than in the past.

On regional equity markets, we are still negative Japan and Asia ex-Japan, but neutral on the U.S. and Europe.

On bonds, we remain positive on Emerging Market and Developed Market high yields. We are, however, negative on Developed and Emerging Market Investment Grades.

Recommendations:

  • Unit Trust: RHB Asian High Yield Fund – RM (Risk rating: High)
    Eligibility: High Net Worth Investors Only
    This fund invests in a target fund, the Fidelity Funds – Asian High Yield Fund and is suitable for investors seeking capital growth and income and long term capital growth. The fund invests primarily in high yielding bond issuers which have principal business activities in the Asian region. Asian high yield bonds feature higher yield and better potential upside with lower default rate and duration compared to other high yield markets. This high yield feature also entails a higher spread which should provide a buffer against spread compression in a rising interest rate environment.
  • Unit Trust: Affin Hwang Select Income Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    Suitable for investors seeking to invest in an income-driven, absolute return focused fund. This fund also targets to provide a high level of cash flow as well as growth by investing at least 70% of its NAV into fixed income instruments and a maximum of 30% NAV into equities globally with an Asian focus.
  • Unit Trust: RHB Asian Income Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    This fund invests in one target fund, the Schroder Asian Income fund and is suitable for investors seeking income and capital growth over the medium- to long-term via an active allocation strategy. Exposure in Asia is opportunistic as we view Asia being in a relatively strong position with a high level of foreign reserves, limited external debt, undervalued exchange rates and plenty of policy flexibility.
  • Unit Trust: Affin Hwang World Series - Global Balanced Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    Investors seeking capital growth opportunities through a portfolio of collective investment schemes with access into equities listed in global markets, fixed income instruments such as debt securities, money market instruments and fixed deposits, issued globally may consider this fund.

Top Investment Ideas are an expression of the investment outlook in this publication. They are not recommendations made in accordance with your investment objective and risk profile. As such, we recommend that you complete a suitability assessment before purchasing your selected investment product.



This document is not intended to constitute research analysis or recommendation and should not be treated as such.

We recommend that you read and understand the contents of the Information Memorandum for the RHB Asian High Yield Fund – RM dated 8 June 2015, by RHB Asset Management Sdn Bhd. Investments in the Fund are exposed to management risk, lower rated / unrated securities, qualified foreign institutional investors, emerging and frontier market risk, currency risk, distribution out of capital risk, securitised of structured debt instruments, derivatives related risk, risks relating to specific derivative instruments and others as disclosed in the Information Memorandum. This fund is eligible to be purchased by High Net Worth Individuals only, the criteria of High Net Worth Individuals as per stated in Schedules 6 and 7 of Capital Market and Services Act (CMSA) 2007.

We recommend that you read and understand the Master Prospectus for the Affin Hwang Select Income Fund dated 18 July 2017 and expires on 17 July 2018 by Affin Hwang Asset Management Bhd (formerly known as Hwang Investment Management Berhad). Investments in the Fund are exposed to specific risks including equity investment risk, equity-linked securities investment risk, credit/default risk, interest rate/price risk, structured products risk, country risk, currency risk, regulatory risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Master Prospectus for the RHB Asian Income Fund dated 6 October 2016 and expire on 5 October 2017, by RHB Asset Management Sdn Bhd. Investments in the Fund are exposed to management risk, liquidity risk, foreign investment risks such as currency risk and country risk and others as disclosed in the prospectus.

We recommend that you read and understand the contents of the Prospectus for the Affin Hwang World Series - Global Balanced Fund dated 6 June 2017, by Affin Hwang Asset Management Berhad. Investments in the Fund are exposed to collective investment schemes risk, credit and default risk, interest rate risk, currency risk, liquidity risk, related parties transaction risk, country risk and others as disclosed in the prospectus.

Product Risk Rating and Suitability Determination Matrix:

Product Risk Rating What this rating could mean to your principal amount Suitable for risk profiles:
Moderate Partial loss of full principal investment amount possible, total loss unlikely.
(‘Partial loss’ means the loss suffered by the investor can be up to 15% of the original investment principal)
  • Balanced
  • Growth
  • Aggressive
High Client may suffer substantial or 100% loss of principal investment amount.
(‘Substantial loss’ means the loss suffered by the investor can be more than 15% of the investment principal)
  • Growth
  • Aggressive


Unit Trust investments are not bank deposits and are not obligations of or guaranteed or insured by OCBC Bank (Malaysia) Berhad. Unit Trust investments are not guaranteed and are subject to investment risk unless otherwise specified. The investment risk includes general risks as described in the Information Memorandum/Prospectuses for Unit Trust investment funds (“Information Memorandum/Prospectuses”) and specific risks which may be different for each Unit Trust investment. Description of specific risks and general risks are published in the Information Memorandum/Prospectuses. With respect to Unit Trust investment, past performance is not indicative of future results; the net asset value can go up or down. Investors should also note that the net asset value per unit and distributions payable, if any, may go down as well as up.

Where unit trust loan financing is available, investors are advised to read and understand the contents of the unit trust loan financing risk disclosure statement before deciding to borrow to purchase units. Where a unit split/distribution is declared, investors are advised that following the issue of additional units/distribution, the NAV per unit will be reduced from pre-unit split NAV/cum-distribution NAV to post-unit split NAV/ex-distribution NAV; and where a unit split is declared, investors should be highlighted of the fact that the value of their investment in Malaysian ringgit will remain unchanged after the distribution of the additional units.

The Information Memorandum/Prospectuses have been registered with the Securities Commission Malaysia, which takes no responsibility for its content. A copy of the Information Memorandum/Prospectuses can be obtained at OCBC Bank’s branches. Units will only be issued upon the receipt of application form referred in, and accompanying the Information Memorandum/Prospectuses. Investors are advised to read and understand the contents of the Information Memorandum/Prospectuses, and if necessary consult their adviser(s), as well as consider the fees and charges involved before investing in the Unit Trust.

This document has been prepared without taking account of the objectives, financial situation or needs of any specific person or organisation who may receive this document. Accordingly prior to making an investment decision, you should conduct such investigation and analysis regarding the product described herein as you deem appropriate and to the extent you deem necessary obtain independent advice from competent legal, financial, tax, accounting and other professionals, to enable you to understand and recognise fully the legal, financial, tax and other risks arising in respect of the product and the purchase, holding and sale thereof.

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You are required to read and understand the terms and Product Highlight Sheet of the product carefully before executing any transaction relating to the product with us. You may request for a copy of the Product Highlight Sheet at OCBC Banks’ branches.

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question is suitable for you. This does not constitute an offer or solicitation to buy or sell or subscribe for any security or financial instrument or to enter into a transaction or to participate in any particular trading or investment strategy.

All information presented is subject to change without notice. OCBC Bank shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein. The information provided herein may contain projections or other forward looking statement regarding future events or future performance of countries, assets, markets or companies. Actual events or results may differ materially. Past performance figures are not necessarily indicative of future or likely performance. Any reference to any specific company, financial product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the same.

OCBC Bank and its respective associated and connected corporations together with their respective directors and officers may have or take positions in any securities mentioned in this report (which positions may change from time to time without notice) and may also perform or seek to perform broking and other investment or securities related services for the corporations whose securities are mentioned in this report as well as other parties generally.

The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.




Lai Mun Yew (Michael)
  Vice President, Research, Wealth Management, OCBC Bank (Malaysia) Berhad

 

Global Outlook – A Very Moderate Slowdown

 

Even though growth momentum has peaked in the second quarter of 2017, the slowdown is very mild and does not involve any substantial disruption; but trade flows are moderating and that will have an economic impact in coming months.

Key Points:

  • The PMIs in developed economies are showing some signs of slippage, but so far it is very mild. Asia is a touch softer which is in line with the idea that trade flows are leading the slowdown. In both cases, PMIs are comfortably above 50, indicating continued expansion.
  • The next recession is still too far in the distance to speculate over the timing. There are some areas of stress – such as Chinese debt or tight U.S. labour markets – but nothing that is flashing an urgent warning signal.
  • The U.S. economy has experienced a sub-par recovery over the past eight years, with GDP growing at an average of 2.1 per cent. This year and next are unlikely to be much different, especially as the chance of big fiscal policy changes has faded. However, even this pace of growth has been enough to bring the unemployment rate down from a peak of 10 per cent down to just 4.3 per cent, but it is hard to see how job growth can keep running at the 180,000 pace of the past year for too much longer as the pool of workers dries up.
  • Political chaos in Washington also raises the danger of a government shutdown or trouble in raising the debt limit. In the past, this has been resolved without much disruption, but the confrontation between President Trump and Congress implies a higher level of risk.
  • The situation in Europe is starting to look like that in the U.S., albeit with a time-lag of a few years. The unemployment rate has been falling steadily and is now at the lowest level since 2009. So far, the rebound in Euro has not been much of a drag on the manufacturing sector.
  • Brexit talks will warm up in coming months and the UK government has been releasing papers outlining its position on various issues. However, this has served to highlight the difficulties in reaching an agreement within the UK, let alone with the European Union. An orderly exit by March 2019 looks impossible, but even the nature of a transition period is far from clear.
  • Japan’s 4 per cent expansion in the second quarter beat the 2.6 per cent in the U.S. and 2.5 per cent in the Eurozone. This looks like the culmination of the pick-up in global activity over the past year that is now starting to fade. This is a partial victory for Abenomics, although slow progress on structural reforms and persistent deflationary concerns limit any celebration.
  • China remains on its “stop / go” policy path, as the focus swings between supporting growth and controlling the credit bubble. Moderate monetary tightening is pointing to a slower economy in coming months and the softer data for July might be an early sign of a shift in pace. Trade friction with the U.S. represents the main threat to the benign short-term outlook.
  • Most emerging markets continue to look healthy, buoyed by the pick-up in global trade and commodity prices, as well as the domestic policy improvements of the past few years. Even compared to four years ago, when we saw a sharp adverse reaction to then-Fed Chair Bernanke’s “taper tantrum”, the situation looks much more solid.



 

Foreign Exchange & Commodities – Remain Neutral On Gold

 

In September, gold could briefly break above US$1,300 per ounce on dysfunctional U.S. politics. Over the next three months, however, we expect gold prices to remain largely range-bound, hovering between US$1,200-$1,300 per ounce.

Key Points:

  • It is possible that gold prices could briefly break above US$1300 per ounce should risks associated with U.S. debt ceiling and the FY 2018 U.S. budget intensify as President Trump seeks to solidify support among his base to offset declining approval ratings by embracing more controversial positions.
  • Barring the possibility of brief surge in gold prices above US$1300 in September, our broader view on gold is that prices will remain largely range-bound over the next 3 months, hovering between US$1200-$1300. We remain neutral on gold. There is an underlying appetite to hold gold as a safe haven and hedge against potential tail risks. However, this needs to be balanced against downside risks for gold from market expectations for a more active Fed, which could hike again this December and also begin tapering its balance sheet in September. We are not bullish on the gold price over a 12-month timeframe given the rising rate headwinds.
  • On oil, the supply–demand balance still looks challenging. Even though consumption has picked up a little, U.S. output is close to record levels and there are concerns over OPEC’s ability to maintain discipline around quotas.
  • Problems with excess supply lead us to think that the trend for prices is likely to be slightly lower. As a result, we maintain our 12-month price target of US$45 per barrel. Moreover, upside is limited by output quickly rising as more of the marginal shale producers become profitable, but there is the risk of a serious break to the downside if OPEC loses control.
  • On the currency front, the U.S. dollar is expected to remain under downside pressure in September with headline risks expected to be highly evident. With no surprises from Fed Chief Yellen out of Jackson Hole, expectations of future rate hikes may remain passive and much will rest upon the Fed policy meeting on 20 September, where balance sheet tapering plans are expected to be announced. Meanwhile, uncertainty about the debt ceiling, the lack of fiscal impetus and the unpredictable nature of policy pronouncements on social media from the U.S. President could also weigh on the U.S. dollar.
  • Elsewhere, expectations about the ECB’s quantitative easing ending may send the Euro higher. The ECB has so far not expressed discomfort with the strong Euro and if it maintains this stance, this could be another factor that is supportive of a stronger Euro.
  • In Japan, the central bank remains sufficiently accommodative and the Yen is expected to remain a function of risk appetite fluctuations and U.S. dollar related risks. Meanwhile, the Pound may continue to underperform its peers on the back of Brexit baggage as the stance from the EU continues to be less than charitable.
  • China’s currency has turned around in 2017 -- after three years of losses -- helped by curbs on capital outflows and Dollar weakness. If the greenback continues to remain weak, this should continue to favour the Chinese currency with positive spill over benefits for other Asian currencies.



 

Bonds – Be Selective

 

We see more reasons to be selective within credit markets than we did at the beginning of the year as future returns are likely to be more muted compared with the recent past, and tight spreads leave little room for error.

Key Points:

  • The global monetary policy outlook, especially among the major developed markets, will have an important impact on the outlook for bond markets. In the U.S., the Fed’s policy dilemma has intensified and continued low readings on inflation suggest it might opt for a break from the sequence of interest rate hikes. By some measures, no rate hike in September could be seen as a pause, but it is better viewed as providing space for the market to absorb the likely September announcement of plans for balance sheet reduction.
  • Strong labour markets and looser financial conditions, despite three rate hikes since last December means that the Fed should want to continue to normalise interest rates. However, its confidence that slippage in inflation was just a temporary aberration has been undermined by a several months of soft data. It seems that the Fed might need more convincing that the underlying pressure on inflation has faded, so, we expect another hike in December before a pause in March, but it could skip the year-end move. We now see three rate hikes in 2018 compared to four previously.
  • If the U.S. struggles to pass a budget or to lift the debt limit to avoid the risk of a default, then we would hear talk of another ratings agency downgrade of U.S. debt. However, this typically has no impact on the performance of the sovereign debt of large developed economies. S&P cutting the U.S. to AA+ in August 2011 was soon forgotten, while Japan has seen multiple downgrades but can still issue 10-year debt at a zero interest rate.
  • Elsewhere, increasing confidence about the prospects for growth means the European Central Bank is set to bring its quantitative easing policy to an end in the first half of 2018, with an announcement likely before the end of 2017.
  • In Japan, inflation remains a long way from the 2 per cent target so a policy shift is still far in the future. Short-term interest rates will remain at -0.1 per cent and bond yields targeted around zero for most, if not all, of 2018.
  • Overall, we still see selective opportunities in bond markets but returns will not be as strong as in the past. With spreads close to all-time tights, we expect modest spread tightening for the remainder of the year, which should be balanced by a modest back-up in U.S. Treasury yields. As a result, coupon income will likely drive asset class performance for the rest of the year. We recommend reducing overall portfolio duration and a move up in credit quality to reduce risk.



 

Equities – Still Cautious

 

We maintain our cautious stance on equities in view of the prospects for tighter global monetary policy and extended stock valuations. Within the equities space, however, we prefer the U.S. for its defensive traits and remain neutral on Europe.

Key Points:

  • Given our view that global monetary policy environment will become tighter, even as overall growth prospects seem to have peaked, we remain cautious on the outlook for equities.
  • With leading central banks owning 20 per cent of their government’s total debt and the ECB and BOJ balance sheets now bigger than the Fed’s, pressure is for the massive balance sheet expansion to finally come to an end. Also extended valuations provide limited support.
  • In the U.S., the recently concluded second quarter earnings season provided further boost to consensus earnings expectations. However, negative headlines from the White House, including the disbanding of pro-business councils, continued to mar hopes of a fiscal stimulus driven boost. Nevertheless, given our overall cautious view on global equities, U.S. equities remain more defensive.
  • Consensus earnings per share downgrades for Europe finally stabilised in August - after deteriorating steadily since peaking in May, despite signs of economic strength and positive earnings surprises. With ECB balance sheet surpassing the Fed’s in U.S. dollar terms, pressure for the central bank to start phasing out its quantitative easing is mounting. Near-term, financial market movements would continue to be dictated by clues on the ECB’s next move. As highlighted earlier, we see a less dovish central bank as the economic recovery continue to gain pace. Overall, we remain neutral on European equities.
  • The persistently strong Yen continued to weigh on Japanese equities (in Yen terms) in August. This is notwithstanding the robust second quarter economic growth, a relatively more positive earnings season and improving consensus EPS estimates. Fundamentally, we maintain our view that sustained re-rating of the market would require more meaningful structural reform to boost growth. To this end, Abe’s fading popularity is not encouraging. Hence, we see macro factors and movements of the JPY to remain key drivers for the market.
  • Asia Ex-Japan equities have done very well this year posting strong double digit gains. However, the region’s equities could bear the brunt again as the investors’ focus on the Fed and ECB’s balance sheet exit plans gain momentum. Also, notwithstanding the period of unexpected calm, trade war risks, especially between China and the US, remains real.
  • In Singapore, the equity market saw some profit taking pressures in August, with seasonal effects partly contributing to the equity market’s softer performance for the month. Near term, in the absence of potential catalysts, we expect the current consolidation phase may continue. One of the brighter spots on the ground remains the improvements in the local property market, where there have been more transactions and en bloc sales.



 

Important Information

 

Any opinions or views expressed in this material are those of the author and third parties identified, and not those of OCBC Bank (Malaysia) Berhad (“OCBC Bank”, which expression shall include OCBC Bank’s related companies or affiliates).

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question is suitable for you. This does not constitute an offer or solicitation to buy or sell or subscribe for any security or financial instrument or to enter into a transaction or to participate in any particular trading or investment strategy.

OCBC Bank, its related companies, their respective directors and/or employees (collectively ‘Related Persons’) may have positions in, and may effect transaction in the products mentioned herein. OCBC Bank may have alliances with the product providers, for which OCBC Bank may receive a fee. Product providers may also be Related Persons, who may be receiving fees from investors. OCBC Bank and the Related Person may also perform or seek to perform broking and other financial services for the product providers.

All information presented is subject to change without notice. OCBC Bank shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein. The information provided herein may contain projections or other forward-looking statements regarding future events or future performance of countries, assets, markets or companies. Actual events or results may differ materially. Past performance figures are not necessarily indicative of future or likely performance. Any reference to any specific company, financial product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the same.

The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.




 


Into Unchartered Waters

 

The combination of peak valuation across most asset classes and monetary tightening broadening out from the U.S. across to a range of other developed economies makes the investing environment much more challenging. There is a need to stay defensive – have some cash buffers to protect portfolios - with the intention to go offensive if there is a market pullback.

On regional equity markets, we are still negative Japan and Asia ex-Japan, but neutral on the U.S. and Europe.

On bonds, we remain positive on Emerging Market and Developed Market high yields. We are, however, negative on Developed and Emerging Market Investment Grades.

Recommendations:

  • Unit Trust: RHB Asian High Yield Fund – RM (Risk rating: High)
    Eligibility: High Net Worth Investors Only
    This fund invests in a target fund, the Fidelity Funds – Asian High Yield Fund and is suitable for investors seeking capital growth and income and long term capital growth. The fund invests primarily in high yielding bond issuers which have principal business activities in the Asian region. Asian high yield bonds feature higher yield and better potential upside with lower default rate and duration compared to other high yield markets. This high yield feature also entails a higher spread which should provide a buffer against spread compression in a rising interest rate environment.
  • Unit Trust: Affin Hwang Select Income Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    Suitable for investors seeking to invest in an income-driven, absolute return focused fund. This fund also targets to provide a high level of cash flow as well as growth by investing at least 70% of its NAV into fixed income instruments and a maximum of 30% NAV into equities globally with an Asian focus.
  • Unit Trust: TA European Equity Fund (Risk rating: High)
    Eligibility: Retail and High Net Worth Investors
    This fund invests in a diversified portfolio of local and/or foreign equity funds, REITs and ETFs investing in Europe. Prospects for European equities have improved – quantitative easing lowers borrowing costs and ECB’s actions appear to be improving sentiment, economic output and, for the time being, inflation expectations. As such, investors seeking exposure in the European region may consider this fund.
  • Unit Trust: Affin Hwang World Series - Global Balanced Fund (Risk rating: Moderate)
    Eligibility: Retail and High Net Worth Investors
    Investors seeking capital growth opportunities through a portfolio of collective investment schemes with access into equities listed in global markets, fixed income instruments such as debt securities, money market instruments and fixed deposits, issued globally may consider this fund.

Top Investment Ideas are an expression of the investment outlook in this publication. They are not recommendations made in accordance with your investment objective and risk profile. As such, we recommend that you complete a suitability assessment before purchasing your selected investment product.



This document is not intended to constitute research analysis or recommendation and should not be treated as such.

We recommend that you read and understand the contents of the Information Memorandum for the RHB Asian High Yield Fund – RM dated 8 June 2015, by RHB Asset Management Sdn Bhd. Investments in the Fund are exposed to management risk, lower rated / unrated securities, qualified foreign institutional investors, emerging and frontier market risk, currency risk, distribution out of capital risk, securitised of structured debt instruments, derivatives related risk, risks relating to specific derivative instruments and others as disclosed in the Information Memorandum. This fund is eligible to be purchased by High Net Worth Individuals only, the criteria of High Net Worth Individuals as per stated in Schedules 6 and 7 of Capital Market and Services Act (CMSA) 2007.

We recommend that you read and understand the Master Prospectus for the Affin Hwang Select Income Fund dated 18 July 2017 and expires on 17 July 2018 by Affin Hwang Asset Management Bhd (formerly known as Hwang Investment Management Berhad). Investments in the Fund are exposed to specific risks including equity investment risk, equity-linked securities investment risk, credit/default risk, interest rate/price risk, structured products risk, country risk, currency risk, regulatory risk and others as disclosed in the prospectus.

We recommend that you read and understand the content of the Master Prospectus for TA European Equity Fund dated 1 October 2016 by TA Investment Management Berhad. Investments in the Fund are exposed to country risk, equity risk, currency risk, market risk, emerging market risk and others as disclosed in the Master Prospectus and Product Highlights Sheet.

We recommend that you read and understand the contents of the Prospectus for the Affin Hwang World Series - Global Balanced Fund dated 6 June 2017, by Affin Hwang Asset Management Berhad. Investments in the Fund are exposed to collective investment schemes risk, credit and default risk, interest rate risk, currency risk, liquidity risk, related parties transaction risk, country risk and others as disclosed in the prospectus.

Product Risk Rating and Suitability Determination Matrix:

Product Risk Rating What this rating could mean to your principal amount Suitable for risk profiles:
Moderate Partial loss of full principal investment amount possible, total loss unlikely.
(‘Partial loss’ means the loss suffered by the investor can be up to 15% of the original investment principal)
  • Balanced
  • Growth
  • Aggressive
High Client may suffer substantial or 100% loss of principal investment amount.
(‘Substantial loss’ means the loss suffered by the investor can be more than 15% of the investment principal)
  • Growth
  • Aggressive


Unit Trust investments are not bank deposits and are not obligations of or guaranteed or insured by OCBC Bank (Malaysia) Berhad. Unit Trust investments are not guaranteed and are subject to investment risk unless otherwise specified. The investment risk includes general risks as described in the Information Memorandum/Prospectuses for Unit Trust investment funds (“Information Memorandum/Prospectuses”) and specific risks which may be different for each Unit Trust investment. Description of specific risks and general risks are published in the Information Memorandum/Prospectuses. With respect to Unit Trust investment, past performance is not indicative of future results; the net asset value can go up or down. Investors should also note that the net asset value per unit and distributions payable, if any, may go down as well as up.

Where unit trust loan financing is available, investors are advised to read and understand the contents of the unit trust loan financing risk disclosure statement before deciding to borrow to purchase units. Where a unit split/distribution is declared, investors are advised that following the issue of additional units/distribution, the NAV per unit will be reduced from pre-unit split NAV/cum-distribution NAV to post-unit split NAV/ex-distribution NAV; and where a unit split is declared, investors should be highlighted of the fact that the value of their investment in Malaysian ringgit will remain unchanged after the distribution of the additional units.

The Information Memorandum/Prospectuses have been registered with the Securities Commission Malaysia, which takes no responsibility for its content. A copy of the Information Memorandum/Prospectuses can be obtained at OCBC Bank’s branches. Units will only be issued upon the receipt of application form referred in, and accompanying the Information Memorandum/Prospectuses. Investors are advised to read and understand the contents of the Information Memorandum/Prospectuses, and if necessary consult their adviser(s), as well as consider the fees and charges involved before investing in the Unit Trust.

This document has been prepared without taking account of the objectives, financial situation or needs of any specific person or organisation who may receive this document. Accordingly prior to making an investment decision, you should conduct such investigation and analysis regarding the product described herein as you deem appropriate and to the extent you deem necessary obtain independent advice from competent legal, financial, tax, accounting and other professionals, to enable you to understand and recognise fully the legal, financial, tax and other risks arising in respect of the product and the purchase, holding and sale thereof.

You should obtain and read the Product Highlight Sheet of the product before you make a decision to acquire the product. All information provided in this document is general and does not take into account your individual objectives, financial situation or specific needs.

You are required to read and understand the terms and Product Highlight Sheet of the product carefully before executing any transaction relating to the product with us. You may request for a copy of the Product Highlight Sheet at OCBC Banks’ branches.

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question is suitable for you. This does not constitute an offer or solicitation to buy or sell or subscribe for any security or financial instrument or to enter into a transaction or to participate in any particular trading or investment strategy.

All information presented is subject to change without notice. OCBC Bank shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein. The information provided herein may contain projections or other forward looking statement regarding future events or future performance of countries, assets, markets or companies. Actual events or results may differ materially. Past performance figures are not necessarily indicative of future or likely performance. Any reference to any specific company, financial product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the same.

OCBC Bank and its respective associated and connected corporations together with their respective directors and officers may have or take positions in any securities mentioned in this report (which positions may change from time to time without notice) and may also perform or seek to perform broking and other investment or securities related services for the corporations whose securities are mentioned in this report as well as other parties generally.

The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.




Lai Mun Yew (Michael)
  Vice President, Research, Wealth Management, OCBC Bank (Malaysia) Berhad

 

Global Outlook – Focus on Debt

 

Tighter monetary policy and credit conditions will bring the focus onto the build-up in global debt, which has risen from under 180 per cent of GDP before the global financial crisis, to 220 per cent of GDP.

Key Points:

  • Higher interest rates along with tighter monetary policy could worry markets and investors because global debt has increased significantly in the past eight to nine years.
  • The rise in debt in developed markets is entirely due to government borrowing. Most of that came in the immediate aftermath of the global financial crisis, as governments tried to boost growth and repair the financial system. Following fiscal austerity, debt levels have been roughly stable for the past five years. Considering the lengthy maturity of government debt, a gradual rise in short-term interest rates should not cause many problems.
  • Private sector debt has fallen (relative to GDP) in developed markets, as a result of improved household finances. This contrasts with the build-up that contributed to the Global Financial Crisis (GFC). Corporate sector debt has been stable, although that might conceal the potential for stress is some sectors.
  • Second, the rise in debt in emerging markets is primarily due to China, because the economy has become so large and the debt has grown so rapidly that it overwhelms the rest. Debt in China is up from 146 per cent of GDP, to 258 per cent over the past decade; all other emerging markets from 109 per cent to 137 per cent.
  • China’s debt build-up is very worrisome and threatens domestic disruption, but is mainly internal and not particularly exposed to tighter global monetary conditions. Some other emerging markets might struggle as developed economy monetary policy tightens, but even compared to the “taper tantrum” of 2013, most look more solid structurally, and external deficits are smaller.
  • As a result, gradual monetary tightening across many developed markets should not involve too many problems for global growth. However, after a decade of ever-looser policy it could produce a different environment for investing.
  • Hurricanes will distort U.S. economic data for the next few months, but natural disasters rarely have lasting impact on large, rich countries.
  • The U.S. economy is at a relatively mature stage in the cycle but so far is showing few signs of upwards pressure in wages or consumer prices. Recent slippage in inflation is hard to explain, and is likely to be short-lived, considering the tightness in labour markets.
  • Political chaos continues, but self-interest might still deliver a corporate tax cut. At least the immediate risk of government shutdown or default has been pushed out, until year-end or beyond. Despite the aggressive rhetoric, the absence of material trade protectionism compensates for the lack of progress on economic reforms.
  • Growth in Europe remains impressively solid, even as the stronger exchange rate should be a drag on the export sector. PMIs are still around the best level since 2011, while GDP growth this year is set to be the strongest in a decade.
  • The end of fiscal tightening has combined with the benefits of post-crisis structural reforms and a more healthy financial system that is improving the effectiveness of monetary policy. A side benefit of the stronger growth is a reduction in support for populist politics, with a busy election calendar bringing no upsets in 2017.
  • The Bank of England is in a difficult position, with inflation running well-above target, while signs are starting to emerge of damage from Brexit. It looks ready to reverse the 0.25% interest rate cut that immediately followed the Brexit vote in June 2016 and will then probably take a wait-and-see approach. Lack of progress in discussions with the EU suggests the risk of material short-term damage from leaving, especially if there is no interim agreement to preserve preferential access to the European market.
  • Another round of elections is unlikely to produce any policy change in Japan. Prime Minister Shinto Abe’s popularity has recovered after some low-grade scandals, and the disarray of the opposition offers the opportunity to extend the government’s term in office.
  • Abe is not asking for a mandate for more aggressive economic reforms, although he is seeking approval for the next step up in the consumption tax, to 10 per cent. Cyclically, the economy is in good shape, with the lowest unemployment rate in a generation, while necessary structural reforms – particularly related to the labour market – continue to look difficult.
  • Growth in China has slowed in response to a squeeze on the housing market and credit growth, but the deceleration is very moderate. Debt is still rising as a proportion of GDP, but at a slower pace than in recent years, lending hope to the idea that reforms aimed at controlling the credit bubble are gaining some traction.
  • We might see pressure on some deficit countries as U.S. interest rates continue to rise, as the cost of attracting capital will become more expensive. However, this does not seem likely to become a systemic problem.



 

Foreign Exchange & Commodities – Headwinds For Gold

 

The safe-haven appeal of gold, coupled with the maturing US Dollar cycle may not be enough to keep gold supported as more developed market central banks join the Fed in leaning toward tighter monetary policy.

Key Points:

  • The newfound love for gold may increasingly be challenged by the gradually changing market backdrop of rising global rates. First, the September Federal Open Market Committee meeting revealed a steady consensus around a December rate hike. Going forward, downside U.S. inflation surprises are likely behind us and normalising inflation is set to drive U.S. rates higher.
  • Second, and more importantly, tightening policy seems to be back in fashion and it is not only about the Fed. Many central banks in advanced countries have swung to a more hawkish stance, likely encouraged by more the solid tone to global growth and stronger equities. The most important change in policy is likely to come from the European Central Bank in October.
  • Over the medium-term, as global rates start to inch up further, we expect gold to rebase lower.
  • Concerns about geopolitical events disrupting supply have given a boost to oil prices, but this is likely to be short-lived. U.S. shale drilling has levelled off in recent weeks, but activity would soon step up if higher prices create the right incentives. Demand growth is solid, but not picking up to any meaningful degree.
  • After the bottoming out in September, the question is will the U.S. Dollar finally turn the corner by strengthening in 4Q2017, after its year-to-date slide? We think this will have to be predicated by a sustained breach of key technical levels across a range of asset prices, including U.S. Dollar index (DXY), 10-year U.S. Treasury yields and Bund yields.
  • As we step into October, the greenback may retain the upper hand against the Euro (political and European Central Bank uncertainty), the Australian Dollar, the Canadian Dollar and the Japanese yen (still sufficiently dovish central bank plus political uncertainty). The Pound (Brexit overhang) and the New Zealand Dollar (political uncertainty, sufficiently dovish RBNZ) could also lose some of their shine against the greenback.
  • Looking further ahead, we think that the Fed is not the only central bank that could tighten policy in the coming months. Given the Fed’s relative confidence of its prognosis in September, other major global central banks may also turn less dovish or even more hawkish. This shifting relative central bank dynamics may eventually hurt the U.S. Dollar.
  • The nominal effective exchange rate (NEER) has continued to persist in the upper half of its perceived fluctuation band, although excessive Singapore Dollar outperformance remains in check.
  • To this end, we look for Singapore Dollar outperformance against the Euro, Australian Dollar, and the Canadian Dollar, while the Singapore Dollar may lag the Pound as the BOE surprises with its hawkish stance again. Elsewhere, we expect the Singapore Dollar to be range bound against the New Zealand Dollar.



 

Bonds – Expect Slower Returns

 

We see more reasons to be selective within corporate bond markets than we did at the beginning of the year, as credit spreads are tight and returns are likely to be more muted compared with the recent past.

Key Points:

  • Monetary policy tightening, in the form of interest rate hikes and smaller central bank balance sheets will spread from North America to a range of other developed economies over the coming year, as economies continue to heal the wounds from the Global Financial Crisis (GFC). The process will be gradual, but it represents a significant change in direction after the ever-looser policy environment of the past decade. This will have implications for bond markets.
  • Overall, we still see selective opportunities in bond markets but returns will not be as strong as in the past. With spreads close to all-time tights, we expect modest spread tightening. As a result, coupon income will likely drive asset class performance. We recommend reducing overall portfolio duration and a move up in credit quality to reduce risk.
  • The Fed does not seem distracted from its intention to slowly normalise monetary policy as it continues to project four more interest rate hikes by the end of 2018. This is in line with our expectations, with the next move coming in December. Balance sheet shrinkage begins in October, but it has been well-signalled and should not be disruptive.
  • The Fed’s process to shrink its US$4.5 trillion balance sheet from October will be gradual, starting at US$10 billion per month and rising to US$50 billion by the end of 2018. At this pace, normalisation will take around four years and the overall G3 balance sheet is set to start to shrinking in 3Q 2018.
  • However, the Fed’s unchanged intention of raising interest rates four more times by the end of 2018 was more notable, as some policy-makers had expressed concern about the recent slip in inflation. This has been puzzling, but is likely to be short-lived, with the unemployment rate below normal levels.
  • In late October, the European Central Bank is set to announce plans to reduce asset purchases in 1H 2018, and could hike rates by end 2018 (together with Switzerland). As with the Fed back in 2014, reducing monetary support to reflect a stronger economy should not cause many problems.
  • Japan’s inflation remains a long way from the 2 per cent target so a policy shift is still far in the future. Short-term interest rates will remain at -0.1 per cent and bond yields are targeted at around zero for most, if not all, of 2018.
  • Monetary policy continuity is likely to be evident when Bank of Japan Governor Kuroda’s term expires in six months, and if he is not re-appointed, his replacement is expected to be just as dovish.



 

Equities – Cautious Outlook

 

A tightening global monetary policy environment with looming unprecedented central bank balance sheet unwinding and potential Fed rate hike underpins our continued cautious stance on global equities.

Key Points:

  • Equities rode on the steady global growth outlook and resilient investor confidence in September, even as geopolitical risks threatened to derail the on-going recovery. Global growth outlook, led by Europe, continued to impress. However, growth momentum in China has slowed although the deceleration is still moderate.
  • Subsequent to the Fed’s plan to unwind their balance sheet, the European Central Bank is set to announce Quantitative Easing tapering plans in 1H2018. In view of the tightening global monetary policy environment driven by the impending unprecedented central bank unwinding and potential U.S. rate hikes, even as overall growth prospects seem to have peaked, we remain cautious.
  • Also extended valuations provide limited support. We continue to prefer the U.S. and Europe over Japan and Asia ex-Japan.
  • Having announced the gradual unwind of their US$4.5 trillion balance sheet, Fed officials are now debating on whether inflation will firm enough for them to raise interest rates a third time in 2017. Inflation has remained below target, even as the U.S. unemployment rate has fallen.
  • The easing in U.S. financial conditions supports a more positive growth outlook but also more hawkish stance. Hopes for fiscal stimulus driven boost continued to fade with the most recent effort to overhaul the healthcare system on life support and a Republican tax proposal still lacking details.
  • Nevertheless, according to a University of Michigan survey, small investors have never been this bullish. Consensus 2017 EPS outlook has been relatively stable. Given our overall cautious view, U.S. equities remain more defensive.
  • Benefiting from further signs of growth recovery and a slightly weaker EUR, consensus EPS for Europe continued to pick up - after deteriorating steadily since peaking in May. The improving macroeconomic outlook means that pressure for the central bank to start phasing out its quantitative easing would intensify.
  • Near-term, financial market movements could still be dictated by clues on the European Central Bank’s (ECB’s) next move. We see a less dovish central bank as the economic recovery continues to gain pace. We maintain a neutral stance here.
  • Japanese equities benefitted from talks of a potential snap election. Despite the euphoria, the latest move by Prime Minister Abe is not expected to result in major policy changes.
  • Near-term, the economy is in a decent state but sustained re-rating of the market would require more meaningful structural reform to boost overall growth. Hence, besides politics, we see macro factors and movements of the JPY to remain key drivers for the market.
  • North Korea and Trump’s spat continued to propel geopolitical risks for the region although investors seem increasingly nonchalant. South Korea, together with the Philippines, led the winners in September. Taiwan and India were the biggest laggards.
  • China, still the best performing market so far this year, came under selling pressure as policymakers unexpectedly stepped in to reign in financial risks ahead of the leadership reshuffle at the 5-yearly party congress. Valuations for the region are now looking stretched as the rally extends.
  • Even as the markets remain sanguine on the North Korea hostility, other macro risk factors, such as the trade war risk between China and the U.S. and potential impact of the unprecedented central bank unwinding further ahead, lurk.
  • We expect investors to take a wait-and-see attitude ahead of the next set of corporate earnings releases. With the recent consolidation, selective accumulation opportunities have opened up. Our advice to rotate into stock ideas with stronger fundamental support is maintained as we head into the last quarter of the year.



 

Important Information

 

Any opinions or views expressed in this material are those of the author and third parties identified, and not those of OCBC Bank (Malaysia) Berhad (“OCBC Bank”, which expression shall include OCBC Bank’s related companies or affiliates).

The information provided herein is intended for general circulation and/or discussion purposes only and does not contain a complete analysis of every material fact. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product.

In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question is suitable for you. This does not constitute an offer or solicitation to buy or sell or subscribe for any security or financial instrument or to enter into a transaction or to participate in any particular trading or investment strategy.

OCBC Bank, its related companies, their respective directors and/or employees (collectively ‘Related Persons’) may have positions in, and may effect transaction in the products mentioned herein. OCBC Bank may have alliances with the product providers, for which OCBC Bank may receive a fee. Product providers may also be Related Persons, who may be receiving fees from investors. OCBC Bank and the Related Person may also perform or seek to perform broking and other financial services for the product providers.

All information presented is subject to change without notice. OCBC Bank shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein. The information provided herein may contain projections or other forward-looking statements regarding future events or future performance of countries, assets, markets or companies. Actual events or results may differ materially. Past performance figures are not necessarily indicative of future or likely performance. Any reference to any specific company, financial product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the same.

The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank’s written consent.




 



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