THE HEAT IS ON IN YEAR OF THE FIRE ROOSTER

Many of us are only too glad to see the back of an eventful Fire Monkey Year, what with the twists and turns from volatile oil prices, Brexit and the US presidential election.

On a positive note, markets ended 2016 on a more upbeat note and this sentiment appears to have trickled into 2017. The benchmark Straits Times Index (STI) here closed up 2.9 points or 0.1 per cent at 3,011.1 last Friday, up 4.5 per cent from its Dec 30 close.
Globally, economic growth is expected to be 2.7 per cent this year and 2.9 per cent in 2018, after growing by 2.2 per cent last year, according to the United Nations’ annual economic forecast.

But before we heave a sigh of relief, financial experts warn that the Year of the Fire Rooster could be characterised by even greater volatility than the Monkey Year.

Unsurprisingly, US President Donald Trump is a major wild card due to his lack of clarity on US policies and their impact on the global economy.

“The Fire Rooster may turn up the heat on investors and cause jitters as global events like Mr Trump’s unorthodox policies, US Fed rate hikes and key European elections unfold, causing unusual uncertainties in financial markets,” said Mr Vasu Menon, OCBC Bank’s senior investment strategist.

So what’s in store for retail investors in the Year of the Rooster? The Sunday Times Invest highlights some possibilities.

US dollar

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DBS has been bullish on the US dollar for several years and remains positive on the currency over coming months. “There are a few factors at play. First, President Trump’s promises of pro-growth policies (fiscal stimulus and deregulation) are likely to drive US growth, inflation and yields. Ultimately, these are positive for the US dollar,” said DBS’ Mr Low. “Further, if Mr Trump can succeed in persuading American companies to repatriate as much as US$2.6 trillion (S$3.7 trillion) in corporate profits stashed offshore, this could provide additional tailwinds for the greenback.”

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Fundsupermart’s Mr Ho noted that the anticipated rate hikes for this year have helped the US dollar strengthen on the back of higher bond yields and tighter monetary policy . The greenback is up 3.5 per cent since the US presidential election last November. However, he warned that investors should be wary of chasing the greenback as it has posted strong gains since 2011 while many developed market, Asian and emerging market currencies are trading at multi-year lows against the dollar.

lornatan@sph.com.sg

US equities

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Mr Steve Brice, chief investment strategist at Standard Chartered Bank’s wealth management unit, regards the US as the most preferred market going into 2017. “There is an added likelihood of measures by the incoming Trump administration to encourage the repatriation of an estimated US$2.3 trillion (S$3.3 trillion) of US corporate profits held overseas. A significant proportion of any such repatriation is likely to be used by companies to boost dividends and increase share buybacks,” said Mr Brice. Following an “earnings recession” in 2015 and 2016, the US and Europe are each expected to post earnings growth in excess of 11 per cent this year, the strongest expansion rates for four to six years, noted Fundsupermart’s Mr Ho.

WHY YOU SHOULD BE CAUTIOUS

DBS’ Mr Low said he is keen on US equities only in the first quarter of this year, as Mr Trump’s promises of expansionary fiscal stimulus and tax reforms will likely ignite animal spirits in the short term. “Beyond that, there is a myriad of uncertainties about whether Mr Trump can successfully carry out his promises and if his ‘Make America Great Again’ approach could ruffle some feathers and undermine long-established relationships with the US’ main trading partners,” Mr Low added. He also noted that valuations are already elevated at almost two standard deviations above their 135-year historical average. “The only two times valuations crossed this mark were before the Great Depression and during the Nasdaq bubble. Thus, we are more cautious about US equities over the longer term,” he said.

 

Bonds

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OCBC’s Mr Menon continues to see opportunities in bond markets, but returns may not be as high as in 2016. “High-yield bonds should remain in vogue as the search for yield continues, given ageing demographics and volatile equity markets. However, reduce risk by buying shorter-dated bonds, which are less susceptible to higher interest rates. Also, buy only bonds that have good credit fundamentals,” he said.

WHY YOU SHOULD BE CAUTIOUS

Financial experts are generally not very optimistic about bonds. Said Mr Jason Low, equity strategist at DBS’ chief investment office: “Bonds have been on a 30-plus-year bull run and are still trading at expensive valuations despite the recent pullback. As inflation is poised to rise further, developed market government bonds are unlikely to do well.”

Singapore equities

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Financial experts agree that the stock market is looking attractive. Ms Carmen Lee, head of OCBC investment research, noted that we have a core group of “very sound companies with very strong cash flow”. “Most of them had a decent year. If you look at STI stocks, for example, on average, the yield is still 3-odd per cent,” she added. “Obviously, earnings have slowed down somewhat, but having said that, most of these are largely fundamentally strong companies in very good sectors, for instance, telcos and banks. The market may not be as exciting as in the US, but I think you can still find very good stocks.” DBS’ Mr Low is positive about Singapore equities because valuations remain undemanding or low. “After two years of earnings contraction, we are optimistic that the worst of the earnings cut cycle has passed,” he said. “For investors still looking for yield, Singapore remains one of the highest yielding markets in Asia, with a dividend yield of about 4 per cent. We favour the banking, consumer goods, property development and transport sectors.” Ms Lee’s stock picks are largely high-dividend ones with a strong focus on property such as CapitaLand (target price of $3.68), Frasers Centrepoint Trust ($2.33) and OUE ($2.17). She also likes supermarket chain Sheng Siong which has given fairly good dividend yields, and its yield is still “very attractive”.

WHY YOU SHOULD BE CAUTIOUS

As Singapore is a small market, it is very dependent on external factors. “This year will be a challenging year, with a new president in the US and a lot of his policies that we’re not sure of yet,” said Ms Lee.

Equities

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Equities are expected to do better this year, some experts say, thanks to projections of higher company profits. Fundsupermart has decided to back equities over bonds this year. Said Mr Ho Song Hui, assistant director of research and content at Fundsupermart: “Given the stronger earnings forecasts, diminishing prospects of new aggressive measures by major central banks as well as the current lack of attractive opportunities in the fixed-income landscape, we believe that equities warrant an overweight in 2017.” Comparatively, shares in Asian and emerging markets could generate gains well in excess of those in developed market economies. Healthy earnings growth and stable dividends will help deliver a higher total return for Asian and emerging markets with Fundsupermart projecting returns of over 40 per cent by the end of 2018 for both Asia ex-Japan and emerging markets. “Emerging markets such as Brazil and Russia, which seemingly turned a page in 2016, are expected to post double-digit earnings growth rates in 2017,” said Mr Ho.

WHY YOU SHOULD BE CAUTIOUS

As always, it is prudent not to put all your eggs in one basket. Ms Chung Shaw Bee, UOB’s head of wealth management for Singapore and the region, said diversification can protect you when market conditions change. So spread your risk across asset classes and geographies through professionally managed unit trusts. “A simple way to do this is to invest in a global multi-asset fund which spans different geographies and asset classes, such as equities, bonds and real estate investment trusts (Reits),” she said.

– Asiaone

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