Central banks are turning on the stimulus tap

Stay pro-risk and stick to “quality” stocks; our “Quality Play” theme has registered strong outperformance since our initiation.
Chief Investment Office27 Nov 2019
Photo credit: AFP Photo

What happened?  

Sharp rebound in risk assets; more than meets the eyes. Risk assets have undergone substantial rebound since 2 October, with the S&P 500 Index up 8.8% and the US high-yield corporate bond spread narrowing 28 bps. The oft-cited reasons for this rebound are:

(a) Troughing global macro momentum

(b) Receding US-China trade tension

Without doubt, these are all plausible explanations. The ISM Manufacturing, for instance, has made a tentative rebound from 47.8 in September to 48.3 in October. On the political front, the GeoQuant United States Political Risk Score Index has fallen from 36.1 to the current level of 35.6, suggesting an easing of geopolitical uncertainties.

But we have to put things in perspective. The latest rebound in macro indicators is only in the early innings and besides, they are coming on the back of sharper and earlier deterioration. Given the strong risks assets rally, we believe there is another factor driving markets higher and that is – the return of central banks’ liquidity. 

What does this mean?

Back to “risk-on”; Fed and ECB balance sheets in expansionary mode. Both the US Federal Reserve and European Central Bank (ECB) have turned on the stimulus tap again. The Fed announced it will purchase USD60b of Treasury Bills per month until 2Q20 while the ECB has also resumed the purchase of Eurozone government bonds at the pace of EUR20b per month starting November for “as long as necessary”.

The latest development has since triggered a spike in the combined balance sheets of the Fed, the ECB, and the Bank of Japan. From January to August, the size shrunk by USD39b per month on average. But in September and October, the balance sheets registered an average monthly expansion of USD130b (Figure 1).   

What should you do?

Stay pro-risk; Stick to “Quality” plays. Barring a sudden deterioration in the US-China trade negotiation, we expect global equities to grind higher in the remaining weeks of 2019 as fundamentals gradually turn the corner. The return of monetary accommodation is another factor underpinning our optimistic view.

To recap, back in 2Q18 CIO Insights “Mind the Bends”, we published a thematic piece titled “Quality Play” – advocating investors to buy quality stocks with strong balance sheets, strong market positioning, and attractive earnings outlook. The strategy has panned out well. Using the MSCI ACWI Quality Index as proxy, the theme has gained 20.2% since 2Q18, outperforming global equities by 8.2%pts.  .

Figure 1: The return of central banks’ largesse

Source: Bloomberg, DBS

The information published by DBS Bank Ltd. (company registration no.: 196800306E) (“DBS”) is for information only. It is based on information or opinions obtained from sources believed to be reliable (but which have not been independently verified by DBS, its related companies and affiliates (“DBS Group”)) and to the maximum extent permitted by law, DBS Group does not make any representation or warranty (express or implied) as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions and estimates are subject to change without notice. The publication and distribution of the information does not constitute nor does it imply any form of endorsement by DBS Group of any person, entity, services or products described or appearing in the information. Any past performance, projection, forecast or simulation of results is not necessarily indicative of the future or likely performance of any investment or securities. Foreign exchange transactions involve risks. You should note that fluctuations in foreign exchange rates may result in losses. You may wish to seek your own independent financial, tax, or legal advice or make such independent investigations as you consider necessary or appropriate.

The information published is not and does not constitute or form part of any offer, recommendation, invitation or solicitation to subscribe to or to enter into any transaction; nor is it calculated to invite, nor does it permit the making of offers to the public to subscribe to or enter into any transaction in any jurisdiction or country in which such offer, recommendation, invitation or solicitation is not authorised or to any person to whom it is unlawful to make such offer, recommendation, invitation or solicitation or where such offer, recommendation, invitation or solicitation would be contrary to law or regulation or which would subject DBS Group to any registration requirement within such jurisdiction or country, and should not be viewed as such. Without prejudice to the generality of the foregoing, the information, services or products described or appearing in the information are not specifically intended for or specifically targeted at the public in any specific jurisdiction.

The information is the property of DBS and is protected by applicable intellectual property laws. No reproduction, transmission, sale, distribution, publication, broadcast, circulation, modification, dissemination, or commercial exploitation such information in any manner (including electronic, print or other media now known or hereafter developed) is permitted.

DBS Group and its respective directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned and may also perform or seek to perform broking, investment banking and other banking or financial services to any persons or entities mentioned.

To the maximum extent permitted by law, DBS Group accepts no liability for any losses or damages (including direct, special, indirect, consequential, incidental or loss of profits) of any kind arising from or in connection with any reliance and/or use of the information (including any error, omission or misstatement, negligent or otherwise) or further communication, even if DBS Group has been advised of the possibility thereof.

The information is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. The information is distributed (a) in Singapore, by DBS Bank Ltd.; (b) in China, by DBS Bank (China) Ltd; (c) in Hong Kong, by DBS Bank (Hong Kong) Limited; (d) in Taiwan, by DBS Bank (Taiwan) Ltd; (e) in Indonesia, by PT DBS Indonesia; and (f) in India, by DBS Bank Ltd, Mumbai Branch.