Winter is not coming – yet
Markets have continued to trade in a highly volatile, non-trending environment. The gains made on Monday (3 December) after the US-China trade war truce were wiped out on Tuesday (4 December), as global investors had second thoughts about the progress made. The backtracking of US President Donald Trump’s announcement that Beijing had agreed to reduce tariffs on US-made cars by top White House economic advisor Larry Kudlow did not help markets.
Fresh worry emerges after trade war and rate hike concerns subside: Headwinds brought about by escalating trade war tensions and Federal Reserve’s rate hikes have been well-documented and discussed. Given the 90-day truce between the US and China as well as the recent dovish tilt in the Fed’s overall monetary stance, both are temporarily behind us, albeit briefly. One fresh concern is the fear of a US economic slowdown in anticipation of a yield curve inversion. Indeed, the 5- and 3-year yield curve has inverted for the first time since 2007, and the 10- and 2-year yield curve is currently very flat at 0.2%. We do not rule out the possibility of an impending inversion of the 10- and 2-year yield, but it takes time for it to negatively impact the equity market – typically a few quarters (Figure 1).
Figure 1: Historically, an inversion in the yield curve did not lead to immediate negative equity performance
Source: DBS, Bloomberg
We maintain that equities will be supported despite Tuesday’s (4 December) selloff and reiterate our Neutral stance. However, given high market uncertainties, investors should adopt a “barbell strategy” to maximise risk-return on their portfolios. This was highlighted in our recent CIO Perspectives – Strengthen cash flow for portfolio resilience. A “barbell strategy” is derived from heavily weighting assets at both ends of the risk spectrum. That is, investors should harness growth and capital gains through long-term investment themes and sectoral calls, while ensuring portfolio resilience through income and cashflow through dividend equities, REITs, cash, and BBB-/BB-rated bonds (Figure 2).
Figure 2: A “barbell strategy” to boost portfolio resilience
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.