After hitting their year-to-date lows in late March, risk assets have put up a formidable rally over the last month.
We had earlier on 27 March upgraded our overall view on equities to overweight. Our belief at that juncture was that although it would have been unusual for a definitive low in equities to be made so early in a crisis, the unprecedented speed and degree of stimulus action from the Fed and policymakers was starting to effectively curtail liquidity-driven risks of a larger financial implosion, and that attractive bottom-up opportunities were available given the risk-reward at depressed prices then. This turned out to be a right call as global equities have since rallied in excess of 25% from their low on 23 March.
This risk-on move was also evident across the asset landscape. Developed markets high yield (DM HY) spreads tightened about 280 basis points to about 800 basis points over this period - in no small part due to the Fed’s announcement on 9 April that it would purchase US high-yield bond ETFs.
Similarly, emerging markets high yield (EM HY) spreads tightened about 230 basis points which also resulted in our overweight view of EM HY bonds performing well over this time.
The three signposts that we were watching for were in April were 1) peaking of infection rates, 2) risk of virus resurgence, 3) stimulus from policymakers.
The first and third signposts played major roles in driving investor optimism over this rally. Containment measures in major economies are taking effect and, as anticipated, we are starting to see infection rates peak in the US and Europe. In addition, G7 policymakers have successively fired stimulus bazookas over the last few weeks. For perspective, the US government has committed to fiscal stimulus equivalent to a whopping 11% of GDP, and the Fed has over the last month purchased more assets than the entire QE2 program.
While the timing of the market upturn was warranted, the magnitude of the move deserves examination. With the sharp rally, much of recent positive developments have been priced in but one needs to ask if the downside risks are fully discounted. Specific asset classes, such as UIS Treasuries and US credit, will be supported by the Fed, but orphaned asset classes, such as equities, are in question.
Earnings estimates have eased significantly over the year to date but remain too high in our view. Even using elevated earnings consensus estimates, forward price-to-earnings valuations of global equities have already rallied to near cycle high; they would appear to be even higher if earnings are further adjusted down.
Incoming corporate results and economic data suggest that uncertainty remains heightened and that the situation will get worse before things improve. The percentage of earnings beats so far are the lowest seen in this decade, and more than 90% of the S&P has withdrawn guidance.
Importantly, the second signpost we have been watching for – the risk of subsequent waves of outbreaks – continues to make us uneasy.
Despite being forefront in controlling the Covid-19 outbreak, China’s experience demonstrates the difficulties posed by asymptomatic spreaders, and we understand policymakers have had to reimpose lockdowns in several locations.
Despite a concerted effort to resume economic normality for a few months now, the path towards resumption in China appears to be long drawn out. Economic activity remains below average, even in the domestic service sectors which have been less affected by weak export and manufacturing demand.
In the absence of a vaccine, we believe that the process of exiting containment measures globally is fraught with uncertainties, and the risk of a more drawn-out recession longer than 12 months needs to be watched carefully.
The widely held baseline expectation is that the global Covid-19 recession will be short-lived, but we are wary that the bear case of an extended recession longer than a year could lead to significant market downside ahead.
All considered, the risk-reward in equities appear less attractive at current prices. In terms of our asset allocation strategy, we now move our view on equities from overweight to neutral. We believe that investors looking for opportunities should not try too hard to chase this rally and should exercise careful capital management in gradually averaging into long-term high quality companies.
Over the longer term, we are cognizant that the flattening of the virus curves and the gradual exit from containment measures, plus an unprecedented degree of fiscal and monetary stimulus in the backdrop, is potentially a potent setup for market upside. Given where valuations are and the risks in play today, however, we believe a neutral stance is optimal at this juncture. We will be keen to turn more constructive on equities ahead if valuations turn more attractive or if the risk factors as laid out earlier abate meaningfully.
This document is prepared for clients of Bank of Singapore Limited (the “Bank”) only. Information has been obtained from sources believed to be reliable but the Bank or its affiliates do not warrant its completeness or accuracy except with respect to any disclosures relative to the Bank and/or its affiliates, and it should not be relied on as such. The information, opinions, estimates and forecasts contained herein are as of the date of this document and are subject to change without notice. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Other than certain reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's judgment.
Sales, trading and professional advisory personnel from the Bank may provide oral or written market commentary or trading strategies to our clients and discretionary portfolio management desks may reflect opinions that are contrary to the opinions expressed in this research. Our asset management desks may make investment decisions that are inconsistent with the recommendations or views expressed in this research.
This communication may provide an analysis of a specific security taken in isolation. It does not take into account any individual’s portfolio, investment objectives, risk tolerance, portfolio diversification or particular needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this communication must make its own independent decisions regarding whether this communication and any securities or financial instruments mentioned herein, are appropriate in the light of its existing portfolio holdings and/or investment needs.
If a specific product is mentioned above, the information in this communication cannot disclose everything about the nature and risks of such product. This is not an exhaustive list of the risks involved, nor should it be regarded as offering advice on the suitability of such product for you. In addition to considering your own circumstances and needs, please read carefully and make sure you understand the relevant product's objectives, risks, charges and expenses, as well as the contents of the prospectus, term sheet or such equivalent documentation before you make any investment. Please also read and make sure you understand all Risk Disclosures, Selling Restrictions and Disclaimers.
(1) Very Low Downside Risk, (2) Low Downside Risk, (3) Moderate Downside Risk, (4) High Downside Risk, (5) Very High Downside Risk
The description of risks in this document does not purport to be an exhaustive list of the risk factors associated with investment in the financial products mentioned in this document. Before making any investment, the reader should consider all risks carefully and consult an independent financial adviser as necessary before dealing with any financial products mentioned in this document.
This document is prepared by Bank of Singapore Limited (Co Reg. No.: 197700866R) (the “Bank”) for information purposes only and is not, by itself, intended for anyone other than the recipient. It may contain information proprietary to the Bank which may not be reproduced or redistributed in whole or in part without the Bank’s prior consent. This document is not, by itself, an offer or a solicitation to deal in any of the investment products referred to herein or to enter into any legal relations, nor an advice nor a recommendation with respect to such investment products. It does not have regard to the specific investment objectives, investment experience, financial situation and the particular needs of any recipient or customer. Customers should exercise caution in relation to any potential investment. Customers should independently evaluate each investment product and consider the suitability of such investment product, taking into account customer’s own specific investment objectives, investment experience, financial situation and/or particular needs. Customers will need to decide on their own as to whether or not the contents of this document are suitable for them. If a customer is in doubt about the contents of this document and/or the suitability of any investment products mentioned in this document for the customer, the customer should obtain independent financial, legal and/or tax advice from the customer's professional advisers as necessary, before proceeding to make any investments.
The Bank, its Affiliates (as defined below) and their respective employees are not in the business of providing, and do not provide, tax, accounting or legal advice to any customers. The material contained herein is prepared for informational purposes and is not intended or written to be used, and cannot be used or relied upon for tax, accounting or legal advice. The customer is responsible for consulting the customer's own independent advisor as to the tax, accounting and legal consequences associated with the customer's investments/transactions based on the customer's particular circumstances.
This document and other related documents have not been reviewed by, registered or lodged as a prospectus, information memorandum or profile statement with the Monetary Authority of Singapore nor any regulator in Hong Kong or elsewhere.
This document may not be published, circulated, reproduced or distributed in whole or in part to any other person without the Bank’s prior written consent. This document is not intended for distribution to, publication or use by any person in any jurisdiction outside Singapore, Hong Kong, or such other jurisdiction as the Bank may determine in its absolute discretion, where such distribution, publication or use would be contrary to applicable law or would subject the Bank and its related corporations, connected persons, associated persons and/or affiliates (collectively, “Affiliates”) to any registration, licensing or other requirements within such jurisdiction.
Investments in financial instruments or other products carry significant risk, including the possible loss of the principal amount invested. Financial instruments or other products denominated in a foreign currency are subject to exchange rate fluctuations, which may have an adverse effect on the price or value of an investment in such products. No liability is accepted by the Bank for any loss (whether direct, indirect or consequential) that may arise from any use of the information contained in or derived from this document. Past performance is not a guarantee or indication of future results. Any prices provided in this document (other than those that are identified as being historical) are indicative only and do not represent firm quotes as to either price or size. You should contact your relationship manager directly if you are interested in buying or selling any financial instrument or other product or pursuing any trading strategy, investment strategy or wealth planning structure that may be mentioned in this document.
While reasonable efforts have been made to ensure that the contents of this document have been obtained or derived from sources believed by the Bank and its Affiliates to be reliable, neither the Bank nor its Affiliates has independently verified the accuracy of such source(s). The Bank and its Affiliates and their respective officers, employees, agents and representatives do not make any express or implied representations, warranties or guarantees as to the accuracy, timeliness or completeness of the information, data or prevailing state of affairs that are mentioned in this document and do not accept any liability for any loss or damage whatsoever, direct or indirect, arising from or in connection with the use of the contents of this document.
The Bank and its Affiliates may have issued other reports, analyses, or other documents expressing views different from the contents hereof and all views expressed in all reports, analyses and documents are subject to change without notice. The Bank and its Affiliates reserve the right to act upon or use the contents hereof at any time, including before its publication herein.
The author of this document may have discussed the information contained therein with others within or outside the Bank and the author and/or such other Bank personnel may have already acted on the basis of this information (including communicating the information contained herein to other customers of the Bank). The Bank, its personnel (including those with whom the author may have consulted in the preparation of this document), and other customers of the Bank may be long or short the financial instruments or other products referred to in this document, may have acquired such positions at prices and market conditions that are no longer available, and may have interests different from or adverse to your interests.
The Bank is a licensed bank regulated by the Monetary Authority of Singapore in Singapore. Bank of Singapore Limited, Hong Kong Branch (incorporated in Singapore with limited liability), is an Authorized Institution as defined in the Banking Ordinance of Hong Kong (Cap 155), regulated by the Hong Kong Monetary Authority in Hong Kong and a Registered Institution as defined in the Securities and Futures Ordinance of Hong Kong (Cap.571) regulated by the Securities and Futures Commission in Hong Kong. The Bank, its employees and discretionary accounts managed by its Singapore Office may have long or short positions or may be otherwise interested in any of the investment products (including derivatives thereof) referred to in this document and may from time to time dispose of any such investment products. The Bank forms part of the OCBC Group (being for this purpose Oversea-Chinese Banking Corporation Limited and its subsidiaries, related and affiliated companies). OCBC Group, their respective directors and/or employees (collectively “Related Persons”) may have interests in the investment products or the issuers mentioned herein. Such interests include effecting transactions in such investment products, and providing broking, investment banking and other financial services to such issuers. OCBC Group and its Related Persons may also be related to, and receive fees from, providers of such investment products.
The Bank adheres to a group policy (as revised and updated from time to time) that provides how entities in the OCBC Group manage or eliminate any actual or potential conflicts of interest which may impact the impartiality of research reports issued by any research analyst in the OCBC Group.
Past performance is not always indicative of likely or future results. The value of any investment or income may go down as well as up. All investments involve an element of risk, including capital loss. Customers who are interested to invest in such investment products should read the risk disclosures and governing terms and conditions that are set out in the relevant offering documents.
Applicable to clients booked and/or managed in the Dubai International Financial Center (DIFC) only: The information contained herein is exclusively addressed to the recipient. The offering of certain products in this document has not been and will not be registered with the Central Bank of United Arab Emirates or Securities & Commodities Authority in the United Arab Emirates. Any products in this document that are being offered or sold do not constitute a public offering or distribution of securities under the applicable laws and regulations of the United Arab Emirates. This document is not intended for circulation or distribution in or into the UAE, other than to persons in the UAE to whom such circulation or distribution is permitted by, or is exempt from the requirements of, the applicable laws and regulations of the United Arab Emirates. The distribution of the information contained herein by the recipient is prohibited. Where applicable, this document relates to securities which are listed outside of the Abu Dhabi Securities Exchange and the Dubai Financial Market. Bank of Singapore Limited is not authorized to provide investment research regarding securities listed on the exchanges of the United Arab Emirates which are outside of the DIFC.
The analyst(s) who prepared this report certifies that the opinions contained herein accurately and exclusively reflect his or her views about the securities of the Company, and that he or she has taken reasonable care to maintain independence and objectivity in respect of the opinions herein.
The analyst(s) who wrote this report does not hold securities in the Company. The analyst(s) receives compensation based on the overall revenues of Bank of Singapore Limited, and no part of his or her compensation was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this report. The reporting line of the analyst(s) is separate from and independent of the business solicitation or marketing departments of Bank of Singapore Limited.
The analyst(s) or his/her associate confirms that he or she does not serve as directors or officers of the Company, and the Company or other third parties have not provided or agreed to provide any compensation or other benefits to the analyst(s) in connection with this report.
An “associate” is defined as (i) the spouse, parent or step-parent, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, parent or step-parent, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.
Australia: Bank of Singapore Limited (i) is exempt from the requirement to hold an Australian financial services (AFS) licence under the Corporations Act 2001 (Cth) in respect of all financial products or financial services it provides in accordance with ASIC Class Order 03/1102 (as continued in force by ASIC Corporations (Repeal and Transitional) Instrument 2016/396) to any person in Australia who is a wholesale client, and (ii) is regulated by the Monetary Authority of Singapore under Singaporean laws which differ from Australian laws. Brunei: This document has not been delivered to, licensed or permitted by the Autoriti Monetari Brunei Darussalam, the authority as designated under the Brunei Darussalam Securities Markets Order, 2013 and the Banking Order, 2006; nor has it been registered with the Registrar of Companies, Registrar of International Business Companies or the Brunei Darussalam Ministry of Finance. The products mentioned in this document are not registered, licensed or permitted by the Autoriti Monetari Brunei Darussalam or by any other government agency or under any law in Brunei Darussalam. Any offers, acceptances, sales and allotments of the products shall be made outside Brunei Darussalam. Hong Kong SAR: Bank of Singapore Limited is an Authorized Institution as defined in the Banking Ordinance of Hong Kong (Cap 155), regulated by the Hong Kong Monetary Authority in Hong Kong and a Registered Institution as defined in the Securities and Futures Ordinance of Hong Kong (Cap. 571), regulated by the Securities and Futures Commission in Hong Kong. Indonesia: The offering of the investment product in reliance of this document is not registered under the Indonesian Capital Market Law and its implementing regulations, and is not intended to constitute a public offering of securities under the Indonesian Capital Market Law and its implementing regulations. According, this investment product may not be offered or sold, directly or indirectly, within Indonesia or to citizens (wherever they are domiciled or located), entities or residents, in any manner which constitutes a public offering of securities under the Indonesian Capital Market Law and its implementing regulations. Japan: The information contained in this document is for general reference purposes only. It does not have regard to your specific investment objectives, financial situation, risk tolerance and particular needs. Nothing in this document constitutes an offer to buy or sell or an invitation to offer to buy or sell or a recommendation or a solicitation to buy or sell any securities or investment. We do not have any intention of conducting regulated business in Japan. You acknowledge that nothing in this document constitutes investment or financial advice or any advice of any nature. Malaysia: Bank of Singapore Limited does not hold any licence, registration or approval to carry on any regulated business in Malaysia (including but not limited to any businesses regulated under the Capital Markets & Services Act 2007 of Malaysia), nor does it hold itself out as carrying on or purport to carry on any such business in Malaysia. Any services provided by Bank of Singapore Limited to residents of Malaysia are provided solely on an offshore basis from outside Malaysia, either as a result of “reverse enquiry” on the part of the Malaysian residents or where Bank of Singapore Limited has been retained outside Malaysia to provide such services. As an integral part of the provision of such services from outside Malaysia, Bank of Singapore Limited may from time to time make available to such residents documents and information making reference to capital markets products (for example, in connection with the provision of fund management or investment advisory services outside of Malaysia). Nothing in such documents or information is intended to be construed as or constitute the making available of, or an offer or invitation to subscribe for or purchase any such capital markets product. Myanmar: The provision of any products and services by Bank of Singapore Limited shall be solely on an offshore basis. You shall ensure that you have and will continue to be fully compliant with all applicable laws in Myanmar when entering into discussion or contracts with Bank of Singapore Limited. Oman: This document does not constitute a public offer of investment, securities or financial services in the Sultanate of Oman, as contemplated by the Commercial Companies Law of Oman (Royal Decree No. 4/1974), Banking Law of Oman (Royal Decree No. 114/2000) or the Capital Market Law of Oman (Royal Decree No. 80/1998) and the Executive Regulations of the Capital Market Law (Ministerial Decision No. 1/2009) or an offer to sell or the solicitation of any offer to buy non-Omani investment products, securities or financial services and products in the Sultanate of Oman. This document is strictly private and confidential. It is being provided to a limited number of sophisticated investors solely to enable them to decide whether or not to make an offer to invest in financial products mentioned in this document, outside of the Sultanate of Oman, upon the terms and subject to the restrictions set out herein and may not be reproduced or used for any other purpose or provided to any person other than the original recipient. Additionally, this document is not intended to lead to the making of any contract within the territory or under the laws of the Sultanate of Oman. The Capital Market Authority of Oman and the Central Bank of Oman take no responsibility for the accuracy of the statements and information contained in this document or for the performance of the financial products mentioned in this document nor shall they have any liability to any person for damage or loss resulting from reliance on any statement or information contained herein. Russia: The investment products mentioned in this document have not been registered with or approved by the local regulator of any country and are not publicly distributed in Singapore or elsewhere. This document does not constitute or form part of an offer or invitation to the public in any country to subscribe for the products referred to herein. South Korea: The document does not constitute an offer, solicitation or investment advertisement to trade in the investment product referred to in the document. The Philippines: The information contained in this document is not intended to constitute a public offering of securities under the Securities Regulation Code of the Philippines. Dubai International Financial Center (DIFC): Bank of Singapore Limited has a branch registered in the Dubai International Financial Centre ("DIFC") which is regulated by the Dubai Financial Services Authority (“DFSA”). Bank of Singapore Limited (DIFC Branch) is not a financial institution licensed in the United Arab Emirates outside of the DIFC and does not undertake banking or financial activities in the United Arab Emirates nor is it licensed to do so outside of the DIFC. This material is provided for information purposes only and it is general information not specific in any way to any particular investor, investor type, strategy, investment need or other financial circumstance. As such this information is not financial advice or a financial promotion, nor is it intended to influence an investor's decision to invest. It is not to be construed as an offer to buy or sell or solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction. The material is only intended for persons who fulfill the criteria to be classified as “Professional Clients” as defined under the DFSA rules and should not be reviewed, received, provided to or relied upon by any other person. United Arab Emirates (U.A.E): The information contained herein is exclusively addressed to the recipient. The offering of certain products in this document has not been and will not be registered with the Central Bank of United Arab Emirates or Securities & Commodities Authority in the United Arab Emirates. Any products in this document that are being offered or sold do not constitute a public offering or distribution of securities under the applicable laws and regulations of the United Arab Emirates. This document is not intended for circulation or distribution in or into the UAE, other than to persons in the UAE to whom such circulation or distribution is permitted by, or is exempt from the requirements of, the applicable laws and regulations of the United Arab Emirates. The distribution of the information contained herein by the recipient is prohibited. Where applicable, this document relates to securities which are listed outside of the Abu Dhabi Securities Exchange and the Dubai Financial Market. The Bank of Singapore Limited is not authorized to provide investment research regarding securities listed on the exchanges of the United Arab Emirates which are outside of the DIFC. United Kingdom: In the United Kingdom, this document is being made available only to the person or the entity to whom it is directed being persons to whom it may lawfully be directed under applicable laws and regulations of the United Kingdom (such persons are hereinafter referred to as ‘relevant persons’). Accordingly, this document is communicated only to relevant persons. Persons who are not relevant persons must not act on or rely on this document or any of its contents. Any investment or investment activity to which this document relates is available only to relevant persons and will be engaged in only with relevant persons. Relevant persons in receipt of this document must not distribute, publish, reproduce, or disclose this document (in whole or in part) to any person who is not a relevant person. United States of America: This product may not be sold or offered within the United States or to U.S. persons. In Hong Kong, Bank of Singapore Limited is a branch of Bank of Singapore Limited incorporated in Singapore with limited liability.
© 2019 Bank of Singapore Limited. All rights reserved.
Version: March 2020