DBS also highlights attractive yield opportunities throughout the fixed-income market spectrum — in developed markets, global investment grade bonds are at 5.5%, and high yield is at 9.1%. In emerging markets, the figure stands at 7.5%, and hybrid capital bonds are at 9% to 9.4%. “This is a very attractive market compared to what we’ve seen in the last 20 years,” adds Hou. Hou’s team has long advocated the “barbell strategy,” emphasising high-quality income-generating companies alongside growth-focused assets. This approach remains their preference. On the portion of income generation, the team once had substantial exposure to dividend-yielding stocks alongside bond interest income. However, due to the Fed’s recent policy shift, DBS has shifted focus entirely to bonds, significantly reducing their dividend-yielding equity holdings.
The “sweet spot” from a risk-reward perspective is to invest in shorter-dated investment grade bonds, says Hou Wey Fook, the chief investment officer of DBS. That means buying bonds from safer, higher-rated issuers with shorter maturities while waiting for market volatility to blow over.
Hou was speaking at the bank’s 4Q2023 investment outlook briefing on Oct 4, titled The Next Yield Play, which details their investment strategy for this quarter. Corporates have been taking advantage of zero bound rates from 2020 to 2022, but with interest rates and yields “exploding”, the investment grade sector is “much better insulated”, in which there will be a continuation of a low default rate environment, he adds.
According to DBS, the “higher for longer” interest rate environment by the US Federal Reserve (Fed) will ensue until recessionary signals emerge. On separate occasions on Oct 8 and 9, various top Fed officials reportedly said the tightening may pause. For example, Dallas Fed President Lorie Logan said that if risk premiums in the bond market are on the rise, that “could do some of the work of cooling the economy for us, leaving less need for additional monetary policy tightening”.
DBS investment team forecasts a 6% total return on a three-year bond portfolio if the Fed halts rate hikes in the next 12 months. But in a scenario where the economy slows down, leading to the Fed cutting rates by 100 basis points (bps), the return on this portfolio will be 9%, making for an attractive return, says the DBS investment team.
