Despite being a Saturday morning, it was a full house at The Edge Singapore’s Year-End Investment Forum on Dec 2. Sponsored by Moomoo SG, the forum featured three experts discussing the outlook for next year.
The speakers were Too Jun Cheong, an equity dealer, Moomoo Financial Singapore; Song Seng Wun, Singapore economic advisor, CGS-CIMB Securities; and Choo Chian, director, macro and multi-asset strategy, UOB Asset Management (UOBAM).
In Too’s presentation, titled “How can investors position their portfolios in an era of economic uncertainties? A tactical game plan for 1Q2024”, the importance of diversification was discussed.
Year to date, the S&P 500 is up some 19% while the Nasdaq is up a more spectacular 36%. The Straits Times Index (STI), on the other hand, has lost almost 5%. If local investors had stuck with the Singapore-listed stocks, they would have underperformed global markets.
However, investors can look into diversifying across different asset classes such as stocks, bonds, mutual funds or even commodities. “Investors can also diversify not just across different types of assets, but different countries,” Too suggests. “When you do diversify, one of the things to take note, of course, is foreign exchange risks,” he cautions.
The most common diversification is the 60:40 division with 60% in equities and 40% in bonds. That may have been fine when interest rates were very low but at current levels of interest rates, portfolios would need to do better than the respective risk-free rates which are yields on 10-year government bonds.
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“The US market did really well [this year]. During diversification, the best way to hedge against, say a recession, is to combine equity positions with options as insurance to protect your position,” Too reasons.
SGX has introduced daily leveraged certificates or DLCs, which offer investors a fixed leverage of three to seven times the daily performance of the underlying index, be it a rising or falling market. “Yet another way of portfolio hedging is the currency hedge. for instance, should the US dollar become less attractive. A popular hedge against the US dollar is gold,” Too continues.
The moribund Singapore market
Why has the S&P500 risen by almost 20%, the Nasdaq by over 36% while the STI is treading water?
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UOBAM’s Choo puts it down to the STI’s components, which have heavy weightage from banks and REITs. The earnings of banks are usually boosted by firmer interest rates. However, as rates peak and funding costs catch up, they may underperform interest rate-sensitive assets such as bonds and REITs. REITs have underperformed for most of last and this year simply because they are affected by risk-free rates and their yields tend to expand when risk-free rates rise.
The net result is likely to be a stagnation by the index. Too puts it a lot more politely: “The STI is not doing as well as the S&P. One of the best aspects of the Singapore market is its stability, as it is a dividend play and has lower volatility. Some investors are looking for this type of stability, less volatility, more dividend.”
CGS-CIMB’s Song also notes that the fear of higher-for-longer interest rates and a recession has impacted the REITs and banks in Singapore, unlike the other indices that gained thanks to their tech stocks.
Choo of UOBAM adds that the US market, in particular, has growth stocks which underpinned its rally. “In global markets, index components tend to be tech, conglomerates, communication services [and] energy,” he suggests.Singapore has interest rate-sensitive stocks as components of the STI. “The banks are sensitive to policy rate changes. And the situation could be negative for banks,” Choo indicates, referring to the end of the rate hike cycle.
“The higher-for-longer scenarios affect different sectors,” Choo adds. In his view, the US Federal Reserve Board is likely to start cutting rates in 2024.
“Some of this has already been priced in by the bond markets. For equity markets, interest rate cuts are partially priced in. Those are interest rate-sensitive sectors which would do well as rates coming down point to lower P/E multiples. The lower cost of borrowing available will benefit most companies,” Choo says.
In his view, while growth stocks are trading at relatively high multiples from 50x to 100x, dividend-focused investors have to be very aware of the underlying factors of what is key in some cyclicals.
In some areas, investors may have over-anticipated the rate cuts next year. An example of some of the exuberance from anticipation that the Fed is almost done with its rate hikes is the surge in the Meme ETF.
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“The Meme ETF has risen nearly 20% in November after the previous FOMC meeting. The S&P is up around 20% for the whole year but this ETF is up almost 20% in a month. It is interesting how investors react when rates are believed to have peaked,” Too points out.
On the economic front, Song, who has seen many economic cycles, points out that a recession is mathematically, easy to achieve. “If you get into two consecutive quarters of contraction, that’s a recession. The high cost of borrowing will slow down economic activities,” he says.
On the other hand, labour market conditions remain supportive. Conversely, that may cause the Fed to keep rates higher for longer. “I will say at the earliest would be a cut would be in the middle of the year. A lot of things can happen and everything will be data-dependent,” Song suggests, echoing the views of Fed chairman Jerome Powell.
“I want to remind people to be more careful not to get carried away because the dollar has eased, oil prices have come down but keep a watch on cryptocurrencies and gold prices,” Song cautions.
Soft landing in US?
Choo says UOBAM expects 2024 to be pretty stable because the hard lifting has been done. “This coming year should present a more so-called stable, benign environment, probably with fewer surprises, yet with investors looking at it with discretion,” he says, with US equities and bonds doing “pretty well”.
The US consumer remains resilient although there is a risk of consumer spending sputtering. “This is not the base case scenario but is certainly something to be monitoring,” Choo says. In the meantime, capital expenditure which has been below average is picking up with the Inflation Reduction Act, reshoring and possibly defence spending.
China’s property market has been something of a tail risk for Asian markets. Can the second-largest economy in the world recover from its slumber?
“China has been something of a disappointment this year when the post-Covid rebound did not materialise,” Song says. In his view, the downside of a centrally-planned economy is it takes a longer time to recover because the policy planners are focused on stability.
“But the good thing is, then everything moves in the same direction. Although people now focus on the worries of the property market, if we take a step back, before Covid, the Chinese authorities had big worries about the huge amount of leverage that some of their companies had overseas,” Song recounts. “That to me is a reminder of how things work in China. We may believe things slow but then the Chinese government will get around to it and when they do, it will be a more orderly adjustment.”
At any rate, other sectors of the Chinese economy are moving ahead, in particular technology with 5G and sustainability. For instance, many Chinese companies are well ahead of their Western counterparts in the electric vehicle (EV) supply chain, in particular with the vehicles themselves and battery technology.
Meanwhile, the Chinese government remains focused on stability. “That is very important because if you have a crisis of confidence, people start to panic and it will be very hard to unwind,” Song says. “I’m more positive. The government is likely to ensure that projects essentially can still move forward and they are likely to put some sort of floor underneath these projects in an orderly manner.”
Moreover, Song points out that the supply chain that involves China will not disappear, with the Chinese government ensuring Chinese corporations are part of the structural shift. “Basic consumption is likely to return stronger once there is greater clarity and confidence in the economy is starting to generate more jobs,” Song adds.
Yet, as investors look to position themselves in sectors that may benefit from the volatile markets, Moomoo’s Too is also careful to remind investors to pare down any debt they may have. “If you’re on any form of debt, it [will] also be higher for longer … and we do not know how long this high-interest rate environment will be for,” he says.
