SINGAPORE (Oct 3): The investment landscape is quickly changing, amid ongoing US-China trade tensions as well as fluctuations in gold and oil prices. And, to ride the wave of uncertainty, DBS Bank has one key piece of advice for investors: Diversification is key.
In the bank’s 4Q outlook on Thursday, aptly themed “Ride the Wave”, DBS Chief Investment Officer Hou Wey Fook focused on how investors should grapple with the “new normal” marked by near-zero to negative cash and bond yields.
“Global central banks have resumed policy easing, and the amount of negative yielding bonds today is at an unprecedented level – making up 25% of the world bond market capitalization,” says Hou.
According to Hou, investor sentiment is likely to be shaken – unless investors take steps to diversify their portfolios without banking too much on any one sector to deliver.
“We always advise our clients to diversify their portfolios. For instance, about 50 to 100 bonds is what we recommend. Clients need to understand that they are not paid to take risks,” says Hou.
In addition to diversification, Hou continues to advocate a “barbell strategy”, or including investments of both growth-oriented and conservative natures in the portfolio.
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According to Hou, this involves building overweight positions in two areas: Income-generating assets, and equities that thrive on secular growth trends.
On the global front, he notes equities appear to be relative cheap compared to bonds, which are looking especially pricey after a robust rally this year.
Identifying one area of promise, Hou highlighted that dividend-yielding equities are poised to emerge as the new “bond proxies” – in line with global economic momentum showing tentative signs of recovery.
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“Within our Barbell strategy, we favour Singapore REITs and China large banks,” says Hou. “Singapore REITs offer both yield and growth, and China banks are set to benefit from the recent interest rate reform.”
Surprisingly, Hou also favours Europe oil majors, which he describes as “bold”. Despite the recent oil price volatility, Hou says the free cashflow and absolute dividend per share is “admirable”.
Meanwhile, Hou notes that gold, despite also having experienced recent price fluctuations, has always been termed a “stable store of value”. Unlike money, the precious metal continues to be steadily appreciated by central banks’ policies.
Hou stresses that although it negatively correlates with real rates, gold will still be favoured as an effective portfolio diversifier amid an unpredictable tug-of-war between monetary policies and geopolitics.
Overall, Hou advises investors to pay attention to the macro economic outlook, and pay special attention to factors such as e-commerce, cloud computing, Asian tourism and the millennial wave.
