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June 29, 2017

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DBS Group predicts gains in global equity market for investors

TAIPEI, Taiwan -- DBS Group recently encouraged investors to ante up securities holdings, given that the uptrend in the global equity market from 2009 is unlikely to terminate in the third quarter after a battle between bulls and bears.

In an investment outlook for the third quarter, DBS Group said the termination of the global equities uptrend from 2009 does not appear to be imminent. A more likely scenario is a significant correction in the second half of the year. Beyond that, global equities should push higher still, but with significant rotation of leadership and outperformance.

Cheap money, along with negative real interest rates, remains a powerful incentive for investors to stay with risk, in both equities and corporate credits.

The outlook for global equities continues to be dominated by moderate growth, stimulatory monetary policies and low volatility. And these three factors are intertwined, DBS said.

Economic growth in developed markets remains modest and inflation is benign. The U.S. Federal Reserve is in no hurry to raise rates from near-zero levels, even as it moves toward the end of quantitative easing. Meanwhile, the European Central Bank has moved its policy rate near zero, and is looking toward "unconventional" monetary policy tools to avoid deflation.

Asian Economies Gain Traction

Japan continues to engage in aggressive monetary expansion. Meanwhile, mainland China's economic growth rate appears to be bottoming out. India is enjoying renewed confidence with the election of a new, business-friendly government.

DBS mentioned that since mid-2011, there have been divergences between developed and emerging markets, with the former outperforming the latter. Even within developed markets, there have been differences, with European and Japanese equities lagging behind U.S. stock performance from 2009.

DBS said although it continues to maintain its overweight outlook on developed market equities, it would also take on more weight now in Asia (ex-Japan) and emerging markets. While catalysts for Asia (ex-Japan) and emerging market outperformance are still not apparent, these markets are now a lot more attractively valued relative to the U.S., Europe and Japan.

At some point over coming months, the narrowing of trading ranges in indices of the emerging markets/Asia (ex-Japan) will bring optimists and pessimists head to head.

Given Asia's superior economic growth fundamentals, DBS said it would be inclined to "bet" on a breakout in favor of the region's equities. And with that, a rotation in the leadership of the equities bull market.

A subdued 10-year U.S. Treasury yield has bought the bond market a bit of time. This has been a function of a modest recovery from the weather-induced economic weakness of the first quarter. But declining net issuance of U.S. Treasuries has also helped hold down yields.

Nevertheless, the rotation of funds out of bonds into equities can be expected, DBS said. The Singaporean bank also said it continues to underweight bonds, preferring corporate credits over government bonds.

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