Regime Change
Reflation Is Here
Quarterly Investment Strategy
First Quarter 2017
Asset Allocation
Equity
Equities raised to Overweight,
Fixed Income reduced to Underweight,
Remain Neutral on Commodities,
Cash raised to Neutral
Developed Markets raised to Overweight,
Emerging Markets reduced to Underweight
Fixed Income
Commodities
Remain Underweight Developed Markets,
Emerging Markets reduced to Underweight
Overweight on Gold and Base Metals,
Underweight on Bulk Commodities and Agriculture,
Remain Neutral on Energy
As one of the thought leaders in asset management, UOBAM regularly produces topical
investment research articles and publications to help our clients stay on top of financial
market developments.
Webcast – Asset Allocation Strategy for Q1 2017
In our quarterly webcast, Mr Tony Raza, Head of Multi Asset Strategy Unit, will share
our asset allocation strategy, as well as discuss key issues driving developments in
global markets.
View the webcast on the homepage of our website at uobam.com.sg.
ContentS
4
5
9
14
19
21
Global Asset Allocation Summary
Global Investment Strategy
Equity Strategy
Fixed Income Strategy
Commodities Strategy
Appendix
QUARTERLY INVESTMENT STRATEGY
First Quarter 2017
3
Investment Strategy Summary
A Reflation Theme Takes Hold
Reflation is the normalisation of inflation and growth rates from low
inflation and deflationary levels. High inflation significantly above
central bank targets is considered bad inflation. However rising
inflation that gets a country out of deflation and back to normal
target levels is considered healthy, carrying implied better macroeconomic conditions. In the current environment, reflation likely
means central banks will no longer have to resort to extraordinary
efforts to meet inflation targets. This also demonstrates that slack
in the economy has been largely taken up, while growth rates and
wages may start to improve. At the same time, normalising inflation
also implies that costs are rising in tandem with wages and revenues,
and that real wages and profits are not necessarily increasing as
fast as much as nominal profits. The broad picture is that overall
investment levels tend to improve with nominal growth and the
world is desperately in need of some confidence and investment.
In most countries suffering deflationary periods, most asset
allocators recommend saving money in either cash or government
bonds. However in periods of normalising inflation, most asset
allocators would recommend investing in stocks and other growth
investments. In a deflationary world, savings in even low yielding
cash accounts have positive real returns and government bonds
hold positive yields plus real returns. Conversely, investments in new
businesses look weaker in a deflationary world. Every loan to start
a new business increases in real terms in the amount that has to be
paid back. For example in a country with a 2% deflation a $100 loan
turns into a $102 loan in real terms after a year. The business that the
loan was used to invest in, is seeing lower revenues and costs each
year due to deflation and thus makes the loan harder to service.
Thus investment levels weaken in deflationary environments. And
the opposite is true in reflationary environments. Businesses “feel”
that the loan taken out to start a new business becomes smaller in
real terms each year and they see their profits growing in nominal
terms. Thus saving looks less attractive and investment looks more
attractive in reflation and thus growth can improve.
It comes as a surprise to many that this reflation trend is taking
off at this stage, or 7 years into this expansion. The combination
of improving global economic trends and expected fiscal policy
support accounts for the sudden change of global sentiment. While
growth has appeared lacklustre through most of the year, positive
trends had been quietly building. In particular, the US economy had
been consistently growing and taking up excess capacity in labour
over the past 7 years, and wages appear to be finally climbing.
Inflation had been slowly creeping closer to more normal levels and
a little stimulus should give market confidence that it will finally
happen.
The surprise election of Donald Trump as US president may seem
an unlikely trigger to tip the US into reflation, but we would argue
that the key policies that are needed are likely to be implemented.
Even more important than the Trump victory is the fact that the US
congress is likely to shift from obstructionism to developing policies
which supports growth. This fiscal boost on top of the already
improving economy becomes a strong basis to expect the reflation
theme to dominate market narrative over 2017.
In the last quarter we highlighted that we were neutrally positioned
between equities and fixed income as we saw equal dangers of
global economies slipping into deflation which would favour fixed
income or reflation which would favour equities. This quarter we
think the scale has tipped toward reflation and thus we are taking
on a more pro-growth positioning.
We recommend an overweight on equities and an underweight
position in fixed income. Within equities we are overweight on
the developed markets (DM) over the emerging markets (EM) with
a focus on the US. In fixed income we are positioning to short
duration and an overweight position in credits over government
bonds. We are neutral on commodities and cash.
John Doyle
Chief Investment Officer
Equities & Multi-Assets
Chong Jiun Yeh
Chief Investment Officer
Fixed Income & Structured Investments
UOB Asset Management
4
QUARTERLY INVESTMENT STRATEGY
First Quarter 2017
GLOBAL ASSET ALLOCATION SUMMARY
For the first quarter of 2017 we have raised our equity allocation
to overweight from neutral and lowered fixed income from
overweight to underweight. We remain neutral on commodities
for the first quarter and are also neutral on cash.
We expect the reflation theme to persist as a key theme in
investment markets in 2017. Reflation implies normalising levels of
inflation and growth which will in turn lead to central bank policy
normalisation. In such an environment, better growth and better
nominal returns tend to support equity market performance but
rising inflation expectations put upward pressure on rates which
will acts as a headwind to fixed income performance. While
these factors are led by the US, we expect these trends to affect
global markets due to the influence that US rates have across
fixed income markets.
Global Asset Allocation*
--
-
Equities
Fixed Income
Commodities
Cash
Source: UOBAM, 1 December 2016
N
+
++
Equities – Overweight
Reflation can benefit equities in several ways. Higher
nominal growth should improve the corporate earnings
outlook. Rising rates should encourage a rotation from
fixed income to equities which should in turn support
equity prices. Also, better wages and headline growth
numbers could further embolden the “animal spirits” or
emotion fuelled consumer confidence which supports
investment. For the year we would expect high single digit
levels of returns.
Fixed Income – Underweight
The global outlook for the past couple of years has
been one of low growth and low inflation which is very
supportive of fixed income performance. But inflation
and interest rate normalisation will likely prove to be a
headwind to performance. We expect Fed rate hikes will
be modest (3 in 2017) and that long term rates will continue
to trend higher. But we think the rate increases will be slow
enough that the full year performance for fixed income
markets will remain positive at low single digit levels.
Commodities – Neutral
Reflation would tend to be positive for commodities as
well but seasonally we find the first quarter to be weak.
Additionally the strong moves in the USD tend to be
headwinds for commodities. We intend to monitor the
commodities outlook for signs of greater strength and may
be in position to raise the outlook in the second quarter.
Cash – Neutral
The growth outlook has improved but risks remain high
and there are increased uncertainties with the new US
Presidency. A neutral call on cash is warranted.
Please refer to the last page for the important notice & disclaimer.
QUARTERLY INVESTMENT STRATEGY
First Quarter 2017
5
GLOBAL INVESTMENT STRATEGY
Regime Change – Reflation is here
Starting in 2008, one of our main tools used to describe our
investment views through the cycle was the investment cycle
clock. This is based on traditional academic investment cycle
analysis and provides an investment process to determine
which asset classes to invest in given the stage of the economic
cycle the world is facing. At the peak of the bull market when
economies start to slow down, the clock advises investors to
focus on cash. When an economy sinks to outright recession
it advises a bias toward government bonds which benefit from
rising prices as central banks cut rates. Once the economy has
survived the worst point of the recession, it advises to focus
on equities which will rebound in the recovery. And finally in an
overheated economy, commodity prices tend to rise sharply.
The invest clock was a very useful tool from 2007 through the
downturn in 2008 and the rebound through 2010. We were
cautious and underweight on equities throughout 2008 and then
shifted back to equities in May 2009. The period between 2011 to
2016 was confusing in that growth was positive, but none of the
usual signs of expansion that the clock monitored were showing.
Specifically, the clock points to rising inflation and rising rates as a
signal that an expansion is getting mature and could be reaching
the peak of the cycle. However the period between 2011 to 2016
was defined by slow but positive growth that did not trigger a
rise in inflation or a rise in interest rates.
In such an environment the investment clock was no longer a
useful tool. We were forced to tell our investors that the clock
was “broken” and would be decommissioned until further notice.
Economically, our main rationale on why this was happening was
that inflation was a key trigger for determining the speed with
which markets rotated through the investment cycles. Global
inflation had effectively stalled and was even threatening to
turn into deflation. Hence we needed a broader methodology
on how we would invest when inflation was not progressing as
normal.
In 2014 we first published our Inflation Regime Methodology. We
explained that there were three main inflation regimes in which
asset classes behaved differently. A different asset allocation
process would be assigned upon assessment of the kind of
inflation regime within the global economy.
UOBAM Investment Clock
Top of Boom
Ca
sh
Ou
es Fall
Pric
tate
Es
al
Re
Recovery
Recession
F a ll
Slowdown
is e
wI
rm
nfl a
tio n
Bo
nd
s
O
es
tR
rm
Lo
rfo
te r
rf o
pe
pe
In
O
sR
ut
ut
ce
ies
P ri
u it
tate
Eq
R eal Es
Boom
ate s
mo
di
tie
s
rm
rfo
tpe
Ou
High
Infl
atio
n
m
for
er
tp
Commo
dity
Pri
ce
sR
ise
Com
Rise
ates
st R
ere
t
n
I
al & s
Fisc licie
Easy ry Po
ta
Mone
Bottom of Boom
UOB Asset Management
6
QUARTERLY INVESTMENT STRATEGY
First Quarter 2017
Inflation regime investment cycles
Low inflation with QE
Normal inflation
Deflation
Top of Boom
Ca
sh
•
Ou
es Fall
Pric
tate
Es
al
Re
Recovery
Recession
is e
tio n
nd
s
O
tR
rm
nfl a
Bo
es
rf o
wI
rm
te r
pe
Lo
rfo
Structurally, bonds
outperform equities for long
periods of time (Japan ex —
government bonds yielded
annual 3% real returns, equities
achieved negative returns)
In
O
sR
pe
ut
ce
ies
P ri
u it
tate
ut
•
F a ll
Slowdown
Eq
R eal Es
Boom
•
Positive for both Equities
and Fixed Income — even in
subpar growth environment
Risk asset volatility around
financial stress and spikes in
crisis risks
ate s
mo
di
tie
s
rm
rfo
tpe
Ou
High
Infl
atio
n
m
for
er
tp
Commo
dity
Pri
ce
sR
ise
Com
Rise
ates
tR
res
e
t
In
al & s
Fisc licie
Easy ry Po
ta
Mone
We are here:
Global Situation 2017
Bottom of Boom
The first regime to take note of is the secular stagnation regime
which is frequently associated with outright deflation. From the
early 1990’s to present, Japan surfaces as the prototypical case of
secular stagnation. The experience of Japan is that equities achieved
close to flat returns over the past 20 years (this even excludes the
initial market collapse and returns would be worse if we included
the initial declines). Fixed income returns were positive and low but
could generate an average annual return of 3% over the past 20
years. Thus one of the stronger conclusions of secular stagnation is
to overweight bonds over equities. Rates remain low for a very long
time and growth stayed muted – a perfect environment for fixed
income.
The second inflation regime is one of low inflation with monetary
policy support. This regime is defined by inflation and growth levels
that are below the central bank target levels and central banks
are actively trying to reach inflation targets. The prototypical case
happened during the post-recession period of 2011 to 2016. Central
banks around the world implemented aggressive monetary policy
tools in order to generate inflation. The tools included lowering
interest rates and purchasing large amounts of assets to increase the
liquidity within the economy. During these periods, rates remained
low and asset prices rose with liquidity support. The performance
of equities and fixed income over this period is consistent with
what we would expect – both performed reasonably well although
with significant volatility.
Please refer to the last page for the important notice & disclaimer.
Finally the third inflation regime is one of normal inflation. For
this regime we go back to the investment clock. Thus in periods
of expansion with rising inflation and rising rates the clock would
advise equities over fixed income and when the expansion gets
very heated, it then focuses on commodities. We would argue that
the global expansion is mature at 8 years but that excess slack has
only recently been taken up and inflation trends are just starting.
We think it points to roughly 10.30pm on the clock – not yet at the
peak but at least half way through the expansion. When inflation
and growth are overheated at some stage in the next couple of
years the clock would advise shifting toward raising cash levels.
We think this methodology explains a large part of what we have
seen in markets over recent years. Global markets were largely
in a regime of low inflation with lots of quantitative easing (QE)
enabling both equities and fixed income to perform. Markets
started to increasingly price a regime shift to secular stagnation in
the second half of 2015 and first half of 2016 and thus fixed income
outperformed equities over this period. And finally, in the past
month markets have concluded that we are back to a reflation
regime which implies overweighting equities again.
QUARTERLY INVESTMENT STRATEGY
First Quarter 2017
Global market indicators
After assessing the broad strategic asset class framework, we
use our global scorecard to assess the momentum, economic
trends, valuations and fund flows around the world. Our view
is that global growth signals are improving across the world but
that equities the developed markets look stronger compared
to the emerging markets. Recent momentum points toward
commodities and developed market equities over fixed income
and emerging market equities.
Economic indicators are broadly supportive of global growth
and support the consensus outlook for sustained growth at a
moderate rate. The Purchasing Managers’ Index (PMI) numbers
across the world have been above the 50 level, indicating
expansion and on improving trends. Economic surprise indices
have generally been trending up across the world as global
macro-economic data have been showing signs of improving
strength.
Global markets performance trends (3mth return USD)
Global PMI trends
3 mths performance in USD as of 30 Nov 2016
Purchasing Managers’ Index
C-Energy
Eurozone
Japan
6.4%
C-Agri
3.0%
Fl-High Yield
0.7%
EQ-Developed Market
0.1%
Fl-Jaci
-2.6%
EQ-Asia
-2.8%
EQ-Emerging Market
58
54
50
-3.1%
Fl-EM
-4.9%
Fl-Investment Grade
-5.9%
Fl-G7
C-Gold
US
17.4%
C-Industrial Metals
46
-7.3%
-10.7%
-15
42
-10
-5
0
5
10
15
20
Source: UOBAM, Bloomberg, 30 November 2016
13
ov
N
14
ay
M
14
ov
N
15
ay
M
15
ov
N
16
ay
M
16
ov
N
Source: UOBAM, Bloomberg, 30 November 2016
UOB Asset Management
7
8
QUARTERLY INVESTMENT STRATEGY
First Quarter 2017
The stronger trends in the US economy and the expectations
of further fiscal support have combined for a stronger outlook
in the US economy for 2017. Furthermore signs of rising inflation
imply that the Fed is likely to raise rates a few times over the
course of the next year. In addition, rising rates and a strong
macroeconomic backdrop combine to form a strong outlook for
the USD.
Dollar Index Spot
(Rebased 100 on 31 December 2014)
Index
110
105
100
14
ec
D
15
ar
M
5
n1
Ju
5
p1
Se
15
ec
D
16
ar
M
6
n1
Ju
6
p1
Se
Source: UOBAM, Bloomberg, 30 November 2016
We expect that the improving growth environment, reflationary
trend and strong USD backdrop imply outperformance for US
and DM equities. We expect emerging market (EM) and Asian
equities to provide positive returns over the coming year but will
lag DM equities as they have done in other periods amid rising
US rates and a strong USD.
Assessment and outlook
We expect 2017 to be more reflationary with better growth
and normalising levels of inflation and interest rates. Our view
is that this trend will help the world break out of its flirtation
with secular stagnation and thus implies an environment where
equities should perform better than fixed income. Better
nominal growth should boost earnings for corporates and
could help stimulate “animal spirits” that support investment
and further growth. At the same time, reflation implies the US
Federal Reserve (Fed) will have to continue with its rate hike
plans (we expect 3 more in 2017). We expect this rate hike path
will be gradual enough that fixed income markets will be able
to continue to provide positive returns, and concurrently create
enough of a headwind that expected returns should fall to low
single digit levels over the coming year.
Please refer to the last page for the important notice & disclaimer.
Furthermore, we expect the reflationary trend and interest rate
hikes to be supportive of the greenback as we anticipate it to
appreciate between the 3 % to 5 % range. Historically, during
period of USD strength, developed market equities outperform
emerging market equities. And while commodities would usually
do well during periods of higher inflation, they also tend to
underperform during periods of dollar strength.
We think the risks to look out for in 2017 would include US policy
makers failing to deliver on fiscal support promised. Additionally,
it will take time for fiscal support to be rolled out either in terms
of infrastructure spending or tax cuts. If the economy starts to
slow and wage increases don’t materialise, the market would
easily return to the momentum from early in 2016 where yields
remained low and fixed income performed better than equities.
Additionally, there are several Trump policies that are more
negative on growth including protectionism and immigration
reduction that could start to weigh on growth in 2018. European
politics could be another source of risk as both Brexit and the
Italian referendum imply growth risks in the European project.
Over in China, the economy is currently tracking well, but we
expect property construction to begin slowing in 2017 and when
China’s economy starts hitting the brakes, global markets would
likely turn volatile on fears of a potential hard landing.
There are not many historical periods where major economies
have shifted from low inflation and secular stagnation to a
reflationary environment. Our asset class investment models
indicate that this regime shift should be supportive of growth
and assets such as equities. It is fair to note that in this
environment, we are forced to make theoretical assumptions
rather than decisions that are based on historical precedents.
Thus the start of 2017 appears promising for growth but will
require careful monitoring for objective evidence for these
growth theories to be confirmed.
QUARTERLY INVESTMENT STRATEGY
First Quarter 2017
9
EQUITY STRATEGY
GLOBAL EQUITY
SECTOR ALLOCATION
--
-
N
+
++
Consumer
Discretionary
Consumer Staples
Energy
Financials
Real Estate
Healthcare
Industrials
Materials
Information
Technology
Telecommunications
Services
Utilities
Notes:
The weights are relative to the benchmark – MSCI AC World Index.
‘- -’ denotes maximum underweight, ‘-’ slight underweight, ‘N’ neutral, ‘+’ slight overweight, ‘+
+’ maximum overweight; arrows show change from last quarter.
We have a positive outlook on global equities in the longer term,
underpinned by continued growth in the advanced economies,
modest earnings growth outlook and strong corporate
profitability.
Given the years of underinvestment following the Global Financial
Crisis, we believe that technology companies should benefit
from rising corporate expenditure on technology hardware,
software and business solutions. Hence, we are overweight on the
information technology sector. We are also overweight on the
healthcare sector given its strong cash generation and dividend
yield. The sector continues to benefit from recent merger and
acquisition activities and strong earnings growth momentum.
We also have an overweight position in financials as we believe
that the rising rate environment should be positive for the banks’
margin amid attractive valuations.
Our strategy is to be underweight on yield and interest rate
sensitive sectors such as staples, telecommunications and utilities
while we are neutral on resources given improving demand and
supply balance.
UOB Asset Management
10
QUARTERLY INVESTMENT STRATEGY
First Quarter 2017
REGIONAL ALLOCATION
--
-
N
+
++
DEVELOPED
US
EUROPE
JAPAN
CANADA
AUSTRALIA
EMERGING
Asia Ex-Japan
LATAM
EMEA
Notes:
The weights are relative to the benchmark – MSCI AC World Index.
‘- -‘ denotes maximum underweight, ‘-‘ slight underweight, ‘N’ neutral, ‘+’ slight overweight, ‘+
+’ maximum overweight; arrows show change from last quarter.
Across regions, we have increased our regional exposure in
Developed Markets (DM) and decreased for Emerging Markets
(EM). This is largely due to our expectations of a stronger USD
which should see capital outflows from EM. Trump’s rhetoric on
global trade protectionism will also be an overhang on the EM
region.
Within DM, we remain overweight on the US which we expect
earnings growth to pick up again with improving economic
conditions. Meanwhile, the tightening labour force will result
in higher wage inflation. A higher disposable income from
consumers along with lower gasoline prices will support the
Please refer to the last page for the important notice & disclaimer.
retail sector, which remains a larger part of the economy. We
retain the view that the economy remains on a strong recovery
trajectory, and the US remains attractive for selective value plays.
We hold an underweight position in Europe despite the potential
for further economic recovery. A weaker euro has helped to lift
confidence and boost economic activity. The region also has
significant operating leverage to an upturn in economic activity
with profit margins currently at trough levels. However, we are
cautious against the backdrop of increasing geopolitical risks in
the region.
Concerns in Japan continue to linger. Economic data remains
mixed but we believe that the Bank of Japan (BoJ) will remain
accommodative, which would help to support the market.
Despite disappointments on policy and the anaemic economic
backdrop, there are some positive developments in corporate
governance and corporate performance. A weaker Yen also
should be beneficial to the exporters and corporate earnings and
hence we have upgraded our position in Japan.
We downgraded EM to an underweight position but there
remains selective value plays within the region. Challenges are
expected to persist due to domestic imbalances and the buildup of excess credit in the period following the Global Financial
Crisis. Meanwhile the slowdown in China continues to weigh
heavily on the demand and prices of resources. The abrupt shift
in the resources sector has dampened investments and growth
in much of the developing world. We believe that the EM still
present good multi-year opportunities from a structural and
macro standpoint but face challenges from a cyclical standpoint.
Growth is falling short of expectations and corporate earnings
could face further downward pressures unless productivity
levels can continue to rise. There are interesting bottom-up
opportunities and stock selection is increasingly critical.
QUARTERLY INVESTMENT STRATEGY
First Quarter 2017
11
ASIA PACIFIC EQUITY
SECTOR ALLOCATION
--
-
N
+
++
Our strategy is currently an overweight on the energy, healthcare
and consumer discretionary sectors. We are retaining our
overweight position in the energy sector given the strong demand
response resulting from low oil prices and improving demandsupply balance globally. We are also overweight on the healthcare
sector given its strong cash generation and dividend yield. We
remain positive on the longer-term trend for the consumer
sector as it provides exposure to the continued strong growth of
domestic demand. We have retained an underweight position in
the technology sector on the back of rich valuations and slowing
growth outlook. However, we remain positive on the sector on the
longer term.
Consumer
Discretionary
Consumer Staples
Energy
Financials
Healthcare
Industrials
Materials
The strategy is underweight on the materials sector due to
concerns on China, which is experiencing slower growth. The
country is also currently in the midst of implementing reforms.
Information
Technology
Telecommunications
Services
Utilities
Notes:
The weights are relative to the benchmark – MSCI Asia Pacific Index.
‘- -’ denotes maximum underweight, ‘-’ slight underweight, ‘N’ neutral, ‘+’ slight overweight, ‘+
+’ maximum overweight; arrows show change from last quarter.
REGIONAL Allocation
--
-
N
+
++
Asia Ex-Japan
Japan
Australia & NZ
Notes:
The weights are relative to the benchmark – MSCI Asia Pacific Index.
‘- -’ denotes maximum underweight, ‘-’ slight underweight, ‘N’ neutral, ‘+’ slight overweight, ‘+
+’ maximum overweight; arrows show change from last quarter.
Across regions, the current positioning of the Asia Pacific strategy is
to be overweight on Asia ex-Japan, Australia and New Zealand. The
position is funded from an underweight position in Japan. This is a
result of bottom-up securities selection and does not necessarily
reflect a view on the respective regions.
For example, the overweight position in Asia ex-Japan is due mainly
to the relative attractiveness of Indonesia and India financials
against the rest of the region. Similarly, the underweight position in
Japan reflects our concern on the operating prospects of Japanese
financial and material companies.
UOB Asset Management
12
QUARTERLY INVESTMENT STRATEGY
First Quarter 2017
ASIA EX-JAPAN EQUITY
COUNTRY Allocation
--
-
N
+
++
China
Hong Kong
India
Indonesia
South Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
Notes:
The weights are relative to the benchmark – MSCI Asia ex-Japan Index.
‘- -’ denotes maximum underweight, ‘-’ slight underweight, ‘N’ neutral, ‘+’ slight overweight, ‘+
+’ maximum overweight; arrows show change from last quarter.
Against expectations for global reflation and a strengthening USD,
inflation in Asia is also expected to rise. Economic growth forecasts
have been trimmed to more sustainable levels along stronger
growth in Indonesia and Thailand. Most Asian economies have
reached the tail end of the monetary easing cycle.
Current expectations of the impact of US President Trump’s
trade policies on Asian exports appear to be overly negative. US
growth recovery is usually positive for global cyclicals, USD earners,
selected banks and financials in Asia. However, uncertainty is likely
to cap short term market performance.
Asian markets and currencies have pulled back since Trump was
elected. Valuations are attractive below the mean level on a priceto-book basis. Asian economies are also on better footing today
compared to ‘taper tantrum’ in 2013. Current account positions have
improved, except in China, Malaysia and Philippines.
In China, the focus on reform and economic restructuring has led
to a manageable slowdown in GDP growth. We are neutral on China
and favour technology and telecoms sectors which are witnessing
stronger growth.
We turn cautious on Hong Kong due to our negative outlook
for the property sector, as well as Taiwan due to seasonally weak
period for tech earnings. Korea has been trimmed to neutral due
to political uncertainty. We are underweight on India owing from a
cash liquidity crunch as demonetisation is expected to dent GDP in
the coming quarters.
In ASEAN, we turn positive on Singapore as valuations are attractive
and corporate earnings should post a mild recovery in 2017. We
remain optimistic on Indonesia and Thailand as lower interest rates
and improvements in confidence should flow through to spending
and investment. The key risks are a disorderly capital outflow,
currency volatility and worse-than-expected slowdown in China.
Please refer to the last page for the important notice & disclaimer.
QUARTERLY INVESTMENT STRATEGY
First Quarter 2017
13
AsEAN Equity
COUNTRY ALLOCATION
--
-
N
+
++
Singapore
Malaysia
Indonesia
Thailand
Philippines
Notes:
The weights are relative to the benchmark – MSCI South East Asia Index.
‘- -’ denotes maximum underweight, ‘-’ slight underweight, ‘N’ neutral, ‘+’ slight overweight, ‘+
+’ maximum overweight; arrows show change from last quarter.
Macro events are likely to dominate ASEAN market
performance in 2017, as USD strength is usually a headwind for
emerging markets.
Valuations have pulled back to close to lows on price to book
basis and now less than 1 standard deviation above the mean
on a price to earnings basis, indicating lower volatility.
The strategy raises our Singapore position to overweight as we
expect GDP and earnings to witness a mild recovery in 2017.
The challenging conditions in the oil and gas sector seem to
have stabilised and this should improve the outlook for the
financial sector.
We believe that the Indonesian economy should recover in
2017 as lower interest rates and the success of the tax amnesty
program should accelerate investment spending and improve
confidence. A smooth royal succession in Thailand paves the
way for improved confidence and continuation of plans to
increase public spending.
Within ASEAN, current account positions in Thailand and
Indonesia have improved since a ‘taper tantrum’ in 2013.
However current account positions in Malaysia and Philippines
have deteriorated. Hence we are underweight on these
markets as we view that Malaysia and Philippines markets will
face challenges amid rising US interest rates. On a positive
note, the ASEAN region has been a recipient of rising foreign
direct investment from Japan and China.
UOB Asset Management
14
QUARTERLY INVESTMENT STRATEGY
First Quarter 2017
Fixed income STRATEGY
GLOBAL fixed income
FIXED INCOME
--
-
N
+
DEVELOPED
DM Government
DM Credit
EMERGING
EM Government
EM Corporate
EM Local Currency
Duration
Yield Curve*
Asia
Latin America
CIS/EE
Middle East/Africa
Notes:
The weights are relative to the appropriate benchmark(s).
‘- -’ denotes maximum underweight, ‘-’ slight underweight, ‘N’ neutral, ‘+’ slight
overweight, ‘+ +’ maximum overweight; arrows show change from last quarter.
*‘+’ denotes Steepener and ‘-’ denotes Flattener.
Please refer to the last page for the important notice & disclaimer.
++
The capital markets are still digesting news from US Presidentelect Donald Trump, with yields and the dollar moving higher on
sentiments of implied growth from fiscal policies. While inflation
and growth expectations have been adjusted upward, we believe
the markets have reacted too rapidly in pricing forward rates.
We now anticipate that the Fed will enact three hikes for 2017,
and the US 10 year yields should range from 2.3 to 2.5% for the
first quarter. The USD should remain strong and continue to be
supported by repatriation of corporate profits that could take
advantage of tax rebates and relative yield trades.
Market volatility is expected to be elevated until we see clarity in
Trump’s trade policies. Any moderation in Trump’s stance towards
trade protectionism will be positive for both Asia (China) and
emerging markets (EM) which have taken the brunt of the broad
USD strength as local currencies and bonds sell-off. Under these
circumstances, we will position our funds opportunistically to
take advantage of any risk pullback, as we expect market sell-off
to fade and yields to stabilize. Nevertheless, there are a few
binary events in Europe to watch out for in the political area.
In the Developed Regions, we remain underweight on
government debt. We are relatively positive on corporate
credits for carry and have reduced duration to short versus the
benchmark against steepening yield curves. We remain defensive
on high yield credits and are selective in the credit selection. In
the EM, we have moved it to a slight underweight position. We
are slightly underweight on USD denominated EM sovereign and
corporate credits. We remain neutral in Latam, Middle East and
Africa regions while maintaining a slight underweight position in
Asia and Commonwealth of Independent States and Central and
Eastern Europe (CIS/EE).We are underweight on local currency
credit in EM.
QUARTERLY INVESTMENT STRATEGY
First Quarter 2017
15
DEVELOPED MARKETS
Review
Developed market government bond yields moved higher, after
the unexpected turn of political events from Brexit and the
US Presidential election. An upward bias remains, and moves
are likely to follow a more orderly fashion. With inflationary
expectations making a comeback and interest rate uncertainties
brewing, terms premia is likely to scale higher. While major central
banks remain very accommodative, most investors expect some
of the developed markets to stay on a gradual normalisation
path ahead.
Outlook and Strategy
The US presidential election results came as a shock to the
financial market. However, the initial flight to safety trades lasted
barely a few hours before US Treasury yields spiked sharply, taking
the USD stronger. While still short on specifics, US President-elect
Donald Trump’s polices are expected to drive higher domestic
growth, higher inflation and anti-globalization. This increases the
probability of future Fed fund rate hikes alongside energy prices
that are also likely to trend higher.
Canada is reliant on the United States through supply chain
dependencies and exposed as part of NAFTA. The future of
NAFTA is uncertain at this point and is too early to tell if potential
higher growth in United States will benefit Canada. Nonetheless,
in recent months, the Canadian economy is recovering with
support from low interest rates, a drag from energy-related
investment demand wearing off, an expanding services sector and
fiscal policy. The Bank of Canada is likely to hold its policy rate
and allow the interest rate differential with the US to widen.
The spillover of the US Presidential election to Europe was
effected through tighter financing conditions and worries over
rising populism. Euroscepticism has been rising for some and
investors will be watchful of events unfolding after two major
surprises. German bunds sold off but to a lesser extent compared
to its US counterpart. Investors have priced in higher expectations
of inflation in the Eurozone, however at a smaller magnitude
compared to the US. Both will effect energy price changes but
the pace of economic growth and wage pressures will differ.
German bunds are viewed as safe haven assets at least amongst
the other European government bond markets. The busy political
calendar in Europe in the coming months will potentially stem the
increase of German bund yields and the European Central Bank
(ECB) may be incentivised to enact a soft tapering of its monetary
policy later rather than sooner.
Even as the Italian Referendum culminated in Prime Minister
Matteo Renzi resigning, more uncertainties are expected
to continue leading up to the next election, evidenced by
Italian government bond yield spreads widening against their
German counterparts. The short term worries will be on the
borrowing costs and health of the banking sector. Over in France,
the political landscape is still evolving as candidates for the
Presidential election are still unconfirmed. France, the third largest
economy in Europe, will impact the euro with its political stand
toward the Eurozone.
The monetary policy divergence in at least in the near term and
heightened political risks in the Eurozone is putting stress on the
euro and weakness is expected to persist for some time. The
United Kingdom is expected to trigger Article 50 of the Lisbon
Treaty early next year, amid uncertainties surrounding the terms
of exit as the negotiations progress.
The Bank of Japan’s Quantitative and Qualitative Easing with Yield
Curve Control (QQE-YCC) is a regime shift to yield targeting away
from asset purchases. This puts Japanese government bond yields
within a tighter range and widens the interest rate differential
against its peers, thereby weakening the yen. With this new
tool, BOJ is not expected to launch other drastic moves without
compelling case.
Australia’s terms of trade has improved on the back of higher
commodity prices. Inflation is still benign with limited wage
pressure. The Reserve Bank of Australia is likely to hold a neutral
stance and allow for a widening interest rate differential against
US to work to increase its currency competitiveness.
We recommend a short duration stance for most developed
market bond markets. The movements in developed bond
markets are highly correlated to each other especially with longer
dated bonds. Japan is an exception with its QQE-YCC where we
maintain a neutral duration.
UOB Asset Management
16
QUARTERLY INVESTMENT STRATEGY
First Quarter 2017
EMERGING MARKETS
Review
In the local currencies market, Brazil was the top performer
whilst Mexico was the worst. By region, Latin America and
Middle East (South Africa) outperformed, while Asia and Europe
underperformed.
EM bonds erased some of their returns achieved year to date
in the aftermath of the US elections result, which was largely
reflective of the repricing of US Treasuries. The benchmark
EMBIGD spread widened by 51 basis points (bps) following the
election. Latin America saw the largest impact, while the Middle
East and Asia remained more resilient. High yielding commodity
exporters fared better than manufacturing exporters to the US.
Outlook and Strategy
Bonds in the EM are facing headwinds from a pullback of
monetary support coming from the DM and steepening yield
curves globally. This trend is reinforced by expectations of an
increased US fiscal support and higher commodity prices. Inflation
is likely to increase from base effects and higher input prices,
while capital flows are rotating into equities from bonds, and
to DM from EM, will drag on local market performance going
forward.
The sell-offs in the EM displayed a higher level of resilience
as fundamentals in the EM strengthened (reserve adequacy,
valuations, real rates, external accounts, inflation). Hence we do
not expect EM assets to suffer the losses experienced during the
tapering tantrum in 2013.
Overall, the recovery in higher yielding markets such as Russia
and Brazil, as well as the rebound of commodity prices alongside
recovering global growth should support valuations. We position
our short duration in lower yielding markets (Asia, Central and
Eastern Europe) and we hold a neutral to long duration on high
yielders (Russia, Brazil, South Africa, Colombia). With currencies,
we are neutral on high yielders, taking tactical positions according
to risk sentiment, while we are negative on Asia currencies.
Please refer to the last page for the important notice & disclaimer.
Trump’s election victory has exposed EM fixed income to the
threat of higher yields, a stronger USD and lingering uncertainty
around trade protectionism. Most vulnerable are Mexico, South
Korea and Taiwan with significant manufacturing exports to the
US. Other suspects at risk are Honduras and El Salvador with
high current account deficits, limited foreign currency reserves
or high dependence on remittances growth. Unless we see more
clarity with the new US administration agenda and its ability to
implement Trump’s policies, we expect further EM implications
arising from the uncertainty to persist into 1Q17.
The historical low interest rates in DM, including negative rates in
Europe and Japan have driven investors out of US Treasuries and
into other asset classes in search of higher yield. Higher UST yields
led to a modest narrowing between emerging and developed
market interest rates. The differential between these two is still
relatively high compared to recent history, offering support for
EM fixed income.
We are close to benchmark neutral with a 6.1% portfolio yield as
we await Trump’s policy details. Portfolio risk has been reduced
from earlier in the year following the EMBIG benchmark rallying
200 bps. Within a broadly defensive positioning, we continue
to prefer higher beta commodity names over manufacturing
exporters as we expect stable EM fundamentals and higher yields
to mitigate potential adverse US policies.
Stronger EM fundamentals should now provide a buffer
preventing significant sell-offs similar to the taper tantrum in 2013.
We believe that once the initial adjustment to higher core yields
and a stronger USD is complete, a more structural view on market
beta will be supported by the resumption of the structural bid
for EM. We find a number of positive idiosyncratic stories such as
Argentina, Brazil and Russia. Overall, we continue to like EM bonds,
primarily for their carry and for the asset class’ favourable riskadjusted returns over the long run.
QUARTERLY INVESTMENT STRATEGY
First Quarter 2017
17
ASIA
Review
Asian hard currency bonds registered positive year-to-date
returns in 2016 of 6.0 % in USD terms, with the first two months
of 4Q16 detracting by 2.8 %. Asian credit spreads had continued
tightening but the sharp spike in underlying US Treasury yields
brought the overall total returns lower. During this quarter, risk
sentiment for emerging market assets had turned negative while
Asian bonds stood firm showing its resilience.
Within a short span of time, we witnessed another unexpected
result from the US presidential election – a Trump Presidency.
The outcome seemed to indicate a change to the current status
quo and rising support for protectionism led international
investors to wonder if America is turning away from globalisation.
Countries globally will feel the shocks should the US as the
world’s biggest economy and consumer engine fulfil Trump’s
rhetoric of protectionism. As most Asian economies remain
export-oriented, the region will be amongst some of the worst
affected. Asia was among some of the negatively affected as
most remain export-oriented. Talks of huge fiscal expenditures
stoked expectations of increased inflationary pressures and thus,
more aggressive engaging in US rate hikes. These in turn drove
massive weekly fund outflows out of emerging markets. For the
first two months of 4Q16, the ten-year US Treasury yield rose
by 78 bps from 1.60 % to 2.38 % while the JP Morgan Asia credit
composite spread tightened from 250 bps to 239 bps.
Outlook and Strategy
A game changer may really be on the cards now for Asian fixed
income. A booster from increased US fiscal spending alongside
stabilised global macroeconomic data may help to set the stage
for the next quarter to price in a slightly faster than expected
US-led global recovery. In addition, the bottoming of oil and
commodity prices may also mean lesser headwinds in the near
term. However, scepticism likely to remain for Asia as China
continues its growth normalisation and reforms in industries
facing excess capacity. In addition, increased political instability
across the globe and trade protectionism may also add more
woes and uncertainties to investor confidence.
On the valuation front, Asian credit spreads further tightened
in this quarter. The average Asian credit spread continued to be
much tighter than the selloff levels in August 2015. As of end
November 2016, the average Asian credit spread stood at about
239 bps which is about 28 bps narrower than its three-year
historical average of 267 bps. On a longer historical basis, current
spread is just 23 bps wide from the lows in 2010. A sharp massive
sell-off in underlying US Treasuries had also brought the overall
low average Asian credit yield from 3.80% back up to 4.58% as
at end November. At current levels, the room for a further rally
looks limited as Asian credit spread valuation looks very stretched
while expectations for the underlying US rates remains on the rise.
Moving ahead, we are inclined to stay slightly negative in our
positioning due to the stretched valuations. Nonetheless, we
remain convicted in gathering a defensive carry by staying
invested. We prefer to turn towards a neutral weighting in the
non-investment grade segment as the risk premium for the high
yield exposure has eroded substantially. Any aggressive chase
for yield may likely be largely undermined as global interest
rates move higher. In such an environment, the consistent focus
on credit differentiation remains paramount for us. Tactical
positioning in cash levels (to high single digit) and duration will be
employed to gather more returns for the portfolio.
UOB Asset Management
18
QUARTERLY INVESTMENT STRATEGY
First Quarter 2017
SINGAPORE
Review
Singapore economy grew 1.1% year-over-year (yoy) in the third
quarter of 2016, slower than the previous quarter of 2.0% but
better than the advance estimate of 0.6%. On a quarter-overquarter (qoq) basis, the economy contracted 2.0%, a reversal
from 0.1% growth in the previous quarter, but better than
advance estimate of 4.1% contraction. Sectoral performance
wise, the manufacturing sector expanded 1.3% yoy, similar to
1.4% growth in 3Q. The construction sector grew by 1.6% yoy,
easing from the 2.0% growth in 3Q. Service sector registered a
flat growth; lower than the 1.2% growth in 3Q. Headline inflation
fell for the 24th consecutive month and came in at -0.1% yoy in
October, compared to -0.2% in September, as a smaller drag from
the cost of oil-related items more than offset lower food and
services inflation. Core inflation rose to 1.1% yoy in October from
0.9% in September, largely on account of the smaller decline in
utilities prices. The Singapore Dollar (SGD) ended the month of
November at 1.4334, weaker by 3.0% compared to end-October
of 1.3911. This was 0.29% below the mid-point of the Singapore
Dollar Nominal Effective Exchange Rate (NEER) policy band. The
depreciation was led by weak domestic growth and sharp rally in
USD.
While the market was still digesting the implosion of Swiber,
more negative headlines shadowed the SGD credit market. Two
issuers (Perisai and Rickmers Maritime) defaulted on their bonds
after failing to achieve an agreement on restructuring. One
issuer (Swissco) applied for judicial management and two issuers
(Kris Energy and ASL Marine) announced consent solicitation in
restructuring their bonds. This will continue to dampen appetite
for higher yielding bonds, especially those in the oil & gas sector.
It also contributes to overall subdued issuance volume in the
SGD space, with total issuance reduced by 15% year to date.
Please refer to the last page for the important notice & disclaimer.
Outlook and Strategy
The Ministry of Trade and Industry (MTI) narrowed the 2016
growth forecast for Singapore economy to 1.0% to 1.5% from
1.0% to 2.0% previously. For 2017, MTI expected GDP to grow at
a modest pace of 1.0% to 3.0%, bearing the full materialization
of downside risks, including uncertainties post Brexit, Chinese
economy restructuring and a slowdown in services and wholesale
trade sectors. The Monetary Authority of Singapore (MAS)
expects headline inflation to pick up to 0.5% to 1.5% in 2017, from
around -0.5% in 2016, largely reflecting the rise in private road
transport cost. Core inflation is expected to average around
1% in 2016 before rising to 1% to 2% in 2017, as energy related
components begin to contribute positively to inflation and
temporary disinflationary effects from budgetary measures fade.
However, the increase in core inflation will be gradual, given the
absence of more generalised demand-induced price pressures.
On the currency front, we expect SGD to remain weak against
USD and trade within the lower half of the NEER policy band,
on the back of sluggish domestic growth and continued USD
strength. As SGD is widely used as a proxy to Asian currencies, it
will be affected by investment sentiment towards Asia under the
a Trump administration.
Despite the sharp correction in interest rates in November, the
seismic shift triggered by Trump that altered an interest rate
outlook may still have some room to run into 2017. We expect
Singapore Government Securities (SGS) yields to rise further, with
the expectations of rate hike and higher inflation. We are short on
duration and are underweight on SGS against the benchmark.
Given generally rich valuations and expectations for an increase in
market volatility with several potential risk events on the horizon,
we maintain our defensive positioning with a preference for
quality credits with leading market share, of systemic importance,
in defensive sectors and which are professionally managed.
QUARTERLY INVESTMENT STRATEGY
First Quarter 2017
19
COMMODITIES STRATEGY
--
-
N
+
COMMODITIES
Gold
Base Metals
Bulk Commodities
Energy
Agriculture
Notes:
The weights are relative to the appropriate benchmark(s).
‘- -’ denotes maximum underweight, ‘-’ slight underweight, ‘N’ neutral, ‘+’ slight
overweight, ‘+ +’ maximum overweight; arrows show change from last quarter.
++
Overview
We remain at a neutral weight for the overall commodities sector.
Although base metals and bulk commodities have performed
strongly in recent months, this has largely been driven by
speculative anticipation of deficit spending by the incoming Trump
administration, which may fail to live up to expectations. There have
also been policy missteps by the Chinese government in the areas of
domestic steel and coal production that have driven up prices, but
are now in the process of reversing. We are cautious of the current
strong rally in the USD due to its negative correlation between
commodity prices in recent years. Finally, the first quarter is typically
the weakest quarter of the year seasonally, as cold weather and the
Chinese Lunar holiday suppresses demand.
Agriculture
We move to a slight underweight position in agriculture
commodities. Grain prices remain depressed given the strong US
harvest, high crop-to-use levels and anticipated planted area for
the coming year. Fertilizer prices also remain depressed, with plenty
of available spare capacity. Although the US is a net importer of
fertilizers, protectionist rhetoric from incoming President Trump
is aimed at bringing manufacturing jobs back to the United States,
with no policies towards reducing agricultural imports. Latest data
from the Australian Bureau of Meteorology shows a neutral La Nina
reading, making it unlikely that drier weather with impact South and
North American crop production in 2017. The only positive factor
is that prices appear to be bottoming, with a potential to rally on
unexpected weather-related events.
UOB Asset Management
20
QUARTERLY INVESTMENT STRATEGY
First Quarter 2017
Base Metals
We move to a slight overweight on base metals. The evidence of
supply-side shortages continues to mount, with zinc, lead, nickel
and tin production appearing constrained given new mine capex
which peaked in 2011. Environmental and social factors require new
mines a timeframe of at least three years from first investment to
first production. This makes it probable that global economic growth
in the 3% range will produce a continuing reduction in inventory
levels, and elevated prices. While copper and aluminium remain
well-supplied at this current time, capital expenditure reductions
and positive industrial production data point to tightness in these
markets in the medium term. Fiscal stimulus programs that target
improved infrastructure may also positive for base metals.
Energy
We move to a neutral position in energy. Crude oil prices have
rebounded after recent agreement by the Organization of the
Petroleum Exporting Countries (OPEC) to cut production by 1.2 million barrels a day (mmbopd), with a further agreed reduction
of 0.6 mmbopd by Russia. Yet it is unlikely that crude oil prices can
rally above US$60/barrel in the coming year given potential for US
onshore share production to ramp up quickly and profitably at that
price point. Supply disruptions could always lead to a price spike but
we note that geopolitical tensions in the Middle East are actually
reducing. Production from Nigeria and Libya is already running at
low levels, and is more likely to increase rather than scale down from
current levels.
Bulk Commodities
We remain with a slight underweight position in bulk commodities.
The recent severe price spike in coking coal, and to a lesser extent in
thermal coal and iron ore, stems from Chinese government enforcing
lower domestic production targets that reduced the operating days
of domestic mines from 330 days to 276 days, and enforcement
of mine closures. The resulting price spikes were unintended, as
has been shown by the complete reversal of Chinese government
policy in recent weeks. In fact, the government is now encouraging
all mines to produce at a maximum level. This will inevitably lead
to lower bulk commodity prices as previously restricted capacity
comes back onto the market.
Gold
We remain overweight on gold due to the potential for negative
interest rates in developed economies, and concerns over
further anti-EU catalysts in the coming quarter. The high level
of indebtedness in the US economy, together with continued
variability in US economic data, means that further hikes could
curtail growth. For example, higher market borrowing rates since
Trump’s election victory have already led to softer mortgage
application demand. We believe further US Fed rate increases will
actually lag inflation. The resulting negative real rates have historically
been positive for gold prices. The recent resignation of Italian Prime
Minister Renzi and the upcoming French Presidential election means
the stability of the European Union will remain a concern over the
coming quarter.
Please refer to the last page for the important notice & disclaimer.
QUARTERLY INVESTMENT STRATEGY
First Quarter 2017
APPENDIX
ECONOMIC INDICATORS
DEVELOPED ECONOMIES
EMERGING economies
Purchasing Managers’ Index
Purchasing Managers’ Index
US
Eurozone
Japan
Brazil
Russia
India
China
China Caixin+
56
58
54
52
54
50
48
50
46
44
46
42
42
13
N
14
ay
ov
M
14
N
15
ay
ov
M
15
N
16
ay
ov
M
N
Industrial Production Growth (YoY%)
US
16
ov
40
13
ov
N
14
ay
M
14
15
ay
ov
N
M
15
16
ay
ov
N
M
16
ov
N
Industrial Production Growth (YoY%)
Eurozone
Japan
Brazil
Russia
India
China
10
10
5
5
0
0
-5
-5
-10
-15
-10
2
1
ec
D
3
n1
Ju
3
4
n1
1
ec
Ju
D
4
1
ec
D
5
5
n1
6
n1
1
ec
Ju
Ju
D
Real GDP growth (QoQ%, saar)*
US
12
ec
D
3
n1
Ju
13
4
n1
ec
D
Ju
14
ec
D
5
n1
Ju
15
6
n1
ec
D
Ju
Real GDP growth (QoQ%, saar)*
Eurozone
Japan
Brazil
Russia
India
China
14
8
8
4
2
-4
0
-10
-4
-16
-8
-22
3
1
ec
D
Ju
4
n1
4
D
1
ec
Ju
5
n1
5
D
1
ec
Ju
6
n1
13
ec
D
4
n1
Ju
14
ec
D
5
n1
Ju
15
ec
D
6
n1
Ju
* For some economies, annualised GDP data are estimates by UOBAM. For India, data are in year-on-year percentages (YoY%).
+ China Caixin PMI was previously known as HSBC PMI (effective July 2015).
Note: All data are sourced from Bloomberg, Datastream and UOBAM unless otherwise stated, as at 1 December 2016.
UOB Asset Management
21
22
QUARTERLY INVESTMENT STRATEGY
First Quarter 2017
DEVELOPED ECONOMIES
EMERGING economies
Inflation - CPI (YoY%)
Inflation - CPI (YoY%)
US
Eurozone
Japan
Brazil
Russia
India
China
20
16
3
12
8
1
4
0
-1
3
c1
e
D
Ju
4
n1
4
c1
5
n1
e
D
Ju
5
c1
e
D
6
n1
13
ec
Ju
D
4
n1
Ju
14
ec
D
5
n1
Ju
15
ec
D
6
n1
Ju
Note: All data are sourced from Bloomberg, Datastream and UOBAM unless otherwise stated, as at 1 December 2016.
Central Banks Interest Rates
Country
Interest Rate
Current Rate
(%pa)
Latest
Meeting
Change at
Latest Mtg (bp)
Last Change
Next Meeting
1-Dec-16
United States
Fed Funds Target Rate US
0.500
2 Nov 2016
-
16 Dec 15 (+25bp)
15 Dec 2016
Eurozone
Refinance Rate
0.000
21 Nov 2016
-
10 Mar 16 (-5bp)
8 Dec 2016
Japan
BOJ Overnight Call Rate
-0.054
-
-
30 Nov 16 (-0.2bp)
-
United Kingdom
UK Official Bank Rate
0.250
30 Nov 2016
-
4 Aug 16 (-25bp)
15 Dec 2016
Brazil
Brazil Selic Target Rate
13.750
30 Nov 2016
(25)
30 Nov 16 (-25bp)
11 Jan 2017
Russia
Bank of Russia Key Rate
10.000
30 Nov 2016
-
19 Sep 16 (-50bp)
-
India
Repurchase Rate
6.250
25 Nov 2016
-
5 Oct 16 (-25bp)
-
China
China Reverse Repurchase Notes 7D Rate
2.250
22 Nov 2016
-
27 Oct 15 (-10bp)
-
South Africa
South Africa Repo Avg Rate
7.000
30 Nov 2016
-
17 Mar 16 (+25bp)
24 Jan 2017
Source: Bloomberg, updated as of 1 December 2016
Please refer to the last page for the important notice & disclaimer.
QUARTERLY INVESTMENT STRATEGY
First Quarter 2017
MARKET PERFORMANCE
DEVELOPED MARKETS
EMERGING MARKETS
Equity Indices
Equity Indices
(Rebased 100 on 31 December 2014)
(Rebased 100 on 31 December 2014)
115
Japan 11.1%
110
USA 9.7%
105
AC World 3.1%
100
95
EM -5.6%
Europe -8.1%
90
115
105
Index
Index
120
80
65
75
70
4
c1
e
5
1
ar
M
5
n1
Ju
5
p1
Se
5
c1
e
D
6
1
ar
M
6
n1
Ju
55
6
p1
14
ec
Se
D
Fixed Income Indices
15
ar
M
5
5
p1
n1
Ju
Se
15
ec
D
16
ar
M
6
n1
Ju
6
p1
Se
Fixed Income Indices
(Rebased 100 on 31 December 2014)
(Rebased 100 on 31 December 2014)
125
113
G7 GBI 0.2%
Inv Grade -1.0%
Sovereigns -1.4%
SG Govt -3.3%
98
Index
103
High Yield 21.5%
120
High Yield 9.2%
Asia 9.0%
108
Index
85
75
85
D
EM Europe -2.1%
Asia ex Japan -2.2%
EM -5.6%
EM Latin Am -10.4%
95
115
Emerging Mkts 10.1%
Corporate 10.0%
Sovereigns 8.2%
110
105
93
Inv Grade 3.7%
88
100
4
1
ec
D
M
5
5
5
1
ar
1
un
J
1
ep
S
5
1
ec
D
6
1
ar
M
J
95
6
6
1
un
1
ep
14
ec
S
D
Commodity Indices
15
5
Ju
5
p1
n1
ar
M
Se
15
ec
D
16
ar
M
6
n1
Ju
6
p1
Se
Dollar Index Spot
(Rebased 100 on 31 December 2014)
(Rebased 100 on 31 December 2014)
120
110
110
Gold -1.3%
Industrial Metals -6.2%
90
80
Agriculture -19.3%
GSCI Light Index -22.2%
70
Index
Index
100
105
Energy -36.3%
60
50
100
40
e
4
c1
D
M
a
5
r1
Ju
5
n1
Se
5
p1
D
e
5
c1
M
a
6
r1
Ju
6
n1
Se
6
p1
14
ec
D
15
ar
M
5
n1
Ju
5
p1
Se
15
ec
D
16
ar
M
6
n1
Ju
6
p1
Se
Note: All data are sourced from Bloomberg, Datastream and UOBAM unless otherwise stated, as at 1 December 2016.
UOB Asset Management
23
24
QUARTERLY INVESTMENT STRATEGY
First Quarter 2017
EQUITY MARKET INDICATORS
DEVELOPED MARKETS
EMERGING Markets
Earnings Revision by Regions for FY2
Earnings Revision by Regions for FY2
Brazil
US
Latin America
Revisions in previous 2 mths
Revisions last mth
World
Revisions in previous 2 mths
Revisions last mth
India
Japan
EMEA
Europe
China
Emerging Markets
Australia
AC Asia Ex Japan
Canada
Russia
-1
0
1
2
-4
3
-2
% Change
0
2
4
% Change
Earnings Revision by Sectors for FY2
Earnings Revision by Sectors for FY2
Cons Discr
Telecom
Health Care
Utilities
Real Estate
Cons Staples
Revisions in previous 2 mths
Revisions last mth
Industrials
Telecom
Cons Discr
Health Care
Energy
Industrials
Cons Staples
Financials
Energy
MSCI
Emerging Markets
Financials
IT
Materials
Materials
IT
Utilities
MSCI World
-2
-1
0
1
2
3
4
5
6
7
8
Revisions in previous 2 mths
Revisions last mth
-6
% Change
Note: All data are sourced from Bloomberg, Datastream and UOBAM unless otherwise stated, as at 1 December 2016.
Please refer to the last page for the important notice & disclaimer.
-5
-4
-3
-2
-1
% Change
0
1
2
3
4
QUARTERLY INVESTMENT STRATEGY
First Quarter 2017
Valuation
Developed Markets Earnings Yield Ratio*
Emerging Markets Earnings Yield Ratio*
6.0
3.5
5.0
3.0
4.0
2.5
Mean +1SD, 2.3x
Mean +1SD, 3.5x
3.0
Nov-16, 2.7x
Mean, 2.3x
2.0
Mean -1SD, 1.2x
1.0
0.0
2.0
Nov-16, 2x
Mean, 1.8x
1.5
Mean -1SD, 1.3x
1.0
Oct-16
Oct-15
Oct-14
Oct-13
Oct-12
Oct-11
Oct-10
Oct-09
Oct-08
Oct-07
Oct-06
Oct-05
Oct-04
Oct-03
Oct-02
Oct-01
Oct-00
Oct-16
Oct-15
Oct-14
Oct-13
Oct-12
Oct-11
Oct-10
Oct-09
Oct-08
Oct-07
Oct-06
Oct-05
Oct-04
Oct-03
Oct-02
Oct-01
Oct-00
0.5
*Mean and SD are based on data from 1999.
P/BV vs ROE by Region
P/E vs Growth by Region
18x
3.0x
US
US
2.0x
Canada
Australia
Europe
1.5x
1.0x
PER FY2 (X)
P/BV FY1 (X)
World
AC World
8%
9%
10%
Australia
14x
AC World
Latin America
Japan
Europe
Asia Ex Japan
12x
Latin America
Asia Ex Japan
EMEA
Japan
11%
12%
10x
13%
14%
15%
16%
7%
8x
EMEA
6%
8%
10%
12%
P/BV vs ROE by Sector^
2.9x
AC World
Utilities
Real Estate
5%
7%
Telecom Svcs
Materials
11%
Real Estate
20.0x
Consumer Staples
Industrials
16.0x
13%
15%
17%
19%
21%
IT
Materials
AC World
Consumer Discr
Telecom Svcs
Financials
10.0x
2%
ROE - 2yr Forward Avg. (%)
^Energy sector is not shown in the chart.
Healthcare
Utilities
14.0x
12.0x
Financials
9%
20%
18.0x
Consumer Discr
Industrials
2.5x
0.9x
Healthcare
PER (FY2)
P/BV - FY1 (X)
IT
3.3x
Energy
18%
22.0x
Consumer Staples
3.7x
1.3x
16%
P/E vs Growth by Sector^
4.1x
1.7x
14%
EPS CAGR FY1- 3 (%)
ROE - 2yr Forward Avg. (%)
2.1x
Canada
World
16x
2.5x
4%
6%
8%
10%
12%
14%
16%
EPS CAGR FY1- 3 (%)
^Energy sector is not shown in the chart.
Note: All data are sourced from Bloomberg, Datastream and UOBAM unless otherwise stated, as at 1 December 2016.
UOB Asset Management
25
26
QUARTERLY INVESTMENT STRATEGY
First Quarter 2017
FIXED INCOME MARKET INDICATORS
Sovereign
Developed Markets 10-Year Government Yield (%)
US
3.5
Euro
Japan
Emerging Markets 10-Year Government Yield (%)
UK
Brazil
18
Russia
India
China
16
2.5
14
12
1.5
10
8
0.5
6
4
-0.5
2
11
ec
2
2
1
un
J
D
1
ec
D
3
3
1
ec
1
un
J
D
4
4
1
un
J
5
5
1
ec
1
un
J
D
6
6
1
ec
1
ec
1
un
J
D
D
Developed Markets Real Government Yield (%)
10-Year Govt Bond Yield
CPI
11
2
n1
ec
D
Ju
12
ec
D
3
n1
Ju
13
ec
D
4
n1
Ju
14
ec
D
5
n1
Ju
15
6
n1
ec
D
Ju
16
ec
D
Emerging Markets Real Government Yield (%)
Real Govt Bond Yield - RHS
3
10-Year Govt Bond Yield
CPI
Real Govt Bond Yield - RHS
2
15
10
1
10
5
0
5
0
-1
0
-5
2
1
0
1 W ago
UK
an
ea
Ta
K
iw
na
or
hi
h
ut
So
ic
In
di
a
C
o
a
ex
do
In
Nominal Yield Curve (%)
SG
M
ne
si
an
y
er
m
G
Eu
ro
zo
ne
pa
n
Ja
Fr
a
us
A
Sw
itz
er
la
nd
nc
e
U
S
tr
al
ia
-2
B
ra
zi
l
M
al
ay
si
a
R
us
So
si
a
ut
h
A
fr
ic
Ph
a
ili
pp
in
es
Th
ai
la
nd
-1
Yield Curve Steepness (10Y – 2Y) (%)
1 W ago
JP
1 W ago
US
1 W ago
3.5
EU
US
UK
SG
3
3.0
2.5
Yield (%)
2.0
2
1.5
1.0
0.5
1
0.0
-0.5
-1.0
1
6
11
16
Tenor (Years)
21
26
31
0
11
ec
D
2
n1
Ju
Note: All data are sourced from Bloomberg, Datastream and UOBAM unless otherwise stated, as at 1 December 2016.
Please refer to the last page for the important notice & disclaimer.
12
ec
D
3
n1
Ju
13
ec
D
4
n1
Ju
14
ec
D
5
n1
Ju
15
ec
D
6
n1
Ju
16
ec
D
QUARTERLY INVESTMENT STRATEGY
First Quarter 2017
27
FIXED INCOME MARKET INDICATORS
Credits
US Markets (USD) Yield and Credit Spread
US Markets (USD) HY Yield and Credit Spread
Bloomberg Barclays US Agg Corporate Yield (%)
4.0
Bloomberg Barclays US HY Yield (%)
260
Bloomberg Barclays US Agg Corporate Spread (bps) - RHS
12.0
900
Bloomberg Barclays US HY Spread (bps) - RHS
240
220
3.5
800
10.0
700
200
180
3.0
160
140
2.5
120
8.0
600
500
6.0
400
100
2.0
11
ec
D
80
2
2
1
un
J
1
ec
D
3
3
1
un
J
1
ec
D
4
4
1
un
J
1
ec
D
5
5
1
un
J
1
un
D
J
11
ec
1
ec
D
D
Bloomberg Barclays Pan-European Agg Corporate Yield (%)
Bloomberg Barclays Pan-European Agg Corporate Spread
(bps) - RHS
5.5
5.0
4.0
12.0
350
11.0
250
3.5
200
3.0
2.5
150
2.0
1.5
1.0
0.5
0.0
D
400
300
4.5
11
ec
2
2
1
un
J
1
ec
J
D
3
3
1
un
1
ec
D
4
4
1
un
J
1
ec
D
5
5
1
un
J
1
ec
J
D
3
3
1
un
1
ec
D
4
4
1
un
J
1
ec
D
5
5
1
ec
1
un
J
D
6
6
1
un
J
1
ec
D
800
700
600
7.0
500
6.0
50
4.0
0
3.0
11
ec
D
D
900
Bloomberg Barclays Pan-European Spread (bps) - RHS
8.0
5.0
1
ec
Bloomberg Barclays Pan-European HY Yield (%)
9.0
100
Asia Markets (USD) Yield and Credit Spread
JACI Yield (%)
J
1
ec
10.0
6
6
1
un
J
D
2
2
1
un
Pan-European Markets (EUR) HY Corporate Yield and
Credit Spread
Pan-European Markets (USD) Yield and Credit Spread
6.0
300
4.0
6
6
1
ec
400
300
200
2
2
1
un
J
1
ec
D
3
3
1
un
J
1
ec
D
4
4
1
un
J
1
ec
D
5
5
1
ec
1
un
D
J
6
6
1
un
J
1
ec
D
Asia Markets (USD) HY Yield and Credit Spread
Bloomberg Barclays Asia HY Yield (%)
JACI Spread (bps) - RHS
450
6.0
5.5
400
11.0
900
Bloomberg Barclays Asia Spread (bps) - RHS
10.0
800
9.0
5.0
350
4.5
300
4.0
250
3.5
700
8.0
600
7.0
6.0
500
5.0
200
3.0
11
ec
D
Ju
2
n1
2
D
1
ec
Ju
3
n1
3
D
1
ec
Ju
4
n1
4
D
1
ec
Ju
5
n1
5
D
1
ec
Ju
6
n1
D
400
4.0
6
1
ec
D
11
ec
Ju
2
n1
2
1
ec
D
Ju
3
n1
3
D
1
ec
Ju
4
n1
4
D
1
ec
Ju
5
n1
5
1
ec
D
Ju
6
n1
6
1
ec
D
Note: All data are sourced from Bloomberg, Datastream and UOBAM unless otherwise stated, as at 1 December 2016.
UOB Asset Management
28
QUARTERLY INVESTMENT STRATEGY
First Quarter 2017
Credits
Emerging Markets (USD) Yield and Credit Spread
Emerging Markets (Local Currency) Bond Yield
JPMorgan EMBI Yield (%)
7.0
550
JPMorgan EMBI Spread (bps) - RHS
500
6.5
450
6.0
7
400
5.5
350
5.0
300
4.5
6
250
4.0
200
1
c1
e
D
JPMorgan GBI-EM Bond Yield (%)
8
2
n1
2
c1
3
n1
e
Ju
D
3
c1
e
Ju
D
4
n1
4
c1
5
n1
e
Ju
D
Ju
5
c1
e
D
6
n1
Ju
D
e
6
c1
5
11
2
n1
ec
D
Ju
12
3
n1
ec
D
Ju
13
4
n1
ec
D
Ju
14
ec
D
5
n1
Ju
15
ec
D
6
n1
Ju
CURRENCIES
G-10 FX against US Dollar
Dollar Index Spot (Rebased 100 on 31 December 2014)
% change versus USD from 31 Dec 15 to 30 Nov 2016
Japanese Yen
5.3
110
Norwegian Dollar
3.9
New Zealand Dollar
3.6
Canadian Dollar
Index
3.1
Australian Dollar
1.4
105
Swiss Franc
-1.8
-2.2
Danish Krone
-2.5
Euro
- 8.4
100
14
ec
D
Swedish Krona
- 15.2
15
5
Ju
5
p1
n1
ar
M
Se
15
16
ar
ec
D
M
6
n1
Ju
6
p1
Se
Emerging Markets FX against US Dollar
-20
-16
5.3
8
12
16
20
Thai Baht
Hong Kong Dollar
-0.1
South Korean Won
- 0.2
-1.1
Singapore Dollar
Indian Rupee
-3.4
Malaysian Ringgit
- 3.6
Chinese Renminbi
- 5.9
- 6.1
-8
-6
Philippines Peso
-4
Note: All data are sourced from Bloomberg, Datastream and UOBAM unless otherwise stated, as at 1 December 2016.
Please refer to the last page for the important notice & disclaimer.
Indonesian Rupiah
1.9
Mexican Peso
4
Japanese Yen
Taiwanese Dollar
0.9
Turkish Lira
-16.0
8
3.1
Polish Zloty
-6.4
-15.1
4
Brazilian Real
Hungarian Forint
0
0
% change versus USD from 31 Dec 15 to 30 Nov 2016
Colombian Peso
3.3
-4
-4
South African Rand
-1.5
-8
-8
Russian Ruble
13.7
10.0
-20 -16 -12
-12
Asia FX against US Dollar
% change versus USD from 31 Dec 15 to 30 Nov 2016
16.8
British Pound
-2
0
2
4
6
16
ec
D
QUARTERLY INVESTMENT STRATEGY
First Quarter 2017
29
COMMODITY MARKET INDICATORS
Brent Crude Oil Price and Production
Agriculture Price (USD)
Corn
Soyabeans - RHS
1,700
110
1,600
100
10
Wheat
1,500
650
90
1,400
80
1,300
70
8
1,200
450
60
1,100
50
1,000
40
2
3
3
1
ec
1
un
D
4
1
ec
1
un
D
J
1
ec
4
D
J
5
5
1
un
J
6
1
ec
900
30
2
1
un
D
1
ec
J
D
Precious Metal Price (USD)
Silver - RHS
35
1,600
Tonnes (thousands)
25
1,400
20
1,200
15
1,000
J
5
5
1
ec
1
un
D
J
D
4
4
1
ec
D
J
D
J
1,600
3
1,400
2
3
D
4
4
J
1
un
D
1
ec
5
5
J
1
un
D
1
ec
USD per tonne
Tonnes (millions)
1,800
J
7,200
400
6,700
6,200
300
5,700
200
5,200
4,700
4,200
3
3
1
un
J
1
ec
D
4
4
1
un
1
ec
D
J
5
5
1
un
J
1
ec
D
6
1
un
J
J
150
120
100
90
80
60
30
60
6
1
un
China Iron Ore Ports Inventory
Australia CIF Prices - RHS
120
2,200
4
D
8,200
7,700
D
2,000
1
ec
J
D
500
2
5
3
6
1
un
LME Copper Inventories
LME Copper Spot - RHS
1
ec
1
un
LME Aluminium Inventories
LME Aluminium Spot - RHS
1
un
J
1
ec
Iron Ore Price (USD)
6
2
D
5
5
1
un
600
6
1
ec
1
un
Aluminum Price (USD)
1
ec
J
1
ec
0
Tonnes (millions)
3
3
D
4
4
1
un
100
10
1
un
J
1
ec
700
30
2
3
3
1
un
Copper Price (USD)
Gold
1
ec
800
250
USD per tonne
6
12
D
ec
3
1
un
J
13
D
ec
4
J
1
un
14
D
ec
5
J
1
un
15
ec
D
6
1
un
J
Note: All data are sourced from Bloomberg, Datastream and UOBAM unless otherwise stated, as at 1 December 2016.
UOB Asset Management
USD per tonne
Million Barrels/Day
Bloomberg OPEC Crude Oil Production Output/Saudi Arabia
DOE EIA US Crude Oil Production
Brent Crude Oil (USD)/bbl - RHS
30
QUARTERLY INVESTMENT STRATEGY
First Quarter 2017
Contact Details
SINGAPORE
UOB Asset Management Ltd
Address
80 Raffles Place UOB Plaza 2 Level 3 Singapore 048624
Tel
1800 222 2228 (Local) • (65) 6222 2228 (International)
Fax
(65) 6532 3868
[email protected]
Websiteuobam.com.sg
MALAYSIA
UOB Asset Management (Malaysia) Berhad
AddressLevel 22, Vista Tower, The Intermark
No. 348 Jalan Tun Razak, 50400 Kuala Lumpur
Tel
(60) (03) 2732 1181
Fax
(60) (03) 2164 8188
Websiteuobam.com.my
THAILAND
UOB Asset Management (Thailand) Co., Ltd
Address
23A, 25 Floor, Asia Centre Building, 173/27-30, 32-33
South Sathon Road, Thungmahamek, Sathon, Bangkok 10120, Thailand
Tel (66) 2786 2000
Fax (66) 2786 2377
Websiteuobam.co.th
BRUNEI
UOB Asset Management (B) Sdn Bhd
Address
Tel
Fax
FF03 to FF05, The Centrepoint Hotel, Gadong,
Bandar Seri Begawan BE 3519, Brunei Darussalam
(673) 2424806
(673) 2424805
TAIWAN
UOB Asset Management (Taiwan) Co., Ltd
Address
Tel
Fax
Union Enterprise Plaza, 16th Floor, 109 Minsheng East Road, Section 3,
Taipei 10544
(886)(2) 2719 7005
(886)(2) 2545 6591
JAPAN
UOB Asset Management (Japan) Ltd
Address
Tel
Fax
13F Sanno Park Tower, 2-11-1 Nagatacho, Chiyoda-ku,
Tokyo 100-6113 Japan
(813) 3500-5981
(813) 3500-5985
Please refer to the last page for the important notice & disclaimer.
QUARTERLY INVESTMENT STRATEGY
First Quarter 2017
31
Important Notice & Disclaimer
This publication shall not be copied or disseminated, or relied upon by any person for whatever purpose. The information herein
is given on a general basis without obligation and is strictly for information only. This publication is not an offer, solicitation,
recommendation or advice to buy or sell any investment product, including any collective investment schemes or shares of
companies mentioned within. Although every reasonable care has been taken to ensure the accuracy and objectivity of the
information contained in this publication, UOB Asset Management Ltd (“UOBAM”) and its employees shall not be held liable
for any error, inaccuracy and/or omission, howsoever caused, or for any decision or action taken based on views expressed or
information in this publication. The information contained in this publication, including any data, projections and underlying
assumptions are based upon certain assumptions, management forecasts and analysis of information available and reflects
prevailing conditions and our views as of the date of this publication, all of which are subject to change at any time without
notice. Please note that the graphs, charts, formulae or other devices set out or referred to in this document cannot, in and of
itself, be used to determine and will not assist any person in deciding which investment product to buy or sell, or when to buy
or sell an investment product. UOBAM does not warrant the accuracy, adequacy, timeliness or completeness of the information
herein for any particular purpose, and expressly disclaims liability for any error, inaccuracy or omission. Any opinion, projection
and other forward-looking statement regarding future events or performance of, including but not limited to, countries, markets
or companies is not necessarily indicative of, and may differ from actual events or results. Nothing in this publication constitutes
accounting, legal, regulatory, tax or other advice. The information herein has no regard to the specific objectives, financial situation
and particular needs of any specific person. You may wish to seek advice from a professional or an independent financial adviser
about the issues discussed herein or before investing in any investment or insurance product. Should you choose not to seek
such advice, you should consider carefully whether the investment or insurance product in question is suitable for you.
In the event of any discrepancy between the English and Mandarin versions of this publication, the English version shall prevail.The
contents in this report were updated as at August 2016.
UOB Asset Management Ltd Co. Reg. No. 198600120Z
UOB Asset Management