Covid-19 outbreak a transitory crisis; green shoots on the horizon from economic shocks: DBS Bank CIO

K R Srivats New Delhi | Updated on March 26, 2020

‘Position portfolio for Asia ex-Japan equities outperformance’

Noting that the Covid-19 outbreak is a ‘transitory crisis’, DBS Bank sees Asian equities ex-Japan outperforming developed markets such as Europe in the coming months.

This stance comes from the expectation that Asia would see a peak in Covid-19 cases earlier than the developed economies and this will be a major boost for sentiment. Also, Asia continues to trade at an attractive discount to the developed markets space, DBS Bank Chief Investment Officer Hou Wey Fook says in a new report Build to Last.

He says that the improving situation in China, which has led to the re-opening of factories, is indeed an encouraging sign, as it means a gradual normalisation of global supply chains.

Confronted with two ‘black swan’events — the Covid-19 pandemic and the oil price collapse — global stock markets have fallen 30 per cent peak-to-trough, while treasury bond yields hit historic lows during the quarter. Clearly, this re-pricing of markets is factoring in a heightened risk of a global recession, said the Singapore-headquartered DBS Bank.

As for where the global equities, especially those in developed markets, are headed and how one should position one’s portfolio, Hou Wey Fook said that a lot hinges on the degree of the spread and persistence of the pandemic.

“If we see a slowing of infection cases in the US and Europe over the next few months through summer, we would expect markets to stabilise and recover,” he said.

“We continue to advocate a ‘barbell portfolio’. Such a portfolio would hold globally diversified securities in two areas of focus. In one area of focus, corporate bonds and dividend-yielding equities act as ‘income generators’ while secular growth equities become 'return enhancers' in the other. We also add gold as ‘risk diversifier’ to the portfolio.”

Until the number of new cases outside of China hits a peak, markets will continue to struggle for direction and display outsized reaction in incoming economic and corporate data.

He also sees higher probability of a"U shaped" market rebound given the non-economic nature of the supply shock.

Green shoots

The Covid-19 outbreak may have caused both supply and demand shocks across the world, but greenshoots are emerging, Fook said.

On the supply side, factories in China are gradually re-opening, with companies chartering buses to bring employees back to work. If China succeeds in bringing its production capacity back to 70 per cent, it will mark the start of a gradual recovery.

On demand side, the DBS Bank report sees the viral crisis as a predominantly transitory event that will fade away when the weather gets warmer. It sees the macro momentum eventually rebounding in the second half.

Looking beyond carnage

The DBS Bank report sees risk assets finding a bottom in the coming months as investors assess the real economic damage caused by the Covid-19 outbreak.

While acknowledging that the viral crisis has been disruptive, the report highlights that it is also a transitory event with no bearing on long-term structural trends.

The factors that will drive equity markets in the coming quarters are widening bond-equity yield gap, the TINA (there is no alternative) factor and the unstoppable tech engine. The widening yield gap between equities and bonds strengthens the case for future portfolio shifts to equities.

With central banks around the world maintaining a dovish stance given ongoing macro anxieties, the hunt for yield will return to dominate the narratives in the second half of 2020, according to the report.

Published on March 26, 2020

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