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CIO Insights 1Q25: Game Changers

The Value in Bitcoin Volatility

Trump 2.0 – Winners & Losers

Credit: Soft-Landing Until Proven Otherw

Credit:Soft-Landing Until Proven Otherwise

The ASEAN Portfolio

CIO Industry Guide: November 2024

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Chief Investment Officer Hou Wey Fook calls for a barbell strategy to ensure portfolio resilience in a time of change

<div style="text-align: justify;">Dear valued clients, &nbsp;</div>
<div style="text-align: justify;">Over the past year, we have been advocating for portfolios to be fully invested, with our quarterly Insights publication having the three consecutive headlines of &ldquo;A Broadening Rally&rdquo;, &ldquo;Risk Assets in Play&rdquo;, and &ldquo;In a Sweet Spot&rdquo;.&nbsp; </div>
<div style="text-align: justify;">Indeed, these calls have panned out as risk assets of credit, equities, gold, and private assets rallied. Consequently, our flagship barbell strategy returned 15.6% (as of 4 Dec 2024) for the year.&nbsp; </div>
<div style="text-align: justify;">Going into 2025, would this same pro-risk narrative remain?&nbsp; </div>
<div style="text-align: justify;">For sure, navigating the world around game-changers like geopolitical tensions and Trump&rsquo;s potential tariff policies will pose challenges. When constructing a portfolio, we must consider the worst-case scenarios. While we stay broadly positive of risk assets, our strategy of holding investment-grade credit as income generators, secular growth equities as return enhancers, and alternatives like gold and hedge funds as diversifiers should help weather periods of heightened volatility.&nbsp;</div>
<div style="text-align: justify;">Our overweight stance on US technology equities continues to be our highest conviction call for growth, catalysed by the growing adoption of AI. Investment-grade credit is our anchor for income generation, especially in a US soft landing scenario that would lead to a trajectory of lower rates.&nbsp; </div>
<div style="text-align: justify;">In the event of an escalating trade war that will certainly accelerate a global slowdown, we expect a lifeline to come from boosted returns in investment-grade bonds as the Fed will most likely respond with accelerated easing. This scenario is not dissimilar to 2018-2019 when President Trump imposed tariffs and other trade barriers on China.&nbsp; </div>
<div style="text-align: justify;">Meanwhile, holding some uncorrelated assets like gold and hedge funds will add overall resilience to the portfolio. In this publication, we highlight the exciting investment potential in sports, given the growing appeal for live sports compounded with the scarcity of sought-after franchises.&nbsp; </div>
<div style="text-align: justify;">Do enjoy the read, and I wish you a profitable year of investing!&nbsp; </div>
Hou Wey Fook,&nbsp;CFA Chief Investment Officer Download the PDF to read the full 1Q25 CIO Insights report.

Stay up to date with our comprehensive coverage of global industries

<div style="text-align: justify;">Trump's presidency forms the backdrop of this issue of the CIO Industry Guide.</div>
 
Trump 2.0
Lower taxation and deregulation to benefit energy and financials while placing pressure on domestic retailers as potential tariffs hikes lead to higher import costs.
Earnings Beat
Communication services, technology, and healthcare posted highest earnings beats in recent reporting season; S&amp;P 500 poised for robust earnings growth of c.13% in 2025.
Winning Streak
Fund flows into tech stay robust amid strong interest in artificial intelligence plays. Financials and consumer discretionary have also attracted significant inflows, ranking just behind tech.
Mixed Messaging
<div style="text-align: justify;">US economic resilience and upcoming festive season serve as tailwinds for consumption and tourism plays, but mixed macro outlook for China fuzzies the picture. Download the PDF to read the full report.</div>

Co-investments shine as a strategic private asset allocation tool, providing flexibility, cost efficiency, and IRR uplift for investors navigating uncertain markets

Alternatives - Private Assets | The Enduring Value of Co-Investments in Uncertain Times

Cheaper at the horizon. Interest rate hikes in the 2022 Fed tightening cycle, and subsequent bouts of public market corrections, precipitated a dip in private equity valuation multiples to 10.8x in 2023, down from the post-GFC (Global Financial Crisis) peak of 11.9x in 2022 &ndash; the first downward adjustment in more than a decade. Lower valuations such as these present attractive opportunities for buyers, offering not only cheaper entry points, but also the potential for internal rate of return (IRR) recovery when market conditions improve, especially as the Fed has embarked on a rate cutting cycle.
Figure 1: Downward-adjusted valuations avail lower entry points for private equity investors <img src="/iwov-resources/aics/images/AICS/CIOweb/202410/241101CIOPFig1.jpg" alt="" width="1444" height="581" />
 Source: Pitchbook, DBS 
Note: Yellow markings denote vintages with majority unrealised returns.
Multiples data was as at Jun 2024
Co-investments to the fore. The prospect of amenable valuations and IRR uplift in private equity compels the careful selection of private equity access points to reap the most reward in a timely manner. While primary funds provide a foundational and diversified entry to private equity and are naturally the first access point that comes to mind, investors do not gain immediate exposure to underlying assets at prevailing market conditions due to early-stage expenses, and take longer to reach positive returns on committed capital.
Co-investments are spin-offs from the primary fund investing model and offer investors the opportunity to invest alongside General Partners (GPs) outside of the aforementioned primary fund commitment structure. Typically, GPs offering co-investments opportunities have already examined the underlying investments, negotiated the terms of the transactions, and are in the process of closing the investment, but require a larger check than they are momentarily able to write. Co-investors fill the funding gap, and in the process, ride on the GPs&rsquo; expertise in deal sourcing, due diligence, and diversification, at an attenuated fee compared to primary fund investors. This arrangement, however, only gets co-investors a minority stake in underlying target portfolio companies. Nevertheless, the arrangement confers co-investors the ability to accelerate their capital deployment into the asset class, and at the prevailing market conditions. Such control over private equity portfolio is paramount. When market environments are favourable, co-investments can be used to build private equity exposure quickly. When valuations become stretched, however, co-investors have the flexibility to taper deployment.
Outperformance more than meets the eye. A comparison of median net IRR of primary funds and co-investments highlight the outperformance of co-investments, which interestingly persisted across bouts of macroeconomic uncertainty since the GFC. The outperformance in net IRR over primary funds during key macroeconomic disruptions from 2017 to 2023, in particular, were in spite of rising private equity valuations, suggesting that the differentiating edge of co-investments likely goes beyond mere enhancements in deal selectivity.
The &ldquo;fee&rdquo; advantage. In contrast to primary funds which display a flat management fee and carried interest structure, co-investments show a dynamic management fee and carried interest profile which appears to adjust in response to macroeconomic conditions. At the dawn of the Covid-19 pandemic, carried interest for primary funds were fixed at 20% whereas that for co-investments were down-adjusted three-fold and reached 10%. Similarly, management fees for co-investments tapered down to 1% ahead of the 2022 Fed tightening cycle, whereas that of primary funds remain fixed at 2% (Figure 4). The stark differences in fees and carried interest between primary funds and co-investments during macroeconomic disruptions likely contributed significantly to the IRR disparities observed (Figure 3).
Lower fees pay off. To illustrate the impact of lower fees and carried interest on relative performance, we ran a hypothetical capital distribution model (Figure 5) fitted with median fee values (from Figure 4) under the assumption of 2.0x gross returns for both co-investment and primary funds over a seven-year horizon. The reduction in GP costs led to a 16% increase in net performance for the Limited Partner (LP) in the co-investment program.
All that glitters is gold. Having elucidated the role of lower fees on the outperformance of co-investments over primary funds, we proceeded to examine the downsides of co-investments by generating a probability distribution model of total value paid-in (TVPI) multiples based on 5,000 simulations of sample baskets containing co-investments and primary funds. The model reveals the probabilities of 5.3% and 10.9% for TVPI to dip below 1.00x in co-investments, and primary funds investing, respectively. This suggests that co-investments offer some downside attenuation compared to primary fund investments.
Making a foray into co-investments. Co-investing offers unique opportunities but also presents specific risks that investors must navigate carefully. Uncertainty in the deal pipeline often means that co-investors cannot predict the quality of upcoming deals. This necessitates well-resourced and experienced teams to conduct thorough evaluations as and when opportunities arise. Additionally, compressed response times for co-investments (often closing in a matter of days to weeks) increase the risk of inadequate due diligence. Investors need to be mindful to prioritise rigour above agility to uphold due diligence standards despite time constraints. Next, adverse selection &ndash; the risk of GPs offering less attractive deals to co-investors and reserving stronger opportunities for their flagship funds &ndash; can result in co-investors allocating disproportionately into deals with high chance of underperformance. This risk may be mitigated by working with reputable GPs who are motivated to offer quality deals to co-investors to foster meaningful long-term relationships. Finally, GPs vary widely in transparency and reporting practices. Working with GPs who are committed to providing comprehensive due diligence materials and consistent performance reporting is paramount.
 Download the PDF to read the full report.

We examine the cross-asset impacts of a second Trump presidency

Asset Allocation | Trump 2.0 – Winners & Losers

Red Sweep: Seismic change in US policies on the cards. The Americans have spoken. With Trump winning both the electoral college and popular vote, Americans have made themselves clear on who they want as the next President of the United States. The recapturing of the Senate means that Republicans are on course to vastly reshape Capitol Hill in the years to come while Democrats confront a looming existential crisis. Clearly, the election outcome shows that concerns over the economy and illegal immigration ranks high on voters&rsquo; agenda and so, expect significant policy changes to come as Trump assembles a new team to steer his presidency.
The Trump victory has already seen &ldquo;Trump trades&rdquo; going into overdrive with S&amp;P 500 up 2.5%, US Dollar Index (DXY) rallying 1.6% and UST 10-year yield up 16 bps. Expect dollar strength to stay as the markets price in higher bond yields on expectations of rising tariffs and bond issuances to fund the taxation cuts. A Trump 2.0 will bring sweeping policies changes and these are the likely scenarios:
&nbsp;
<ul>
<li>
<div style="text-align: justify;">Tax Cuts: To revitalise domestic manufacturing and jobs creation, Republicans are on course to lower corporate tax rates from 21% to 15% for US-based companies. This reduction in tax burden not only enhances the competitiveness of US companies, it also helps drive innovation as companies reinvest these savings into their businesses. The Republicans are also on course to expand the Tax Cuts and Jobs Act (TCJA) across all income levels, which will support US domestic consumption. However, such tax cuts come at a price. According to estimates from the Committee for a Responsible Federal Budget, the tax reduction for individuals/business and the extension of TCJA will translate to USD9.35tn increase in fiscal costs.</div>
</li>
</ul>
<div style="text-align: justify;">
<ul>
<li>Trade War: Trump&rsquo;s protectionist stance is set to be revived and this could encompass the imposition of a blanket 10% tariff on most imports, along with significantly higher tariffs of up to 60% on Chinese goods. This, along with renegotiations of trade deals like the USMCA, are expected to escalate trade tensions. On a global level, the IMF cautioned that the tariff hikes could potentially reduce global GDP by 0.8% in 2025 and 1.3% in 2026. But that said, we are also mindful that election rhetoric may not necessarily translate into actual implementation given the potential for retaliation from trade partners, and above all, Trump&rsquo;s transactional style of policy making. The situation remains fluid on this front.</li>
</ul>
</div>
<div style="text-align: justify;">
<ul>
<li>National Debt: Republican sweep is expected to add a net c.USD7.75tn to the national debt from 2026 to 2035, driven by policies such as the extension of TCJA and a reduction in business taxes. To fund these taxation cuts, the Republicans will: (a) Increase revenue from tariffs, (b) Implement cuts to entitlement programs like Medicare and Medicaid which provide healthcare for seniors and low-income earners, (c) Eliminate energy-related tax credits used to incentivise renewable energy development. However, these initiatives will nonetheless be insufficient to offset revenue losses from the tax cuts.</li>
</ul>
</div>
<ul>
<li>
<div style="text-align: justify;">Geopolitics: Expect geopolitical fragmentation to deepen, with exporters to the US to experience margin pressure. But the eventual outcomes remain fluid given the likelihood of retaliation from US&rsquo;s major trading partners. Our economists, meanwhile, holds a sanguine view for Asia on the basis of the region&rsquo;s strong ties with US and China. The region&rsquo;s openness to trade and strong balance sheets will put them in good stead during Trump 2.0.</div>
</li>
</ul>
&nbsp;
Figure 1: AxJ and China equities performance <img src="/iwov-resources/aics/images/AICS/CIOweb/202411/241107CIOPFig1.jpg" alt="" width="1444" height="581" />
 Source: Bloomberg, DBS 
 Download the PDF to read the full report.

Keep abreast of market moving events with CIO's weekly bulletin

Multi-Asset Weekly: Global Equities Fly High on Jobs Data Optimism

Equities: Markets surge as rate cut expectations rise
A soft landing outlook strengthened global equities. US equities hit record highs last week. The S&amp;P 500 rose about 1%, while NASDAQ jumped 3.3%. November nonfarm payrolls (NFP) increased by 227K, and the unemployment rate edged up to 4.25%, signalling a moderating labour market and driving rate cut expectations. Fed Chair Jerome Powell&rsquo;s comments reinforced the view of a resilient economy, allowing for a cautious approach to rate cuts. This, along with robust earnings from tech companies, heightened investor optimism, pushing expectations for a 25 bps rate cut in December and strengthening the outlook for a soft landing.
The STOXX Europe 600 Index increased by 2% and FTSE 100 ended 0.26% higher despite political instability in France triggering the forced resignation of the country&rsquo;s prime minister. Japan&rsquo;s Nikkei 225 rose 2.3% as the weakness of the yen supported the profit outlooks for Japan&rsquo;s export-heavy industries. Chinese markets rallied with both the Shanghai Composite and Hang Seng Index adding 2.3% as market expectations were high on hopes that China would roll out additional measures to ward off the growth risks posed by the incoming Trump administration&rsquo;s trade policies.
Topic in focus: S&amp;P 500 ends the year with robust earnings performance. The US earnings season is coming to an end with c.99.2% of the companies having reported their earnings (as of 6 Dec 2024). The results are reassuring, highlighting continued strength, with c.76% of the companies reporting positive earnings surprises. This robust performance continues to demonstrate the ongoing resilience of US corporate earnings. Communication services, healthcare, and technology sectors produced the highest positive earnings surprises at 92%, 87%, and 87% respectively.
From a sectoral perspective, we continue to advocate exposure to communication services and technology, especially on Big Tech (i.e. Alphabet, Apple, Amazon, Meta Platforms, and Microsoft), given their strong market positioning and robust cash flow generation abilities. Technology is poised to be a key beneficiary as the world embarks on the transformational journey of artificial intelligence (AI). AI is currently still in its infancy phase and expands beyond hardware (including semiconductor companies), which most investors currently focus on, to encompass software (including cloud services, enterprise solutions, and cybersecurity) and diverse industry-specific applications. This broadening landscape presents a multitude of investment opportunities across the entire AI value chain.
Figure 1: Robust earnings season for S&amp;P 500 <img src="/iwov-resources/aics/images/AICS/CIOweb/202412/241209CIOWeeklyFig1.jpg" alt="" width="694" height="385" /> Source: Bloomberg, DBS
 Download the PDF to read the full report which includes coverage on Credit, FX, Rates, and Thematics.

CIO Asset Allocation

Navigating a new world order under Trump 2.0

Asset Allocation 1Q25 – A New World Order

As the Fed continues to cut rates, Chief Investment Officer Hou Wey Fook foresees a soft landing that is constructive for risk assets

Video 4Q24: In a Sweet Spot

Multi-Asset Weekly: US Equities Climb on the Back of Consumer Confidence High

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We see strong momentum in utilities, consumer staples, and healthcare

US Equities 4Q24 – Positioning for Fed Pivot

<div style="text-align: justify;">Significant sectoral rotation in preparation for Fed&rsquo;s pivot. This change in the Fed&rsquo;s policy stance triggered huge shifts in portfolio positioning during 3Q24 as data from EPFR Global shows investors rotating from tech-related sectors to defensive plays and domestic cyclicals</div>
<ul>
<li style="text-align: justify;">Utilities, consumer staples, and healthcare will see strong momentum in an environment of growth moderation and falling bond yields</li>
<li style="text-align: justify;">Earnings surprise came at c.80%, driven by strong momentum in technology, consumer staples and healthcare</li>
<li style="text-align: justify;">Tech sell-down on the S&amp;P 500 presents opportunities for investors to jump onto the AI bandwagon</li>
<li style="text-align: justify;">Broadening US rally and lower yields will also underpin momentum in US small caps</li>
<li style="text-align: justify;">Investors rotate from tech-related sectors to defensive plays and domestic cyclicals</li>
</ul>
Figure 1: US sectoral rotational in play <img src="/iwov-resources/aics/images/AICS/CIOweb/202410/CIOInsights4Q24_USFig1.jpg" alt="" width="1802" height="664" /> Source: EPFR Global, DBS
&nbsp;
<div>Download the PDF to read the full US equities report.</div>
<div>Click&nbsp;<a href="../102024/CIOInsights4Q24.xml">here</a>&nbsp;for the full 4Q24 CIO Insights publication.</div>

Brace for additional reductions and further cuts in the coming months

Europe Equities: When It Rains, It Pours

Bleak growth outlook. The European Central Bank (ECB) has cut its benchmark interest rates by 25 bps for the third time this year, bringing the deposit facility rate to 3.25%. The ongoing disinflationary trend was cited as the primary driver for the consecutive rate cuts. Driven by a sharper drop in energy prices and softer services inflation, Euro Area inflation continued its decline, falling below the ECB&rsquo;s 2% target to 1.7% in September, down from 2.2% in August. 
Meanwhile, the region&rsquo;s Purchasing Managers' Index slipped into contractionary territory. Core member countries, particularly those heavily reliant on manufacturing, are grappling with a mix of challenges, including rising competition and sluggish demand for key exports such as automobiles and capital goods. This has resulted in a slower recovery in exports and dampened investment sentiment across the bloc. Notably, Germany, Europe&rsquo;s largest economy, has downgraded its growth outlook, now forecasting a 0.2% contraction in 2024, a reversal from the previously expected 0.3% growth. This marks the second consecutive year of negative growth, following a 0.3% contraction in 2023. 
In light of these developments, we have revised our rate cut projections, now anticipating an additional reduction in 4Q24, followed by further cuts in the first half of 2025 to bring the neutral rate to 2.0%. There are also growing discussions within the ECB on whether rates should be lowered below neutral to further stimulate the sluggish economy. 
Earnings coming in short. Europe equities had a dismal start to October as the earnings season fell short of expectations, prompting downward revisions in forecasts. Of the 56 companies in the STOXX 600 that have reported earnings so far, 26 have missed expectations. As a result, the initial earnings growth forecast for FY24 has been slashed from 4.3% to 1.8%. Looking ahead, we anticipate that the 9% earnings growth forecast for next year will also be revised downward, given weak corporate guidance and ongoing headwinds from tariff negotiations. 
In response to the EU's decision to impose tariffs of up to 45% on Chinese-made electric vehicles (EVs), China's Ministry of Commerce has announced provisional anti-dumping measures on brandy imports from the EU. Additionally, China is conducting investigations into EU pork and dairy imports and is considering raising tariffs on imported large fuel vehicles. With China being EU's second largest trading partner, accounting for approximately 6% of total trade, these retaliatory actions are likely to create further challenges for European economies and corporations. 
Figure 1: Of Pork, Dairy and Brandy - China imports from Europe <img src="/iwov-resources/aics/images/AICS/CIOweb/202410/241024CIOP2Fig1.jpg" alt="" width="1444" height="581" />
Source: Bloomberg, DBS 
Delayed positive impact from China stimulus. China is a crucial market for many European industries. While Beijing's recent announcements of large-scale stimulus measures ignited some optimism, the lack of specificities has left uncertainty on whether China can restart its growth engine. Furthermore, overhang from China-Europe trade tariffs, coupled with US restrictions on technology exports to China, are likely to delay positive repercussions. 
French luxury giant LVMH reported weak quarterly sales, primarily driven by sluggish demand in China. Although semiconductor equipment maker ASML exceeded earnings expectations, it issued a cautious outlook due to the uncertain environment. According to calculations from Reuters data, approximately 10% of European corporate earnings are derived from China/Asia, underscoring the region's importance in contributing to Europe's economic fortunes. 
Energy prices a concern for the region. Ongoing turmoil in the Middle East is adding to volatility in energy markets with concerns mounting over potential threats to critical energy infrastructure in the region. As supply risks increase and climate uncertainties persist, the upcoming winter season could drive energy prices higher. This poses a significant risk to the global disinflationary trend and could limit the ECB's ability to implement further rate cuts which are crucial for supporting the region&rsquo;s slowing economy. 
Given these challenges, we maintain a cautious stance on European markets, particularly in light of economic headwinds and disappointing corporate earnings. However, we remain optimistic about long-term structural themes with quiet luxury, technology, and healthcare continuing to be our investment preferences, while renewables present fresh opportunities. 
 Download the PDF to read the full report.

Brace for potential near term slowdown and prepare for the long term

Global Oilfield Services: Still Constructive, but Be Selective

Capex discipline trend to continue in 2025The trend of capex discipline in the oil and gas (O&amp;G) industry is likely to persist in 2025, especially with expectations of moderating oil prices. Oil majors remain focused on returning capital to shareholders via dividends and buybacks, thus the low reinvestment rates, further aided by cost reduction and efficiency gains over the past decade. Some signals of capex scale back have been observed. In early December, Chevron unveiled plans to reduce 2025 capex by ~USD1bn or c.6-7% to the USD14.5-15.5bn range (vs USD15.5-16.5bn for 2024), including investment cuts in the US Permian basin, in favour of free cash flow. Petrobras indicated an intention to lower 2025 capex from USD21bn to USD17bn, citing rising equipment cost and financing limitations. Over in Asia, Petronas&rsquo; capex may also decline in 2025 due to greenfield project delays and loss of Sarawak gas income. There will be more clarity in the next few months as other supermajors and national oil companies (NOCs) release their annual strategies.
Oilfield services&rsquo; medium-term outlook remains constructive.Despite the likelihood of a slight slowdown in the near term, we believe the longer term outlook remains constructive with low single digit growth expected for global oilfield services (OFS) through 2030, driven by still robust production and exploration activities, particularly in the gas segment, and the deployment of new technologies, aimed at optimising production costs and decarbonisation. Digitalisation and low carbon technology investment will continue to be the bright spots of OFS market with 25-30% of key oil majors&rsquo; capex spent on low carbon products/technology (comprising hydrogen production and carbon capture). OFS giants, Schlumberger and Baker Hughes, are the industry leaders in this regard&mdash;taking the leap and transforming into energy technology companies that develop critical technologies for the transition. The North American market is also expected to see an uptick in activities with Trump promising to raise O&amp;G lease sales and expedite approvals for LNG export permits. The consolidation trend in the oilfield service sector is also set to intensify under Trump.
Stay with the industry leaders. Weak macroeconomics and muted oil market fundamentals have taken a toll on share price performance of OFS stocks this year with Schlumberger (SLB) and Halliburton (HAL) having corrected ~20% YTD. Baker Hughes outperformed its two peers with share price rising over 20% YTD, thanks to its steadier diversified portfolio and gas leverage which are expected to continue driving the outperformance. We believe downside has been priced in to a large extent. The O&amp;G capex and OFS outlook remain constructive as long as oil price remains above USD70/bbl.
Figure 1: Share price performance relative to Brent oil price and indexes <img src="/iwov-resources/aics/images/AICS/CIOweb/202412/241211CIOPFig1.jpg" alt="" width="1444" height="581" />
 Source: Bloomberg, DBS 
 Download the PDF to read the full report.

Japan Equities 4Q24: Supportive Earnings

There and back again. The BOJ&rsquo;s surprise rate hike, resurgent recessionary fears, and a sharp unwinding of the yen carry trade sent Japan equities on a whipsaw, returning them to historic highs after briefly wiping out their gains for the year.
<ul>
<li style="text-align: justify;">Semiconductor and IT services sectors, as well as financials sector will see strong momentum from BOJ normalisation</li>
<li style="text-align: justify;">Increase in defence spending presents opportunities for the heavy machinery sub-sector within industrials</li>
<li style="text-align: justify;">Current elevated uncertainties and currency volatility will weigh on risk appetites and corporate investments in the near term</li>
<li style="text-align: justify;">Full-year EPS growth is projected at 13% and 18% for 2024 and 2025 respectively, outpacing historical averages</li>
</ul>
Figure 1: TOPIX valuations are below their 10Y averages <img src="/iwov-resources/aics/images/AICS/CIOweb/202410/CIOInsights4Q24_JapanFig1.jpg" alt="" /> Source: LSEG Datastream, DBS 
<div>Download the PDF to read the full Japan equities report.</div>
<div>Click&nbsp;<a href="../102024/CIOInsights4Q24.xml">here</a>&nbsp;for the full 4Q24 CIO Insights publication.</div>

Keep abreast of the latest equity research

Equities Weekly | Japan Equities – Long-term Structural Trends in Play

<div style="text-align: justify;">Japan equities: Long-term structural trends in play. Japanese equities have performed well this year. The TOPIX index registered double-digit gains on the back of solid corporate earnings, a weak yen benefitting exporters, and significant inflows from foreign investors. Structural reforms led by the Kishida administration and Japan Exchange Group, improved corporate governance, and increased shareholder returns have also boosted the appeal of Japanese stocks. Under the leadership of the newly elected Prime Minister Shigeru Ishiba, we expect these measures to continue building investor confidence. Going into 2025, key risks surround the BOJ policy uncertainty, yen volatility, and leadership transition in the US. We maintain that the BOJ will continue to gradually normalise interest rates, in line with modest GDP growth and rising wages. </div>
<div style="text-align: justify;">Consensus forecasts an aggregate earnings growth of 9% for Japanese companies next year; the healthcare, technology, consumer staples, materials, and financials sectors are poised to outperform. This is on the back of long-term structural drivers such as Japan&rsquo;s ageing population, digital transformation, growing AI commercialisation, as well as interest rate normalisation. Specifically, Japanese banks remain undervalued, trading at a P/B ratio of 0.9x, well below pre-GFC levels and global peers. With significant tailwinds in play, we continue to advocate exposure to the semiconductor space &ndash; strong demand from industries such as automakers, robotics, machinery, and consumer electronics continue to buoy global demand for AI-related chips. </div>
<div style="text-align: justify;">Equity fund flows: Continued bifurcation in DM flows. US Equity Funds registered another week of inflows, with small cap equity funds leading the way in AUM terms. In contrast, Europe Equity Funds tallied their ninth straight outflow as fiscal constraints, political uncertainty, and concerns on wider trade protectionism under Trump 2.0 continue to weigh on investor sentiment. Enthusiasm for Japan Equity Funds also stumbled, with redemptions registered at the end of November exceeding USD4bn. Meanwhile, Emerging Market (EM) Equity Funds extended their longest run of outflows since 4Q23, as funds continued flowing to US-mandated funds.</div>
 Figure 1: Opportunities in the financial and materials sectors in Japan
<img src="/iwov-resources/aics/images/AICS/CIOweb/202412/241211EquitiesWeeklyFig1.jpg" alt="" width="1371" height="530" /> Source: LSEG Datastream, DBS Equity Research Highlights
<img src="/iwov-resources/aics/images/AICS/CIOweb/202412/241211EquitiesWeeklyTable1.JPG" alt="" width="954" height="824" /> Download the PDF to read the full report.

Equity Strategy

Silver lining ahead given inherent fundamentals

Asia ex-Japan Equities 1Q25 - Selective Opportunities

Weak economic growth has not limited the TOPIX from hitting fresh highs

Japan Equities 1Q25 – Staying the Course

Navigate downbeat European equities as we head into 1Q25

Europe Equities 1Q25 – Slower for Longer

US outperformance expected to persist given impending taxation cuts, and fiscal and monetary policy tailwinds

US Equities 1Q25 – Only Game in Town

For this and other ideas, please check out the DBS Stock Pulse. Your go-to morning essential that inspires you with investment and trading ideas daily.

DBS Stock Pulse: Singapore hotel REITs expected to see slower growth in 2025

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For Chief Investment Officer Hou Wey Fook, a soft landing in the US bodes well for risk assets

Video 3Q24: Risk Assets in Play

<div style="text-align: justify;">In this video, DBS Chief Investment Officer Hou Wey Fook discusses the following: </div>
<ul>
<li style="text-align: justify;">Our call for portfolios to engage with risk assets has paid off this year, as reflected in the continued run in equities and the compression of credit spreads</li>
<li style="text-align: justify;">We see a Goldilocks economy panning out in the US due to tapering growth and inflation, resulting in a soft landing that will lead to the Fed graudally cutting rates</li>
<li style="text-align: justify;">We continue to advocate for excess cash to be deployed in well-balanced portfolios comprising public equities, bonds, and alternative asset classes</li>
<li style="text-align: justify;">Stay with quality companies with deep moats for equities, investment-grade with longer duration for bonds, and overweight gold and private assets</li>
</ul>
 Click <a href="../062024/CIOInsights3Q24.xml">here</a> for the full 3Q24 CIO Insights publication.

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