Friday 29 Mar 2024
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This article first appeared in Personal Wealth, The Edge Malaysia Weekly on October 30, 2017 - November 5, 2017

At the end of last year, economists thought the market outlook for this year was rather moribund. Despite their grim prognostications, global trade growth has been strong this year and financial markets have remained calm despite strong geopolitical activities and deteriorating inflation trends in all the major regions.

In this investment climate, it is not unthinkable for volatility to return quickly and in an unpredictable manner. To insulate themselves from external shocks, investors should stay diversified, says Ronnie Lim, country head for personal financial services at United Overseas Bank (M) Bhd.

“As the US Federal Reserve gradually pursues monetary policy normalisation and other major central banks follow suit, global bond yields are expected to rise moderately. We would be cautious against taking excessive interest rate or duration risks. Hence, we recommend that people invest in short-duration, high-yield bonds and subordinated financial bonds, which provide attractive valuations and additional yield pick-up.

“Markets will be focusing on US domestic policies such as the debt ceiling issue, tax reform, the repeal of the Healthcare Act and a fiscal stimulus package. As markets have priced in the positives, failure to implement or resolve such issues is likely to unsettle investors.”

This year, the Fed has hiked interest rates twice and announced balance sheet reductions in September. Similarly, the Bank of Canada has increased rates twice while there may be one by the Bank of England in November. The European Central Bank is not expected to raise rates anytime soon, but may gradually move towards normalisation.

There has also been an upswing in global economic activity. According to Lim, a confluence of low inflation, higher employment, improving sentiment and relatively accommodative central bank policies have led to a unified global expansion.

“Global growth, which in 2016 was the weakest since the global financial crisis at 3.2%, is projected to rise to 3.6% this year and 3.7% next year, according to the latest IMF projections. Overall, the global economic expansion is providing a positive backdrop for corporate earnings,” he says.

Moving forward, the lingering risks in the market include US domestic policies, an economic slowdown in China, Brexit negotiations between the UK and EU and geopolitical factors, particularly in the Korean peninsula. However, the markets seem to be increasingly desensitised as the standoff persists and escalates, says Lim.

According to the UOB house view report for 4Q2017, global equities have resumed positive momentum after poor performance due to the sabre-rattling between the US and North Korea, the US debt ceiling deadline and hurricanes hitting the southwest coast of the US.

The company retains an overweight allocation for European equities due to the positive economic and investment sentiment earlier this year, which has translated into stronger tangible economic activity. Emerging market equities have performed well this year due to the US dollar weakness, which has led to looser financial conditions in the emerging economies, where debt continues to be denominated in US dollars.

Precious metals, previously supported by geopolitical risks, will find it difficult to sustain gains due to a possible US rate hike in December. After a strong rally in the previous quarter, industrial metals are due for a healthy correction.

Meanwhile, the report says it may be crude oil’s time to shine with increasing signs of recovering global energy demand. In the fourth quarter, Brent crude oil will likely trade higher at US$60 per barrel.

While fixed-income funds may face some headwinds from rising rates, the report says it will be more modest than in previous cycles. “We continue to believe that many investors who do not have the risk tolerance for equity volatility will still benefit from being in fixed-income markets. Also, the positive part of the fixed-income outlook is that the multi-year outlook can improve as yields of fixed-income funds rise.”

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