Why investors should hold more cash in 2017
Understanding the role of cash in portfolios
Investors should hold on to more cash, while adding exposure to diversifiers such as hedge funds and private equity investments to prepare portfolios for increased market uncertainty this year.
Doing so also protects portfolios from the impact of Trumponomics or the economic policies of US President-elect Donald Trump, says Bank of Singapore. Bank of Singapore is the combined private banking businesses of OCBC Bank and ING Asia Private Bank, which OCBC acquired in 2010.
“We suggest holding more cash as it can be deployed if there is good opportunity ahead and can mitigate any negative outcome from an unexpected scenario,” says Johan Jooste, chief investment officer of Bank of Singapore.
With Trump’s policies tilted to benefit the US, Bank of Singapore expects the world’s largest economy to outperform Europe, Japan, and Asia. The bank has raised its outlook for US equities to neutral from underweight and has maintained an underweight rating for the other three markets.
But the bank remains vigilant amid uncertainty as a result of Trump’s policies.
“We can be moderately defensive in our asset allocation and continue to prefer credit over equity. As we do not foresee credit spreads to widen significantly, we are turning less bearish on developed market high yield bonds,” Jooste says.
Bank of Singapore is also looking at opportunities in emerging markets, whose outlook has improved over the past year driven by a rebound in commodity prices.
“This trend is likely to persist, but higher US interest rates and tariffs on some exports may threaten to dull the pace of the rebound,” says Richard Jerram, chief economist of Bank of Singapore. “With restrictions on US imports from China, emerging Asia would be affected by the impact on extended supply chains,” he adds.
Bank of Singapore forecasts emerging markets to grow 4.4% in 2017, up from 4.1% in 2016.
“Looking into China, the credit bubble is expanding rapidly, which makes it vulnerable to the impact of US trade barriers. Rapid lending, high investment rates and slowing economic growth suggest an inefficient allocation of credit and an eventual bad debt crisis,” says Jerram.
Bank of Singapore expects moderate fiscal stimulus to raise US growth in the second half of 2017 and 2018, boosting inflation and leading to faster Fed tightening than previously expected.
“Inflation is now increasingly evident as shown in both consumer prices and wages. Under Trump’s presidency, the planned fiscal stimulus, a more restrictive approach to immigration and the proposed tariffs on imports will heighten inflationary pressures,” says Jerram.
Bank of Singapore expects seven 0.25% rate hikes in the following two years, with three in 2017 and four in 2018. Meanwhile, the market should keep an eye on the policy direction of the Trump administration, as this may provide a clearer outlook by the end of first quarter of 2017.
The bank is cautious on equities in 2017 as valuations look extended while earnings expectations are lofty. US equity returns are expected to lead global equity markets as Trump’s policies are expected benefit this asset class.
In terms of fixed income, Jooste says that outsize bond returns that were experienced in 2016 for emerging markets will be difficult to repeat in 2017.
“We plotted the likely outcome for 2017 and we’ve really moderated what we think we can achieve from these asset class this year compared to last year. We think that this year you’re going to only basically get the coupon. So a 4% bond will return you about 4%,” Jooste says.