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CIO Insights 4Q24: In a Sweet Spot

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

CIO Insights 3Q24: Risk Assets in Play

Dear valued clients, Since the start of this year, our call for portfolios to engage with risk assets has paid off as reflected in the continued run in equities and the compression of credit spreads. We see a Goldilocks economy panning out in the US &ndash; not too hot, not too cold. In other words, a soft landing with tapering growth and inflation that will lead to the Fed gradually cutting rates. Looking at past cycles, such a trajectory in interest rates had led to a bullish trend that persisted for longer. Hence, we continue to advocate for excess cash to be deployed in well-balanced portfolios comprising public equities, bonds and alternative asset classes. Stay with quality companies with deep moats for equities, investment grade with longer duration for bonds, and overweight gold and private assets. Such a portfolio construct will demonstrate superior risk-reward over market cycles, while harnessing &ldquo;risk premiums&rdquo;, or incremental returns over cash. In this publication, we highlight a new investment theme: &ldquo;New frontiers in space&rdquo;. Commercialising spaceflight might sound new-fangled, but the theme is a natural extension of the rapid innovation behind Big Tech&rsquo;s market gains in recent years. It is not difficult, for instance, to chart a path between Tesla&rsquo;s semi-autonomous vehicles to SpaceX&rsquo;s reusable rockets. Do enjoy the read! 
Hou Wey Fook,&nbsp;CFA Chief Investment Officer Download the PDF to read the full 3Q24 CIO Insights report.

Wage negotiations could add billions of dollars in additional labour expense

Global Autos: Major Events Could Derail Near-term Growth

Events to watch - US labour movement and EU probe into China&rsquo;s EV subsidy. The uncertainty over labour contract negotiations in the US could affect production, and eventually the entire value chain from parts suppliers to distributors. The wage negotiations between automakers General Motors, Ford, and Stellantis, and the United Automobile Works (UAW) could add billions of dollars in additional labour expense to the automakers, which could lead to higher prices for end customers. Total losses from the first two weeks of the strike are estimated to be USD3.9b1. The labour strike could also impact the Chinese auto parts suppliers such as Minth, Fuyao Glass, and Nexteer, which have 20-60% exposure to the North American auto market. Further, the anti-subsidy probe into Chinese-made Electric Vehicles (EVs) by the EU Commission adds uncertainty to the global EV development. China is the third largest market for European Union (EU) vehicle exports, and the export value per car is about 3x higher compared to the average value per car imported from China.
Global vehicle demand stays resilient. Global vehicle deliveries in August point to steady demand momentum despite the high interest rate environment. The improving supply chain in the US and Europe has helped to boost production and sales YTD. So far, the European and US vehicle markets have recovered back to about 80-90% of pre-Covid levels. On the other hand, global EV penetration (BEV+PHEV) is trending higher, with China at 32.8% and EU at 28.4% in August. The financial support by the US and EU governments are crucial to boost the EV industry development &ndash; covering EV batteries to EVs. The cost environment is also favourable to the automakers, with Chinese EV battery lithium prices having corrected by c.30% from a 3-month high.
Clean transport hinges on rapid EV charging network expansion. The urgency to cut transport emissions should support global EV sales to grow at an annual rate of 23% from 2022-2027 to some 30m units. However, the pace of transport decarbonisation is highly dependent on the speed of EV charging infrastructure construction. At the end of 2022, there were 2.7m public charging points worldwide, still lagging EV charging demand. So far, China has made good progress in developing its EV charging infrastructure. As of end- August, China has about 2.27m public charging piles across the country, the highest in the world. In Europe, there are about 0.5m EV charging piles and it needs to reach 6.8m public charging piles by 2030, with total investment estimated at some EUR144b. In the US, the Biden administration aims to raise the number of EV chargers to 500,000 by 2030, to be supported by federal funding of USD7.5b. 1 Anderson Economic Group&nbsp; Figure 1: EV sales in major markets heading higher
<img src="/iwov-resources/aics/images/AICS/CIOweb/202310/231011CIOPFig1.jpg" alt="" /> Source: ACEA, CEIC, Bloomberg, DBS Download the PDF to read the full report.

Prevailing conditions today suggests that equity markets will trend higher in tandem with oil prices

Impact of Rising Oil Price on Global Equities

Rising energy prices bad for equities? Not necessarily so. Global oil prices have been on a tear, rising 29% since 27 June amid production cuts in Saudi Arabia and Russia. Not surprisingly, this has triggered concerns on the trajectory of risk assets. Based on conventional wisdom, rising oil prices translate to higher input cost which will, in turn, result in margin squeeze and lower corporate profitability. This is particularly so for net importer countries such as United States and China.
To be sure, for companies operating in the consumer staples or industrials space with limited pricing power, such train of thought makes sense. But to apply this logic wholesale on the entire equity universe is misguided as historical data shows. There are different moving parts at play here and the important factors which we need to consider are: What is the prevailing state of the economy? And is the increase in oil price demand-driven or supply-driven?
Supply concerns aside, rising energy prices also reflect economic resilience. Saudi Arabia announced plans to extend production cuts till the end of the year and this prompted OPEC to forecast potential supply shortfall of 3.3m barrels a day for 4Q23. The likelihood of Saudi Arabia putting a lid on production and keeping oil price elevated is high. According to Bloomberg Economics, the country needs oil price to stay above USD100/bbl in order for the government to cover its expenditure.
Beyond supply concerns, the recent oil price rally also reflects resilient demand, particularly from China. Based on OPEC&rsquo;s projections, global oil demand is expected to increase by 2.44m bpd this year, followed by 2.25m in 2024. The robust demand for oil suggests that the current rally is also a function of economic resilience and this augers well for the outlook of risk assets.
Positive historical correlation between oil price and equities. The relationship between oil price and equities has evolved over the years. From 1970 till 1999, we observed a slight negative correlation of -0.046. But by the turn of the century, this relationship is noted to evolve, with correlation turning positive at +0.159 from 2000 till 2009. And since 2010, correlation between the two assets classes went one notch higher to 0.423. This explains why equities has rallied in tandem with oil prices during periods of economic expansion in the recent years.
Figure 1: Relationship between oil and equities <img src="/iwov-resources/aics/images/AICS/CIOweb/202309/230922CIOPFig1.jpg" alt="" /> Source: Bloomberg, DBS *Chart is truncated Download the PDF to read the full report.

Market Updates

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

Multi-Asset Weekly: Global Equities Rally Around China's Stimulus

Multi-Asset Weekly: US Equities Soar to Record Highs

Multi-Asset Weekly: Global Equities Rally Around Upcoming Fed Rate Cuts

Multi-Asset Weekly: Global Equities Dip Amid a Cooling Labour Market

Multi-Asset Weekly: Global Equities Uplifted by Inflation Data

Multi-Asset Weekly: Global Equities Mark Positive Growth Following Jackson Hole

Multi-Asset Weekly: Optimistic Outlook for US Equities

Multi-Asset Weekly: US Equities Dip Amid Volatile Market Conditions

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Quarterly House Views

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

Navigating a "higher-for-longer" macro regime

Asset Allocation 3Q24: Complicated Last Mile

Video 3Q24: Risk Assets in Play

We continue to advocate for investors to hold gold in their portfolios and hedge funds in macro strategies

Gold & Hedge Funds 3Q24: Maximising Wealth with Uncorrelated Assets

 Build portfolio resilience with exposure to gold and private assets

Alternatives 2Q24: New Equilibrium

Maintain preference for bonds over income equities given its attractive risk-reward

Asset Allocation 2Q24: Cruising Mode

DBS Chief Investment Officer Hou Wey Fook shares his insights for the coming quarter

Video 2Q24: Shifting Currents

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In periods of high uncertainty, capitalise on volatility through options structures.

CIO Insights 4Q24: In a Sweet Spot

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US Presidential Elections: Market Impact

Credit: The Trump Effect on Bonds

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Market Updates

CIO Insights 3Q24: Risk Assets in Play

Global Autos: Major Events Could Derail Near-term Growth

Impact of Rising Oil Price on Global Equities

Multi-Asset Weekly: Global Equities Rally Around China's Stimulus

Multi-Asset Weekly: US Equities Soar to Record Highs

Multi-Asset Weekly: Global Equities Rally Around Upcoming Fed Rate Cuts

Multi-Asset Weekly: Global Equities Dip Amid a Cooling Labour Market

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Quarterly House Views

CIO Insights 4Q24: In a Sweet Spot

Asset Allocation 3Q24: Complicated Last Mile

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CIO Insights 3Q24: Risk Assets in Play

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