Trades to carry through the market fog


Markets have swung from despair to optimism, soothed by Fed guidance and expectations of a thaw in trade wars. Sensitivities are high—a swing back to negative sentiments will remain on the cards...
Taimur Baig, Nathan Chow11 Jan 2019
  • In this environment, we like the following trades
  • Steepeners in the US and India and flattener in China (rates)
  • Long the USD against AUD, CNY, and SGD (FX)
  • Favourable toward investment grade credit and China BBs (credit)
  • Long Indonesia ETF and S-REITs (equities)
Photo credit: AFP Photo


Our favourite trades

From utter despair to widespread optimism, it hasn’t taken much for the markets to turn around so far this year. All it took was a few dovish words from Fed officials and some news that China-US trade talks were proceeding. We will take this development with a grain of salt, as the threshold for falling back into risk aversion does not seem particularly high. This is a sharp contrast from the global growth dynamic a year ago, when sentiment was so strong that concerns about trade wars or China slowdown were regularly shrugged off.

Recognizing that the market fog can reappear readily, we have some high conviction trades in mind to get going with the year:

From utter despair to widespread optimism, it hasn’t taken much for the markets to turn around so far this year. All it took was a few dovish words from Fed officials and some news that China-US trade talks were proceeding. We will take this development with a grain of salt, as the threshold for falling back into risk aversion does not seem particularly high. This is a sharp contrast from the global growth dynamic a year ago, when sentiment was so strong that concerns about trade wars or China slowdown were regularly shrugged off.

Recognizing that the market fog can reappear readily, we have some high conviction trades in mind to get going with the year:

Rates: We think that the US fixed income market has overreacted to slowdown concerns, and a steepener is on the cards. Given the wage-jobs dynamic and widening fiscal deficit, the 10-year yield should be considerably higher. We also think that long-term rates in India will rise on fiscal concerns, and support a similar trade. In contrast, a China flattener is in order, given the ongoing economic slowdown and pipeline policy support.

FX: We are not as bullish the USD now as we were last year, but still see it gain modestly against the AUD, CNY, and SGD. As the US economic cycle matures, there will a moment to go dollar bearish, but the moment is not now.

Credit: The migration to higher grade credit has been on for a while, and will continue this year, in our view. We like BBBs, especially out of China and India, and BBs in China for carry.

Equities: After a torrid 2018, we see reasons to be constructive Indonesian equities as prospects of a market-favourable election outcome rise and oil strikes a sweet spot of helping commodities in general without causing inflation concerns. As a defensive play, we consider S-REITs in the retail and industrial subsegments.

Taimur Baig and Nathan Chow

Highlights of the week:

Chart of the Week: Volatile days
US Rates: Late Cycle
China: More policy support in the pipeline
Top-10 investment strategies for 2019: #1 Bet on more rate hikes by the Fed
Top-10 investment strategies for 2019: #2 Looking for USDSGD to hit 1.40
China: Disinflation is back
India fiscal: Treading a fine line


To read the full report, click here to Download the PDF.


Taimur Baig, Ph.D.

Chief Economist - G3 & Asia
taimurbaig@dbs.com


Nathan Chow

Strategist - China & Hong Kong
nathanchow@dbs.com

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