Remain positive for investing in 2017
Despite market fears, investors can benefit if their fundamentals are right
It has been a nerve-jangling year for global equities, marked by political upsets and sharp sector rotations. Even so, the MSCI All Country World Index defied the odds with a total return of 7 per cent year-to-date, and a number of equity indices are now at all-time highs.
The MSCI Asia ex-Japan Index returned a decent 5.3 per cent this year, with the Singapore benchmark lagging behind yet again with 0.5 per cent gain.
Despite recent setbacks, Asian bonds as measured by the JP Morgan Asia Credit Index rose 5.8 per cent over this same period. Have investors who remained on the sidelines missed the boat? We don't think so.
Next year will likely shape up to be a good one, not just for United States equities, but also emerging markets.
True, US President-elect Donald Trump's unexpected election victory has raised fears over capital market disruption, while the extent of his protectionist policies remains a source of vulnerability for the region.
But not all emerging markets were made equal. Latin America sends 47 per cent of all its exports to the US.
Asia, by contrast, trades with a more diverse group of nations, and ships just 16 per cent of all its exports to the US.
Among emerging economies with large domestic markets, particularly Brazil, China and India, we see opportunities for outperformance.
What's more, while the repricing of inflation expectations in the US should continue, further rises in US yields are likely to be gradual.
With higher inflation and likely three Fed hikes from now till end-2017, private investors need to be more selective. Min Lan Tan, Head CIO APAC Investment Office, UBS Wealth Management
With the size and timing of potential fiscal stimulus still unknown, the Federal Reserve System's (Fed) moves will likely remain gradual to help heal the labour market.
Secular forces - ageing demographics, the preponderance of savings over investments and low productivity - should also work to keep longer-term interest rates anchored.
We expect the 10-year US Treasury yield to be no higher than 2.3 per cent to 2.5 per cent by end-2017, likely blunting the current momentum seen in the US dollar.
While Mr Trump's election is a potential setback for globalisation, the pro-growth elements of his proposals - tax cuts, fiscal spending and deregulation - are reflationary.
Historically, this has led to positive spillovers on Asia, which remains on track for a year of stronger nominal gross domestic product growth, high single-digit earnings recovery and gradually higher lending rates.
The current batch of determined leaders in Asia, many backed by strong popular mandates, lifts the chances of success as the region ploughs ahead with technology and infrastructure upgrades, and industrial renewal.
For China, ahead of the critical political leadership transition late next year, Beijing will likely emphasise reasonable growth and financial markets stability, with critical reforms in state-owned enterprises and overcapacity sectors staying gradual over the next 12 months.
We remain positive on Asian risk assets with a preference for equities over investment grade bonds.
As producer prices rebound and return-on-equity recovers, we expect Asian equities to deliver low-teen returns next year, with an overweight on China and India, versus an underweight on Taiwan and the Philippines.
Singapore is a relative beneficiary of a steepening yield curve, and valuations near decade-lows should offer downside support.
But we expect the market to trade range-bound in the absence of growth catalysts.
With historically low yields still on the horizon, the search for yield may prevail. But with higher inflation and likely three Fed hikes from now till end-2017, private investors need to be more selective.
"Yield with growth" stocks typically found in Asian cyclical sectors, including consumer discretionary, materials and IT, should outperform.
As bond proxies, Real Estate Investment Trusts (Reits) would likely be impacted by the ongoing rotation out of defensive equities.
Still, selected Reits from Australia, Singapore and Hong Kong with cyclical growth potential, acquisitive opportunities and conservative debt-hedging profiles should remain well-supported in a gradually higher yield environment.
Within Singapore, we prefer ungeared yield (that is, dividends paid out of a net cash position) over leveraged yield amid rising interest rates.
A sustained increase in interest rates bodes well for banks.
Thematically, the "growth at a reasonable price" strategy remains rewarding, and we like the new economy and technology leaders.
Asian financials and blue-chip cyclicals in the consumer discretionary and materials industries also offer attractive value.
The recently announced Shenzhen-Hong Kong Stock Connect will be a catalyst for the China market and Hong Kong-listed small- and mid-cap stocks. But we are less excited about Asian credits, given their stretched valuations, weakening credit quality and increasing supply.
Still, Asian bonds are likely to be more resilient than their global counterparts, due to the higher credit quality of issuers and support of local investors.
We expect most Asian currencies to gain some ground against the US dollar.
Within the region, higher inflation and a better growth backdrop should spur Asian central banks to shift to a more neutral stance.
We enter 2017 preferring high-yielding Asian currencies like the Indonesian rupiah.
Conversely, we expect the Singapore dollar and the Chinese yuan to underperform. Investing in Asia this year was not for the faint-hearted.
Next year will likely be no different, given increased policy uncertainty in the US and political risks in Europe.
Still, the underlying economic and earnings fundamentals matter more - investors should take a well-diversified investment approach, and be more nimble than in recent years.
The writer is the APAC regional head at the chief investment office of UBS Wealth Management.