SINGAPORE – Despite the war in Ukraine, inflation and rising interest rates, the upside of markets remains intact, thanks to a post-pandemic reopening and an abundance of liquidity in the system. Investors should stay committed and invest in “best-in-class” companies and use a diversified barbell approach.
So says Hou Wey Fook, Chief Investment Officer of DBS.
“Despite the impact of oil on inflation and the growing risk of stagflation, the economic recovery after the post-pandemic reopening of economies supports continued investment. Continue to use a barbell approach with secular growth stocks and assets revenue generators, and adding gold as a risk diversifier,” Hou said in his Q2 strategy report.
DBS expects the US Federal Reserve to implement six more interest rate hikes this year, followed by four next year, while the European Central Bank’s quantitative easing will soon end.
“Will this herald the start of a bear market? We believe not,” the report said. “Raising key Fed rates amid an improving economy will not derail equity markets and our analysis of historical data supports that view.”
The report acknowledges that the situation in Ukraine remains fluid and that the Russian invasion could turn into a protracted military campaign.
But DBS believes the risk of economic contagion from the Russia-Ukraine crisis is low, given that Russia accounts for just 1.8% of global gross domestic product (GDP). The United States is 24.7% and China’s 17.4%.
In terms of global trade flows, Russia accounts for only 1.7% of global exports (compared to 12.1% for China and 9.5% for the United States) and 1.4% of global imports (compared to 12 .8% for the United States and 10.8% for the United States). China).
“A common assumption among investors is that military conflicts are devastating to financial markets,” Hou said. “Based on the experience of major military conflicts since 1990, the data suggests otherwise. Global equities have, on average, risen 38% during military conflicts.”
As for the Fed’s over-tightening in the face of spiraling inflation and triggering stagflation, DBS noted that US GDP and corporate earnings are poised to grow.
3.7% and 15.8% respectively this year.
This suggests the market is on a path of “rising bond yields and rising growth momentum,” which is constructive for the outlook for risk assets, according to the report.
“A repeat of 1970s-style stagflation is not an option, given that the high inflation we see today is accompanied by stable macroeconomic fundamentals.”