Singapore’s DBS expects a normalisation of risk premiums on equities, given the fact that things do not look as grim as they used to and many of the shock scenarios, such as a breakdown of a major international bank, the fiscal cliff in the US, an EMU breakup, or a hard landing in China, have not come true.
Lim Say Boon, chief investment officer of DBS Private Bank says: "The equity risk premiums are still at a very high level, a 40 year high in the US for instance, but they seem less and less justified given that central banks around the world have positioned themselves as the buyers of last resort. We expect risk premiums to normalise and therefore go overweight on equities."
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He elaborates: "This is not to say that the structural disfunctions in the financial systems have been overcome, but they seem manageable. Central banks and governments have been managing risk sidewards and every time it rises they respond. The tail risk fear is fading and shifting towards a normal risk. Life goes on."
China may well be the outperformer in 2013, right in time for a new cyclic upturn, indicated by numerous indicators that seem to have bottomed out, such as money supply, loan growth, business climate, and even real estate climate.
Lim recommends: "We recommend A-shares over H-Shares over Hang Seng over STI. Bonds on the other hand we have moved to neutral and we recommend our customers to shift the portfolio towards equities or investment-grade bonds into selected high yield bonds."
Commodities are also expected to see an upswing, particularly base metals will benefit from growth in China. Likewise risk currencies such as the Australian Dollar will perform well, as the current weakness in terms of trade is likely to turn around driven by an increase in commodity prices.
Lim says: "As long as the central banks will continue quantitative easing, and there is little reason to expect this will change in the anytime soon, we expect stocks to be the best option for investors. This will particularly benefit Asian stocks and we expect outperformance to shift from the US to Asia ex-Japan."
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