H2 Market Outlook: Buckle up and stay invested!
The first half of 2018 was an eventful one filled with expected and unexpected events. The US Federal Reserve continued their rate hike policy and increased interest rates both in March and in June to 1.75%-2.00%, bringing the number of rate increases since December 2015 to seven in total. The landmark Trump-Kim summit held in Singapore, while historic, did not move financial markets much, and of course, the main headline risk continues to be the escalation of a potential trade war, which is unlikely to go away any time soon.
How then should you position your portfolio in this mature bull market?
In H2 2018, we expect the continuation of geopolitical uncertainty but we also believe that with the economic environment improving and corporate earnings rising, buying on dips on selected sectors may yield positive results.
In this current environment where rates are poised to continue their upward climb, pay more attention to Equities in contrast to Fixed Income. Within the Fixed Income space, take a look at unconstrained bond funds where duration is managed at the shorter end and be extra selective within High Yields where rising rates will increasingly weigh in on the profitability of these companies.
In terms of geographical regions, equity valuations in the US are starting to come off as earnings have caught up with prices, led by Technology and Consumer Discretionary sectors. The rollback of the Dodd-Frank Act coupled with rising rates will also likely be the next driver for small and mid-cap US Financials where valuations are also looking attractive. Europe on the other hand, continues to rattle investors as risk of a potential Eurozone fallout looms.
Over in Asia, long-term outlook remains positive but short-term economic headwinds may keep markets volatile. Pay attention to fundamentally strong economies such as China, Hong Kong and Singapore. In Japan, equity markets have had a good run since Shinzo Abe took over and appointed Kuroda as the Bank of Japan (BoJ) governor, with unprecedented massive stimulus spurring the economy and keeping unemployment rate at one of Japan's lowest for decades. This however may change if the scandal-hit Abe administration loses support and steps down. It may be wise to adopt a wait and see approach at this moment.
Just as much as a hiker needs to take a breather at base camp before scaling Mount Everest, we see 2018 as the year where the bulls consolidate before pushing to greater heights.
Stay invested, and continue to buy in on dips.
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Information is correct as of 06/07/2018.