Where we'd invest in 1Q23 - China, REITs & Tech

#1 - Macro - How's the economy? 

#1 – Global growth is slowing: The global economy is experiencing a broad-based and sharper-than-expected slowdown, according to the International Monetary Fund (IMF).

#2 - Inflation moderating: The rise in US consumer prices has been slowing after peaking in June, with an increase of 7.1% in November compared to the previous year. 

#3 - Central banks slowing down pace of interest rates increase: The Fed raised interest rates by 0.50% in December, after four consecutive hikes of 0.75%.

#2 - Outlook - How's the future looking?

The global economic outlook remains “tough” as we head into the new year. 

The IMF expects global growth to slow to 2.7% in 2023 from 3.2% in 2022. 

In fact, IMF chief expects one-third of the world’s economies to be in recession with the US, Europe and China facing slowing growth.

In Singapore, the MTI expects GDP growth in 2023 to be between 0.5% to 2.5%, slowing down from a 3.8% expansion in 2022. 

The good news is that we might not see a further spike in interest rates like we did last year. A moderation in inflation in the US has reduced the risks of sharp increase in interest rates.

#3 - Risks - What could go wrong?

These are some risks we’re keeping a close lookout for: 

#1 – Inflation could be harder to bring down than anticipated, especially with China’s re-opening

#2 – A deep recession in the US which has a spillover effect to the rest of the world

What would change our view:

#1 - Fed pivot from aggressive interest rate hikes

#2 - Peace talks in Europe

#4 - Explore - How would we invest today?

Stocks – Looking for thematic ideas in China, REITs and Tech

With China one of the bright spots amidst a weak global economy and prospects for interest rates peaking, we will start looking out for opportunities in the following themes:

• China re-opening
• REITs
• Tech

Thematic idea #1 – China re-opening 

Chinese stocks could present an interesting opportunity as China’s re-opening is happening at a faster pace than the market expects. 

Government policies have also turned more pro-growth with more concerted efforts to support the weak property market. 

Lastly, the valuation for the Chinese market remains attractive compared to the past and to other markets such as the US. 

China re-opening ideas:

• CapitaLand Investment: An improvement in China’s economic outlook could drive higher appetite for real estate transactions and growth in asset under management for its fund management business.
• Lion-OCBC Securities Hang Seng Tech ETF: The ETF provides exposure to the 30 largest tech-themed companies listed in Hong Kong.
• UOBAM PingAn ChiNext ETF: The ETF offers exposure to the 100 largest and most liquid A-shares listed and traded on the ChiNext Market of the Shenzhen Stock Exchange (SZSE)

Thematic idea #2 - REITs

REITs could present an interesting opportunity if interest rates were to stop rising.

A stabilization in interest rates could allay concerns about lower distributions from higher interest payments. It would also make the dividend yield on REITs more attractive compared to other asset classes. 

However, as interest rates could remain elevated, it is important to look for REITs which are able to generate higher rental income, and have a relatively low gearing level. 

REIT ideas:

• CapitaLand Integrated Commercial Trust: Portfolio of high-quality office and retail assets that have proven resilient through economic cycles. 
• Mapletree Pan Asia Commercial Trust: VivoCity riding on travel recovery in Singapore, and return of tourists in Hong Kong could drive turnaround of Festival Walk in Hong Kong
• NikkoAm Asia ex Japan REIT ETF: The ETF offers exposure to a diversified portfolio of quality Asia ex Japan REITs with some of the most attractive yields across the world.

Thematic idea #3 –  High quality tech stocks 

High quality tech stocks could present an interesting opportunity if interest rates were to stop rising. 

A stabilization in interest rates could help to reverse the fall in valuation of tech stocks, which have seen their share prices fall sharply over the past year. 

However, as the demand environment remains uncertain, it is important to look for tech stocks which have a proven business model and are able to generate positive cash flow. 

Tech ideas:

• Microsoft: Highly profitable and well-established franchise with shift to subscriptions accelerating growth 
• Nvidia: Data centre business resilient to macro-economic challenges, while proliferation of artificial intelligence presents massive growth opportunity.

Bonds – Interest rates remain attractive 

As interest rates remain high, the yields on bonds continue to look attractive. 

For example, the yield on the 6-month T-bill has been consistently above 4% p.a. in recent auctions. 

With a lower likelihood that interest rates would spike from current levels, we would start to think about reinvestment risk and how to lock in interest rates for longer durations. 

For example, the February issuance of the Singapore Savings Bonds offers a 10-year average interest rate of 2.97%, having come down from above 3% in previous months. 

Bond ideas:

Singapore Treasury Bills: A sound way to earn a decent yield over 6 months or 1 year. 

Singapore Savings Bonds: An attractive option to lock in long-term interest rates while offering flexibility of redeeming with no penalty. 

About the simulated portfolio

Our asset allocation begins with the simulated portfolio of a young working adult, Ian. 

Ian has a medium to long term investment time horizon of more than 5 years. After all, he's just 29 years old young and does not have any near term obligations to meet. 

Like us, he's constantly on the lookout for how he can improve his absolute risk-adjusted returns by making more informed investment decisions!  

Through this simulated portfolio, he can learn how to build a portfolio resilient across different market conditions.

• The simulated portfolio is intended for illustrative and educational purposes only. It does not involve actual money, investments or solicitation of funds for actual fund management by Beansprout. 

• You are advised to seek independent financial or other professional advice for your own investments