CIOInsights 1Q18 Nai

DBS CHIEF INVESTMENT OFFICE
CIO INSIGHTS 1Q18
2018
CIO Insights Source: AFP Photo
The Bull Ain’t Done

Positive Asia, Global Financials, and Technology
The ”Goldilocks” environment of stable growth, weak inflation, and sustained corporate
earnings growth will underpin further upside for global equities. Gain exposure to Asian
equities. Global Financials and Technology stocks offer opportunities.
Favour EM Corporate Bonds

The global synchronised recovery and removal of policy stimuli from central banks will push
yields higher. Expect the US Treasury yield curve to flatten as the Fed tightens. Favour credit over
government bonds. Within credit, BBB/BB Emerging Market (EM) bonds are attractive.
Recovery in the US Dollar

The Fed’s rate-hiking trajectory remains intact. US economic growth is expected to surpass the
post-crisis average in the coming years. The Japanese yen looks particularly vulnerable to rising
US bond yields.
CIO INSIGHTS 1Q18
Contents
Source: AFP Photo
CIO INSIGHTS
3 Foreword
4 Executive Summary
5 Core Investment Views
6 Asset Allocation
19 Global Macroeconomics
27 US Equities
34 Europe Equities
38 Japan Equities
41 Asia ex-Japan Equities
45 DM Government Bonds
48 DM Corporate & EM Bonds
51 Currencies
56 Investment Theme 1: Global Financials
61 Investment Theme 2: US Technological Disruption
66 Investment Theme 3: The Belt and Road Initiative
69 Investment Theme 4: Asian Dividends
73 Special Feature: China: Age of Strongman
CIO INSIGHTS 1Q18
3
Foreword
Dear valued clients,
I’m delighted to launch our flagship CIO Insights, your all-in-one investment guide to
usher in 2018.
Led by our Chief Investment Office (CIO) and supported by over 100 research analysts,
CIO Insights is a quarterly publication that lays out our market outlook and investment
strategy. It marks the latest of our efforts to serve wealth clients better, by cutting through
the noise and delivering up-to-date, actionable ideas.
All of this has come together with the acceleration of our digital agenda, which gives our
clients a faster, smarter, and more personalised way to manage their wealth. Our digital
wealth platform, DBS iWealth, now allows clients to conduct their banking transactions,
manage their wealth, and also trade on a single platform – a first in Singapore.
Thanks to your consistent support, our total assets under management (AUM) has grown
to SGD200b (USD150b) today!
None of this could have been done without you. Together with the DBS family, I look
forward to serving you even better in the year ahead – and beyond.
Tan Su Shan
Group Head
Consumer Banking & Wealth Management
CIO INSIGHTS 1Q18
4
Executive Summary
Dear valued clients,
What a year we’ve had in 2017! Financial markets began the year with much scepticism;
few believed the global bull market, led by US stocks, could go further – especially after
an unabated run from 2010.
But as always, markets never fail to confound.
All told, global stocks went up 20% in 2017 – this time led by Asia, which climbed 35%!
What about 2018? Surely today’s valuations are high and markets must fall?
We continue to think not. Instead, we believe tailwinds – from synchronised global growth
and low inflation – will trump valuation concerns.
In this publication entitled “The Bull Ain’t Done”, we argue our case for being overweight
on equities, with a preference for Asia and the US over Europe. We stay neutral on bonds,
preferring Emerging Market corporates over Developed Market and Government bonds.
In addition, we summarise our global economic and currency views, and feature a special
spotlight on China post the recently-concluded 19th National Congress. On investment
themes, we highlight China’s Belt and Road Initiative, Asian Dividends, and the global
sectors of Financials and Technology.
Do enjoy the read, and we wish you a fruitful year of investing in 2018!
Hou Wey Fook, CFA

Chief Investment Officer
CIO INSIGHTS 1Q18
5
Macro
Outlook
Monetary Policy Economic Growth
Global monetary Global synchronised growth
accommodation at inflexion continues. Momentum
point. Gradual policy underpinned by buoyant asset
tightening will not derail the markets and accommodative
risk rally. government policies.
Geopolitics Inflation Fiscal Policy

Geopolitical tension in Europe Global inflation to stay US fiscal policy to be
persists. Watch for Brexit benign given supply shocks. supportive of growth
negotiation, Catalan crisis, US inflation to stay below in the near term.
Italian elections, and German 2% in 2018 and 2019.
politics.
Markets
Outlook $€¥
Equities Currencies
Further upside for equities US dollar to rebound in 2018,
amid “Goldilocks” economy buoyed by stable growth and
and strong corporate earnings rising yields. Asian currencies
outlook. Overweight Asia. to experience volatility.
Prefer US over Europe.
Rates Credit Thematics

Rates to grind higher given Tight credit spreads to Global Technology to disrupt
cyclical economic recovery, continue. Prefer EM over DM traditional businesses – ride
policy tightening, and credits. the uptrend. Rising rates are
potentially higher oil prices. positive for Financials.
CIO INSIGHTS 1Q18
6
Asset Allocation
Will the bull continue?
Hou Wey Fook, CFA 2017 has come and gone, but the much-anticipated “topping out” of the eight-year-old
Chief Investment Officer US equity bull market did not materialise after all. The prevailing rich valuations of equities
and bonds have often been cited as the reason for the bull market’s end.
Dylan Cheang
Strategist Judging from past cycles, we have observed that valuation on its own does not trigger
the start of bear markets. More fundamental factors – such as economic growth and
inflation – need to be at play as well. Today, these factors are supportive and do not act
as market headwinds.
The excesses seen during the Global Financial Crisis in 2008/2009 have undergone
structural unwinding, while the synchronised global growth story has unfolded, buoyed
by the recovery in corporate capital expenditure, exports, and domestic consumption. This
positive macro environment has put global corporate earnings on a healthy trajectory.
Reinforcing this backdrop is the fact that inflationary pressures remain subdued. Never
mind that weak inflation has been a bane for central bankers, who have tried (and
failed) to drive prices higher via large-scale monetary stimulus. The weak inflationary
environment is a boon for financial markets, as it allows central banks to keep monetary
policies accommodative.
In other words, the “Goldilocks” environment will persist in 2018, leading to the continued
hunt for yield. Equities and corporate debt will continue to be beneficiaries. We therefore
think the likelihood of a bear market emerging over the next three to six months is low
Global monetary accommodation at inflexion point
In retrospect, the massive Quantitative Easing (QE) led by the US Federal Reserve in the
wake of the Global Financial Crisis has reaped substantial benefits. US employment
growth has rebounded impressively while financial markets have rallied – leading to an
easing in financial conditions.
Studies from the International Monetary Fund (IMF) show that the Fed’s QE in 2008-2012
CIO INSIGHTS 1Q18
7
Monetary accommodation has suppressed the real US Treasury 10-year yield by 140 bps. The risk rally in turn created
has reached an inflexion a positive feedback loop in the broader economy as rising wealth reinvigorated the labour
point market, and boosted consumption. The effects of central banks’ largesse in the Euro
Area have been equally pronounced, evident in the region’s economic momentum and
financial market performance.
…and the major central But global monetary accommodation has now reached an inflexion point, and the cycle
banks are expected to is in the process of reversing – albeit on a gradual basis.
gradually reverse such
policies In October 2014, the Fed ended its asset purchase programme and in September 2017, it
announced the trimming of its balance sheet. Across the Atlantic, the European Central
Bank (ECB) has tapered its asset purchases to the pace of EUR30b per month, while the
Bank of England (BOE) has also raised its Bank Rate by 25 bps. The Bank of Japan (BOJ)
has been the only major central bank to maintain an accommodative monetary stance.
A repeat of “taper A “taper tantrum redux” on the cards? Not in our view. Global risk assets underwent
tantrum” in other markets a sharp sell-down in 2013 when the Fed announced that it was scaling back its asset
is unlikely, even as their purchases. The pronounced reaction then was due to investors misconstruing the Fed’s
central banks begin to action as the start of a swift policy tightening process.
scale back asset purchases
Since that episode, markets have become convinced of the Fed’s gradual roadmap for
monetary tightening. This is demonstrated in the positive reaction of both the S&P 500
Index and corporate bond spreads, since the Fed tapered its asset purchase and began the
gradual rate hike process from 16 December 2015 (see Figures 1 and 2).
In this regard, we believe other central banks’ intentions to scale back asset purchases
in the future will likely not see the kind of reaction we got with 2013’s “taper tantrum”.
Figure 1: US equities have rallied sharply since the Figure 2: Similarly, US corporate bond spreads have
first Fed rate hike narrowed sharply since the first rate hike
2,600
1.4 (Inversed scale) 3.0
1.2 Fed Fund Rate (%, LHS) S&P 500 (RHS) Fed Fund Rate (%, LHS)
2,500 3.5
US high yield bond spread (%pts, RHS)
1.2 4.0
2,400
1.0
4.5
2,300 1.0
5.0
0.8
2,200 5.5
0.8
6.0
0.6 2,100
6.5
0.6
2,000 7.0
0.4
0.4 7.5
1,900
8.0
0.2 1,800 0.2 8.5
Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17
Source: Bloomberg, DBS Source: Bloomberg, DBS
CIO INSIGHTS 1Q18
8
The Fed appears to be ahead The Fed tightens monetary policy to build “policy buffer”. Among developed
of the curve by raising rates economies, the Fed appears to be “ahead of the curve” by raising rates despite subdued
despite subdued inflation inflation. One of the often-cited reasons for exiting QE and hiking rates is that the Fed
would want to avoid the build-up of asset bubbles as well as prevent the labour market
This allows them to build from overheating. But there are also other factors at play. On the surface, the prevailing
a sufficient “policy buffer” subdued inflationary environment has often been attributed to “transitory” factors, such
in preparation for the next as weak energy prices. On the flipside, the impact of technological advancements could
cyclical downturn also lead to structurally-low inflation in the years ahead. This topic is certainly under
intense debate among policymakers today. Should central bankers accept that the neutral
real rate has fallen and inflation is almost “as low as it gets”, then it would make sense for
them to start raising rates now to build a sufficient “policy buffer” in preparation for the
next cyclical downturn. With policy rates remaining anchored at or near historical lows,
this is a smart move on the part of the Fed.
Historically, there have been Will rising rates lead to a sell-down in equities? The spectre of rising bond yields has
occasions where equities often been associated with weaker equity prices. But history shows that this need not
rallied in tandem with rising necessarily be the case. Between December 1998 and January 2000, the US Treasury (UST)
bond yields 10-year yield rose 202 bps and the S&P 500 Index correspondingly gained 13%. Similarly,
between May 2003 and June 2006, the 177 bps surge in the UST 10-year yield failed to
Next year will be no different, deter US equities from notching up gains of 32%. We believe this rate hiking cycle will
with global equities grinding not be any different. So long as the Fed maintains its “gradualist” stance of monetary
higher so long as the Fed tightening, the uptrend in risk assets will unlikely be derailed. The counter-argument to
maintains a gradual monetary our constructive stance is a sudden spike in inflation, which will then necessitate the Fed
tightening stance hiking rates at a faster pace. But given soft energy prices and subdued wage growth
around the world, this is currently not our base-case scenario.
Figure 3: Rising US Treasury yields need not necessarily translate to weaker equity prices. The S&P 500 has
rallied in tandem with rising rates during periods in 1998-2000, 2003-2006, and 2009-2010.
7 US Treasury 10-year yield (%, LHS) S&P 500 (RHS) 1,650
1,550
6 1,450
1,350
5 1,250
1,150
4 1,050
950
3 850
750
2 650
Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10
Source: Bloomberg, DBS

CIO INSIGHTS 1Q18
9
Global equity valuation has Sustainability of global corporate earnings will be key
been capped under the lid Much has been said about global equity valuations being no longer cheap, and therefore
because corporate earnings a sell-down in equity markets is imminent. But taking a step back and viewing this from
have been robust a longer-term perspective, the current forward price-to-earnings (P/E) of 19.3x constitutes
a mere 14% premium to the long-term average. One of the key reasons valuations have
managed to stay under the lid – despite strong equity market performances – is the fact
The ISM Manufacturing that corporate earnings have been rising broadly over the last two decades (see Figure 4).
Index’s current trajectory The latter was in turn a function of healthy corporate operating margins, which stayed
augurs well for the US elevated in the realm of 11% since 2010. Looking ahead, the outlook for corporate
earnings outlook earnings remains upbeat. Using the US market as a proxy, forward earnings growth has
historically exhibited a close correlation with the US ISM Manufacturing Index. The latter
recently hit 58.7 in October and the strength in US manufacturing momentum bodes well
for forward earnings outlook.
Market consensus Based on market consensus, corporate earnings for Developed Markets (DM) are expected
expecting robust earnings to grow 9% next year. In Asia ex-Japan (AxJ), earnings are expected to grow 18%, with
growth from both DM China and ASEAN at 15% and 9%, respectively.
and APxJ
Geography Expected earnings growth in 2018
United States 10%

Europe 7%*
Japan 3%
Asia ex-Japan 18%
China 15%
ASEAN 9%
*Expected EBITDA growth
Figure 4: Global equities poised to grind higher as Figure 5: The recent rebound in earnings was partly
corporate earnings improve a function of a rising operating margin
500 Global Equities (LHS) 30 30 Global Equities - Trailing 12-mth EPS (RHS) 14.5
Global Equities - Trailing 12-mth EPS (RHS) Global Equities - Trailing 12-mth operating margin (LHS)
13.5
450
25 25 12.5
400 11.5
20 20 10.5
350
9.5
300
15 15 8.5
250 7.5
10 10 6.5
200
5.5
150 5 5 4.5
Feb-95 Feb-99 Feb-03 Feb-07 Feb-11 Feb-15 Feb-95 Feb-99 Feb-03 Feb-07 Feb-11 Feb-15

CIO INSIGHTS 1Q18
10
Low-volatility environment supports pro-risk strategies
The low-volatility environment The current low-volatility environment could persist in the year ahead, given that global
is positive for equities growth momentum has held up substantially while inflation remains anchored to lows.
Historically, the combination of stable economic growth and low inflation has kept
volatility in check – a positive for risk assets. We prefer equities over bonds; this rests on
Continue to favour equities the fact that the earnings yield for global equities currently stands at 4.9% – substantially
over bonds as the current higher than the US Treasury (UST) 10-year yield of 2.4% (Figure 7).
yield gap remains attractive
Figure 7: The earnings yield for global equities is still substantially higher than
the US Treasury 10-year yield
12 Global Equities - Earnings Yield (%, LHS) US Treasury 10-year yield (%, RHS)
10
0
Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10 Jan-13 Jan-16
Stay constructive on US US equities to resume global leadership; stay constructive. As we head into 2018,
equities, given: we believe that there are three compelling reasons to adopt a positive stance on the
(1) Technological advancement US equity market. First, US companies remain at the forefront of global technological
(2) Non-crowded trade innovation and disruption. Since 2010, the S&P 500 Internet Services sub-segment has
(3) Potential tax reform outperformed the broader index by 171 percentage points. Its outperformance over
global equities is even more staggering at 236 percentage points. We believe that the
world is currently at the cusp of a major wave of technological disruption, and that US
companies are well-positioned to ride this upturn. In the recent third quarter US earnings
CIO INSIGHTS 1Q18
11
season, the proportion of US companies reporting positive earnings surprise stood at a

healthy 77%. Second, according to surveys, fund managers are currently Underweight
on US equities and this suggests that investors’ may be overly cautious on the US market.
Third, there will also be additional catalysts from US President Donald Trump’s tax reform
plan, should it gain passage in Congress.
Figure 8: The US Technology space will continue to drive the broader market in
the coming months
800 (Normalized)
700 US Internet services sector US Equities Global Equities
600
500
400
300
200
100
0
Figure 9: US financial conditions have become sub- Figure 10: Asia ex-Japan equities rebounding in tan-
stantially more accommodative than Europe dem with domestic corporate earnings
US Financial Conditions Europe Financial Conditions 800 50
1.0 45
700
40
0.5 600
35
500 30
0.0
400 25
-0.5
20
300
15
-1.0
200 Asia ex-Japan Equities (LHS)
10
Asia ex-Japan Equities - Trailing 12-mth EPS (LHS)
-1.5 100 5
Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Feb-02 Feb-05 Feb-08 Feb-11 Feb-14 Feb-17

CIO INSIGHTS 1Q18
12
Headwinds on European Tightening financial conditions and geopolitical uncertainties to weigh on

equities due to: European equities; adopt positive stance on Asia ex-Japan. European equities
(1) Euro strength underwent a brief rally after Emmanuel Macron’s victory in the French presidential
(2) Rising geopolitical election. But this brief up-move has since fizzled out; we believe that in the coming
uncertainties months, European equities could underperform relative to their US counterparts for two
reasons. First, the euro has rallied substantially against the dollar. The strength in the
currency will not only weigh on the competitiveness of European exporters, it also results
in tighter financial conditions in the region and this is evident from Figure 9. Secondly,
the recent fiasco surrounding Catalonia’s push for independence in Spain has brought
back geopolitical uncertainties in the region. To add to that, all eyes will now be watching
closely on the upcoming Italian elections.
Go Overweight on AxJ given: Meanwhile, we adopt a positive stance on Asia ex-Japan equities as we expect the region
(1) Stable growth in China to continue to benefit from: (1) Stable economic growth in China; (2) Broad-based
(2) Accommodative financial accommodative financial conditions; (3) Improving corporate earnings; and (4) Attractive
conditions valuations.
(3) Improving earnings and
cheap valuations China’s economy continues expand at a stable pace, and this augurs well for the external
(4) Attractive valuation demand outlook for countries in Asia ex-Japan, especially commodity producers. Besides,
financial conditions in the region have loosened substantially since late-2015, and
this has coincided with the broad-based rally in Asia ex-Japan equities. Another factor
underpinning the strength of Asia ex-Japan is the improvement in corporate earnings.
On a 12-month trailing basis, earnings have surged by 22% since hitting a trough in
October 2016. Asia ex-Japan trades at a 18% discount to DM, while market consensus is
expecting 18% earnings growth for the region next year.
Neutral Bonds; prefer Corporates over Government bonds
Neutral Bonds; We are Neutral on Bonds in 1Q18, as our cautious view on DM government bonds is
prefer Corporate over offset by a more positive stance on both DM and Emerging Markets (EM) corporate
Government bonds bonds.
CIO INSIGHTS 1Q18
13
Longer-term UST yields to grind Underweight on DM government bonds on expectation of rising yields. With
higher in 2018 given: exception of the BOJ, both the Fed and the ECB are expected to embark on monetary
(1) Fed rate hike tightening next year; this is expected to weigh on government bonds in DM. We
(2) Potential tax reform maintain our base-case assumption that inflation will eventually head north as the output
(3) Wage growth outlook gap tightens and wages continue to grind higher. Besides, the plausibility of positive
developments in US tax reform will be an additional factor lending upward pressure to
government bond yields. In the Euro Area, the ECB will be tapering the size of its purchase
to EUR30b per month.
Corporate bonds underpinned Go Neutral on DM corporate bonds while Overweighting EM bonds. In the
by the global search for yield corporate bond space, we are Neutral on DM corporate bonds while going Overweight
on EM bonds despite lingering concerns on valuation. In our view, so long as the Fed’s rate
The low-volatility environment hike trajectory remains benign, the global search for yield will continue to underpin the
bodes well for the outlook of resilience of these segments. Within the EM space, the current low-volatility environment
EM spreads also bodes well for the outlook of EM spreads.
Figure 11: US inflation is poised to grind higher as Figure 12: The low-volatility enivironment bodes
US weekly earnings improve well for the outlook of EM corporate spreads margin
4.0 6 EM bond spreads (bps, LHS) EM volatility (RHS) 14
US average weekly earnings (y/y, %, LHS) 540
US headline inflation (y/y, %, RHS)
5 13
3.5
490
4 12
3.0
3 11
440
2.5 2 10
390
1 9
2.0
0 340 8
1.5
-1 7
290
1.0 6
-2
0.5 -3 240 5
Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Feb-08 Feb-10 Feb-12 Feb-14 Feb-16
CIO INSIGHTS 1Q18
14
Neutral on Gold and Hedge Funds
Maintain exposure to We hold a Neutral weighting on the asset class of Alternatives (comprising both gold and
Alternatives as portfolio hedge funds). From a portfolio perspective, this asset class acts as “diversifier” to the
diversifier overall portfolio of bonds and equities. Over time, having a dedicated exposure to this
asset class would enhance the Sharpe ratio (the “return per unit of risk” of the portfolio).
Neutral Gold; its investment Recent US dollar rebound weighed on Gold; Stay Neutral. The Fed is expected to
merit as portfolio diversifier continue hiking rates next year and recent resurgence of the US dollar has weighed on gold.
offset the potential headwind This downward pressure is expected to linger on given our FX Strategist’s expectation of
from a stronger dollar dollar strength over the next six to 12 months on rising UST yield (Figure 13). Despite this,
we would advocate a Neutral weighting on gold due to its characteristic as beneficiary of
“black swan” events – such as the escalation of geopolitical tensions – which could lead
to risk assets of corporate bonds and equities selling off.
Hedge funds possess low Gain hedge funds exposure given low correlation with traditional risk assets.
correlation with traditional Hedge funds serve as an important portfolio diversifier given its low correlation with
asset classes traditional risks assets. Within the hedge funds space, the strategies we favour are:
(a) Equity Long/Short (b) Credit Long/Short; and (c) Global Macro. The usage of Long/
Short strategies is relevant at this juncture given that markets have rallied hard over past
years and investment returns going forward will likely be lower. Global Macro strategy,
meanwhile, allows investors to capture opportunities in thematic trends globally.
Figure 13: Recent US dollar rebound weighed on gold

1,390 (Inversed scale) 90
Gold (USD/troy ounce, LHS) US Dollar Index (DXY, RHS)
1,340 92
1,290 94
1,240 96
1,190 98
1,140 100
1,090 102
1,040 104
Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17
CIO INSIGHTS 1Q18
15
Table 2: 1Q18 – Global Tactical Asset Allocation
Asset Class
3-Month Basis 1Q18 12-Month Basis 1Q18
Equities Overweight Neutral
US Equities Overweight Underweight
Europe Equities Underweight Neutral
Japan Equities Neutral Neutral
Asia ex-Japan Equities Overweight Overweight
Bonds Neutral Underweight
Developed Markets (DM) Government Bonds Underweight Underweight
Developed Markets (DM) Corporate Bonds Neutral Neutral
Emerging Markets (EM) Bonds Overweight Neutral
Alternatives Neutral Overweight
Gold Neutral Neutral
Hedge Funds Neutral Overweight
Cash Underweight Neutral Source: DBS
Figure 14: TAA Breakdown by Asset Class (Balanced Figure 15: TAA Breakdown by Geography within
Profile) Equities (Balanced Profile)
Alternatives Cash 1% Asia ex-Japan
5% 24% US
Equities 46%
54%
Japan
13%
Fixed
Income
40%
Europe
17%
Source: DBS Source: DBS
CIO INSIGHTS 1Q18
16
Defensive
TAA SAA Active
Equities 0.0% 0.0%

Cash
US 0.0% 0.0% 20.0%
Europe 0.0% 0.0%

DM Govt
Japan 0.0% 0.0% Bonds
44.0%
Asia ex-Japan 0.0% 0.0%
Fixed Income 80.0% 80.0%
Developed Markets (DM) 80.0% 80.0%
DM Government Bonds 44.0% 44.0%
DM Corporate Bonds 36.0% 36.0% DM Corp
Bonds
Emerging Markets (EM) 0.0% 0.0% 36.0%
Alternatives 0.0% 0.0%

Gold 0.0% 0.0%
Hedge Funds 0.0% 0.0%
Cash P4 risk rated UCITs Alternatives
*Only 20.0% 20.0%
Conservative
TAA SAA Active
Equities 15.0% 15.0%

US
US 6.0% 6.0% Cash Equities Europe
6.0% Equities Japan
10.0% Equities
Europe 4.0% 4.0% 4.0%
2.0%
Japan 2.0% 2.0% AxJ
EM Equities
Asia ex-Japan 3.0% 3.0%
Bonds 3.0%
Fixed Income 75.0% 75.0% 23.0%
Developed Markets (DM) 52.0% 53.0% -1.0%
DM Government Bonds 29.0% 30.0% -1.0%
DM Corporate Bonds 23.0% 23.0%
Emerging Markets (EM) 23.0% 22.0% 1.0% DM Govt
Bonds
DM Corp 29.0%
Alternatives 0.0% 0.0% Bonds
Gold 0.0% 0.0% 23.0%

Cash 10.0% 10.0% Source: DBS
*Only P4 risk rated UCITs Alternatives

CIO INSIGHTS 1Q18
17
Balanced
TAA SAA Active Alternatives Cash
5.0% 1.0%
Equities 54.0% 50.0% 4.0% US Equities
25.0%
EM Bonds
US 25.0% 22.0% 3.0% 12.0%
Europe 9.0% 11.0% -2.0%
Japan 7.0% 7.0%
Asia ex-Japan 13.0% 10.0% 3.0% DM Corp
Bonds
Fixed Income 40.0% 40.0% Europe
14.0%
Equities
Developed Markets (DM) 28.0% 30.0% -2.0% 9.0%

DM Corporate Bonds 14.0% 14.0%
Japan
Emerging Markets (EM) 12.0% 10.0% 2.0% DM Govt Equities
Bonds 7.0%
14.0% AxJ Equities
Alternatives 5.0% 5.0%
13.0%
Gold 2.0% 2.0%
Cash 1.0% 5.0% -4.0%
*Only P4 risk rated UCITs Alternatives
Aggressive
TAA SAA Active
Equities 66.0% 65.0% 1.0% Cash

Alternatives 4.0%
US 32.0% 30.0% 2.0% 10.0%
US Equities
Europe 11.0% 14.0% -3.0% 32.0%
EM Bonds
Japan 8.0% 8.0% 7.0%
Asia ex-Japan 15.0% 13.0% 2.0%
Fixed Income 20.0% 20.0% DM Corp
Bonds
Developed Markets (DM) 13.0% 14.0% -1.0% 7.0%

DM Govt
DM Corporate Bonds 7.0% 7.0% Bonds
6.0%
Emerging Markets (EM) 7.0% 6.0% 1.0%
Europe Equities
Alternatives 10.0% 10.0% AxJ Equities 11.0%
15.0%
Gold 4.0% 4.0% Japan Equities
8.0%
Cash 4.0% 5.0% -1.0%
Source: DBS
* Only P4 risk rated UCITs Alternatives
Weak Inflation:
The Amazon
Effect?
Source: AFP Photo

CIO INSIGHTS 1Q18
19
Global Macroeconomics
Taimur Baig, Ph.D. United States

Chief Economist
The US economy and markets have been enjoying a sweet-spot lately, with economic
Radhika Rao activities rising appreciably while inflation remains muted. Wage growth is no longer
Economist anaemic, reflecting a gradually-tightening labour market – but still far from causing
any concerns about margins or inflation. Asset markets are buoyant, ignoring domestic
Ma Tieying political noise and a plethora of outstanding geopolitical flashpoints.
Economist
We think that growth could continue to deliver robust numbers in the quarters to come.
Economic growth has averaged only about 2% so far this decade, but there have been
clear idiosyncratic drags holding back growth over the past five years or so. These drags
are thankfully no longer present.
First, owing to a strong imperative to consolidate the fiscal position after an extraordinary
Global Financial Crisis-related loosening, the public sector subtracted from growth during
2011-2014. The Trump Administration is unlikely to pursue fiscal restraint, independent
of the magnitude and scope of the forthcoming tax reform legislation. We therefore
expect fiscal policy to be growth supportive in the near term.
Second, the US Dollar experienced sharp appreciation following the late-2013 taper
tantrum episode, which hurt US exports in the following two years, acting as drags to
growth. For 2017, the opposite has been true, and even if we see some modest USD
appreciation in 2018, it is unlikely to be large enough to hurt exports.
Third, the 2015 commodity crash took away the wind from the sails of the most dynamic
investment sector in the US – shale oil and gas-related fracking. Faced with the sudden
need to cut costs, US energy investors scaled back sharply, causing the investment’s
contribution to growth to turn negative in the following year. With commodities
stabilising, the drag has been mostly neutralised, with better prospects in the coming year.
In the absence of such drags, we are optimistic that growth will head to around 2.5% in
2018/2019. We are not basing this forecast on the efficacy of tax cuts or any other policy
initiatives. The intrinsic momentum in the economy has been building up over several
years, in our view, and is in shape to grow comfortably for the time being, despite the
CIO INSIGHTS 1Q18
20
length of the ongoing expansion.
Although there has been a sustained rise in output and fall in unemployment, inflation
has been subdued this year. Even accounting for one-offs such as the impact of the
commodity price collapse and some utility price cuts, the overall trend for prices is
starkly benign.
There is little in fundamentals Analysts have offered numerous supply-side explanations behind the low inflation
outlook that would make for a conundrum, including population aging, low wage growth, globalisation,
decisive shift in the prevailing technological advances (the “Amazon effect”), and changing pattern of employment
inflation dynamic any time and consumption. These have been used to argue that the output gap may still be
soon wide, the Philips Curve may be flatter than earlier thought, and so on. Regardless of
which factors are key, we think that there is little in the demand or supply side outlook
that would make for a decisive shift in the prevailing inflation dynamic any time soon.
We are therefore comfortable forecasting sub-2% inflation in 2018 and 2019.
The Fed, regardless of Against this background, the Federal Reserve, regardless of the composition of its
the composition of its leadership, will likely pursue a policy of gradual tightening. We will take note of the
leadership, will likely forthcoming announcement with respect to the Fed Chair, and clearly the choice of
pursue a policy of gradual a dovish head would support market sentiments going in to the year’s end. But we
tightening doubt the credentials of the Fed Chair will dominate the central bank’s actions over the
coming years, especially if macro developments remain as benign as we expect. We
see the Fed Funds rate heading to 2.25% by the end of 2018, with another 50 bps in
hikes the following year.
Figure 1: Contribution to GDP growth – Figure 2: A series of supply shocks (Amazon effects,
Idiosyncratic shocks are fading price war by utilities, low commodity prices) has
kept inflation low
Consumption Investment Net exports
3% Headline Urban Core PCE
Government GDP
4% 4%
2%
3% 3%
2% 2%
1%
1% 1%
0%
0% 0%
-1% -1% -1%

2011 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2017
Source: CEIC, DBS Source: CEIC, DBS

CIO INSIGHTS 1Q18
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Eurozone
The positive Eurozone growth Strong Eurozone growth has been one of the key positive surprises this year. The economy
momentum to extend into expanded by 2.5% y/y in 3Q17, taking growth in the first three quarters of the year to a
2018 strong 2.3% – likely the fastest pace of annual expansion in a decade. This momentum
is likely to extend into 2018, with a slightly moderate pace of 1.9% due to base effects.
Investment spending and Recovery is likely to stay broad-based as firm domestic demand combines with an
household consumption improving trade balance. Investment spending and household consumption remain the
remain the main contributors main contributors to headline growth, propped up by a pick-up in the capacity utilisation
to headline growth rate and encouraging confidence surveys. Low borrowing costs and easier lending
standards have lifted the industry’s credit growth, which comes at a time when the bloc’s
governments are scaling back fiscal support. Households, meanwhile, continue to benefit
from benign inflation, which has propped up real incomes. Even as growth has picked up,
inflation remains well below the 2% target; we expect 1.5% and 1.2% inflation in 2017
and 2018, respectively (the latter to be weighed by base effects).
This high-growth-yet-weak-inflation conundrum has complicated the European Central

Bank’s (ECB) policy direction. Taking a middle path, the ECB opted for the ‘lower for
longer’ quantitative easing (QE) taper approach, to balance the need to scale back asset
purchases (due to firm growth), but keep it in place for longer.
Policy normalisation in the From January 2018, monthly asset purchases stand halved to EUR30b from the present
Eurozone is likely to lag EUR60b, and will be extended by nine months to September 2018. This is the second
tightening moves in the US, reduction this year, after QE purchases were trimmed to EUR60b from EUR80b in April
keeping a lid on the euro and 2017. Looking ahead, we suspect the assets mix will gradually shift away from government
bond yields bonds (close to 80% of the total) and move toward corporate bonds. Key interest rates,
meanwhile, will stay accommodative well past the horizon of the net purchases, which
we suspect is deeper into 2019-2020. Hence, policy normalisation in the Eurozone is likely
to lag tightening moves in the US, keeping a lid on the euro and bond yields.
While growth is on a While growth is on a stronger footing, few political developments warrant attention. Far-
stronger footing, few political right parties have gained ground in Germany and Austria in recent months, something
developments warrant that the contenders at the Italian elections (due in May 2018) are likely to watch closely.
attention Formation of the new German government remains a work-in-progress after the ruling
party fell short of a majority in the September elections and was forced to seek an uneasy
coalition. Brexit negotiations, meanwhile, drag on as attention shifts to the next European
Union (EU) summit in December. UK Prime Minister Theresa May also faces internal
challenges, just as the government’s Brexit strategy remains unclear. The economy is in a
tough spot with slow growth but high inflation, necessitating the Bank of England (BOE)
to hike rates earlier this month. In all, these are risks with potentially market-moving
implications. While they do not pose imminent risks to the Euro Area’s stability, ears
should be kept to the ground.
CIO INSIGHTS 1Q18
22
Figure 3: Post-taper, ECB Balance Sheet rise to near 40% of GDP by 3Q18
50
Balance sheet; assets, as % of GDP
45
Sep18: DBSf
40
35 Dec16
Sep12
30
25
20
Mar15:
15 QE started
10
01 03 05 07 09 11 13 15 17
Source: CBC, DBS
Japan
The Japanese economy has The Japanese economy has finally returned to a steady growth path after experiencing
finally returned to a steady the slumps caused by the 2008-2009 global financial crisis, 2011 earthquake disaster,
growth path and the 2014 sales tax hike. Gross domestic product (GDP) growth has stayed at about
1% for three consecutive years since 2015. We expect growth to remain at 1.1% in 2018
before easing to 0.9% in 2019, lower than the peak of 1.6% in 2017 but still close to
the trend levels.
Short-term outlook bolstered Short-term outlook will be bolstered by a further improvement in the global economy and
by improving global economy, thus exports, as well as the combination of a flexible fiscal policy and a loose monetary
flexible fiscal policy, and policy under Abenomics. The second-phase sales tax hike, which is scheduled for October
loose monetary policy under 2019, will pose a major challenge to the medium-term growth prospects. But the impact
Abenomics should be smaller than that of the first tax hike in 2014.
Big win by the LDP in the The ruling Liberal Democratic Party (LDP) led by Shinzo Abe achieved a big win during the
October general elections general elections in October this year. This should boost the chances for Abe to retain the
paves the way for continuation leadership position during the LDP leader election in September 2018, which, in turn, also
of Abenomics paves the way for him to be given the third term as the prime minister, and push forward
the existing policies under Abenomics.
Inflation dynamics to remain Inflation dynamics, however, are expected to remain weak as price expectations remain
weak as price expectations subdued and the Phillips curve is still flat. We expect consumer price index (CPI) inflation
remain subdued and the to pick up only slightly to 0.6% in 2018 from 0.4% this year. The two-percentage point
Phillips curve is still flat hike in the sales tax will take inflation to 1.0% in 2019, but the rise is expected to be
one-off and temporary. Upside risks to inflation would mainly come from external factors,
such as a surge in global oil prices and a sharp rise in the USD/JPY exchange rate.
CIO INSIGHTS 1Q18
23
BOJ will not be in a hurry to Given the weak inflation outlook, we think the Bank of Japan (BOJ) will not be in a
normalise monetary policy hurry to normalise monetary policy – ending the negative interest rate policy, raising the
long-term yield targets substantially, and eventually, allowing market forces to determine
the yield curve. We expect the BOJ to continue to anchor a flat yield curve via flexible
quantity of asset purchases in 2018-2019. That said, policymakers will likely monitor the
side-effects of monetary easing very closely (e.g., banks’ looser lending practices and the
run-up in stock prices), and some form of policy fine-tuning cannot be fully ruled out for
the forecast period.
Figure 4: Japan’s real GDP
540
JPY trn, 2011p, sa
530
520
510
500
Sales tax hike
490
480
Japan earthquake
470
460
Global financial crisis
450
2000 2003 2006 2009 2012 2015
Source: CBC, DBS
Asia
Given sustained strength in The ongoing economic momentum will readily carry over Asia into a strong start in 2018,
exports and incipient signs of a in our view. Asia’s open, electronics-exports oriented economies have delivered a string
pick-up investment, the Asian of strong data in recent months, allowing for several rounds of forecast upgrades. A
economy will likely stay robust year ago, we expected 2017 to be a broadly lackluster year, but it has turned about a
in 2018 goldilocks scenario – with growth surprising on the upside and inflation remain modest.
Except for India, all the Asian economies we track will likely beat our year-ago forecasts
by 50-150 bps. With recent data showing sustained strength in exports, and incipient
signs of a pick-up investment, we think that there is good reason to expect a strong 2018.
CIO INSIGHTS 1Q18
24
The Chinese economy China has been the key reason behind the upside surprise this year, growing at close to
has surprised on the 7% when there was across-the-board expectation of a slowdown 12 months ago. Why
upside driven by: did China surprise on the upside? We see three broad drivers:
1) A spill-over from the • First, the fiscal expansion of 2016 spilled over into this year, helping sustain demand
2016 fiscal expansion for goods and services from the public sector. Moreover, the authorities ensured
2) The bottoming out of that liquidity was not taken away from the system, thus allowing for money market
EU demand and a trough stability and viability of corporates that have been facing financial difficulties. Last
in the commodity market year’s capital account tightening measures also helped stabilise the FX market,
3) Well-supported restoring confidence and shoring up flows.
Chinese consumption and • Second, the bottoming out of demand in the EU and a trough in the commodity
investment sentiments market revived exports demand and investment sentiment, which helped the bottom
line of China’s exporters considerably.
• Third, while there is widespread concern about protectionism, so far there has been
little friction of substance between China and the West. Consequently, Chinese
consumption and investment sentiments were well supported through the year.
China’s demand upside China’s demand upside was complemented by a synchronised pick-up in activity in the
was complemented by a US, EU, and Japan, something we have not seen in a long time. Emerging markets in
synchronised pick-up in general benefitted from this demand buoyancy; Asia, which sits at the center of global
activity in the US, EU, and manufacturing activities, found the going particularly good as a result.
Japan
While demand surprised on the upside, the impact was not surprising at all. The more
an economy was embedded in the global supply chain, the more it benefitted. Following
China were Malaysia, Singapore, South Korea, Taiwan, and Thailand, which all experienced
robust exports. Hong Kong, a high beta to China, felt the tailwind too. The Philippines
and Vietnam, although at the lower end of the supply chain, saw strong external demand
and sustained domestic demand, allowing for mid-6% growth.
India will likely grow by about The year’s two disappointments were India and Indonesia, although in the case of India
7% this year, 100 bps lower the markets completely ignored the indifferent GDP prints. India will likely grow by about
than last year 7% this year, 100 bps lower than last year, but the factors driving weak growth – last
year’s demonetisation and this year’s goods and services tax (GST) introduction – were
considered structural reforms with some negative short-term consequences yet long-
term dividends. We are not as confident though, as efforts to formalise the economy
could create many losers (some companies and individuals could find the cost of doing
business in a more transparent and compliant environment to be prohibitive), creating
considerable short-term economic friction. India’s weak performance was also due to the
fact the economy, which is not embedded in the regional manufacturing supply chain,
could not draw dividend from this year’s spurt in global demand.
CIO INSIGHTS 1Q18
25
The economic outlook for Indonesia has one of strongest fundamentals in the Association of Southeast Asian
Indonesia remains challenging Nations (Asean), with low household debt, ample fiscal space, moderate inflation, stable
governance, and low political risk. Yet, afflicted by the hangover from the 2014/2015
commodity crash and a still-challenging investment environment, the economy seems
to be stuck at a 5% growth trajectory – well below its potential. With policy making
becoming more challenging and the 2019 Presidential election looming, Indonesia would
need a major pull from the external environment to move to a higher gear, in our view.
All in all, Asia looks well-placed All in all, Asia looks well-placed for another year of strong growth. Inflation will probably
for another year of strong pick up on the back of firming commodity prices, rates will have to move up as Fed-policy
growth. normalisation gathers steam, and geopolitical risks will loom – but the chance of a major
spoiler that will pull down economies and markets sharply is low, in our view.
Macroeconomic Forecasts
GDP growth, % YoY CPI inflation, % YoY, ave
2015 2016 2017f 2018f 2019f 2015 2016 2017f 2018f 2019f
China 6.9 6.7 6.8 6.4 6.2 1.4 2.0 1.6 2.1 2.2
Hong Kong 2.4 2.0 3.4 2.5 2.5 3.0 2.4 1.8 2.5 2.5
India* 7.5 8.0 7.1 6.8 7.3 6.0 4.9 4.5 3.2 4.0
Indonesia 4.9 5.0 5.1 5.3 5.4 6.4 3.5 3.9 4.1 4.2
Malaysia 5.0 4.2 5.7 5.0 5.0 2.1 2.1 3.4 3.3 3.0
Philippines 5.9 6.9 6.7 6.7 6.7 1.4 1.8 2.9 2.9 3.2
Singapore 2.0 2.0 3.2 3.0 2.7 -0.5 -0.5 0.6 1.0 1.8
South Korea 2.8 2.8 3.1 2.9 2.9 0.7 1.0 2.0 1.8 1.8
Taiwan 0.7 1.5 2.4 2.5 2.4 -0.3 1.4 0.6 1.0 1.0
Thailand 2.9 3.2 3.5 3.6 3.8 -0.9 0.2 0.5 1.2 1.8
Vietnam 6.7 6.2 6.4 6.4 6.6 0.6 2.7 3.7 3.6 3.8
Eurozone 1.9 1.8 2.1 1.9 1.9 0.0 0.2 1.5 1.2 1.6
Japan 1.1 1.0 1.6 1.1 0.9 0.8 -0.1 0.4 0.6 1.0
United States** 2.6 1.5 2.2 2.4 2.5 0.1 1.3 1.6 1.8 1.8
* refers to year ending March. ** eop for CPI inflation. Source: CEIC, DBS
CIO INSIGHTS 1Q18
26
Policy interest rates, eop
4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19
China* 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4 4.4
India 6.0 6.0 6.0 6.0 6.0 6.3 6.3 6.5 6.5
Indonesia 4.3 4.3 4.3 4.3 4.5 4.8 5.0 5.0 5.0
Malaysia 3.0 3.0 3.0 3.3 3.5 3.5 3.5 3.5 3.5
Philippines 3.3 3.5 3.8 3.8 4.0 4.3 4.5 4.5 4.5
Singapore** 1.4 1.4 1.7 1.9 2.2 2.2 2.4 2.4 2.7
South Korea 1.3 1.5 1.5 1.8 1.8 2.0 2.0 2.3 2.3
Taiwan 1.4 1.4 1.4 1.4 1.5 1.5 1.6 1.6 1.8
Thailand 1.5 1.5 1.5 1.5 1.5 1.8 2.0 2.3 2.5
Vietnam*** 6.3 6.3 6.3 6.3 6.3 6.5 6.5 6.8 6.8
Eurozone 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Japan -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1
United States 1.5 1.5 1.8 2.0 2.3 2.3 2.5 2.5 2.8
*1-yr lending rate. **3M SOR. ***Prime rate. Source: DBS
CIO INSIGHTS 1Q18
27
US Equities
Dylan Cheang US equities to regain cyclical leadership
Strategist
US equities have been a laggard performer in the Developed Markets (DM) this year as
its gained 17% in 10M17 (on USD-based total returns basis), compared to the 20%
and 24% gains registered by Japan and Europe, respectively. The underperformance was
even more stark when compared to the performances of Emerging Markets (EM) and
Asia ex-Japan, which registered respective gains of 33% and 37%. The overall subdued
performance of the US market can be attributed to various factors. Firstly, the “Trump
trade” underwent substantial unwinding during the first half of the year as geopolitical
dysfunction on Capitol Hill dampened the likelihood of a meaningful fiscal policy easing
ahead. Secondly, the US market continues to trade at a valuation premium to the broader
DM and there were concerns if corporate earnings growth in the US could continue to
stay robust and justify this level of valuation.
But looking forward to 2018, we believe that US equities are in a sweet spot and the
market is poised to regain cyclical leadership in terms of relative performance. Our positive
view is premised on both macro top-down and micro bottom-up factors.
Sweet Spot I: Stable economic expansion with benign inflation. The US economy
Figure 1: The US Treasury yield curve has flattened but unlikely to invert, hence
the likelihood of an impending recession in the US is low
300
250
200
150
100
50
-50
US Treasury 10yr-2yr yield curve (bps)
-100

CIO INSIGHTS 1Q18
28
is expected to undergo stable economic expansion, with gross domestic product (GDP)
growth accelerating to 2.4% in 2018 and 2.5% in 2019. Fiscal policies will be pro-growth
at least in the near term and the tax reform, if it gains passage in Congress, will be an
additional catalyst. Despite the ongoing recovery, headline inflation is expected to stay
subdued at 1.8% for both 2018 and 2019.
The gradual rate hike In short, US economic growth is expected to stay upbeat and the chances of recession
scenario and the NY Fed remain low. While the Treasury yield curve has flattened (see Figure 1), we are unlikely
probability of US recession to see it inverted on the back of a gradual rate hike. In past cycles, inversion of the yield
index suggest that the curve signalled a higher probability of recession and was most of the time set off by more
likelihood of a US recession aggressive rate hikes. Similarly, the Federal Reserve Bank of New York Probability of US
is low Recession Index is assigning only 7.6% chance of a recession – a level which does not
commensurate with previous episodes of major market corrections. During the “dotcom”
sell-down in 1999-2003, the recession index spiked to 26.5% and 46.3%, respectively.
More recently during the Subprime crisis in 2007-2009, the recession index peaked at
41.7% (see Figure 2).
Figure 2: Previous sell-downs in US equities came amid high probabilities of a

US recession. This is currently not the case
50 NY Fed probability of recesion (LHS) S&P 500 (RHS)

45
2400
40
35
1900
30
25
1400
20
15
10 900
5
0 400
The ISM Manufacturing Sweet Spot II: Strong bottom-up growth momentum. A broad-based macro rebound
index suggests that the in the US has been driving corporate earnings from the micro bottom-up level. Figure 3
outlook for US earnings shows the long-term 12-month trailing earnings for the US market. After hitting a trough
remains upbeat in 2016, US earnings have resumed its uptrend, buoyed by strong gains in the technology
space. Since 4Q16, the 12-month trailing earnings for the US market and the technology
sector have increased 13% and 22%, respectively. The outlook for earnings, meanwhile,
remains upbeat and this is evident from Figure 4, which illustrates the positive relationship
between Institution of Supply Management (ISM) Manufacturing data and the year-on-
year change in US forward earnings.
CIO INSIGHTS 1Q18
29
US earnings expected to grow Based on market consensus forecast, US corporate earnings are expected to grow by
10% in 2018 10% in 2018, driven by a combination of sales growth and margin expansion. Top-line
revenue is expected to increase by 5% while earnings before interest and tax (EBIT) is also
slated to improve from 15% to 16%.
Table 1: US earnings outlook based on consensus forecasts
2016 2017E 2018E 2019E
Sales 1,133.1 1,232.2 1,290.1 1,352.1
Sales growth 9% 5% 5%
EBIT 146.0 188.3 205.6 221.8
Margin 13% 15% 16% 16%
EBITDA 210.6 254.0 274.6 294.7
Margin 19% 21% 21% 22%
Earnings 108.7 133.3 146.6 161.4
Earnings growth 23% 10% 10%
Source: Bloomberg
Figure 3: US earnings on the uptrend Figure 4: The ISM Manufacturing augurs well for
earnings outlook
120 US Equities - Trailing 12-mth EPS (LHS) 10.5 65 ISM Manufacturing (LHS) 50%
US Technology - Trailing 12-mth EPS (RHS) Change in US forward earnings (y/y, %, RHS)
40%
60
100 8.5
30%
55
20%
80 6.5
50 10%
45 0%
60 4.5
-10%
40
40 2.5 -20%
35
-30%
20 0.5 30 -40%
Jan-95 Jan-99 Jan-03 Jan-07 Jan-11 Jan-15 Jan-96 Jan-00 Jan-04 Jan-08 Jan-12 Jan-16
US valuation is no longer cheap US valuation concerns overdone; it’s all relative. An often-cited concern of the US
but far from the “extended” equity market is that its valuation is no longer cheap. But in our view, such concerns appear
levels seen in the past overdone. US equities trade at 19.3x forward price-to-earnings (P/E). While this puts the
market close to the one standard deviation expensive mark, it is nonetheless nowhere near
the exuberant level seen during the “dotcom” bubble. Back then, US valuation hit a peak of
26.6x forward P/E and this puts it above the current three standard deviation expensive mark.
Even on a cross-asset basis, US equity valuation remains reasonable relative to corporate

Relative to corporate bonds
bonds. Historically, the implied P/E from US BBB corporate bonds (based on the inverse
however, US equity valuation
bond yield) trended in tandem with the forward P/E of US equities (see Figure 6). However,
remains attractive
the relationship started to diverge in 2010 and this has since resulted in a substantial gap
between them – with US BBB corporate bonds trading with an implied premium of 40%.
CIO INSIGHTS 1Q18
30
Figure 5: US equity valuation is not at “extended” Figure 6: US equities appear cheap relative to US
levels seen in the past such as during “dotcom” BBB corporate bonds
bubble
28 Implied P/E from US BBB
corporate bond yield (x)
30
24 US Equities - Forward P/E (x)
20 25
16
20
12
8 15
Feb-90 Feb-95 Feb-00 Feb-05 Feb-10 Feb-15
US Equities - Forward P/E (x) +1 s.d.
+2 s.d. +3 s.d.
-1 s.d. -2 s.d.
10
US Equities - Forward P/E (x) +1 s.d. Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17
US Sector Allocation – 1Q18
Overweight cyclicals over We initiate coverage on US sectors with Overweight calls on Technology, Financials, and
rate-sensitive non-cyclicals Consumer Discretionary. As the US economy continues to rebound in 2018, we expect
cyclical sectors to broadly outperform the non-cyclicals. Among cyclicals, we favour a
mixture of both globally exposed (Technology, Industrials, and Consumer Discretionary)
and domestically exposured sectors (Financials).
At the other end of the spectrum, we are Underweight on rate-sensitive “bond proxies”
like Telecom, Real Estate, and Utilities. These sectors will unlikely outperform as the Federal
Reserve continues to tighten monetary policy next year. Meanwhile, we are Neutral on
Energy despite the fact that: (1) The sector has vastly underperformed the broader market
since 2014 and is playing “catch-up”; and (2) Crude oil price is currently on the rebound.
Our cautious stance stemmed predominantly from the fact that energy stocks are trading
at steep valuations and the trajectory of crude oil prices hinged heavily on the supply
discipline of producers and this represent a major risk in our view.
Table 2: US Sector Allocation - 1Q18
Overweight Neutral Underweight
Technology Energy Telecom

US Sectors Industrials Cons. Staples Utilities
Cons. Discretionary Materials Real Estate
Financials Heath Care
Source: DBS
CIO INSIGHTS 1Q18
31
Technology earnings to stay New Technology will continue to drive cyclical leadership. The US Technology sector
robust amid rising adoption of has been on a tear for the past few years and we believe that the outperformance will
new technologies continue in the year ahead. The ongoing adoption of new technologies, such as robotics,
artificial intelligence, and the ”Internet of Things” in wide ranging industries will drive
sectoral earnings and by extension, keep valuations under the lid. At 19.6x forward P/E,
the Technology space is trading in line with the market while delivering substantially
higher return on equity (ROE) of 22.5%.
The weightage of US Another reason why investors should gain substantial exposure to Technology lies on
Technology stocks has the fact that it is a sector accounts for a significant weightage of the S&P 500 today.
increased from 16% in end- During end-2004, the Technology sector accounts for only 16% of the index. Today, its
2004 to 25% today weightage has increased to 25% (see Figure 9). Apart from Technology, we also favour
the e-commerce companies in Consumer Discretionary. The ongoing shift from traditional
retailing to online retailing will continue to drive earnings in this space.
Rising interest rates are Rising rates environment: the winners and the losers. The Fed is poised to continue
positive for Financials and hiking rates next year as inflationary pressure rises. One clear winner in such environment
negative for “bond proxies” will be the US Financials. As Figure 7 shows, US Financials have been trending in tandem
with the US Treasury 10-year yield given the implied positive impact of rising long-term
rates on banks’ net interest margin. On the other hand, rates-sensitive “bond proxies”
such as Utilities and Real Estate Investment Trusts (REITs) will underperform (see Figure 8).
To recap, the latter have rallied markedly in recent years given the benign interest rates
environment. However, as the output gap continue to narrow and long-term rates resume
its upward trajectory, underperformance of these “bond proxies” relative to the global
cyclicals is on the cards.
Figure 7: Rising rates have been a boon for US Figure 8: Rising rates have been a bane for US Real
Financials Estate
450 US Financials (LHS) 2.7 220 US Real Estate (LHS) (Inversed scale) 1.3
US Treasury 10-yr yield (%, RHS) US Treasury 10-yr yield (%, RHS)
2.5 210 1.5
400
2.3 1.7
200
2.1 1.9
350 190
1.9 2.1
180
1.7 2.3
300
1.5 170 2.5
250 1.3 160 2.7

Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-15 Oct-15 Jul-16 Apr-17

CIO INSIGHTS 1Q18
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Synchronised global Global synchronised recovery a boon for Industrials. Meanwhile, the ongoing
recovery boost the synchronised recovery of the global economy will boost the outlook for Industrials.
outlook for Industrials Medium-term drivers for the sector include: (1) Stabilising Chinese economic growth;
and (2) Potential catalyst from US infrastructure spending. Earnings momentum for the
sector has been upbeat as positive earnings surprise stands at around 80% in the recent
reporting season.
Figure 9: US sector index weights
Materials
Real Estate Telecom
3%
Utilities 3% 2%
3%
Energy
6% Technology
25%
Consumer
Staples
8%
Industrials
10%
Financials
14%
Consumer
Discretionary
12% Health Care
14%
Source: Bloomberg
Table 3: US sector performance and key ratios
YTD Total Forward

P/Book EV/EBITDA ROE ROA OPM
Returns P/E
(x) (x) (%) (%) (%)
(%) (x)
S&P 500 16.9 19.3 3.2 13.0 13.8 2.8 13.2

S&P 500 Financials 15.8 16.1 1.4 - 8.5 1.0 19.9
S&P 500 Energy -7.3 35.3 2.0 13.6 1.7 0.8 2.6
S&P 500 Technology 37.2 19.3 5.5 14.9 23.4 10.0 22.0
S&P 500 Materials 20.3 20.6 2.9 13.8 12.9 4.9 11.3
S&P 500 Industrials 14.4 20.0 4.5 12.5 20.8 5.5 12.6
S&P 500 Cons. Staples 5.1 20.2 5.2 13.8 27.2 8.6 9.3
S&P 500 Cons. Dis. 14.3 20.7 5.1 12.0 21.3 5.6 11.0
S&P 500 Telecom -12.0 11.6 2.3 6.6 17.1 3.9 18.7
S&P 500 Utilities 16.2 19.1 2.1 12.5 6.3 1.6 15.0
S&P 500 Real Estate 8.2 37.5 3.4 21.6 10.3 4.1 25.2
S&P 500 Health Care 19.4 17.3 3.9 14.1 15.8 5.9 10.5
Source: Bloomberg
Catalonia:
Harbinger of
Things to Come?
Source: AFP Photo

CIO INSIGHTS 1Q18
34
Europe Equities
Dylan Cheang Underweight after a strong showing
Strategist
On a dollar-based total returns basis, Europe equities have been the standout performer
in developed markets this year. The region rallied 24% in 10M17, as compared to 17%
for the US and 20% for Japan. European cyclicals were particularly buoyant with the
likes of Technology, Materials, and Industrials registering average gains of 33%, while
the steepening yield curve also drove European Financials 26% higher. The recent bout
of euro strength buoyed the Utilities space (+28%) too, as investors sought domestic
exposures.
As we step in 2018, we believe European equities will continue to register absolute

gains. However, on a relative basis, the region is expected to underperform the broader
developed markets and our cautious stance is premised on the following factors: (1)
Subdued earnings despite broad-based macro recovery; (2) Lingering euro strength; and
(3) Geopolitical uncertainties.
European economy on the rebound, but where are the earnings? The European
economy has displayed solid improvement in recent years, as quantitative easing from
the European Central Bank (ECB) suppressed the cost of capital and buoyed household
Figure 1: The Euro Area economy has improved Figure 2: But where are the earnings? European
markedly since 2013 corporate earnings remain subdued
4 450 (Normalized)
3 400 US Equities - Trailing 12-mth EPS
2 Europe Equities - Trailing 12-mth EPS
350
1
300
-
250
(1)
200
(2)
(3) 150
(4) Euro Area GDP growth (y/y %) 100
(5) Eurozone household 50

consumption (y/y %)
(6) 0
Mar-01 Mar-04 Mar-07 Mar-10 Mar-13 Mar-16 Feb-95 Feb-98 Feb-01 Feb-04 Feb-07 Feb-10 Feb-13 Feb-16
CIO INSIGHTS 1Q18
35
consumption across the region. Euro Area gross domestic product (GDP) has rebounded
from -1.2% y/y in 1Q13 to +2.5% y/y in 3Q17, while the composite purchasing managers’
index (PMI) also rebounded from 52.6 in January-2015 to 56.0 in October 2017.
But the upbeat macro outlook has failed to translate into robust earnings momentum,
especially when compared to the US. The dire earnings situation is seeing no signs of a
quick turnaround; this is evident from the recent reporting season. Of the companies that
have announced their numbers in Europe, only around 58% reported positive earnings
surprise, as compared to around 78% in the US. The sectors with weak earnings surprise
momentum include Consumer Discretionary and Industrials. Based on consensus, Europe’s
earnings before interest, tax, depreciation and amortisation (EBITDA) growth is expected
at 7% and 5% respectively in 2018 and 2019..
Table 1: Europe earnings outlook based on consensus forecasts

2016 2017E 2018E 2019E
Sales 100.9 101 104.7 107.6
Sales Growth 0% 4% 3%
EBIT 9.0 11.8 12.9 13.7
Margin 9% 12% 12% 13%
EBITDA 15.3 17.7 19.0 19.9
Margin 15% 18% 18% 18%
EBITDA growth 16% 7% 5%
A persistently strong euro is Challenges posed by euro strength have diminished, but geopolitical uncertainties
negative for the outlook of remain. The euro has rallied sharply against the dollar throughout the course of 2017,
exporters before retracing in September. Our FX Strategist expects the dollar to regain some ground
and the EUR/USD to hit 1.12 in 4Q18. But even at this level, the euro remains noticeably
stronger than where it was at the start of 2017. In general, a persistently strong euro is
negative for the outlook of exporters and in such an environment, our preferred exposure
to the market is still via domestic consumption plays.
Geopolitical uncertainties on Geopolitical uncertainties in the region, meanwhile, have recently ratcheted up as the
the rise Catalonia crisis lingers on. While Madrid has already taken steps to dissolve the regional
parliament and announced an election slated for 21 December 2017, the situation
remains fluid as the Catalan separatists have vowed to resist direct ruling. The Brexit
After Brexit came the Catalan negotiations, meanwhile, have failed to make any major headway, while the region must
crisis; the upcoming Italian also tend to the uncertainties associated with the upcoming election in Italy. Given the
election will be closely rise of Euroscepticism, a surprise outcome in Italy will pose tremendous instability to the
watched wider Euro Area.
CIO INSIGHTS 1Q18
36
Figure 3: The euro has strengthened markedly this year

1.40 EUR/USD exchange rate
1.35
1.30
1.25
1.20
1.15
1.10
1.05
1.00
Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Source: Bloomberg
Technology sector accounts “Old Economy” sectors dominate in Europe; limited exposure to “New Economy”
for only 4% for Europe growth. Corporate earnings in Europe have been more subdued compared to the US.
versus 25% in the US market We believe this weakness is partly attributable to the composition of the European equity
market. In the US, Technology accounts for 25% of the S&P 500 Index, and the sector’s
strength has been one of the drivers of recent years’ robust US equity performance.
However, the situation is vastly different across the Atlantic. A breakdown of the weights
for the Stoxx Europe 600 Index shows that Technology accounts for only 4% of the index,
while “old economy” sectors like banks and industrials good/services account for the
largest weightings.
The lack of exposure to fast- The lack of exposure to fast-growing sectors (such as Technology) in European equities
growing sectors in European will continue to drag on domestic earnings vis-a-vis their US counterparts. Based on
equities drag on domestic the consensus forecast, the European Technology sector is expected to register EBITDA
earnings growth of 11% in 2018 – far superseding the 7% growth expected for the broader
European market.
CIO INSIGHTS 1Q18
37
Figure 4: European sector weights
Travel/Leisure
Financial Services Real Estate 2% Banks
2% 2% 14%
Media
Retail 2%
3% Industrial
Goods/Services
Basic Resources 12%
3%
Construction/Materials
3%
Auto
3%
Telecom Health Care

4% 12%
Utilities
4%
Technology
4%
Personal/Household
Oil/Gas Goods
5% 9%
Chemicals
5% Food/Beverages Insurance
5% 6%
Source: Bloomberg
CIO INSIGHTS 1Q18
38
Japan Equities
Jason Low, CFA Neutral on Japan equities

Strategist
Japanese equities have outperformed global indices on the back of Prime Minister Shinzo
Abe’s recent landslide election win. This puts him firmly in power and implies the likely
continuation of Abenomics and the era of easy monetary policy. This could drive the
JPY lower, which has historically been positive for Japanese equity markets. DBS Group
Research sees USD/JPY at 121 per dollar by 4Q18. The macro backdrop remains positive
in Japan. Corporate profits are still rising, though expectations are now relatively elevated.
Valuations have somewhat re-rated and look fairly-priced. Low inflation continues to be
a perpetual concern for the Bank of Japan (BOJ). We stay Neutral on Japanese equities,
believing that much of the positive fundamentals are priced into the market and the
remaining catalyst is a weaker JPY.
Outperformance of Japanese equities in 4Q17
After underperforming in mid-2017, Japanese equities have made a strong comeback.

The country’s stocks outperformed global equities by around 3% (in local currency terms)
in October. This came as USD/JPY weakened 1% over the same period.
Figure 1: Era of easy monetary policy to continue Figure 2: Strong earnings momentum since 2011
1.1
Japan 10-year Govt Bond Yield (%) 1400
1.0 Japan Equities EPS
0.9
1200
0.8
0.7 1000
0.6
0.5 800
0.4
0.3 600
0.2
0.1 400
0.0
-0.1 200
-0.2
-0.3 0
2012 2013 2014 2015 2016 2017 2018 2011 2012 2013 2014 2015 2016 2017E
CIO INSIGHTS 1Q18
39
Continued monetary and Abe’s victory implies continued monetary and fiscal easing. As expected, the Liberal
fiscal easing likely after Democratic Party (LDP)-Komeito coalition won the recent snap Lower House elections. The
Abe’s victory ruling party also retained its two-thirds majority, which is required to propose a national
referendum on constitutional reform. The victory also increased the chances of Abe of
staying on as Prime Minister beyond his current term to become Japan’s longest-serving
Prime Minister. With BOJ governor Haruhiko Kuroda’s term ending in April 2018, the
chances of him being re-elected or the appointment of an equally dovish governor has
increased. Fiscal policy will also remain loose, with spending likely to stay expansionary.
The government had signalled before the elections it will increase spending in social
welfare. In all, with Abe at helm, expect the era of loose monetary and fiscal policies to
continue (Figure 1).
With the still weak Dovish tilt at the latest BOJ meeting. At its latest meeting on 31 October, the BOJ
inflation outlook, BOJ maintained its dovish bias. It upgraded its growth outlook by 0.1 percentage point to
likely to keep its loose 1.9% for 2017 while trimming its FY17/18 inflation estimates to 0.8% (from 1.1%)
monetary policy and 1.4% (from 1.5%) respectively. While Japan’s economic activity is picking up, price
dynamics remain weak. We believe, given the still weak inflation outlook, the BOJ will
likely keep its loose monetary policy for at least the next 12 months.
Figure 3: Valuation is fair, but at a discount to Developed Markets

Relative Forward P/E - MSCI Japan relative to Developed Markets
Average
1.7
1.5
1.3
1.1
0.9
0.7
2010 2011 2012 2013 2014 2015 2016 2017

CIO INSIGHTS 1Q18
40
Japanese corporates continue Earnings momentum continues. There has been a strong earnings momentum in
to outperform consensus Japan since 2011 and this trend looks set to continue. (Figure 2) Japanese corporates
estimates have continued to outperform consensus estimates in 4Q17. In the latest earnings season,
60% of reported companies have beaten estimates. Consensus expects high single digit
earnings growth for Japan equities in 2018.
Japanese equities are fairly Valuations fairly-priced. MSCI Japan trades at about 15x forward price-to-earnings
valued (P/E), which is slightly above its seven-year historical average of 14.6x. On a relative basis,
Japanese equities still offer value. They trade at an attractive 16% discount compared to
Developed Markets (DM), which is at the lower end of its relative valuation range since
2010 (Figure 3).
CIO INSIGHTS 1Q18
41
Asia ex-Japan Equities
Jason Low, CFA Asia outperformance to continue

Strategist
After underperforming Developed Markets (DM) since 2010, Asian equities have finally
Joanne Goh awakened from their long slumber and began to outperform in late-2016. Robust earnings
Strategist recovery, attractive absolute and relative valuations, and improving macroeconomic
conditions drove this outperformance. We believe Asia ex-Japan equities offer more
upside potential than their DM peers including the US and Europe. The gradual monetary
policy normalisation in the US also bodes well for Asian equities.
Strong earnings recovery after long earnings recession helped bolster Asian
equities. While DM equities enjoyed a relatively strong earnings recovery since the Global
Financial Crisis (GFC), the same could not be said for Asian equities. Earnings recovery
was generally sluggish, beyond the initial rebound in 2010. Earnings recession plagued
Asian equities from 2014 as a strong dollar, lacklustre business environment, and weak
commodity prices adversely impacted earnings. The tide has changed since. While DM
earnings are generally late-cycle, earnings in Asia rebounded strongly since late-2016
buoyed by stabilising growth environment and improving purchasing managers’ indices
(PMIs). This looks set to advance further over the coming year. Consensus expects Asia
earnings to outperform DM in FY2018. (Figure 1).l
Figure 1: Asia earnings to outperform DM Figure 2: Asia – one of the cheapest regions for
equities
20% 1.3 Relative P/E Valuations - MSCI Asia Pacific ex-Japan relative to DM
FY2018F Earnings Growth Average
18%
1.2
16%
14%
1.1
12%
10%
1.0
8%
6% 0.9
4%
2% 0.8
0%
Asia ex-Japan US Developed Markets 0.7
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

CIO INSIGHTS 1Q18
42
Relative to DM, Asian equities Attractive relative valuations. Asia ex-Japan trades at attractive valuations relative to its
trade at attractive relative DM peers while generating higher earnings growth. In fact, the region stands out as one
valuations of the cheapest globally. At 14.7x forward price-to-earnings (P/E), Asia ex-Japan trades
an 18% discount to its DM peers, which is at the lower end of its relative P/E valuations
range since 2005 (Figure 2). Asia ex-Japan also stands out as having the most attractive
price-to-book (P/B) vs. return on equity (ROE) profile across major regions. Besides, the
region offers one of the most attractive equity risk premiums globally.
Fund flows have been Fund flows are supportive of Asian gains. Fund flows into Asia equities picked up
supportive of Asia – the region strongly in 2017 after three years of negative flows. We believe Asia ex-Japan should
should continue to attract continue to attract inflows, as long as the global macro backdrop remains positive. The
inflows low bond yields and benign USD had contributed to inflows into the region and these two
drivers remain the ones to watch.
Gradual US rate hike outlook Gradual US rate hike outlook helpful for Asian equities. Initial fears that a rising
generally positive for Asian US rate hike cycle could pull funds away from Asia and adversely impact Asian equities
equities were proved unfounded. With current Federal Reserve Chair Janet Yellen stepping down
February 2018, incoming new Fed Chairman Jerome Powell is expected to bring more
of the same, that is, gradual monetary policy normalisation and a relatively high degree
of continuity. Consequently, the Fed is likely to be gradual in their rate hikes in light of
lacklustre inflation, declining productivity, and high debt levels. Such a backdrop works
better for Asian equities than their DM peers. In fact, Asian equities have shown they can
perform well and at times outperform US equities even as rates in the US rise, especially
if the rate increases were driven by better US growth outlook (Figure 3).
Investment case for HK/China remains strong
Hong Kong/China offers The investment case for Hong Kong/China remains strong as China President Xi Jinping
attractive investment case at starts his second term. There should be more confidence in the new administration
cheap valuations after witnessing the country’s new dominance in global affairs and its strong grip on
domestic issues. Meanwhile, ongoing financial sector and capital market reforms, as well
as economic restructuring should present opportunities in the state-owned enterprises,
banks, e-commerce segments, and new technology sectors. Valuations on H-shares
remain attractive at 9x forward P/E, below their 10-year historical average.
ASEAN offers selective opportunities
Selective opportunities in The attractive demographics story of Emerging ASEAN remains intact. We continue to
ASEAN view consumer and investment spending as key growth drivers. In addition, reforms
and the stable political backdrop in Emerging ASEAN present investment opportunities.
We favour exposure to the Philippines, Indonesia, and Thailand. While we are Neutral
on Singapore, it remains one of the cheapest markets in ASEAN. Here, we expect the
property and banking sectors to trade higher on reflation.
CIO INSIGHTS 1Q18
43
Figure 3: Asia performs well even as US rates rise
UST 10-yr UST 10-yr S&P 500 MSCI Asia ex-Japan

From To
Yield peak (%) change (bps) (%) (%)
15-Oct-93 4-Nov-94 8.0 286 -1.5 17.9

2-Oct-98 21-Jan-00 6.8 249 43.8 117.0
19-Dec-08 2-Apr-10 3.9 182 32.7 65.6
25-Jul-12 2-Jan-14 3.1 167 38.3 17.7
8-Jul-16 15-Dec-16 2.6 132 9.1 5.6

Figure 4: Country Ratings
Overweight Neutral Underweight
Philippines Korea Taiwan

Indonesia Singapore Malaysia
Thailand India
China / Hong Kong
Source: DBS
Bonds:
Challenges ahead
Source: AFP Photo

CIO INSIGHTS 1Q18
45
DM Government Bonds
Eugene Leow 2018 is likely to be characterised by further removal of monetary stimuli by the Federal
Strategist Reserve, the European Central Bank (ECB), and to a much smaller extent, the Bank
of Japan (BOJ). Faced with a global cyclical recovery, elevated asset prices, nascent
inflationary pressures, and risks relating to higher oil prices, conditions are becoming
more compelling for the G-3 central banks to tighten monetary policy. Support for
developed market bonds will erode further.
Net liquidity injection into the global financial system could drop to zero by end-2018.
The Fed is shrinking its balance sheet by USD10b/month and this figure could grow to
USD50b/month by the end of the year. Further rate hikes (three in our view for 2018)
are also on the horizon. The ECB is scheduled to taper purchases to EUR30b/month
in January, and this program could be scaled down again in October or terminated
entirely. Meanwhile, the BOJ does not seem intent on keeping to its JPY80t/year asset
purchase target. Some stealth tapering may have already taken place. Support for
developed market government bonds is fading. However, given the differing stages of
economic growth and the stances of the respective central banks, the reactions to the
government bond curves will diverge.
The US is the most advanced in the economic recovery and in monetary normalisation.
The debate on where the terminal Fed Funds rate will take centre stage. However, if
inflation stays relatively contained (sub-2%), we would reasonably expect the 2-year/10-
year spread to narrow as the Fed hike cycle ages. When the 2004/2006 tightening cycle
was close to completion, the curve was already flat. While the reduction of the Fed
balance sheet should put upward pressures on longer-term yields, this may be largely
offset if the US Treasury does not extend the current average maturity of outstanding
US Treasuries (USTs) or consider ultra-long bond issuances. We reckon that the Fed can
hike three times in 2018 and two times in 2019, taking the Fed Funds rate to 2.75%
by the end of our forecast horizon. 10-year yields should also flatten out close to 3%.
years, in our view, and is in shape to grow comfortably for the time being, despite the
length of the ongoing expansion.
Relative to the US, the Eurozone economy is several years behind. Steepening in
the German Bund and swap curves is likely if the ECB mimics the Fed in removing
CIO INSIGHTS 1Q18
46
Figure 1: G3 central banks’ balance sheet to stall by end-2018?

400
USD bn, chg per mth
300
200
100
Fe d
-100
E CB
-200 BOJ
-300
Jan-13 Jan-15 Jan-17 Jan-19
10-year German Bund yield to monetary accommodation. Even if the ECB stops asset purchases in October 2019,
approach 0.8% there may not be any urgency to lift the benchmark refinance rate or the deposit rate.
Accordingly, shorter-term EUR rates are likely to be held low in the immediate few
quarters. However, 10-year German yields (0.4%) are still very low relative to consumer
price index (CPI, hovering above 1% since the start of the year). As distortions from
Quantitative Easing (QE) fade, we would expect 10-year yields to touch 0.8% by end-
2018. 10Y Bund-swap spreads are elevated due to the shortage of German Bunds.
However, this premium in swaps is likely to grind lower as QE gets phased out. Relative
to the USTs, German Bunds look very expensive. The yield spread of 10-year USTs over
10-year German Bunds is close to 200 bps. Room for further widening is limited. That
said, concerns over the Italian general elections (due May 2018) is likely to keep a lid
on German yields in the short term. Once this hurdle is cleared, it would pave the way
for the UST/German Bund spreads to narrow, but this would be an extended process.
10-year JGB yield to stay Between the Fed, the ECB, and the BOJ, the BOJ is the least likely to tolerate less loose
unchanged monetary policy. There has been no indication that the BOJ will tweak either the balance rate
or the 10-year yield target. With the former anchored at -0.1% and the latter at 0.0%, the
Japanese Government Bond (JGB) yield curve provides scant signals on how the economy is
doing or how monetary policy is likely to shape up. Currently, with the strength of the JPY
still a consideration and UST yields still low, the market is not pricing in any chance that the
10-year yield target would increase. It would likely take a combination of significantly higher
UST yields and a weaker JPY to prompt 10-year JGB yields to retest 0.1%.
CIO INSIGHTS 1Q18
47
Support for developed market bonds is set to fade further in the coming two years. Total
returns for USTs, German Bunds, and JGBs are likely to be flat to negative.
Figure 2: G3 government bond curves

2.50
% pa
2.00 UST
1.50
1.00
0.50 German Bund
JGB
0.00
-0.50
-1.00
1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y
Table 1: Forecast summary
2017F 2018F 2019F

United States
3m Libor 1.8 2.5 3.0
2Y 1.8 2.5 2.9
10Y 2.4 2.9 3.0
10Y-2Y (bps) 60 35 10
Eurozone
3m Euribor -0.3 -0.3 -0.3
2Y -0.7 -0.6 -0.4
10Y 0.6 0.8 1.0
10Y-2Y (bps) 120 140 140
Japan
3m Tibor 0.1 0.1 0.1
2Y -0.1 -0.1 0.0
10Y 0.1 0.1 0.1
10Y-2Y (bps) 20 20 10
% eop unless stated otherwise Source: DBS
CIO INSIGHTS 1Q18
48
DM Corporate Bonds & EM

Bonds
Hou Wey Fook, CFA Seeking relative value in EM Corporates
Chief Investment Officer
Global rates are likely to grind higher in this synchronized growth environment. Fed
Jason Low, CFA Funds rate will likely rise to 2.25% by end-2018, according to our Group Research. We
Strategist remain underweight on Developed Markets (DM) government bonds. Credit spreads
are generally tight globally, but we do not see the risk of them widening too much
with the continued ‘hunt for yield’, given ample liquidity globally. We prefer Emerging
Markets (EM) corporates over DM Government and Investment Grade corporates, and
see opportunities in the BBB/BB-rated issues. We are unlikely to see capital gains, given
the expected US rate hikes; as a result, total returns will come primarily from coupons
received. Given the flattened yield curve in the past years (Figure 2), portfolio duration
should be kept at the shorter end.
Figure 1: Rates will slowly grind higher Figure 2: Yield curve has flattened
4.0 UST 10-year Yield JGB 10-year Yield German 10-year Yield 3.0
UST 2Y/10Y Spread
3.5
2.5
3.0
2.5 2.0
2.0
1.5
1.5
1.0 1.0
0.5
0.5
0.0
0.0
-0.5
-1.0 -0.5
Jan/2010 Jan/2012 Jan/2014 Jan/2016 Jan/2018 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017

CIO INSIGHTS 1Q18
49
Underweight DM Government Bonds

Stay underweight in DM Given the very low level of government bond yields today – 10-year US Treasuries (UST) at
government bonds as rates 2.4%, German Bunds at 0.4%, and Japanese Government Bonds (JGB) at 0%, as well as
grind higher, and given the the outlook for rates going higher in 2018 – we do not see a lot of value in government
very low yield levels today bonds in delivering total returns. We expect three rate hikes in the US with the short-end
Fed Funds rate forecasted to rise to 2.25%, while the 10-year UST is expected to rise to
2.8% from 2.4% today. The yield curve is expected to stay relatively flat. Investors should
position the duration of their portfolios relatively short.
Neutral DM Corporates
Stay Neutral. Improving Credit spreads in DM bonds are tight (Figure 3) but we do not expect a steep widening of
profitability and credit metrics spreads, based on improving fundamentals and low default rate. Corporate profitability
would ensure a continued and credit metrics are improving – helped to some extent by stabilising commodity and
low default rate among DM oil prices. For example, the median net debt-to-earnings before interest, tax, depreciation
corporate bonds and amortisation (EBITDA) ratios fell while revenue growth improved across US investment
grade and high-yield non-financial corporates.The US tax reforms, depending on what
form they ultimately take, could prove supportive for corporate earnings and credit
profiles.
Overweight EM Corporates
Be overweight in BB/BBB-rated EM investment grade and high-yield corporates offer relatively attractive yields of 3.5%
EM bonds for the higher yields, and 5.7%, respectively. Like DM corporates, the credit profiles of EM companies are also
vs. Govts and DM corporates. improving with the default rate expected to stay low. In addition, this sector is supported
Harness “carry” through a by strong supply-demand technicals due to limited primary issuances. As rates rise in the
highly diversified portfolio US, EM bonds – particularly high-yield ones – are relatively less impacted, given the wider
yield spreads compared to government and DM bonds.
This is despite their spreads being the narrowest compared to past cycles. For example,
the yield spread for Asia high-yield is currently at 3% compared to the 4% to 6% range
seen in 2013-2015 (Figure 4). We see opportunities in the BBB/BB-rated buckets.
The rationale to be Overweight EM bonds is to capture “carry” or incremental returns.

There is unlikely to be much capital gains, given the rising rate outlook, so total returns
will come mainly from coupons received. To harness this “carry”, portfolios have to be
diversified with a minimum of 40 issuer names.
CIO INSIGHTS 1Q18
50
It is good to be reminded that bonds are instruments where investors are not paid to take
on concentration risk, as the upside of bonds is capped at the yield-to-maturity – unlike
the equity asset class. Therefore, diversification in a bond portfolio is most essential.
Figure 3: DM Corporate bond spreads are generally tight
2.0 US IG Spread
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
Jun/2010 Jun/2012 Jun/2014 Jun/2016

Figure 4: Asia HY spreads not as high as before
11 Asia HY Spread
10
2
Jun/2010 Jun/2012 Jun/2014 Jun/2016

CIO INSIGHTS 1Q18
51
Currencies
Philip Wee The US dollar has scope to recover into 2018 after its sharp depreciation in 2017.
Strategist There will be no changes to the Federal Reserve’s normalisation policies after Janet
Yellen’s term as Fed Chair ends in February 2018. Fed Chairman nominee Jerome
Powell is expected to keep to the path of gradual rate hikes and to unwind the Fed’s
balance sheet at an incremental pace. In contrast to 2017, the three Fed hikes that
we expect next year are likely to be accompanied by higher US 10-year bond yields
of 2.85% by end-2018.
US growth is expected to surpass its post-crisis average of 2.1% in the 2018-2019

period. US President Donald Trump and his Administration are targeting to lower the
corporate tax rate to 20% from 35% in 2018. US lawmakers have also started to
push for a relaxation of the banking regulations put in place after the 2008 financial
crisis, an initiative likely to be supported by the new Fed Chairman and Governors
appointed by Trump.
Technically, the Japanese yen will be most vulnerable to rising US bond yields. In
anchoring the 10-year Japanese Government Bond (JGB) yield near zero percent,
the Bank of Japan’s (BOJ) yield curve control policy has effectively linked USD/JPY to
the US 10-year Treasury yield. Our US 10-year bond yield forecast suggests scope for
USD/JPY to rise above its 108-115 per dollar range, towards 120 a dollar again. The
yen, however, will occasionally reprise its safe-haven status whenever geopolitical
tensions, especially over North Korea and the Middle East, result in market risk
aversion.
Asia Pacific ex-Japan (APxJ) currencies are unlikely to revisit the traumatic experiences of the
Fed taper tantrums in 2013. The monetary policy divergences that started with the BOJ’s
ultra-easy policies in 2013 have stopped inciting competitive devaluation. Currency war
fears receded significantly this year from two factors. First, Trump discouraging depreciation
in the greenback, especially against the euro, the Japanese yen, and the Chinese yuan;
and second, the yuan making the transition from a one-way depreciation bet to a two-
CIO INSIGHTS 1Q18
52
Figure 1: US growth outlook is strongest amongst the G4

3.0 Real GDP growth, % change annual
2016 2017 2018 2019

2.5
US post-crisis average growth
2.0
1.5
1.0
0.5
0.0
US EU Japan UK
Figure 2: USD/JPY to rise with US bond yields
3.00 USD/JPY 125

%
2.75 US 10Y bond yield (left)

120
2.50
115
DBS forecast
2.25
110
2.00
USD/JPY
(right) 105
1.75
1.50 100
1.25 95
Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18
way exchange rate. China will adopt a more balanced approach in internationalising
its yuan with its Belt and Road Initiative and the opening of its financial sector.
Some APxJ currencies may Some APxJ currencies, however, may experience more volatility than others. Given their
experience more volatility sensitivity to higher US bond yields, the Indian rupee and the Indonesian rupiah will move
than others away from this year’s stable ranges in favour of modest depreciation paths. Between the
two countries, India has more challenges. With its monetary and fiscal policies constrained
by slower growth, rising inflation, wider trade and current account deficits, fiscal slippage
risks, and a bank recapitalisation plan, the rupee will probably face more depreciation
pressure. Another country that needs monitoring is the Philippines where overheating
risks have surfaced.
CIO INSIGHTS 1Q18
53
In the near term, the In the latter half of 2018, the strength in the US dollar is expected to wane and give way
Australian dollar is under to depreciation on monetary policy convergences. As the recovery in the world economy
duress from a coalition gains traction and become more balanced, many central banks will be reviewing their
government losing its loose monetary policy stances. The European Central Bank (ECB) should be looking to
parliamentary majority wind down its asset purchases programme after its extension ends in September 2018. As
the ECB shifts its guidance towards interest rates thereafter, the euro should appreciate
again on speculation over the end of negative rates in 2019. Similarly, Australia will
be positioning for a rate hike as its growth and inflation returns above 2.5% and 2%,
respectively, in the second half of 2018. In the near term, the Australian dollar is under
duress from a coalition government losing its parliamentary majority.
Despite the Bank of England’s (BOE) guidance for two more rate hikes before end-2019,
the well-being of the British pound will depend more on the progress in Brexit negotiations
between the United Kingdom and the European Union.
As the policy normalisation As the policy normalisation theme broadens globally, Singapore should be looking to end
theme broadens globally, the neutral stance for its SGD policy in 2018. Singapore’s export-led growth is expected
Singapore should be looking to become more broad-based across sectors next year but inflation is likely to remain
to end the neutral stance for moderate. Unless the slack in the labour market gets absorbed quicker than expected, the
its SGD policy in 2018 return to an appreciation stance is likely to come at the policy review in October instead
of April next year. With trend growth ahead set to be lower than the average before the
2008 global crisis, we expect the slope of the SGD policy band to be flatter than past
cycles. Against this background and our global US dollar outlook, we expect USD/SGD
to peak near USD1.40 around 3Q18 before it starts to fall back towards USD1.35 again
in 2019.
Table 1: Interest rate hikes expected in Asia in 2018 - bps change in policy rate
Country Q1 Q2 Q3 Q4
Indonesia … … … 25
Malaysia … … 25 25
Philippines 25 … 25 25
South Korea 25 … 25 …
Taiwan … … … 12.5
US … 25 25 25
Source: DBS
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54
Table 2: Currency forecasts

2017 2018 2019
Currency pairs
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
usd/CNY 6.66 6.74 6.81 6.88 6.81 6.74 6.66 6.59 6.52
usd/HKD 7.81 7.82 7.82 7.83 7.82 7.82 7.81 7.81 7.80
usd/INR 64.7 65.2 66.1 67.0 67.2 67.4 67.7 67.9 67.9
usd/IDR 13480 13530 13620 13710 13740 13760 13780 13810 13810
usd/MYR 4.26 4.28 4.30 4.32 4.30 4.28 4.26 4.24 4.22
usd/PHP 51.2 51.6 52.0 52.4 52.8 53.2 53.6 54.0 54.4
usd/SGD 1.37 1.38 1.39 1.40 1.39 1.38 1.37 1.36 1.35
usd/KRW 1143 1150 1157 1164 1157 1150 1143 1136 1128
usd/TWD 30.6 30.8 31.0 31.3 31.0 30.8 30.6 30.4 30.2
usd/THB 33.5 33.8 34.1 34.4 34.1 33.8 33.5 33.1 32.8
usd/VND 22770 22820 22870 22920 22970 23020 23070 23120 23170
EUR/usd 1.16 1.14 1.12 1.10 1.12 1.14 1.16 1.18 1.20
usd/JPY 113 116 119 122 121 120 119 118 117
GBP/usd 1.31 1.30 1.3 1.3 1.3 1.3 1.3 1.3 1.3
AUD/usd 0.76 0.75 0.75 0.74 0.75 0.75 0.76 0.77 0.78
Source: DBS
Financials:
Seize tailwinds
Source: AFP Photo

CIO INSIGHTS 1Q18
56
Investment Theme 1:
Global Financials
Jason Low, CFA Favour Financial sector on rising rates and better growth environment
Strategist
Among global sectors, Financials stand out as being one of the most attractive. We like
the set-up of Financials because of its relatively low valuation globally (Figure 1), a rising
rate environment amid synchronized global growth (Figure 2), and potential US financial
deregulation. US tax reform, depending on what form it takes, could also provide an
additional boost to the US Financials sector. With these tailwinds potentially playing out
over the next six to 12 months, we think global financials – especially in the US and Asia
– could be on the cusp of a period of outperformance. Investors should also look at the
China insurance sector for beneficiaries of the rate hike cycle.
Figure 1: Low valuations across Financials Figure 2: Rising rates benefit global financials
3.5 MSCI Global Financials Fed Fund Target Rate (%, RHS)
US Financials P/B Global Financials P/B 7
154 6
3.0
5
2.5 124
4
2.0
94 3
1.5
2
64
1.0 1
0.5 34 0
2000 2002 2004 2006 2008 2010 2012 2014 2016
2000 2002 2004 2006 2008 2010 2012 2014 2016
A gradual but rising rate A gradual but rising rate hike cycle benefits global Financials. While some investors
hike cycle benefits global remain skeptical on the impact of rising rates on financials, the fact is that Financials
Financials, regardless of do benefit from a rising rate environment, regardless of the slope of the yield curve.
slope of curve According to a 2016 Federal Reserve study, there has been a strong relationship between
higher interest rates and higher bank profits over the past 20 years. This after dissecting
results of 3,418 banks from 47 countries to test the theory. The research also showed
CIO INSIGHTS 1Q18
57
average net interest margins (NIM) are higher in high-rate environments than in low-rate
environments.
Futures markets could be Markets could be underpricing rate hike trajectory. Pricing in only 1.7% Fed Funds
underpricing rate cycle, with rate by end-2018, futures markets could be underestimating the Federal Reserve’s rate
barely two hikes priced in by hike trajectory. DBS sees one more rate hike in December 2017 and three in 2018. Any
end-2018 upside surprise to the consensus rate hike outlook could benefit global Financials. Indeed,
the risk-reward skew for rates is favourable.
Rising rates to benefit large US large and commercial banks to benefit. With more than half of its loan portfolios
US banks and commercial being floating by nature, a higher rate environment benefits US large banks, by realising
banks strong asset yield expansion. NIM and net interest income (NII) could see upticks as rates
are gradually raised. Yet, valuations for US financials are still relatively low at 1.5x book,
and at the low end of its 20-year historical average.
Continued deregulation US financials to benefit from deregulation and tax cuts. The Trump Administration’s
efforts and tax cuts could push to loosen financial regulations is gradually taking form. Incoming Fed Chair Jerome
mean a further boost for the Powell is known to be less hawkish on supervision and regulation. In early October, the US
US financial sector Treasury also released a blueprint for loosening constraints on the financial industry, and
more deregulation efforts are expected to come, after key regulatory positions are filled
by nominees from the new Administration. Another positive impetus for the sector is the
potential passing of tax reforms, given US banks have a high tax burden. The effective
federal tax rate for the biggest banks averaged 28% for the three years ending in 2015,
which is twice the rate paid by all large companies, according to Bloomberg data. A tax
cut also brings about a buoyant lending environment, thereby boosting NII. Further, with
the potential repatriation of the estimated USD2.6t in offshore profit back to the US
could spark a revival of mergers and acquisitions (M&A) activities – thereby benefitting
investment banks.
European financials
European banks trade at Similar to their US peers, European banks will benefit from rising rates. But rates
undemanding valuations normalisation in Europe will likely take a longer time than in the US. That said, lower loan-
loss provisions have contributed to improving European banks’ earnings. Asset quality
and capital positions have been improving and should continue. These could potentially
bring about further return of capital – through dividend upside and buybacks. Valuations
remain undemanding at around 1x book.
CIO INSIGHTS 1Q18
58
Asian financials recovering; to benefit from rising rates and decline

in provisions
Asian banks to benefit Asian banks are generally in recovery mode. Loans are starting to grow. Banks benefitting
from rising rates and falling from rate hikes are expected to see NII on firmer growth. A decline in provisions would
provisions. Favour Singapore likely be the key metric driving 2018 earnings, as most are gradually easing out of their
and HK banks. China banks respective asset quality cycles. Favour Singapore and Hong Kong banks as beneficiaries
and insurance companies are of rising rates. China banks are sustainable dividend plays and should see the end of NIM
also beneficiaries compression.
In Singapore, every 25 bps Singapore and Hong Kong banks beneficiaries of higher rates. As monetary
rise in SIBOR would raise policy is gradually normalised, the corresponding rise in rates will benefit Singapore
NIM by 3 bps. In HK, every and Hong Kong the most in Asia (Figure 3). The expected sustained rise in SIBOR
25 bps rise in HIBOR would should see Singapore banks’ NIM on a firmer rise in 2018. Our sensitivity analysis
raise NIM by 3 bps indicates that every 25 bps rise in SIBOR would raise NIM by 3 bps (all else being
constant), and leading to a 2% increase in earnings. Similarly in Hong Kong, we see
banks booking better NIM trends ahead. Every 25 bps rise in HIBOR would translate
to 3 bps NIM expansion (all else being constant), leading to a 2% increase in earnings.
Loan growth should also recover for Hong Kong and Singapore banks. DBS forecasts
7% loans growth for the former in 2018, driven by property development, property
investment, and loans used outside Hong Kong. Singapore banks are also back on
the growth path, with 6% loans growth.
Figure 3: NIM trends in Singapore and Hong Kong Figure 4: Low penetration rates in Emerging Asia
1.90%
Hong Kong Singapore Life premium Premium
2016
1.85% as a % of GDP per capita in USD
1.80% World 3.5 353
1.75%
G7 4.3 1995
1.70%
Asia 3.7 229
1.65%
Emerging Asia* 2.3 99
1.60%
1.55%
*Excludes advanced countries in South and East Asia.
1.50%
Source: Swiss Re Sigma, DBS
1.45%
1.40%
2011 2012 2013 2014 2015 2016 2017 2018F 2019F
CIO INSIGHTS 1Q18
59
Chinese banks should see End of NIM compression for China Banks. China banks are showing signs that
end of NIM compression. NIM contraction, triggered by interest rate liberalisation and benchmark rate cut,
Earnings growth to re- is at its tail end. The Chinese banking sector’s core earnings growth is likely to re-
accelerate. Sector trades at accelerate on several key drivers. First, the rise in China interest rates. Second, the
cheap valuations and offers growth in Chinese corporate loan demand. Third, increasing efforts to redirect off-
>5% yield balance sheet to on-balance sheet credit growth. Indeed, interest income still remains
a major revenue stream for Chinese banks, accounting for 80% of major state-
owned enterprise (SOE) banks’ total revenue and 70% of joint-stock banks’ total
revenue. Further, an improving corporate earnings cycle and rising cashflows across
Chinese corporates mean improving asset quality for Chinese banks. At 0.8x forward
price-to-book (P/Book) and offering more than 5% dividend yield, we think Chinese
banks offer both good value and income.
Low overall penetration Opportunities in Asia Insurance sector, especially in China. The overall penetration
rate for emerging Asia life rate for life insurance in emerging Asia remains low. Life premiums in emerging Asia
insurance. Rising rates also makes up only 2.3% of gross domestic product (GDP) compared to 4.3% of GDP in G-7
benefit life insurers. China countries (Figure 4). This gap offers significant growth opportunities. We believe China’s
insurers offer opportunities low insurance coverage, the launch of the China Risk-Oriented Solvency System, and
policy guidance will continue to direct China life insurers to re-focus on traditional life
products and value enhancements. Life insurance players are also beneficiaries of rising
interest rates, as premiums can be invested at higher yields. Consequently, this should
boost investment income and margins for these life players. We are positive on the China
insurance sector and see multi-year growth ahead.
US Tech:
Ride the Wave
Source: AFP Photo

CIO INSIGHTS 1Q18
61
Investment Theme 2:
US Technological Disruption
Dylan Cheang US Technology at an inflexion point
Strategist
The US equity market has been on a tear since the Global Financial Crisis as the S&P 500
Index surged 185% between 2009 and end-October 2017. However, this is predominantly
attributed to the US technology space, which rallied 373% over the same period as
the rapid proliferation of e-commerce and the “Internet of Things” (IoT) drove 641%
gains in the US internet software and services sub-segment. No doubt, after such robust
performance, scepticism and caution will reign. Attention has since been focused on the
sustainability of this rally and whether sharp pullbacks will take hold should the numbers
start to disappoint. But in our view, to overemphasise short-term earnings gyration could
be counterintuitive at this juncture given that the US technology space is currently on the
cusp of major disruption, which will be a multi-year transformational trend.
Tech bubble in the making? Not in our view. An often-cited concern of the current
tech rally is that a “bubble” is forming and the level of excesses in this space will
eventually lead to a massive sell-down – reminiscence of the “dotcom” crash. But to
draw parallel between what happened in 2000 and the current situation would be a
mistake. Back then, many of the tech companies trading at steep valuations were mainly
“conceptual” in the sense that they do not actually generate positive cash flows and the
business models were still in the incubatory and conceptual stages. The steep valuations
that investors were willing to pay for were premised on robustly projected multi-year
earnings that may or may not come to fruition. At the height of the “dotcom” bubble,
the level of extreme exuberance in the market saw the US technology sector trading at a
massive 56.5x forward price-to-earnings (P/E) in December 1999. The rest, as we know, is
history. The sector subsequently plunged 80% from its March 2000 peak to bottom out
in September 2002.
Unlike the “dotcom” bubble, the current tech rally is backed by fundamentals.
The US technology sector has undergone robust rally over the past few years and we
believe that it will not see the same year-2000 sell-down. The reason is simple – the
current rally is backed by fundamentals. To recap, between 1995 and March 2000, the
US technology sector rallied a massive 817%. But earnings growth on a 12-month trailing
basis rose only 163% in the same period. In other words, there was a distinct disconnect
between equity prices and corporate earnings. Today, the situation is vastly different.
CIO INSIGHTS 1Q18
62
Since 2010, the US technology sector has rallied 196% and this is matched by a robust
160% gain in corporate earnings (see Figure 1). The strong earnings growth explains why
valuation for US tech has been kept under the lid despite its outperformances in recent
years (see Figure 2).
Figure 1: Unlike the “dotcom”-bubble era, the Figure 2: Robust technology earnings growth has
current US tech rally is backed by fundamentals kept valuation under the lid
US Technology (LHS) US Technology - Trailing 12-mth EPS (RHS)
1,100 45 US Technology - Forward P/E (x)
60
55
900 35
50
700 25 45
40
500 15 35
30
300 5
25
20
100 -5
15
-100 -15 10
Feb-90 Feb-94 Feb-98 Feb-02 Feb-06 Feb-10 Feb-14 Feb-90 Feb-94 Feb-98 Feb-02 Feb-06 Feb-10 Feb-14
The age of disruption is here – ride it
Faster Internet speed Traditional business models are on the cusp of massive transformation as the usage
and rising adoption of of robotics, artificial intelligence (AI), and the Internet of Things (IoT) continue to gain
smartphones drove rapid dominance. One of the sectors that have undergone a sea change in the age of disruption
proliferation of e-commerce is the US retail space. Faster Internet speed, coupled with rapid adoption of smartphones
usage, drove rapid proliferation of e-commerce across the world. Brick-and-mortar retail
companies that failed to innovate and capitalise on this seismic shift towards online
retailing experienced sharp corrections in their share prices. Figure 3 shows the divergent
path between Internet-related companies (such as e-commerce) and their department-
store peers in the age of disruption. Listed below are some of the key segments that will
drive US technology revenue in years ahead:
IFR expects 2.6m units of Robotics – the rise of the machines: The usage of industrial robots is on the rise.
industrial robots to be used According to the Robotic Industries Association (RIA), North American orders and
globally in 2019 shipments of robots rose 10% to 34,606 in 2016. On a segmental basis, the order for
robots surged 61% in assembly applications while the food/consumer goods segments
also registered a 32% growth. Over in Japan, producers’ shipment of industrial robots
gained 41% in 1H17 while the production of intelligent robots jumped 64% over the
same period (see Figure 4). This robust trend will continue in years ahead. According to
CIO INSIGHTS 1Q18
63
the International Federation of Robotics (IFR), the number of industrial robots used globally
will increase to close to 2.6m units in 2019. Currently, about 70% of the industrial robots
are utilised in areas like electrical/electronics and automotive.
AT Kearney expects IoT to Internet of Things (IoT) – strong growth ahead: The Internet of Things (IoT) is the
impact about 6% of the global concept of adding Internet connectivity to different devices. Today, the IoT is widely used
economy by 2020 in various industries and according to International Data Corporation (IDC), global IoT
revenue is expected to hit USD7.065b by 2020 (vs. USD2.7b in 2015). In terms of device
usage, IHS Markit is forecasting that the IoT space will grow from 15.4b devices in 2015
to 75.4b by 2025 (see Figure 5). Areas that may see robust IoT growth includes security,
transportation, warehousing, and retail. AT Kearney forecasts that IoT will impact about
6% of the global economy by 2020.
A new report by Grand View Artificial Intelligence (AI) – a new frontier: Artificial Intelligence is the simulation
Research shows global AI of intelligence from computer systems to perform tasks (such as vision perception or
market reaching USD35.87b language processing) that would normally require human intelligence. The subsets of AI
by 2025 include Machine Learning and Deep Learning. Current global investments on AI is huge,
with McKinsey & Company estimating it at USD26-39b in 2016. Based on a report by
Grand View Research, the global AI market is expected to reach USD35.87b by 2025.
cyclicals is on the cards.
Figure 3: US internet sector vastly outperforming Figure 4: Shipments and production of robots on the
the department store space rise in Japan
(Normalized) US Internet Sector (LHS) US Department Store Sector (RHS)
300
800 Japan Producer Shipment of Industrial Robots Japan Production of Intelligent Robots
700 250
600
200
500
400 150
300
100
200
50
100
0 0
Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17

CIO INSIGHTS 1Q18
64
Figure 5: Strong growth expected for global IoT installed base

80 Global IoT installed base (b, LHS) y/y change (%, RHS) 24%
70 22%
60
20%
50
18%
40
16%
30
14%
20
10 12%
0 10%
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Source: IHS, Markit
Belt and Road:
Connect the
World
Source: AFP Photo

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66
Investment Theme 3:
The Belt and Road Initiative
Jason Low, CFA Connecting the world through BRI
Strategist
The Belt and Road Initiative (BRI) is a development strategy that was proposed by Chinese
Rachel Miu President Xi Jinping in 2013. This grand plan aims to enhance China’s investment and
Analyst trade links with Europe, Asia, and Africa, by connecting over 60 countries, more than
60% of world population, and 30% of world gross domestic product (GDP) across
the three continents to China. Connecting the continents over land through Euro-Asia
continental roads and sea – through the South China Sea and Indian Ocean – would
accelerate Beijing’s outbound investments.
Figure 1: ASEAN infrastructure spending to stay Figure 2: China’s foreign engineering contracting
high projects increasing
US$bn
350
450 US$bn
400 300
350
250
300
200
250
200 150
150
100
100
50 50
0
0
Indonesia Vietnam Thailand Philippines Malaysia 2015 2016 2017F 2018F
(2017-21F) (2014-23F) (2017-26F) (2017-22F) (2015-20F)
BRI infrastructure investment to accelerate faster than expected
China is stepping up its efforts on infrastructure development in countries along the BRI
route, some time after the master plan was introduced in September 2013. Asia’s fixed
asset investment (FAI) only makes up less than 1% of GDP, far smaller than China’s FAI
to GDP of 4% to 6% over the past 10 years. This limited infrastructure spending in Asia
was mainly because of the lack of capital to finance construction. Now with the Chinese
CIO INSIGHTS 1Q18
67
government taking on a more proactive role in the BRI, we anticipate the pace of
investments to accelerate going forward.
ASEAN to be a key beneficiary of BRI
Based on our analysis, we believe the potential infrastructure spending is significant

and could exceed expectations. The initial costs of developing infrastructure in Asia
are already massive. For example, infrastructure investment along the China-Pakistan
Economic Corridor (CPEC) is estimated to cost around USD40b and around USD77b in
the Association of Southeast Asian Nations (ASEAN). History has shown that the amount
of transport infrastructure investment tends to rise in the long-term to match with the
economic development of the region. Indeed, since the 1997-1998 Asian Financial Crisis,
infrastructure investment in most ASEAN countries has not yet caught up with the rest of
the world. Various studies have estimated that the region’s annual infrastructure needs
are in excess of USD110b a year, including transportation, power, telecom, and other
amenities. Selected ASEAN countries expect their infrastructure investments to stay
high over the next five to 10 years (Figure 1). DBS estimates that the transport-related
projects could generate investments of USD200b over a five-year period in ASEAN, more
than double the current batch of transport infrastructure projects under development in
ASEAN.
China construction companies are major beneficiaries of BRI
The Chinese construction companies have been awarded some sizeable projects in CPEC
and in ASEAN. In 2016, China signed USD126b worth of overseas projects with countries
along the BRI – 36% higher than in 2015. Indeed, in line with this, Chinese contractors
are actively bidding for many infrastructure projects in Asia. To date, Chinese construction
companies have made good progress in Malaysia, with some USD15b worth of engineering,
procurement and construction (EPC) railway projects. Thailand and Indonesia are the
next two countries with significant investment potential, and offer opportunities for the
Chinese construction companies. Indeed, China construction companies are gaining more
success overseas in recent years, given their access to funding, cost competitiveness, and
fast turnaround (Figure 2). We estimate the value of overseas projects for these companies
to grow by 10% in 2018.
Asian Dividends:
Still appealing
Source: AFP Photo

CIO INSIGHTS 1Q18
69
Investment Theme 4:
Asian Dividends
Jason Low, CFA Continue to favour Asian dividend equities on gradual rate outlook
Strategist and aging demographics
Asian dividend equities continue to appeal to investors, driven by both macro-economics

and fundamental factors. As the hunt for yield continues in today’s low interest-rate
environment, Asian dividend-yielding equities could benefit from structurally lower rates
(Figure 1). Global and Asian demographics are also driving the demand for dividends.
Dividend yield spreads in Asia still compare favourably to other regions, supported by
growing free cashflow and relatively stronger balance sheets.
Figure 1: Structurally lower rates Figure 2: Ageing population in Asia and globally
drives demand for dividends
22
Fed Funds Target Rate (%) Average (80-89) Average (90-99) Average (00-09)
Global Population above age 65 (%) Japan Population above age 65 (%)
20 28 China Population above age 65 (%)
18
Japan
16 23
14
18
12
Average: 9.8%
10
13 China
8
Average: 5.1%
6 8
Average: 3.0%
Global
4
3
2
0
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 -2 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Source: Bloomberg, DBS Source: The World Bank, DBS
Gradual rate hike outlook. Incoming Federal Reserve Chair Jerome Powell is likely to
bring a relatively high degree of continuity, and gradually normalise monetary policy when
he takes over in early-2018. With the US Federal Reserve in gradual rate-hiking mode,
coupled with a falling neutral rate that arose from demographics and productivity issues,
CIO INSIGHTS 1Q18
70
Fed Funds target rates are unlikely to return to previous cycles’ highs. The latest dot-plot
signalled that the target rate is likely to settle around 2.75% over the longer term – much
lower than the 5.25% peak seen in the 2007 cycle. The market’s outlook on rates is
also muted. Futures markets are pricing in 1.7% on the Fed Funds rate by end-2018.
Meanwhile, a Bloomberg consensus of economists shows expectations for the Fed Funds
rate to be at 2.15% by end-2018.
Ageing demographics driving dividend demand. Around 8.5% of the global

population is above 65-years old, and that proportion is projected to rise to 17% by 2050
(Figure 2). In Japan, the above-65 population already made up 27% of it’s population
in 2016, a sharp rise from the 6% seen in 1960. Likewise, China’s above-65 population
made up 10% of its population in 2016, compared to just 3.7% in 1960. As the global
population ages, demand for passive income and dividends is likely to rise correspondingly.
As such, we believe dividend-yielding equities will continue to be a preferred strategy for
the global ageing population.
Do not underestimate dividends. While growth investors may ignore dividends, they
remain a very powerful source of returns. Historical returns for Asia Pacific ex-Japan
show the benefits: more than half of total returns for the region came from dividends,
highlighting how they can be a sustainable source of returns in these uncertain times.
Attractive dividend yield and yield spreads in Asia. Asia offers an attractive dividend
yield of 2.6%, 30 bps more than the global average. More importantly, Asia dividend
yield spreads (against 10-year US Treasury notes) are also higher than the global average
at 40 bps. Within Asia, Singapore and Hong Kong stand out with attractive dividend yield
spreads of 100 bps and 180 bps, respectively.
Banks in China are sustainable dividend plays
We think banks in China are sustainable dividend plays on improving core earnings
growth and asset quality. The Chinese banking sector’s core earnings growth is likely
to reaccelerate on several key drivers: first, the rise in China interest rates; second, the
growth in Chinese corporate loans demand; and third, increasing efforts to redirect off-
balance sheet to on-balance sheet credit growth. Indeed, interest income still remains
a major revenue stream for Chinese banks, accounting for 80% of major state-owned
enterprise (SOE) banks’ total revenue and 70% of joint-stock banks’ total revenue. Further,
an improving corporate earnings cycle and rising cashflows across Chinese corporates
imply improving asset quality for Chinese banks (Figure 3). These will strengthen the
sector’s ability to pay out sustainable dividends. We expect Chinese banks to comfortably
CIO INSIGHTS 1Q18
71
maintain its 30% payout ratio. At 0.8x forward price-to-book (P/B) and with a more than
5% dividend yield, we see Chinese banks as both dividend and value plays.
Singapore REITs are long-term beneficiaries
We continue to believe Singapore Real Estate Investment Trusts (S-REITs) are long-
term beneficiaries of global ageing demographics as well as the trend of structurally
lower rates. The sector is trading at 1x price-to-net asset value (P/NAV) – in line with
its historical average since 2003 (Figure 4) – and yielding 5.8% in FY18. We expect
S-REITs yield spread to tighten further to 3.25% in 2018 (from the current 3.7%).
However, investors should be selective in their sector exposure. DBS Group Research
prefers exposure in the hospitality, logistics, and office sectors, while avoiding the
retail sector.
The hospitality sector in Singapore is enjoying better average day rates in 2H17 and
is expected to post the first turnaround in revenue per available room (RevPAR) since
2013. Looking ahead, there is a strong pipeline of meetings and conventions in
2018, as well as a fall in supply growth of hotel rooms. This strong demand is also
seen in the logistics space, especially in business parks, driven by increasing interest
from e-commerce and media industries. In the office sector, supply is expected to fall
significantly over the 2018-2020 period. Pre-commitment rates for new supply have
so far been positive.
Figure 3: Improving asset quality for Chinese banks Figure 4: S-REITs trading in line with historical
average
Sector Yield Mean Yield +1 SD -1 SD

Non-performing loans 14.0%
1.7
12.0%
1.5
10.0%
1.3
8.0%
1.1
6.0%
0.9
4.0%
0.7
2.0%
0.5 0.0%
2009 2010 2011 2012 2013 2014 2015 2016 FY17F Jan-03 Jan-06 Jan-09 Jan-12 Jan-15

China:
Age of
Strongman
Source: AFP Photo

CIO INSIGHTS 1Q18
73
Special Feature:
China in 2018/2019:
Age of Strongman
Chris Leung A new age of the strongman
Economist
A new era has begun for China. Gauging the economic outlook requires a thorough
understanding of the new leadership under President Xi Jinping. He has achieved
overwhelming authority from the 19th National Congress (NC) of the Communist Party.
Four out of the seven members of the Standing Committee of the Politburo are his
long-standing allies, alongside 11 out of 18 new members introduced to the 25-person
Politburo. Most importantly, the new members in the Standing Committee will be too
old to be eligible as Xi’s successor in the 20th NC in 2022. There is a high probability
that Xi will lead China potentially for another decade – and beyond. The orientation of
macroeconomic policies will focus on improving the well-being of the economy in the
long run.
All decisions to be made by Xi will easily be endorsed by the Standing Committee and
the Politburo. Thus, it is fair to assume the execution of economic policy will be faster,
particularly in the fiscal space pertaining to urbanisation and those related to Belt and
Road Initiative (BRI). There is a high likelihood that state-driven investment will become a
prime economic growth driver in 2018 and beyond.
Figure 1: Nominal GDP vs disposable income growth

% YoY
15
Nominal GDP Disposable income per capita
14
13
12
11
10
6
Q1-14 Q1-15 Q1-16 Q1-17

CIO INSIGHTS 1Q18
74
Investment-led growth to re-surface. The orthodoxy of developing a consumption-led

economy is unlikely the sacred goal for China at this juncture. Improving the livelihood of
Chinese people requires per capita income to rise sustainable over the long run.
This requires investments in the right places now, to generate decent returns in the future.
Consumption eventually rises only when income goes up beforehand. That was indeed
the development path of many Asian economies. China clearly does not want to be
cursed by the “middle income trap”. The authorities know very well that artificial wealth
creation – via inflation of the property bubble – is a precarious route.
How then to make the right investment decision? The usual textbook answer is to allow
free movement of interest rates to reflect the risk premium. In China, this represents
only a small part of the investment decision process. What matters more now is that
local governments’ investment plans are absolutely in sync with the goals of central
government. All state-owned enterprises (SOEs) must follow the decisions made
upstream. Centralisation of control will be the “new normal” pertaining to SOE reform.
Experimentation of mixed ownership reform will continue. But when it comes to important
Growth momentum in 2018 decision making, the state will prevail.
is to be led by investment
spending which would ramp The state has been increasing the control of newly-merged SOEs by including Communist
up consumption Party Committee Members in the board of directors, and management is encouraged
to seek direction from the Party Committee Member before making major decisions.
Many SOEs are also combining the role of company chairman with Party secretary. These
new policies reflect consolidation of political control over core strategic industries. It is
a complete departure from the thesis of separation of political control from enterprise
management.
The central government has zero tolerance for corruption. Compared to the past, fiscal
wastage will likely be reduced to a minimum. And they have big plans to spur the next
phase of urbanisation and scientific innovation (as seen from the China Manufacturing
2025 initiative). These areas are unlikely to be affected too much by the “deleveraging”
processes. Urbanisation is about co-facilitation among various provincial governments,
to sharpen the strength and mitigate weakness of their respective cities by cooperation.
Although greater cooperation was hindered by vast differences in political interests in the
past, these hurdles are now gone after the 19th NC meeting. There will likely be some
real progress on this front in 2018. See for example the integration of Beijing-Tianjin-
Hebei with the Xiong’an new district, and the Greater Bay Area concept of integrating
Hong Kong with Macao and Guangdong province, etc.
That is not to say the share of consumption of gross domestic product (GDP), which
currently stands at 60%, is going to drop sharply. The growth momentum in 2018 is
likely to be spearheaded by investment. If these new investments are executed well, it will
significantly ramp up consumption.t
CIO INSIGHTS 1Q18
75
Industrial Policy matters. As far as the agenda to push for scientific innovation is concerned,
industrial policy clearly matters. China will spur technological innovation by boosting
research and development expenditure at universities and SOEs in artificial intelligence,
manufacturing robotics, and big data mining. Meanwhile, the state will seek opportunities
to become shareholders of successful tech companies from the private sector.
Figure 2: Contribution to GDP growth
ppt , YTD
Consumption
10 Gross Capital Formation
Net Exports
8
-2
Q1-14 Q1-15 Q1-16 Q1-17
Source: CEIC
The process is however at risk of being characterised by rapid growth in the initial phrase,
but mired by overcapacity later. Here is the usual sequence:
1. State identifies a few key industries to invest in.

2. Everyone follows suits due to easy and quick regulatory approvals.
3. Easy loans support from state banks.
4. Foreign suppliers benefit from strong import demand.
5. As time goes by, oversupply sets in, collapsing margins.
6. To save them from bankruptcies, state-subsidies are provided.
7. Export overcapacity to rest of the world.
Industrial policies will intensify to sharpen the export competitiveness of the following
strategic sectors: railway equipment, electric vehicles, manufacturing control systems,
maritime engineering, and biomedicine, among others. China will continue to embrace
free trade to her mercantilist favour. Trade conflicts with the US are set to rise.
Against this, 2018 growth, buoyed by a new phase of urbanisation and state-driven
investment in strategic sectors, may surprise on the upside, conditional on the magnitude
of de-leveraging.
CIO INSIGHTS 1Q18
76
Property market neither cold nor hot. The property market can neither be too cold nor too
hot. It is another “too big to fail” situation. Persistent price ascendency without restraints
breeds social resentment, which in turn threatens social stability. In 2016, the ratio of monthly
mortgage payment to disposable income of cities such as Beijing, Shanghai, and Guangzhou
shot up to irrational levels of 128%, 90% and 74%, respectively. House prices have already
become out of reach for many households. The government under Xi has repeatedly
cautioned homes are meant to be lived in, and are not for speculation. The message was
reiterated again after 19th NC meeting was finished.
Figure 3: Monthly payment to disposable income

120
110 Beijing Shanghai Guangzhou
100
90
80
70
60
50
40
30
Jan-2014 Jan-2015 Jan-2016 Jan-2017
Source: CEIC
On average, property prices had been growing faster than incomes. China’s urban disposable
income was up 8.1% in the first half of 2017, compared with a 10.2% on-year jump in June.
To ensure social stability, It was only until September the market began to witness an apparent deceleration of rising
property prices are prices, to 6.3% from 8.3% in August (the peak was over 12% in November 2016). Sales of
expected to rise only gross floor area also fell (5.7% on-year) for the first time since March 2015, after 29 straight
gradually, in line with months of growth. However, real estate investment (land purchase and construction) growth
economic growth accelerated to 11.9% in September from 10.9% in August. Property developers are taking
a positive long-term view on the sector in spite of the omnipresence of austerity measures.
Local governments are expected remained restrained into 2018. Should economic growth
momentum start losing steam, austerity measures will likely be relaxed. It has always been
the case that occasional administrative measures to cool down the real estate market has
the biggest impact on short-term sales volume. Prices always adjust much more gradually.
Furthermore, the low share of mortgage loans on banks’ asset portfolios (around 20% of
total outstanding loans) justifies to further leverage up household balance sheets. Thus, the
temptation to reboot the economy via the property market will remain high.
CIO INSIGHTS 1Q18
77
Benign monetary policy on Given a debt overhang, there is not much room for monetary authorities to manoeuvre.
subdued inflation and debt China cannot loosen but they cannot tighten too much either. Upward pressure on
overhang general prices has been timid. The consumer price index (CPI) has been largely hovering
around the 2% threshold, in spite of a significant rebound in the producer price index
(PPI) since 2016. The benign inflationary environment sparks no tightening pressure on
the central bank. We may only see a slight uptick in headline CPI in 2018, due to more
investment spending by the state.
CNY to remain stable Fiscal canons should be more effective in boosting short-term growth. However, effective
expansionary fiscal policy is about meticulous planning and execution. Coherence of policy
execution should be substantially improved in the next five years, as key provincial leaders
supporting Xi are already in place. That should buy China some more time to deleverage
to restrain the proliferation of WMPs. As far as the exchange rate is concerned, the key
tactic is to maintain “the stability of CNY with a slight depreciation bias”. Doing so fits
the purposes of multiple agendas.
China is expected to speed From now on, attention must be paid to foreign policy, especially those pertaining to
up BRI projects in 2018 projects related to BRI. In 2018, China will speed up these projects: the building of
(1) the Jakarta-Bandung high-speed railway, (2) China-Laos railway, (3) Addis Ababa-
Djibouti railway, (4) Hungary-Serbia railway, (5) Melaka Gateway project in Malaysia, and
upgrading (6) Gwadar port in Pakistan. The goal is to elevate the global influence of
China via the Eurasia integration strategy. China will likely put extra effort on the Pakistan
and Malaysia projects because they are the easiest to proceed with, given the countries’
strong diplomatic relationships.
The financial rewards of BRI may take decades to pay off. If successful, however, this
program will help export Chinese goods (alongside those industrial commodities deeply
mired in overcapacity), promote RMB internationalisation, and proliferate Chinese
engineering standards. This a model that involves a long-term commitment to export
capital (credit), labour, and know-how of Chinese standards to rest of the world.
2018 will mark the very first year of a new China era that is under the firm control of Xi’s
team. They have big plans, and the challenges are equally immense. Political aspirations
are high and the impetus is strengthening. The risks and uncertainties are also largely
already known. As Nelson Mandela once commented, “It always seems impossible until
it’s done.”
CIO INSIGHTS 1Q18
78
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DBS CHIEF INVESTMENT OFFICE

CIO INSIGHTS 1Q18

CIO Insights Source: AFP Photo

The Bull Ain’t Done

Favour EM Corporate Bonds

Recovery in the US Dollar

Source: AFP Photo

Dear valued clients,

Dear valued clients,

But as always, markets never fail to confound.

Hou Wey Fook, CFA

Geopolitics Inflation Fiscal Policy

Rates Credit Thematics

Will the bull continue?

Global monetary accommodation at inflexion point

Source: Bloomberg, DBS

United States 10%

Source: Bloomberg, DBS Source: Bloomberg, DBS

Low-volatility environment supports pro-risk strategies

season, the proportion of US companies reporting positive earnings surprise stood at a

700 US Internet services sector US Equities Global Equities

Source: Bloomberg, DBS

Source: Bloomberg, DBS Source: Bloomberg, DBS

Headwinds on European Tightening financial conditions and geopolitical uncertainties to weigh on

Neutral Bonds; prefer Corporates over Government bonds

Neutral on Gold and Hedge Funds

Figure 13: Recent US dollar rebound weighed on gold

Table 2: 1Q18 – Global Tactical Asset Allocation

US Equities Overweight Underweight

Europe Equities Underweight Neutral

Japan Equities Neutral Neutral

Asia ex-Japan Equities Overweight Overweight

Bonds Neutral Underweight

Developed Markets (DM) Government Bonds Underweight Underweight

Developed Markets (DM) Corporate Bonds Neutral Neutral

Emerging Markets (EM) Bonds Overweight Neutral

Alternatives Neutral Overweight

Gold Neutral Neutral

Hedge Funds Neutral Overweight

Cash Underweight Neutral Source: DBS

Equities 0.0% 0.0%

Europe 0.0% 0.0%

Alternatives 0.0% 0.0%

Equities 15.0% 15.0%

Hedge Funds 0.0% 0.0%

*Only P4 risk rated UCITs Alternatives

DM Government Bonds 14.0% 16.0% -2.0%

Equities 66.0% 65.0% 1.0% Cash

DM Government Bonds 6.0% 7.0% -1.0%

Source: AFP Photo

Taimur Baig, Ph.D. United States

length of the ongoing expansion.

-1% -1% -1%

Source: CEIC, DBS Source: CEIC, DBS

This high-growth-yet-weak-inflation conundrum has complicated the European Central

Figure 4: Japan’s real GDP

GDP growth, % YoY CPI inflation, % YoY, ave

Policy interest rates, eop

4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19

Source: Bloomberg, DBS

Figure 2: Previous sell-downs in US equities came amid high probabilities of a

50 NY Fed probability of recesion (LHS) S&P 500 (RHS)

Even on a cross-asset basis, US equity valuation remains reasonable relative to corporate