NOW is the time to re-engage Asian equities for investment, especially financials and tech plays in China.
This sanguine view of risk assets in Asia came from DBS Bank chief investment officer Hou Wey Fook on Wednesday, who spoke about the bank's fourth-quarter investment outlook.
DBS has upgraded Asia ex-Japan equities to "overweight" from "neutral" in the previous quarter, on the back of emerging value in North Asia. The recommendation was made despite the backdrop of a strong greenback, and ongoing US-China trade tensions.
"While we continue to expect the dollar to be strong, its strength against developed market currencies will likely taper off," DBS said.
In particular, the bank is bullish on Hong Kong and China equities, as it believes that stimulus policies will prop up China tech stocks and financials (which includes banks and insurance).
Said DBS: "China has been sold down in sympathy with the weaker emerging markets of Turkey and Argentina. With this, we believe that value has now emerged."
A recent sell-down in China financials also means that valuations are now near lows, and almost as cheap as in Dec 2015, Mr Hou said.
Noting a potential increase in the weighting of A-shares in the MSCI indices, DBS is of the view that Chinese financials offer an attractive risk-return profile. The bank added that as more than 90 per cent of China's financial companies generate their revenue domestically, they are relatively insulated from trade tariffs.
Riding on the e-commerce boom, DBS is also favouring Chinese tech stocks due to the sheer number of smartphone users in China, it said. Data indicates that China's online shopping penetration rate has almost tripled from 28 per cent in 2009, to 69 per cent in 2017. Nonetheless, online sales only account for about 15 per cent of retail sales in China as of last year, which shows a lot more room for growth, Mr Hou said.
According to the bank's research, China now has the highest number of smartphone users in the world with about 700 million users - roughly double that of the US population.
As Mr Hou puts it, "It's a secular growth story in China, and you do not want to miss this window of opportunity."
From a country allocation perspective, besides Hong Kong and China, DBS has a preference for Thailand with its recovery gaining traction, as well as Singapore for its "strong external balances, attractive valuations and dividend support".
Mr Hou also noted that performance of the Singapore market is predominantly driven by banks, followed by property.
"Just as we are bullish on global financials or US financials, I think the Singapore market will also be carried up by banks," he added.
DBS has maintained its "overweight" stance on US equities from Q3, citing strong earnings momentum. While the bank is cognisant that the current US bull run is the longest-running rally to date, it does not yet see signs of overheating.
"Wage growth, commodity prices, and inflation remain modest. Federal Reserve chair Powell's policy of gradual rate increases remains constructive of risk assets. Barring a full-blown trade war, which is not our base case, we continue to engage equities and credit," DBS said.
The bank added that the US equity rally is broad-based, which suggests a "healthy rally", since the market is not just carried by a few stocks.
By analysing fund-flow trends, DBS also observed that the US stock market is not an "overcrowded" trade, as is generally perceived. In fact, investors have been actively re-engaging US equities since the start of the second half this year, with net outflows totalling US$334 billion since 2015, the bank said.