Global markets on track for growth, corporate earnings to normalize: DBS CIO

Do not bank on bond yields, but instead adapt “Buy-Write Strategy”, Hou advises.

The global equity market is “back on track” for growth, and corporate earnings are sighted to normalize, says DBS chief investment officer (CIO) Hou Wey Fook.

In his Q2 2021 outlook, the bank's CIO shared his view that the rollout of vaccines and continuous monetary support from governments will break the cycle of lockdowns and push towards earnings recovery.

“The rollout of vaccines will break the start-stop cycle of economic lockdowns and reopenings. Coupled with trillions of dollars in fiscal stimulus globally, we are now on track for growth and for corporate earnings to normalize,” Hou said in the outlook’s executive summary.

The report discusses key issues and metrics in determining recovery of equities and income earnings.

Amongst these, Hou warned against betting too much on bond yields, which has been driven higher by news of COVID-19 vaccination and the expectation of stronger fiscal easing this year. History shows it is premature to assume yields will undergo sustained increase from here, Hou said.

“Since the Great Recession of 2008, bond yields have previously undergone similar spikes, only to correct to lower lows in subsequent periods,” he noted, adding that from a longer-term perspective, global bond yields have been trending south since the early 1980s due to the moderation of the global macroeconomic momentum and with the neutral rate of interest–which functions as a “benchmark” for the Fed’s decision-making process–on a persistent downtrend.

“In the current low yielding environment, enhancing a portfolio’s income stream via equity exposure will gain prominence in coming quarters. The traditional notion of “equity income strategy” is premised on dividend stocks. But this strategy will face increasing challenges as traditional companies are disrupted by the global digitalisation wave, which would impede companies’ ability to pay out dividends,” he added.

The report instead suggested the “Buy-Write  Strategy”, or covered call strategy, which “Buy-Write” entails buying a security and simultaneously selling a call option against it. Option premium collected from the call option helps to enhance income generation as well as mitigate portfolio downside in times of market volatility, he explained.

“Our analysis shows that between 2015-20, a portfolio consisting of global credit will only attain average annualised monthly returns of 4.3%. However, a hypothetical multi-asset income portfolio consisting of 40% credit, 30% dividend equities, and 30% covered calls will attain average returns of 6.4%. This illustrates how a multi-asset income strategy incorporating call writing will garner higher returns for investors in present environment,” the report noted.