The Asian private bank has cut equity exposure and isn't yet minded to buy stocks on continued weakness. Escalating tariffs from the US and China have spooked markets.
Bank of Singapore has cut its equity market exposure and suggests clients should hold gold to hedge against turbulence amid escalating protectionism between the US and China.
The private bank said it "pared down overall equity risk exposure" to a neutral position two days before US President Donald Trump pushed up tariffs on China last week.
Equity markets have fallen and prices of safe-haven gold, for example, have risen as worried investors have scrambled from risk assets. The chances of a trade war between the world's largest economies has taken the gloss off equity markets, which until a few weeks ago had started the year on an upward path. Yesterday, the S&P 500 Index of US equities sank by 2.4 per cent and commodities such as oil and copper fell. Gold, however, rose slightly, although it is close to where it began at the start of the year. It was trading around $1,300 per ounce yesterday (source: BullionVault).
"Our neutral position reflects our view that investors should not over-react to trade uncertainties. While trade uncertainties have escalated and we see a one-in-three chance of talks breaking down, our base case (2/3 chance) is that the trade talks will continue and we will eventually see an agreement," BoS said in a note yesterday.
As the bank noted, earlier this week China announced that it will hit back at the US, raising tariff rates on $60 billion of US imports. The hike takes effect from 1 June this year.
While by no means only a campaign for the Trump administration, fears that the US will slap tariffs on China - and possibly also on the European Union - intensified after Trump won the election in 2016. One of his longest-standing policy views has been that China competes unfairly with the US and that the Asian giant has cost the US jobs in its manufacturing base.
"We expect volatility to continue over the near term as the market continues to digest heightened trade risk, particularly as a key driver for the market rally this year has been trade optimism. We believe it is still too early to buy on weakness for now," Bank of Singapore continued.
"In terms of BOS' asset allocation strategy, we are well positioned for this correction. Two days before the US tariff hike last week, we had reduced overall risk exposure, sold our overall equities position down to neutral and cautioned against expectations for a quick deal," it said.
Taking a more optimistic note, the bank said that other causes for this year's stock market rally "remain in place". "Central bank policies remain supportive, inflation is modest and the term premium is negative. Unlike in H2 2018 when growth was slowing, there are early signs of growth stabilisation in the US and China this year that could be sustained if the current bout of trade uncertainties is not too prolonged," it said.