AS THE global market enters an uncertain inflationary macro environment with Donald Trump “in the driving seat” of the United States (US) for the second time, investors will do well to maintain a core position in their portfolios, rather than try to time the market.
Speaking at a panel on Nov 9, Sue Lee, director and Asia-Pacific head of index investment strategy at S&P Dow Jones Indices, said that the US equity market may not see returns as high as this year’s in the future.
Potential import tariffs from a second Trump administration are expected to put further upward pressure on inflation, even as the world is already reeling from the effects of inflationary pressure from the Covid-19 pandemic.
The US Federal Reserve has begun to cut interest rates, but market watchers expect a slowdown in the pace of these cuts as Trump 2.0 beckons.
“We’re going into the late cycle, but with Trump in the driving seat,” said Lee, referring to the economic cycle reaching its peak before slowing down in growth.
In a scenario where it is difficult to predict the direction of inflation, it is “very important” for investors to maintain a core position in their portfolios as timing the market is “a very difficult job”, she added.
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“As an individual investor, I think what you can do is always have your core portfolio and then be very diversified.” She also noted that consistent exposure to a US diversified index fund is important.
The panel, titled “Exploring the Dow: Opportunities and strategies for US equities investments”, was held on Nov 9 at the Singapore Exchange (SGX) Auditorium and moderated by The Business Times senior correspondent Ben Paul.
The other panellists were Jermyn Wong, head of intermediary for South-east Asia at State Street Global Advisors, and Geoff Howie, a market strategist at SGX.
Wong was of the view that US equities have to remain “a very important and core part” of any investor’s asset allocation despite concerns of a looming stock market bubble.
“One of the reasons I think the US market continues to be strong, especially relative to a lot of other developed markets, is that it’s now in a space where household as well as corporate balance sheets are just extremely strong,” he said. The US also has cash-rich and consistently profitable companies, he added.
Accessing US stocks through the Dow
While the capitalisation-weighted S&P 500 has been “extremely popular” among investors, the Magnificent Seven technology stocks are heavily represented in the index, noted Wong.
“And that’s where I think the Dow can come in, especially in an environment like today’s where you’re not quite sure whether or not the tech companies will continue to perform,” he said, responding to a question on how investors can gain access to US stocks.
Apart from tech, the financial, healthcare and consumer discretionary sectors have significant representation on the Dow Jones Industrial Average index, also known as the Dow.
The 30 constituent companies on the Dow are subject to a higher standard of qualitative measures than the S&P 500, said Lee.
Companies on the S&P 500 are determined mostly through quantitative measures such as their market capitalisation, liquidity and earning performance.
The Dow’s constituents are chosen from among these S&P 500 companies. They are selected based on their reputation, sustained growth, and significance to a large number of investors, Lee explained.
“You can think of it as a selected blue-chip stock index,” she added.
Upsides for Singapore investors
Howie added that the index methodology for the Dow is more active than that of the S&P 500, in line with demand for actively managed exchange-traded funds (ETFs).
“And that plays to a strength with Singapore investors, because they have a propensity to be value traders,” he said.
Lee acknowledged that the US equity market does not have as high a dividend yield as the Singapore market. Compared to the Straits Times Index, which has a dividend yield of around 4.5 per cent, the S&P 500 has a yield of about 1.4 per cent while the Dow’s is around 1.7 per cent.
However, she noted that the proportion of dividend yield of US ETFs such as the Dow will increase over time due to their capital growth.
“Dividend income you will get today, but capital growth will give you more potential for future dividends,” she said.
Wong said that while Singapore investors are subject to a 30 per cent withholding tax on all dividends received from US-listed equities, the SPDR Dow Jones ETF is cross-listed on the SGX, giving them local access to the same US-listed fund.
For Singapore investors, the biggest benefit of investing in a local listing is that they may use non-cash avenues such as the Supplementary Retirement Scheme (SRS).
“The Dow Jones listed in Singapore is one avenue for you to be able to deploy your SRS money, as compared to the US listing, because if you buy anything in the US, you cannot use SRS money,” said Wong.
This will also grant investors savings on their tax returns for the following year, he added.
The SRS allows Singapore investors to purchase investment instruments with their fund contributions to the scheme. Contributions are eligible for tax relief and investment returns are tax-free.
“Seismic” changes ahead
In light of potential trade tensions between the US and China under a Trump administration, Howie said that investors would have to take a wait-and-see approach. He was responding to a question from moderator Paul on his view of US and Asian stocks.
Apart from China, other Asian countries such as Vietnam, India and South Korea have seen their trade surpluses grow against the US, putting them at risk of tariffs too. The incoming US administration is also likely to pursue strategic industrial policies to secure its economic supply chains, said Howie.
If interest rates remain higher than expected next year, the US dollar will also strengthen against other currencies.
Against this backdrop, the marketplace for international capital – be it portfolio inflows or foreign direct investment – is going to become a lot more competitive, Howie added.
“So like I said, (there will be) big, seismic changes. We have to wait and see week by week how these things (play) out.”
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