Asset Allocation | 2Q19 Cautious optimism · 1) and this augurs well for a cautiously optimistic view of risk assets in the later part of the year.-2 0 2 4 6 8 10-60-40-20 0 20 40

Asset Allocation | 2Q19

Cautious optimism

Source: AFP Photo

MacroOutlook

Monetary PolicyBoth Fed and ECB will put monetary normalisation on hold amid weaker growth and subdued inflation. Global rates will stay low for longer.

EquitiesStay positive on China given attractive valuations and policy stimulus. Outperformance of US over Europe and Japan is set to persist.

InflationDespite energy prices trending north, overall US inflation to stay subdued at 1.5% given lacklustre wage growth.

CreditTotal return is unattractive for DM corporate credits given yield-spread compression and weaker bond yields. EM bonds set to be a good carry play.

GeopoliticsBrexit and political instability in Italy and Spain remain ongoing concerns. A change in ECB leadership this year will be another thing to look out for.

RatesGrowth concerns and dovish central banks are set to weigh on G-3 bond yields. UST and JGB 10-year yields to be capped at current levels.

Economic GrowthG-3 growth divergence remains, with the US economy staying on firmer footing while momentum in Europe falters. Expect greater policy stimulus in China.

CurrenciesDespite a dovish Fed, US dollar strength stays in play as the US economy is more robust than G-3 peers. EUR will be plagued by weak growth and hard politics.

Fiscal PolicyWhile US tax cuts continue to underpin the economy, room for further stimulus is limited. Tax relief is on the cards for China.

ThematicsPositive tailwinds in China A-shares. Ride the Millennial gastronomy wave. A dovish Fed is positive for income-generating assets such as Singapore REITs.

MarketOutlook

CIO Thematic Research

New Theme | CIO Insights 2Q19



Ongoing Theme | CIO Insights 1Q19

Source: AFP Photo

Millennial Wave – Gastronomy

Millennials are increasingly dining out as they value convenience and new experiences. Their dining habits will be a major driving force in global discretionary spending in the years ahead.

Singapore REITs

A dovish Fed and a flat yield curve have historically been positive for dividend generating assets like Singapore REITs (SREITs). SREITs add resilience to one’s portfolio through income generation.

Global Health Care

Health Care is a defensive play in an environment with rising volatility. Earnings have been stable through the cycles. Tailwinds include an ageing population and a strong pipeline of new prescription drugs.

China A-shares

Internationalisation of A-shares is an irreversible trend as index providers expand its inclusion. This enhances the importance of China equities as a core asset class among global investors.

CIO INSIGHTS 2Q19 | 8

Asset Allocation

“Tug of War” market to continue

At the start of 2019, we argued that despite the 20% fall in the S&P 500 Index during 4Q18, this would neither be a deep nor prolonged bear market. Instead, it was going to be a “Tug of War” between the bulls and the bears, characterised by elevated volatility, and non-trending and broad-ranging markets.

The acute rally in January attested to this view as global equities surged and reversed most of December 2018’s losses.

Heading into the US’s first quarter reporting season, expectations were extremely low as investors were pricing in weak earnings momentum and bearish forward guidance. However, that did not transpire. Earnings surprises for the S&P 500 remained healthy at 72%, with cyclical sectors like Industrials and Technology reporting upbeat numbers. So, despite concerns over the detrimental impact of the US-China trade war, corporate earnings have proved to be more resilient than expected.

Hou Wey Fook, CFAChief Investment Officer

Dylan CheangStrategist

Source: Bloomberg, DBS

Figure 1: Risk-on – Markets rallied on expectations of Fed patience and China’s policy easing

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Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19

Global equities (LHS) US corporate spreads (%pts, inversed, RHS)


The US Federal Reserve has turned “dovish” amid muted inflation

As we head into the second quarter, we continue to hold the view of a “Tug of War” market. Investors should not be too pessimistic as corporate fundamentals remain sound, nor too optimistic given the outstanding risks related to the trade war. There are constructive developments to believe we will not likely revisit the index’s lows of 4Q18. These are:

1) The Fed’s dovish pivot; and2) China’s resolve to counter hard-landing fears

Fed’s dovish pivot: Monetary tightening concerns on the mend and its impact on equities. It was not so long ago when the key concern dominating market sentiment was aggressive monetary tightening by the US Federal Reserve. And indeed, a hawkish tilt in the Fed’s comments, coupled with upbeat US wage data, drove the US Treasury 10-year yield beyond 3.2%. But this fear proved temporary.

In the FOMC’s December meeting, the Fed did a volte-face and turned dovish, removing the phrase “further gradual rises” (on rates) in its statement. Furthermore, it also emphasised the need to be “patient” given “muted” inflation – the latter has averaged only at 1.6% in the past decade, as compared to pre-GFC crisis levels of 2.8% (Figure 2). This, coupled with a subsequent downward revision for longer-run interest rate projections in the Fed’s “Dot Plot”, drove bond yields lower (Figure 3).

And again in the March FOMC meeting this year, the Fed reiterated its dovish stance by highlighting that economic activity has “slowed from its solid rate” while household spending is also seeing “slower growth”. Taken together, the Fed has gone decisively cautious on the outlook of the economy and this is reflected in the latest “Dot Plot”, which is showing only one rate hike by end-2020 (vs December’s forecast of two hikes in 2019 and one in 2020).

With the Fed reverting to a more dovish stance, the pertinent questions are: • Is the rate-hiking cycle coming to an end?• What happens to equities when the Fed stops hiking?

Source: Bloomberg, DBS Source: Bloomberg, DBS

Figure 2: Fed’s emphasis on “patience” came on the back of subdued inflation in the US

Figure 3: Downward revision for longer-run interest-rate projections weighed on bond yields

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US inflation (%)Average monthlyinflation during1999-2008: 2.8% Average monthly

inflation during2009-2018: 1.6%

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The S&P 500 has gained 7.6% on average during the final stages of a Fed-hiking cycle

These are still early days and we shall not dwell on the plausibility of rate cuts going forward. What is clear, though, is that the Fed is putting policy normalisation on hold, and supporting the economy is now its top priority. From a historical standpoint, the tail end of the Fed’s hiking cycle has usually been positive for risk assets (Figure 4).

Table 1: The S&P 500 has historically performed well during the tail end of a Fed-hiking cycle

Periods Duration (months) Performance of S&P 500

Feb-89 to May-89 4 7.7%

Feb-95 to Jun-95 5 15.8%

May-00 to Dec-00 8 -9.1%

Jun-06 to Aug-07 15 16.1%

Average 8 7.6%

Source: DBS

Figure 4: The tail end of the Fed rate-hiking cycle has historically been associated with positive performance for equity markets


The tail end of the Fed’s hiking cycle has usually been positive for risk assets

To substantiate our point, we have gone back to track the S&P 500’s performance when the Fed paused policy tightening. Back in the 1989 cycle, the S&P 500 gained 7.7% over four months. Meanwhile, in 1995, it rose 15.8% over five months. During 2006-07, the index gained 16.1% over fifteen months. The only time it registered losses was in 2000 (Table 1).

On average, the S&P 500 gained 7.6% during the final stages of a Fed-hiking cycle (Table 1) and this augurs well for a cautiously optimistic view of risk assets in the later part ofthe year.

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S&P 500 (y/y change, %, LHS) Fed Funds Rate (%, RHS)


China policy stimulus to counter hard-landing fears. China’s growth momentum has undergone sharp deceleration since the first half of 2018, and the slowdown is evident from the slew of economic data released in the final month of the year:

• Manufacturing PMI fell from 51.9 in May to 49.4 in December, a level which suggests that manufacturing activities have entered contraction mode. The weakness is broad-based, with production and new orders declining across the board.

• Exports fell 4.4% y/y in December amid weakness in G-3 demand, particularly in the US.

• On domestic consumption, the downtrend in retail sales growth continued as it moderated to 8.2% y/y (vs a 10-year average of 14% y/y).


Figure 5: Manufacturing activities in China entered contraction mode as PMI dipped below 50

Figure 6: China’s export growth headed south


Figure 7: Weakness in external demand comes amid rising trade uncertainties

Figure 8: That sinking feeling – Retail sales in China are languishing on the back of weak auto sales

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54

Jan-14 May-15 Sep-16 Jan-18

China Manufacturing PMIChina New Export Orders PMIChina New Orders PMI

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-10

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Mar-05 Mar-08 Mar-11 Mar-14 Mar-17

China exports (y/y change, 3mma, %, LHS)China exports to US (y/y change, 3mma, %, RHS)

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US economic policy uncertainty - trade policy (LHS)China-HK economic policy uncertainty (RHS)

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Jun-06 Aug-09 Oct-12 Dec-15

China retail sales (y/y change, %, LHS)China passenger car sales (y/y change, %, RHS)


Targeted easing on the cards; RRR cuts to buoy domestic economy. Given the broad-based economic deceleration in China, we expect policymakers to embark on policy accommodation as announced in the recent NPC. But make no mistake. The magnitude of policy easing this time round will be unlike that seen post-GFC, as the government is cognisant of the detrimental effects of easing policies indiscriminately. Instead, it will be more selective and the primary tools of choice will be both fiscal and monetary policies.

In fact, the PBOC has already fired the first salvo this year by announcing 100 bps in total cuts to banks’ RRR to 13.5%, a move which will boost lending activities as well as release CNY800b worth of liquidity into the system. Historical evidence shows that domestic economic activity tend to pick up after the PBOC is done with their RRR cuts (Figure 9).

We tracked the level of domestic economic activity in China using the “Li Keqiang Index” – an index which aggregates the growth of bank lending, rail freight, and electricity production in the country. The impact of RRR cuts on the domestic economy was as follows:

• Oct-08 to Dec-08: RRR cut from 17.5% to 15.5% in three months. At the end of the rates-cutting cycle, the average pace of domestic economic growth in China (as proxied by the Li Keqiang Index) accelerated from 2.6% in December 2008 and peaked at 26.8% in November 2009.

• Dec-11 to May-12: RRR cut from 21.5% to 20% in six months. The average pace of economic growth subsequently accelerated from 7.8% in May 2012 and peaked at 11.9% in August 2013.

• Feb-15 to Mar-16: RRR cut from 20.0% to 17.0% in fourteen months. At the end of the cycle, average pace of domestic economic growth accelerated from 6.6% in March 2016 and peaked at 12.9% in February 2017.


Figure 9: Economic activities in China tend to rebound after the government reduces the RRR for banks

The Chinese government is expected to embark on selective fiscal and monetary easing

Domestic economic activities in China tend to pick up after the PBOC are done with their RRR cuts

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China Li Keqiang Index (LHS) China RRR for major banks (%, RHS)


Maintain a barbell strategy

In 1Q19’s CIO Insights “Tug of War”, we advised investors to adopt a barbell strategy in the way a portfolio should be constructed. We reaffirm this approach.

To recollect, a barbell strategy refers to being heavily-weighted at both ends of the risk spectrum. This means overweighting high-growth stocks on one end of the portfolio, while loading the other end with stable and income-generating ones.

Our research shows that this strategy has historically resulted in substantial outperformance during periods of elevated volatility. We applied and tracked the performance of this strategy in the US equity market. For this analysis, our “US Equity Barbell Portfolio” comprised (Figure 10):

• S&P 500 Technology: 30% weight • S&P 500 Consumer Discretionary: 30% weight• S&P 500 Dividend Aristocrats (an index consisting of companies that followed a policy

of increasing dividends every year for at least 25 consecutive years): 40% weight

We tracked the performance of this barbell portfolio during two periods of elevated volatility over the past 28 years (Figure 11):

• Jun-97 to Jun-03 (a period where the CBOE SPX Volatility Index (VIX) Index averaged 25.2, vs the long-term average of 19.3)

• Jun-08 to Dec-11 (a period where the VIX Index averaged 28.2, vs the long-term average of 19.3)


Figure 10: The equity barbell strategy encapsulates both cyclical and non-cyclical exposures

Figure 11: Barbell strategy has outperformed during periods of elevated volatility

For the Jun-97 to Jun-03 period, average monthly returns for the S&P 500 was 0.3% while average returns for the “barbell portfolio” was 0.7%. On a cumulative basis, the S&P 500 gained 14.9% during the period while the “barbell portfolio” surged 41.1%, constituting an outperformance of 26.2 percentage points (Figure 12).

Similarly, for the Jun-08 to Dec-11 period, the S&P 500 registered monthly losses of 0.1% while the “barbell portfolio” saw monthly gains of 0.5% on average. On a cumulative

A barbell strategy has historically resulted in outperformance during periods of elevated volatility

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S&P 500 Technology

S&P 500 Consumer Discretionary

S&P 500 Dividend Aristocrats5

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VIX Index


basis, this translated to a 10.2% loss for the S&P 500 and a 14.3% gain for the “barbell portfolio”, constituting an outperformance of 24.5 percentage points (Figure 13).


Figure 12: The equity barbell strategy outperformed during the 1997-2003 period of high volatility

Figure 13: Similarly, the strategy managed to outperform during the 2008-11 period of high volatility

2Q19 Asset Allocation: Take selective risks; Upgrading EM bonds to Overweight

Source: DBS

Categories IndicatorsScore Range

Equities Bonds

US Europe Japan AxJ DM Govt DM Corp EM Bonds

Fundamentals

PMI -1 to +1 0 -1 0 1 0 0 1

Economic surprise -1 to +1 0 -1 0 0 0 0 0

Inflation -1 to +1 1 0 0 0 0 0 0

Monetary policies -1 to +1 1 1 1 1 0 0 0

Forecasted EPS growth -2 to +2 1 0 0 1 - 1 1

Earnings surprise -2 to +2 1 -1 0 1 - 0 1

Valuation

Forward P/E -2 to +2 0 0 0 1 - - -

P/B vs ROE -2 to +2 0 0 0 1 - - -

Earnings yield - 10-yr yield

-2 to +2 1 1 1 1 -1 - -

Credit spread -2 to +2 - - - - - -1 0

Fund flows -2 to +2 -1 -1 0 1 0 1 1

Momentum Volatility -1 to +1 1 1 1 1 1 - -

Catalysts -2 to +2 0 -1 0 0 0 0 0

Raw Score 5 -2 3 9 0 1 4

Adjusted Score* 0.26 -0.11 0.16 0.47 0.00 0.07 0.29*Note: The “Adjusted Score” is calculated using the “Raw Score” divided by the maximum attainable score for each category.

Table 2: 2Q19 CIO Asset Allocation (CAA) framework

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S&P 500 US “Barbell Portfolio”(Indexed)

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S&P 500 US "Barbell Portfolio"


Cross assets: Equities remain more attractive than bonds. From a cross-asset perspective, we have maintained a preference for equities over bonds since 2018, and our strategy remains unchanged. In our CAA framework (Table 2), the adjusted score for equities stands at 0.79 and this remains higher than bonds (at 0.36).

On a segment basis, the sub-asset classes that garnered the highest adjusted scores for 2Q19 are: Asia ex-Japan equities (0.47), Emerging Markets (EM) bonds (0.29), and US equities (0.26). At the other end of the spectrum, the sub-asset class with the lowest adjusted score is Europe equities, which stands at -0.11 (see Figure 14).


Figure 14: Sub-asset classes with the highest adjusted scores in our 2Q19 CAA framework are Asia ex-Japan equities, EM bonds, and US equities

Fundamentals: Global economic momentum is expected to moderate in 2019 amid lingering uncertainties from US-China trade tensions, which weigh on capital expenditure and domestic consumption. That said, a recession this year remains a low-probability event and hence, corporate earnings are expected maintain stable growth.

Valuations: Since the high-octane rebound in 1Q19, global equities are trading at c.14.8x forward P/E and this is largely in line with their long-term average (Figure 15). The global corporate bond spread of 1.3 percentage points, however, remains tighter than its long-term average of 1.5 percentage points (Figure 16). On a cross-asset basis, the gap between earnings yields and Treasury yields has markedly widened since 1Q18, and the prevailing level of 3.5% shows that equities continue to remain more attractive than bonds as an asset (Figure 17).

Momentum: On cross-asset flows, investors are seemingly rotating from equities to bonds this year. In 2018, global equities registered total net inflows of USD56.8b. However, these flows have partially reversed since the start of 2019 as global equities saw net outflows totalling USD46.2b. In contrast, USD28.7b exited from global bonds in 2018. But these outflows have largely reversed as net inflows in 2019 totalled USD65.8b for the asset class (Figure 18).

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US Equities EuropeEquities

JapanEquities

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EM Bonds



Figure 15: Fair value – Global equities are currently trading in line with the long-term average

Figure 16: Global corporate bond spreads are slightly tighter than the long-term average

Source: Bloomberg, DBS Source: EPFR Global, DBS

Figure 17: On a cross-asset basis, equities remain significantly more attractive than bonds

Figure 18: Rotation in motion – Bond funds seeing substantial inflows this year

Equities: Maintain preference for US over Europe; Add positions in Asia ex-Japan and China. In the DM, we continue to favour US over Europe for 2Q19 and this strategy is based on a combination of both “pull” and “push” factors. For “pull” factors, our preference for US stems from its earnings superiority over Europe. And Europe has a low representation of technology/e-Commerce stocks, a sector that is clearly on a secular uptrend.

In terms of “push” factors, we believe that the medium-term outlook for Europe will be impeded by: (1) Geopolitical uncertainties; and (2) Lacklustre economic momentum. Indeed, based on the Economic Policy Uncertainty Index by Baker, Bloom, and Davis, Europe has been experiencing higher policy headwinds than the US in the past few years (Figure 19). Given the dire state of affairs in Italy and Britain currently, this situation is not going to improve anytime soon.

Continue to favour US over Europe given its earnings superiority

Europe is saddled with geopolitical uncertainties and lacklustre economic momentum

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Global Equities - Forward P/E(x)

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Global equities fund flows (3mma, USDb)Global bond fund flows (3mma, USDb)


On the economic front, unlike the US, the recent slew of macro data coming out from the Eurozone largely remains below consensus forecast (Figure 20). The underperformance of Europe cyclicals to non-cyclicals points to further weakness for the economy ahead (Figure 21).


Figure 19: Europe has been experiencing higher economic policy uncertainties as compared to the US in the past few years


Figure 20: Unlike US, Europe’s economic momentum continues to trend south

Figure 21: The underperformance of Europe cyclicals relative to non-cyclicals point to further weakness in the economy

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European Economic Policy Uncertainty Composite IndexUS Economic Policy Uncertainty Composite Index

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Citi Economic Surprise Index - USCiti Economic Surprise Index - Eurozone

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Europe global cyclicals vs non-cyclicals


Meanwhile, we recommend investors to increase their exposure to Asia ex-Japan, given our positive view on China. As Figure 22 shows, China equities have been trending in tandem with forward earnings, which have undergone a marked decline with trade war concerns and domestic economy moderation. But at c.8x forward P/E, we believe that substantial negative news flow has already been priced in for China equities. Policy stimulus by the Chinese government, via cuts to household tax rates as well as banks’ RRR, will be a net positive for the economy and by extension, domestic corporate earnings.


Figure 22: China equities have undergone substantial pullback on the back of earnings concerns

Figure 23: China fund flows saw sharp reversal in 2018 as the market registered substantial net inflows


Figure 24: The dovish shift in recent Fedspeak has buoyed the outlook of EM equities

Figure 25: EM flows have been robust since 2018

Increase exposure to China on expectations of policy stimulus by the Chinese government

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China fund flows - cumulative (USDb)

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EM equities (LHS)UST 10-yr yield (%, inversed, RHS)

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DM equity - fund flows (3mma, USDb)EM equity - fund flows (3mma, USDb)

Source: EPFR Global, DBS


Bonds: Upgrade EM to Overweight. 2018 has been a challenging year for EM bonds as the region grappled with rising bond yields, a challenging growth outlook, and rising geopolitical uncertainties. Apart from the US-China trade tension, elections in countries such as Russia, Brazil, and Mexico also added on to the proverbial wall of worries.

But after the sharp selldown in 2018, we are upgrading EM to an Overweight. The dovish shift to a more “data-dependency” mode in recent Fed comments will dampen policy tightening expectations in coming quarters. This provides medium-term tailwinds for the asset class. And besides, on the back of acutely widening spreads in 4Q18, EM bonds are no longer overvalued (Figure 26).

Fund flow data, meanwhile, is similarly supportive of the asset class. In 2018, a total of USD12.3b exited from EM bonds. But we are seeing a complete reversal as USD18.0b has already flowed into this space YTD (Figure 28). On a geographical basis, we prefer EM Asia over EM EMEA and EM LatAm. The fundamentals and valuations for EM Asia bonds look attractive in our view.


Figure 26: EM bonds are more fairly valued after the recent correction

Figure 27: Reversal of fortunes – fund flows are returning to the EM space again after the outflows in 2018

Upgrading EM bonds to Overweight as dovish shift in Fed policy will be a medium-term tailwind

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Emerging Markets spread (% pts)

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EM bonds fund flows (3mma, USDb)

Our positive view on China is reinforced by fund flow data from EPFR Global. Between 2014 and 2017, China saw net outflows of USD39.5b. But in 2018, China registered net inflows of USD34.8b, reversing the bulk of prior years’ outflows (Figure 23). The robust flows into China is a function of rising optimism in the broader EM space. Between 2014-17, EM equities registered net outflows totalling USD34.1b amid concerns on policy normalisation by the US Federal Reserve. But in 2018, the flows reversed as EM saw significant net inflows of USD55.0b (Figure 25).


Gold: An important portfolio hedge in times of volatility; Upgrade to Overweight. Gold has historically been a good portfolio hedge against extreme market volatility. This defensive quality has been clearly evident during recent past crises like the Technology Bubble of 2001, the Subprime Crisis of 2008, and the European Debt Crisis of 2011.

On average, the VIX Index surged 229% during the crisis while global equities corrected by 36%. Gold, on the other hand, gained 10% and this translates to an outperformance of 46 percentage points on average for the precious metal.

Given prevailing geopolitical uncertainties and the advanced stage of the current market cycle, we advise investors to maintain an Overweight exposure to gold in their portfolio as a form of insurance against acute market drawdowns.


Figure 28: EM spreads by region

On average, gold has rallied 10% when volatility spiked during past crises

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Emerging Markets EMEA spread (%) Emerging Markets Asia spread (%)Emerging Markets LatAm spread (%)

Table 3: Gold has historically outperformed during extreme market volatility

Change in VIX Index

Change in Global Equities

Change in Gold Price

Outperformance of Gold over

Global Equities

Technology Bubble(Sep-00 to Sep-02) 136% -46% 16% 63%pts

Subprime Crisis (Jun-07 to Oct-08) 359% -41% 10% 51%pts

European Debt Crisis(May-11 to Sep-11) 191% -21% 4% 25%pts

Average 229% -36% 10% 46%pts

Source: DBS


Table 4: 2Q19 global tactical asset allocation (TAA)

Source: DBS

Asset Class

Three-Month Basis 12-Month Basis

Equities Neutral Neutral

US Equities Overweight Underweight

Europe Equities Underweight Neutral

Japan Equities Neutral Neutral

Asia ex-Japan Equities Overweight Overweight

Bonds Underweight Underweight

Developed Markets (DM) Government Bonds Underweight Underweight

Developed Markets (DM) Corporate Bonds Underweight Neutral

Emerging Markets (EM) Bonds Overweight Neutral

Alternatives Overweight Overweight

Gold Overweight Neutral

Hedge Funds Overweight Overweight

Cash Overweight Neutral


Figure 29: Gold has historically rallied when volatility spiked

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CBOE SPX Volatility Index (LHS) Gold price (USD per troy ounce, RHS)


Figure 30: TAA breakdown by asset class (Balanced Profile – three-month view)

Figure 31: TAA breakdown by geography (Balanced Profile – three-month view)

Source: DBSSource: DBS

Equities 50%

Fixed Income

32%

Alternatives 11%

Cash 7%

US46%

Europe12%

Japan14%

Asia ex-Japan28%

ConservativeTAA SAA Active

Equities 0.0% 0.0%

US 0.0% 0.0%

Europe 0.0% 0.0%

Japan 0.0% 0.0%

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%

Emerging Markets (EM) 0.0% 0.0%

Alternatives 0.0% 0.0%

Gold 0.0% 0.0%

Hedge Funds* 0.0% 0.0%

Cash 20.0% 20.0%

*Only P4 risk rated UCITs Alternatives Source: DBS, Morningstar Investment Management Asia Limited

DM Govt Bonds44.0%

DM Corp Bonds36.0%

Cash20.0%


Moderate TAA SAA Active

Equities 15.0% 15.0%

US 7.0% 6.0% 1.0%

Europe 1.0% 4.0% -3.0%

Japan 2.0% 2.0%

Asia ex-Japan 5.0% 3.0% 2.0%

Fixed Income 71.0% 75.0% -4.0%

Developed Markets (DM) 42.0% 53.0% -11.0%

DM Government Bonds 25.0% 30.0% -5.0%

DM Corporate Bonds 17.0% 23.0% -6.0%

Emerging Markets (EM) 29.0% 22.0% 7.0%

Alternatives 0.0% 0.0%

Gold 0.0% 0.0%

Hedge Funds* 0.0% 0.0%

Cash 14.0% 10.0% 4.0%

Source: DBS, Morningstar Investment Management Asia Limited *Only P4 risk rated UCITs Alternatives

US Equities7.0%

Europe Equities1.0% Japan

Equities 2.0%

AxJ Equities5.0%

DM Govt Bonds25.0%

DM Corp Bonds17.0%

EM Bonds29.0%

Cash14.0%

Balanced TAA SAA Active


US 23.0% 21.0% 2.0%

Europe 6.0% 12.0% -6.0%

Japan 7.0% 7.0%

Asia ex-Japan 14.0% 10.0% 4.0%

Fixed Income 32.0% 40.0% -8.0%





Alternatives 11.0% 5.0% 6.0%

Gold 5.0% 2.0% 3.0%

Hedge Funds* 6.0% 3.0% 3.0%

Cash 7.0% 5.0% 2.0%


US Equities23.0%

Europe Equities6.0%

Japan Equities 7.0%

AxJ Equities14.0%DM Govt

Bonds10.0%

DM Corp Bonds8.0%

EM Bonds14.0%

Alternatives11.0%

Cash7.0%


Aggressive TAA SAA Active


US 32.0% 29.0% 3.0%

Europe 7.0% 15.0% -8.0%

Japan 8.0% 8.0%

Asia ex-Japan 18.0% 13.0% 5.0%

Fixed Income 16.0% 20.0% -4.0%





Alternatives 13.0% 10.0% 3.0%

Gold 5.0% 4.0% 1.0%

Hedge Funds* 8.0% 6.0% 2.0%

Cash 6.0% 5.0% 1.0%


US Equities32.0%

Europe Equities7.0%

Japan Equities 8.0%

AxJ Equities18.0%

DM Govt Bonds3.0%

DM Corp Bonds2.0%

EM Bonds11.0%

Alternatives13.0%

Cash 6.0%


Notes: 1. The above are based on three-month views. 2. Asset allocation does not ensure a profit or protect against market loss. 3. “TAA’ refers to “Tactical Asset Allocation”. “SAA” refers to “Strategic Asset Allocation”.4. The expected return of the SAA is based on capital market assumptions derived from Morningstar’s econometric model that relies on historic, current

and forecasted data on the indices highlighted below. The information is for reference only.5. The expected risk (or expected standard deviation) of the SAA model represents the expected risk level of the portfolio based on asset class relationships

(correlations) and expected volatility, based on the indices highlighted below. The information is for reference only.6. Morningstar‘s SAA models started on 1 October 2010. Morningstar reviews the strategic asset allocation on an annual basis. The current Strategic

Asset Allocation (SAA) is as of 1 December 2018.7. Based on the SAA model, the Aggressive model has the highest risk, followed by Balanced, Moderate, and Conservative, with Conservative being

the least risky. The risk consideration that was used in formulating the Strategic Asset Allocation was the expected volatility as measured by expected standard deviation.

8. The investor type classification for the portfolio has no direct relationship with the Financial Needs Analysis customer risk profile types and the portfolios are not assigned any product risk rating based on the bank’s proprietary risk rating methodology.

9. The above SAA models are effective from December 2018 to November 2019 and are subject to change.10. The expected return and expected risk are based on the following indices for calculation:

• Equity: US – MSCI USA GR USD; Europe – MSCI Europe GR USD; Japan – MSCI Japan GR USD; Asia ex Japan – MSCI AC Asia Ex Japan GR USD• Bond: Developed Market Bonds – Citi WGBI USD; Developed Market Corporate Bond – Citi WBIG USD; Emerging Market Bonds – JPM EMBI

Global Diversified TR USD • Alternatives: Gold – S&P GSCI Gold Spot; Hedge Fund – Credit Suisse Hedge Fund USD• Cash: BofAML US Treasury Bill 3 Mon TR USD

Disclaimer by Morningstar:For Professional Investors Only. Morningstar Investment Management Asia Limited (“Morningstar”) is licensed and regulated by the Hong Kong Securities and Futures Commission to provide investment research and investment advisory services to professional investors only. Morningstar relies on certain exemptions (Singapore Financial Advisers Regulations, Section 27(1)(e)) to provide its financial advisory services to institutional investor recipients in Singapore.

Morningstar provides strategic asset allocation to DBS Bank Limited (“DBS”) based on certain criteria set by DBS. DBS has the authority to accept, reject or modify Morningstar’s strategic asset allocation. Morningstar takes no responsibility for advice provided by DBS to its clients. Morningstar is licensed with the Hong Kong Securities and Futures Commission to provide investment research and investment advisory services to professional investors (which include DBS) only. Morningstar is not acting in the capacity of adviser to individual investors. Morningstar is not affiliated with DBS. The Morningstar name and logo are registered trademarks of Morningstar, Inc. All investments involve risks. The information is for your reference only and does not constitute any offer or solicitation to enter into any investment arrangement. Past performance is not indicative of future performance. You should refer to relevant investment offering documents for detailed information prior to investing in any investment option.


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GLOSSARY 2Q19 | 93

Glossary of Terms: Acronym Definition Acronym DefinitionADAS advance driver assistance system DXY US Dollar Index

AEI asset enhancement initiative EBITDA earnings before interest, tax, depreciation, and amortisation

AGM annual general meeting EC European Commission

AI artificial intelligence ECB European Central Bank

ARPU average revenue per user EM Emerging Markets

ASEAN Association of Southeast Asian Nations EMD Emerging Market debt

ASP average selling price EMEA Europe, the Middle East, and Africa

AV autonomous vehicles EPA Economic Partnership Agreement

AxJ Asia ex-Japan EPFR Emerging Portfolio Fund Research

bbl barrel EPS earnings per share

BI Bank Indonesia ETF exchange-traded fund

boepd barrels of oil equivalent per day EU European Union

BOJ Bank of Japan EV electric vehicles

bpd barrels per day FCF free cash flow

BV book value FDI foreign direct investment

CAA CIO Asset Allocation FOMC Federal Open Market Committee

CAGR compound annual growth rate FFO funds from operations

capex capital expenditure FX foreign exchange

CAR capital adequacy ratio FYP first-year premium

CASA current account saving account GCC Gulf Cooperation Council

CBIRC China Banking and Insurance Regulatory Commission GDP gross domestic product

CDS credit default swap GFC Global Financial Crisis

CEO chief executive officer GGM Gordon Growth Model

CET1 common equity tier 1 GMV gross merchandise volume

CFO chief financial officer GRE government-related entity

CFTC Commodity Futures Trading Commission GSIB Globally Systemically Important Bank

CIS Commonwealth of Independent States HNW high net worth

CNNIC China Internet Network Information Center HY high yield

COC change of control IEA International Energy Agency

CPI conusmer price index IG investment-grade

CPTPP Comprehensive and Progressive Agreement for Trans-Pacific Partnership

IMF International Monetary Fund

CRM customer relationship management IPO initial public offering

CSRC China Securities Regulatory Commission ISM Institute for Supply Management

DCF discounted cash flow IT information technology

DDM dividend discount model JGB Japanese Government Bond

DM Developed Markets JV joint venture

DPS dividend per share KPI key performance indicator

DPU distribution per unit LatAm Latin America

GLOSSARY 2Q19 | 94

Acronym Definition Acronym Definition

LNG liquefied natural gas QFII Qualified Foreign Institutional Investor

LTV loan-to-value QSR quick-service restaurants

M&A merger & acquisition R&D reseach & development

MAS Monetary Authority of Singapore REIT real estate investment trust

mmbbl million barrels RM relationship manager

mmbpd million barrels per day RMB renminbi

MREL minimum requirement for own funds and eligible liabilities

ROA return on asset

MRO maintenance, repair, and operations ROCE return on capital employed

NAV net asset value ROE return on equity

NII net interest income ROI return on investment

NIM net interest margin ROTE return on tangible equity

NPC National People's Congress RQFII Renminbi Qualified Foreign Institutional Investor

NPL non-performing loan RRR reserve requirement ratio

O&M offshore and marine SAA Strategic Asset Allocation

O2O online to offline saar seasonally adjusted annual rate

OECD Organisation for Economic Co-oporation and Development

SASAC State-owned Assets Supervision and Administration Commission of the State Council

OEM original equipment manufacturer SD standard deviation

OPEC Organization of the Petroleum Exporting Countries SOE State-owned enterprise

OPM operating profit margin SST Swiss Solvency Test

P&C Property & Casualty TAA Tactical Asset Allocation

P/B price-to-book TEU twenty-foot equivalent unit

P/E price-to-earnings TLAC total loss-absorbing capacity

P/EV price-to-enterprise value TLTRO targeted longer-term refinancing operations

P/NAV price-to-net asset value TP target price

P/TBV price-to-tangible book value TSR total shareholder return

P2F passenger-to-freighter UCITS Undertakings for Collective Investment in Transferable Securities

PBOC People's Bank of China UST US Treasury

PCE personal consumption expenditure VNB value of new business

PLM product lifecycle management WTI West Texas Intermediate

PM portfolio manager WTO World Trade Organization

PMI purchasing managers' index YTD year-to-date

POE privately-owned enterprise YTW yield to worst

QE quantitative easing

Documents

Asset Allocation | 2Q19 Cautious optimism · 1) and this augurs well for a cautiously optimistic view of risk assets in the later part of the year.-2 0 2 4 6 8 10-60-40-20 0 20 40