The Federal Reserve is expected to cut rates twice this year, in September and December, by 25 basis points each time, according to Bank of Singapore. These rate cuts are likely to create positive macroeconomic conditions for long-term investments. However, the market is also facing short-term risks amid escalating geopolitical issues and the upcoming US elections. Diversifying the investment portfolio is key to buffering these risks and seeking higher returns.
“In the second half of 2024, we still maintain a moderately risk-on stance. The market has performed very well. We will not rule out short-term corrections, but these present an opportunity for investors to stay engaged in the markets and increase exposure in countries and sectors where they are under-allocated. Diversification is the key,” says Jean Chia, global chief investment officer at Bank of Singapore, the private banking arm of Singaporean lender OCBC.
As uncertainties increase, the traditional 60/40 portfolio strategy – allocating 60% to equities and 40% to bonds – can hardly be relied on by those seeking decent or higher returns. Adding alternatives, meanwhile, can diversify the investment portfolio and drive growth.
Capital allocation to private markets and real assets will continue to rise. Infrastructure is increasingly presenting investment opportunities. Significant investment is required to meet global infrastructure demands. The growing popularity of artificial intelligence has increased the demand for data centres, which have presented great investment opportunities in recent years. The Asia-Pacific data centre market is poised for substantial expansion, with a projected compound annual growth rate of 12% from 2023 to 2027, and is expected to reach US$48 billion by 2027, according to consultancy Renub Research.
Data centres consume about 3% of the world’s electricity, and this substantial energy consumption is set to increase in the future as more data is stored and processed in data centres. In this case, the demand for energy, especially clean energy, is also rising. Power requires the most investment globally at around US$20.2 trillion, according to data from Bank of Singapore and McKinsey Global Institute.
In addition, ongoing geopolitical issues, including the protracted Russia-Ukraine war, continue to drive military expenditure for most countries. In this case, technology, energy, and metals present investment opportunities.
Bank of Singapore holds a neutral stance on bond investment durations. The main concern is the fluctuating US treasury yield, which necessitates more secure asset classes like gold to balance the risk profile of the portfolio. Moreover, the US elections in November could also lead to higher inflation. The firm remains neutral on US treasuries but is overweight on emerging markets' high-yield bonds in the second half, given their good performance with around a 6% return last year.
In terms of the equity market, Japanese and US equities have outperformed other global peers in the past 12 months. Markets in Asia, excluding Japan, have also presented opportunities for investors seeking to diversify risks. Bank of Singapore emphasizes investment in key areas such as communication services, information technology, consumer staples, and healthcare.
Regarding Asian market allocations, Bank of Singapore focuses on investments in India, Indonesia, South Korea, and Singapore. India, a hotspot in 2023, continues to attract investors' interest, given its GDP growth of 6-7% in FY2023-24, consistent earnings delivery, and an expected return on equity of 16-17%.
“We are overweighting equities, particularly focusing on the Asian equity market. This is because the valuation of the Asian equity market is still relatively low compared to other markets, while the fundamentals are improving since the potential Fed rate cut and earnings growth will support equity valuations,” says Kelvin Tang, head of the chief investment office at the Hong Kong branch of the Bank of Singapore.
