Why investors should hold more cash in 2017

Investors should hold on to more cash, and add more portfolio diversifiers such as hedge funds and private equity in 2017, in order to be prepared for higher uncertainty and wider range of asset returns that may result from Trumponomics.

“We suggest holding more cash as it can be deployed if there is good opportunity ahead and can mitigate any negative outcome from an unexpected scenario,” says Johan Jooste, chief investment officer of Bank of Singapore.

With US president-elect Donald Trump’s policies tilted to benefit the US, Bank of Singapore expects the US to outperform Europe, Japan, and Asia. It has raised its outlook for US equities to neutral from underweight and has maintained an underweight rating for the other three markets.

Bank of Singapore remains vigilant amid uncertainty as a result of Trump’s policies.

“We can be moderately defensive in our asset allocation and continue to prefer credit over equity. As we do not foresee credit spreads to widen significantly, we are turning less bearish on developed market high yield bonds,” Jooste says.

Driven by a rebound in commodity prices, the outlook for emerging markets has brightened over the past year.

“This trend is likely to persist, but higher US interest rates and tariffs on some exports may threaten to dull the pace of the rebound. With restrictions on US imports from China, Emerging Asia would be affected by the impact on extended supply chains,” says Richard Jerram, chief economist of Bank of Singapore. Bank of Singapore forecasts emerging markets to grow at 4.4% in 2017, up from 4.1% in 2016.

“Looking into China, the credit bubble is expanding rapidly, which makes it vulnerable to the impact of US trade barriers. Rapid lending, high investment rates and slowing economic growth suggest an inefficient allocation of credit and an eventual bad debt crisis,” says Jerram.

Bank of Singapore expects moderate fiscal stimulus to raise US growth in the second half of 2017 and 2018, boosting inflation and leading to faster Fed tightening than previously expected.

“Inflation is now increasingly evident as shown in both consumer prices and wages. Under Trump’s presidency, the planned fiscal stimulus, a more restrictive approach to immigration and the proposed tariffs on imports will heighten inflationary pressures,” says Jerram.

Bank of Singapore expects seven 0.25% rate hikes in the following two years, with three in 2017 and four in 2018. Meanwhile, the market should keep an eye on the policy direction the Trump administration, as this may provide a clearer outlook by the end of first quarter of 2017.