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CIO Insights 4Q24: In a Sweet Spot

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Global Technology: Harnessing the Power of AI

Nothing &lsquo;artificial&rsquo; about AI &ndash; Encouraging earnings outlook driving the future. AI players drew investors&rsquo; attention during the FY23 results season, driven by revenue from high-performance computing, high-bandwidth memory, and advanced nodes/packaging. Within technology, AI-centric sectors are leading the charge, as evidenced by robust performance in data centres and networking.
These segments experienced the most positive revisions in guidance. Capital expenditure (capex) and revenue for the data centre segment are projected to substantially surpass that of other segments over the next three years. The robust growth in data centre revenue is not only evident among direct players, but also in companies with indirect data centre exposure, suggesting the vast potential/opportunity of this segment.
Data centre and memory chips are key beneficiaries of the AI wave. The data centre segment is projected to be the biggest beneficiary of the ongoing AI boom. Demand for cutting-edge, AI-enabling graphics processing unit (GPU) remains robust, supported by strong demand among cloud players and data centre providers.&nbsp;
Memory chips, a key component in data centers for the storing and accessing of data, are also expected to excel as they ride on the AI boom. The technology roadmap among key memory players is also heating up &ndash; with growing need for high-bandwidth memory chips as well as the progressive shift towards memory-intensive, AI-inference work.
AI to spearhead value chain progression; Stronger growth vs broader market expected. Apart from robust growth in the data centre segment, we are also seeing encouraging signs of nascent AI development in other end markets, such as PCs and smartphones.
The total addressable market (TAM) of AI chips is anticipated to register CAGR of 28% during 2023-2027, significantly higher than the semiconductor industry&rsquo;s CAGR of 9.4%. With a much faster growth rate, AI will account for 18% of total semiconductor revenue by 2027, up from 10% in 2023.
Figure 1: AI as % of semiconductor industry revenue
<img src="/iwov-resources/aics/images/AICS/CIOweb/202403/240327CIOPFig1.jpg" alt="" /> Source: Gartner, DBS Download the PDF to read the full report.

Keep abreast of the latest equity research

Equities Weekly: Global Equities - The Everything Rally

Global equities: The everything rally. The recent surge in global equity markets to all-time highs has been nothing short of remarkable, especially since it happened before any rate cuts by central banks. This rally is underpinned by a confluence of factors such as consistently robust economic data, solid consumer spending, a tight labour market, and signs of stabilisation in the manufacturing sector, providing a favourable backdrop for corporate earnings growth. Additionally, the markets are pricing in rate cuts by major central banks across the US and EU as inflation shows signs of moderation. The Fed's dovish comments from last week&rsquo;s Federal Open Market Committee (FOMC) have further enhanced market expectations, as reflected by the CME FedWatch Tool. Markets are now pricing in a 66.7% probability of a cut in June, up from 55.6% before the meeting. Lower interest rates would be supportive of equity valuations and help stimulate economic activity. Furthermore, over USD6tn of liquidity is sitting in money market funds, poised to flow into risk assets once the pivot happens, providing an additional tailwind to the rally. With positive economic data, accommodative monetary policy on the horizon, and the potential for substantial liquidity inflows, the conditions appear conducive for the equity market's upward trajectory. Equity fund flows: The week ended 20 March saw outflows across the board for DM and EM equity funds, marking DM&rsquo;s first outflow in five weeks. US Equity Funds saw outflows of USD22bn, a stark contract from last week&rsquo;s USD56bn inflows. This was mainly due to markets reacting to the uptick in inflation data for the first two months of the year. Within the EM space, China equity funds saw redemptions of USD0.9bn, despite factory output and retail sales beating expectations.
 Figure 1: Market pricing
<img src="/iwov-resources/aics/images/AICS/CIOweb/202403/240327EquitiesWeeklyFig1.jpg" alt="" width="1371" height="530" /> Source: CME Group, DBS Equity Research Highlights
<img src="/iwov-resources/aics/images/AICS/CIOweb/202403/240327EquitiesWeeklyTable1.jpg" alt="" width="954" height="824" /> Download the PDF to read the full report.

Favour players with shale reserves and expertise

Global Oil & Gas: Dawn of New Era for US Shale Oil

Improving fundamentals drive higher oil prices. The trajectory of oil prices has defied initial expectations this year, surging despite softening economic conditions and restrictive monetary policy in the West. Year-to-date, WTI and Brent crude oil prices rose 13.7% and 11.3% respectively, and currently stand by at USD81.48/bbl and USD85.73/bbl (as of March 18). The surge in oil prices can be attributed to: (i) disruptions in the global supply chain driven by geopolitical conflicts (e.g. Houthi attacks in the Red Sea, Ukraine's assault on Russian refineries etc.), (ii) ongoing production cuts by OPEC+, and (iii) a surge in global demand exceeding earlier projections for 2024. In Feb 2024, the International Energy Agency (IEA) revised its oil demand growth forecast upwards from 860,000 barrels per day to 1.2 million barrels per day (mmbpd). The US Energy Information Administration (EIA) and OPEC+ have similarly upgraded their forecasts for oil demand growth in 2024; EIA predicts a 1.4 mmbpd increase while OPEC+ projected a robust oil demand growth of 2.25 mmbpd. Moreover, US crude reserves are below historical trend due to a sustained drawdown on the strategic petroleum reserves (SPR) since Aug 2020, and any efforts to replenish the SPR will see a further increase in oil demand. Figure 1: Oil demand on the rise; surpassed pre-Covid highs
<img src="/iwov-resources/aics/images/AICS/CIOweb/202403/240326CIOPFig1.jpg" alt="" /> 
Source: IEA US shale oil makes a strong comeback. Amid these favourable conditions, US oil production has shown a steady uptrend since 2H23. After averaging around 12.3mmbpd for the first seven months of 2023, similar to the 2022 exit rate of 12.1mmbpd, US oil production jumped since August and exited 2023 at a run rate of 13.2mmbpd, much higher than street estimates earlier in the year, and close to prior record levels last seen in early 2020 pre-Covid. The increase was driven by higher production from the shale patch. Over the last couple of years, we had seen a slowdown in US shale production as the listed US independents focused more on profitability and shareholder returns and less on capex and production volumes, but that story has changed. US shale is firmly back in the reckoning over the last six months or so and gaining market share, as oil prices stay elevated on the back of sustained production cuts by the OPEC+ members. The US is now the world&rsquo;s largest oil producer by a margin, following production cuts by Saudi Arabia and Russia, and looks set to be a key swing producer with dominant position in the global oil markets. Shale accounts for approximately 76% of total US oil production, making shale an increasingly indispensable component of global supply. Download the PDF to read the full report.

Equities Weekly: China Equities - Comeback On The Cards

China equities: Comeback on the cards. After three consecutive years of underperformance, we believe a comeback could be on the cards for China equities. The recent performance of key benchmark indices suggests that a rebound is underway; the SHCOMP, HSCEI and Hang Seng are up by 5.2%, 5.4% and 2.3% respectively on a 1m basis (as at 19 Mar). In addition to technical factors such as the sharp discount to global equities, floor level valuations, and light investor positioning, we believe the following will provide additional tailwinds for China equities:&nbsp; 1. Pro-growth measures to combat deflationary pressures. China&rsquo;s deflationary pressures have held its market back, with the GDP deflator remaining in negative territory for three quarters in a row. The implementation of pro-growth measures is anticipated to restore growth in the GDP deflator, which would help lift investor sentiment. With the market&rsquo;s low base last year, coupled with gradual domestic consumption recovery, we expect prices to gradually climb out of deflation. 2. Expected recovery in PPI. Previous PPI data moved in tandem with profit growth momentum. As PPI is expected to regain momentum towards 2H24, it should drive earnings revisions across China Equities and support multiple expansions. 3. Share buybacks in Hong Kong and Shanghai supportive of markets. Share buybacks in both Hong Kong and Shanghai exchanges have been taking place at elevated levels. Hong Kong buybacks in particular hit a record high of HKD126bn in 2023, which is approximately five times the average level seen from 2017 &ndash; 2021. This signals companies&rsquo; confidence in their own prospects and helps to bolster investor sentiment as well as build a floor for stock prices. Equity fund flows: Significant inflows into US equity funds. The week ended 13 Mar saw record-setting flows into US equity funds; EPFR-tracked US equity funds saw USD56bn in new monies, which is the highest inflow since 1Q21. Flows into leveraged US equity funds also climbed to an 86-week high. AxJ equity funds saw marginal outflows, led by China equity funds, which recorded just its second outflow year-to-date. Europe equity logged its 11th consecutive weekly outflow, with another USD1.7bn redeemed during the week.
 Figure 1: Close correlation between PPI and industrial profits
<img src="/iwov-resources/aics/images/AICS/CIOweb/202403/240320EquitiesWeeklyFig1.jpg" alt="" width="1371" height="530" /> Source: Bloomberg, DBS Equity Research Highlights
<img src="/iwov-resources/aics/images/AICS/CIOweb/202403/240320EquitiesWeeklyTable1.jpg" alt="" width="954" height="824" /> Download the PDF to read the full report.

We remain constructive on Japan equities with the beginning of BOJ's policy normalisation

A New Dawn for Japan

The end of an era. The Bank of Japan (BOJ) has embarked on policy normalisation, ending its negative interest rate policy (NIRP) and abolishing yield curve control (YCC). The BOJ will also limit its maximum bond purchases across different yield tenors and end the buying of TOPIX exchange-traded funds and Japan REITS. We believe this serves as a stamp of confidence by the BOJ to mark the end of Japan&rsquo;s deflationary era, accompanied by the return of stable growth and inflation. Nonetheless, BOJ governors indicate that financial conditions will remain accommodative, and that this is not the beginning of a tightening cycle given a still fragile economic recovery.
Figure 1: &ldquo;Kishidanomics&rdquo; vs &ldquo;Abenomics&rdquo; &ndash; more way to go for TOPIX
<img src="/iwov-resources/aics/images/AICS/CIOweb/202403/240320CIOP2Fig1.jpg" alt="" width="1594" height="577" /> Source: Bloomberg, DBS 
 With the removal of the policy normalisation overhang, we are constructive on Japan equities. We believe the end of negative rates is a positive for Japanese corporates given their low debt and high cash levels, since having cash will no longer be a drag on their income. Besides, banks should benefit from BOJ normalisation and reflation on the back of higher loan growth, fee income, and net interest margins. As the BOJ turns to market determination on yields, bond trading activity should pick up once again. As it stands, banks still trade at around 0.8x P/B on average, with ROE of 8.5%. We expect the rally on Japan&rsquo;s megabanks to continue.
We remain convicted in the semiconductor sector as the government focuses on its rejuvenation aims of elevating Japan&rsquo;s worldwide semiconductor manufacturing share to 3% by 2027. We anticipate a ripple effect on Japan&rsquo;s robust chip infrastructure as they boast exceptional capabilities in the tools and materials essential for cutting-edge chip production, with its suppliers often leading the industry in their specialised domains.
Japan is actively fostering the growth of its semiconductor sector, revitalising hubs in Kyushu, Tohoku, and establishing a new one in Hokkaido. TSMC has established its first Japanese plant in Kyushu in February this year, with the mutual benefit of having big Japanese corporate customers such as Sony, Renesas, and Toyota, amongst others.
We note that Japan&rsquo;s economic growth remains subdued with a long term potential GDP growth of around 1%.&nbsp; This comes on the back of an ageing population, as well as shrinking labour force and consumption base. Structural reforms implemented by current PM Kishida will take years before bearing fruit. We focus on big cap quality stocks in Japan which lead in innovation and global presence, such as economic heavy weight industries like autos, automation, electronics, and electricals. We prefer consumer stocks where earnings are exposed to global consumers.&nbsp; 
 
Download the PDF to read the full report.

Focus shifts from pure subscriber growth to profitability

Global Entertainment & Media: Streaming Revolution

Clear cut direction for pure streaming companies while legacy TV players face the innovators&rsquo; dilemma. The share of TV households without a cable TV subscription in the US has steadily risen from 19% in 2014 to 53% in 2022. By 2025, this is expected to reach 75%. We believe pure streaming companies are in the right space at the right time with the sole focus of increasing profitability.
On the other hand, the strategy for legacy TV players is less clear cut as they need to strike a balance between forgoing profitable cable TV contracts in a sunset industry vs growing the streaming platforms which are likely to yield losses initially.
This dichotomy underscores the intricate balance traditional media companies must strike as the pivot to streaming involves reshuffling content distribution strategies towards streaming platforms, which is likely detrimental to lucrative cable TV contracts.
Legacy TV&rsquo;s stronghold in sports and news still stands for now; but streaming will continue to encroach into cable TV&rsquo;s territory. Legacy TV players currently maintain their advantage in sports. Indeed, the sense of community during live sports events (in addition to exclusive broadcasting rights) acts as a key draw for cable TV viewers.
Streaming companies, on the other hand, continue to struggle to cover the exorbitant costs associated with securing premium sports rights (which have ballooned from USD3.4bn before 2000 to USD15.4bn in 2023 according to Bloomberg) given their comparatively lower subscription fees. The surge in costs raises doubts about the economics of sports streaming ventures.
That said, it is noteworthy that some companies are shifting sports content towards stand-alone streaming offerings. And in response to this challenge, media giants are also leveraging a strategy of co-opetition to manage sports rights costs and capitalise on cord-cutting trends, offering a strategic workaround to navigate the evolving media landscape.
Figure 1: Consumer spending on subscription streaming in the US (USDbn)
<img src="/iwov-resources/aics/images/AICS/CIOweb/202403/240320CIOPFig1.jpg" alt="" /> Source: Digital Entertainment Group, Omdia, DBS Download the PDF to read the full report.

Digitalisation reshaping the competitive landscape

Global Payments: Riding on Digitalisation Trends

Riding on the cashless and digitalisation trends. Following robust growth of the global payments industry in 2023, we remain positive on this space amid long-term drivers like 1) Ongoing conversion from cash to non-cash transactions, 2) Rising adoption of e-commerce, and 3) Expanding partnerships worldwide and tapping into new payment categories.
The growth in cross-border volume is expected to outpace domestic payment volume, and this is primarily driven by resilience in travel and tourism, as well as booming e-commerce transactions. Payment players are diversifying their revenue mix towards value-added services (VAS), which is expected to grow at a faster pace compared to payment services. We expect companies with higher VAS mix to deliver low-teens y/y growth in revenue for FY24F and outperform peers with high single-digit revenue growth.
Digitalisation reshaping the competitive landscape. Market leaders of the payments network are raising the bar for digital payments through (1) Faster expansion of partnerships and (2) Entry to new payment categories worldwide. They are tapping on to new flows between individuals, businesses, and governments which provide potential access to more than 10 times the cash and check opportunities seen in traditional payments market.
Leading payment players continue to invest in innovative AI-driven solutions (such as fraud prevention products) to enrich VAS offerings. On the consumer side, new payments and credit rails are growing (this includes digital wallets and buy-now-pay-later (BNPL)) and capturing market share from traditional credit cards. Following years of unrestrained growth, BNPL players are facing mounting headwinds such as regulatory scrutiny, interest rate pressure and intense competition. This may have negative impact on their business.
Figure 1: Global payment players&rsquo; payment volume, y/y growth (foreign exchange neutral)
<img src="/iwov-resources/aics/images/AICS/CIOweb/202403/240313CIOPFig1.jpg" alt="" /> Source: Company data, DBS Download the PDF to read the full report.

Investor confidence returning with recovery in biotech funding

Global Pharmaceuticals: New Catalysts for Weight-loss Drugmakers 

Indication expansion to cardiovascular disease and chronic kidney disease are new catalysts. Drugs targeting human body protein glucagon-like peptide-1 (GLP-1) came into the spotlight in 2021 after a GLP-1 drug was shown to cut body weight by 15% in 68 weeks. These drugs, which were originally intended to help type-2 diabetes patients manage their blood glucose, subsequently gained widespread notoriety on both mainstream and social media as a &ldquo;blockbuster diet drug&rdquo;.
But beyond its ability to aid weight loss, a new catalyst for this class of drugs emerged in Aug 2023 when clinical data showed GLP-1 drugs could reduce the incidence of heart attack, stroke, or death from heart disease by 20%. In Oct 2023, positive clinical trial developments indicated GLP-1 drugs could also potentially be used for the treatment of chronic kidney disease. The above developments are highly significant for makers of GLP-1 drugs as they could potentially expand their users by 27% to 1.2b globally by 2024 [these are current statistics in 2024].
FDA approval and clinical trial readout are catalysts for beneficiary stocks. Drugmakers worldwide are actively engaging in R&amp;D to compete for leadership in the largely unsaturated GLP-1 market. We believe FDA approvals and positive clinical trial readout would likely boost the share price of GLP-1-focused drugmakers. This could include the FDA approval of GLP-1 for the treatment of cardiovascular disease and the positive clinical data readout of GLP-1 for the treatment of chronic kidney disease, both of which are expected in 2024. Upstream companies providing pharmaceutical packaging materials to be used for GLP-1 drugs will benefit too, such as providers of syringes and rubber stoppers.
Investor confidence is returning with recovery in biotech funding. With drug developers raising USD6.2b in the US equity capital markets in Jan 2024, the highest since Feb 2021, the recovery of biotech is underway. With more funds to support the R&amp;D of drugmakers, price catalysts from positive clinical data are expected.
Figure 1: Global GLP-1 market
<img src="/iwov-resources/aics/images/AICS/CIOweb/202403/240306CIOPFig1.jpg" alt="" /> Source: Frost &amp; Sullivan, DBS Download the PDF to read the full report.

Market Updates

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Favour sectors with secular growth trajectory in face of macro headwinds

Europe Equities 2Q24: Quality Matters

Eurozone is experiencing varying degrees of recovery from a weak growth phase. With ECB&rsquo;s potential easing policies, we favour luxury, healthcare, and tech sectors for their secular growth trajectory. 
<ul>
<li style="text-align: justify;">Macro headwinds include trade and energy vulnerability to geopolitical tensions</li>
<li style="text-align: justify;">Equity risk premium continues to be compressed, with the spread between earnings yield and bond yields nearing historic lows</li>
<li style="text-align: justify;">Look to the Extreme Ultraviolet (EUV) sector for European tech, which is key for the booming semiconductor industry.</li>
<li style="text-align: justify;">Considerable upside potential in the pharmaceutical realm with GLP-1 drugs and the European firms that successfully develop and market them.</li>
</ul>
Figure 1: ERP (Earnings yield minus bond yield) compressed further <img src="/iwov-resources/aics/images/AICS/CIOweb/202404/CIOInsights2Q24_EuropeFig1.jpg" alt="" width="716" height="366" /> Source: Bloomberg, DBS
<div> Download the PDF to read the full&nbsp;Europe equities report.</div>
<div>Click&nbsp;<a href="../032024/CIOInsights2Q24.xml">here</a>&nbsp;for the full 2Q24 CIO Insights publication.</div>

Asia ex-Japan Equities 3Q24: Weakness not Perennial

Asia's economic growth forecast upgraded to 4.5% due to upward revision for China, strong growth in India, and robust private consumption across the region. The improving outlook augurs well for corporate profitability with the region poised to register earnings growth of 16% in 2024 and become a major driver of global economic growth over the next five years
<ul>
<li style="text-align: justify;">AxJ equities set to outperform in 2024, China expected to contribute 21% to global economic growth in the next half a decade</li>
<li style="text-align: justify;">We maintain an overweight view on Asia due to cheap valuation, improving cash flow, quality balance sheets, and positive earnings outlook</li>
<li style="text-align: justify;">China equities listed in Hong Kong deliver more than 30% returns as sentiments rebound, policy outlook turning favourable</li>
<li style="text-align: justify;">Anticipation of sustained long-term growth in ASEAN, mitigation of domestic weakness by resilient US economy, and recovery of China equity market support ASEAN markets</li>
<li style="text-align: justify;">Vietnam a standout among ASEAN markets and set to join the ranks of the others in growth and size; domestic sentiment to boost India&rsquo;s market returns</li>
</ul>
 Figure 1: Asia - Quality and growth outperformed value <img src="/iwov-resources/aics/images/AICS/CIOweb/202406/CIOInsights3Q24_AxJFig1.jpg" alt="" /> Source: Bloomberg, DBS 
<div>Download the PDF to read the full Asia ex-Japan equities report.</div>
<div>Click&nbsp;<a href="CIOInsights3Q24.xml">here</a>&nbsp;for the full 3Q24 CIO Insights publication.</div>

CIO Insights 4Q24: In a Sweet Spot

Alternatives | The Value in Bitcoin Vola

US Presidential Elections: Market Impact

Credit: The Trump Effect on Bonds

Space - The Next Frontier

CIO Industry Guide: August 2024

Market Updates

Global Technology: Harnessing the Power of AI

Equities Weekly: Global Equities - The Everything Rally

Global Oil & Gas: Dawn of New Era for US Shale Oil

Equities Weekly: China Equities - Comeback On The Cards

A New Dawn for Japan

Global Entertainment & Media: Streaming Revolution

Global Payments: Riding on Digitalisation Trends

Global Pharmaceuticals: New Catalysts for Weight-loss Drugmakers

Quarterly House Views

Europe Equities 2Q24: Quality Matters

Asia ex-Japan Equities 3Q24: Weakness not Perennial

Europe Equities 4Q24 – Slowing Momentum

US Equities 4Q24 – Positioning for Fed Pivot

US Equities 3Q24: US Exceptionalism Continues

Japan Equities 3Q24: Selective Themes Prevail

Japan Equities 2Q24: Japan's Chip Renaissance

Asia ex-Japan Equities 2Q24: Slow & Steady

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