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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

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As the Fed continues to cut rates, Chief Investment Officer Hou Wey Fook foresees a soft landing that is constructive for risk assets

Dear valued clients, In the two quarters leading up to now, we have expounded our case that risk assets were in play. Going into 4Q, risk assets should remain in a sweet spot as the surprise 50 bps rate cut will increase the odds of a soft landing. Since then, bond and equity indices have trended upwards. More recently within equities, non-tech laggard sectors have started to outperform US Tech. Notwithstanding this, we stay convinced of our longer-term &ldquo;barbell&rdquo; strategy comprising secular growth equities on one end and income generating assets on the other. Even with the recent moves, Big Tech continues to shine in the growth end of our portfolio. Unlike the dot-com boom during the 1990s, the AI revolution today is being funded by free cash flow rather than debt. This is clearly demonstrated in the hyperscaler companies of Alphabet, Amazon, Meta, and Microsoft, which remain flush with cash from their well-established and profitable businesses &ndash; and we maintain that the AI revolution is in its infancy and holds immense growth potential. On the broadening theme, we like ASEAN equities as they will be a beneficiary of lower rates and a weaker US dollar. While they have been laggards for several years, it is now time for ASEAN equities to shine. On the income end of the portfolio, longer-duration, investment-grade bonds will provide constant cash flow, with potential for capital gains as the Fed embarks on monetary easing. We also go overweight on Singapore REITs for their attractive valuation and sound financial metrics. Last but not least, alternatives will continue to feature in our portfolio as gold, hedge funds, and private assets offer a non-correlating source of returns, or alpha. Do enjoy the read, and I wish you a fruitful final quarter of investing. 
Hou Wey Fook,&nbsp;CFA Chief Investment Officer Download the PDF to read the full 4Q24 CIO Insights report.

With the arrival of a new era of monetary easing, we believe the situation today mirrors that of 1995 &ndash; from both economic and technological standpoints

Asset Allocation 4Q24 – Sweet Spot

<div style="text-align: justify;">
The Fed easing cycle today mirrors that of 1995. The economic resilience and Fed cut, overlaid with game-changing technological advancements driving productivity gains, will be tailwinds for risk assets.
<ul>
<li>Gold, ASEAN equities, and Asia REITS will see strong momentum in an environment of falling bond yields and dollar weakness</li>
<li>Risk assets that demonstrate resilience in demand despite overall macro moderation and/ or beneficiary of falling bond yields will thrive amongst growth moderation without recession</li>
<li>Maintain preference for bonds over equities</li>
<li>Lower US treasury yields and dollar weakness benefits Southeast Asian economies</li>
</ul>
</div>
 Figure 1: Yen carry trade unwinding appears to be over &ndash; for now <img src="/iwov-resources/aics/images/AICS/CIOweb/202410/CIOInsights4Q24_AAFig1.jpg" alt="" width="955" height="457" /> Source: Bloomberg, DBS
&nbsp;
<div>Download the PDF to read the full&nbsp;Asset Allocation report.</div>
<div>Click&nbsp;<a href="../102024/CIOInsights4Q24.xml">here</a>&nbsp;for the full 4Q24 CIO Insights publication.</div>

Stay up to date with our comprehensive coverage of global industries

<div style="text-align: justify;">US elections season, an upcoming era of rate cuts, and consumers&rsquo; inflation pains form the backdrop of this issue of the CIO Industry Guide.</div>
 
Poised for Cuts
As lower interest rates beckon, industries that traditionally benefit include consumer discretionary and technology while dividend paying industries like utilities and oil &amp; gas also stand to gain.
Biggest Winners
Healthcare, financials, and materials shine in recent reporting season; S&amp;P 500 poised for robust earnings growth of c.10% in 2024 as rally broadens.
Looking for Value
While spending at the high end remains resilient, lifting industries like consumer electronics and payment platforms, higher prices have also impacted demand in the packaged F&amp;B industry.
Unstoppable Force
<div style="text-align: justify;">Tech continues to be the leading sector for investment, attracting the largest inflows this quarter, maintaining strong momentum. Financials and industrials also saw substantial inflows, coming in after tech on a sectoral basis. Download the PDF to read the full report.</div>

Middle East conflicts have historically had a muted impact on financial markets, with gold and oil as the most effective hedges against further escalation

Middle East Conflict: Gold and Oil as Effective Hedges

The Japanese yen remains a central focus for carry trade unwinds; But rising Middle East tension also warrants close attention. While predicting developments on the ground is difficult, an all-out war seems to have been averted for now, with nations urging for de-escalation and diplomatic solutions. Risk premium on par with Oct 2023&rsquo;s high. Amid heightened geopolitical risks, we assessed risk premiums relative to Oct 2023 by examining Israel&rsquo;s local markets. Israel&rsquo;s 10Y bond yields peaked at 4.7% last October before returning to pre-conflict levels of 3.8%. Reflecting recent tensions, bond yields have risen again, reaching a peak of 5.2% and currently hovering near the October high of 4.6%. Our analysis shows that risk premiums are now comparable with those seen at the peak in Oct 2023, the onset of the Israel-Hamas conflict. Figure 1: Risk premia adequately priced <img src="/iwov-resources/aics/images/AICS/CIOweb/202408/240812CIOPFig1.jpg" alt="" width="1444" height="581" /> Source: LSEG Datastream, DBS In contrast, Israel&rsquo;s currency and equity markets have demonstrated more stability. The Israeli shekel and the Tel Aviv 125 stock market index have fully recovered from their October lows and are now approaching pre-conflict levels. Overall, investors seem cautiously optimistic, anticipating that the current tensions will eventually ease. Historically, conflicts in the Middle East have limited impact on financial markets. Investors appear accustomed to such situations. Our analysis from when the Hamas-Israel conflict first erupted in October last year (<a href="https://www.dbs.com/in/treasures/aics/templatedata/article/generic/data/en/CIO/102023/231011CIOP2.xml" target="_blank" rel="noopener">link</a>) revealed that beyond immediate headlines and reactions, Middle East conflicts have historically had a muted impact on financial markets. The most effective hedges against further escalation remain to be gold and oil. Middle East tensions spell upside potential for oil. The impact of Middle East conflicts on global financial markets have traditionally been through oil prices. This is unsurprising as approximately a quarter of global crude production comes from the region, and a third of its related trade passes through the Straits of Hormuz; any disruptions to production and trade as a result of geopolitical conflict will materially impact global supply and raise prices. We saw this happen late last year on the back of attacks on ships in the Red Sea from Nov 2023 to Jan 2024, causing a c.5.5% increase in oil prices during the same period. Impact will still be there, but possibly more muted. We believe this time is no different: an escalation in conflict between Iran and Israel presents upside potential for oil prices. However, the magnitude of the upside may not be as significant as some expect. This is due to two reasons: i) while the Middle East remains a key crude producer, the US has increased its production over time through its burgeoning shale supply, and this has reduced the former&rsquo;s influence as a swing producer; ii) global supply chains have likely adjusted to the drop in tanker traffic in the Suez Canal by now. On point (ii), unless the escalation in conflict is severe enough to further reduce tanker traffic, we will likely not see significant oil price upside from trade disruptions specifically. Safe haven gold a potential beneficiary. Gold has not had a shortage of tailwinds in recent times. Decelerating growth, easing inflation, and a softening labour market in the US are setting the stage for Fed rate cuts later in the year, and laying the foundation for further rallies for non-interest-bearing gold. Furthermore, central bank gold buying remains robust, driven by the threat of monetary debasement, fiscal sustainability concerns, and de-dollarisation. The US elections in November also present potential right-tail risk for the precious metal. Heightened geopolitical tensions add to that mix, giving gold yet more room for upside. Should the conflict between Iran and Israel escalate into all-out war, we believe gold will likely experience a short-term boost through elevated safe haven demand. How much of a boost will bullion receive? Based on historical analysis of recent risk-off incidents, we found that gold rallies after such episodes lasted 13 days on average and resulted in an average price increase of 7.1% trough to peak. It is reasonable to assume that a war between Iran and Israel will likely result in a rally of similar length and magnitude. However, the exact impact will really depend on how the conflict plays out; should the conflict be contained between the two nations, the resultant rally will be a likely be a one-off event. However, if the conflict results in wider regional instability, we could see multiple gold rallies with each episode of escalation. Stay with Barbell Strategy in uncertain times. Since the onset of the Israel-Hamas war in Oct 2023, our DBS CIO Barbell Strategy has demonstrated resilience, delivering a stellar return of 15.6%, outperforming the 14.8% return of the 50-50 composite of global equities and bonds index. As geopolitical tensions persist, we continue to advocate adopting our Barbell Strategy to build a robust investment portfolio during such challenging times. On the growth side, invest in companies that are well positioned to capture long-term secular trends and benefit as the world transits to a digital economy. On the income side, invest in dividend yielding equities such as REITs and bonds. The income nature of these assets will provide resilience to the overall portfolio. In addition, risk diversifiers such as gold, which have low correlations to equities and bonds, can further reduce portfolio volatility and drawdowns. Download the PDF to read the full report.

Keep abreast of market moving events with CIO's weekly bulletin

Multi-Asset Weekly: Another Week of Rallies for Global Equities

Equities: Strong US jobs report bolsters investor confidence
Global equities clocked another winning week. Global equity markets advanced last week thanks to strong US labour market data for the month of September. Nonfarm payrolls (NFP) showed the US economy added 254,000 new jobs in September, significantly higher than economists&rsquo; estimate of 150,000 new jobs. The unemployment rate also declined to 4.1% despite expectations for it to stay at 4.2%. This supports the notion that the Fed may pull off a &ldquo;soft landing&rdquo; for the US economy. The S&amp;P 500, NASDAQ and Dow Jones were up 0.2%, 0.1%, and 0.1% respectively for the week.
Asia equities sustained their upward momentum as investors in Hong Kong continued to digest the positive news of China&rsquo;s latest stimulus package; the Hang Seng rose 10.2% for the week. Meanwhile, Japan equities bucked the trend as the country grappled with changes in its political landscape and uncertainties over its monetary policy moving forward; the Nikkei-225 fell 3.0% for the week.
Topic in focus: Europe equities &ndash; Renewables present fresh opportunities. Post the dual shocks of the pandemic and the Russia-Ukraine war, European governments were alarmed by the region&rsquo;s reliance on foreign supply of energy and fossil fuels. The ensuing energy crisis shored up the urgency in transitioning Europe to green energy&mdash;the EU has set a target to reduce net greenhouse gas emissions by at least 55% by 2030; alongside policies focused on increased deployment of renewables and energy efficiency, there is also a focus on the diversity and resilience of clean energy supply chains, both for manufacturing and critical minerals.
In 2023, investment in renewables generation totalled almost USD110bn, an increase of more than 6% from the previous year, according to the International Energy Agency. Denmark and Germany remain at the forefront of the wind power sector in Europe despite ongoing profitability challenges, while Spain has led the surge in solar adoption to see wholesale electricity prices fall to record lows during periods of high solar output. A shift to cleaner and more secure energy sources is set to create significant opportunities to invest in renewable energy generation, grid networks for distribution, energy storage solutions, and new mobility.
Figure 1: Global installation of new energy storage projects by region <img src="/iwov-resources/aics/images/AICS/CIOweb/202410/241007CIOWeeklyFig1.jpg" alt="" width="694" height="385" /> Source: CNESA, Wood Mackenzie, EASE, DBS
 Download the PDF to read the full report which includes coverage on Credit, FX, Rates, and Thematics.

CIO Asset Allocation

Multi-Asset Weekly: Global Equities Rally Around China's Stimulus

Multi-Asset Weekly: US Equities Soar to Record Highs

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Opportune time to capture liquidity flow amid US Fed rate cut, weakening USD, and investors' underweight positioning in China equities.

China Equities: A Welcome Policy Move

New policy blitz. China's central bank, the People's Bank of China (PBOC), has taken a proactive approach to bolstering the economy with a series of policy easing measures, surprising the market. These include reductions in Reserve Requirement Ratios (RRR) and adjustments to policy and mortgage rates. These efforts aim to stimulate investment, enhance liquidity, and restore confidence in the financial markets. Addressing housing concerns will be essential to counter ongoing deflationary pressure.&nbsp;
The timing of these announcements could not be more opportune, capitalising on the tailwinds of supportive factors: liquidity inflow coinciding with the start of the US Fed&rsquo;s rate cut cycle, a weakening US dollar, investors&rsquo; underweight positioning in China equities, and a general improvement in sentiment across Asia (excluding Japan) since the second quarter of this year. In addition, the widening valuation gap has spurred investors to reassess their underweight position in China equities. At current level, the risk-reward dynamic appears favourable. At a forward PER of 10x (Figure 1), China equities are trading at a steep discount to the global average of 19x.&nbsp; &nbsp;&nbsp;
The jury is still out. While these policies take a hopeful aim at the sustained recovery of the stock market and broader GDP growth, the effectiveness and successful implementation of these measures remain to be seen. Nonetheless, these recent steps have undoubtedly boosted near-term sentiment and raised market expectations.
Figure 1: Valuation gap to narrow <img src="/iwov-resources/aics/images/AICS/CIOweb/202409/240925CIOP2Fig1.jpg" alt="" width="1444" height="581" />
Source: Bloomberg, DBS 
Unlike previous rounds of announcements, we believe this is less likely to be a false dawn. A robust ecosystem of favorable factors, both external and internal, supports this view. Effective implementation and sustained follow through over the longer term could restore wealth effects and reinforce domestic consumption. With global central banks lowering policy rates, China policy makers can breathe a sigh of relief. This backdrop presents the PBOC greater room for monetary easing, flexibility to inject liquidity into the system, stabilise the real estate market, and support a recovery in consumption. Moreover, lower global rates are supportive of risk assets in emerging markets which have underperformed since 2022. Recommendations moving forward: 1. Reassess investment positions: For clients who are underinvested, this presents an ideal opportunity to revisit their portfolios. We suggest adding to large-cap and index heavy-weights, technology leaders, and quality growth stocks which are the forefront of favourable liquidity flows. 2. Income opportunities: On the income side, stay invested in large state banks for their reliable dividend yields which provide an attractive income stream for investors in an environment of falling rates. Historically, dividend payouts among China large state banks have remained stable over economic and interest rate cycles. 3. Targeted exposure: For investors who already have exposures in China, we recommend investing in structured products to expand their exposure at targeted entry points. Supplementary tailwinds: Another potential tailwind supportive of improving performance over the longer term is the significant amount of cash on the sidelines. China&rsquo;s total household deposits reached CNY126tn (USD18tn) at the end of 2023, surpassing total GDP value for the first time. Additionally, total bank deposits in Hong Kong banking sector rose to a record USD2.2tn. With right policy initiatives and implementations, the former will be crucial to revitalising domestic consumption and reversing a precautionary savings mindset. Meanwhile, the latter will provide liquidity that can flow back into equities, seeking better returns in this declining rate environment. More time needed on real estate issues: Nonetheless, the years-long real estate slowdown and inventory issues &mdash; widely regarded as the single largest challenge faced by the country in recent decades &mdash; remain a headwind to the near-term outlook. Considering its substantial impact, a government-led resolution of the housing debacle will be crucial to stabilising growth targets. Valuations at floor: While we do not anticipate the market direction to immediately turn into a straight-line recovery, the combination of policy supports since 2023, current measures, and floor valuations on low expectations will emerge as credible tailwinds to support the improving outlook. Download the PDF to read the full report.

We highlight key investment opportunities in each of ASEAN&rsquo;s economy

ASEAN Equities: The ASEAN Portfolio

Sustained momentum. As investors brace for global economic slowdown, ASEAN continues to demonstrate promising potential as a strategic economic bloc supported by five key pillars &ndash; favourable demographics, infrastructure development driving urbanisation and economic growth, an abundance of natural resources, a wealth of attractive tourist destinations, and a strategic location for supply chain diversification.
Against surrounding headwinds, ASEAN economies continued to sustain their growth momentum. GDP grew in all economies, with growth in Indonesia, Malaysia, the Philippines, and Singapore picking up pace during this period while Thailand and Vietnam recorded slower growth. Strong domestic demand backed by tight labour markets and stable prices, buoyed by robust tourism and a recovery in exports markets have helped to drive growth. By 2030, the bloc is set to become the fourth-largest economy in the world, overtaking Germany.
Figure 1: ASEAN-6 economies sustain strong growth momentum <img src="/iwov-resources/aics/images/AICS/CIOweb/202409/240905CIOPFig1.jpg" alt="" width="1444" height="581" />
Source: IMF, DBS 
The region boasts strong export positions in sectors such as electronics, aerospace, semiconductors, machinery, and packaged foods. Other than the potential for expansion, China+1 offers ASEAN economies more opportunities to move up the value chain in their respective domains, pursuing higher value-added segments and harnessing Industry 4.0 to boost productivity, given the region&rsquo;s relatively smaller role in higher-value industries such as biopharmaceuticals and chemicals.
One region, nine countries. Each ASEAN economy has its unique identity and growth story, from manufacturing-driven economies to commodity-rich producers, and to financial service providers. These factors collectively contribute to their attractiveness as investment destinations in the region. Long-term drivers for the region include access to critical materials, proximity to suppliers, and a focused policy on energy transition, in addition to a more liberal investment policy landscape facilitated by close collaboration across the member states.
Singapore &ndash; a gateway to the region. With its favourable taxation policies and strategic geographical position, supported by a stable political environment and robust legal system, the city state offers investors unprecedented access to the Asian market, serving as a gateway to the region. Its wide network of trade agreements means businesses may access over 80 double taxation avoidance agreements, significant tax deductions, and numerous free trade agreements (FTA) with neighbouring Asian nations, the EU, the US, China, and India. S-REITs, banks, and Singapore's home-grown global champions stand out as attractive long-term investment opportunities.
Indonesia &ndash; commodity superpower. Agriculture continues to play an integral role in the economy, employing one-third of the country&rsquo;s total workforce. As a resource-rich country, commodities account for around 60% of Indonesia&rsquo;s exports. To reduce its vulnerability to global commodity price shocks, Indonesia is focusing on developing its downstream processing capabilities to improve its supply chain resilience. Driven by growing domestic consumption, Indonesia has demonstrated a continuous track record of high growth compared to other low-cost countries.
The nation has also maintained relative political stability through the years, led by a democratic government committed to economic development; the government continues to implement prudent macroeconomic policies and structural reforms to enhance the ease of business growth. Now a member of the G-20 economies, the nation offers foreign investors significant long-term growth potential, given its status as the largest economy in ASEAN, and the 16th largest in the world. Banks, consumerism as well as the commodity and energy sectors are active plays in Indonesia.
Thailand &ndash; a tourist favourite. Thailand boasts a prominent position as the world&rsquo;s primary source of food and agricultural commodities, including rice and natural rubber. Its economy is highly diverse, comprising of mature sectors ranging from manufacturing, agriculture, and tourism to healthcare. Already a key auto manufacturing hub, Thailand is gunning for a larger market share in EV manufacturing; FDI interest has been directed largely to the electronics and autos sectors.
Data from Thailand&rsquo;s Commerce Ministry show its top five export categories in 2023 are motor cars, parts and accessories, automatic data processing machinery, precious stones and jewellery, rubber products, and refined fuels. Thailand&rsquo;s tourism sector also provides significant opportunities for investments in hospitality, retail, and related services. We favour Thailand&rsquo;s tourism and the medical sector, as well as auto-related industries.
Malaysia &ndash; progressing up the value chain. A major exporter of agricultural and mining commodities, Malaysia has seen a shift in its export dynamics in recent years, marked by a decline in agricultural and mining exports which is offset by a surge in exports of manufactured goods. Malaysia is fast gaining increasing importance in global supply chains &ndash; particularly due to trade tensions between the US and China &ndash; such as a location for semiconductor producers looking to diversify their business risks.
Its well-established industrial sector presents opportunities in healthcare, electronics, the digital economy, and Islamic finance, among many other sectors. This shift reflects Malaysia&rsquo;s progress towards higher value-added industries and highlights the broader changes in global demand and structural transformations within its economy. We believe investors would do well by gaining exposure to a broad market ETF with a portfolio comprising stocks of banks, utilities, and basic materials.
Philippines &ndash; a vast consumer market. The Philippines was among the world&rsquo;s fastest-growing emerging markets in 2022, recording a GDP of 7.6%, the fastest pace since 1976. The nation is working to reduce its reliance on overseas remittances and has gradually developed its domestic industries to move up global value chains in select industries, presenting new investment opportunities. Its vast population of highly educated English-speaking pool of workers are still well sought after, especially in the medical and hospitality sectors across other countries.
The business process outsourcing (BPO) industry in the Philippines remains key for the country&rsquo;s economy, contributing c.USD32.5bn in 2022, a 10% increase from 2021. The Philippines is second only to India in BPO, and this sector will likely remain a key part of its economy going forward, outpacing remittances. In our view, property and consumer stocks are the best plays for the Philippines.
CLMV &ndash; collective strength. Collectively known as CLMV, Cambodia, Laos, Myanmar, and Vietnam represent ASEAN&rsquo;s frontier markets. By 2050, ASEAN is slated to become the fourth largest economy in the world, with the rise of CLMV driving additional investor interest to the region. Despite being at varied stages of development, which are uneven and still nascent, CLMV demonstrates significant growth potential, offering opportunities for foreign investors looking to tap into developing economies.
Vietnam&rsquo;s accession to the World Trade Organization (WTO) in 2007 marked its ascension as a committed and robust trade partner for the global community. Since then, the country has entered into numerous FTA and Double Tax Avoidance Agreements, and is a key beneficiary of China+1 strategy. We believe Vietnam&rsquo;s consumer market and industrialisation sectors present dynamic opportunities.
 Download the PDF to read the full report.

Stimulus measures set to support and energise the stock market

China Financials: Beneficiary of Stimulus Package

China stimulus package better than expected. China regulators have announced an extraordinary robust set of stimulus measures, including reserve requirement ratio (RRR) cuts, support for property markets, and low-cost facilities to boost the stock market. The People&rsquo;s Bank of China (PBOC) delivered a series of policy rate cuts, and the Politburo&rsquo;s call for &ldquo;forceful&rdquo; rate reductions signals further easing ahead. The PBOC has also revised down outstanding mortgage rates by c.50 bps to support the property sector and consumer sentiment. Although China&rsquo;s banks will face a 5-6 bps decline in net interest margins (NIM) due to the repricing of existing mortgages, this impact is mitigated by lower funding costs, increased loan volume, and growth in capital market-related fee income. As a result, we expect a neutral overall impact on banks' NIM and earnings.
A-share market energised. The PBOC has also introduced several measures to support the stock market, including a swap facility that enables securities firms, funds, and insurers to access PBOC liquidity for equity purchases, and a re-lending facility that allows listed companies to buy back shares and increase their holdings. The initial phase of these initiatives amounts to RMB800bn. These measures are expected to inject additional funds into the stock market, signalling the central government's strong commitment to bolstering the economy and improving market sentiment in the short term. Both brokers and insurers stand to benefit from the recent market rally, as increased trading volumes and fund inflows into mutual funds boost brokers' fee income, while rising stock values generate gains for both brokers and insurers.
Despite the recent market rally when the policy measures were first announced, valuations are still appealing. The anticipated fiscal stimulus could drive short-term price appreciation, while the policy measures&rsquo; long-term effects &mdash; reflected in sustained improvements in macroeconomic data and consumer confidence &mdash; should underpin a longer-term re-rating of the stock market, especially financial stocks.
<div style="text-align: justify;">Insurance companies to benefit from policy-driven shift. We favour financial institutions which are aligned with the policy-driven structural shift in the stock market, especially following the Chinese government&rsquo;s move from restricting speculative investment to promoting the stock market as a wealth-building avenue. As returns from property investment are expected to decline, we foresee a significant flow of wealth toward long-term accumulation vehicles such as mutual funds, insurance products, and wealth management solutions. Insurers with strong distribution networks and high sensitivity to stock market gains are well-positioned for business growth and improved earnings prospects. The overall impact of recent policies on banks is neutral. </div>
 Figure 1: A-share market average daily turnover (ADT) <img src="/iwov-resources/aics/images/AICS/CIOweb/202410/241010CIOPFig1.jpg" alt="" width="1444" height="581" />
Source: Bloomberg, DBS 
 Download the PDF to read the full report.

We reaffirm our constructive stance on tech as an anchor on the growth end of the DBS CIO Barbell Strategy

Global Technology: Sell-off Presents Opportunity

Markets under selling pressure &ndash; Tech stocks hardest hit. The week has seen markets come under selling pressure, led by AI heavyweight NVIDIA who was recently dealt a double whammy in the form of unmet investor expectations following their latest earnings release, and a subpoena from the US Justice Department as part of a wider antitrust probe on the chipmaker. Market momentum was also further dampened by weakness in US macroeconomic data, with ISM manufacturing logging its fifth consecutive month of contractionary data and job vacancies falling in July to their lowest in more than three years , stoking additional recession fears.
Victims of lofty expectations. Notwithstanding these latest developments, we remain structurally bullish on the technology sector and its stalwarts, on the basis of strong earnings growth and compelling shareholder returns. While investors were disappointed with the latest round of earnings, we argue that it had more to do with expectations being too lofty, as opposed to Big Tech surprising on the downside. NVIDIA did beat expectations on both revenue and earnings in its latest results release, but it simply failed to reach the higher end of the forecasted range. Overall, earnings growth for Big Tech companies remains encouraging with a majority of companies posting beats on both their top and bottom lines in the previous quarter while providing positive forward guidance.
Table 1: Earnings guidance remains encouraging <img src="/iwov-resources/aics/images/AICS/CIOweb/202409/240906CIOPFig1.jpg" alt="" width="1444" height="581" />
Source: Company announcements, DBS 
Sell-off presents opportunity to re-engage tech leaders. We believe this earnings growth momentum will be sustained in the future, driven by irreversible secular trends such as the continued digitalisation of the global economy and the proliferation of AI-enabled devices and applications. In fact, we argue that AI as a megatrend is but in its early innings and has yet to experience the bulk of its growth; the total addressable market for AI is expected to grow to a staggering USD2.6tn by 2032 (Figure 1). This strong structural growth will continue to support superior shareholder returns for Big Tech, which currently sits above 20% (Figure 2). Against this backdrop, we believe that this round of sell-offs presents an opportunity for investors to re-engage technology leaders at a more reasonable valuation.
Proven long-term track record in IT spending. Another factor that will support earnings growth and shareholder returns for the technology sector is the established resilience of IT spending over time. Capital expenditure and R&amp;D spending is a crucial factor in driving growth in technology-related sectors, and they have proven to be extremely resilient through multiple cycles - even in the face of black swan events. Overall IT spending stayed impervious to the effects of the Covid pandemic from 2019 to 2021, only dipping marginally post the 2008 GFC. With IT spending set to remain robust, we can expect continued innovation from technology leaders, which will in turn drive strong future pipelines, both in the hardware and software space.
Positive catalysts ahead. While the past month has been challenging for technology stocks and Big Tech, we foresee brighter days ahead. Other than the structural long-term tailwinds mentioned above, there are other catalysts on the horizon that should support a turnaround in sentiment in the technology space over the shorter-term:
<ol>
<li>Launch of the new iPhone in early September should drive a new wave of excitement as it will be the first model to feature Apple Intelligence, an AI platform developed by Apple.</li>
<li>Launch of NVIDIA&rsquo;s Blackwell chipset in 4Q24 should be a positive development for the company and technology space.</li>
<li>Consensus earnings for Big Tech firms are still projected to grow at mid-to-high teens over the next two to three years, outpacing other sectors.</li>
<li>Impending rate cuts by the US Fed should increase liquidity in markets and give a boost to risk sentiment in general.</li>
</ol>
Reaffirming our structurally bullish call on Big Tech and I.D.E.A. Having established both the long-term and short-term tailwinds for the sector, we reaffirm our constructive call on the Big Tech and technology sectors as anchors on the growth end of the DBS CIO Barbell strategy. Utilise the I.D.E.A (Innovators, Disruptors, Enablers and Adapters) framework to identify winners along the technology value chain and across verticals such as IC design, semiconductors, and software applications. The recent market sell-off provides a good opportunity for investors who did not manage to catch the Big Tech growth-train early on to re-engage highly valued technology leaders at a more reasonable valuation.
 Download the PDF to read the full report.

Keep abreast of the latest equity research

Equities Weekly | China Equities – Policy Stimulus Underscores Commitment to Drive Growth

<div style="text-align: justify;">China equities: Policy stimulus underscores commitment to drive growth. China&rsquo;s central bank, the People&rsquo;s Bank of China (PBOC), has taken a proactive approach to bolster the economy with a series of policy easing measures. Unlike previous measures which are more supply-side driven, the measures this time are more focused on addressing the structural demand-side issues in the economy. These include reductions in Reserve Requirement Ratios (RRR), adjustments to policy, cuts in mortgage rates, and other consumption-related subsidies. These policies aim to stimulate investment, enhance liquidity, and restore confidence in financial markets. 
<div style="text-align: justify;">Significant amount of cash on sidelines. Household savings can serve as significant tailwind to support performance for China&rsquo;s equity market. By the end of 2023, China&rsquo;s total household deposits reached CNY126tn (USD18tn), surpassing the country&rsquo;s total GDP value for the first time. As consumer sentiment improves with the implementation of supportive policies, these substantial savings will be crucial in revitalising domestic consumption and boosting economic activity. Additionally, total bank deposits in the Hong Kong banking sector rose to a record USD2.2tn, providing ample liquidity. This capital may then flow back into equities as investors seek higher returns in this declining rate environment. 
<div style="text-align: justify;">While we do not anticipate the market to experience an immediate, linear recovery, we believe that a combination of existing policy supports and recent measures, coupled with floor valuations, will serve as tailwinds to support the outlook of Chinese equity market. 
<div style="text-align: justify;">Equity fund flows: The week ended 2 Oct saw a bifurcation in fund flows, with Developed Market (DM) Equity Funds registering outflows while Emerging Market (EM) Equity Funds attracted inflows. Within the DM space, US Equity Funds faced significant outflows of USD9.7bn as conflict between Israel and Iran escalated. Within the EM space, China Equity Funds recorded substantial inflows of USD13.9bn, driven by recent policy measures from PBOC which rekindled investor sentiment in the Chinese market. Figure 1: China's household savings have now exceeded its GDP</div>
<img src="/iwov-resources/aics/images/AICS/CIOweb/202410/241009EquitiesWeeklyFig1.jpg" alt="" width="1371" height="530" /> Source: Bloomberg, NBS, DBS Equity Research Highlights
<img src="/iwov-resources/aics/images/AICS/CIOweb/202410/241009EquitiesWeeklyTable1.jpg" alt="" width="954" height="824" /> Download the PDF to read the full report.</div>
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For Chief Investment Officer Hou Wey Fook, a soft landing in the US bodes well for risk assets

Video 3Q24: Risk Assets in Play

<div style="text-align: justify;">In this video, DBS Chief Investment Officer Hou Wey Fook discusses the following: </div>
<ul>
<li style="text-align: justify;">Our call for portfolios to engage with risk assets has paid off this year, as reflected in the continued run in equities and the compression of credit spreads</li>
<li style="text-align: justify;">We see a Goldilocks economy panning out in the US due to tapering growth and inflation, resulting in a soft landing that will lead to the Fed graudally cutting rates</li>
<li style="text-align: justify;">We continue to advocate for excess cash to be deployed in well-balanced portfolios comprising public equities, bonds, and alternative asset classes</li>
<li style="text-align: justify;">Stay with quality companies with deep moats for equities, investment-grade with longer duration for bonds, and overweight gold and private assets</li>
</ul>
 Click <a href="../062024/CIOInsights3Q24.xml">here</a> for the full 3Q24 CIO Insights publication.

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