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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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In an ever-evolving market, companies that resonate with a "quiet luxury" ethos demonstrate superior financials

Thematic Strategy 1Q24: Quiet Luxury

Mindsets shift with a growing focus on sustainability and conscious consumerism. This has manifested in the growing popularity of understated opulence, better known as &lsquo;Quiet Luxury&rsquo;, where consumers partake in mindful choices that are timeless yet sophisticated.
<ul>
<li style="text-align: justify;">Subtle displays of wealth are fast gaining prominence amid growing social divides and the desire for exclusivity</li>
<li style="text-align: justify;">The rise of quiet luxury reflects a changing consumer mindset &mdash; one that values subtlety, authenticity, and a deeper connection to products</li>
<li style="text-align: justify;">Change is underway in the realms of horology, perfumery, and gastronomy, reflecting a broader shift in consumer values and preferences</li>
<li style="text-align: justify;">Brands that resonate with the quiet luxury ethos not only cater to a discerning clientele, but also demonstrate superior profitability in an ever-evolving market</li>
</ul>
 
Figure 1: A widening social divide - Ever-increasing gap in wealth disparity since the 1970s
<img src="/iwov-resources/aics/images/AICS/CIOweb/202312/CIOInsights1Q24_LuxuryFig1.jpg" alt="" />
Source: Bloomberg, DBS
&nbsp;
&nbsp;
<div>Download the PDF to read the full Quiet Luxury report.</div>
<div>Click&nbsp;<a href="../122023/CIOInsights1Q24.xml">here</a>&nbsp;for the full 1Q24 CIO Insights publication.</div>

Persistent demand for resilient and adaptable infrastructure to keep up with 21st century challenges

Thematic Strategy 1Q24: Next Generation Infrastructure

Demand for next generation infrastructure to persist as the world races to keep ahead of climate crises, demographic shifts, cyberattacks and supply chain upheaval. This presents attractive opportunities to deploy capital towards building future-proof infrastructure assets.
<ul>
<li style="text-align: justify;">A shift to cleaner energy sources creates opportunities to invest in renewable energy generation, grid networks for distribution, energy storage solutions, and new mobility solutions</li>
<li style="text-align: justify;">Widespread adoption of cloud services will drive the demand for data centres, reliable cloud networks, and their surrounding ecosystems</li>
<li style="text-align: justify;">Global trends in reshoring to increase demand for transport and logistics infrastructure</li>
<li style="text-align: justify;">Investments in infrastructure are generally long-term commitments, backed by real assets, and generally offer protection against inflation</li>
<li style="text-align: justify;">Investors seeking exposure to infrastructure would do well to understand the nuances of different infrastructure strategies; assets with more core-like characteristics offer persistent demand and stable cash flows across economic cycles </li>
</ul>
Figure 1: The world faces a cumulative USD15t infrastructure gap
<img src="/iwov-resources/aics/images/AICS/CIOweb/202312/CIOInsights1Q24_InfrastructureFig1.jpg" alt="" />
Source: Global Infrastructure Hub, DBS
&nbsp;
&nbsp;
<div>Download the PDF to read the full&nbsp;Infrastructure report.</div>
<div>Click&nbsp;<a href="../122023/CIOInsights1Q24.xml">here</a>&nbsp;for the full 1Q24 CIO Insights publication.</div>

We cut through buzzwords, hype, and hyperbole surrounding the AI craze to decipher what it means and how investors can benefit

Into the AI Frontier

AI's Coming of Age
In 1950, Alan Turing &ndash; the founding father of modern cognitive science &ndash; devised the &ldquo;Turing test&rdquo; to evaluate a machine&rsquo;s ability to exhibit intelligent behaviour. For more than 70 years, this remained within the realm of science fiction; but today, Artificial Intelligence (AI) has finally made its definitive transition into reality. 2022 would be remembered as the year that machines successfully conquered Turing&rsquo;s imitation game &ndash; with (i) Google&rsquo;s LaMDA being claimed to be &ldquo;sentient&rdquo; by one of its engineers, and (ii) OpenAI&rsquo;s ChatGPT taking the world by storm with its human-like natural language outputs.
Exponential Growth Ahead
AI&rsquo;s revenue potential is projected to grow rapidly over the next decade. Back in 2021, Fortune Business Insights had already estimated that the Global AI market size would grow at a CAGR of 40% to reach USD360.4b by 2028. Considering these projections were made even before the meteoric rise of ChatGPT and the recent quantum leaps in AI technology, they would most likely be considered conservative by today&rsquo;s standards. All this to say, the total addressable market for AI is more than likely to grow at breakneck speed moving forward.
In this publication, we take a deep dive into the following:
<ul>
<li style="text-align: justify;">Understanding the AI "Toolbox"</li>
<li style="text-align: justify;">Generative AI - The Rising Star</li>
<li style="text-align: justify;">How does Generative AI Learn?</li>
<li style="text-align: justify;">Cognitive AI - Mixing Man and Machine</li>
<li style="text-align: justify;">Macro Impact of AI</li>
<li style="text-align: justify;">Industries Affected &amp; Business Applications</li>
<li style="text-align: justify;">Investment Expressions</li>
</ul>
With such ground-breaking disruption coming at us at breakneck speed, we believe there is no better time to start preparing for the future of AI than now. Download the PDF to read the full report.

With India and China now contributing a quarter of global economic activity and more than a third of the world's population, their growth potential surely cannot be ignored

Jewels of India and China

Cradles of civilisation. Pioneers of groundbreaking technologies. Modern day economic marvels. These accolades come to mind when we consider - by many metrics - the meteoric rise of India and China. The strength of their economies might have ebbed and flowed over time, but in this decade, they have emerged as two of the most significant players in the global economy, possessing trump cards that make them a force to reckon with. In this publication, we look into their demographic, economic, and geopolitical drivers, to identify winners within these markets, or what we term, the &lsquo;Jewels of India and China&rsquo;.&nbsp; India&rsquo;s Sectoral Jewels
<ul style="list-style-type: square;">
<li>IT services &ndash; A growth powerhouse in a digital era</li>
<li>Banking &ndash; Vast untapped potential</li>
<li>Consumer staples &ndash; A demographic play</li>
<li>Pharmaceuticals &ndash; Regulatory tailwinds abound</li>
</ul>
 China&rsquo;s Sectoral Jewels
<ul style="list-style-type: square;">
<li>Digital economy &ndash; Winning the digital arms race</li>
<li>Consumer discretionary &ndash; Multiple dimensions of growth</li>
<li>Banking &ndash; Growing affluence</li>
</ul>
<div style="text-align: justify;">Beyond these sectors, there are also opportunities to be unearthed in India and China's debt and private asset markets. Several long-standing macro trends appear favourable for debt in both India and China. Although India and China local currency bond markets are still in the early stage of development, we believe bond investors should keep a pulse on these markets for future consideration in alpha generation. Meanwhile, with their vibrant talent pools and innovative culture, India and China are both hosts to thriving ecosystems of emerging technologies and new businesses, and we expect to see the landscape for private asset investing in the region develop and flourish in the coming decade. Download the PDF to read the full report.</div>

Focus on quality plays and stay with industry leaders

Luxury Still Reigns Supreme 

Sectoral call on luxury playing out as high-end spending remains resilient. On the back of secular trends of rising affluence and consumerism, we had earlier identified the global luxury goods sector as a winner for the 21st century. Today, although dampening consumption, growth headwinds and economic challenges cloud the near-term horizon, this has not dulled the sector&rsquo;s outlook. In fact, this challenging climate has allowed leading brands to distinguish their performance as evidenced through their brand loyalty, superior pricing power, and resilient demand through economic cycles.
Indeed, the luxury sector has widened its lead in a macroeconomic environment that has otherwise proven challenging for investors. To illustrate, the European luxury index widened its outperformance over global equities by more than 20% year-to-date (YTD), with luxury powerhouse LVMH making headlines by becoming the first European company to break USD500b in market capitalisation. Other luxury bellwethers have also displayed outstanding performance, driven by strong sales especially in Europe and Asia.
Risks to the sector include a slowdown in consumption given the challenging macro environment, especially in the US. There are also uncertainties regarding sentiment in China as the society emerges from months of prolonged, stringent lockdowns. Nonetheless, we remain optimistic regarding the gradual return of Chinese tourists to global luxury retail and China&rsquo;s continued role as the world&rsquo;s consumption engine. Furthermore, should a slowdown ensue, the most established brands catering to the most exclusive echelons of consumers are generally insulated and able to best defend their margins, boding well for the owners of top brands. On the flipside, companies concentrated on specific brands which are still subject to execution risk could face challenges.
We reiterate our strategy to focus on high quality companies. The outperformance of the sector has been backed by strong organic sales growth, demonstrating the ability of distinguished brands to entice consumers through economic cycles. Stay with industry leaders given brand polarisation that favours the most established, exclusive brands.
Figure 1: Luxury sector widening its lead since the start of 2023
<img src="/iwov-resources/aics/images/AICS/CIOweb/202304/230427CIOP2Fig1.jpg" alt="" /> 
Source: Bloomberg, DBS
&nbsp;
Download the PDF to read the report.&nbsp;

We reaffirm our conviction in cybersecurity as a growth theme

Thematic Strategy 2Q23: Cybersecurity - Opportunity Amid Danger

In part two of our cybersecurity deep-dive, we determine the costs of cyberattacks and where the growth areas lie. We look at large technology players that are making strategic acquisitions of smaller firms for their specific expertise, and consider APAC which promises to be the next growth region for the sector.
<ul>
<li style="text-align: justify;">Expectations of cyberattacks are increasing as corporate executives brace for a surge in hacking and cybersecurity breaches</li>
<li style="text-align: justify;">Healthcare and financial sectors have been among the hardest hit, experiencing the highest cost per data breach compared to other sectors</li>
<li style="text-align: justify;">Higher spending will be allocated to the following key areas: 1) endpoint &amp; network security, 2) identity &amp; access management, and 3) application &amp; data protection with overall emphasis on Cloud security</li>
<li style="text-align: justify;">AI provides some viable solutions to identify cyber threats though there is a long runway to achieve optimal implementation levels</li>
<li style="text-align: justify;">Growth opportunities abound for the sector as the demand for cybersecurity become commonplace, and we expect disproportionate amounts of corporate spending on Cloud and IT infrastructure</li>
</ul>
<img src="/iwov-resources/aics/images/AICS/CIOweb/202303/CIOInsights2Q23_CybersecurityFig1.JPG" alt="" width="1083" height="544" /> 
<div>Download the PDF to read the full&nbsp;Cybersecurity&nbsp;report. Click <a href="CIOInsights2Q23.xml">here</a>&nbsp;for the full 2Q23 CIO Insights publication.</div>

A collision of forces will prove to be catalysts for the medical and financial transformation that healthcare has long promised to the world

Healthcare: A Prescription for Growth

What the doctor ordered. Mortality has been a universal concern of humankind since time immemorial; references to the mythical &ldquo;fountain of youth&rdquo; were seen in western writings as early as 5th century BC, while texts from the Han dynasty documented the efforts of alchemists to concoct a pill that would grant the emperor immortality. Fastforward to the 21st century, the human pursuit of longevity and self-preservation is stronger than ever and has now taken the form of a multi-billion dollar healthcare industry.
But as universal as healthcare is to the human experience, it had been relegated to being a counter-cyclical sector for a good part of the past decade. That is until the Covid pandemic quickly and dramatically brought the sector back into the spotlight and highlighted not just its defensive characteristics but also its substantial growth runway.
Strong historical performance. While Covid may have given a boost to this sector in recent years, it has consistently delivered solid earnings and share price performance since the start of the decade due to its long-term tailwinds. On top of that, the sector has also exhibited defensive characteristics as evidenced by lower volatility.
Long-term tailwinds ahead. Beyond the pandemic, other secular growth trends underpin the healthcare industry, all of which warrant investor attention. Today, the healthcare sector accounts for a meaningful 12% of the global benchmark and is buoyed by the following structural tailwinds:
<ol>
<li style="text-align: justify;">Ageing population and longer lifespan giving rise to increasing need for medical products and services</li>
<li style="text-align: justify;">Greater medical expenditure on the back of rising disposable income and accumulation of capital</li>
<li style="text-align: justify;">Continuous R&amp;D leading to medical &amp; technological advances</li>
</ol>
 Orphan drugs: An emerging frontier
The healthcare sector&rsquo;s dynamic progression along the healthcare value chain has placed emphasis on the following areas:
<ul>
<li style="text-align: justify;">Life-sciences and orphan drugs</li>
<li style="text-align: justify;">Development and improvement of equipment and devices</li>
<li style="text-align: justify;">Strategic M&amp;A opportunities &amp; expansion of balance sheet strength</li>
<li>Sustainable profitability</li>
<li>Digital transformation</li>
</ul>
 Above all, we believe the orphan drug subsector offers important developments to the overall healthcare industry, and pharmaceutical firms are set to benefit from their rise.
&nbsp; Download the PDF to read the report.

Thematics

Space economy reaches for the stars with robust growth trajectory backed by innovation and competition

Thematic Strategy 3Q24: The Next Frontier

We look at how the space economy has evolved, which companies are ready for take-off, and why a future in space is the new reality for humanity

Space – The Next Frontier

Big Tech's outperformance is rooted in superior revenue and earnings growth

Thematic Strategy 2Q24: Big Tech's New Paradigm

We look beyond the surface of the aesthetic, identifying the undercurrents driving the re-emergence of stealth wealth and what it means for investors

Luxury, Redefined

Explore long-term investment opportunities in Big Tech, Hardware Manufacturers, Cloud Platforms, and Cybersecurity

Thematic Strategy 3Q23: Artificial Intelligence

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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>

We believe any downsides have been priced in.

Global Oilfield Services: Correction Seems Overdone

Buoyant international market for oilfield services. The global Oilfield Services (OFS) market is expected to grow at 3-4% CAGR through 2030, driven by robust production and exploration activities (largely due to the rapid growth in the gas segment and deployment of new technologies aimed at optimising production costs). The North American market (NAM) is expected to remain the largest during the forecast period, owing to resilient drilling and production activity in shale fields. However, in the near term, NAM drilling and completion (D&amp;C) capex growth could see single digit decline with pricing pressure in 2024 before turning positive again in 2025. On the other hand, the international D&amp;C market is expected to remain in positive growth territory over the next two years. The deepwater segment remains the star performer, seeing a robust Final Investment Decision (FID) project pipeline.
Will US election results impact the US drillers? While policy actions certainly matter for the oil and gas (O&amp;G) industry&rsquo;s future, the ever-booming US production levels over the past decade indicate that irrespective of the candidates&rsquo; stated stance towards clean energy vs fossil fuels, oil market fundamentals (global oil demand, oil prices, production efficiencies as well as energy security) eventually remain the key drivers. Unlike coal, which has shown clear declining trends in the US, O&amp;G production climbed higher at the end of the administration&rsquo;s term than at the beginning for the past three US presidencies. Nevertheless, the US election on 5 Nov will be keenly watched as the latest polls show a tight race between Democrats (Kamala Harris) and Republicans (Donald Trump). A Trump win could be mildly positive for the OFS industry, given his widely known stance as a pro-fossil fuel supporter and could potentially stimulate O&amp;G demand further in the US while pressing ahead with LNG export terminal approvals that have been banned by the Biden administration.
Opportunity to bottom-fish blue-chip names. Weak macroeconomics and muted oil market fundamentals &ndash; slower-than-expected oil demand and fears of rising OPEC+ supply &ndash; have taken a toll on share price performance of OFS stocks the past few months with sharp share price correction of c.30% for most stocks from recent highs in April, pushing valuation of the top three OFS players to an average of 6.5x FY25 EV/EBITDA or 1.7SD below mean. We believe any downside has been priced in to a large extent. The sell-off appears overblown, in our view, given the healthy growth of projected O&amp;G capex in international markets, and oil prices are unlikely to fall below USD70/bbl, as OPEC+ could take more steps to stabilise the oil markets.
Figure 1: Share price performance relative to Brent oil price and indexes <img src="/iwov-resources/aics/images/AICS/CIOweb/202409/240918CIOPFig1.jpg" alt="" width="1444" height="581" />
Source: Bloomberg, DBS 
 Download the PDF to read the full report.

Risk-reward continues to shine on for Asian banks

Asian Banks: Impact of Impending Rate Cuts 

Rate cuts priced in; emerging markets such as Indonesia poised to benefit from increased liquidity flow. Our economists expect the Federal Reserve to lower rates by 25 bps per quarter starting from 3Q24, continuing for six consecutive quarters. For now, the impact of rate cuts should already be priced in, though faster-than-expected cuts could accelerate fund outflows from bank stocks. Through the remainder of this year and next, banks should continue to see supportive non-interest income growth which would help to offset weakness in net interest income (NII) as rates begin to decline.
Globally, banks have been preparing for an environment of lower rates by increasing hedging positions while sustaining growth in wealth management and global transaction fees. In our view, impending rate cuts should be more beneficiary for banks from regional emerging markets, compared to those from developed markets. Among ASEAN, Indonesia banks are primed to benefit from increased flows to emerging markets.
In the earlier half of the year, Indonesia banks faced net interest margin (NIM) pressure due to tighter liquidity as loan growth exceeded third-party funds growth. Our economists expect Bank Indonesia (BI) to follow the Fed in adjusting its policy rate &ndash; in the near-term, Indonesia banks will broadly benefit from rate cuts as their liabilities are more sensitive to rate adjustments. Additionally, rate cuts should bode well for the IDR against the USD; a stronger domestic currency would improve investor sentiment, posing tailwinds for the banking sector.
Attractive dividend yield play. With selected banks offering forward dividend yields ranging from 5-10%, we continue to favour several banks across China, Hong Kong, and Singapore which return dividend yields that will compare favourably in an environment of lower rates. For Singapore banks holding excess capital, we see potential for further dividend upside. Valuations continue to be undemanding for Hong Kong, Singapore, as well as China banks in particular, which are trading at c.0.4x forward P/B ratios. In conclusion, the risk-reward for Asian banks remains favourable as we believe downside risks from declining economic growth and asset quality have already been priced in.
Figure 1: Asia&rsquo;s interest rate environment <img src="/iwov-resources/aics/images/AICS/CIOweb/202409/240912CIOPFig1.jpg" alt="" width="1444" height="581" />
Source: Bloomberg, DBS 
Data as of 10 Sep 2024 
 Download the PDF to read the full report.

Asia REITs: Time to Bask in the Sun

REITs shine as interest rates head lower. With inflation tapering off and other macro datapoints in the US showing signs of softening, the Fed has turned visibly dovish, signalling their readiness to cut interest rates at the Federal Open Market Committee (FOMC) meeting in September. With global interest rates now on a normalisation trend amid declining macro headwinds, we have seen a pick-up in performance for REITs in recent weeks. Given close inverse correlation between interest rates and REITs prices, we remain confident that REITs, especially those in Hong Kong and Singapore offering yields of 6-7% on average, will continue to see strong inflows from investors in the months ahead as they seek high yielding opportunities.
Interest costs peaked; lower-hedged REITs positioned to benefit. The impact of rising interest costs on Singapore REITs (S-REITs) appears to have peaked in the first half of 2024. Given recent declines in short-term interest rates across Asia and the expectation of further cuts in 2025, refinancing costs are likely to stabilise. Assuming a typical three-year loan rollover, the overall cost of borrowing could decrease, particularly for REITs with higher exposure to floating rates. Throughout the first half of 2024, REIT managers have been gradually unwinding hedges, positioning their portfolios to benefit from falling rates. Our sensitivity analysis indicates that for every 100 bps drop in interest rates, S-REITs could realise up to a 2.4% increase in earnings in 2025, a factor that is not yet reflected in current valuations.
Investors to refocus on property fundamentals; suburban retail, data centres, and logistics are well-placed to deliver steady growth. With declining macro headwinds, investors will likely refocus on underlying property fundamentals. Across Singapore and Hong Kong, we like suburban retail subsectors where growth is underpinned by resilient retail tenant sales amid limited new retail supply, driving the landlords&rsquo; ability to raise rents. In addition, secular trends underpinned by e-commerce, Generative Artificial Intelligence (Gen AI) will drive continued demand for data centres and logistics properties. We turn more cautious on hotels with expected softness in demand as most hoteliers have become more price sensitive, given the slower-than-expected pick-up in China demand.
Merger and acquisition activity could pick up, presenting upside surprise to REITs&rsquo; distributions. Lower interest rates will be a boost to the overall operating environment as it spurs more transaction activities. As the cost of capital turns more conducive for REITs to pursue accretive acquisitions, S-REITs will be back in a &lsquo;virtuous cycle of growth&rsquo;. This has not been priced in by investors and will present an upside surprise should it transpire eventually.
Figure 1: REITs have trended higher as rates retreat <img src="/iwov-resources/aics/images/AICS/CIOweb/202409/240904CIOPFig1.jpg" alt="" width="1444" height="581" />
Source: Refinitiv, Bloomberg, DBS 
 Download the PDF to read the full report.

We anticipate stabilisation in Chinese equities, poised for further rerating.

China – Establishing New Pillars

Current stimulus insufficient to turn around the property sector, expect more support. The Chinese government has rolled out a series of stimulus measures to stabilise the waning real estate sector. These policies include the removal of a floor on mortgage rates, adjustments to downpayment ratios, and absorption of unsold units. However, an ongoing weakness in home prices indicates that more support measures are needed. Figure 1: More support required to revive real estate sector <img src="/iwov-resources/aics/images/AICS/CIOweb/202408/240813CIOPFig1.jpg" alt="" width="1444" height="581" /> Source: WIND, DBS Measures to absorb excess property inventory is timely and on the right track. The move to distribute a CNY300bn relending package for local State Owned Enterprises (SOEs) to purchase unsold properties and convert them into social housing underscores the authority&rsquo;s determination to ensure housing delivery, digest inventory, as well as alleviate developers' balance sheets and cash flow burdens. As real estate accounts for a substantial proportion of household assets, a gradual stabilisation of the property sector will ease the public&rsquo;s stance on precautionary savings and boost consumption. Strategic shift in growth drivers. The country continues to transform into a new economic model which reduces its dependence on traditional industries. Against this backdrop, there has been an ongoing shift into new growth drivers such as upstream technology components, software, and education, healthcare, and new energy transition. In 2023, technology components accounted for 13% of GDP while software made up 10%, both at levels above the contribution of real estate. Similarly, the combined weight of education, healthcare, and new energy reached a consequential 9%. China's accelerating innovations in next-generation technology, software, artificial intelligence, quantum science, biotechnology, new energy, and new materials (solar, batteries) will play integral roles in the advancement of digitalisation and the new energy transition, thus aligning with the government&rsquo;s &ldquo;New Productive Force&rdquo; blueprint. This phenomenon points towards the emergence of new industries bolstered by strong policy support to provide a substantial runway for future growth, plugging the gap resulting from the decline in real estate. Intensifying semiconductor innovations and homegrown R&amp;D. The strategic goal of establishing China as a science and technology powerhouse by 2035 is evident. To support the development of integrated circuit (IC) design, including manufacturing, design, packaging and testing, the government established three National IC Industry Investment Funds, with investments of USD22bn in 2014, USD30bn in 2019, and USD50bn in 2023. Remarkably, in 2023, imports of semiconductor manufacturing equipment reached USD27.4bn, an annual increase of 28.7%. In the first five months of 2024, the number increased to a monthly average of USD2.53bn, representing a 10% growth from last year&rsquo;s monthly average, and 2.5x of the past 10 years&rsquo; monthly average of USD1bn. We expect R&amp;D efforts to intensify, targeting bottlenecks and technology development constraints in areas such as integrated circuits, semiconductor equipment, advanced materials, and wafer foundry. With a proper implementation roadmap, coupled with the tailwinds of global semiconductor demand, China is set to capture the wave of next-generation technology innovation and emerge as a significant player, building a formidable homegrown semiconductor supply chain, thereby aligning with its strategic goals for higher technological self-reliance and economic transformation. FDI: from recipient to contributor. Over the years, China has transitioned from a net FDI recipient to a net capital exporter as local firms leveraged the "China+1" trend to embark on regional expansions. The creation of world-class companies across various industries has facilitated this shift where neighboring countries including Malaysia, Vietnam, and Indonesia account for a considerable proportion of China's immense outbound foreign direct investment (FDI). The Middle East, rich in oil and gas resources, has also been a major recipient of China outbound FDI. This geographical diversification not only enables China industries to hedge input costs, but also tap into new end markets in recipient countries and strengthen bilateral ties, enhancing Chinese corporates' long-term revenue mix and growth opportunities. By investing in other countries, China can navigate global trade patterns and secure crucial resources, circumventing potential tariffs and sanctions. Valuation support. We anticipate stabilisation in Chinese equities, poised for further rerating. At 10x forward PER, the China market is supported at 1SD below historical mean, while backed by projected earnings growth of 11% and 12% in 2024 and 2025 respectively. This backdrop presents an attractive opportunity for re-rating, as fundamentals continue to improve on the back of policy support and market reforms. We remain constructive on China, focusing on thematic positioning in domestic consumption, technology development, platform companies, software, energy transition, and dividend yielding large cap financials. Download the PDF to read the full report.

Expect investors to shift from MMF to higher-risk assets

Global Capital Markets: Re-risking Ahead of Anticipated Rate Cuts

Improving fee prospects for asset managers, particularly those with strong fixed income franchise. The cooling inflation and labour market in the US has raised expectations for interest rate cuts, driving the two-year US Treasury yield down from the peak of 5% in Apr 2024 to 4% recently. DBS economists are projecting 50 bps of rate cuts by end of 2024F, and another 100 bps cut during 2025F. With returns from cash heading lower, we expect investors to gradually shift part of the &gt;USD10tn in money-market funds (MMF) to higher-risk assets. This could create a generational opportunity for fixed income asset managers as bond yields are now substantially higher than they were during the zero-rate era, while price risks from rising rates are fading. The shift from MMF to bond/equity funds will thereby boost management fees from an increase in the blended fee rate.
ETFs, the favoured instrument. Exchange-Traded Funds (ETFs) are increasingly popular due to their cost efficiency, flexibility, and accessibility. Global ETF assets under management (AUM) nearly tripled from USD3.3tn in Dec 2016 to USD12.3tn in Mar 2024, reflecting a 20% compound annual growth rate (CAGR) &mdash; significantly outpacing the 8% growth of mutual funds over the same period. We anticipate this strong momentum to persist, driven by two key factors: (1) the potential expansion into fixed-income assets which remain underrepresented in ETFs. For example, in the US, ETFs accounted for 13% of total equity assets, but only 2.8% of fixed-income assets by the end of 2023. We expect this disparity to narrow. Additionally, (2) ETFs are likely to become the preferred instruments for asset reallocation as they offer investors the flexibility to adjust their exposure during periods of market volatility. So far this year, ETFs have attracted USD582bn in net inflows, while mutual funds have seen USD278bn in outflows during the same period. As a result, we expect asset managers with strong ETF offerings to outperform.
Potential boost to retail brokers&rsquo; trading activities. Retail brokers have successfully sustained strong growth in client assets by offering MMF and high-yield deposits with approximately 4% annual returns which are significantly more appealing than traditional bank deposits. The revenue potential from these newly acquired assets could gradually be unlocked as clients shift them into securities accounts for trading, particularly following interest rate cuts which would, in turn, boost commission income. Additionally, as (1) more funds are transferred into securities accounts and (2) clients increase their trading activity, idle and transactional cash balances are likely to grow, further supporting brokers&rsquo; interest income.
Figure 1: % AUM of worldwide mutual funds <img src="/iwov-resources/aics/images/AICS/CIOweb/202408/240828CIOPFig1.jpg" alt="" width="1444" height="581" />
Source: Investment Company Institute, DBS 
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Expect companies with higher ERP exposure to outperform

Global Software: Favour Companies with ERP Exposure

Software industry is a clear AI beneficiary. In 2023, software accounted for 37% of the total global AI market, surpassing hardware&rsquo;s 24% share. The ERP (enterprise resource planning) software market is expected to grow at a CAGR of 14% over 2024-20321, reaching a market size of USD239bn by 2032. This growth outpaces the 13% CAGR projected for the CRM (customer relationship management) software market2 and the 12% CAGR forecasted for the global software market3.
ERP integrates a wide range of business processes into a single cohesive system, encompassing accounting, procurement, risk management, compliance, and supply chain operations. This expansive scope makes ERP solutions critical for businesses seeking to improve efficiency. In the era of Industry 4.0, characterised by automation, data exchange, and advanced manufacturing technologies, ERP becomes increasingly crucial in managing complex operations and data flows. In contrast, CRM systems focus on niche areas such as sales, marketing, and customer relationship management.
Many software players started monetising their AI offerings last year. Salesforce is charging users USD50 per month for its Einstein GPT which helps customers automate tasks.4
Solid revenue growth ahead. Major software players reported adjusted earnings in line with expectation for 1Q24 (calendar year), driven by operational efficiency. Revenue growth was primarily fuelled by cloud, AI, and analytics solutions. However, the outlook is mixed across the industry. Leading CRM vendor is guiding revenue growth below that of market expectations, citing elongated deal cycles, deal compression, and heightened budget scrutiny. On the other hand, cloud-centric players have guided for robust revenue growth, exceeding market expectations due to robust backlog.
Preference for players with ERP exposure. Many ERP players are incorporating AI tools into their existing core products at no additional charge. As more features are added, we expect them to adopt consumption-based pricing. Companies with higher exposure in the ERP segment have experienced an increase in share prices by 30-40% YTD, while leading CRM share prices remained flat. This trend of outperformance by ERP companies is expected to continue.
1 Fortune Business Insights, 2 Fortune Business Insights, 3 Precedence Research, 4 Salesforce
Figure 1: Global ERP and CRM software market size (USDbn) <img src="/iwov-resources/aics/images/AICS/CIOweb/202408/240821CIOPFig1.jpg" alt="" width="1444" height="581" />
Source: Fortune Business Insights, DBS 
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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 
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