CIOInsights 3 Q21

CIO
Insights
3Q21
Source: Unsplash
Hope into Reality.

Growth normalising Risk assets supported Grow with I.D.E.A. Income from credit &
dividends
The reopening of US and The dynamics of FOMO Stay with Innovators, Generate steady income
European economies (fear of missing out) Disruptors, Enablers, and from a diversified pool of
points to a snapback in and TINA (there is no Adapters for the Growth BBB/BB-rated bonds.
economic growth and alternative), alongside end of the Barbell Portfolio. China and Singapore
inflation. We see central high levels of liquidity will We add winners of the banks as well as REITs
banks gradually tapering support equities and credit. transformational shift from stand out as dividend
their asset purchases while Stay invested through our combustion engines to plays.
holding policy rates at zero- Barbell Strategy and add electric vehicles.
bound. gold for portfolio resilience.
DBS CIO INSIGHTS | THIRD QUARTER 2021
Content
02 FOREWORD 107 THEMATIC STRATEGY
Electric Vehicles 108
03 129
Good Yield Hunting
EXECUTIVE SUMMARY
143 SPECIAL FEATURE

06 INVESTMENT STRATEGY
Commodity Boom 144
Asset Allocation 08
26
152
Macroeconomics
GLOSSARY
US Equities 39
Europe Equities 45
Japan Equities 50
Asia ex-Japan Equities 57
Global Rates 69
Global Credit 79
Global Currencies 90
Alternatives: Gold 103
CONTENT 1
Foreword
Dear valued clients,
In the blink of an eye, we are halfway through the year. In recent months,
we have seen encouraging news of economies gradually reopening and
travel bubbles taking shape in some parts of the world, as we witness
valiant efforts to inoculate the global population.
Through these uncertain times, we stay committed to anchoring ourselves

as a thought leader and sharing our perspectives, which brings us here –
to the launch of 3Q21’s CIO Insights, a curated publication to guide your
investment strategies.
Our wealth management business continues to attract strong interest from

regional family offices. In the past three years, we have seen double-digit
Sim S. Lim
growth in clients from the Greater China region, and we expect this strong
uptrend to sustain. Group Head Consumer Banking
& Wealth Management
We continue to innovate and adopt new technologies – last month, we
launched Asia’s first bank-backed trust solution for cryptocurrencies via
the bank’s wholly-owned trust company, DBS Trustee, to allow our private
banking clients to invest, custodise, and manage digital assets.
The pandemic has resulted in a greater push for sustainable development,

with many businesses accelerating their plans in this area. DBS is working
with government organisations to proactively bank the underserved and
marginalised groups such as migrant workers to ensure financial inclusion.
We seek to identify more opportunities for clients like yourself to closely
engage with social enterprises: dual bottom-line businesses that generate
both financial returns and social impact.
Covid-19 has prompted us to rethink issues which may have previously

been neglected. There is much in our environment that is beyond our
control, making it all the more important to protect the wealth and legacy
that have taken years or decades to build.
Thank you for your continued trust and support in us as your preferred
wealth advisor, and we look forward to serving you better.
2 FOREWORD
Executive Summary
Dear valued clients,
We started the year with “A New Hope”. With the increasing rollout of
vaccines, we are now beginning to see encouraging signs of normalcy.
By no means are we saying the world has turned the corner in its fight with
the pandemic. But recent developments in the US and parts of Europe are
pointing towards a strong recovery. US GDP is expected to grow by over
+6% this year, from -3.5% last year.
With this V-shaped recovery, inflation fears as reflected in surging commodity

prices have resurfaced. Will the Federal Reserve take its foot off the pedal
and taper its stimulus policies? If so, would the bullish sentiment reverse
its course?
Hou Wey Fook, CFA
The Bank of Canada, followed by the Bank of England were among the Chief Investment Officer
first central banks to taper bond purchases, and others are expected to
follow. However, we believe they will be reassuring in communicating that
interest rates will stay zero-bound for a considerable period of time.
The “taper tantrum” lesson of May 2013, in which bond yields spiked, will
lead to the Fed taking a slow path in withdrawing its monetary stimulus -
particularly as they view current elevated inflation figures to be transitory.
Alongside the high levels of uninvested liquidity, we stay constructive on
the outlook for risk assets. We continue to advocate that you stay invested
in equities, bonds, and gold through our Barbell portfolio approach.
In this publication titled “Hope into Reality”, we dive into the transformational
shift towards Electric Vehicles (EV) as well as the income themes of China
banks and Singapore REITs.
I hope you enjoy the read.
EXECUTIVE SUMMARY 3
Tug
of War
A S S E T A L L O C AT I O N 3 Q 2 1
In assessing the probability of “Taper Talk” in 2H21, a comparison

between macro conditions prior to the May 2013 “taper tantrum”
with prevailing conditions today will be helpful in giving insight
on how the Fed will likely proceed in coming months should the
upward trajectory of macro data persists.
4
Global Equities:
Taper, but no
tantrum
5
Source: Unsplash
Investment
Summary 3Q21
Macro Policy Economic Growth Inflation

Barring a sharp rise in wages Real GDP growth of 10% in Short-term supply side inflation
and retail prices, rising inflation China and 6% in the US would drivers not a major concern.
will be a manageable risk and support the global economy Similarly, demand side drivers
the Fed is expected to maintain this year. Expect robust will influence only a few parts
monetary accommodation. growth momentum to sustain. of the CPI and PPI.
Geopolitics Equities Currencies

Lingering tension between the Equities remain supported by Rising US inflation and
US and China remains as the robust economic momentum expectations of potential Fed
Biden administration views and strong corporate taper to buoy DXY. EUR – a
China as strategic competitor. earnings. Upgrade Europe negative yielding currency – is
to Overweight as vaccination vulnerable to a less dovish Fed
rollout gathers pace. and a steeper US yield curve.
Rates Credit Thematics

Expect 10Y yields to drift Sweet spot is in BBB/ EVs are poised to overtake
higher as investors digest high BB-rated credits in Asia and ICEVs as the automobile of
inflation prints. Further rise in Europe. Maintain average choice in the next century and
5Y5Y inflation swap to prompt portfolio duration of 5 years this presents huge investment
Fed discussion on taper. where the roll down of the opportunities. Huge demand
steeper yield curve is highest. surge expected in China.
6 INVESTMENT SUMMARY
Theme: Theme: Special Feature:

Electric Vehicles Good Yield Hunting Commodity Boom
The allure of the Electric Vehicle The old adage about banks A spectacular rally in
(EV) has never been stronger. being the mainstay of every commodity prices has taken
Improvements in battery country’s economic stability hold since late-2020 which
technology and strong support holds true. The optimistic could well continue into 2021,
from government bodies have economic outlook of China is supported by an early recovery
driven the global surge in supportive of earnings recovery in China and big infrastructure
demand for EVs. in its large banks. spend in the US.
As EVs overtake as the vehicle With ultra-low savings rates, While we expect some
of choice, strong growth demand for passive income moderation, average
for various supply chain and dividends will continue to commodity prices in 2H21 will
beneficiaries are also expected. rise. China banks and S-REITs be significantly higher than in
Technological advancement stand out as high dividend- 2020. In this Special Feature,
and affordability continue to yielding sectors, well supported we examine the upstream
improve, paving the way for by recurring income streams and downstream impact of
widespread adoption. from commercial properties rising energy, base metal, and
across the region. agricultural prices.
Source: Unsplash
T H E M AT I C S U M M A R Y 7
01. Hou Wey Fook, CFA

Chief Investment Officer
Asset Allocation. Dylan Cheang

Strategist
It is becoming a tug of war of views between the US employment rate fell from a peak of 14.8% to
Federal Reserve and the market on whether a 5.8% currently. The consequential rise in inflation
“Fed Taper” is imminent during the second half. expectations has since resulted in rising expectations
On one end of the spectrum, the Federal Reserve of a Fed “taper talk” in the coming months.
is downplaying the scale of recent US recovery,
alleging that substantial economic slack remains. The June FOMC meeting saw an upward shift in
The sharp rebound in inflation was also deemed as the median dot for 2023 to two hikes (from zero
“transitory” on the basis of base effects. in March). But despite the hawkish surprise, Fed
Chair Jerome Powell maintained that “reaching the
However, the bond market is suggesting otherwise. standard of ‘substantial further progress’ is still a
The US 10Y breakeven rate has risen to 2.4% while ways off”.
the UST 10Y yield has also hit 1.5%. The up move
in bond yields reflects both rising optimism on Despite the Fed’s adamant stance in keeping policy
economic growth as well as concern over inflationary loose, we believe that the narrative may change –
pressures from rising commodity prices and wages. should employment and inflation figures continue to
ratchet up. A comparison between macro conditions
Since early last year, global commodity prices
have been on a one-way street. Brent crude oil is
up 277% from its trough while the London Metal Rising energy and base metal prices
Exchange LMEX Index has also rallied 92%. In the
US labour market, signs are also pointing to rising 4,500 London Metal Exchange LMEX Index 95
Brent crude oil (USD/bbl, RHS)
wage pressure as the output gap narrows.
85
4,000
Rising prices – set against a background of strong 75
money supply – suggest that one can no longer be 3,500
65
too certain that the recent rebound in inflation is
“transitory”. 3,000 55
45
Assessing the probability of Taper Talk 2,500
in 2H 35
2,000
25
There is no denying that the US economy has
improved sharply from the depths of the pandemic 1,500 15
Apr-15 Apr-17 Apr-19 Apr-21
last year. The ISM Manufacturing, for instance, has
spiked above the 50-mark to hit 61.2 in May, while Source: Bloomberg DBS
8 3 Q 2 1 A S S E T A L L O C AT I O N
prior to the May 2013 “taper tantrum” with prevailing • Employment: Unlike the Subprime Crisis,
conditions today will be helpful in giving insight on the nature of the Covid-19 pandemic crisis
how the Fed will likely proceed in coming months is “non-structural” in nature and this explains
should the upward trajectory of macro data persists. for the sharp fall in unemployment rate when
conditions improve. Currently, the latter stands
at 5.8% and this is markedly better than the
Macro conditions today and prior to 7.6% level seen in 2013.
2013 “taper tantrum”
• Inflation: Inflationary conditions today are not
dissimilar to 2013. Back then, the measure of
April 2013 May 2021 inflation expectations was 2.3%, not far from the
current 2.4%. Core inflation today, at 3.8%, is
ism manufacturing 51.0 61.2 however markedly higher than the 1.7% level in
unemployment rate 7.6% 5.8%
2013.
inflation expectations 2.3% 2.4%
us core inflation 1.7% 3.8%
Better than 2013
70 ISM Manufacturing (LHS) 16

US unemployment rate (%, RHS)
• Economic Momentum: Using ISM Manufacturing
14
as proxy for “economic momentum”, the current 65
reading of 61.2 suggesting that manufacturing 12

activities are on expansionary mode and it is 60
vastly higher than the 51.0 level registered in 10

April 2013. 55
8
50
6
45
4
40 2
May-10 May-13 May-16 May-19
Source: Bloomberg DBS
3 Q 2 1 A S S E T A L L O C AT I O N 9
Inflationary conditions not dissimilar to Global Equities: Taper, but no tantrum

2013
To be sure, any Fed taper or cutting back on its asset
US core inflation (%, LHS)
purchase programme on the back of a recovering
3.0 US inflation expectations (%, RHS) 2.8
economy is not negative for the equity since rising
corporate earnings from a stronger economy will be
2.5
2.3 highly supportive.
2.0 The Fed policy normalisation process in 2013-18 is

1.8 a case in point and listed below are our key findings:
1.5
» Bond yields spiked when the “taper tantrum”
1.3 first took hold in May 2013. The UST 10Y yield
1.0
surged 1.4 %pts from 1.7% in April 2013 to hit
an intermittent peak of 3.0% in December 2013.
0.5 0.8
Feb-10 May-13 Aug-16 Nov-19 Despite the rise in bond yields, global equities
rallied 11% during this period.
» It took 31 months from the start of “taper

tantrum” in May 2013 for the Fed to implement
Powell has guided that a QE taper will be conducted its first policy rate hike in December 2015. By
“well before” any rate hike. Indeed, as in the previous then, the rise in UST 10Y (since April 2013)
episode, it took a total of 31 months for the Fed to has slowed to 0.6 %pt while the gains in global
implement its first policy rate hike (in December equities was 8%.
2015) after highlighting the plausibility of tapering of
its QE programme in May 2013. » The rate hiking cycle by the US Fed eventually
peaked at 2.5% in December 2018. At that
Given (a) Similarities in macro conditions today and point, magnitude of the rise in UST 10Y (since
conditions prior to the “taper tantrum” of 2013 and April 2013) was 1.0 %pt while the gains in global
(b) The huge time lapse between taper talk and equities hit 23%.
actual rate hike in the previous cycle, we believe
that a Fed taper cannot be ruled out should inflation These findings highlight three salient points:
expectations approach the 3% mark. It is therefore
prudent for portfolio allocators to position for this 1. Rising US bond yields does not translate to
eventuality. corrections in equity markets. Global equities
continue to rally in spite of rising yields, as
demonstrated during the previous Fed Taper.
2. Bond yields tend to rise ahead of a Fed rate hike » From the start of “taper tantrum” to the first
as expectations get “priced in”. policy rate hike in December 2015, global
equities gained 8%. The divergence in DM-EM
3. Equity markets rallied throughout the rate hiking performance was, however, extremely stark.
cycle. While DM gained 13% over this period, EM
plunged 24%.
The rally through the Fed hiking cycle » From the start of “taper tantrum” to the peak
of the Fed rate hiking cycle in December 2018,
UST 10Y yield (%, LHS) global equities were up 23%. DM continued
3.5 Fed Fund Rate (%, LHS) 4,500
S&P 500 (RHS)
to surge ahead with a 28% gain while the EM
4,000
3.0 world lost 7%.
3,500
2.5
3,000
2.0 2,500 DM outperformance in hiking cycle

1.5 2,000
Fed Funds Rate (%, LHS)
3.0 2.2
1,500 DM equities rel. to EM equities (RHS)
1.0
1,000
2.5 2.0
0.5
500
2.0 1.8
0.0 0
May-11 Apr-14 Mar-17 Feb-20
1.5 1.6
1.0 1.4
Fed Taper: Winners and losers in the

equity world 0.5 1.2
0.0 1.0
Even though equities on a global basis rallied during May-11 May-13 May-15 May-17
the previous Fed rate hiking cycle, there has been a
huge divergence in performance between DM and Source: Bloomberg DBS
EM. Here are the key findings:

These past observations show that emerging
» From the start of “taper tantrum” in May 2013 to market equities underperform their developed peers
the point whereby bond yields hit an intermittent substantially during a Fed monetary tightening cycle.
peak in December 2013, global equities were up We believe it will be no different this time – should
11%. But geographically, while DM rallied 13%, Fed begins the tapering process, given the following
EM lost 4%. reasons:
1. Huge dependence on external funding: The 3. Reliance on dollar debt funding: Debt issuance
Covid-19 pandemic has led to a surge in by emerging economies are predominantly
borrowing among emerging economies. A rising denominated in USD. Rising rates in the US
rate environment can trigger sudden withdrawal will place upward pressure on USD and this, in
of foreign liquidity and causing funding gaps for turn, increases the debt servicing burden of EM
these countries. borrowers.
2. Narrowing yield differentials: Rising UST yields 4. Divergence in Covid-19 situation: Unlike the
increase the relative attractiveness of US developed economies which have managed to
government bonds over their emerging peers. put the pandemic under control, the emerging
This could result in reversal of capital flows out space is still experiencing substantial number
from EM to DM. of new cases and this will hamper the latter’s
attempt to return to normalcy.
EM spreads widening on the cards Spike in new COVID-19 cases

should the Fed tighten
700
J.P. Morgan EMBI Plus Sovereign Spread New coronavirus case in DM (’000)
New coronavirus case in EM ('000)
650
700
600
600
550
500
500
450
400
400 300
350 200
300 100
250 0
Apr-16 Nov-17 Jun-19 Jan-21 Jan-20 Jun-20 Nov-20 Apr-21
-100
Source: Bloomberg DBS Source: Bloomberg, DBS
* Chart is truncated
Fed tightening concerns a drag on EM; Earnings: The key driver for equities in
Earnings momentum to underpin DM 2021
resilience 190 S&P 500 - Forward earnings (LHS) 29
S&P 500 - Forward P/E (x, RHS)
180 27
We believe concerns around Fed’s monetary
tightening will dominate the narratives in coming 170 25
months and incoming inflation/employment data
160 23
will therefore be closely monitored. The recent
underperformance of EM equities relative to DM is 150 21
therefore likely to persist.
140 19
The trajectory of DM in 2021 will predominantly 130 17
be an earnings growth story. Using the S&P 500

120 15
Index as a proxy, US corporate earnings powered
ahead this year as the economy emerged from the 110 13
Apr-16 Dec-17 Aug-19 Apr-21
EM underperformance since early 2021 lows of the pandemic. This is evident from the 1Q
earnings season which saw c.87% positive earnings
surprises. Given the strong set of numbers, we
0.52 EM equities rel. to DM equities
believe upward earnings revisions are on the cards.
0.50 In 2020, the rally in the S&P 500 was about valuation
multiple expansion. This was demonstrated by the
0.48 16% rally despite the economy grinding to a halt
and forward earnings collapsing 15%. The rally was
the result of a massive 37% multiple expansion as
0.46
investors were pricing in the likelihood of a recovery
in 2021.
0.44
But with the market trading at 22.6x forward P/E

0.42 currently, there is clearly limited room for further
Jan-19 Oct-19 Jul-20 Apr-21 multiple expansion this year. Instead, further upside
will be driven by earnings growth and the strong 1Q
numbers augur well for this upward trend.
“The valuation
argument for equities
could come under
scrutiny in coming
months should bond
yields grind higher
while equity markets
stay elevated.”
14
Source: Unsplash
15
Source: Unsplash
3Q21 CIO Asset Allocation (CAA) framework
Equities Bonds
Score
Categories Indicators
Range DM DM EM
US Europe Japan AxJ
Govt Corp Bonds
PMI -1 to +1 -1 1 -1 -1 0 0 0
Economic surprise -1 to +1 -1 1 -1 -1 0 0 0
Inflation -1 to +1 0 0 0 0 -1 -1 -1
Fundamentals
Monetary policies -1 to +1 0 0 0 0 0 0 0
Forecasted EPS growth -2 to +2 2 1 1 1 - 0 0
Earnings surprise -2 to +2 2 1 1 1 - 0 0
Forward P/E -2 to +2 -1 0 0 0 - - -
P/B vs ROE -2 to +2 0 -1 0 0 - - -
Valuation Earnings yield - 10-yr yield -2 to +2 1 1 0 0 0 0 0
Free Cashflow yield -2 to +2 0 0 0 0 - - -
Credit spread -2 to +2 - - - - - -1 -1
Fund flows -2 to +2 2 0 0 0 0 0 1
Momentum Volatility -1 to +1 -1 -1 -1 -1 -1 - -
Catalysts -2 to +2 0 0 0 0 0 0 0
Raw Score 3 3 -1 -1 -2 -2 -1
Adjusted Score* 0.14 0.14 -0.05 -0.05 -0.18 -0.13 -0.06
*Note: The “Adjusted Score” is calculated using the “Raw Score” divided by the maximum attainable score for each category. Source: DBS
3Q21 Asset Allocation: Equities remain But despite the strong headline numbers, one has
attractive relative to bonds to be mindful of base effects given the devastation
caused by the pandemic last year. The long-term
Cross Assets: Vaccination rollout and growth trend remains below pre-pandemic days
macroeconomic recovery will continue to drive and it is may take years before a return to normalcy.
outperformance of equities over bonds. From a Moreover, the resurgence in new infection waves
cross-assets perspective, we keep our preference (particularly in emerging economies) suggests the
for equities over bonds. In our CAA framework, persistent of macro headwinds.
equities garnered a higher composite score of 0.05
as compared to -0.12 for bonds. Momentum wise, we believe that the macro rebound
in the US, Japan, and Asia ex-Japan has peaked
Fundamentals: Aided by ongoing vaccinations for now and some moderation is on the cards.
and reopening of various industries, 2021 will be Growth momentum for Europe, meanwhile, appears
a year of recovery for the global economy. The promising in the coming quarter given its success on
JPMorgan Global Manufacturing PMI stayed firmly the vaccination front.
in expansionary territory with a reading of 55.8 in
April while the Citi Economic Surprise Index (Global) Valuation: On cross-assets basis, the gap between
remains elevated at 61.3 (as of 18 May). US earnings yields and Treasury yields narrowed
further in 2Q as the global equity rally persisted
through the quarter. With the yield gap standing at
Substantially narrowed yield gap 1.7%, equities remain more attractive than bonds
from a valuation perspective. However, the valuation
US yield gap (%)
argument for equities could come under scrutiny
6 in coming months should bond yields grind higher
while equity markets stay elevated.
5
Momentum: On cross-assets flows, the strong
4
inflow of funds into equities persisted in 2Q. For
the whole of 2020, equities registered total inflows
of USD190b while bonds inflows were markedly
3
higher at USD383b. But the situation has reversed
this year. On a YTD basis, equities have seen inflows
2 of USD482b, outpacing bond flows which were
more subdued at USD213b. Geographically, the US
1 accounts for the largest inflow by far this year within
Apr-16 Dec-17 Aug-19 Apr-21 the equity space.
The rotation into equities has begun • Geared beneficiary of vaccine discovery:
The European equity market has a heavy
30 Global equities - Fund flows (USDb, 3mma) concentration of “traditional” sectors of
Global bonds - Fund flows (USDb, 3mma) Financials, Industrials, and Materials. These
25
sectors are poised to undergo stronger recovery
20
in a post-pandemic world.
15
10 Rising optimism over the region’s recovery is

5 evident from the strength of recent upward
0 earnings revision. As recent as December last
-5
year, consensus was expecting European
earnings to fall 35% y/y. However, by April this
-10
year, this was upgraded to a 32% y/y gain. This
-15
constitutes a net change of 67 %pts (vs +57
-20 %pts for global equities).
Jan-10 Jan-13 Jan-16 Jan-19
Source: EPFR Global, DBS
Europe macro momentum on the rise

Equities: Upgrade Europe, downgrade Asia
ex-Japan. Within DM, we have turned marginally Economic Surprise - Eurozone
positive on Europe equities and our rationale is: 250 Economic Surprise - US & Japan *
200
• Improving macro momentum: As compared to 150
the US (in particular), the economic recovery in 100

50
Europe since the depth of the pandemic has
0
been patchy. This is partly due to the region’s
-50
inability to put the crisis under control, which has
-100
hindered the smooth reopening of the economy.
-150
-200
However, recent data suggest progress is made -250
on this front as vaccinations have gathered -300
pace. The economic surprise numbers from -350
Jan-19 Sep-19 May-20 Jan-21
Europe is now coming in better than the US/
Japan combined and underlines the momentum Source: Bloomberg DBS
in the region’s recovery. * Average for the US and Japan
Strong fund flows into US equities • Impact of rising bond yields: Asia (and by
extension EM) has historically underperformed
14 US equities - Fund flows (3mma, USDb, RHS) DM during periods of rising bond yields. During
Japan equities - Fund flows (3mma, USDb)
12 Europe equities - Fund flows (3mma, USDb)
the previous Fed policy tightening cycle in 2013-
AxJ equities - Fund flows (3mma, USDb) 18, the UST 10Y yield rose 0.9%. DM equities
10
gained 40.7% while Asia ex-Japan was up only
8 8.9% (underperformance of 31.8 %pts). The
6 same underperformance for Asia equities could
be on the cards as the Fed gradually shifts
4
towards policy tightening in the coming quarters.
2
-2
Asia’s deteriorating Covid-19 situation
-4
Jul-19 Jan-20 Jul-20 Jan-21
80% New coronavirus cases - Asia Pacific as % of global total
Source: EPFR Global, DBS
60%
For this quarter, we downgrade our long-held
positive stance on Asia ex-Japan to Neutral. The
reasons are the following: 40%
• Rising new Covid-19 infections: Unlike the US,

the Covid-19 situation in Asia has deteriorated. 20%
In end-2020, Asia Pacific accounted for 6% of

total new cases globally. However, by 17 June
this year, the region accounted for a significant 0%
May-20 Sep-20 Jan-21 May-21
share of 48% new infections. Should Asia fail
to put the pandemic situation under control Source: Bloomberg DBS
in coming months, the region’s economic *chart is truncated
and corporate earnings trajectory will take a

substantial hit.
Bonds: Stay constructive on HY; Asian credits Asian credits remain attractive
preferred. Volatility in the fixed income space is
expected to ratchet up as markets progressively 12 Bloomberg Barclays Asia USD High Yield spread (%)
reprice inflation expectations. In such environment, Average
11
we maintain our preference for HY credits over IG
for two reasons: (a) Unlike IG, the average duration 10
for HY credits have been on the decline and (b) 9

HY credits moving up the quality curve with BBs
8
accounting for a higher proportion of the basket
these days. On a geographical basis, we continue 7
to like Asian credits given their strong underlying 6

fundamentals. Our preferred sectors include China
5
property, gaming and leisure, and Indonesian quasi-
sovereigns. 4
3
Jul-10 Sep-13 Nov-16 Jan-20
TAA breakdown by asset class (Balanced TAA breakdown by geography within

Profile) equities (Balanced Profile)
Cash Asia ex-Japan
4% 16%
Alternatives Equities
15% 50% US
54%
Japan
4%
Europe
26%
Fixed Income
31%
Source: DBS Source: DBS
3Q21 Global Tactical Asset Allocation
3-Month Basis 12-Month Basis
Equities Neutral Neutral
US Equities Overweight Overweight
Europe Equities Overweight Underweight
Japan Equities Underweight Underweight
Asia ex-Japan Equities Underweight Overweight
Fixed Income Underweight Underweight
Developed Markets (DM) Government Bonds Underweight Underweight
Developed Markets (DM) Corporate Bonds Neutral Neutral
Emerging Markets (EM) Bonds Overweight Neutral
Alternatives Overweight Overweight
Gold Overweight Overweight
Hedge Funds Overweight Neutral
Cash Underweight Neutral
Cash US Equities
7.0% 8.0%
Cash Europe Equities
20.0% 5.0%
DM Govt Japan Equities
EM Bonds
Bonds 1.0%
21.0%
30.0%
AxJ
Equities
1.0%
DM Govt
Bonds
17.0%
DM Corp DM Corp Bonds

Bonds 40.0%
50.0%
CONSERVATIVE MODERATE
TAA SAA Active TAA SAA Active
Equities 0.0% 0.0% Equities 15.0% 15.0%
US 0.0% 0.0% US 8.0% 6.0% 2.0%
Europe 0.0% 0.0% Europe 5.0% 4.0% 1.0%
Japan 0.0% 0.0% Japan 1.0% 2.0% -1.0%
Asia ex-Japan 0.0% 0.0% Asia ex-Japan 1.0% 3.0% -2.0%
Fixed Income 80.0% 80.0% Fixed Income 78.0% 80.0% -2.0%
Developed Markets (DM) 80.0% 80.0% Developed Markets (DM) 57.0% 60.0% -3.0%
DM Government Bonds 30.0% 30.0% DM Government Bonds 17.0% 20.0% -3.0%
DM Corporate Bonds 50.0% 50.0% DM Corporate Bonds 40.0% 40.0%
Emerging Markets (EM) 0.0% 0.0% Emerging Markets (EM) 21.0% 20.0% 1.0%
Alternatives 0.0% 0.0% Alternatives 0.0% 0.0%
Gold 0.0% 0.0% Gold 0.0% 0.0%
Hedge Funds* 0.0% 0.0% Hedge Funds* 0.0% 0.0%
Cash 20.0% 20.0% Cash 7.0% 5.0% 2.0%
*Only P4 risk rated UCITs Alternatives *Only P4 risk rated UCITs Alternatives
Cash Cash
4.0% US Equities 3.0% US Equities
27.0% Alternatives 33.0%
Alternatives
15.0% 19.0%
EM Bonds
5.0%
EM Bonds
14.0%
DM Corp
Europe Bonds
Equities 7.0%
13.0%
DM Govt
Bonds
DM Corp Bonds 1.0% Europe
15.0% Japan Equities Equities
AxJ Equities
2.0% 18.0%
DM Govt Bonds AxJ Equities 12.0%
2.0% 8.0% Japan Equities
2.0%
BALANCED AGGRESSIVE
TAA SAA Active TAA SAA Active
Equities 50.0% 50.0% Equities 65.0% 65.0%
US 27.0% 25.0% 2.0% US 33.0% 30.0% 3.0%
Europe 13.0% 10.0% 3.0% Europe 18.0% 15.0% 3.0%
Japan 2.0% 5.0% -3.0% Japan 2.0% 5.0% -3.0%
Asia ex-Japan 8.0% 10.0% -2.0% Asia ex-Japan 12.0% 15.0% -3.0%
Fixed Income 31.0% 35.0% -4.0% Fixed Income 13.0% 15.0% -2.0%
Developed Markets (DM) 17.0% 25.0% -8.0% Developed Markets (DM) 8.0% 11.0% -3.0%
DM Government Bonds 2.0% 10.0% -8.0% DM Government Bonds 1.0% 4.0% -3.0%
DM Corporate Bonds 15.0% 15.0% DM Corporate Bonds 7.0% 7.0%
Emerging Markets (EM) 14.0% 10.0% 4.0% Emerging Markets (EM) 5.0% 4.0% 1.0%
Alternatives 15.0% 10.0% 5.0% Alternatives 19.0% 15.0% 4.0%
Gold 9.0% 5.0% 4.0% Gold 8.0% 5.0% 3.0%
Hedge Funds* 6.0% 5.0% 1.0% Hedge Funds* 11.0% 10.0% 1.0%
Cash 4.0% 5.0% -1.0% Cash 3.0% 5.0% -2.0%
*Only P4 risk rated UCITs Alternatives *Only P4 risk rated UCITs Alternatives
Notes:
1. The above are based on three-month views.
2. Asset allocation does not ensure a profit or protect against market loss.
3. “TAA’ refers to “Tactical Asset Allocation”. “SAA” refers to “Strategic Asset Allocation”.
4. Based on the SAA model, the Aggressive model has the highest risk, followed by Balanced, Moderate, and Conservative, with Conservative being the least risky.
5. The investor type classification for the portfolio has no direct relationship with the Financial Needs Analysis customer risk profile types and the portfolios are not
assigned any product risk rating based on the bank’s proprietary risk rating methodology.
Robust
rebound
underway
MACROECONOMICS 3Q21
With vaccinations ameliorating the pandemic situations in major

economies, a robust rebound is underway. Inflation risks are likely
manageable, and we dial up our growth forecasts in view of the
prevailing general optimism.
24
Source: Unsplash
Taimur Baig, Ph.D.
02. Chief Economist

Radhika Rao
Economist
Macroeconomics. Ma Tieying
Economist
Suvro Sarkar
Analyst
US about the right balance between lives and livelihood,

with only partial compliance with safe practices
Sustained strong momentum necessary to keep the outbreak at bay. Eventually
though, fiscal and monetary authorities unleashed
Despite rising concerns about variant-driven support measures of magnitude previously unseen.
resurgence of the Covid-19 pandemic, the world’s As a result, domestic demand picked up quickly, but
two largest economies are undergoing robust production and exports lagged considerably.
rebounds. China and the US are on course to print
sufficient GDP growth this year to make up for the That trend has spilled over from 2020 to 2021.
lost output of 2020. While some of it is base effect Latest data show an economy undergoing a boom
driven, real GDP growth of around 10% in China and in consumption of goods and services, along with
6%+ in the US would help considerably in supporting residential investment. Also, investment confidence
the global economy this year. has improved, wages and employment are on
their way up, and financial market conditions are
The two economies are, however, growing in highly accommodating. The combination of this
rather contrasting manners. After the pandemic
broke, China took strong measures to manage the
pandemic, accompanied by only modest stimulus
measures. After an unprecedented lockdown and a US domestic demand surging ahead
resulting sharp decline in activities in 1Q20, 2Q20 saw relative to China
infections decline and factories reopen. Export order
books began filling up from pent-up demand from the
55.0% US industrial production
rest of the world, industrial production rebounded, US retail sales
and business confidence bottomed. Since then, 45.0% China industrial production
China retail sales
the Chinese economy has been characterised by
35.0%
a gradual pick-up in domestic demand. Although
Covid cases are low and domestic mobility has 25.0%
risen, full normalisation of domestic activity has
15.0%
yet to materialise. An additional factor keeping a
sharp rebound from taking place is largely neutral 5.0%
monetary conditions, with the authorities keeping

-5.0%
liquidity ample but in control to prevent real estate-
related credit bubbles from forming. -15.0%
-25.0%
In the initial part of the pandemic in 2020, the US 2018 2019 2020 2021
proceeded with a rather lukewarm response, unsure

Source: CEIC, DBS
3Q21 MACROECONOMICS 25
type of economic momentum, together with highly Could inflation spoil the story? Only partially, in our
supporting fiscal and monetary policies, is rare in view. Many of the short-term supply side drivers
history. Unless Covid mounts an unwelcome return of inflation (semiconductor shortage and shipping
in the coming quarters, the makings of a major bottleneck) may cause some friction in the period
boom are in place. Although base effects will fade ahead, but not so much to worry the Federal
and some points of weakness can appear in one Reserve, push up rates uncomfortably, or dent
corner of the economy or the other, there is genuine consumer confidence. As for runaway demand
underlying strength to propel the US economy at pushing up prices (the way lumber prices have shot
above trend growth this year and next. up in the US due to surging home improvement), we
think that too will influence only a few parts of the
CPI and PPI. Unless we see sharp rise in wages,
US exports lag China substantially; followed by material impact on margins, which then
opposite for imports leads to retail price hikes, we will continue to see
rising inflation as a manageable risk.
China exports China imports
US exports US imports
80% As structural reforms kick in, for example through
the much anticipated infrastructure bill, the near-
60% term outlook will likely be characterised by strong
consumption, modest industrial production, and
40%
large trade deficits as imports keep lagging exports.
20%
The growth strategies going forward will likely
0% be different. The US will pursue policies to revive
investment over the medium term, while China’s
-20% focus will be on consumption, which will help adjust
its external account imbalances and provide a more
-40% sustainable footing for the economy.
2018 2019 2020 2021
Source: CEIC, DBS
26 3Q21 MACROECONOMICS
Eurozone Growth rebound tracks bounce in stress

indicators
Benefitting from an improving rate of
GDP (% y/y, LHS) Eurozone stress indicator (inverse, RHS)
vaccination
5.0 -0.2
The pandemic situation is on the mend in the

0.0
0.0
Eurozone. Caseloads have peaked in most member
countries, especially the core-4, containing the 0.2
fatality and hospitalisation rates. Restrictions are -5.0
easing but gradually. For instance, Germany has 0.4
allowed few contact-intensive services to reopen, -10.0

while some parts of the continent are open for cross 0.6
border travel. New and vaccine-resistant variants are, -15.0

0.8
however, a risk, which has seen authorities exercise
considerable caution in the reopening process.
-20.0 1.0
2002 2006 2010 2014 2018
After a slow and hesitant start, the vaccination pace
has accelerated. Daily inoculations in Germany, Source: Bloomberg, DBS
France, Spain, and Italy have surpassed the US into

May. About 30-40% of the respective populations
have received at least the first dose and expectations
recently raised their 2021 growth forecast to 4.3%
are that a critical mass will be covered by 3Q21,
vs 3.8% earlier, fully reflecting the likely economic
subject to sufficient supplies.
impact of the Recovery and Resilience Facility into
the math.
Growth is receiving a fillip after a difficult 2020.
Encouragingly, considering the stringency of the
1Q21 GDP contracted by a smaller -1.8% y/y
measures in 2H20 and 1Q21, the decline in activity
(-0.6% q/q sa), with France’s sequential growth
was milder than during 1H20’s wave as the linkage
returning to black, and Italy notched the most
between mobility and growth pace weakened. This
improvement. On-track reopening will help income
owed to an extended period of accommodative
and employment uncertainty to fade, which along
policy, adept households and business to
with additional buoyancy from tourism, external
subsequent lockdowns, as well as tailwinds from
trade, and easy financing conditions buoying
stronger global growth. The European Commission
investments will be crucial legs for growth this year, a return in the demand impulses and high service
provided infection rates remain under control and sector pressures as economies reopen. April
vaccine rollout achieves critical mass in 2H21. We inflation ticked up to 1.6% y/y vs January’s 0.9% and
dial up our 2021 forecast to 4.0% and 2022 to 4.2% might surpass 2% in 2H21, above the central bank’s
to capture the anticipated turnaround in activity and target. Yet policymakers are likely to see this jump as
forward looking optimism. transitory given that output is below pre-pandemic
levels and there is slack in the labour markets. We
dial up 2021 CPI inflation estimates.
Market-based price indicators tick up
The ECB will be in a tough spot, reflecting optimism
Brent prices (USD/bbl, LHS) 5Y5Y swaps (%, RHS)
in their economic outlook but needing to prevent
120 2.5
financial conditions from tightening up prematurely.
Bond yields have risen from late-2020 lows, especially
100
2.0
widening Bund-Italian spreads, even as UST yields
80 have stabilised. The financial market gauge for
inflationary expectations, YTD, has risen more than
60 1.5 the US, tracking better growth prospects as well as
higher supply-side drivers namely commodity prices
40 and rising input costs. Any guidance on taper in
1.0 asset purchases is not the cards this year, with the
20
US Federal Reserve expected to front-run Eurozone
policymakers in this regard.
0 0.5
2014 2016 2018 2020
Fiscal deficits are unlikely to meaningfully correct
Source: Bloomberg, DBS in 2021 despite an upward revision in growth
projections, as emergency policy support and higher
expenditure stands extended in most cases. The
A combination of cost-push pressures, temporary
Eurozone’s deficit is expected to rise to 8% of GDP
factors (tax changes), base effects, and re-weighting
vs -7.2% in 2020, with overall public debt also set
of the price basket, have driven inflation higher in
to rise to a new record of 102% from 98% last year,
recent months. This might be fuelled further by
underpinning bond supplies.
12 3Q21 MACROECONOMICS 29
Source: Unsplash
Japan The main challenge comes from the new highly

contagious virus variants, which have caused the
Downside risks to growth forecast fourth wave of infections in populous Japanese cities
and triggered the third state of emergency. It does
After contracting 5% q/q saar, or about 2% y/y in not help that the pace of vaccination has remained
1Q21, the Japanese economy is expected to stay slow, due to the shortage in global vaccine supply.
stagnant in 2Q21 and recover moderately in the Only around 5% of population has been inoculated
second half. Our full year GDP growth forecast for as of end-May.
2021 remains at 2.8%, but risks are skewed to the
downside. The resurgence in coronavirus has weighed on
confidence, discouraged consumer spending on
non-essential goods and services, and aggravated
Growth and inflation still in negative consumers’ deflation expectations. Meanwhile, it
territory also dampened the hope for the Tokyo Olympics
Games to boost tourism and consumption in 3Q21.
GDP growth (% y/y) CPI inflation (% y/y)
2
A prolonged period would be needed for private
0
consumption to recover to its normal levels seen
before the 2020 pandemic outbreak and the 2019
-2 sales tax hike.
-4
Consumer confidence below the 2019

-6
levels
-8
Consumer Confidence Index
45
-10
-12
1Q19 3Q19 1Q20 3Q20 1Q21
35
Sources: CEIC, DBS
25
15
2015 2016 2017 2018 2019 2020 2021
Sources: CEIC, DBS
The key driver for GDP growth remains exports. The government is still inclined to inject more
The acceleration of vaccination in the US and other fiscal stimulus into the economy, through the
developed economies bolsters the case for a further existing contingency reserve funds and also the
recovery in global trade activities in the second supplementary budgets. In addition to the economic
half of this year. The deterioration in the pandemic pressure stemming from the pandemic, Prime
crisis in India and other emerging economies would Minister Yoshihide Suga and the ruling Liberal
depress smartphone and automobile demand. But it Democratic Party would also face greater political
may also spur demand for the consumer electronics pressure in the next several months, in the context
products that support working from home and of a Lower House election that must be held before
homeschooling. October.
Asia
Exports growth picking up on a broad
basis Singapore’s renewed pandemic
Exports to ASEAN (% y/y)
stringency
50
Asia NIEs
40 China Singapore stepped into 2Q21 with a spring in its
EU
30
US
step. Auto sales, retail sales, and dining out were
20 growing robustly. Trade had perked up, with exports
10 hitting record highs, which in turn had a salutory
impact on industrial production. The labour market
0
was picking up, business confidence was on the
-10
rise, as reflected in the PMI survey, and company
-20
earnings were on the mend. The strong beginning of
-30 2Q21, however, was marred by a resurgence of the
-40 Covid pandemic, which prompted the authorities to
-50 impose a series of stringent measures on 16 May,
2019 2020 2021 driven by concerns over a rise in community cases.
As dining in is suspended, large gatherings curtailed,
Sources: CEIC, DBS
and WFH becomes the norm again, domestic
activities are bound to take a hit.
In the face of a delayed recovery and lingering
deflation, the BOJ is likely to lag other major central
In addition to the usual concern about resurging
banks to normalise monetary policy. The BOJ has
cases in South and parts of Southeast Asia, two
kept the door open for further policy easing. It
other matters have come up. First, the spread of
established an Interest Scheme to Promote Lending
a particularly virulent variant of the coronavirus,
at the March meeting, paying 0.1-0.2% interest to
namely B.1.167. The further muted form of the
the financial institutions that tap its cash coffers to
variant is B.1.167.2, which has been spreading
boost loans. This scheme provides some leeway
rapidly in India, and to some extent, in the UK. Data
for the BOJ to further cut the negative policy rate,
suggest that the variant is highly transmissible.
if needed.
Second, a few instances have come up in which fully experience is already supportive of those vaccinated
vaccinated individuals have caught the Covid-19 not facing any serious health consequence after
infection and passed it on to others. As more data catching Covid-19.
come in, public health professionals would be able
to make the call if the practice that has caught on This is the essence of the pandemic battle, in our
in Western economies, of relaxing mask mandates view. As long as nations manage to vaccinate a large
for those vaccinated, is a sound one. Until then, chunk, if not all, of their at-risk population, they will
an abundance of caution warrants some degree be able to deal with new waves of infection, even if
of reinforced stringency on mobility and proximity, they are virulent.
which is where Singapore stands now.
What does the mobility restriction mean for
On the road to vaccination, Singapore has picked up Singapore’s economic outlook? We think what
the pace; we reckon that by the end of summer, a happened in Japan in 1Q21 may be instructive for
critical mass of at-risk population will be vaccinated, Singapore’s 2Q21 outturn. Japan’s real GDP likely
adding a sense of safety in the community. A more contracted by 2% q/q saar as domestic demand
aggressive campaign to remove residual hesitancy deteriorated due to the resurgence of Covid-19,
regarding vaccination, making vaccines available fully offsetting the recovery in exports. Singapore
to wider community, examining the possibility of had the makings of domestic and external demand
vaccinating children, are all critical dimensions of complementing each other through April, but May
putting the pandemic to rest. There is growing and June would be setbacks, which may well cause
recognition among public health officials that shifting a q/q decline in activities.
from a policy of outright suppression to considering
SARS-Cov2 an endemic virus may be warranted. On a q/q basis, the GDP growth number will be
Governments around the world may follow that shift amply positive though. None of the new restrictions
eventually, but only after mass vaccination. are comparable to the severe and stringent
measures implemented during last year’s “Circuit
The WHO has already designated B.1.167 a variant Breaker”. Protocols to continue with production,
of concern, with data from India showing nearly 30% transportation, work, and school are well in train, so
of new infections there stem from that variant family. the economy can carry on. Still, a decline in footfall
Even in the UK, which is presently characterised by a will hurt retail and recreation vendors, sentiments
dramatic decline in hospitalisation and fatalities, the will be dented, and planned activities which would
variant has begun to raise its head. have added momentum to the economy would
be postponed. Singapore’s outlook just got rather
Concerns notwithstanding, early data clearly suggest clouded, but between vaccinations and public sector
the usefulness of vaccines in dealing with the support, coming out from the May/June turbulence
coronavirus, in general, and the variant, in particular. ought to be easier. Reverting back to the long-term
Although vaccinations do not fully eliminate the risk trend, given adverse demographics and subdued
of catching the virus and passing it on, Singapore’s productivity, will be Singapore’s key challenge.
Singapore’s Covid scar
190 Real GDP Trend (2010-19)

Projection
180
170
160
150
140
130
120
110
100
2010 2012 2014 2016 2018 2020 2022 2024 2026
Source: IMF World Economic Outlook April 2021, DBS
Energy Demand recovery is on track – global oil demand in

April is already c.4.0 mmbpd above 2020 average
Oil prices buoyed by inventory declines and we expect to see continued oil demand recovery,
especially in seasonally strong 3Q21, as developed
Oil price continues bullish momentum YTD in economies like the US and Europe continue to
2021 as global inventory levels normalise. Brent open up. This has led to OECD oil inventories falling
crude oil prices touched USD70/bbl briefly in 1Q21 below the five-year average, and the oil glut caused
and has since stabilised at around the USD65/bbl by Covid-19 is all but gone, propping up oil prices.
range. The recovery has been much faster than we Coupled with continued vaccine rollout optimism
had expected. Having started the year at USD52/ and US fiscal stimulus measures, oil prices appear
bbl, the rally has gone from strength to strength in relatively well supported in the foreseeable future.
the first few months of 2021. A series of positive The only key risk is the impact of the severe Covid
news flow has provided significant momentum to crisis in India, but that should hopefully not dent
oil bulls, including the OPEC+ decision to defer global oil demand numbers by too much (maybe
production increases till April 2021, and only gradual c.0.3-0.4 mmbpd negative impact if it does not
increases thereafter. In the interim, we saw other worsen further beyond 2Q21).
outages including a cold snap in Texas, helping to
further tighten the market.
Sharp fall in global oil inventories YTD in Looking further ahead, we believe there could be
2021 supports oil price momentum oil price spikes towards USD80/bbl or higher in late
2022 and beyond, once demand has recovered
3,300
OECD oil inventories (mmbbls) to pre-Covid levels and OPEC spare capacity is
down to normalised levels, as severe systemic
3,200
underinvestment on the upstream side in recent
3,100 years could have an impact on non-OPEC supply
growth.
3,000
2,900 OPEC+ commitment likely to remain firm

despite potential return of Iranian barrels.
2,800
OPEC+ meetings in January through March saw
2,700 members agreeing to raise production only very
2,600
marginally over the first four months of the year.
This was followed by Saudi Arabia unilaterally
2,500
declaring that it would voluntarily cut production by
1.0 mmbpd from January levels for the next three
Source: Bloomberg, DBS months till April. The most recent OPEC+ meeting
in April saw the first signs of easing of production
Forecast revised up for 2021. Brent crude oil cuts, but with gradual calibration. So, we are likely
prices averaged around USD43/bbl in 2020. We are to see OPEC+ put back around 2.0 mmbpd of oil
likely to see a much better year for oil in 2021, as till July, but this is likely to be in line with seasonal
demand recovers (by around 5.5 mmbbpd by our and cyclical oil demand increase and will not result
projections, after falling around 9.0 mmbpd in 2020), in flooding the market.
while supply remains curtailed by OPEC+ production
OPEC production remains subdued YTD
cut agreements (increasing by around 3.0 mmbpd
in 2021
by our projections, less than the demand increase).
33 OPEC production (mmbpd)
This will lead to inventory drawdowns and stronger oil
prices overall. With a stronger 2Q21 in our forecasts
31
now, we are raising our average 2021 Brent crude oil
price forecast to USD65-70/bbl. Our 2022 average
29
Brent crude oil forecast remains at USD65-70/bbl as
well, on the assumption that OPEC+ discipline stays
27
in the face of the potential removal of Iran sanctions
and US shale growth being contained.
25
23
21
Source: Bloomberg, DBS
Quarterly average oil price forecast 2021/22 – DBS base case view
(USD per 1Q21A 2Q21F 3Q21F 4Q21F 1Q22F 2Q22F 3Q22F 4Q22F
barrel)
Average
Brent crude 61.5 68.5 70.5 67.0 66.0 67.5 70.0 71.0
oil price
Average WTI
crude oil 58.5 65.5 67.5 64.0 63.0 64.5 67.0 68.0
price
Source: DBS
Looking further forward, we believe there could be Iran production is currently around 1.4
some progress in coming months on the Iran-US mmbpd off recent peaks in 2018
nuclear deal front, which could lead to removal of
sanctions on Iranian oil exports sometime in 2H21. 4.5 Iran production (mmbpd)
This could result in the addition of 1.0-1.5 mmbpd
of supply to the market within a short period of time,
but OPEC+ will likely take this into account and
defer any further planned easing of production cuts 3.5
(another 2.0 mmbpd easing was likely for the rest of

2021 if not for Iran) beyond July 2021 to cater to this
possibility and ensure stability in oil markets.
2.5
1.5
GDP growth and CPI inflation forecasts
GDP growth, % y/y CPI inflation, % y/y, ave
2019A 2020A 2021F 2022F 2019A 2020A 2021F 2022F
Mainland China 6.1 2.3 10.5 5.5 2.9 2.3 2.5 2.5
Hong Kong -1.2 -6.1 6.0 2.3 2.9 0.3 2.0 2.5
India 4.7 -7.1 8.0 6.0 3.7 6.6 4.7 4.5
India (FY basis)* 4.0 -7.8 9.5 5.8 4.8 6.2 4.8 4.4
Indonesia 5.0 -2.1 4.0 4.5 2.8 2.0 2.2 2.8
Malaysia 4.3 -5.6 5.2 4.8 0.7 -1.1 1.4 2.0
Philippines** 5.9 -9.5 6.0 6.5 2.5 2.4 4.0 3.0
Singapore 0.7 -5.4 6.3 3.2 0.6 -0.2 1.4 1.5
South Korea 2.0 -1.0 3.8 2.8 0.4 0.5 1.7 1.0
Taiwan 3.0 3.1 5.0 2.8 0.6 -0.2 1.5 1.0
Thailand 2.4 -6.1 2.1 3.5 0.7 -0.8 1.0 1.3
Vietnam 7.0 2.9 6.7 6.8 2.8 3.2 3.3 3.6
Eurozone 0.9 -6.8 4.0 4.2 1.2 0.3 1.8 1.0
Japan 0.3 -4.8 2.8 1.5 0.5 0.0 0.0 0.5
United States*** 2.2 -3.5 6.0 2.5 2.3 1.3 3.5 2.2
* refers to fiscal years, i.e. 2020 represents FY21 - year ending March 2021. Source: CEIC, DBS
** new CPI series. *** eop for CPI inflation.
Policy interest rates forecasts, eop
2019A 2020A 2021F 2022F 2019A 2020A 2021F 2022F
Mainland China* 3.85 3.85 3.85 3.85 3.85 3.85 3.85 4.05
India 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00
Indonesia 3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50
Malaysia 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75
Philippines 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00
Singapore** 0.12 0.12 0.12 0.12 0.12 0.12 0.12 0.12
South Korea 0.50 0.50 0.50 0.50 0.50 0.50 0.75 0.75
Taiwan 1.13 1.13 1.13 1.13 1.13 1.13 1.13 1.25
Thailand 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50
Vietnam*** 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00
Eurozone 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Japan -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10
United States 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25
* 1-yr Loan Prime Rate; ** 3M SOR ; *** prime rate. Source: CEIC, DBS
Switch to
quality
US EQUITIES 3Q21
Rising enthusiasm for the US market is evident from recent fund

flows data. With strong progress on vaccination and the rollout of
fiscal initiatives from the Biden administration, upward trajectory for
US equities is expected to be sustained for the rest of this year.
38
Source: Unsplash
03.
US Equities.
Dylan Cheang
Strategist
US equities leading the pack in 2021. We started US earnings have displayed great
the year stating that it will be a year of recovery. resilience
Recover it did. US GDP recovered from an 8.5%
y/y decline in 2Q20 to a 2.3% y/y growth by 1Q21. 300 US equities - Trailing 12-mth EPS
Global ex-US equites - Trailing 12-mth EPS
By extension, the S&P 500 Index and Russell 2000
Index have also notched gains of 12% and 14% 250
respectively. The strong up-move in US equities has
been underpinned by both absolute and relative
200
factors:
• Absolute factor: For 1Q21 earnings season, the 150
S&P 500 reported strong earnings surprise of

87%, and momentum was particularly strong 100
in Technology (96%) and Financials (94%). This
strong showing suggests that US corporate
50
earnings are finally on the mend after getting
Dec-09 Jul-13 Feb-17 Sep-20
ravaged by the pandemic last year.
• Relative factor: On a relative basis, US earnings

have proved to be more resilient over the cycles
to Japan. Given strong progress on vaccination
as compared to other markets (global ex-US).
and the unrolling of fiscal initiatives from the Biden
Since 2010, trailing EPS growth for US equities
Administration, upward trajectory for US equities is
has exceeded markets outside of the US by 110
expected to be sustained for the rest of this year.
percentage points.
Easy money made; focus on quality now. After

Rising enthusiasm for the US market is clearly
the strong YTD performance, the upward momentum
evident from recent fund flows data by EPFR Global,
for the S&P 500 could moderate in coming months
which showed USD179b flowing to US equities YTD,
given:
as compared to USD16b to Europe and USD9b
3Q21 US EQUITIES 39
• Peaking economic momentum: The strong US macro momentum rolling over

rebound in US macro momentum since early
last year has peaked and is starting to roll over. 300 Citi Economic Surprise Index - US
250
• Narrowing yield gap: The sharp up-moves in US
equities, coupled with rising bond yields, have 200
seen the US yield gap narrowing from 5.7% in 150

20 March 2020 to 1.8% currently – a level which 100
is broadly in line with its recent lows.
50
In such an environment, we advise investors to 0
focus on large cap quality names that possess the -50

following traits: (a) Sustainable earnings and scalable
-100
business models, (b) Low gearing and resilience to
rising rates. -150
Apr-19 Oct-19 Apr-20 Oct-20 Apr-21
US saw strong inflow of funds Yield gap has narrowed substantially
14 US Equity - Fund Flows (3mma, USDb) 7 US yield gap (%)

Japan Equity - Fund Flows (3mma, USDb)
12 Europe Equity - Fund Flows (3mma, USDb)
6
Asia ex-Japan Equity - Fund Flows (3mma, USDb)
10
8 5
6
4
4
2 3
0
2
-2
-4 1
Jul-19 Jan-20 Jul-20 Jan-21 Jan-10 Jan-13 Jan-16 Jan-19
Source: EPFR Global, DBS Source: Bloomberg DBS
40 3Q21 US EQUITIES
3Q21 US EQUITIES 41
Source: Unsplash
3Q21 US Sector Strategy – Replacing For the upcoming quarter, we are upgrading
Energy with Financials to ride the Financials to Overweight while downgrading Energy
“vaccine winners” trade to Neutral. Our rationale behind this tactical switch
are:
The YTD performance of our US sector calls is a
mixed bag. Our preferred exposure for the “vaccine • Broad-based economic recovery and rising
discovery” trade was via exposure in US Energy; inflation expectations will put upward pressure
indeed, the call has panned out well as the sector on US bond yields in coming quarters and US
garnered the highest returns of 47.2% this year. Financials will be a geared beneficiary.
However, we were Neutral on Financials which saw
returns of 26.7%. • The potential return of Iranian barrels in 2H21
could be a headwind for energy stocks which
Meanwhile, our long-term conviction calls on the have undergone a strong rally this year.
Technology-related space did not pan out as well
this year as rising yields triggered active sector • US Energy has outperformed US Financials by
rotations. While US Communications Services 20.5%pts YTD and the latter is attractive as a
outperformed the broader market with gains of “catch-up” play.
16.6%, the performance for US Technology and
Consumer Discretionary was subdued on a relative
basis.
Our Overweight calls saw mixed bag Rising yields positive for US Financials
performance
Y TD Total Returns (%) 700 US Financials (LHS) UST 10Y yield (%, RHS) 4.0
US Energy 47.2
3.5
US Financials 26.7
600
US Real Estate 26.3 3.0
US Comm. Svcs 19.0
2.5
US Materials 17.9 500
US Industrials 16.7 2.0

S&P 500 14.1
400
1.5
US Health Care 10.3
US Technology 10.3 1.0
US Cons. Dis. 7.1 300
US Utilities 6.5 0.5
US Cons. Staples 5.6

200 0.0
0.0 10.0 20.0 30.0 40.0 50.0 Jan-15 Jan-17 Jan-19 Jan-21
Source: Bloomberg, DBS Source: Bloomberg, DBS

* YTD performance as at 14 June 2021
42 3Q21 US EQUITIES
3Q21 US sector allocation
Overweight Neutral Underweight
Technology Materials Utilities
Comm. Services Real Estate Cons. Staples

US Sectors
Cons. Dis. Energy Industrials
Health Care
Financials
Source: DBS
US sector key financial ratios

YTD TOTAL
FORWARD P/B EV/EBITDA ROE ROA OPM
RETURNS
P/E (X) (X) (X) (%) (%) (%)
(%)
S&P 500 INDEX 14.1 22.6 4.6 18.3 13.9 2.7 12.5
S&P 500
26.7 14.4 1.7 7.7 12.4 1.3 25.2
FINANCIALS
S&P 500 ENERGY 47.2 19.8 1.9 27.5 -10.3 -4.3 -8.8
S&P 500
10.3 27.5 10.9 22.5 32.4 11.7 23.6
TECHNOLOGY
S&P 500
17.9 18.9 3.4 16.8 10.7 4.3 10.6
MATERIALS
S&P 500
16.7 27.8 6.0 24.8 8.5 2.1 6.7
INDUSTRIALS
S&P 500 CONS.

5.6 21.7 6.8 16.5 25.4 7.0 9.3
STAPLES
S&P 500 CONS.

7.1 34.3 11.6 23.2 22.6 4.6 7.6
DISCRETIONARY
S&P 500 COMM.

19.0 22.9 4.5 16.5 12.9 4.9 17.4
SERVICES
S&P 500 UTILITIES 6.5 19.1 2.2 14.2 8.6 2.2 18.2
S&P 500
26.3 53.0 4.4 27.0 7.0 2.7 20.9
REAL ESTATE
S&P 500
10.3 17.1 5.0 18.0 16.2 5.5 8.4
HEALTH CARE
Source: Bloomberg
* Data as at 14 June 2021
3Q21 US EQUITIES 43
On the
Mend
EUROPE EQUITIES 3Q21
1Q21 earnings have surprised on the upside and we expect growth

momentum to pick up and earnings to return to pre-crisis levels
by the end of this year. Along with the stronger economic outlook,
we are upgrading our outlook for Europe equities, and believe that
market recovery could broaden to several other sectors.
44
Source: Unsplash
04.
Europe Equities.
Joanne Goh
Strategist
Europe had a strong quarter in 2Q21 on signs of Stimulus to work into the economy. In line with
the pandemic coming to an end. The economy the expected reopening of the economy in June, on
emerged better than expected from a second wave the back of effective vaccination efforts, we believe
in 1Q21, and vaccination efforts have accelerated 2021 will be the inflexion point for stronger growth
after a sluggish start in the second quarter of the ahead.
year. The economy is expected to open for summer
and the recovery is likely to be sustained throughout Governments across the Euro Area and the ECB
the year. Business surveys have indicated that have committed to EUR750b in emergency and
the manufacturing sector continues to recover, recovery funds and EUR1.85t bond purchases to
supported by solid global demand, while the services support the hardship faced during the pandemic
sector has showed signs of bottoming out. and post-crisis recovery. We believe these support
packages should work their way into the economy,
thus leading to a strong economic recovery in 2H21.
Green shoots Money ready to spend
PMI Services Manufacturing Household savings, EURb

370
70
60 320
50
270
40
220
30
170
20
10 120
Dec-19 Jun-20 Dec-20 99 01 03 05 07 09 11 13 15 17 19
Source: Bloomberg, DBS Source: Eurostat, DBS
3Q21 EUROPE EQUITIES 45

High household cash levels. European Investment Opportunities

households are likely to have emerged “cash rich”
from the pandemic on the back of robust support With European economies slated for reopening in
measures by the government. With the economy the summer and vaccine passports ready for travel,
previously under lockdown, shopping, dining, and we expect travel, leisure, and food and beverage
traveling were all restricted and there were few spending to pick up pace. Key sector beneficiaries
avenues to spend money. Our calculations show should include:
that cash that was saved among households and
ready to be spent is as much as EUR350b. 1. Europe Oil Majors: Sentiments toward the
Energy sector should improve with higher
Recovery fund to be deployed in 2H21. oil prices. The sector price performance has
Meanwhile, starting the second half of the year, the lagged oil price and its earnings, and we believe
EUR750b pandemic recovery fund will be availed it should close the gap as oil demand picks up
to kickstart another investment cycle. These funds with the resumption of travel.
have been designated for clean projects, modern
infrastructure, and digitalisation in areas which will
benefit Europe on a long-term, sustainable basis. Sector to close gap
The fund is expected to add 1% to Eurozone’s GDP
over the course of three years. Oil price
Index, rebased Europe Energy eps
to oil price Europe Energy performance
Turning positive on Europe equities. Europe
90
equities gained c.12% in 1H-to-date, led by the
80
cyclical sectors such as Financials, Consumer
70
Discretionary, Energy, and Technology. Earnings
60
have surprised on the upside in 1Q21 and we expect
the growth momentum to pick up and earnings to 50
return to pre-crisis levels by the end of this year. 40
In line with the stronger economic outlook, we are 30
upgrading our outlook for Europe equities, and 20
believe that market recovery could broaden to other 10

sectors as well. 0
2015 2017 2019 2021
46 3Q21 EUROPE EQUITIES

2. Aerospace: The growth in air traffic is most likely Clean Energy Transition
to bounce back from a very low base as travel
restrictions are lifted in the summer. Coupled With the EU planning for climate neutrality by 2050
with pent-up demand and high cash levels for and to reduce carbon emissions by 55% by 2030,
spending, the numbers are likely to exceed there should be a lot of green projects vying for
market expectations. We believe the sweet spot funding from the EUR750b EU recovery fund. The
is in the aerospace industry where the agenda following sectors should benefit from the fund:
for fleet renewal, on the back of the goal towards
decarbonisation, is most urgent. 1. Utilities: Infrastructure spending on power grids
should be important for Europe to achieve its
3. Beverages: We expect beer sales volumes climate goals. To connect wind farms and solar
to be robust following the reopening of pubs plants to residents, the power network will
throughout Europe. need to expand with thoughtful infrastructure
planning.
4. Financials: European banks are still suffering from
the aftermath of the Eurozone sovereign debt
crisis in the last decade. Economic rescue plans
European Autos still running cheap
during and post Covid-19 are likely to burden the
x
same countries with high debt levels, which they 2.0
may find difficulty to repay the banks. Moreover,
1.8
a doubling of excess liquidity by the ECB and a
deposit rate at -0.5% are likely to squeeze the 1.6
banks’ margins further. We are selective in the +1 SD

1.4
sector by focusing on potential restructuring,
new cost plans, M&A, or leadership changes 1.2
Avg
pursued by the banks that could help breathe 1.0
new life into them. Among Financials, we are
0.8 -1 SD
positive on the Insurance sector as a post-Covid
recovery play, where better negotiated terms 0.6
and conditions on potential risks are key to the
0.4
return of improved profits. 2010 2012 2014 2016 2018 2020
3Q21 EUROPE EQUITIES 47

2. Electric Vehicles (EV): The companies in the More free cashflow

same value chain – such as batteries, charging
stations, and auto manufacturers – are slated to Free cashflow
per share
benefit from the clean energy transition, as road
70
transportation is identified as one of the sectors
60
where decarbonisation can be done with the
50
least resistance. Strong demand can be derived
from consumers incentivised with subsidies 40
and the promise of more charging stations. 30
Meanwhile EV manufacturers are assisted with 20

R&D grants and the sourcing of parts and 10
materials to accelerate ramp up of battery EV 0
capacity.
2014
2015
2016
2017
2018
2019
2020
2021 Current
2021E
2022E
Long-term Themes
Digitalisation. The outperformers last year were Source: Bloomberg, DBS
beneficiaries of structural changes brought about by

the pandemic including WFH trends and accelerated Dividend Theme
digitalisation. We continue to advocate staying in
these winners as they ride on secular, or long-term The fiscal and monetary support for European
and irreversible trends. These include stocks in the companies were very positive for their cashflows.
Automation and Semiconductor sectors. Many European companies took advantage of the
ECB’s bond-buying programme by raising debt
Millennials spending. Millennials remain a levels, while preserving cash by reducing costs,
formidable consumption force. Sports, fashion, and cutting dividends, and postponing share buybacks.
luxury goods players in Europe have adapted well to At the end of 2020, free cashflows were extremely
Millennials’ spending patterns. Most of them have high, thus allowing room for M&A, dividends, and
also expanded online sales by adapting to the post- share buybacks to be restored. With earnings
pandemic accelerated e-Commerce trends. The expected to recover to pre-pandemic levels this
sector has been relatively resilient, but we continue year, we believe the typical high dividend payouts
to witness their long-term potential with great from European companies will be restored.
adaptabilities.
48 3Q21 EUROPE EQUITIES

Domestic
headwinds
J A PA N E Q U I T I E S 3 Q 2 1
Despite domestic headwinds, valuations have become more

palatable and yield gaps remain supportive. Among major
central banks, the BOJ is seen to be the least likely to remove
accommodative policies. We highlight selected investment
opportunities in companies leveraged on global demand.
49
Source: Unsplash
05.
Japan Equities.
Joanne Goh
Strategist
Renewed concerns in rising Covid-19 cases and Services took a hit

delayed vaccine rollouts led to the underperformance
of Japan equities relative to the US and Europe in (Index) Manufacturing Services
2Q21.
60
55
With the Olympics and the upcoming elections at
stake, we believe the situation should be resolved 50
soon. The government has since set up concrete 45
steps to accelerate inoculations and control the virus
40
spread. What is certain is that domestic sentiment
is weak as the new virus wave has weighed on 35
confidence, discouraged consumer spending on 30

non-essential goods and services, and aggravated
25
consumers’ deflation expectations. It will take long
before domestic demand starts to pick up. 20
Jun-18 Apr-19 Feb-20 Dec-20
Manufacturing activities however, remain robust on Source: Bloomberg, DBS
the back of strong export demand led by the US

and China, global new technology demand, and
increased digitalisation and electrification.
Inflation should be welcomed
We expect Japan’s economy to stay stagnant in
2Q21 after 1Q21’s contraction, and to recover Debates on inflation have heated up in recent months
modestly in the second half of the year. amid rising metals and oil prices, supply woes in
semiconductor chips and raw materials, and as
Japan’s equity market had a strong start to the global central banks flush the market with liquidity
year before succumbing to Covid-19 variants and and outsized stimulus packages – raising concerns
the Nasdaq Composite Index’s volatility in 2Q21. that high inflation may already be here.
We believe investors will likely look pass the worst
as global recovery to normalcy, led by the US and However, for a country where inflation is persistently
Europe, stays on path. Valuations had become more below target despite maintaining zero interest rates
palatable and yield gaps remain supportive as far for the longest time, inflation should be welcomed.
as the Japan market is concerned. Among major Latest inflation prints from Japan continue to point to
central banks, the BOJ is seen to be the least likely deflationary pressure; we thus maintain the view that
to remove accommodative policies.
50 3 Q 2 1 J A PA N E Q U I T I E S
Rising exports Earnings and Valuations
Exports growth, % Japan corporates reported a strong set of earnings

50
for financial year ending March 2021. Valuations
have come off their peak levels, but are still at the
40
high end of historical range. Aggregate EBIT and
30
EBITDA levels have surpassed pre-Covid levels,
20 mainly driven by cyclicals, which also led in earnings
10 surprises.
0
However, most sectors reported guidance that fell
-10
below consensus expectations. We believe this is
-20
likely due to a combination of elevated expectations,
-30 slow re-opening due to Covid-19 resurgence,
-40 and sector specific factors. Price reactions to the
2012 2014 2016 2018 2020
positive results are inexplicit in our view. We look
Source: Bloomberg, DBS for fundamentally strong sectors which have been
mis-priced.
the BOJ will maintain its accommodative monetary Topix favors a weak yen
policies of QE, negative policy rate, and 0% yield
targeting. Index TOPIX (LHS) USD/JPY (RHS) USD/JPY
2100 130
A rise in global inflation should still be positive for

1900
Japan. The transmission mechanism is through 120
higher external rates and widening spreads, hence
1700
weakening the yen and favouring Japan’s exports 110
competitiveness. 1500
100
However, the impact of US QE taper is mixed. Apart 1300
from rising US yields, the notion that the US will
90
taper before Japan could make JPY a safe haven 1100
and attract foreign flows. A strong yen is negative

900 80
for equities. 2013 2015 2017 2020
3 Q 2 1 J A PA N E Q U I T I E S 51
Source: Unsplash
A rise in
global
inflation
is a
welcome for
Japan
Source: Unsplash
Selected investment opportunities are in Valuation not excessive

companies leveraged on global demand, including
Japanese companies having a competitive edge
Forward P/E (x)
in semiconductor production equipment, trading
18
companies, industrial automation, autos, and
video gaming sectors. Domestic sectors such 17
as cosmetics and banks bear downside risks, 16

unless they can mitigate domestic weakness with 15
substantial overseas contribution.
14
13
Key sector outlook 12
11
Semiconductor production equipment.
10
Companies generally upgraded their expectations
9
for the equipment market for CY2021 by 10-20%,
2012 2014 2016 2019 2021
and are expected to post record-high earnings.
This is largely due to strong capex plans among
semiconductor manufacturers. For instance, TSMC
plans to increase capex further from 2022, Intel is
due to resume large-scale investments from 2022,
and Chinese semiconductor manufacturers are
stepping up capex.
Trading companies. Business conditions for both
Industrial Automation. Earnings for March 2021 resource and non-resource sectors should remain
quarter was largely in-line, but guidance was favourable for trading companies. As a sign of
generally below expectations. Some companies confidence in the outlook, one particular company
have commented that the current strong demand is beefing up its shareholder return policies with
is unsustainable, expecting a slowdown of order the announcement of an additional share buyback
momentum over the summer. However, we believe and a hike to its dividend floor for March 2022.
that these companies may have underestimated the Management has set conservative assumptions for
global capex spending driven by shortages, and commodity prices while iron ore, copper, and crude
outsized stimulus packages. We remain constructive oil prices are still running high and we believe there
on the sectoral outlook. should be upside surprise.
Machinery sector rerate to Capex Cosmetics. Companies generally issue

spending disappointing guidance despite upbeat earnings,
pointing to a longer-dated recovery ahead. The
(index) Semicondcutor Capex (RHS) USDb extended state of emergency in Japan, and the
600 Japan machinery sector Index (LHS) 160
pushing back of inbound sales and duty-free
550 assumptions were common factors cited. Indeed,
140
500 the sector bears a high risk of disappointment if the
120
450 Olympics fail to materialise.
100
400
350 80 Banks. Markets and fees/commission incomes are

300 healthy, while the outlook for credit costs remains
60
250
the main worry given the resurgence of Covid-19
40 cases in Japan.
200
20
150
Meanwhile, dividend guidance by the banks generally
100 0
surprised on the upside although buybacks were not
2008 2012 2016 2020 2024
announced. Banks with high overseas ratios should
Source: Bloomberg, DBS benefit from rising interest rates overseas while
Japan is still stuck with low interest rates.
Video gaming companies. They mainly missed Japanese autos are US reflation
guidance due to a weak pipeline for FY22 after a beneficiary
strong series of launches in FY21 on stay home
demand. We believe periods of lulls in game 4,500 London Metal Exchange LMEX Index 95
Brent crude oil (USD/bbl, RHS)
launches are typically good opportunities to buy
85
quality gaming companies. 4,000
75
Autos. Global discretionary spending should 3,500

65
continue to rise in line with the reflation trend and
Japanese autos exporters are the biggest beneficiary 3,000 55
of the re-opening trend in the US. They are expected 45

to see accelerated growth in market share due to 2,500
1) productions with ample semiconductor inventory 35

2,000
staying unaffected by the global semiconductor 25
shortage; 2) a weak yen which gives Japanese car
1,500 15
makers a global competitive advantage. Apr-15 Apr-17 Apr-19 Apr-21
Recovery
gains
momentum
A S I A E X - J A PA N E Q U I T I E S 3 Q 2 1
Asia ex-Japan equities faced volatility as investors weighed global

inflation risks, the reopening of DM economies, as well as Covid-19
resurgence in the region. We explore opportunities in the different
economies and encourage investors to look ahead towards the long
term.
56
Source: Unsplash
06. Yeang Cheng Ling

Strategist
Asia ex-Japan Equities. Joanne Goh

Strategist
Asia equities started 2021 with a strong first quarter, North Asia
but subsequently underwent volatility in the remaining
first half of the year amid a few factors, which include While we acknowledge that recent events have given
the resurgence in Covid-19 cases in some countries, rise to the current cautious investment sentiment,
policy rollout to regulate platform entities, spike in we advocate investors to look ahead, towards the
UST yields, as well as tension in bilateral relations. long term.
We believe these headwinds will persist in the coming From the lows of 2020, North Asia equities have
quarter as US taper and inflation chatters are likely benefitted from the rapid advancement in digitalisation
to be in focus. EM, such as emerging ASEAN are and technology, coupled with the fast reopening of
likely to be more affected than the rest of the region domestic economic and manufacturing activities. For
as their financial markets are dependent on foreign instance, the stellar performance of the Taiwan stock
flows. Foreign appetite may wane as domestic bond market was driven by the semiconductor foundries
yields and currencies come under pressure due to and IC design firms, such as Taiwan Semiconductor
uncertainties on Federal Reserve policies. Alongside
with the difference in Covid response among EM
and DM, risk-reward should favor DMs which are North Asia markets have been strong
ready to open their economies while EMs are still
struggling with new Covid waves. North Asia World China
Japan ASEAN Taiwan
S.Korea
We are thus downgrading Asia ex-Japan to 60
Underweight. Within Asia ex-Japan, we remain
positive on North Asia, with focus on its Tech sector 40
which are less affected by Fed policies. We are also
positive on the high yielding sectors in China large 20
banks and Singapore banks and REITs.
0
-20
-40
Dec-19 May-20 Oct-20 Mar-21
3 Q 2 1 A S I A E X - J A PA N E Q U I T I E S 57
Manufacturing Company Limited (TSMC), United Leisure trips in demand

Microelectronics Corporation, GlobalWafers Co Ltd,
MediaTek Inc, Novatek Microelectronics, and Realtek No. of trips bookings by Hainan travel agencies (’000)
3,500
Semiconductor Corporation. Similarly for South
3,000
Korea, leading performers include semiconductor
and consumer electronic names like LG Electronics,
2,500
Samsung Electronics, and LG Display; New
Economy stocks such as Kakao and Naver; and 2,000
battery manufacturers such as LG Chemical Ltd and
1,500
Samsung SDI Co Ltd.
1,000
This rapid recovery demonstrates the strong secular
theme of digitalisation, its prevailing ecosystem, and 500
the expansion of supply chains. Evidently, this is a

-
theme in which North Asia entities excel and will Mar-11 Mar-14 Mar-17 Mar-20
continue to lead over the long term.
China New Economy and the broader technology

Domestic activities on the rebound in China. A
sectors have shrugged off the headwinds from
strong rebound in domestic mobility in the world’s
2019’s trade tension and the impact of the pandemic
most populous nation underpins sustained economic
in 2020, delivering attractive long-term returns.
recovery and better corporate earnings outlook.
Robust China New Economy and Tech Domestic railway traffic on the rebound
sectors
China A-shares H-shares Million passengers per month
China New Economy stocks China Technology 400
2018 = 100
280
300
230
200
180
100
130
80 0
Dec-18 Aug-19 Apr-20 Dec-20 Dec-10 Dec-13 Dec-16 Dec-19
58 3 Q 2 1 A S I A E X - J A PA N E Q U I T I E S
Travel-related activities staged a strong rebound Corporate earnings set to rebound

during the recent Labor Day holiday when bookings
for hotels, car rentals, and other related spending China industrial enterprise profit (y/y %, LHS)
100 16
China manufacturing output (y/y %, RHS)
more than tripled from a year ago. A record 230m
14
trips were made during the period, 18% higher 80
than in 2019. Even as borders remained closed, 12

60
local spending power remained firm. Trip bookings 10
to Hainan rose to new highs towards the end of 40 8
2020 and we anticipate the reading to stay high.
20 6
These data point towards signs of buoyancy in local
sentiment. 4
0
2
Leading indicators. Similarly, leading indicators are -20
0
pointing towards strong and convincing multifaceted
-40 -2
recovery in corporate earnings. Factories have Dec-14 Dec-16 Dec-18 Dec-20
been operating at high capacity utilisation rates
since China steered away from the pandemic in the
second half of 2020. The economy’s ability to revive
The industrial sector’s overall operating profit margins
and sustain the profitability of manufacturing firms
were resilient and rose to a multiyear high of 6.5% in
will continue to support China equities.
1Q21. This trend is expected to continue.
Recovery of operating profit margins Local consumption stays sturdy
China industrial sector operating margins (%) 60 China Service PMI SA

7.0 Average (%) Expansionary >50
55
6.0
50
5.0 45
40
4.0
35
3.0 30
Feb-14 Feb-16 Feb-18 Feb-20 Dec-14 Dec-16 Dec-18 Dec-20
Since 2Q20, China’s services PMI has returned Technology firms in the region have been
to levels above 50 as the economy emerged from holding the pole position in wafer foundry and
pandemic lockdowns; a level above 50 indicates the semiconductor contract manufacturing. We expect
sector is in an expansionary mode. The dramatic this trend to continue over the long term as supply
improvement in consumer sentiment and confidence and demand for integrated chipsets, smart devices,
will remain principal factors in driving encouraging high performance computing, power management
and sustained expansion in domestic GDP factors. and amplification, RF mixed signal components,
As the services industry increasingly takes centre electrification, and graphic processing alike will
stage in China’s mammoth domestic spending, it continue expanding.
will help sustain the government’s long-term growth
target and support the buoyancy of corporate A strong indication is the series of announcements
earnings. among upstream technology firms to lift their capex
plans to develop chips with greater specification for
devices and components. There is a close connection
Asia tech sector riding on rising capex
between the performance of the technology sector
trend
and capex spending, as rising expenditure pledges
1,200 AxJ tech index AxJ tech capex (USD/share) 60 are usually backed by high order visibility and
commitment from customers.
1,000 50
Greater China equities at premium
800 40 valuations
Asia ex Japan P/B +1 sd -1 sd
600 30
400 20 2.2
200 10
1.8
- -
Dec-07 Dec-11 Dec-15 Dec-19
Source: Bloomberg, DBS 1.4
1.0
AxJ equities at premium valuations Valuations supported by robust earnings

outlook
Greater China equites P/B +1 sd -1 sd AxJ fwd EPS Greater China fwd EPS
2.5
60 17
16
55
2.0 15
50
14
45
13
1.5 40
12
35
11
1.0 30 10
Dec-10 Dec-13 Dec-16 Dec-19 Dec-10 Dec-12 Dec-14 Dec-16 Dec-18 Dec-20
Stay Overweight on Greater China. We are Although valuations among AxJ and Greater China
constructive on Greater China markets as the equities appear at premium, they are well supported
region is well placed to reap the benefits of vaccine by recovery in earnings expectations as the regions
rollouts and sustained global recovery. Being largely were among the first to return to normalcy and
net exporting economies, Mainland China, Taiwan, recover well.
and South Korea are well positioned to maintain
their leadership in a wide range of industries, which Investors should take advantage of the compelling
include technology, industrials, and materials against fundamentals offered by robust Asia corporate
the reflation backdrop. Mainland China, in particular, sectors, look ahead to earnings rerating, and
offers investors attractive returns, reinforced by long- embrace the long-term benefits of investing in Asia.
term robust corporate earnings growth from ongoing
transformation, rising domestic consumption, and
the burgeoning of New Economy sectors.
For the Income side of the Barbell Strategy, we

favour China large banks and Singapore REITs for
their resilient dividend yields.
Source: Unsplash
ASEAN’s recovery not derailed dovish stance as the balance is tilted towards growth
risks.
ASEAN markets finished mixed in 2Q21 with
investors weighing global inflation risks, reopening New economy lockdowns have also prompted
of DM economies, as well as Covid-19 resurgence governments to unveil more aid packages to support
in the region. While the region’s exports benefitted businesses and households. Fiscal deficits and debt
from the global recovery led by China and the US, ratios have deteriorated, but ratings agencies are
private consumption remains weak as effects from likely to look through this weakness as recovery in
the pandemic still linger. later years and low interest rates should not weaken
the balance sheets drastically.
With the virus resurgence and slow vaccination
rates, ASEAN economies will face delay in recoveries Moving to the “reality” phase
and will have to live with the pandemic – now turned
endemic – which will remain for some time. The Moving from the “hope” phase in terms of the equity
most urgent agenda now will be for economies to price cycle, we believe the “reality” phase will need
reach herd immunity, with vaccine sourcing and growth checks where sector and stock selection
the encouragement of residents to get vaccinated, will be instrumental in determining returns going
including prioritising vaccinations in key tourist forward. Investors will likely look through the near-
destinations. term volatility and focus on the market’s longer-term
prospects.
Meanwhile, policy rates are at record lows to support
economic recovery. Despite pockets of inflationary In terms of earnings growth and valuations,
pressure, we expect central banks to hold their Singapore, Vietnam, and Indonesia stand out as
Export-driven recovery P/E vs growth matrix
% y/y 3mma Malaysia Philippines 16.0 Thailand

Indonesia Singapore
50
Thailand Vietnam
15.0
40
Malaysia Philippines
30 14.0
2023 P/E (x)
20 AXJ
China
13.0
10 Vietnam
0 12.0
Singapore
-10 Indonesia
11.0
-20
-30 10.0
-10% -5% 0% 5% 10% 15% 20% 25% 30%
-40
Jan-20 Jul-20 Jan-21 2021-23 CAGR earnings growth
Source: CEIC, DBS Source: Bloomberg, DBS
markets which are cheap compared to their growth

potential.
Singapore
Singapore aims to reach herd immunity by 3Q21,

by which it will be ready to open the economy. We
like Singapore REITs, which are paying high dividend
yields and will be re-rated once the economy
reopens. We also like the banks in Singapore, which Source: PhocusWire
are paying yields of close to 5% and where earnings
are expected to surprise on the upside as credit
costs have been lower than expected.
The development of the exchange is reflective of the
Indonesia digital economy’s boom, which has transformed the
lives of millions of Indonesians by creating a sharing
The Indonesia market had a volatile swing in 2Q21, economy and boosting consumption, capitalising
weighed down by broad dollar strength and US on its young demographic. The “GoTo” new entity
bond yield spikes during the quarter. Although the combines mobility and logistics, e-Commerce, and
market is recovering, it may have to take a breather financial services under its umbrella, contributing to
for now as it remains vulnerable to taper tantrums about 2% of the economy’s GDP.
should there be a further spike in bond yields. We
think the Fed may open the debate on tapering in We believe Indonesia should be a long-term play
June, if inflation moves over its tolerance level. to reap the demographics dividends in Asia in this
new digital era. Our stock selection is mainly in
Nonetheless, Indonesia’s market fundamentals banks which can participate in this digitalisation
remain sound. The market and the economy are transformation.
going through a Tech transformation. The two
largest Tech unicorns in Indonesia have officially Vietnam
merged to prepare for dual listings in Indonesia
and the US by the end of this year. The company, Vietnam is the best performing market in ASEAN YTD
“GoTo”, a merger of “Gojek” and “Tokopedia”, is with gains of c.22%. The economy benefited from
valued at approximately USD30-40b, potentially the export growth and reflation, with sector beneficiaries
second-largest listed company in the Jakarta Stock such as banks, property, and manufacturing leading
Exchange (JSX). Over the medium term, the tech the gainers. Banks have surprised on the upside, as
weighting in JSX will be increased from 0% to about enhanced digitalisation has led to the rapid opening
10-20%. of online bank accounts and under a low interest rate
environment, money has been put to good use in
loans and investments in properties and stocks.
Vietnam’s new high from global supply shortages. Among these three
economies, we believe Thailand has sectors where
Avg daily turnover (RHS) Vietnam HCM Index (LHS) earnings are more defensible in this environment.
Index USDm
1400 1200 Thailand

1300
1000 Thailand is waiting to reopen its economy cautiously
1200
800
as it speeds up its vaccination rate. Its economy is
1100
projected to grow the slowest among the regional
1000 600 countries and still bear downside risks as the key
900 tourism industry is unlikely to normalise soon.
400
800
Likewise, for earnings growth which now stands at
200 85% compared to last year’s -55%, we see downside
700
risks if the economy is not opened fully by this year.
600 0
Oct-17 Jun-18 Feb-19 Oct-19 Jun-20 Feb-21
We look for stocks where fundamentals are solid and
still trade cheaply, such as banks. Pandemic winners
include hospitals, oil and petrochemical stocks, and
Average stock transaction in Vietnam stock logistics stocks which benefit from the e-Commerce
exchanges exceeds USD1b daily, which is nearly trend.
similar to that of Singapore. Interestingly, these are
mostly attributed to locals, with foreign investors
being net sellers in the market this year.
We continue to see Vietnam equities as viable

investments in non-core holdings.
Thailand, Malaysia, and the Philippines are more
expensive relative to their growth prospects.
Malaysia is lacking in sustainable growth drivers. The
electronics and commodity sectors should benefit
Key Asia investment themes
Themes Beneficiaries
Digitalisation, 5G Semiconductors, IC Design, Cloud Computing
e-Sports Online gaming platforms
Ageing population China insurance
Singapore REITs
Dividend plays Singapore banks
China large banks
Asia domestic consumption China e-Commerce
China large banks

Government stimulus
Indonesia consumption
Market reform China A-shares
Tourism
Vaccine rollout Integrated resorts
Indonesia consumption
Source: DBS
A Fed
pivot
G L O B A L R AT E S 3 Q 2 1
Monetary policy in the G-3 has been extraordinarily accommodative.

As investors digest higher inflation prints and pullbacks in central
bank policies, we expect yields to generally drift higher.
68
Source: Unsplash
07. Eugene Leow

Strategist
Global Rates. Duncan Tan

Strategist
A robust economic recovery across many parts early 2022. This process should conclude by end
of the developed world is underway. Against a 2022. Rate hikes are still likely to take place in 2023.
backdrop of economic reopenings (vaccinations Meanwhile, we expect the ECB to give clear
progress) and still sizable fiscal and monetary signals of taper later this year. The central bank
support, we think that economic momentum is is buying at an accelerated pace of about EUR100b
firm, especially in the DM. Accordingly, there will be a month including 20b of APP and 80b of PEPP.
concerns of overheating and the resultant reaction PEPP is set to end in March 2022 without further
functions of the central banks and how that impacts extensions. We expect 10Y yields across the
on yields in the coming quarters. The Bank of Canada G-3 to generally drift higher as investors digest
and the BOE have already tapered asset purchases. monetary stimulus pullback, a strong economy and
Within the G-3, the BOJ has already slowed bond moderately high inflation.
purchases.
The Federal Reserve pivoted to a more Steepening is not done

hawkish stance at June’s FOMC and appeared
to place more emphasis on inflation worries. Two JGB (% pa, LHS)
rate hikes for 2023 are now projected in the Fed’s German Bund (% pa, LHS)
1.50 UST (% pa, LHS)
dotplot. This is a change from a view that inflation
is transitory and that rate hikes will only come in
1.00
2024. This is a hawkish surprise that drove the UST
curve sharply flatter as the market assessed that a
hawkish Fed frontloading rate hikes would curtail 0.50
inflation worries. We are not convinced that the Fed

is about to abandon its Average Inflation Targeting 0.00
(AIT) framework but acknowledge that there are

downside risks to our 2% end-2021 forecast for 10Y -0.50
UST yield.
-1.00
1Y 4Y 7Y 10Y
We expect the Fed to announce taper plans in August/
September with taper set to start in end-2021/ Source: Bloomberg, DBS
3 Q 2 1 G L O B A L R AT E S 69
US and Europe on cusp of herd immunity Inflation expectations are close to multi-
year highs
number of shots per 100 people US 10Y breakeven (%, LHS) GE 10Y breakeven (%, LHS)
JP 10Y breakeven (%, RHS) 1.50
90
2.75
80
70 1.00
2.25
60
50 1.75
US 0.50
40
1.25
30
0.00
20
0.75
10 Average of Germany, Italy,
and Spain
0 0.25 -0.50
17-Jan 16-Feb 18-Mar 17-Apr Apr-14 Apr-16 Apr-18 Apr-20
Time to think about taper

USDb, chg per mth BOJ ECB Fed
2,000
1,500
1,000
500
-500
Nov-15 Jul-17 Mar-19 Nov-20
Source: Bloomberg ,DBS
70 3 Q 2 1 G L O B A L R AT E S
3 Q 2 1 G L O B A L R AT E S 71
Source: Unsplash
Asia Rates
CNY rates: No signs of tightening No signs of PBOC tightening

10Y CGB yields have headed sideways since
the start of the year even as DM yields rose. 10Y CGB (% pa) Weighted 7D repo (% pa)
Part of this can be attributed to the fact that the 3.50
PBOC normalised policy ahead of other major
central banks. However, there were also lingering 3.00
fears that monetary tightening may be in the offing
as economic momentum gets maintained as
2.50
nascent signs of inflation pop up (in elevated PPI
figures). However, we think that these fears may be
overblown. The authorities appear to be cooling the 2.00
economy via credit measures. If so, twin tightening,

via higher rates becomes less likely. In fact, the 7D 1.50
repo has been hovering between 2-2.5% for the

most part of this year. In any case, the PBOC has also 1.00
reassured market participants that there would be Jan-20 Jun-20 Nov-20 Apr-21
sufficient liquidity to absorb upcoming government

bond issuances. We remain comfortable with CGB
duration.
IDR rates: Strong foreign bond inflows may not Tight 10Y IndoGB’s yield spread over
be forthcoming UST
With the global growth recovery uneven and risk
10Y IndoGB (IDR) - UST yield spread (%)
sentiments towards EM still soft, international bond
8.0
investors are likely to stay circumspect, and strong
7.5
foreign inflows into Indonesia Government
7.0
Bonds (IndoGB) may not be forthcoming in
3Q21. From a pricing standpoint, the current level 6.5
of IndoGB yields is likely not a convincing long. 6.0
10Y IndoGB yield spread over UST appears to be 5.5
slightly tight relative to recent historical ranges, and 5.0

scope for more narrowing may be limited in 4.5
the absence of strong global growth outlook or 4.0
weak US dollar backdrop. At the same time, we 3.5
do not see much scope for yields to move much
3.0
higher, because BI is expected to keep purchasing 2015 2017 2019 2021
bonds to anchor yield levels and ensure government Source: Bloomberg, DBS
financing proceeds smoothly. Our preferred strategy
is to await 10Y IndoGB yields to move closer towards
the 7% level before re-evaluating long opportunities.
72 3 Q 2 1 G L O B A L R AT E S
INR rates: G-SAP 1.0 programme to be renewed 1Y-5Y OIS spread could widen further
in 3Q
Issuance of India government dated securities (GSec)
1Y-5Y OIS spread, onshore (%)
is projected to stay elevated in 3Q’FY2021, where 1.6
weekly auctions will alternate between 5Y/14Y/30Y/

FRB issuances (aggregate INR310-320b) for one week 1.4
and 2Y/10Y/40Y issuances (aggregate INR260b) for

1.2
the next. The RBI’s Open Market Operations will
certainly continue to be crucial in cushioning
1.0
heavy bond supply pressures, as well as anchoring
market sentiments against headwinds of higher inflation
0.8
and rising global yields. We expect that G-SAP 1.0
(Government Security Acquisition Programme)
0.6
will be renewed in 3Q and be supplemented
with ad-hoc Twist operations. At the current levels, 0.4
we do not have a conviction view and thus prefer to Jun-20 Sep-20 Dec-20 Mar-21 Jun-21
stay neutral. There could be scope for 1Y-5Y OIS

curve to steepen further as markets push back the
timeline for RBI rate hikes and liquidity normalisation.
10Y GSec yields look rich relative to other tenors,
and rich against swaps, but we are cognisant that
its richness continues to be underpinned by RBI’s
disproportionately larger support for the 10Y tenor.
KRW rates: Most scope to move higher One of the strongest recoveries within
From a macro fundamentals perspective, South the region
Korea interest rates are likely have the most
South Korea exports (% y/y)
scope to move higher. South Korea’s economic 50
recovery has been one of the strongest within 40

the region, underpinned by strength in global goods
demand. As a result, the BOK has been sounding 30
less dovish and has noted upside risks to its growth 20

forecast. This should continue to support market
10
expectations that South Korea would be one of
the first to normalise monetary policy within 0
the region. Fiscal support is also expected to stay
-10
expansionary and we are forecasting South Korea to
be one of the few countries where bond issuances will -20
further increase in 2021, to KRW186t from KRW174t
-30
in 2020. From a valuations standpoint, we recognise 2017 2018 2019 2020 2021
that South Korea’s rate differentials vs its Asian peers Source: Bloomberg, DBS
are currently quite wide and thus, could pose some
upward resistance. Therefore, our preferred strategy
will be to await dips in 10Y Korean bond yields towards
the 2% levels, to build pay positions in KRW swaps.
3 Q 2 1 G L O B A L R AT E S 73
MYR rates: Local bond demand to pick up in Twelve straight months of foreign bond
3Q21 inflows recorded
From a total returns perspective, MGS could be
ON Lending Facility Rate (%)
well placed to outperform in 3Q21. MGS should 6
ON Deposit Facility Rate (%)
disproportionately benefit more from surging 3M Interbank Ref rate (%)
commodity prices and the global vaccine rollout, 5
via one of the few positive exposures to higher

energy prices and one of the higher dependencies 4
on international tourism revenues within Asia. In

3
3Q21, we expect the outlook for local MGS
demand to substantially improve. Specifically,
2
we expect a large portion of i-Sinar withdrawals
to have been approved and credited by then, and
1
consequently, the Employees Provident Fund’s
capacity to purchase MGS should begin to pick up
0
in 3Q21. The streak of monthly foreign inflows into 2020 2021
Malaysia bonds is also expected to extend. There
is however, likely to be some small deterioration in
real yield buffers, due to the higher inflation prints
expected this year. Overall, we expect MGS yields
to rise alongside US rates, but to a smaller extent. In
total returns terms, MGS should outperform within
the region.
PHP rates: Weight of issuances shifting towards Onshore liquidity continues to be quite
retail bonds flushed
There are several supportive factors for RPGB to
outperform, in total return terms. Though bond 4,000
Foreigners’ monthly bond flows (USDm)
issuances are projected to stay elevated this year,

3,000
the Bureau of the Treasury has been shifting
the weight of issuances towards retail bonds 2,000
where demand from retail/individuals segment has

1,000
been robust. Onshore liquidity continues to
be quite flushed with short-term funding rates 0
(interbank reference, T-bill) trading below the interest -1,000

rate corridor for the last six to nine months. And
there are some prospects of further cuts to the -2,000
RRRs that would add more liquidity, and boost -3,000

support for government financing needs. Worries
-4,000
around inflation printing above target in recent
2017 2018 2019 2020 2021
months should abate ahead, as we are seeing
some stabilisation in sequential inflation momentum.
The outlook for balance of payments is likely to stay
constructive, as the slow recovery means that capex
imports could take a much longer time period to fully
normalise.
74 3 Q 2 1 G L O B A L R AT E S
SGD Rates: Look to recovery The premium of SORA over SOFR should
SGD interest rates (especially out to the belly narrow amid recovery
tenors) are still relatively high compared to
% pa 5Y SORA OIS 5Y SOFR OIS
their USD counterparts. At the start of the year,
1.25
worries about tight SGD liquidity and rapidly rising
USD rates led to a premium being built into SGD
1.00
rates. More recently, the announcement of tighter
Covid-19 measures put a dampener unto sentiment
as expectations of recovery in the travel sector gets 0.75
delayed. As a result, the spread between 5Y SORA

and 5Y SOFR has stayed persistently wide. We 0.50
prefer to look through this bout of volatility noting that
Singapore is one of the fastest in the vaccination race 0.25
in Asia. Herd immunity could be established by late
3Q21 or 4Q21, sharply reducing the odds of further
0.00
Covid-19 outbreaks, allowing the battered hospitality Aug-20 Nov-20 Feb-21
segment to recover. Accordingly, we would expect
the premium in SGD rates to be eroded over the
coming few months.
THB rates: BOT actively manages supply of Policy normalisation to be pushed far
public debt out in Thailand
Thai interest rates should be better anchored
against higher global inflation and rising global rates. BOT 1D Repo Rate (%) 2Y THB IRS, onshore (%)
Therefore, we like receiving THB swaps against 1.3
regional peers. The vaccine rollout across Asia 1.2
has been slow and the risks of virus resurgences 1.1
remain ever present. Consequently, the timeline for 1.0

reopening of international borders, and by extension 0.9
Thailand’s full growth recovery, has been pushed 0.8
back. And markets will likely continue to price 0.7
Thailand as one of the last to normalise liquidity
0.6
and hike rates. On bond issuances, the BOT
0.5
actively manages the supply of public debt to
0.4
ensure issuances are easily absorbed. The key
0.3
risks to our view revolve around the prospects of
2020 2021
fiscal support packages and additional borrowings
– THB500b of additional borrowings have recently
been announced. We think that the impact on bond
supply pressures will be manageable, because some
of the additional financing will also be shared across
Treasury bills, term loans, and promissory notes.
3 Q 2 1 G L O B A L R AT E S 75
Rates forecasts
2021 2022
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
3M SOFR OIS 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10
2Y 0.16 0.20 0.23 0.25 0.30 0.35 0.50 0.65

US
10Y 1.74 1.67 1.84 2.00 2.12 2.25 2.37 2.50
10Y-2Y 158 147 161 175 182 190 187 185
3M Tibor 0.07 0.07 0.07 0.07 0.07 0.07 0.07 0.07
2Y -0.12 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10 -0.10

Japan
10Y 0.10 0.10 0.10 0.15 0.15 0.18 0.20 0.20
10Y-2Y 22 20 20 25 25 28 30 30
3M Euribor -0.54 -0.50 -0.50 -0.50 -0.50 -0.50 -0.50 -0.50
2Y -0.69 -0.65 -0.65 -0.60 -0.60 -0.60 -0.60 -0.60

Eurozone
10Y -0.29 -0.15 -0.10 -0.05 0.00 0.00 0.00 0.00
10Y-2Y 40 50 55 55 60 60 60 60
3M Jibor 3.68 3.63 3.65 3.70 3.75 3.80 3.85 3.90
2Y 4.88 4.53 4.55 4.70 4.80 4.85 4.95 5.00

Indonesia
10Y 6.78 6.47 6.64 7.00 7.00 6.90 6.80 6.70
10Y-2Y 190 194 209 230 220 205 185 170
3M Klibor 1.94 1.95 1.95 1.95 1.95 1.95 1.95 1.95
3Y 2.13 2.25 2.25 2.30 2.30 2.35 2.35 2.35

Malaysia
10Y 3.27 3.42 3.59 3.75 3.87 4.00 4.12 4.25
10Y-3Y 114 117 134 145 157 165 177 190
3M PHP ref rate 1.29 1.40 1.50 1.60 1.70 1.85 2.00 2.15
2Y 2.41 2.15 2.25 2.35 2.45 2.60 2.75 2.90

Philippines
10Y 4.44 4.17 4.34 4.50 4.62 4.75 4.87 5.00
10Y-2Y 203 202 209 215 217 215 212 210
3M SORA OIS 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15
2Y 0.52 0.40 0.40 0.40 0.40 0.40 0.45 0.60

Singapore
10Y 1.74 1.52 1.59 1.65 1.72 1.80 1.87 2.00
10Y-2Y 122 112 119 125 132 140 142 140
%, eop, govt bond yield for 2-year and 10-year, spread bps. Source: CEIC, Bloomberg, DBS
76 3 Q 2 1 G L O B A L R AT E S
2021 2022
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
3M Bibor 0.62 0.62 0.62 0.62 0.62 0.62 0.62 0.62
2Y 0.45 0.50 0.50 0.50 0.55 0.55 0.65 0.75

Thailand
10Y 1.97 1.97 2.14 2.30 2.42 2.55 2.67 2.80
10Y-2Y 152 147 164 180 187 200 202 205
1Y LPR 3.85 3.85 3.85 3.85 3.85 3.85 3.85 4.05
2Y 2.83 2.65 2.70 2.75 2.80 2.85 2.90 2.90

Mainland
China
10Y 3.19 3.10 3.20 3.30 3.35 3.40 3.40 3.40
10Y-2Y 36 45 50 55 55 55 50 50
3M HIBOR 0.23 0.40 0.40 0.40 0.40 0.40 0.40 0.40
2Y 0.27 0.20 0.23 0.25 0.30 0.35 0.50 0.65

Hong Kong
10Y 1.41 1.17 1.34 1.50 1.62 1.75 1.87 2.00
10Y-2Y 114 97 111 125 132 140 137 135
3M CD 0.75 0.65 0.65 0.65 0.65 0.65 0.90 0.90
3Y 1.13 1.35 1.35 1.40 1.40 1.45 1.70 1.70

South
Korea
10Y 2.06 2.27 2.39 2.55 2.62 2.75 2.77 2.90
10Y-3Y 93 92 104 115 122 130 107 120
3M MIBOR 3.74 3.75 3.75 3.85 3.90 4.00 4.05 4.15
2Y 4.67 4.75 4.75 4.90 4.95 5.10 5.15 5.30

India
10Y 6.17 6.00 6.05 6.10 6.20 6.30 6.40 6.50
10Y-2Y 150 125 130 120 125 120 125 120
%, eop, govt bond yield for 2-year and 10-year, spread bps. Source: CEIC, Bloomberg, DBS
3 Q 2 1 G L O B A L R AT E S 77
When
cash
needs an
alternative
GLOBAL CREDIT 3Q21
In no other asset class does the whiff of inflation drive such fear as it
does in bonds. But counterintuitively, cash is the greater risk. The key
lies in managing avoidable risk. We highlight key credit segments with
inexpensive valuations and improving fundamentals.
78
Source: Unsplash
08.
Global Credit.
Daryl Ho, CFA
Strategist
The emerging ghosts of inflation past. Whether Higher inflation expectations, higher
or not aggregate prices would eventually experience rates
the levels of consistent increase last seen before
200 Inflation expectations
the GFC, the point is now secondary. Inflation Policy expectations
expectations – under both survey and market- 150 Policy rate
based measures – are now at levels not seen since Term Premium
100
3m rolling change in rates (bp)
UST 10Y
2008, bucking the trend of disinflationary projections
that dominated the last decade. The damage, as 50
they say, is already done; current market pricing

0
mechanisms are always served with a healthy dose
of future expectations. -50
Inflation expectations
-100 were the main driver of
Where it hurts the most. In no other asset class higher rates in 2021
does the whiff of inflation drive such fear as it does -150
in bonds. Conceptually, bonds are a stream of fixed -200

future cashflows, with the largest portion (in the Apr-20 Jul-20 Oct-20 Jan-21 Apr-21
form of principal repayment) backloaded. Inflation
simply means that these fixed nominal streams of
cashflows are eroded in real terms; in other words,
the purchasing power of these future payments Is the nightmare over for bond investors?
diminishes with time – the longer it takes for Having risen more than 100 bps from the lows of
repayment, the higher the risk. This results in bond last year, the question on top of investors’ minds
yields rising (or prices falling) to incorporate inflation would certainly be whether the largest moves in the
risk premiums into current prices. Accordingly, US 10Y rates are now behind us, or still ahead of us.
inflation expectations were unmistakably the As the commodities surge had been a large factor
dominant driver of the steep rise in UST yields that in guiding inflation expectations of late, we find it
first began at around August 2020. fitting to use a commodity-based measure to guide
our thoughts on interest rate risks in the months to
come.
3Q21 GLOBAL CREDIT 79

Enter the copper/gold ratio. Remarkably, the Mind the gap. By this measure, it does appear
ratio between the price of copper and the price of that the risk for rates lie more on the upside than on
gold has historically served as an effective leading the downside, seeing as the copper/gold ratio has
indicator of the direction of UST 10Y yields in the risen to levels commensurate with 10Y yields closer
past. The logic is straightforward – copper is an to 3%. Although this ratio is far from deterministic,
industrial metal used in highly cyclical industries such it is nonetheless still instructive for bond investors
as construction and machine manufacturing (namely to be mindful not to take excessive duration risk
electrical components), while gold has been the safe while such commodity-based gauges (commodities
haven metal of choice for humankind practically themselves being drivers of supply side inflation) are
since the dawn of civilisation. The price ratio of the signaling higher rates down the road.
red to yellow metal is therefore a barometer for the
market’s appetite for risk vs its appetite for safety. A Counterintuitively, cash is the greater risk.
higher ratio signals a larger appetite for risk assets When it comes to inflationary fears, the broad brush
than risk-free assets, with a resultant higher yield on perspective is just to avoid all things fixed income.
treasuries. The opposite is true for a lower ratio. Yet investing is rarely this simplistic. Investors who
choose to keep cash for safety and not invest in
fixed income markets for fear of inflation are jumping
Yields may yet have room to run to a false conclusion – that their cash holdings would
UST 10Y yield (LHS) protect the real value of their assets better than fixed
Copper/Gold ratio (RHS) income assets could. Given that the former is yielding
3.5 0.3
nothing, while the latter still presents avenues for
3.0
0.25 positive yields (especially in select credit markets),
this conclusion is decidedly untrue.
2.5
0.2
2.0 The Fed is unlikely to reward depositors. Some

%
0.15
may look ahead towards an earlier-than-expected
1.5
rate hiking cycle that would help increase the yields
0.1
1.0 on cash deposits, but this is unlikely to meaningfully
0.05
improve cash returns for a couple of reasons. Firstly,
0.5
the post-virus crisis environment has seen such a
0.0 0 spike in global debt that lifting rates synchronously
2011 2013 2015 2017 2019 higher would undeniably threaten debt sustainability.
80 3Q21 GLOBAL CREDIT

Secondly, the Federal Reserve’s shift towards IG-HY divergence in duration risk
an average inflation targeting framework means
a higher tolerance for inflation overshooting 2%, 8
therefore deposit rates would almost certainly lag IG bonds
inflation outcomes.
7
Manage any avoidable risks; not avoid

(interest rate sensitivity)
Modified Duration 6
managing any risk. Holders of cash might think
they are safe by avoiding all investment risks, but as
it is with inflation, avoiding risk by staying in cash may 5
itself be a risky endeavour. To generate fixed returns
that can match or exceed inflation, one requires
4
additional spread risk that select credit markets can
still offer with good risk management. HY bonds
3
2008 2010 2012 2014 2016 2018 2020
Is IG always “safer” than HY? Supposing one
is convinced that cash is not the solution, the next
broad brush perspective would then be to just
hold a portfolio of purely IG credit to prioritise loss
avoidance. One would have then been surprised to more sensitive to the recent steepening of the yield
learn that this would have been an inferior strategy curve, explaining its underperformance.
for 2021 thus far, with global IG credit on average
generating negative returns of -1.9% against the Blurring the line between HY and IG. Moreover, it
+2.1% YTD in global HY credit. With interest rate may come to the surprise of many that duration risk
volatility on the rise, bonds with higher rate sensitivity is not the only risk that has risen under the broader
– or duration risk – come directly under the line of fire IG universe vs HY, but remarkably, credit risks as
of rising yields. Over the last decade, it was peculiarly well. This is certainly not to say that HY is “safer”
IG credit indices that had seen a significant rise in than IG; in absolute terms one would conventionally
average duration, while the same measure had almost always be exposed to greater default risks in
conversely declined in HY credit – in effect making IG HY bonds compared to IG bonds. However, it is the

compositional evolution of credit ratings that have … while HY is now more “top heavy”
seen IG indices deteriorate in quality with time, while
HY indices have, on the contrary, improved. 100%
90%
The devil is in the details. Diving into a cross-
Global HY universe ratings composition

80% BB, 37.9%
sectional study, we see that while BBBs used to BB, 51.1%
70%
account for less than c.29% of the IG universe in
2011, they have risen substantially to make up more 60%
than 48% at the end of 2020; as excess liquidity has 50%

B, 31.5%
enabled more borderline IG issuers to access the 40%
debt capital markets. 30% B, 32.2%
CCC, 8.4%
20%
IG is now more “bottom heavy”… 10% < CCC, 21.3% CCC, 8.7%
< CCC, 7.7%
0%
AAA, 0.4% AAA, 1.0%
100% 2011 2020
AA, 6.6%
90% AA, 11.9%
Source: Bloomberg, DBS. Bonds with split ratings/no ratings excluded
Global IG universe ratings composition
80%
70% A, 37.2%
60% A, 42.7%
The reverse is true for the HY universe. While
BBs used to account for c.38% and ≤CCC made
50%
up c.30% of global HY in 2011, the composition
40%
has now shifted to c.51% in BBs and only c.16% in
30%
BBB, 48.3% ≤CCC in 2020. Curiously, the steady flow of “fallen
20%
BBB, 29.3% angels” (bonds downgraded from IG to HY) may have
10% ironically served to improve the average credit quality
0% of the global HY universe over the last decade.
2011 2020
Source: Bloomberg, DBS. Bonds with split ratings/no ratings excluded

Now, onto valuations. Driven by excess liquidity, Narrowing sectoral spread dispersion
bonds are now at their most expensive levels in
decades. Not only are global credit yields hovering Global Investment Grade
near their all-time lows, but sectoral spread Government
dispersion has also narrowed significantly from Technology
a year ago, implying that investors now see less Health Care
price distinction between sectors; there is a smaller Consumer Staples
May 2021
premium in differentiating industries that would Utilities
May 2020
outperform and those that would not. In other Communications
words, bonds are expensive on both absolute terms Industrials
and relative terms. Financials

Materials
Consumer Discretionary
Seeking alpha. With yields at multi-year lows and
Energy
spread dispersion at rock bottom levels, specific
credit selection is more key than ever for alpha -100 -50 0 50 100
Spread dispersion from index mean
generation. As such, we highlight the key credit
market segments that exhibit inexpensive valuations Global High Yield
and improving fundamentals for investors to Communications

consider. Consumer Staples
Health Care
1. China property. We had previously taken a Technology
May 2021
positive view on the China property sector, Utilities
May 2020
highlighting that the introduction of the “Three Materials
Red Lines” policy – which limits debt growth Financials
based on three balance sheet metrics (Liabilities/ Consumer Discretionary
Assets <70%, Net debt/Equity <100% and Government

Industrials
Cash/Short-term debt >1x) – would lead to
Energy
sectoral deleveraging and improved credit
quality. As anticipated, this deleveraging shift -400 -200 0 200 400
Spread dispersion from index mean
had become more evident comparing between


Seek alpha in
inexpensive
sectors with
improving
fundamentals
Source: Unsplash
the 1H20 and FY20 results of the major China China property bonds increasingly
property bond issuers in the USD space, scarce
signifying that the sector has taken the directive
Gross issuance Net issuance
both seriously and expeditiously. 100
90
China property bond issuance (USDm)

China property bond supply continues 80
to diminish. It is a necessary corollary of 70
deleveraging that there would be increased
60
scarcity of bonds, as gross issuances continue
50
to taper while redemptions gather pace. As such,
40
this would provide strong technical support for
China property credits – which will be supportive 30
of prices in the medium term. 20
10
0
China property issuers deleveraging 2015 2016 2017 2018 2019 2020 YTD2021

F Y20 Results
10%
1H20 Results All 3 metrics
13% 17%
6% breached 2. Asia gaming and leisure. Financial metrics
38% of the gaming companies had been solid
2 metrics
8% breached coming through the pandemic, supported
1 metric
by a favourable gaming mix and good cost
breached management. Despite an 85% collapse in gross
No breach gaming revenues (GGR) in 2020, most operators
maintained interest coverage ratios >2.5x and
62%
46% manageable debt levels of debt/EBITDA <4x.
This implies that operators remain in a good
position to service their regular debt obligations.
Source: Company data, DBS

Furthermore, most gaming operators have rating is at low risk of downgrade, given the
a sufficient cash “lifeline” to cover general strong shape of its external balances – Current
operating expenses for more than a year under a Account balances remain on an uptrend, while
near-zero revenue scenario. Asia gaming offers government debt/GDP at c.30% is conservative.
a mix of defensive balance sheets and potential Moreover, growth remains supported by
for upside with a lifting of travel restrictions. consumption recovery and higher commodity
prices observed in 2021 to date. To top it off,
IDR has been trading in a stable range between
14,000-15,000 since the crisis. These quasi-
Asia gaming companies are cash rich
sovereigns are largely in the utilities (low industry
cyclicality) and commodity (beneficiaries of
Genting
higher commodity prices) sectors, which are
continuing to see tailwinds coming into 2021.
MGM
Wynn
Indonesia is the second largest Asia
Sands
USD credit market
SJM Thailand Taiwan

Malaysia 1.7% 1.3% Macau
NagaCorp 3.4% 1.0%
Philippines
4.3% China
Studio City Singapore 48.5%
4.3%
0 12 24 36 48 60 72 84 India
Operation cash coverage (No. of months) 5.5%
Source: Bloomberg, DBS Hong Kong

7.0%
3. Indonesia quasi-sovereigns. Considering the South Korea

9.3%
emerging risks in India (viral resurgence) and
China (uncertainty in state support of Huarong Indonesia
AMC), Indonesia is fast becoming a haven 13.6%
for Asia credit investors. The country’s BBB Source: Bloomberg, DBS

4. European insurance capital securities – Taking the battle against inflation seriously.
RT1/T2. The European insurance sector enjoys John Maynard Keynes once famously said that “By
higher profitability, global scale, and leading continuing a process of inflation, government can
strategic positions compared to the continent’s confiscate, secretly and unobserved, an important
banking sector. Also, unlike the banking sector, part of the wealth of their citizens.” In this regard,
the European insurance sector had not been holding cash might be more detrimental to one’s
prevented from dividend distributions in the savings than most might think. With an allocation to
crisis, which highlights the superior relative credit, the hedge against inflation uncertainty works
capitalisation of the latter. As bank dividend both ways. If (a) modest inflation should return, the
resumption is underway, capital ratios are higher yields on credit would at least keep pace
expected to decline, while comfort is derived with the eroding real value of investments, and (b) if
from the comparatively large capital buffers the world remains disinflationary, then credit should
of the European insurers from their regulatory perform well in a prolonged chase for yield.
trigger levels.
Picking the right spots. We believe the benefits
lie with taking the best of both worlds in the BBB/
European insurers have large capital
BB sweet spot; BBB being the segment in IG least
buffers
sensitive to interest rate risks, and BB being the
200% Average Average Total 20% HY segment of the highest credit quality. The 5Y
Solvency II Capital Ratio, tenor is also the area that best defends against
180% Ratio,196% 19% 18%
Buffer to coupon
cancellation
steepening yield curves. We recommend that
Regulatory solvency ratio for Insurers
160% 16%
investors look at (1) China property, (2) Asia gaming
Regulatory capital ratio for Banks
140% Tier 2, 2.0% 14% and leisure, (3) Indonesia quasi-sovereigns and (4)
Additional
120%
Tier 1, 1.5%
12% European insurance capital securities as valuations
100% 10% remain appealing for their respective underlying
fundamentals.
80% Tier 2 and 8%
Tier 3, 50%
60% Common 6%
Restricted equity
40% - CET1, 11.5% 4%
Tier 1,10%
Unrestricted
20% 2%
Tier 1, 40%
0% 0%
European Insurance European Banks

More stable
and
dichotomous
currencies
GLOBAL CURRENCIES 3Q21
Global vaccination drives and improving economic outlooks have

seen currencies stabilise, following a volatile 2020. Nonetheless,
patches of virus resurgences in DM and EM have led to divergent
trends among currencies.
89
Source: Unsplash
09.
Global Currencies.
Philip Wee
Strategist
In 2021, currencies have been significantly 2021 has been more stable with more
less volatile than in 2020, and more stable and divergent trends
divergent. AUD, the most violent currency during
15 Developed Markets Emerging Asia
the pandemic, traded in a 6-7% wide band this year
compared to the whopping 40% range last year. The 10 % ytd vs USD
as of 21 May
underlying weakness of USD last year was mitigated
5
by a resurgent US outlook boosted by stimulus and
vaccinations in 1Q21, only to have USD’s upside 0
potential drained by the Federal Reserve’s dovish

-5
stance in April-May. DM and EM currencies took
turns combating fresh Covid-19 waves with new -10
and deadlier variants of the virus. With DM hoarding

-15
vaccines at the expense of EM, the former clearly
had an advantage over the latter. That said, negative -20
yielding DM currencies such as JPY, CHF, and EUR

-25
did expose their vulnerability to future rollback of the GBP AUD NZD EUR CHF JPY CNY INR VND PHP SGD MYR IDR KRW THB
Fed’s crisis measures to combat the pandemic. Source: Bloomberg DBS
2020 was a highly volatile year stacked DXY has been fluctuating within 89-94 this
against USD year. A consolidation for USD is not unreasonable
15 Developed Markets Emerging Asia after its 13% plunge last year. Monetary policy at the
Fed and other DM central banks have converged
10 % ytd vs USD and are aligned with one another to support this
Full year
5 year’s still-challenging economic recovery from the
pandemic. USD may, however, regain the upper
0
hand in 3Q21. The Fed’s assumption that inflation
-5 will be transitory on base effects has run up against
US companies looking to raise prices to offset rising
-10
input costs from record commodity prices. The run
-15 up in US inflation has rendered the negative real
rates and bond yields concerns to financial stability
-20
risks. Hence, expectations have emerged for the
-25 Fed to pave the ground for tapering asset purchases
AUD CHF EUR NZD JPY GBP CNY KRW PHP SGD MYR VND IDR THB INR later this year. A signal at the Fed’s Jackson Hole
Symposium in August has not been ruled out.
90 3Q21 GLOBAL CURRENCIES

EUR is a negative yielding currency that is the US stock market could derail the bloc’s recovery.
vulnerable to a less dovish Fed and a steeper EU Current Account surplus has narrowed sharply
US yield curve. Although the Eurozone’s outlook to EUR17.8b in March, down from its peak of EUR
has improved from a vaccination drive, the ECB is EUR29.2b in September. As of 16 June, 45.6% of
determined to ensure favourable financial conditions the EU population has received at least one dose of
for the pandemic recovery. EUR bulls may be the Covid-19 vaccine.
ahead of themselves in expecting the ECB to scale
back its EUR1.8t Pandemic Emergency Purchase
GBP is overbought relative to the UK’s
Programme, which formally expires in March 2022.
relatively weaker fundamentals
Italy’s 10Y bond yield spread over its EU counterpart
has widened to 118 bps on 20 May after it bottomed 1.50 1.50
GBP/USD DBS forecast
at 91 bps on 12 February. The European Systemic Consensus
1.45 1.45
Risk Board warned that corporate insolvencies
could materialise quickly once policy support 1.40 1.40
measures are withdrawn. The ECB assessed, as 1.35 1.35

per its Economic Stability Review, that a 10% fall in
1.30 1.30
EUR has been consolidating around 1.25 1.25

1.18-1.23
1.20 1.20
1.40 1.40
EUR/USD 1.15 1.15
1.35 1.35
1.10 1.10
1.30 DBS forecast 1.30 2016 2018 2020 2022
Consensus
1.25 1.25 Source: Bloomberg DBS
1.20 1.20
GBP has corrected below 1.40 after its recovery
1.15 1.15
to 1.42 in May. GBP has, as of 17 June, appreciated
1.10 1.10 1.8% YTD as the second strongest G-10 currency this
year. Apart from a dovish Fed weighing on the USD
1.05 1.05
in April-May, GBP was bolstered by a resilient UK
1.00 1.00 economy, underpinned by a rapid vaccination rollout,
2014 2016 2019 2022 higher public spending, and tax cuts announced in
the March budget. As of 15 June, 61.9% of the UK
3Q21 GLOBAL CURRENCIES 91

population has been vaccinated with at least one its core CPI forecast to 0.1% from 0.5% previously
dose of the vaccine. Optimism for GBP centred for the current FY ending March 2022. National
mainly on the UK’s 2021 growth outlook, which CPI remained negative for the seventh consecutive
was revised up by the central bank (BOE) on 6 May month at -0.4% y/y in April. More importantly,
to 7.5%, above the US growth forecast of more Japan has fallen well behind the US, UK, and EU
than 6% this year. Even so, the UK does not have in containing Covid-19 and rolling out vaccines.
America’s high inflation rates and pressure to start Japan has, as of 16 June, vaccinated 15.8% of its
internal debates on tapering asset purchases. population with at least one dose of the vaccine.
Real GDP growth has turned negative in 1Q21 after
JPY is the worst performing G-10 currency two quarters of growth. The central bank (BOJ) has
this year. The negative yielding JPY is vulnerable to signalled its intention to extend its pandemic relief
rising US bond yields. Despite higher inflation risks measures beyond the current September deadline.
in other developed economies, Japan revised down
CHF recovered more than JPY during USD’s
JPY has been vulnerable to a steeper depreciation in in April-May. Switzerland, like the
UST yield curve EU, has been playing catch up with the vaccination
125 125 campaign in the US. As of 13 June, Switzerland has
USD/JPY vaccinated 43.4% of its population with at least one
120 120 dose of the vaccine. Switzerland had started to ease
its pandemic restrictions and is planning to join the
115 115 EU in reopening borders to fully vaccinated travellers.
DBS forecast
Consensus
Also, the US Treasury Department Currency Report
110 110 in mid-April reversed last December’s decision by
the former Trump administration to label Switzerland
105 105 a currency manipulator. The Swiss Economic
Institute (KOF) was confident that GDP growth would
100 100 rebound from -3.0% last year to 3.7% in 2021,
above the 2-3% forecast by the central bank (SNB).
95 95 CPI inflation turned positive at 0.3% y/y in April for
2016 2018 2020 2022 the first time since January 2020 but is still below the

CHF did not appreciate past its multi- borders are unlikely to fully reopen before the general
year resistance elections in mid-2022. This, coupled with Canberra’s
deteriorating relations with Beijing, will continue to
1.05 1.05
USD/CHF weigh on important sectors such as airlines, tourism,
real estate, and universities. The central bank (RBA)
1.00 1.00
has also set high hurdles to bring forward rate hikes
0.95 0.95
from 2024. The RBA reckoned the unemployment
rate needed to decline to the “low 4s” and “high
0.90 0.90
3s” (well below its pre-pandemic low at 5%) in
order to lift wage growth to 3% and sustain inflation
0.85 DBS forecast 0.85 within its 2-3% target. The Morrison government
Consensus has projected wide budget deficits in the next few
0.80 0.80
years to support medium-term growth and lower the
unemployment rate to pre-pandemic levels.
0.75 0.75
2011 2013 2016 2019 2022
AUD is expensive within its old 0.70-0.80

range
0.85 0.85
SNB’s 2% target. The SNB has remained committed AUD/USD DBS forecast
Consensus
to negative interest rates and forex interventions in
0.80 0.80
managing monetary policy. All things considered,
CHF has exhibited it is vulnerable to rising US bond
0.75 0.75
yields in 1Q21 and is unlikely to be immune to Fed
taper talks ahead.
0.70 0.70
AUD has and is expected to continue its

0.65 0.65
consolidation between 0.70 and 0.80 this year.
AUD has not been able to push above 0.80 despite
0.60 0.60
higher commodity prices and a better growth
outlook. Although Australia has been successful
0.55 0.55
in controlling Covid-19, its vaccination rollout has 2015 2017 2019 2022
been slow. While it has eased most restrictions, its

NZD/USD to trade in a tighter 0.67-0.75 range NZD is not cheap within its old 0.68-0.75
this year after its solid rebound from the pandemic range
last year. In YTD terms, NZD has been fluctuating in
0.85 0.85
a ±4% range vs USD in the first five months of this NZD/USD
year despite rising commodity prices. On a relative
0.80 0.80
basis, the bias for NZD is tilted to the downside for DBS forecast
the rest of the year. The improvement in its growth, Consensus
0.75 0.75
inflation, and unemployment rate outlook will pale
in comparison to those in the US. Although the 0.70 0.70
central bank (RBNZ) no longer thinks about negative
interest rates, it is not about to normalise its loose 0.65 0.65
monetary policy anytime soon either. The Treasury
has delivered a budget that is projected to increase 0.60 0.60
net core Crown debt from 26.3% of GDP in 2020
to 34.0% in 2021 and 43.8% in 2022, and widen 0.55 0.55
the Current Account deficit from 1.8% of GDP to 2015 2017 2019 2022
2.7% and 3.4% for the corresponding periods. Source: Bloomberg DBS
Finally, the government is determined to rein in the
red-hot property sector and has warned of a sharp
slowdown in house price growth by mid-2022 from
its housing tax policy changes. As of 16 June, New
Zealand has vaccinated 11.8% of its population with
at least one dose of the vaccine.


Source: Unsplash
Asia Currencies
CNY CNY is due for correction within its price

CNY to consolidate in a 6.40-6.60 range after its year- channel
long appreciation. The drivers of CNY gains in April-
7.40 7.40
May have waned. China’s real GDP growth is likely
USD/CNY
to have peaked at 18.3% y/y in 1Q21; consensus 7.20 Reflation 7.20
trade
has profiled a steady slowdown to 5.0% in 4Q21. Reflation
7.00 trade 7.00
Commodity prices corrected in May especially after
the State Council vowed to crack down on “malicious 6.80 Currency 6.80
speculation” in commodity markets. On 23 May,
6.60 6.60
the central bank (PBOC) reiterated that CNY will be
Trade
kept “basically stable” at “reasonable and balanced” 6.40 6.40
levels. Put together, China does not appear to favour
6.20 DBS forecast 6.20
further CNY strength to address higher inflation this Consensus
year. In any case, CPI inflation was last at 0.9% y/y 6.00 6.00
in April, well below its official 3% cap. With the US
5.80 5.80
readying to engage China on the implementation of 2014 2016 2019 2022
the Phase 1 trade deal, there is reason for CNY to
hold steady. US trade deficit with China widened
45.7% y/y in 1Q21.
HKD HKD has started to ease from the

HKD was not immune to a stronger USD from stronger limit of its band
higher US 10Y bond yield. It depreciated to 7.7850
per USD in early April from the floor of its 7.75-
7.90 7.90
7.85 convertibility band. Although HKD recovered
to 7.76-7.77 in April-May, the central bank (HKMA) USD/HKD
has not lowered its guard. The HKMA warned that a
7.85 7.85
sharp economic rebound and higher inflation in the
US could shift the Fed’s dovish stance and trigger
capital outflows from Hong Kong and Asia. On Hong
7.80 7.80
Kong’s status as an international financial centre, the
HKMA is confident that the linked exchange rate will
continue to operate efficiently. Instead, the central
7.75 7.75
bank is more concerned about the slow uptake of DBS forecast
vaccinations. As of 16 June, 24.3% of the population Consensus
has been vaccinated with at least one dose of the

7.70 7.70
vaccine. Looking ahead, US-China tensions over
2018 2019 2021 2022
Hong Kong may increase in the second half of the
year especially ahead of the Legislative Council
election scheduled on 19 December. The Biden
administration has maintained former President
Trump’s policy not to extend preferential treatment
to Hong Kong under US law.

KRW KRW has been the worst performing

KRW has been consolidating between 1,110 Asian currency
and 1,140 since March. Although the South
1350 1350
Korean economy recovered to pre-pandemic levels
USD/KRW
in 1Q21, KRW fluctuated more with external factors, 1300 1300
namely, the weak JPY, the US 10Y bond yield, and
the Nasdaq Composite Index. As in many Asian 1250 1250
countries including Japan, South Korea was faced
1200 1200
with a new wave of Covid-19 infections. The country
was also affected by global chip shortages which
1150 1150
experts say will last into 2022. The Moon government
has responded with a KRW510t investment strategy 1100 1100
funded mostly by the private sector over the next 10
years to position South Korea as a chip powerhouse. 1050
DBS forecast
1050
Domestically, South Korea’s high debt burden has Consensus

1000 1000
come under scrutiny from the IMF and debt rating 2014 2016 2019 2022
agencies. Government debt exceeded GDP in 2020
while household debt surged to 98.6% of GDP in
2Q20.
SGD SGD is expected to return into its old

SGD could return into a weaker 1.34-1.39 1.34-1.39 range
range later this year. SGD has, on a YTD basis,
stayed weak in the first five months of 2021. SGD
1.50 1.50
depreciated by 2.0% YTD to 1.35 on a resurgent
USD/SGD
USD in March, driven by a stronger US outlook and
1.45 1.45
a steeper UST yield curve. SGD next recovered Trade war range
to 1.3250-1.3370 in April-May from a dovish Fed 1.34-1.39
1.40 1.40
stance on US inflation. An optimistic MAS policy
review on 14 April also lifted, as per our model, the
1.35 1.35
SGD NEER into the strongest quartile of its policy
band. This did not last long. SGD NEER returned
1.30 1.30
closer to the band’s mid-point in May from a new DBS forecast
Consensus
wave of Covid-19 infections. Singapore reverted to USD/SGD: 1.31
1.25 EUR/USD : 1.25 1.25
Phase 2 restrictions from 8-30 May, which were later USD/CNY : 6.30
extended to 13 June with “heightened” restrictions.
1.20 1.20
The Hong Kong-Singapore travel bubble set for 26 2014 2016 2019 2022
May was also delayed again.

INR INR is not immune but resilient to rising

INR to hold a range of 72-77 per USD. INR was US bond yields
stable in a ±1% YTD range when USD rebounded
80 80
on rising US 10Y bond yields in February-March. USD/INR
The resilience during this period was attributed to 78 78
a very bullish 2021 growth outlook for India. The 76 76

INR’s plunge to 4.6% YTD during April was triggered
74 74
by a second and deadly Covid-19 outbreak that
wiped out the Sensex’s gains around the same time. 72 72
Sentiment recovered quickly after more than 40 70 DBS forecast 70

countries sent aid to India. INR is, however, not out Consensus
68 68
of the woods yet. The IMF is looking to downgrade
India’s growth forecast in July and estimated 66 66
that India needs 1b doses to inoculate 60% of its 64 64

population by end-2021. As of 16 June, India has
62 62
vaccinated 15.3% of its population with at least 2018 2019 2021 2022
one dose of the vaccine. As for the Fed’s taper talk
ahead, INR does not have the wide Current Account Source: Bloomberg, DBS
deficit and high inflation that led INR to depreciate
by 20% YTD during the Fed taper tantrums in 2013.
IDR IDR is not immune but resilient to higher

IDR will not be immune to internal taper debate US bond yields
at the Fed ahead of its Jackson Hole Symposium in
August. IDR depreciated by 5.0% YTD to 14,615 per
17000 17000
USD on 16 April on a USD rebound from a higher US USD/IDR
10Y bond yield in 1Q21. Even so, IDR is expected to 16500 16500
avert the 17-20% YTD depreciation incurred during 16000 16000
the Fed taper tantrum in 2013. Today, Indonesia has 15500 15500
a more stable macroeconomic. First, CPI inflation
15000 15000
held below its 2-4% target since mid-2020 vs 7-8%
14500 14500
in 2H13. Second, the Current Account deficit was
14000 14000
wide at 3.0-3.8% of GDP in 2013 compared to
0.4% in 1Q21. Nonetheless, the central bank (BI) 13500 13500
DBS forecast
did downgrade this year’s growth outlook for 2021 13000 Consensus 13000
outlook to 4.1-5.1% from 4.3-5.3% previously. The 12500 12500
health ministry expects another spike in infections
12000 12000
after the religious Eil al-Fitr holidays in May. As of 2015 2017 2019 2022
16 June, only 8.0% of its population has received at
least one dose of the vaccine.

MYR MYR will not buck the trend of its Asian

MYR to consolidate in a higher range of 4.15- peers
4.20 per USD. MYR depreciated, as of 18 June, by
4.50 4.50
3.2% YTD to 4.14 per USD to become the second
worst performing Southeast Asian currency. The 4.40
USD/MYR
4.40
central bank (BNM) considers the inflation surge in
2Q21 as temporary and expects core inflation to 4.30 4.30
average 0.5-1.5% this year. Hence, BNM is expected

4.20 4.20
to refrain from hiking its overnight policy rate from
1.75%. Monetary policy will be kept accommodative 4.10 4.10
to support the recovery from the pandemic. To rein
in the third wave of Covid-19 outbreak that started 4.00
DBS forecast
4.00
in April, Malaysia has been placed under movement Consensus

3.90 3.90
control order (MCO 3.0) from 12 May to 7 June. As
of 18 June, only 11.2% of its population received at 3.80 3.80
least one dose of the vaccine. Due to the drag on 2018 2019 2021 2022
services here, the recovery will continue to be led
by the manufacturing export sectors. On balance, Source: Bloomberg, DBS
MYR is caught between slower growth prospects
and higher inflation.
THB THB need not worry about strengthening

THB has been consolidating in a 31.0-31.5 past 30 for now
range with a weak bias in 2Q21. THB has, as
of 18 June, depreciated 5.1% YTD to 31.367 per
34.0 34.0
USD to become the worst Southeast Asian currency
USD/ THB
this year. Thailand has been hit hard by a third 33.5 33.5
wave of Covid-19 outbreak and vaccine shortages. 33.0 33.0

On 21 May, Thailand extended a nationwide state
32.5 32.5
of emergency by two months to end-July. The
Health Ministry is targeting to vaccinate 70% of its 32.0 32.0
population with at least one dose by September from 31.5 31.5

7.3% (as of 16 June). Earlier on 6 May, the central
31.0 31.0
bank (BOT) lowered, for a second time this year, its
GDP growth forecast for 2021 to 1-2%; the forecast 30.5 DBS forecast 30.5
Consensus
was previously downgraded in March to 3.0% from 30.0 30.0
3.2%. The factors that were responsible for THB
29.5 29.5
strength in the past few years have weakened. They 2018 2019 2021 2022
included high household debt of around 89% of
GDP, an external debt of near its record high around
37% of GDP, and five straight months of Current
Account deficits into March.

PHP PHP’s three-year appreciation is due for

The disappointing Philippine economy was some correction
more reflected by its weak stock market than
56 56
the PHP. Real GDP contracted by 4.2% y/y in
USD/PHP
1Q21. Although the official growth forecast for 2021
54 54
was lowered from 6.5% to 7.5%, the new 6-7%
goal remained lofty and unattainable because of
52 52
the new Covid-19 wave. Doubts persist over the
DBS forecast
government’s goal to vaccinate 50% of its population. Consensus
50 50
The country has, as of 14 June, vaccinated only
4.7% of its population with at least one dose of the
48 48
vaccine. Not surprisingly, the central bank (BSP)
has looked past higher inflation and maintained its
46 46
overnight reverse repo rate at 2.00% and kept the
door open to cut banks’ reserve requirement ratio.
44 44
Although CPI inflation held above its official 2-4% 2016 2018 2020 2022
target since January, BSP lowered its forecast to
3.9% from 4.2%. Consensus is less sanguine and Source: Bloomberg, DBS
expects growth to be lower at 5.5% and inflation
higher at 4.1% this year.
VND VND is on a very modest appreciation

VND has been in a stable tight 0.6% range path
between 22,970 and 23,110 per USD in the first five
months. Foreign reserves totalled USD83b, which
23800 23800
covered four months of imports and accounted for a
USD/ VND
third of GDP. The US Treasury Department reversed 23600 23600
its earlier decision in January to label Vietnam a
currency manipulator. The odds of achieving this 23400 23400
year’s official 6% growth target have lessened.
23200 23200
Growth disappointed at 4.48% y/y in 1Q21 followed
by a fourth and deadlier Covid-19 outbreak in April.
23000 23000
As of 16 June, Vietnam has vaccinated only 1.75%
of its population with at least one dose of its vaccine. 22800 DBS forecast 22800
The government wants to accelerate the vaccination Consensus
programme and is considering adopting “vaccine 22600 22600
passports” to reopen borders. Other factors working

22400 22400
against more VND appreciation this year include a 2018 2019 2021 2022
surge in CPI inflation to 2.7% y/y from its low of
-1.0% in January and the return of trade deficits
in the last four out of five months. The optimistic
outlook for VND at the start of the year has turned
more neutral.

DBS currency forecasts
Exchange rates, eop
11 June 3Q21 4Q21 1Q22 2Q22 3Q22 4Q22
Mainland China 6.3987 6.60 6.58 6.57 6.55 6.54 6.52
Hong Kong 7.7616 7.77 7.78 7.78 7.79 7.79 7.80
India 73.076 75.0 74.8 74.6 74.4 74.2 74.0
Indonesia 14,189 14,700 14,600 14,500 14,400 14,300 14,200
Malaysia 4.1085 4.20 4.18 4.16 4.14 4.12 4.10
The Philippines 47.701 49.0 48.7 48.3 48.0 47.7 47.3
Singapore 1.3260 1.36 1.35 1.35 1.35 1.34 1.34
South Korea 1,111 1,150 1,145 1,145 1,140 1,140 1,140
Thailand 31.087 31.8 31.6 31.5 31.3 31.2 31.0
Vietnam 22,944 23,100 23,070 23,030 23,000 22,960 22,930
Australia 0.7708 0.75 0.76 0.77 0.78 0.79 0.80
Eurozone 1.2109 1.17 1.18 1.19 1.20 1.21 1.22
Japan 109.66 109 109 108 108 107 107
New Zealand 0.7130 0.70 0.71 0.72 0.73 0.74 0.75
Switzerland 0.8983 0.94 0.93 0.93 0.92 0.91 0.90
United Kingdom 1.4112 1.36 1.37 1.38 1.38 1.39 1.40
DXY 90.555 94.0 93.2 92.4 91.6 90.8 90.0
Australia, Eurozone, and United Kingdom are direct quotes. Source: Bloomberg DBS

Illuminate
your
portfolio
A LT E R N A T I V E S : G O L D 3 Q 2 1
After one of history’s weakest quarters in 1Q21, gold had a

complete turnaround as factors against its prices reversed in the
second quarter. Alongside a spike in volatility, gold reinforced its
effectiveness as a hedge. We remain constructive on the medium-
term outlook for gold.
102
Source: Unsplash
10.
Alternatives: Gold.
Joanne Goh
Strategist
Gold had a complete turnaround in 2Q21 after Real rates and gold
recording one of the historically weakest quarters in
1Q21. All three factors which were biased against Gold price (USD/oz, LHS)
2,100 -5.0
Real rate (%, RHS, inverse)
gold prices reversed in the second quarter – US
bond yields retreated, the dollar weakened, and the 1,900 -3.0
US employment outlook faltered. Alongside a spike
in volatility, gold reinforced its effectiveness as a 1,700
-1.0
hedge.
1,500
1.0
We expect gold prices to remain supported in 3Q21
and the aforesaid factors should remain favourable 1,300
3.0
to gold. Occasional spikes in yields may occur,
and we look for bond yields to peak at 2% by the 1,100
year’s end. Importantly, surrounding the uncertainty 5.0
over the yield spike is the outlook for the Federal 900
2009 2011 2013 2015 2017 2019
Reserve’s rate hikes, which we believe will be tamed.
The Fed will likely be on hold till 2023.
Gold tends to perform well when realised inflation is prices and post-GFC expansion. Gold prices
elevated and rising, and as the Fed stays on hold. were similarly going up. This indicates that the
Intuitively, gold is a hard asset and expectation for inverse correlation between real rates and gold
further increases in consumer prices could start to price is tight. We are therefore of the view that
boost demand for the precious metal as a hedge. gold should be doing a catch-up, with the
We think inflation expectations could be driven expanding negative real rates in the coming
higher in the coming months, as economies reopen. months.
Similarly, in the aftermath of the GFC, real rates Gold for currency hedging. Meanwhile
turned increasingly negative in 2011 as US yields fell the dollar outlook is mixed with none of the
and the yield curve flattened, in large part due the currencies yet to break out of this year’s trading
Eurozone debt crisis and the Fed’s QE2 Operation ranges. DM currencies have held up better than
Twist programmes. At the same time, US CPI prints emerging Asian ones. The need to hedge
were rising through the year because of higher oil currencies in Asia – amid rising inflation and virus
resurgence – are boosting demand for gold
among Asian investors.
3 Q 2 1 A LT E R N AT I V E S : G O L D 103
Historically, gold has proven to have outperformed Shielding from uncertainties

major currencies including EUR, CNY, AUD, and
the DXY. We therefore believe gold can be used to World Uncertainty Index (index, LHS)
38,000 Gold price (USD/oz, RHS) 2,000
preserve the value of currencies, especially when
interest rates right now are close to zero. 1,800
33,000
1,600
Gold and uncertainties. Geopolitical risks rose
28,000 1,400
to the foray in 2Q21 as conflicts intensified in the
1,200
Middle East, and tensions among China, US, and 23,000
Russia escalated over human rights, cyberattacks, 1,000
and politics surrounding semiconductor chip 18,000 800

shortages. Measures such as the World Uncertainty
600
Index display a positive relationship and point to the 13,000
400
hedge and safe haven characteristic of gold.
8,000 200
1990 1998 2006 2014
Gold has outperformed all currencies Source: Ahir, Bloom, and Furceri, Bloomberg, DBS
(index, Gold EUR DXY

rebased) CNY AUD
250 Physical demand for gold is rising. We see
potential new demand for gold arising from central
banks looking to raise their allocation as part of their
200
reserve management as well as from increased
technology usage. While investments into ETFs
remain fickle, the recent high volatility and price drop
150
in cryptocurrencies present opportunities for gold to
shine as a more stable alternative investment.
100
The diversified sources of demand from gold make

it a more stable asset to hold as a risk diversifier.
50
2009 2013 2017 2021
Its uncorrelated macro attributes make it a perfect
hedge for high inflation, weakening currency, and
Source: DBS Bloomberg high volatility.
Note: exclude compounding interest rates.
Physical gold short squeeze. Given the limited

gold supply, there could be a demand squeeze
which can potentially increase the demand for
physical gold in the following situations:
104 3 Q 2 1 A LT E R N AT I V E S : G O L D
1. ETF holdings of gold have been on a downtrend unallocated gold will be subject to an increase in
since October last year, with net sales of stable funding requirements from 50% to 85%.
USD19b. Coincidentally, net purchase of This could potentially increase the demand for
Bitcoin has risen, with USD388b market value physical gold in our view.
being added. With the depreciating value in
Bitcoin, the investment value can potentially be Silver
transferred to gold. Using the same analogy that
some forecasters use to value Bitcoin, based on Silver’s price may benefit from its dual nature as both
the current Bitcoin market value of USD643b, a precious and industrial metal. Hence silver prices
that will be equivalent to 343m ounces of gold should be guided by copper and gold. Demand
– or four years of newly mined gold – to satisfy could be buoyed in 2021 on greater industrial usage
Bitcoin speculators, given that only about 80m as economies reopen after the pandemic and the
ounces of gold are mined each year. new trend of electrification (electric vehicles, 5G,
solar panels, green energy) will add to fabrication
2. Basel III implementation has been in the offing
demand.
for a while but will face a hard deadline by
January 2022. Under Basel III, physical gold
Compared to gold, the metal’s spot price near
allocations would become a Tier 1 asset, while
USD27 an ounce as of 4 May is still 46% below
its 1980 peak of USD49.45, whereas gold already
Size, Bitcoin vs gold ETF holdings attained a new record high of USD2,063.54 an
ounce in August 2020. Yet unlike gold which is
USDb Bitcoin market cap Gold ETF holdings of limited supply, silver above USD30 should face
1,200 pressure from strong supply volumes.
1,000
Silver is produced as a by-product from other
base metals such as copper, lead, and zinc, and
800
production of these metals is expected to increase in
line with the global recovery, and hence the supply of
600
silver. 55% of silver come from these sources, and the
400 remaining are from primary silver mines. According
to the United States Geological Survey, silver mines
200 and reserves have peaked and production has been
declining each year. With demand from investment
0 and industry ramping up, there is not much “free
Jan-19 Jul-19 Jan-20 Jul-20 Jan-21
float” of physical silver left. Silver ETFs can be very
Source: Bloomberg, Blockchain.com, DBS momentum driven, and occasional short squeezes
on physical silver are possible.
3 Q 2 1 A LT E R N AT I V E S : G O L D 105
Gold miners Gold price forecast range
Gold and silver mining securities should benefit DXY

from higher demand and rising prices. Last year,
the industry mined less gold and silver amid the 85 90 95 100
lockdown of global economies. We believe it will be 1.0 2,185 2,093 2,001 1,909
a production growth story this year for the miners. In
their 1Q21 post result briefings, mining companies 1.2 2,163 2,071 1,978 1,886
expressed upbeat exploration progress and M&A
1.4 2,140 2,048 1,956 1,864
opportunities. Production volume should thus be US 10Y bond
yield (%)
higher this year. Miners should therefore be able to 1.6 2,117 2,025 1,933 1,841
maintain all-in costs with higher production volume
1.8 2,095 2,002 1,910 1,818
despite threats from higher operating costs such as
wages and fuel prices. 2.0 2,072 1,980 1,887 1,795
Source: DBS
Gold mining companies are strong generators
of cashflows and their balance sheets are well
managed – in contrast to the earlier years from their
spree of overpaying for M&As.
We prefer the large, senior miners which we believe

demonstrate better cost and portfolio optimisation,
as well as carry higher ESG ratings.
Remain constructive
We remain constructive on the medium-term outlook

for gold. Our forecasts for gold remain at USD2,000/
oz and for silver at USD30/oz for the rest of the year.
106 3 Q 2 1 A LT E R N AT I V E S : G O L D
An
Electrifying
Future
THEME 1 – ELECTRIC VEHICLES
Since Tesla kicked off the modern-day EV with the roadster in 2009,
the EV market has gradually moved from the fringe to the mainstream.
2020 was a pivotal year as global EV sales grew 40% even though
overall car sales fell 14%. We take a deep dive into the catalysts and
beneficiaries of the electrification trend.
107
Source: Unsplash
Dylan Cheang
11.
Strategist
Rachel Miu
Analyst
Electric Vehicles. Lee Eun Young

Analyst
Benjamin Goh
Analyst
A brave new world – transformational shift to Catalysts spurring mass adoption of EVs
electrification. It has been 118 years since Henry
Ford introduced the Model A in 1903. Until now, According to the Environmental Protection Agency
never has the global automobile industry witnessed (EPA), the Transportation space accounts for the
the global automobile industry witnessed such largest share of greenhouse emissions at 29%,
transformational change lurking at its doorstep. followed by Electricity at 25%. As carbon footprint
With advancements in technology and a changing reduction becomes a top global priority, ICEV usage
regulatory landscape, Electric Vehicles (EV) are is expected to undergo substantial decline.
poised to overtake Internal Combustion Engine
Vehicles (ICEV) as the automobile of choice in the Instead, electrification is slated to be the main driver
next century. of vehicle sales in coming years and the outlook is
electrifying. According to BloombergNEF, EVs are
There is, however, a sense of déjà vu in this EV vs ICEV expected to account for 58% of new car sales by
rivalry as the very same comparison actually took 2040.
place more than 100 years ago, long before the days
of Elon Musk and Tesla Inc. Back in 1912, American Transportation has the largest carbon
inventor Thomas Edison built three prototype electric footprint (2019)
cars. Unfortunately, with a price tag double that of
normal gasoline-powered vehicles, the first electric
Agriculture
cars failed to take off. Sounds familiar? 10%
Transportation
29%
However, the narrative has changed since. Today, Commercial &
Residential
technological advancement and rising affordability 13%
are paving the way for widespread adoption of
EVs. There is also an overarching environmental
angle to this argument. Automobiles are the largest
contributors to greenhouse gases by far and
the transition to EVs would dramatically reduce
greenhouse emissions that contribute to climate Industry
23%
change.
Electricity
25%
Source: Environmental Protection Agency (EPA), DBS
108 3 Q 2 1 T H E M AT I C S T R AT E G Y
EV sales on the rise to buy an EV (USD38,000 – Model 3) vs ICEV

(USD25,000 – 2.0L, USD30,000 – 2.5L). On a
70%
Electric Vehicle share of new car sales (forecast)
(m) 60
component basis, the most expensive part of an EV
Electric Vehicle sales
is the battery pack, which accounts for 30-40% of
60%
50 total production cost.
50%
40 But more players competing in this space means
40%
more capital investment. The surge in research
30 and development (R&D) dollars brought about new
30% battery chemistry and manufacturing techniques
20 resulted in higher rising battery density (4-5% a
20%
year) and faster charging speeds. This translated to
10%
10 a sharp decline in production cost for EV batteries
over the past decade, from USD1,160/kWh in 2010
0% 0 to USD137/kWh in 2020.
2020 2025 2030 2040
Source: BloombergNEF, DBS
EV battery production cost

It is hard to start a conversation on EVs without first
(USD/kWh) Cell price Pack price
talking about prices. From a consumer perspective, 800
affordability is everything. If the total cost of
700
maintaining an EV is lower than an ICEV in the long
run, the shift in the consumption trend will come. 600
Recent developments suggest that the days of 500

affordable EVs are near and the underpinning drivers
400
are: (1) Falling production cost and (2) Progressive
government regulations and incentives. 300
200
1. Falling Production Cost
100
The biggest challenge to widespread EV adoption 0

is its higher price point as compared to traditional 2013 2014 2015 2016 2017 2018 2019 2020
vehicles. Without subsidies, it is more expensive

3 Q 2 1 T H E M AT I C S T R AT E G Y 109
At which point would EVs undergo mass adoption? EV expected to reach cost parity by
The simple answer is: EVs will see widespread c.2030
adoption when its production cost is on par with
ICEVs. 21 ICEV Cost EV Cost
20
To further analyse this, we constructed an industry
model forecasting the future production cost curves 19
for both ICEVs and EVs. According to the Institute

18
of Automotive Technology (Technical University
of Munich), the breakdown of EV production by 17
components is: (1) Battery: 39%, (2) Interior: 13%,

16
(3) E-Drive: 10%, (4) Exterior: 10%, (5) Assembly:
7%, (6) Chassis: 6%, (7) Powertrain: 3%, and (8) 15
Others: 10%.
14
In our forecast, we project EV battery cost to decline 13

2020 2022 2024 2026 2028 2030
8-12% per annum from now till 2025, before moving
to a more consistent level of 7% until 2030. The Source: Institute of Automotive Technology (TU of Munich), DBS
other components, such as E-Drive and Powertrain,

are expected to undergo smaller cost declines of
1.0-1.5% per annum. The engine cost for ICEV, on Based on our analysis, EV production cost is
the other hand, is expected to increase by a gradual expected to decline 26% from EUR20,300 currently
1.5% per annum. to EUR15,100 by 2030. This is predominantly due to
a 58% decline in battery cost as a result of growing
economies of scale and higher R&D investments. To
EVs approaching sticker price parity
be sure, our forecast is skewed to the conservative
with ICE vehicles
side as it has yet to factor in the positive impact from
60 (USD ’000) Toyota Camry 350-Mile Range Ev solid-state batteries, which is targeted for launch in
2024.
50
The production cost for ICEV, meanwhile, is slated

40 to increase by 3%, reaching EUR14,500 by 2030.
Under this pricing assumption, the discount
30 between ICEVs and EVs will narrow from EUR6,300
currently to EUR600 by 2030 – a reduction of 91%.
20 We believe that the mass adoption of EV will take
place at that juncture.
10
0
2019 2021 2023 2025
Source: Ark Invest, DBS
Forecasts for ICEV and EV production cost

% chg.
(in EUR
2020 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E (2020 vs.
‘000)
2030E)
ICEV cost 14.0 14.0 14.1 14.1 14.2 14.2 14.3 14.3 14.4 14.4 14.5 3.0%
Engine 3.0 3.0 3.1 3.1 3.2 3.2 3.3 3.3 3.4 3.4 3.5 16.0%
E-drive 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -
Powertrain 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 0.0%
Interior 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 0.0%
Exterior 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.7 0.0%
Chassis 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 0.0%
Assembly 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 0.0%
Others 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 0.0%
EV cost 20.3 19.3 18.5 17.9 17.3 16.8 16.4 16.1 15.7 15.4 15.1 -26.0%
Battery 8.0 7.0 6.3 5.8 5.3 4.9 4.5 4.2 3.9 3.7 3.4 -58.0%
E-drive 2.0 2.0 2.0 1.9 1.9 1.9 1.9 1.9 1.8 1.8 1.8 -10.0%
Powertrain 0.7 0.7 0.7 0.7 0.7 0.6 0.6 0.6 0.6 0.6 0.6 -14.0%
Interior 2.7 2.7 2.8 2.8 2.8 2.8 2.9 2.9 2.9 3.0 3.0 10.0%
Exterior 2.1 2.1 2.0 2.0 2.0 1.9 1.9 1.9 1.9 1.8 1.8 -14.0%
Chassis 1.3 1.3 1.3 1.3 1.2 1.2 1.2 1.2 1.2 1.2 1.2 -10.0%
Assembly 1.5 1.5 1.5 1.4 1.4 1.4 1.4 1.3 1.3 1.3 1.3 -14.0%
Others 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 0.0%
Cost Gap -6.3 -5.2 -4.4 -3.7 -3.1 -2.6 -2.2 -1.7 -1.3 -0.9 -0.6
Source: Institute of Automotive Technology (TU of Munich), DBS
From a consumer’s “total affordability” perspective, 2. Progressive Government Regulations &

vehicle price is only one part of the equation. The Subsidies
cost of usage/maintenance after the purchase is
equally important. One component that is closely Vehicle decarbonisation requires long-term
watched is energy efficiency, which EVs clearly commitment from all parties – from governments
possess a significant advantage over ICEVs. to automobile companies and consumers.
Transportation is responsible for about 24% of direct
The most efficient ICEVs in the market have an CO2 emissions from fuel combustion, out of which,
energy efficiency of 16-25%. EVs, on the other hand, road vehicles account for nearly three quarters.
transfer 86-90% of the power to wheels. According Growing pressure to reduce vehicle CO2 emissions
to the United States Environmental Protection is the primary factor for automobile manufacturers to
Agency, one of the most efficient ICEVs is the Toyota accelerate their vehicle electrification plans.
Camry at 32mpg (miles per gallon) while the Tesla
Model 3 Standard Range Plus does 141mpg. The government plays an important role in driving
EV adoption, through a mixture of regulations and
EVs’ advantage in energy efficiency explains why it subsidies. The pace of vehicle decarbonisation is
is not only better for environmental reasons, but for expected to accelerate globally, with the US trying to
commercial reasons as well. catch up with Europe and Asia.
More efficient in converting energy to • Government regulations: In 2015, 196 countries

power signed the Paris agreement, a legally binding
international treaty on climate change to limit
global warming to below 2 degrees Celsius.
ICEV Efficiency EV Efficiency
Under this agreement, countries are required
to submit long-term strategies on how they can
Charging losses 68% to 72% 10%
reduce their greenhouse gas emissions.
Drivetrain losses 5% to 6% 20%

Since then, policymakers in 13 countries and
31 cities/regions have announced plans to
Other losses 12% to 17% 8% phase out the sale of ICEVs while the biggest
economies have also proposed legislation or
Regenerative
braking
- +17% passed laws to achieve net-zero emission.
Power to the
16% to 25% 86% to 90%
wheels
Source: PolishedPrices.com, Bloomberg, DBS

Diamond prices are estimated using the price per carat
of the highest grade.
Progression towards net-zero emissions

Country Year Target
Suriname - Achieved
Bhutan - Achieved
Sweden 2045 In law
United Kingdom 2050 In law
France 2050 In law
Denmark 2050 In law
New Zealand 2050 In law
Hungary 2050 In law
European Union 2050 Proposed legislation
Canada 2050 Proposed legislation
South Korea 2050 Proposed legislation
Spain 2050 Proposed legislation
Chile 2050 Proposed legislation
Fiji 2050 Proposed legislation
Source: Energy & Climate Intelligence Unit Net Zero Tracker, DBS
Listed below are some of the key regulations enacted

in major EV markets – the US, Europe, and China:
Regulations undertaken by the US, Europe, and China

Country Regulations
In the US, President Biden recognises climate change as an existential threat and has committed the US to reaching
US Net-Zero emissions by 2050. The President’s climate and environmental justice proposal will make USD1.7t of
federal investment over ten years towards clean energy.
The European Union member states are expected to achieve Net-Zero emissions by 2050. The European
Europe Commission also launched a stimulus package recently with up to EUR550b earmarked to be spent on climate
change over 2021-2027.
In China, President Xi announced that its emissions would peak before 2030 and China will work towards being
carbon neutral by 2060. There are also mandates imposed on car manufacturers requiring them to sell a certain
China
number of EVs each year to avoid financial penalties. This requirement will go up every year until EV sales constitute
40% of total car sales.
Source: US Department of Energy, Europa, MIT
China
Largest EV market
Government imposes
US
mandates on automakers to
sell a certain number of EVs
EVs are exempted from
3rd largest EV market vehicle purchase tax and
Committed USD1.7t federal receive cash subsidies if it
investment over 10 years costs less than CNY300,000
towards clean energy
Provides Federal and local
incentives worth approx.
EV. USD10,000
Europe
the 2nd largest EV market
future is
European Commission launched
a stimulus package with up to
electric.
EUR550b earmarked for climate
change
Offers lower taxes and cash subsidies
for EV purchases
EVs are set to

Transportation account for
29% 58% of New Car
Electricity
Industry sales by 2040,
25% 23% up from only
Today, the Transportation & Energy sectors
account for more than half the Greenhouse
2.7% in 2020
Gas emissions in the US.
But this is set to change.
• Government incentives: Although the Worldwide Electric and Plug-in Hybrid

environmental benefits of EVs are widely sales (2020)
publicised, consumers remain resistant to
innovations that may disrupt their established
habits and routines. Hence, apart from China
United States
10%
implementing regulations, governments are 43%
also dishing out incentives to drive consumer
Japan
adoption of EVs. 1%
In the past decade, policymakers have

Other
implemented supportive incentives like cash 1%
subsidies, rebates, and tax exemptions to drive
EV sales. According to market surveys by the
Institute of Transportation Studies, nearly 30%
of US consumers who bought EVs cited EV
credits as an important factor in their purchase Europe
decisions. 45%

Listed below are some of the key incentives
available in major EV markets like the US,
Europe, and China.
EV incentives in the US, Europe, and China

Country Regulations
The US has the third-largest EV market in the world with 1.1m EVs in active use. On the federal level, new EVs enjoy
a federal income tax credit of up to USD7,500 on top of the state and local incentives. In most cases, the combined
incentives would be over USD10,000 in savings.
US
The government has recently stipulated that the federal government’s fleet of ICE vehicles will be replaced with US-
made EVs. Additionally, there are also plans to provide more incentives for consumers to replace ICE vehicles with
EVs.
Europe has the second-largest EV market in the world with 1.2m EVs in active usage. The automotive industry is
crucial for the EU as it employs 6.1% of the workforce and generates over 7% of its GDP.
Europe
Germany, for instance, offers lower VAT and cash subsidies (up to EUR9,000 for EVs that cost below EUR40,000) for
EVs. All EU member countries (excluding Lithuania) plus the United Kingdom offer incentives and/ or tax reductions
for purchase of EVs.
China, the largest EV market in the world with 2.3m EVs in active usage (45% global stock of EVs), sees an opportunity
with the mass adoption of EVs to become a major automobile exporter.
China has extended incentives for purchase of New Energy Vehicles (NEV) by providing exemptions from vehicle
China
purchase tax and cash subsidies for NEV passenger cars that cost less than CNY300,000.
In cities like Beijing, only EVs are allowed in the city centre. In Shanghai, EVs are exempted from the astronomical
license plate fees which on average costs RMB89,000.
Source: Virta, U.S. News, Europa, Argus Media, Bloomberg
Change in global electricity generation Outlook for EV sales
10 (PWh) 2000-2019 2019-2040

Despite the Covid-19 pandemic and decline in
global total car sales, EV sales have grown strongly
8
– increasing 41% y/y to c.3m units in 2020 –
6
driving EV contribution to total car sales to a record
4
4.6% during the year. The robust momentum was
2 underpinned by:
0
-2 1. Strong policy support and additional stimulus

-4 measures, particularly in Europe; 2020 was an
important target year for emissions standards
-6
while purchase incentives also increased
-8
(notably in Germany)
-10
Coal Gas Other low- Wind Solar PV
2. Continued declines in battery costs and OEM’s
carbon upgraded offers in both model choice and
Source: Bloomberg, DBS performance in EV
Given the positive outlook for the sector, we expect

total EV sales to register CAGR of 27% between
Passenger EV (BEV & PHEV) sales 2020 and 2030. On a geographical basis, the bulk of
forecasts the new EV demand will come from China. In 2020,
China accounted for 39% of total EV sales and by
Other US EU
(k unit)
Japan China 2030, this is expected to increase to 49%, with
35,000 EVs contribution to total car sales 35% Europe and the US accounting for 18% and 12%,
respectively.
30,000 30%
25,000 25% In terms of vehicle type, there are three main

CAGR 27%
20,000 20% categories of EVs currently in the market: (1) Battery
Electric Vehicles (BEVs), (2) Plug-in Hybrid Electric
15,000 15%
Vehicles (PHEVs), and (3) Hybrid Electric Vehicles
10,000 10% (HEVs). BEVs are full EVs that run on battery power
only while PHEVs and HEVS both have a small
5,000 5%
gasoline engine that helps extend range.
0 0%
16
17
18
19
20
21F
22F
23F
24F
25F
26F
27F
28F
29F
30F
Source: IEA, DBS
Currently, HEVs account for 42% of the market while 1. Automakers

BEVs account for 37%. But by 2030, the market for
BEVs is expected to surge to 64%, with PHEVs and The most direct beneficiaries of rising EV sales are
HEVs accounting for 24% and 11%, respectively. the automakers. But not all automakers are created
equal. In this section, we look at how pure-play EV
companies stack up against automotive incumbents.
EV sales forecasts (by vehicle type)
35,000 (k unit) BEV PHEV HEV E-BUS E-Truck
i. Pure-play EV Companies – unencumbered
by legacy technology. Companies like Tesla
30,000 are unencumbered by legacy technology. This
CAGR 20%
allows them to develop EVs without the fear of
25,000
cannibalising their existing ICEV product range
20,000
or rendering their existing production lines
redundant.
15,000
EVs from these companies are developed like
10,000
smart phones. They receive regular over-the-
air software updates which enhance vehicle
5,000
performance, introduce new features, and
0 provide security updates. This not only helps to
16 17 18 19 20 21F 22F 23F 24F 25F 26F 27F 28F 29F 30F improve customer satisfaction; more importantly,
Source: IEA, DBS it helps to extend the product lifecycle.
The other key advantages of pure-play EV

Beneficiaries of the electrification trend companies are:
The EV sector is expected to undergo phenomenal » Data goldmine: EVs are equipped with
growth in the coming years as the EV overtakes the multiple cameras, radars, and ultrasonic
ICEV as the vehicle of choice for global consumers. sensors that constantly gather data back
On a segmental basis, the biggest beneficiaries to their manufacturers. According to Intel,
of this wave are: (1) Automakers, (2) EV Charging autonomous vehicles produce up to 4TB
Infrastructure Providers, and (3) Raw Material of data a day. This feature gives companies
Providers. like Tesla an enormous advantage over its
competitors as the company has already
collected 3b autopilot miles (as of February
2020).
In an era where more training data translates ii. Legacy Automakers – playing catch-up.
to better performance, Tesla’s data Given the astronomical growth of EV start-
advantage will prove to be significant when ups and stricter emissions targets, legacy
companies start rolling out autonomous automakers are frantically playing catch-up
driving services. by announcing major overhauls to their
business models and adapting to the
» Recurring revenue: Vehicles built by pure- “new normal” of rising electrification in the
play EV companies are among the most automotive industry. For instance:
technologically advanced in the world and
they adopt a “recurring revenue” business » Volkswagen (the biggest automotive
model through the provision of software group in Europe which owns brands
subscription services for their users, for such as Audi, Bugatti, Porsche,
instance: Lamborghini, Skoda, and SEAT) will
be investing c.USD85b over the next
• Tesla indicates that it will launch a “Full five years on e-mobility and digital
Self-Driving Package” on subscription technologies. By 2029, Volkswagen
basis, coming on the back of the plans to have 75 full electric and 50
“Premium Connectivity” subscription hybrid models for sale.
plan launched at USD9.99 prior. This
plan offers users live traffic visualisation,
Tesla is now worth more than the top
in-car streaming music/media, and
four traditional automakers combined
Internet browsing.
700 (USDb)
• Chinese EV maker, NIO, on the other
hand, has a battery swap programme 600
that allows users to swap for fully

500
-charged batteries up to six times a
month for USD142. 400
The shift towards “recurring revenue” 300
business models, with SaaS (Software as

200
a Service) or BaaS (Battery as a Service),
allows automakers to pivot away from low 100
margin hardware production to the highly
lucrative service models. 0
Top four traditional automakers Tesla
DBS CIO INSIGHTS | S
THEC
I RODN D
Q UQAURATRETRE 2
R 0 22 01 2 1
INFOGR
PLACEH
ESG investments received record inflows in 2020 as the COVID-

19 crisis reminded policymakers and investors the importance
of long-term sustainable goals in addition to financial profits. We
want to focus specifically on the environmental space, where we
see companies dedicated to providing new solutions to the grow-
ing needs for energy transition and sustainable resources.
Source: Unsplash
D BDSBC
SI O
C I ION SI NI G
SHI GTH
S T|S S|E TCHOI N
RD Q U A R T E R 2 0 2 1
13 countries
and 31 cities
announced
plans to
RAPHIC
phase out
HOLDER
ICEVs
3 Q 2 1 T H E M AT I C S T R AT E G Y 1 12 31
Tesla accounted for nearly 80% of US EV vehicles. BloombergNEF predicts that

registrations (2020) 500 different EV models will be available
globally by 2022.
Others 7%
Audi E-tron 3%
Tesla 2. EV Charging Infrastructure Providers
Nissan Leaf 3%
Model 3
Chevrolet 37%
Bolt EV For years, it has been a chicken and egg problem for
8%
the EV charging infrastructure space:
Tesla
Model S
6% » On one hand, range anxiety and the availability
of charging stations are among the key reasons
Tesla behind consumers’ reluctance to consider an
Model X EV. A study conducted by Cox Automotive
8%
found that 83% of consumers cited battery life
and charging anxiety as a leading barrier to EV
Tesla Model Y adoption.
28%
Source: electrek, DBS » On the other hand, automakers are unwilling to

allocate capital for the construction of expensive
» Ford plans to spend USD30b on vehicle charging stations until existing demand justifies
electrification by 2025, targeting 40% of doing so.
future sales to be electric by 2030. Its
domestic rival, General Motors (GM), No of charging stations globally
is also planning to spend USD27b on
electric/autonomous vehicles by 2025, 35 (m)
31.3
and a more aggressive target of selling 28
30
only EVs by 2035. GM also plans to be
a carbon neutral company by 2040. 25
20
» Fiat-Chrysler recently merged with PSA
Group (Peugeot) to form Stellantis. This 15
merger will allow the group to share 8.1

10
synergies across its 14 brands and
3.4
spread development cost across more 5
1.4
2.4
0
Americas EMEA APAC Americas EMEA APAC
2019 2025
Source: IHS Markit, DBS
However, there is Tesla. Tesla bucked the industry » GM partners with EVgo, the largest public EV
trend by forging ahead and building thousands of fast charging network to build 2700 new fast
superchargers. This move gave the company the chargers in the US.
first-mover advantage as the extensive network
of chargers provided Tesla vehicle owners with According to IHS Markit, an 800% increase in the
flexibility and convenience. Today, Tesla owns/ number of charging stations globally is expected
operates more than 2,700 stations housing over by 2025, with the highest growth coming from Asia
20,000 superchargers, the largest fast charging Pacific. Research firm Market Study Report expects
network globally. the global EV charging infrastructure market to
increase from USD11.3b in 2019 to USD113.2b by
In a bid to play catch-up, the other automakers 2027 (CAGR of 33.4%).
started partnering with existing charging networks
(instead of building their own): 3. Battery Manufacturers
» Shell announced plans to build 500,000 electric Given the importance of batteries in EVs, naturally,
charging stations in the next four years while BP another geared beneficiary of the electrification trend
would be partnering with Chinese firm DiDi to would be the battery manufacturers. According
develop a fast charging station network across to IEA, automotive lithium-ion (Li-Ion) battery
China. production increased 33% y/y to 160GWh in 2020
No. of publicly accessible electric Battery demand forecasts (by vehicle)

chargers (2019)
Others 10% (GWh) HEV PHEV
2,500 BEV e-Bus
Netherlands 6%
e-Truck Consumer Electronics
Norway 1% Energy Storage Two-wheelers
2,000
France 3%
Japan 4% 1,500
United
Kingdom
3% 1,000
Germany 3%
China 61% 500
0
United States 9% 2016 2018 2020E 2022E 2024E 2026E 2028E 2030E
Source: IEA, DBS Source: IEA, DBS
amid a 41% increase in electric car registrations. In Currently, the major EV battery manufactures are
future, we expect EV battery production to register CATL, LG Energy Solution, and Panasonic and their
stronger growth than EVs. respective market shares in 1Q21 are 32%, 21%,
and 17%.
Based on our forecast, EV battery demand is
expected to register CAGR of 31% by 2030 as a 4. Battery Materials Producers
result of rising battery capacity installation per car
and energy density of batteries. Geographically, the Riding on the strong demand for EV batteries, the
key drivers of global battery demand are depicted in battery materials producers are also expected to
the charts that follow. see strong growth in the coming decade. The focus
in the industry these days is on “energy density”,
» China: China accounts for over 70% of global which is a measure of how much energy a battery
battery cell production capacity and contributes contains in proportion to its weight (Wh/kg). Higher
to 50% of global battery demand at c.80GWh energy density enables EVs to increase their driving
in 2020. distance and this is attained by increasing nickel
content in the cathode chemistry.
» Europe: Europe registered the largest battery
demand growth of 110% to reach 52GWh in In 2020, nickel-manganese-cobalt (NMC) continued
2020, exceeding domestic production capacity to be the dominant chemistry for Li-ion batteries
of c.35GWh. The EU has announced an with around 71% market share while nickel-cobalt-
ambitious plan to install EV battery capacity up aluminium accounted for the bulk of the remaining.
to 400GWh by 2025. While lithium-iron-phosphate (LFP) battery chemistry
Battery demand growth by sector (2019- Nickel demand (by cathode chemistry)
2030)
35% CAGR 19~30 1,800 (k ton) NCA NMC111 NMC532

31% NMC622 NMC811
1,600
30%
1,400
25% 23%
1,200
19%
20%
1,000
15% 13%
800
10% 600
6%
400
5%
200
0%
EV Consumer Energy Two-wheelers Total 0
Electronics Storage 2018 2020E 2022E 2024E 2026E 2028E 2030E
Source: IEA, DBS Source: WBMS, IEA, INSG, DBS
had regained some market share, it still accounted Challenges facing the EV industry
for less than 4% of the market.
Previously, the biggest challenge to widespread
The strong global demand for battery materials such EV adoption was battery cost. But thanks to
as lithium, nickel, and cobalt has led to respective technological progress in battery chemistry and
price surges of 142%, 34%, and 53% since Jul rising productivity, battery cost has fallen steadily
2020. We expect nickel demand from EV batteries over the years and it is no longer an impediment to
to account for 35% of total nickel demand in 2030 EV usage. Instead, the two key challenges weighing
(up from 5% in 2020), as a result of 31% annual on EV growth are: (a) Shortage of automotive chips
growth in EV battery demand. and (b) Shortage of EV charging infrastructure.
Lithium vs. Cobalt prices » Shortage of automotive chips: The tight supply
of automotive chips is affecting the global value
(USD/tonne) China Lithium Carbonate 99.5% (USD/tonne)
chain, hitting both EV and ICEV production.
LME Cobalt Price (RHS)
30,000 100000 The impact appears to be uneven, with North
90000 America and Europe taking a bigger hit than
25,000 Asia. To circumvent these headwinds, global
80000
automakers are aligning their production and
20,000
70000 focusing on high-margin models to meet rising
60000 demand from China.
15,000
50000
But due to the complexity and advanced
40000 technology of EVs, automotive chip content
10,000
30000 value is estimated at three times higher than
conventional vehicles. The market expects
5,000 20000
Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 automotive chip supply to take 1-2 years to
normalise.
» Shortage of EV charging infrastructure: A

shortage of EV charging infrastructure could
also be a drag on EV adoption worldwide. In
this instance, China appears to have a better EV
charging rollout programme, with approximately
1.76m charging points at the end of February
2021, supporting about three EVs per charging
point.
Asian Focus I: China Liberalisation of the Chinese NEV market in 2018

paved the way for rapid industry development. A
China has led the world in vehicle electrification for a strong eco-system has helped China excel in the
decade with the government recently announcing a EV space. The Shanghai Auto Show held in April
long-term development plan (2021-2035) as part of 2021 demonstrated China’s ability to attract global
the initiative to steer the country to carbon neutrality players, with over 50 new EV models and concept
by 2060. The plan draws on the support of the cars being featured during the show.
energy and communications sectors to speed up EV
market expansion, with the aim of achieving c.20% Above all, a new group of domestic EV makers
of NEV sales ratio to total passenger cars by 2025, such as NIO, XPeng, and Li Auto has emerged in
up from c.6% in 2020. China, injecting more vibrancy into the EV market.
Collaborations between ICE automakers and
To encourage EV technological advancement and Technology giants (such as Tencent, Baidu, and
lower reliance on subsidies, the government has Huawei) further enhance China’s EV development,
raised the requirements on driving range and battery especially in the smart EV space.
efficiency in order to qualify for NEV subsidies. At the
same time, the Chinese government has reduced its We estimate the Chinese NEV market to grow at an
NEV subsidy by 20% this year and the scheme will annual rate of c.30% to c.6m units by 2025 and by
expire by end-2022. 2030, NEV penetration is expected to hit c.40%.
China NEV sales projections Domestic passenger and commercial

vehicle market growth
Units (’000) Units (000) NEV Ratio (%) (%) (y/y %) India Indonesia China
16000 45 400.0
14000 40 300.0
35
12000
200.0
30
10000
25 100.0
8000
20
6000 0.0
15
4000 -100.0
10
2000 5
-200.0
0 0
2019
2020
2021F
2022F
2023F
2024F
2025F
2026F
2027F
2028F
2029F
2030F
-300.0
Jan-19 Sep-19 May-20 Jan-21
Source:CEIC, DBS Source:CEIC, DBS
Asian Focus II: India and Indonesia
EV development in India and Indonesia are still in their » Indonesia EV industry: Indonesia’s government
early stages as these markets are largely dominated has proposed to nurture the EV market, but
by the 2- and 3-wheelers. Besides, the charging progress remains slow. So far, Indonesia’s
infrastructure network is underdeveloped to promote participation is largely as a supplier of key battery
EV adoption. materials like nickel. In 2019, the Indonesian
government set an ambitious target of 20%
» India EV industry: From April-March 2021, of vehicle production to comprise electric and
India achieved domestic sales of c.2.8m units hybrid vehicles by 2025, including 20% of the
of passenger vehicles and c.0.7m units of targeted 1m vehicle exports.
commercial vehicles. India will stick to the Paris
pledge to reduce its carbon footprint by 33-35% The EV regulations stipulate minimum local content
from its 2005 levels by 2030 and is studying levels of 80% by 2029, and the government is
the possibility of achieving carbon neutrality by leveraging on the abundant resources (such as
2050. cobalt, zinc, and nickel) to attract EV and battery
investments into the country.
That said, EVs make up a very small portion
(less than 1%) of the overall market. Overcoming
range anxiety is the key to increasing EV adoption
in India.
The hunt
for yield
continues
THEME 2 – GOOD YIELD HUNTING
The hunt for yield is on in this environment of low interest rates. China
Banks and S-REITs have proven to be attractive dividend plays, playing
a crucial role in the income end of the Barbell Strategy. China Financials
demonstrated sturdy share price performance as 2020 drew to a close, and
S-REITs offers one of the world’s highest dividend yields at 5%.
128
Source: Unsplash
12. Yeang Cheng Ling

Strategist
Good Yield Hunting. Pauline Lee

Equities
China large banks: An attractive dividend Banks’ profit trends remained resilient
play
China banks quarterly net profits, 2011-2020 (CNYb)
600
The optimistic outlook of the Mainland China
economy in 2021 and 2022 is supportive of an 500
earnings recovery in large banks. China Financials
demonstrated sturdy share price performance as 400
2020 drew to a close. From the trough in 3Q20, the

sector has risen more than 30% as China emerged 300
from the Covid-19 pandemic and domestic recovery

200
took shape in the second half of 2020.
100
The banking sector has survived the economic
challenges brought about by the pandemic, as
-
shown by the quarterly profits recovery. The resilience Mar-11 May-14 Jul-17 Sep-20
of China’s banking system is evident.
The regulators refrained from drastically cutting

interest rates throughout the pandemic, which
avoided putting pressure on the banks’ NIM. With
GDP projected to stage a strong rebound of more
A convincing recovery
than 8% in 2021 and north of 5% in 2022, the
350 domestic large banks are well positioned to reap the
positive impact of this development.
300 Policy stability. The last round of RRR easing was

in January 2020. While there was room for further
monetary easing with the elevated RRR, the PBOC
250 did not employ unorthodox and drastic policies to
flush the country with widespread liquidity. Rather,
the government took a measured approach in
200 steering the world’s most populous nation towards a
buoyant domestic economy.
150 After hitting 2.09% in both 2Q20 and 3Q20, the NIM
Dec-15 Aug-17 Apr-19 Dec-20 began to show signs of revival to 2.10% in 4Q20.
Source: Bloomberg DBS With re-leveraging taking shape, the NIM trend could
be supported by incremental loan volume on higher Loan rates and NIM bottoming
rates charged to SMEs and non-SOEs, as domestic
demand expands across more sectors. CN avg ordinary loan rate (%, LHS)
8.0 CN banks NIM (%, RHS)
Underlying demand for loans remained sturdy 2.8
as the country continues its progress towards

7.0
building a robust domestic economy, widening its 2.6
manufacturing capability, and scaling up broad-

based self-sufficiency. The loan-to-deposit ratio 2.4
6.0
expanded some 10 % pts to 75% since 2015 as
banks put their balance sheets to work. 2.2
5.0
2.0
Room for more easing if the need arises

4.0 1.8
China small banks RRR (%) Dec-10 Feb-14 Apr-17 Jun-20
China large banks RRR (%)
25
20
Dividend payout maintained. The million dollar
question on investors’ minds throughout the past
15
one year was answered as China large banks
maintained their dividend payout at 30% of 2020
earnings, consistent with historical trends. The
10 large banks continue to reward shareholders with
attractive yields of 6-7%.
5
The top four banks in China distribute an average
Dec-10 Feb-14 Apr-17 Jun-20
yield of more than 6% annually. This continues to
Source: Bloomberg, DBS support our investment stance on China banks as
high yielding proxies on the Income side of a Barbell
portfolio construct.
China banks are good proxy for yield hunting

investors as the dividend payout ratio has been
consistent and reliable. For example, an investment
Consistent payout ratio in China banks since 2014 would have generated a
total return of 50% over a period of five to six years,
FY2020 div payout ratio (LHS, %) in contrast with less than 20% in share price returns.
Yield (RHS, %)
40% 10.0%
Asset quality enhanced. We expect the number
of non-performing assets to be well contained. The
8.0%
35% NPL ratio has remained steady over the past decade
at below 2%, in part due to the non-performing asset
6.0%
disposal arrangement with the asset management
30%
companies and the forbearance stance on bad
4.0%
loans by the regulators.
25%
2.0%
The old adage about banks being the mainstay
of every country’s economic stability and social
20% 0.0% wellbeing holds true. China’s regulators have taken
ICBC CCB BOC ABC B.Com CMB
steps to strengthen the banking sector with the
Source: Bloomberg, DBS formation of the Domestic Systemically Important
Bank (D-SIB) framework in December 2020, where
the higher capital buffer requirements reinforce the
resilience of major banks.
China banks’ attractive dividend yield to The power of dividends

persist
12.0 China Financials TR
180 China Financials price only
10.0 160
140
8.0
120
6.0
100
4.0 80
Dec-10 Feb-14 Apr-17 Jun-20 Oct-14 Nov-16 Dec-18 Jan-21
Systemically important, the six large banks have built Rising capital base
up strong loan-loss provision buffers in their balance
sheets. At the end of 2020, they had more than 35.0
200% in loan loss provisions and more than CNY30t

30.0
of total capital, to weather any unforeseen volatility.
25.0
China banks are also equipped with strong capital
positions. The sector’s capital adequacy ratio (CAR) 20.0
and Tier-1 CAR rose to 14.7% and 12.0% at the end

15.0
of 2020, substantially above the respective 8% and
6% required by Basel III. 10.0
Importantly, the barometer of dividend payout ratio 5.0
was maintained, effectively resolving the concerns in

-
investors’ minds over the past one year about China Dec-10 Feb-14 Apr-17 Jun-20
banks’ commitment and ability to maintain dividends.
We remain constructive on the large banks due to Source: Bloomberg, DBS
their earnings stability, potential rise in fee-based

income, and reduction in provision pressure relative
Notably, the NPL ratio remained at 1.8% at the end
to smaller peers in the region.
of 2020, easing the stress on asset quality among
the lenders. This will give banks the necessary dry
As the worst appears to be over for China banks,
powder to expand their loan books and other fee
their share prices should rerate over time. The
base businesses. Other positive factors for earnings
government’s move to tighten the rules on consumer
include 1) writeback of 2020 provisions over the next
lending by financial technology platforms will also
two years and 2) lower loan-loss provisions going
level the playing field for banks to regain some
forward.
market share.
We remain constructive. China banks have
Promising outlook. The better margin outlook and
done well since the start of the year and we
stabilisation of asset quality among banks, especially
remain constructive on their long-term outlook,
the large state-owned banks, amid the post-Covid
as the sector’s operating backdrop improves
recovery will allow banks to continue to deliver stable
incrementally with structural domestic growth
earnings over the coming quarters. NIM has passed
uptrend, undemanding valuations, and recovery of
the trough in mid-2020 and is expected to recover
pre-provision operating profit growth.
in 2021 and beyond. As such, the dividend payout
ratio and compelling dividend yields are sustainable.
With pressure from non-performing assets easing, Valuation discount should narrow
NIM bottoming, loan yields rising, and fee-based
income returning, banks’ balance sheets and Price to book: China Fin/Global Fin
Average
earnings should improve over the coming quarters. 1.1
We continue to stay constructive on the large state- 1.0

owned banks, as they are trading at low valuations
notwithstanding the improving fundamentals and a 0.9
supportive operating environment. With government
stimulus measures taking effect and recovery in
0.8
domestic demand picking up pace alongside global
economies, China’s banking sector – which is also
0.7
the world’s largest – offers investors compelling
upside potential with attractive and sustainable
0.6
dividend yields in the range of 5–7%. The sector Dec-13 Dec-15 Dec-17 Dec-19
remains an essential component in the income part
of a long-term core portfolio construct.
At trough valuation The catalysts for China banks also include multiple
expansion and narrowing of valuation discounts. We
China Financials fwd P/B
+1 SD view the steep discount in valuations to regional and
-1 SD global peers unwarranted and given time, the gap
1.2 should narrow.
1.0
0.8
0.6
Quality in China large banks
A more efficient balance sheet Health asset quality

80 China L/D ratio (%) 8.0 China banks NPL/total loans, 2006-20 (%)
7.0
75 6.0
5.0
70 4.0
3.0
65 2.0
1.0
60 0.0
Dec-10 Feb-14 Apr-17 Jun-20 Dec-06 Dec-09 Dec-12 Dec-15 Dec-18
Source: Bloomberg DBS Source: Bloomberg DBS
Loan book expansion at manageable pace
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
Building up provision cushion
Average loan-loss provision for China’s six largest banks (%)

300%
250%
200%
150%
100%
50%
0%
Solid capital adequacy ratios

CAR (%) Tier-1 CE (%)
15.0
13.0
11.0
9.0
DBS CIO INSIGHTS | THIRD QUARTER 2021 DBS CIO INSIGHTS | THIRD QUARTER 2021
S-REITs United
United Japan
Japan
5.2%
Kingdom
Kingdom
2.0% 3.8%
Hong
Hong
Kong
Kong
5.9%
Among the highest United
United
States
States
yields globally
2.6% Singapore
Singapore
Cont.
Cont. EU
EU 5.2%
3.8% Thailand
Thailand
5.1%
Good
Austalia
Austalia
5.1%
Yield China Large Banks

Hunting 6.7%
Attractive yield to persist
Singapore REITs in the new normal Why S-REITs?
Fertile hunting ground for dividend yields. As 1. Attractive yield spreads. S-REITs currently
the global population ages, coupled with ultra-low offer an average yield spread of 3.6%, above
savings rates globally, demand for passive income the 10-year Singapore bond yield of 1.5%, in
and dividends will continue to rise. Singapore real line with the 16-year historical mean. This is an
estate investment trusts (S-REITs) stands out as attractive yield spread compared to the ultra-
a high dividend-yielding sector, well supported low savings rate and fixed deposits rates in the
by recurring income streams from commercial region.
properties across the region.
Compared to global REITs, S-REITs offer one of the S-REITs yield spreads over time
highest dividend yields at 5% and compelling yield
spreads of close to 3.6%. The sector is trading at Yield spread vs 10Y bond
a price-to-book multiple of 1.05x, near its 15-year Sector Yield Spread Mean Yield Spread
historical mean.
8.0%
7.0%
5.6%
(-1 SD)
Fertile ground for dividend yields 6.0%
3.8%
5.0% (Mean)
Global REITs Comparison - Dividend Yield
4.0%
7.0%
5.9% 3.0%
6.0%
5.2% 2.0%
5.1% 5.1% 2.1%
5.0% (-+1 SD)
1.0%
3.8% 3.8% 3.6% 0.0%
4.0%
2005 2010 2015 2020
3.0% 2.6%
2.0%
*Chart is truncated
2.0%
1.0%
2. Improving balance sheet strength. Credit
metrics for the S-REITs sector, including interest
0.0%
coverage ratio, debt tenor, and interest costs,
HK SG AU TH Cont JP MY US UK
EU have all improved since the GFC. While there is
a damp during COVID-19 pandemic in 2020,
these credit metrics are starting to improve
again. Gearing is notching up to a sector
average of 38%, but this is still a healthy level
compared to the new MAS requirement of 50%
(raised from 45% in April 2020).
Improving credit metrics
FY08 FY09 FY10 FY19 FY20 1Q2021 FY20 vs FY08 (GFC)
Gearing (%) 31.6% 30.8% 32.6% 35.0% 37.2% 38.1% Higher
Interest coverage (x) 5.0 5.5 5.1 6.8 5.3 na Improved
Debt tenor (years) 2.6 2.3 3.0 3.1 3.0 3.0 Improved
Interest cost (%) 3.3% 3.3% 3.1% 2.5% 2.7% 2.6% Improved
3. Long-standing track record. S-REITs Asset Quality: In asset quality, we select S-REITs
outperformed the STI Index in 13 out of the with high proportion of freehold assets, long weighted
last 17 years – a commendable track record. average lease expiry (WALE), and consistently high
S-They underperformed in 2007 (period of occupancy rates.
rising interest rates and inflation); 2008 (GFC);
2013 (Federal Reserve tapering tantrum); 2020 Business Mix: Here, we favour real estate sectors
(Covid-19 pandemic). Despite the dips, S-REITs that are undergoing an upcycle, positive rental
tend to recover and rerate higher over time as reversions, tight supply, and assets geared to
earnings growth and improving fundamentals secular growth. At this juncture, our preference is
shine through. to keep to industrial sectors (business parks/high
specifications/data centres, and tech) and suburban
Stick to Quality “ABCD” REITs. For long-term retail. Both industrial and suburban retail have
investors looking for stable passive investment demonstrated resilience in crisis periods as well as
income streams, our preference is to stick to quality during the Covid-19 pandemic. Industrial sectors
REITs with a track record to deliver resilient recurring continue to see stable occupancy rates through the
dividends. When it comes to stock selection, we GFC and Covid-19 pandemic on the back of strong
use our proprietary ABCD rank-based scorecard to demand for e-Commerce and stockpiling. Suburban
position in quality S-REITs. Our quality selection of retail continues to enjoy strong traffic amid WFH
“ABCD” REITs takes into consideration REITs with trends and is highly defensive given that close to
strong Asset Quality, Business Mix, Competitive 40% of its tenants are F&B and essential service
Edge, and Debt Resilience. providers.
Improving credit metrics
"S-REITs "STI "Relative performance

Year "DPU Growth %" Remarks
Total Returns %" Total Returns %" vs Index"
2004 34% 13% Outperform 14%
2005 18% 17% Outperform 9%
2006 44% 31% Outperform 9%
2007 1% 22% Underperform 11% Rising rates, inflation
2008 -48% -46% Underperform 13% GFC
2009 77% 67% Outperform -10%
2010 17% 13% Outperform 2%
2011 -10% -14% Outperform 2%
2012 43% 23% Outperform 5%
2013 -3% 3% Underperform 9% Fed QE tapering
2014 15% 9% Outperform 10%
2015 -2% -8% Outperform 2%
2016 10% 3% Outperform 0%
2017 19% 13% Outperform -1%
2018 -4% -6% Outperform 2%
2019 20% 9% Outperform 2%
"Covid-19 severely
2020 -10% -8% Underperform -12% impacting hospitality
& retail REITs"
Interest
3.3% 3.3% 3.1% 2.5% 2.7%
cost (%)
77% of asset base for large cap industrial Suburban retail focuses on essentials
REITs
Bigger shift towards “specialised”/New Economy properties Propor tion of Net t Lettable Area allocated To
Essential Ser vices 1 ( %)
Other industrial
45,000 Business parks, data centres, logistics 80.0%
• Suburban retail malls generally have higher proportion of NLA
% New Economy assets (RHS)
40,000 allocated to Essential Services than central malls
35,000 75.0%
FCT Retail Portfolio 3 :
30,000 45.2%
AUM (SGDm)
70.0%
25,000 Suburban
40.0% 60.0%
Retail Malls 2
20,000
65.0%
15,000
10,000 Central Malls 2 20.0 - 30.0% 70.0 - 80.0%

60.0%
5,000
0 55.0% % of Essential Services % of Non Essential Services
Source: DBS Source: Company data
Competitive Edge: In our view, S-REITs with strong Key Risks:

competitive edge comes with low gearing, strong
government-backed sponsors, high proportion Steepening yield curves. Steepening yield curves
hedged in fixed rate debts, and low management could reduce the investment appeal of S-REITs.
fees as a percentage of portfolio. We believe a Moreover, they tend to underperform in times of
combination of these factors will allow the REITs to rising bond yields due to narrowing yield spreads
thrive in both good times and bad times. Strength in and risk of higher cost of funding.
these metrics will also provide a good buffer against
interest rates volatility. Rising bond yields. According to our analysts,
while S-REITs tend to underperform the STI when
Debt Resilience: We see the strongest debt 10Y yields rise by >50 bps over a three- to six-month
resilience in S-REITs with low refinancing risks (low period, they generally turned outperformers in the
proportion of debt expiry over the next three years), subsequent six to 12 months after interest rates
low cost of debt, and long term to maturity. start to stabilise.
“ABCD” Quality selection metrics for S-REITs. Mitigating factors: With the S-REITs hedging
We believe a strong combination of these quality >76% of their borrowings in fixed rate debt, coupled
metrics is key for the S-REITs to sustain earnings with a projected growth in DPUs of 8.0% CAGR over
and DPU resilience across market cycles, led by the next two years, this should help cushion DPU
scale, strategic assets and strong financials. against interest rate volatility.
“ABCD” scorecard
“ABCD” S-REITs for Quality Yields and Earnings Resilience
Asset Quality Business Mix Competitive Edge Debt Resilience
• Freehold asset • Sector preference: • Strong sponsor • Low % of debt maturing in

• Long WALE suburban retail, data • Low gearing and large next three years
• Consistently high centres, business parks, headroom to grow • Long term to maturity
occupancy rate high-specs industrial • High proportion of debt (years)
• High domestic exposure hedged in fixed rates • Low cost of debt
• High tech exposure • Low management fees (%
of AUM)
Fed tapering leading to hyperinflation. During Covid-19 impact to SREITs in 2020

the Federal Reserve tapering tantrums in 2013,
the FTSE ST Real Estate Investment Trusts Index COVID-19 rebate as a % of 2019A dist. income
40%
(FSTREI) fell by close to 20% from May 2013 to
34%
September 2013. However, the index recovered 35%
in the subsequent 12 months (up close to 9%) on 30%

the back of strong DPU growth. Hence, while Fed
25%
tapering could be an imminent risk, we believe
19%
S-REITs that are able to deliver consistent growth 20%
and balance sheet strength along with an improving
15%
economic backdrop are in a good position to recover
from market dips. A key concern will be when the 10%
5% 5%
economy gets overheated and hyperinflation sets in. 5% 2% 2%
0%
0%
Emergence of vaccine-resistant variants. Data Retail Industrial SG office US office Hospitals Hotel
centres
Through the Covid-19 pandemic in 2020, the largest
impact was seen across retail and hotel REITs, Source: DBS
while industrial and suburban REITs stayed relatively
resilient and defensive through the pandemic.
Downside risks include persistent Covid-19
variants leading to prolonged economic lockdowns.
Prolonged tightening Covid-19 measures will have
adverse impact on the S-REIT’s profitability and
distributions.
Commodity
boom: Winners
and losers
S P E C I A L F E AT U R E – C O M M O D I T I E S
A spectacular rally in commodity prices has taken hold since late-2020

which could well continue into 2021, supported by an early recovery in
China and big infrastructure spend in the US.
Source: Unsplash
13. Suvro Sarkar

Analyst
Commodity Boom. Lee Eun Young

Analyst
DBS Group Research *
Robust commodity outlook amid rising Steel spread (benchmark HRC – raw
demand. Most commodities – metals, energy, and materials)
agriculture – endured a difficult time in 2020 given
Covid-19 lockdowns and the consequent plunge (USD/tonne) Spread (RHS) (USD/tonne)
Iron ore and coal cost per ton of steel
in economic activities. But a spectacular rally in 1,200 HRC Benchmark Price, World Export 700
commodity prices has taken hold since late-2020
which could well continue into 2021. The driving 1,000 600
factors are:
800 500
• Ongoing global recovery in 2021 drove

600 400
commodities demand sharply higher to return
close to pre-Covid levels, boosted by an 400 300
early recovery in China and big infrastructure
spending in the US. 200 200
• Expansionary monetary policies and fiscal

0 100
stimulus measures undertaken by governments
May-16 May-18 May-20
around the world (especially the US) have
boosted inflation expectations and weakened
the dollar.
• Lingering supply challenges in certain Brent crude oil price trends (since 2020)
commodities owing to sporadic Covid-19
related restrictions, supply chain issues, and USD/bbl
80
weather events in certain areas.
70
While we could expect some moderation in
commodity prices in 2H21 after the recent rally, 60
average commodity prices in 2021 will end up 50

significantly higher than in 2020. This obviously
benefits the upstream commodity producers. But 40
for the downstream consumer sectors, the outlook Since 2020 low: +240%
30 Y TD 2021: +33%
for margins is also not as dire as what one would
Last 3M: +11%
expect. 20
10
Higher demand for end products ensures that some
Jan-20 May-20 Sep-20 Jan-21 May-21
of these costs will be passed on to customers. In the
following section, we examine the impact of rising Source: Bloomberg DBS
commodity prices on various sectors in details and

identify the winners and losers from this commodity
up cycle.
144 3 Q 2 1 S P E C I A L F E AT U R E
Rising Base Metal Prices: Upstream LME copper prices and warehouse stock
impact
LME warehouse stock (RHS)
Steel, Copper, and Aluminium (USD/tonne) (k tonnes)
LME copper price
• Strong margin improvement in store for 11,000 400
steel producers. Regional steel markets

10,000
have been tightening since 4Q20 on the
300
back of industry restructuring, shutdown of 9,000
uncompetitive steel plants in the US and Europe,
8,000
and robust demand recovery in China. Thus, we 200
expect the steel spread based on benchmark 7,000
HRC prices to rise by a whopping 61% y/y to
6,000
USD366/tonne in 2021. In addition, we believe 100
sales volume growth in 2021 will be a key driver 5,000

for earnings growth, reducing unit production
4,000 0
cost per tonne. Jan-16 Jan-18 Jan-20

• Copper miners to benefit from surges in
copper prices. The global copper market
is expected to remain in deficit in 2021. LME Rising Base Metal Prices: Downstream
copper prices have risen 28% to USD10,160/ impact
tonne YTD on 28 May after surging 26% in 2020.
Accordingly, miners will be chief beneficiaries Automobiles
from rising copper prices as mining costs are • Positive for dealerships. The current condition
only expected to rise modestly, irrespective of of tight vehicle supply and healthy demand
copper price growth. benefit auto dealerships in China as this
translates to stronger prices and attractive gross
• Aluminium smelters could see the strongest profit margins. Moreover, tight vehicle supply
earnings since 2008. LME aluminium prices also benefits the pre-owned car market – a new
have rallied c.20% YTD to USD2,400/tonne growth catalyst for auto dealerships.
levels in anticipation of strong demand growth
in 2021. Industry capacity utilisation rates • Slightly negative for auto OEMs. On the other
should rise above historical averages, thanks to hand, higher metal prices will be slightly negative
increasing demand and limited capacity growth. for auto OEMs as they are unlikely to on-pass all
This will boost gross profits of aluminium the cost increases. Gross margin contraction for
smelters, especially those with captive power auto OEMs is likely in 2021.
plants which will benefit from subdued alumina
input cost.
3 Q 2 1 S P E C I A L F E AT U R E 145
Apart from steel, automobile OEMs have been Orderbook-to-fleet trends for shipping
using more aluminium in their vehicle production
to reduce vehicle weight and lower CO2 % Containership Bulkcarrier
emissions. Raw materials (largely metals) are 40 Product Tanker Crude Tanker
estimated to account for about three quarters 35

of vehicle production costs in the supply chain.
30
Shipbuilding 25
• Near-term margin pressure for older

20
contracts. Shipyard contracts require long
lead time of one to two years for delivery. 15
While the contract price is fixed, shipyards are 10

exposed to changes in material costs during
5
the construction period. Steel accounts for 20%
of vessel cost and therefore, rising steel cost 0
Jan-12 Jan-14 Jan-16 Jan-18 Jan-20
will impact 2021’s margins for older contracts
Source: Clarkson Research, DBS
targeted for delivery this year.
• Limited concerns for new orders. For contractors that have higher exposure to high
recent and future new orders, margins are rise building projects whereby steel constitutes
expected to recover from 2021’s low through c.15% of total cost (vs c.5% for infrastructure
higher newbuild prices that reflect cost inflation. projects). This is more apparent in private sector
Recovery in economic activities and commodity projects where prices are fixed and there are
prices bode well for the shipping industry. Not no pass-on clauses to account for potential
surprisingly, newbuild prices have risen by more escalation in raw material prices.
than 10% YTD. We believe prices will continue
to rise in line with firmer economic conditions. • No impact on newer projects: Higher steel
The orderbook-to-fleet ratio remains at historical price only applies to current projects on the
lows for bulk carriers and tankers, indicating contractors’ orderbooks and does not apply
potential uptick in orders. to new ones. For new projects, the contractors
will price into the tenders the higher cost of
Construction raw materials. For key multi-year government
projects in countries like Indonesia, there is
• Negative impact for projects with high usually a pass-on clause for increases in raw
steel content. The construction sector is more material prices.
negatively impacted by rising steel prices than
price inflation in other raw material like concrete,
cement, and diesel. The key losers would be
Real Estate Technology Hardware

• Limited impact on developer margins. Property • Strong ability in circumventing rising input cost.
developers are generally expected to undergo Raw materials (which include component and
slight margin compression amid rising input parts) can account for c.30% to more than
costs (concrete, steel, and labour) for their 80% of total manufacturing cost for technology
ongoing and upcoming projects. However, hardware companies. However, the impact can
these costs are mostly manageable given: be managed. Despite rising commodity prices,
technology hardware companies in the region
» Their contribution to overall costs is less are able to maintain or even improve on their
than 50% (land cost is key). margins by:
» Most developers are shielded as
construction contracts are either locked » Passing on the increase in cost to
in or they are able to pass on these cost consumers amid strong end demand while
increases to home buyers by raising selling leveraging on the strong customer-supplier
prices for upcoming launches. relationships to secure components and
raw materials.
In markets like Singapore and Hong Kong, land costs » Adopting product redesign and innovation
are high. Construction cost typically account for only to reduce or substitute components that
25-35% of overall development costs and hence, are hard to secure.
the impact from commodity inflation is limited.
» Shifting product mix to focus on higher
margin products and improve operational
efficiencies.
Malaysian contractors’ margins vs steel ASEAN tech hardware margins vs steel

Steel prices (RM/MT) (LHS) USD/tonne Steel price (LHS)
RM/ MT %
Average pretax margins (RHS) 1,200 ASEAN Tech gross profit margin (RHS) 26%
2,800 10
2,700
9 1,000 25%
2,600
2,500 8
800 24%
2,400
7
2,300 600 23%
2,200 6
2,100 400 22%

5
2,000
1,900 4 200 21%

1Q20 2Q20 3Q20 4Q20 1Q21 Jan-15 Jan-17 Jan-19 Jan-21
Rising Energy Prices: Upstream impact Chemicals
Oil and Gas Producers • Petrochemical companies are likely to

• Oil and gas producers to benefit. Upstream benefit. Generally, chemical prices will adjust
and integrated oil companies stand to benefit alongside with crude price and feedstock cost
from rising energy prices. The sharp rebound movements. There is found strong positive
in oil and gas prices should drive upstream correlation of c.0.6 between chemical prices
earnings to multi-year highs in 2021 given that and margins and feedstock costs such as
pure play upstream companies’ earnings are condensate and naphtha.
highly leveraged to energy prices. For instance,
oil prices of USD70-80/bbl could drive earnings Players using ethane feedstock will benefit more
up by 30-60% or so as compared to oil price at due to cost advantage over naphtha cracker
USD60/bbl. during crude price uptrend as ethane gas cost
remains relatively flat (c.85% of polyethelene
Oil Refining and Marketing products is ethane cracker base). This provides
• Standalone refinery margins will be under downside protection in the event of rising
pressure. Generally, crude oil and by-products feedstock cost, i.e. naphtha, while product
such as naphtha and condensate are primary prices remain unchanged. However, there
feedstocks of petroleum refinery and service can be up to a one-month lag in adjustment
station businesses and petrochemical sectors. of chemical prices, depending on position in
The rise crude oil prices is deemed slightly chemical value chain.
negative for the refinery business (everything
else holding constant). Refinery margins are
usually squeezed during rising crude oil prices, Benchmark refining margin vs oil price
as individual product margins are mainly
Singapore gross refining margin (RHS) Dubai (LHS)
determined by its own specific demand and 80 10
supply dynamics.
70 8
• Marketing margins squeezed. Rising energy 60 6

price is negative for service station businesses
and historically, the correlation between 50 4
ex-refinery prices and marketing margins is

40 2
negative at of c.-0.4. This is due to the time
lag for price adjustments as retail oil prices do 30 0
not adjust promptly to changes in crude prices.
20 -2
Moreover, governments often intervene and
set the ceiling for retail prices of fuels. Thus, 10 -4
marketing margins are squeezed during crude Jan-19 Jul-19 Jan-20 Jul-20 Jan-21
price uptrends. Source: Bloomberg, DBS
Rising Energy Prices: Downstream Jet fuel price trends for aviation sector
impact
Crack spread (RHS)
USD/bbl Jet fuel (SG) USD/bbl
Aviation 100 Brent crude oil 25
• Acute margin compression on the cards.
90
Airlines’ operating margins are inversely related 20
80
to fuel, which accounts for 20-30% of operational 15
70
costs and tends to be the one of the largest
10
cost items. We expect airlines to experience 60
acute margin erosion if crude oil prices continue 50 5

to climb in the near term, as they lack pricing 40
0
power to pass on higher costs to consumers in 30
the face of lacklustre demand. -5
20
10 -10
Cement Production Jan-17 Jan-19 Jan-21
• Margin pressures for China cement industry
from higher coal prices in 2021. Coal energy Source: Bloomberg, DBS
is one of the major cost components (20-40%)

for cement production. Chinese coal miners
may increase production in response to the CPO and soybean prices
government’s recent warning on tempering
commodity price gains. But even so, the average USD/MT CPO price Soybean price
coal price would remain higher than last year. 1,500
Owing to rising coal input price, China cement

product price spread (benchmark cement price 1,300
minus coal price) is expected to decline by more

1,100
than 10% y/y on average in 2021.
900
Rising Agricultural Prices: Upstream
impact 700
Crude Palm Oil (CPO) Producers 500

• High leverage to price upswing. CPO
producers are expected to benefits from the 300
Feb-18 Feb-19 Feb-20 Feb-21
upswing in CPO price. CPO plantation estates
have high operating leverage as costs are largely Source: Bloomberg, DBS
fixed per hectare, consisting of upkeep and

cultivation (fertilisers, harvesting activities) and
milling cost. Hence, rising average selling price
has substantial impact to planters’ earnings
performance.
Rising Agricultural Prices: Downstream Thai consumer sector margins vs CPO

impact price
CPO price (LHS)
Consumer – FMCG 5,000 30%
Thai consumer sector avg gross margin (RHS)
• Margin impact dependent on brand loyalty.
4,500 29%
Higher CPO price is more negative for personal
care companies than F&B ones given that the 4,000
28%
latter utilise more palm oil (or its derivatives) in

27%
their ingredients. For home and personal care 3,500
companies, we estimate palm oil-related costs 26%

3,000
to account for 10-30% of total costs (vs under 25%
10% for F&B companies). 2,500
24%
The impact on gross margins, meanwhile, will 2,000 23%

depend on product mix and the ability to pass
1,500 22%
on costs to consumers. Companies with high Jan-18 Jan-19 Jan-20 Jan-21
market share and strong brand loyalty tend to
be able to pass on higher raw material costs
(albeit not immediately given that the pandemic
is affecting consumer spending too).
• Headwinds for hog players in China.
Consumer – F&B Upstream hog players in China are facing
• Agricultural prices are key determinants significant challenges this year. They are
of F&B margins. Across F&B companies, subjected to weaker hog prices and yet, their
raw material (agricultural products) account for feed costs have been rising in recent months.
85-90% of total manufacturing costs. While We anticipate average hog prices to decline by
rising commodity prices have direct impact on at least 20% y/y in 2021 and feed costs to rise
gross margins, many companies adopt effective by c.15%.
hedging policies to minimise cost impact.
The other methods employed include (a)

Improving production efficiency, (b) Increasing
economies of scale, and (c) Upgrading of product
mix portfolio. Leading players with bigger scale
have an upper hand in cost management.
* Other contributors: William SIMADIPUTRA, Duncan CHAN, Tjen-San CHONG, Lee Keng LING, Duladeth BIK, Rachel MIU, Pei Hwa HO, Jason SUM,
Duncan CHAN, Maynard Priajaya ARIF, Mavis HUI, Derek TAN, Danielle WANG and Chris KO
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Glossary.
Acronym Definition Acronym Definition
ASEAN Association of Southeast Asian Nations eop end of period
AUM assets under management EPFR Emerging Portfolio Fund Research
AxJ Asia ex-Japan EPS earnings per share
B2B business to business ESG Environmental, Social, and
Governance
B2C business to consumer e-Sports electronic sports
bbl barrel ETF exchange-traded fund
BI Bank Indonesia EU European Union
BNEF BloombergNEF EV electric vehicle
BNM Bank Negara Malaysia F&B food and beverage
BOE Bank of England FCF free cashflow
BOJ Bank of Japan FDA Food and Drug Administration
BOK Bank of Korea FDI foreign direct investment
BOT Bank of Thailand FMCG fast moving consumer goods
bpd barrels per day FX foreign exchange
BSP Bangko Sentral ng Pilipinas GDP gross domestic product
C2B consumer to business GFC Global Financial Crisis
C2C consumer to consumer GMV gross merchandise value
CAGR compound annual growth rate HIBOR Hong Kong Interbank Offered Rate
CFTC Commodity Futures Trading Commission HKMA Hong Kong Monetary Authority
CGB China Government Bonds HY high yield
CPI consumer price index IC integrated circuit
DM Developed Markets ICEV internal combustion engine vehicles
dma day moving average IG investment grade
DPU distribution per unit IMF International Monetary Fund
DXY US Dollar Index IOT Internet of Things
EBITDA earnings before interest, tax, depreciation, IPO initial public offering
and amortisation
EC European Commission ISM Institute for Supply Management
ECB European Central Bank IT Information Technology
EM Emerging Markets JGB Japanese Government Bond
152 GLOSSARY
Acronym Definition Acronym Definition

KTB Korea Treasury Bonds RCEP Regional Comprehensive Economic
Partnership
LATAM Latin America REIT real estate investment trust
M&A merger and acquisition RM relationship manager
MAS Monetary Authority of Singapore ROA return on asset
MGS Malaysia Government Securities ROE return on equity
MIFOR Mumbai Interbank Forward Offer Rate RPGB Philippine Treasury Bonds
mmbpd million barrels per day RRR reserve requirement ratio
NEER nominal effective exchange rate SAA Strategic Asset Allocation
NIESR National Institute of Economic and Social saar seasonally adjusted annual rate
Research
NPL non-performing loan SD standard deviation
OECD Organisation for Economic Co-operation and SDR Special Drawing Rights
Development
OEM Original Equipment Manufacturer SGS Singapore Government Securities
OIS overnight indexed swap SIBOR Singapore Interbank Offered Rate
OPEC Organization of the Petroleum Exporting SME small and medium-sized enterprise
Countries
OPM operating profit margin SNB Swiss National Bank
P/B price-to-book SOE state-owned enterprise
P/E price-to-earnings SOR swap offer rate
P/Sales price-to-sales SORA Singapore Overnight Rate Average
P2P peer to peer STI Straits Times Index
PBOC People's Bank of China TAA Tactical Asset Allocation
PEG price/earnings-to-growth TAM total addressable market
PM portfolio manager UCITS Undertakings for Collective
Investment in Transferable Securities
PMI purchasing managers' index UST US Treasury
QE quantitative easing WFH work from home
R&D research and development WGBI World Government Bond Index
RBA Reserve Bank of Australia WTI West Texas Intermediate
RBI Reserve Bank of India YTD year-to-date
RBNZ Reserve Bank of New Zealand YTW yield to worst
GLOSSARY 153
CIO Collection
1Q21 CIO INSIGHTS 2Q21 CIO INSIGHTS

A New Hope Back on Track
December 2020 December 2020
1Q20 CIO INSIGHTS 2Q20 CIO INSIGHTS 3Q20 CIO INSIGHTS 4Q20 CIO INSIGHTS
New Wine, New Skin Build to Last Resilient in the Storm On the Mend
December 2019 March 2020 June 2020 September 2020
154 CIO COLLECTION

Tug of War Lift to Win A Changing World Ride the Wave
The Bull Ain’t Done Mind the Bends Steer Through Rough Seas Window of Opportunity
CIO COLLECTION 155

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DBS Chief Investment Office
go.dbs.com/sg-cio
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Yu Guo Head, Investment Communications

Sabrina Lim Investment Communications
Cheryl Han Investment Communications
Sharlene Goh Investment Communications

CIOInsights 3 Q21

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CIO

Hope into Reality.

Electric Vehicles 108

143 SPECIAL FEATURE

Dear valued clients,

Through these uncertain times, we stay committed to anchoring ourselves

Our wealth management business continues to attract strong interest from

The pandemic has resulted in a greater push for sustainable development,

Covid-19 has prompted us to rethink issues which may have previously

Dear valued clients,

With this V-shaped recovery, inflation fears as reflected in surging commodity

I hope you enjoy the read.

In assessing the probability of “Taper Talk” in 2H21, a comparison

Macro Policy Economic Growth Inflation

Geopolitics Equities Currencies

Rates Credit Thematics

Theme: Theme: Special Feature:

01. Hou Wey Fook, CFA

Asset Allocation. Dylan Cheang

inflation expectations 2.3% 2.4%

us core inflation 1.7% 3.8%

Better than 2013

70 ISM Manufacturing (LHS) 16

reading of 61.2 suggesting that manufacturing 12

vastly higher than the 51.0 level registered in 10

Source: Bloomberg DBS

Inflationary conditions not dissimilar to Global Equities: Taper, but no tantrum

2.0 The Fed policy normalisation process in 2013-18 is

» It took 31 months from the start of “taper

2.0 2,500 DM outperformance in hiking cycle

Fed Taper: Winners and losers in the

EM. Here are the key findings:

EM spreads widening on the cards Spike in new COVID-19 cases

The trajectory of DM in 2021 will predominantly 130 17

be an earnings growth story. Using the S&P 500

Source: Bloomberg DBS

But with the market trading at 22.6x forward P/E

3Q21 CIO Asset Allocation (CAA) framework

Forecasted EPS growth -2 to +2 2 1 1 1 - 0 0

Valuation Earnings yield - 10-yr yield -2 to +2 1 1 0 0 0 0 0

Free Cashflow yield -2 to +2 0 0 0 0 - - -

Adjusted Score* 0.14 0.14 -0.05 -0.05 -0.18 -0.13 -0.06

10 Rising optimism over the region’s recovery is

Source: EPFR Global, DBS

Europe macro momentum on the rise

• Improving macro momentum: As compared to 150

the US (in particular), the economic recovery in 100

• Rising new Covid-19 infections: Unlike the US,

In end-2020, Asia Pacific accounted for 6% of

in coming months, the region’s economic *chart is truncated

and corporate earnings trajectory will take a

for HY credits have been on the decline and (b) 9

to like Asian credits given their strong underlying 6

Source: Bloomberg DBS

TAA breakdown by asset class (Balanced TAA breakdown by geography within

Source: DBS Source: DBS

3Q21 Global Tactical Asset Allocation