Yield: Not the place to be

- "By December, most of Asia’s central banks will be hiking rates again and we expect their ranks will, by then, include China and Indonesia, Asia’s two key holdouts so far. Trouble in the US and Europe isn’t going to kill Asia’s recovery. In the two years since Lehman Brothers imploded, consumption in the US has gone absolutely nowhere – it still has not returned to precrisis levels. Ditto for Europe. Ditto for Japan. But compared to precrisis (3Q08) levels, consumption in Asia is up by 18%. That’s why Asia’s central banks will be back in tightening mode soon – because Asia’s recovery is not about the US. It’s about Asia. Asia is no longer too small to matter. Among other things, this means Asia can and will consume whether the G3 does or not. And it means Asia’s monetary policies will depend more on what happens here in Asia and less on what happens elsewhere in the world."
- "The market environment is likely to get more unfriendly and challenging for bond investors in 4Q10 and 2011. Yes, US real GDP growth will be slow in the coming quarters, but slow growth is a far cry from recession and USD yields need to be a lot higher, if recession fears drop out of the picture. USD yield curves will steepen to discount an earlier and more rapid rise in short-term interest rates. If that happens, the bond market is not the place to be. Yield curves will steepen not only in the US, but also in Asia. Improvements in the macro outlook will oblige many Asian central banks to tighten monetary policy further in 2011 and expectations of that will put upward pressure on yields well be before actual rate hikes push shortterm rates higher."
- "Unless economic conditions deteriorate to an outright recession, which would force investment portfolios to reduce allocation of riskier assets, we do not see much downside for equities. We think Asia equities will continue to be well supported, underpinned by attractive valuations and resilient domestic and regional growth."

DBS Tactical Regional Asset Allocation 20100915

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