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CIO Insights 4Q24: In a Sweet Spot

The Value in Bitcoin Volatility

US Presidential Election: Market Impact

Credit: The Trump Effect on Bonds

The ASEAN Portfolio

CIO Industry Guide: August 2024

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Navigating obstacles and isolated opportunities as the world retreats into de-globalisation

Thematic Strategy 4Q24: The ASEAN Portfolio

The post-pandemic world has brought elements investors had not previously considered. Geopolitical unrest and protectionist policies are disrupting the global economy, fragmenting trade networks, regulatory environments, and global supply chains.
<ul style="list-style-type: square;">
<li style="text-align: justify;">China+1 presents opportunities for various sectors to move up the value chain which continues to benefit ASEAN</li>
<li style="text-align: justify;">Investment landscape is becoming increasingly collaborative</li>
<li style="text-align: justify;">Access to critical materials, proximity to low-cost manufacturing and suppliers, and concerted efforts in energy transition are critical for long-term growth</li>
</ul>
Figure 1: ASEAN-6 economies sustain strong growth momentum
<img src="/iwov-resources/aics/images/AICS/CIOweb/202410/CIOInsights4Q24_ASEANFig1.jpg" alt="" width="615" height="341" /> 
Source: IMF, DBS Download the PDF to read the full Thematic Strategy report. Click <a href="../102024/CIOInsights4Q24.xml"> here </a>for the full 4Q24 CIO Insights publication.

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

Space – The Next Frontier

To Infinity and Beyond
Mankind&rsquo;s fascination with space dates back centuries, but recent decades have seen a remarkable advancement in space exploration. The entry of private companies (such as the likes of SpaceX, Blue Origin, and Virgin Galactic) have infused new dynamism into the space industry, propelling technological advancements and reducing costs through innovation and competition.
In this publication, we take a deep dive into the following:
<ul>
<li style="text-align: justify;">The space economy and how it is driven by commercialisation</li>
<li style="text-align: justify;">How cost reduction has played a part in the rise of reusable rockets and smaller satellites</li>
<li style="text-align: justify;">Societal benefits of a flourishing space economy</li>
<li style="text-align: justify;">Investment themes and key players in the space economy</li>
</ul>
We believe that established industry players that build on the legacy of innovation in aerospace and new entrants that leverage on cutting-edge technology and visionary approaches will redefine the boundaries of space exploration. Download the PDF to read the full report.

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

Thematic Strategy 1Q24: Quiet Luxury

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

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

Thematic Strategy 1Q24: Next Generation Infrastructure

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

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

Into the AI Frontier

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

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

Jewels of India and China

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

Focus on quality plays and stay with industry leaders

Luxury Still Reigns Supreme 

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

We reaffirm our conviction in cybersecurity as a growth theme

Thematic Strategy 2Q23: Cybersecurity - Opportunity Amid Danger

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

Thematics

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

Thematic Strategy 3Q24: The Next Frontier

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

Thematic Strategy 2Q24: Big Tech's New Paradigm

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

Luxury, Redefined

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

Thematic Strategy 3Q23: Artificial Intelligence

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Stay up to date with our comprehensive coverage of global industries

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

We believe any downsides have been priced in.

Global Oilfield Services: Correction Seems Overdone

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

Risk-reward continues to shine on for Asian banks

Asian Banks: Impact of Impending Rate Cuts 

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

Asia REITs: Time to Bask in the Sun

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

US auto sales remain stable, with strong demand for hybrids serving as a key growth driver

Global Automobiles: Position in Japanese Autos amid US Election and Trade War Risks

US auto sales volumes have remained stable, backed by robust hybrid demand. 9M24 light vehicle sales volume grew +0.6% y/y despite disrupted sales in Florida, Georgia, South Carolina, North Carolina, and Tennessee due to Hurricane Helene in Sep-24. Hybrid demand remains a bright spot in recent months, expanding its market share to 10% in 2Q24 (from 8.6% in 1Q24), compared to the slowing EV market with its flattish market share of 7%. Japanese automakers are major beneficiaries of the US&rsquo; burgeoning hybrid demand, with 9M24 sales growth rates ahead of its US peers (see Figure 1).
The US Presidential Election and ongoing US-China trade war present near-term uncertainties for US automakers. With Donald Trump being a vocal opponent against EVs, a Trump presidency could result in a setback for the US EV industry via a potential watering-down of (i) emission rules and/or (ii) Inflation Reduction Act (IRA) EV purchase tax credit (of up to USD7,500), which would negatively impact EV players. The ongoing US-China trade war is another headwind to watch, with the US Commerce Department&rsquo;s latest proposal to ban Chinese vehicles and &lsquo;connected car&rsquo; technology from US roads due to national security concerns. Given that &ldquo;any vehicles that is manufactured in China would likely fall under the prohibitions&rdquo;, according to the regulator, automakers that export cars out of China for sale in the US may see some impact.
Prefer Japanese automakers for hybrid-led growth and localised US manufacturing exposure. In view of the current uncertainties that lie ahead for US automakers, we recommend investors position themselves in Japanese automakers, due to their strategic advantage rising from a diverse product portfolio and localised US production, supported by the fact that North America accounts for &gt;50% of their overall revenue. Furthermore, Japanese automakers offer a broad product line-up across ICE, hybrid and EVs, which makes them more resilient towards any changes in US emission rules and/or IRA EV tax credits. Their significant investments in US manufacturing will also mitigate the impact of the US-China trade war.
Figure 1: Sales of passenger cars and light commercial vehicles (9M24 vs 9M23) (y/y) <img src="/iwov-resources/aics/images/AICS/CIOweb/202410/241024CIOP3Fig1.jpg" alt="" width="1444" height="581" />
Note: Market share is based on latest Jan &ndash; Sep 2024 sales volume.
 Source: Marklines, DBS 
 Download the PDF to read the full report.

Valuations remain attractive as the F&amp;B industry still trades at 1SD below average P/E, signalling strong upside potential

China Food & Beverages: Riding the Bull Run

Transformational shifts in Chinese domestic consumption patterns. Domestic consumption in China is undergoing significant transformation, characterised by evolving consumer behaviour, demographics, and economic challenges. A notable shift is the increasing preference for social commerce, especially through live streaming platforms, which has reshaped the way products are discovered and purchased. Younger consumers are also increasingly favouring domestic brands over foreign ones, driven by national pride and local brands&rsquo; agility to adapt to emerging trends and shifting preferences.&nbsp; Stock market rallies on massive stimulus. China&rsquo;s stock markets rallied following the unveiling of China's most significant stimulus measures since the pandemic to support the economy. The measures announced include: (i) People&rsquo;s Bank of China (PBOC) reducing its short-term rates from 1.7% to 1.5%, (ii) PBOC lowering Reserve Requirement Ratio (RRR) by 50 bps, (iii) Reducing mortgage rates for approximately 150mn households, potentially reducing CNY150bn in household interest payments annually.&nbsp; The latest slew of government stimulus drove the CSI300 Index higher by over 15% and the Hang Seng Index by nearly 10% over the last 20 days. While it is still premature to assume a significant increase in positive wealth effects, the government&rsquo;s willingness to spend substantially to revive the economy and stabilise the property market will elevate overall consumer confidence. &nbsp; Stock market rally sparks consumer optimism. The recent rally in Chinese equities translates to positive wealth effects that will boost domestic consumption. Indeed, historical data shows strong correlation of 0.8 between stock market performance and consumer confidence in China. For every 10% sustained increase in stock prices, retail sales are expected to improve by 2.8%. Prevailing forecasts are suggesting low-to-mid single-digit y/y growth in China&rsquo;s retail sales, but the recent market rally could elevate this to mid-to-high single-digits. Restaurants and brewers are most likely to benefit from increased spending on dining out and social activities.&nbsp; Room for further valuation rerating. Valuations remain attractive as the F&amp;B industry still trades at 1 standard deviation below average P/E, thus signalling strong upside potential. Breweries and restaurants remain oversold versus other F&amp;B categories in the past year. We reiterate our preference for these segments given their upside potential of &gt;20% from current levels.&nbsp;
Figure 1: China indices: CSI300 vs. consumer confidence vs. retail sales&nbsp; <img src="/iwov-resources/aics/images/AICS/CIOweb/202410/241018CIOPFig1.jpg" alt="" width="1444" height="581" />
Source: CEIC, DBS 
 Download the PDF to read the full report.

Volume recovery is expected in 2H25, bolstered by anticipated interest rate cuts and easing inflation

Global Home and Personal Care: Diversified and Defensive Portfolios Key Amid Delayed Volume Recovery

US HPC companies' core EPS beat estimates despite slowing sales growth. In the current quarter ending Sep 2024, US Home &amp; Personal Care (HPC) companies reported core EPS that exceeded market expectations, bolstered by productivity gains and pricing benefits that offset higher raw material costs, increased marketing expenses, and adverse foreign exchange impacts. Organic sales growth slowed to 1&ndash;7% y/y as volume recovery lagged at 0&ndash;4% growth despite tempered price hikes of 1&ndash;3%, mainly in hyperinflationary markets. Kimberly-Clark (KMB) lowered its FY24F organic sales growth guidance to 3&ndash;4% (from mid-single digits), while Colgate-Palmolive (CL) raised its target to 7&ndash;8% (from 6&ndash;8%), indicating moderating growth in 4Q24. Procter &amp; Gamble (PG) maintained its FY25F organic sales growth target at 3&ndash;5%, expecting softer growth in 4Q24 and stronger growth in 2025.
Short-term volume growth challenges persist, acceleration expected in 2H25. With consumer spending still under pressure in some markets, HPC companies face decelerated volume growth that is likely to remain subdued in the near term. Modest organic sales growth is anticipated as the effects of prior price increases wane. Additionally, competition from private labels and increased trade-down behaviour may further constrain volume growth. In response, companies may intensify promotions, especially for lower-priced tiers and ramp up advertising efforts to drive demand, supported by cost-saving initiatives. Volume recovery is expected to be more assured in the latter part of 2025, bolstered by anticipated interest rate cuts, enhanced economic growth, and easing inflation.
Preference for diversified geographic exposure and defensive portfolios. Amid ongoing macroeconomic and political volatility, adverse foreign exchange movements, and slowdowns in markets like China, North America, and Latin America, companies with diversified geographic exposure and defensive product portfolios are preferred. Companies with lower exposure to China are favoured due to delayed demand recovery despite recent stimulus measures. We prefer companies with less concentration in North America where uncertainty surrounding the upcoming US election may affect consumer sentiment. Meanwhile, growth in Europe, Asia Pacific, the Middle East, and Africa appears more resilient, though still dependent on product categories. Companies focused on daily essentials are preferred as they demonstrate more resilient demand compared to discretionary items like cosmetics or prestige beauty products. CL exemplifies this with its geographically diverse portfolio and strong oral care segment, leading to better volume growth relative to peers.
Figure 1: Net sales by geographic region <img src="/iwov-resources/aics/images/AICS/CIOweb/202410/241030CIOPFig1.jpg" alt="" width="1444" height="581" />
 Source: Company reports, DBS 
*For CL: Oral, Personal, and Home Care only; excludes Pet Nutrition
**India etc. refers to India, the Middle East, and Africa
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Stimulus measures set to support and energise the stock market

China Financials: Beneficiary of Stimulus Package

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