DBS is the latest global bank to exercise caution on emerging market investments in Asia, underlining the need for more policy clarity in China, especially with regards to the internet sector.

According to DBS, its downgrade of Asia ex-Japan equities in the third quarter last year proved timely as it was able to avoid the ongoing drawdown driven in part by China’s tech crackdown.

«As the Fed cuts back on its asset purchases, the underperformance of [Asia ex-Japan] relative to [developed markets] is expected to persist in coming quarters,» said the bank’s chief investment officer Hou Wey Fook.

«We will review our underweight call on AxJ should greater policy clarity in China – in particular the Internet space – emerge.»

Property Risks

In addition, Hou also highlights increased risks in the property sector with credit spreads implying defaults are worse than prior crises, though its base case does not include a systemic crisis.  

«While risks have risen, we believe the regulators would ultimately show restraint in their policies to avoid a systemic default that would amplify risks of severe social and financial instability – the very risks that policymakers were trying to avoid with such curbs on leverage in the first place,» he explained.

Income Generators

Nonetheless, DBS is not ruling out the whole of the Chinese markets, underlining mainland banks stocks – alongside BBB/BB-rated Asian credits, Singapore REITs, and European integrated oil – as attractive sources of yield for its barbell strategy which focuses on growth and income.

Overall, the bank maintains its overweight call on U.S. and Europe equities heading into 2022 due to a robust earnings outlook for tech-related firms for the former and ECB dovishness as well as limited wage pressure for the latter.

«The post-pandemic, high octane, upward earnings revision has peaked. As with past business cycles, we expect earnings momentum to revert to a more moderated pace,» Hou added. «However, this by no means suggests that equity markets will undergo steep correction when growth momentum softens.»