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We advocate staying Overweight in China equities as the country works towards returning to normalcy

China Strategy: Stay Overweight

China has been addressing market overhangs such as the Covid situation, China real estate developers, platform e-commerce and technology regulations, and American depositary receipt (ADR) delisting issue. We maintain the view that the market will find a bottom at current levels to stage a long-awaited recovery as policymakers have been proactively introducing supportive measures and working to resolve the situation.
Covid cases are falling and should further subside in due course. While there has been headline news on lockdowns and the impact on the economy, the actual number of Covid cases in China is falling (Figure 1), paving the way for reopening. Drawing from the experience in the US and UK, the current Covid outbreaks in various parts of China should eventually subside to pre-omicron levels. In the US and UK, it took approximately six weeks to peak and six weeks to fully subside (Figure 2). If China and Hong Kong follow the same pattern, daily new cases should return to low levels in China towards summer. <img src="/iwov-resources/aics/images/AICS/CIOweb/202205/220518CIOPfig.jpg" alt="" width="1059" height="529" />
Covid impact on EPS being factored in. Consensus on earnings per share (EPS) downward revisions have been largely priced in (Figure 3).&nbsp;
<img src="/iwov-resources/aics/images/AICS/CIOweb/202205/220518CIOPfig3.jpg" alt="" width="1062" height="624" />
China property market supportive policies. Various local governments have relaxed limitations on property purchases, and banks have lowered borrowing costs for mortgages. Further tightening measures seem unlikely while gradual support to the property market is being administered at a measured pace.
Platform e-commerce and technology. New government regulations continue to be introduced at a faster pace as promised and on a stable and transparent basis. The markets are looking forward to clarity and the end of further tightening.
ADR delisting issue. China regulators are considering allowing the US Public Company Accounting Oversight Board to conduct joint inspections with Chinese regulators on Chinese ADR companies&rsquo; auditors. Should this transpire, it may resolve the issue.
Institutional holdings at 10Y low. Global equity funds have greatly underweighted China relative to benchmark weight for the most part of the past 10 years, and aggressively reduced the weights since 4Q18. Currently, the benchmark-relative underweight in China is at 10Y low.
China equities at historical trough valuations. China&rsquo;s forward PER (price earnings ratio) has dropped to below historical mean while the P/B ratio is below -1 standard deviation, both at the lowest in seven years. Such compelling valuations are adding to the support against downside risk. On a relative basis, China equities are trading at a steep discount to global average.
Risk-reward in favour of being invested. A lot of pessimism has been priced in and expectations set low. On an absolute and relative basis, China equities are inexpensive and being underweighted. We see asymmetric risk-reward in favour of staying invested, on the back of returning to normalcy, progress in removing the market overhangs, and compelling valuations. Sectors we prefer are China large state-owned enterprise banks for their stable yields of 6-7%, platform e-commerce, technology firms, and insurance companies that ride on long-term secular growth trends. Download the PDF to read the full report.

Cloud services companies play the roles of an innovator, disruptor, enabler, and adapter in our I.D.E.A. framework

Cloud Services: Ride the Secular Wave

The stronger-than-expected earnings in the latest quarter by Salesforce.com demonstrated the resilience and constructive outlook of the cloud computing industry. The admirable results were achieved despite muted expectations and a mixed operating backdrop.
Over time, cloud solutions have emerged as an important element in the global trend towards digital transformation. Cloud services companies play the roles of an innovator, disruptor, enabler, and adapter in our I.D.E.A. framework, and we believe this development has a long runway ahead (Figure 1).
Cloud access means using the Internet as the ubiquitous mode to utilise applications without the necessity to download. This saves users the operational hassle and the financial burden of having to maintain an infrastructure of hardware and software. Instead, these applications are hosted on networks of cloud ecosystems where the vendors own the servers, manage the applications for users&rsquo; access, and run daily business functions on a real time basis.
Common types of cloud solutions include: enterprise resource planning (ERP), front-mid/back-office processes, accounting, procurement management, customer relationship management (CRM), risk tracking, supply chain management, enterprise performance management (EPM), and data analytics;&nbsp; to name a few.
Given its long-term growth potential, cloud services are among the secular growth themes in the CIO&rsquo;s barbell strategy and I.D.E.A. Fund.
Figure 1: Strong revenue uptrend
<img src="/iwov-resources/aics/images/AICS/CIOweb/202206/220610CIOPFig1.jpg" alt="" width="1412" height="852" /> Source: Bloomberg, DBS
The global cloud computing market is expected to reach USD947.3b by 2026 and will soon surpass the trillion-dollar level in the later part of the decade, from USD445.3b in 2021, as the world continues to transform towards digital engagement.&nbsp;
Time and again, cloud networks have been used as key tools in this era of remote and timely access to information that facilitates greater collaboration, transparency, and reliability.
&nbsp;
Download the PDF to read the report.

S-REITs provide a hedge against inflation while remaining fertile hunting ground for dividend yields

S-REITS: Withstanding the Test of Time

<div style="text-align: justify;">The hunt for yield in an inflationary environment. Despite the wall of worries surrounding new Covid variants, Fed tapering, and a sticky inflationary backdrop, there is also a sense of optimism as the world reopens to live in a new normal with more effect ive treatments and vaccines. Along with the post-pandemic reopening of economies, the Singapore Real Estate Investment Trusts (S-REITs) are well positioned for steady growth, and remain fertile hunting ground for recurring income and dividend yields (5-6%).</div>
<div style="text-align: justify;"><img src="/iwov-resources/aics/images/AICS/CIOweb/202206/220601CIOPfig1.jpg" alt="" /></div>
<div style="text-align: justify;">The outlook for the S-REITs sector remains robust, led by tight supply across subsectors and improving demand momentum. Take the Central Business District&rsquo;s (CBD) Grade A office segment for instance, the current rental rates of SGD9.60 psf is above the 10-year average of SGD9.20 psf and according to property consultancy firm JLL, rental growth of 25-30% is expected between now and 2025. Singapore continues to be the preferred location for companies looking to set up regional headquarters and such a trend will underpin rental momentum across the retail and commercial segments within S-REITs. Strong demand, particularly from Tech giants amid tight supply, continues to support positive rental reversions. For instance, the upcoming Central Boulevard is turning into a CBD tech hub with Amazon potentially its fi rst anchor tenant. Other tech giants like Meta and ByteDance are also potentially exploring options at Central Boulevard. Furthermore, pent up demand to travel is recovering fast as economies reopen, as evident in the broad-based recovery in revenue available per room (RevPar) for hotel REITs and improving occupancy rates and traffic footfalls across retail REITs in 1Q22. </div>
<div style="text-align: justify;">An inflation hedge. S-REITs serve as a good inflation hedge given that rental and property values tend to rise in tandem with rising inflation. Importantly, the ability of S-REITs in paying dividends is less impacted by rising interest rates due to their reasonable levels of gearing (averaging around 38%) and high proportion in fixed rate borrowings (c.75%). On utility cost guidance from the S-REITs sector, utility costs typically comprise only between 1-3% of revenue, except for hospitality, where it ranges between 3-5%. Industrial and office sector utility costs are largely borne by the tenants. While hospitality may bear the brunt of the high costs, these could be passed on via room rates, given the strong demand and that these rates see ongoing adjustments. Retail landlords may have to bear higher utility costs as the pass-through mechanism may have some timing issues. Nevertheless, some of these costs could be offset with the return of atrium sales and parking income. In the near term, as energy prices have spiked since the Russian-Ukraine war started, most S-REITs have relooked at their utility contracts to ensure the rates are substantially locked in to minimise the utility cost impact in FY22. Interest rates sensitivity: According to DBS Group Research, based on management guidance and sensitivity analysis, a 25 bps increase in interest rates is estimated to have a 0.4-2.3% impact on FY22F distribution per unit (DPU).</div>
<img src="/iwov-resources/aics/images/AICS/CIOweb/202206/220601CIOPfig3.jpg" alt="" />
<div style="text-align: justify;">Reopening S-REITs &ndash; Paid to Wait. The reopening of international borders and travel is poised to accelerate surely but unevenly. Globally, high and improving vaccination rates have enabled this shift by substantially reducing the risks of severity and fatality. Hospitality and retail S-REITs are well placed to be reopening beneficiaries that are trading at compelling valuations, with both subsectors trading at below 1x Price-to-book (P/B) multiples, below the historical mean since 2010. Moreover, at around 0.9x P/NAV, hospitality S-REITs are trading at SGD700,000-800,000 per key, compared to recent transactions for Singapore hotels located in the CBD at a valuation of SGD1.8m per key (or per room).</div>
<img src="/iwov-resources/aics/images/AICS/CIOweb/202206/220601CIOPfig4.jpg" alt="" />
<div style="text-align: justify;">In addition, operating trends are improving with Retail REITs continue to record improving footfalls and higher occupancy rates, while hotel REITs continue to record broad-based improvement in RevPAR (Revenue Per Available Room) across the regions. We saw green shoots in 1Q22 with RevPARs rising by 1-34% despite a slight setback from an increase in Omicron infections in many countries. The longer-term recovery trajectory for RevPARs remains strong with the return of leisure travel and strong pent up demand. <img src="/iwov-resources/aics/images/AICS/CIOweb/202206/220601CIOPfig5.jpg" alt="" /> Hospitality S-REITs&rsquo; key markets like (i) Singapore (c.40% of asset value) have substantially opened its borders with a robust line-up of MICE events in 2H22, while staycations are still key, (ii) Europe (c.15%) and Australia (14%) will likely shrug off the Omicron impact as international travel return. In Asia, we await the re-opening of Japan (c.13%) to tourists, and China, which are the next catalysts to drive a further hike in RevPARs.</div>
<img src="/iwov-resources/aics/images/AICS/CIOweb/202206/220601CIOPfig6.jpg" alt="" /> <img src="/iwov-resources/aics/images/AICS/CIOweb/202206/220601CIOPfig7.jpg" alt="" />
<div style="text-align: justify;">Stick to Quality REITs. For long-term investors who are looking for stable passive investment income streams, our preference is to stick with quality S-REITs with a track record of sustaining recurring dividend growth and resilient income streams. When it comes to stock selection, we use our proprietary ABCD rank-based scorecard to position in the top quality S-REITs. Our quality selection of &ldquo;ABCD&rdquo; REITs takes into account REITs with strong Asset Quality, Business Mix, Competitive Edge, Debt Resilience. We believe a combination of these quality metrics wil l drive resilience to earnings and DPU, enabling S-REITs to emerge from market downturns stronger due to scale, strategic assets, and strong financials. 
<div style="text-align: justify;">Key risks: Key risk on the S-REITs remains a prolonged and persistent spike in interest rates. We believe this will be largely mitigated by:
<ul>
<li>Healthy gearing at around 38% vs the regulatory gearing limit of 50%</li>
<li>High proportion in fixed rate debt (c.75% of interest cost)</li>
<li>Low refinancing risks over the next two to three years, with staggered debt maturities of &lt;11% of overall debt expiring in 2022 and &lt;17% of debt expiring in 2023</li>
</ul>
 Download the PDF to read the report.</div>
</div>

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CIO Insights 2Q24: A Broadening Rally

Luxurious Outperformance by Quiet Luxury

Distressed Debt Opportunities Return

Credit: How Policy Rates Affect Deficits

Gold: Another record high in the books

Market Updates

China Strategy: Stay Overweight

Cloud Services: Ride the Secular Wave

S-REITS: Withstanding the Test of Time

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