Singapore’s largest bank DBS outlines 12 trade ideas for 2021

SINGAPORE — Asia is set to outperform the rest of the world as economies in the region look to rebound in 2021 from the coronavirus-induced slump, said the chief economist of Singapore’s largest bank.

Few Asian countries will continue to receive large fiscal support next year, but that’s “OK” because the region is in “a far better state” in terms of managing the pandemic and growth recovery compared to the West, said Taimur Baig of DBS Group Research.

“I think it’s a fairly easy set of arguments to be made that given the favorable growth differential, given attractive valuation, Asian economies and markets will attract investor interests — they will do better,” he told CNBC’s “Street Signs Asia” on Wednesday.

“Therefore, we are actually making a fairly strong outperformance call for Asian asset classes and Asian economies in 2021 relative to the rest of the world,” he added.

In a report last week, Baig and other DBS strategists outlined 12 trade ideas and strategies for 2021 in rates, currencies and credit.

Rates trading has a macroeconomic focus and usually revolves around sovereign bonds and interest rate derivatives. The DBS report listed six trading themes for rates:

• Steepening of the U.S. Treasury yield curve, with interest rate on the 10-year tenor likely to hit 1.3% in the latter part of 2021 — up from current levels of around 0.9%.
• Betting on Singapore-dollar rates outperforming those of the U.S. dollar.
• Expecting Indonesian government bonds to strengthen in value as they are now relatively cheap; DBS analysts see 6.5% as a “decent entry point” in the near term for the 10-year bond.
• Flattening in the Indian government bond curve, with the difference in rates between the three-month and five-year segments inching toward 150 basis points by the end of 2021.
• Favoring Chinese government bonds that may rebound in the near term as it feeds off the yuan’s strength, with a preference for the five- and seven-year tenors.
• Widening 10-year yield spreads between Korean treasury bond and Thai government bond to as much as 70-80 basis points given potential elevated bond supply in South Korea.

The U.S. dollar has become “less over-valued,” which means it may depreciate more gradually in 2021, according to DBS. The bank has three ideas on how to trade currencies next year:

• Expecting a basket of high-yielding Asian currencies — the Indonesian rupiah, Philippine peso and Indian rupee — to strengthen against the greenback.
• Seeing value in the Philippine peso against the Swiss francs and Japanese yen. This strategy has generated stable spot returns of up to 2% and still appears provide “value,” the analysts said.
• Predicting the British pound might weaken against the New Zealand dollar given the differing fundamentals between the two economies.

In terms of investing in debt securities, the DBS analysts favored Asian credit denominated in U.S. dollars. They have three preferred sectors:

• Indonesian investment-grade bonds;
• “Quality” Indian bank credit;  
• Chinese real estate and cyclical consumer credit.

DBS said China — where the coronavirus was first detected — is set to lead the global recovery in 2021. But investors should be cautious of Chinese companies with higher leverage and poor profitability, the bank warned.  

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