A�er a torrid end of 2018, the new year has brought with it a new wave of optimism, with equities posting their best quarterly performance since 2010 and credits rallying strongly across regions (CHART A). What drove this dramatic volte-face? Firstly, there has been a huge shi� in the global macro backdrop over the last quarter as investor’s sentiment were buoyed by signals from a much dovish US Federal Reserve. �e Fed’s more cautious stance towards raising interest rates was followed by concordant moves at other central banks, including the Bank of Canada, Reserve Bank of Australia and, most notably, the European Central Bank. Similarly, we see Chinese policymakers continue their implementation of stimulus measures to support the economy.

Secondly, the global economy avoided the protracted slump that some feared might occur towards the end of last year. Also, a reduction in perceived geopolitical risk primarily around U.S.-China trade tensions has also buoyed market sentiment. As trade negotiations continue, any accord reached between both the US and

China is likely to provide a boost. Otherwise, if trade disagreements escalate, the impact on business spending and consumer sentiment will be globally signi�cant. However, we conclude that structurally the two sides remain divided on many issues; as a result, we would interpret any agreement as a cease-�re rather than a lasting resolution. Looking ahead, we believe global growth will be a key factor for the direction of interest rates (CHART B). �e recent change in the Fed’s expectations for further interest rate hikes could be the clearest signal yet that the tightening cycle it began in 2015 may have ended and only time will tell whether central banks will act pre-emptively to support activity in the coming months.

In the meantime, as central banks turn dovish, we are encouraged to embrace the bond market again as the state of a�airs supports a preference for credit markets. In 2018, negative headlines on the U.S.-China trade con�ict coupled with fading regional demand led to signi�cant spread widening between the J.P. Morgan Asia Credit Index (JACI) with the High Yield (HY) sub-index. Although the HY market bounced back quite signi�cantly during the �rst quarter of this year, we still think this represents an attractive opportunity given that valuations remains attractive. �ere is potentially a signi�cant pool

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SETTING THE PROFESSIONAL STANDARD FOR FINANCIAL ADVICE IN SINGAPORE

Issue Thirty-Four 2019

PIAS INVESTMENT OUTLOOK Q2 2019

of money sitting in cash equivalents looking to enter this market as concerns around the HY segment in 2018 may have been overstated. Despite our current preference for HY within the �xed income segment, we remain selective as we think there are still lots of speci�c risks. We have a preference for Asian HY as they look relatively attractive compared with other �xed income alternatives.

Although we have seen incoming data pointing to slower global growth, investors have, in our view overreacted to the �rst signs of slowdown. 2019 will feel a bit di�erent from the synchronized growth that we had in 2017 and we think a modest improvement in global cycle conditions is likely. �is would be led by US and China, where the economic performance of these two countries will be really important for determining the path of the global economy. Overall, we think the global growth and corporate earnings is in pretty good shape and concerns about an imminent recession are misdirected.

Against this backdrop, we have made no changes to our overall model portfolios asset allocation, with U.S. and Asia Paci�c ex Japan being our most preferred equity region. In addition, we have upgraded our European equities outlook from slight negative to neutral as the macroeconomic and �nancial backdrop shows tentative signs of stabilization. Nevertheless, more time is needed for clarity within the region given the risk of a no-deal Brexit and its impact to UK and EU economies. In bonds, we continue to focus on income strategies as coupon income historically has contributed the major share of total returns across global bond markets. On balance, our portfolio allocation re�ects an environment that supports risk taking. We believe the supportive stance of global policymakers should underpin both equities and bonds but advocate more carefully balancing risk and reward in

portfolios given today’s mature, late-cycle environment.

Author | Jazil Johari, Senior Investment Analyst, Partnership Management | PIAS Source | Figures extracted from �omson Reuters Datastream and JP Morgan Asset Management

Performance Across Asset Class – Total Return (Chart A) Global Real Policy Rates (Chart B)

Source: Bloomberg, JPAM, April 2019 �omson Reuters Datastream, April 2019

8

6

4

2

0

-2

-4

U.S. LCACWI

JP Equity U.S. SC

U.S. HYEMD

EAFE EquityU.S. IG

U.S. AggEMU Equity

Euro Gov BondsU.S. 10Y

EMECommodities

Total Return, USD, Q1 2019 vs. 201800 02 04 06 08 10 12 14 16 18

-20% -15% -10% -5% 0% 5% 10% 15%

US Euro area UK Japan

P IAS I nvestment Outlook Q2 2019

Fear has been driving global markets in recent months amid seemingly mounting downside risks – a slowing global economy aggravated by trade tensions, tighter �nancing conditions, and the possibility of a hard Brexit, among others.

Is extreme pessimism warranted? We don’t think so. Here, we answer key questions pertaining to the future direction of equity markets – Asia’s in particular.

Are today’s economic challenges unique?Yes and no. Over the last half century, the causes of economic and market downturns have varied widely, as have the degrees of severity. Today, markets are reacting to trade tensions. In the 1970s, the twin oil shocks triggeredby geopolitical events in the Middle East plunged the global economy into recession until the early 1980s. �e 1990s witnessed the Gulf War, the bursting of the Japanese asset bubble, and the Asian �nancial crisis. �e global �nancial crisis (GFC) was only a decade ago, followed by the European sovereign crisis.

While causes of upheavals vary, they do rhyme. �e common denominator is fear and extreme pessimism. History tells us that markets have generally done well for long-term investors.

Are global growth rates going to continue?�e economies that are part of our Asia ex Japan small cap universe1 have been the bellwether for global growth for decades, contributing around 40% to global GDP growth today.2 Over the long term, we believe the economies in Asia ex Japan should continue to lead global growth thanks to regional tailwinds including a young demographic, rising urbanization, and rapid technological adoption.

Moreover, we believe most of these countries would likely not hesitate to exploit wide-ranging policy tools to ensure that their economies do not fall o� the cli�. In

China, for example, we think policy plays a much more important role in the economy than trade does. Indeed, China’s slowdown is primarily the result of its economic rebalancing policy, not the trade war. In recent months, we have seen a series of measures to boost growth. We expect the bene�ts of the stimulus to cascade across the region, allaying concerns of a drastic regional slowdown.

1 Australia, China, Hong Kong, Indonesia, India, Korea, Malaysia, New Zealand, Pakistan, Philippines, Singapore, �ailand, and Vietnam.2 World Bank data, accessed 22 January 2019.3 Source: PineBridge calculations using World Bank data, accessed 22 January 2019.4 Source: Bloomberg, median of the indices, as of 22 January 2019.

For illustrative purposes only, we are not soliciting or recommending any action based on this material. Any opinions, projections, estimates, forecasts and forward-looking statements presented herein are valid only as of the date of this document and are subject to change.

as ia small cap equ it i es : Captur i ng the F i rst Mover Advantage i n As ia P IAS I nvestment Outlook Q2 2019

Capital at Risk: All investments involve risk. �e value of your investment and the income from it will �uctuate and a loss of capital may occur.

Global GDPAsia Ex Japan Contributes a Signi�cant Share of

3

0%

20%

40%

60%

80%

100%

1980 1983 1986 1989 1992 1995 2004 2007 2010 2013 2016 2017

Our Asia Universe Rest of the World

Expected to IncreasePro�t Margins of Asia Ex Japan Small Caps Are

4

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018e2019e8%

10%

12%

14%

Are pro�t margins going to drastically change in the future?For GDP growth to translate into pro�t growth, pro�t margins must not slip signi�cantly. In Asia, most industries are deregulated and compete globally, which gives us con�dence that demand will be su�cient and margins will be more or less sustainable – barring some short-term hiccups. �erefore, unless margins deteriorate signi�cantly going forward, there is no reason to believe that pro�tability growth will lag the region’s economic growth.

Are interest rates going to change signi�cantly in future?Interest rates act as a gravitational force for returns. If theending interest rates are higher than the starting interestrates, then the price-to-earnings (P/E) multiples drop andthe rise in market capitalization is not in tandem with the

growth in corporate pro�tability.

Recently, central banks in the region have tightened monetary policy – either as a macro-prudential responseor to tame rising in�ation. Now that in�ation is runningbelow the tolerance level for most economies in Asia, webelieve the balance of risk shi�s towards easing.

Are the current valuations looking reasonable?A�er the sell-o� in 2018 and with some markets correcting over 25%, we think valuations are quite reasonable – on both an absolute and relative basis for long-term investors.

�e sell-o� has opened up a plethora of mispriced opportunities in some sectors and individual names across the region. We think, more than ever, stock selection will be the key to successful investing.

6%

5%

4%

AU CH HK IN ID JP KR MA NZ PH SG TW TH VN

3%

2%

1%

0%

Latest Mid-point of O�cial Forecast or Range

Source: Bloomberg, respective central banks, as of 22 January 2019. For illustrative purposes only, we are not soliciting or recommending any action based on this material.

In�ation Is Mostly Below Target Across the Region

as ia small cap equ it i es : Captur i ng the F i rst Mover Advantage i n As ia

Why should Asia ex Japan Small Cap equities remain on your radar?�is strategy o�ers exposure to:• Attractive growth and diversification opportunities in one of the world’s most dynamic regions: �ere aremore than 20 times as many small caps as large caps in the region, providing ample opportunity for us to search for mispriced stocks.• Technological change: As technology changes business models, the ownership of the pro�t pool in an industry changes hands and new winners emerge.• Turnarounds: If we can spot a turnaround or a company that is su�ering from near-term issues, yet its basic earnings franchise is not fatally damaged, going overweight in such names can reap handsome rewards.• Companies with high capital efficiency: Typically in acompetitive world, achieving high returns on capital is rare unless the opportunity set is niche. Such names may not necessarily be large in terms of market capitalization.

5 Source: Bloomberg, Morgan Stanley, January 2019.Past performance is not indicative of future results. For illustrative purposes only, we are not soliciting or

recommending any action based on this material.

GLOBAL DISCLOSURE STATEMENT

For more informationHotline: +65 6571 9360 PineBridge Investments Singapore Limited1 George Street, #21-06, Singapore 049145www.pinebridge.com.sg

Important information: Any opinions expressed in this document represent the views of the manager, are valid only as of the date indicated, and are subject to change without notice. �ere can be no guarantee that any of the opinions expressed in this document or any underlying position will be maintained at the time of this presentation or therea�er. We are not soliciting or recommending any action based on this material. All investments involve risk, including possible loss of principal. Information is unaudited unless otherwise indicated, and any information from third-party sources is believed to be reliable, but PineBridge Investments cannot guarantee its accuracy or completeness.

As ia small cap equ it i es : Captur i ng the F i rst Mover Advantage i n As ia

5

Forward Price to Earnings (P/E) Europe US APxJ

Current 12.1x 14.6x 11.4x

5-Year Average 13.1x 15.4x 12.1x

10-Year Average 12.5x 14.8x 12.5x

Max Since 1998 23.9x 25.2x 19.4x

Min Since 1998 7.8x 9.5x 8.7x

Current Premium/Discount to

5 Years -7.6% -5.7% -5.8%

10 Years -3.0% -1.7% -8.9%

MULTI-ASSET | FIXED INCOME | EQUITIES | ALTERNATIVES

About PineBridge

Investments

pinebridge.com

PineBridge Investments is a private, global asset manager focused on active, high-conviction investing. We draw on the collective power of our experts in each discipline, market, and region of the world through an open culture of collaboration designed to identify the best ideas. Our mission is to exceed clients’ expectations on every level, every day. As of 31 December 2018, the firm managed US$89.6 billion across global asset classes for sophisticated investors around the world.

We are proud to share that PIAS was recently awarded with Top FA Firm Award 2018 by a renowned Insurer - Aviva Ltd.

PIAS has also received the following awards previously:• Top FA Firm Life & Health Award 2017• Top FA Firm Life & Health Award 2016• Top FA Firm Life & Health Award 2015• Top FA Firm Life & Health Award 2014• Top FA Firm Life & Health Award 2013• Top FA Firm Life & Health Award 2012

Winning these awards will certainly motivate us and help propel PIAS as the premier �nancial advisory company in Singapore. It is an incredible achievement which we are extremely proud of - an achievement that truly belongs to everyone in PIAS including your �nancial adviser representative, and most importantly, valued customers like you.

Without your continuing trust, the success we have today would not have been possible!�e Board and Management Team would like to take this opportunity to thank you for your trust in PIAS.

TOGETHER, we set the professional standard for �nancial advice in Singapore.

PIAS Received Top FA Firm Award

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DISCLAIMERThe views expressed in this presentation reflect the views of the Professional Investment Advisory Services Pte Ltd (“PIAS”). The information provided herein is intended for general circulation and are not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use will be contrary to local law or regulation. This presentation may not be copied, either in whole or in part, or distributed to any other person without our specific prior consent. PIAS and its affiliates, directors, associates, connected parties, employees and/or Representatives may own or have an interest in the securities covered in this material. PIAS does not make any representation or warranty (express or implied) as to its accuracy, completeness, timeliness or correctness for any particular purpose.

The content in this presentation may consist of the past performances of markets, sectors and funds. These are provided for reference only and do not have regard to the specific investment objectives, financial situation or the particular needs of any recipient. Henceforth, the contents shall not be construed as an offer or solicitation to buy, sell or subscribe for any investment or life insurance product or the giving of advice thereof. Accordingly, no warranty whatsoever is given and no liability whatsoever will be accepted by PIAS for any loss arising whether directly or indirectly as a result from you acting based on this information.

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