Investors are entering the fourth quarter of the year faced with a challenging mix of global political and economic developments.
In Asia, massive protests in Hong Kong have stock market punters in the region worried, while expectations of more monetary easing by the Bank of Japan is driving the yen to record lows.
In the West, speculation over further stimulus by the European Central Bank twinned with anticipation of interest rate hikes by the United States Federal Reserve have pushed down gold and oil prices while keeping stock market investors on edge.
It is exciting to watch these events unfold, but savvy investors would also know that this makes it a fitting time to fine-tune their portfolios and gear up for a potentially rocky three months ahead.
Stocks
First, some good news. The global economic environment still offers healthy growth trends that will help support corporate profitability, which in turn will fuel the stock market, notes UOB Asset Management's chief investment officer for equities and multi-assets, Mr John Doyle.
"At the same time, we also expect a gradual increase in (interest) rates. Overall, we believe that such an environment of healthy growth and rising rates is clearly favourable to equities over bonds."
Equity valuations in many parts of the world are above average but not excessively so, he adds.
"Given the cyclical pickup in demand, we are overweight on the technology sector, which continues to benefit from rising corporate expenditure and the IT upgrade cycle that has been suppressed so far due to prior uncertainties," he says.
He is positive on industrials, as well as the health-care sector, which continues to benefit from recent merger and acquisition activities as well as strong earnings growth momentum from the biotech sub-sector.
Mr Doyle is most bullish on US stocks and neutral on Asian markets. He advises cutting exposure to most other markets, including Europe, Japan and Latin America.
However, the Singapore market will likely remain range-bound in the quarter ahead, he says, driven by a mixture of unexciting corporate earnings and modestly supportive valuations.
Nonetheless, he is positive about the local energy sector as he sees renewed interest in specific offshore and marine service providers with strong earnings growth at undemanding valuations.
"We scale back our exposure to the consumer discretionary and financials sectors. However, a recovery in margins prompts us to upgrade the consumer staples sector."
OCBC Investment Research head Carmen Lee notes that there has been a slowdown in trading activity on the Singapore bourse in the last two to three months, which is in sharp contrast to the US markets.
Similarly, the Hong Kong market is also enjoying brisk trade despite recent uncertainty, she notes.
"As such, for the Singapore market and heading into the fourth quarter, we expect the typical year-end lull period to persist, partly due to the school breaks.
"In addition, the Straits Times Index has been consolidating at the current level for a while and looks set to remain at the current level since corporate activities have tapered off."
However, she says, the quiet market makes it an opportune time to collect stocks, especially blue chips.
The Singapore Exchange's move to shrink trading lot sizes from 1,000 shares per lot to 100 per lot will attract more retail interest to the market and this should benefit blue chips, she adds.
Fixed income
Strategists are generally less bullish on fixed income, as stronger economic growth and the start of modest interest rate hikes in the US make bonds relatively less attractive than equities.
"The bond market is caught between twin offsetting forces - higher US Treasury yields pushing prices down and ample global liquidity pulling prices up," notes Mr Lim Say Boon, the chief investment officer of group wealth management and private banking at DBS Bank, in his latest investment outlook report.
"This is a function of unprecedented monetary stimulus on a global scale, under which the state is both issuer and buyer of bonds, albeit via different agencies."
However, strategists say there is still room in an investment portfolio for some fixed income products, especially those focused on Asia. "We believe Asia now looks attractive versus developing Europe and Latin America in terms of valuation and we maintain Asia as our preferred emerging market region for the remainder of the year," says Bank of Singapore's head of fixed income research, Mr Todd Schubert.
"China, by far the largest component of Asia, has benefited from an absence of macro-policy missteps. Meanwhile, in Russia... political headlines emanating from the Ukraine conflict remain."
Currencies
Citi's global asset allocation team said in an outlook report last week that it expects the US dollar to strengthen about 10 per cent against the Group of 10 average over the next six to 12 months, with the greenback's strength especially evident against the currencies of countries whose central banks are easing monetary policy.
DBS' Mr Lim notes in his report that the steepness of the ascent of the US dollar over the past three months suggests a correction is likely, but this may not be the case.
"As long as the US economy remains the strongest within the developed markets, the US dollar index should climb. It is about the relative strength of economies.
"As economic growth moves in favour of the US, so will rates and government bond yields.
"And as yield differentials move in favour of the US, so will the relative value of currencies."
Credit Suisse's senior foreign exchange strategist Heng Koon How has a neutral outlook on the Singdollar versus the US dollar.
"In Singapore, economic growth in the first half was close to 3.5 per cent, so it was nothing exciting. The regulators will maintain their policy of a modest and gradual appreciation of the Singdollar," he notes.
"The US dollar is also getting stronger, so they balance each other out. I would say that the range of exchange movements that we have seen so far this year will stand - S$1.23 to S$1.29 against the US dollar."
Another one of the few global currencies that can likely hold its own against the greenback, Mr Heng adds, is the Chinese yuan.
"China's trade balance is improving. It had a trade deficit in February during the Chinese New Year period but in September, their trade surplus hit a new high. "Exports should stay strong as the US economy recovers, and this influx of exported dollars will underpin the yuan's strength."
Oil and gold
This year has not been kind to gold or crude oil, also known as "black gold".
Looking ahead, strategists remain pessimistic over their outlook.
OCBC Bank economist Barnabas Gan writes in his latest commodities outlook report that the bearish behaviour in both the key West Texas Intermediate (WTI) and Brent crude oil contracts is unsurprising, given a healthy supply and a stronger greenback.
"More importantly, the easing geopolitical tensions in Ukraine and softening concerns over oil supply disruptions in Iraq have effectively narrowed the risk premium in oil prices," he adds.
DBS' Mr Lim agrees, noting in his report that US oil production continues to surge, reopening a political debate on whether the US government should reverse a multi-decade ban on crude oil exports.
Meanwhile, Libyan oil production is recovering and the Islamic State in Iraq and Syria militant group has failed to disrupt southern Iraq's output.
"The market now waits on Saudi Arabia to make deep cuts to its output. Although it has just cut output by 400,000 barrels per day (bpd), Saudi Arabia is still producing around two million bpd above its 2012 output level.
"Until Saudi Arabia cuts deeply, WTI could continue to trade in the US$90 to US$100-per-barrel region," Mr Lim said.
The outlook is just as glum for gold, with Mr Gan noting that the prospect of a stronger US dollar, improving global economic indicators and weaker-than-usual physical demand from China and India should continue to drag gold prices lower for the rest of the year.
Mr Lim is slightly more optimistic. He says: "Gold is likely to be trapped sideways over coming months by the opposing forces of production costs (which are believed to average around US$1,000 per troy ounce) and the likelihood of a stronger US dollar.
"But as it is, at the bottom of the trading range, we are upgrading gold from underweight to neutral."
This article was first published on Oct 5, 2014.
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