One month after Brexit, financial markets are behaving as if the UK’s exit vote had never happened. Stock markets, including the UK, have not only recovered from the sharp post-Brexit losses but have surged ahead. The US stock market moved further into uncharted territory as it touched new high levels. The reason for the risk rally is in the expectation that central banks will over-compensate Brexit’s presumed negative effects with excessive easing. But despite markets setting new highs, we urge investors not to chase this rally. Instead, investors should stay cautious and take some profit.

1. Market Watch – August 2016
Don’t chase the rally
STRATEGY
We maintain our
defensive posture
due to heightened
market uncertainty.
Continue to hunt for
yield.
EQUITY
We maintain our
underweight stance
on equities. Negative
on Europe, balanced
by positive on the US.
FIXED INCOME
Stay positive on EM
high yield as a key
source of yield-carry.
FX
USD stays supported
but range-bound.
GBP and CNH to
weaken further; USD
JPY to trade within a
100-110 range.
One month after Brexit, financial markets are behaving as if the UK’s exit vote had never happened.
Stock markets, including the UK, have not only recovered from the sharp post-Brexit losses but have
surged ahead. The US stock market moved further into uncharted territory as it touched new high
levels. The reason for the risk rally is in the expectation that central banks will over-compensate
Brexit’s presumed negative effects with excessive easing.
So far, central banks have been on a wait-and-see mode to assess Brexit’s damage. Although the
UK looks to be headed for a mild recession, there has been little financial or economic contagion.
The early readings of Europe’s economic data have shown resilience. Therefore, markets may be a
little too hopeful in expecting central banks to ease aggressively.
In fact, the gains in stock markets are not supported by earnings. For stock markets to continue
rising, earnings need to improve dramatically. And that is unlikely to happen. In fact, actual
earnings are in negative territory and analysts have not yet revised their 2017 earnings downwards,
as we expect they will soon.
With the plunge in long-dated bond yields, the “low for longer” outlook now looks more entrenched
—an outcome that has unleashed a renewed search for yield whether it is in the bond market or in
high dividend equities.
Buoyant stock markets in the face of weak fundamentals and political turmoil need to be validated
by actual economic performance—otherwise the rise stock markets cannot be sustained. As
markets set new highs, we urge investors not to chase this rally. Instead, investors should stay
cautious and take some profit.

2. Marc Van de Walle
Global Head of Products
Going into a more uncertain environment, we maintain our defensive posture for asset allocation.
On equities, we continue to stay underweight in Europe, in favour of the US. On bonds, we keep our
overweight stance on emerging market high yield bonds as a key source of yield-carry. More
importantly, we continue to advocate a hunt for yield strategy, whether it is from highly rated bonds
or high income equities.

3. Disclaimer
This article, prepared by Bank of Singapore Limited (Co. Reg. No.: 197700866R) (the “Bank”), is for information purposes only and
is not an offer or a solicitation to deal in any of the financial products referred to herein or to enter into any legal relations, nor an
advice or a recommendation with respect to such financial products. This document is prepared for general circulation. It does not
have regard to the specific investment objectives, financial situation and the particular needs of any recipient. You should
independently evaluate each financial product and consider the suitability of such financial product, taking into account your
specific investment objectives, investment experience, financial situation and/or particular needs and consult an independent
financial adviser as necessary, before dealing in any financial products mentioned in this article.
This article may not be published, circulated, reproduced or distributed in whole or in part to any other person without the Bank’s
prior written consent. This article is not intended for distribution, publication to or use by any person in any jurisdiction outside
Singapore, Hong Kong or such other jurisdiction as the Bank may determine in its absolute discretion, where such distribution,
publication or use would be contrary to applicable law or would subject the Bank and its related corporations, connected persons,
associated persons and/or affiliates (collectively, “Affiliates”) to any registration, licensing or other requirements within such
jurisdiction.
While reasonable efforts have been made to ensure that the contents of this article have been obtained or derived from sources
believed by the Bank and its Affiliates to be reliable, the Bank, its Affiliates and their respective officers, employees, agents and
representatives do not make any express or implied representations or warranties as to the accuracy, timeliness or completeness
of the information, data or prevailing state of affairs that are mentioned in this article and do not accept any liability for any loss
or damage whatsoever, direct or indirect, arising from or in connection with the use of or reliance on the contents of this article.
The Bank and its Affiliates may have issued other reports, analyses, or other documents expressing views different from the
contents hereof and all views expressed in all reports, analyses and documents are subject to change without notice. The Bank and
its Affiliates reserve the right to act upon or use the contents hereof at any time, including before its publication herein.
Bank of Singapore Limited is a licensed bank regulated by the Monetary Authority of Singapore in Singapore and an Authorized
Institution as defined in the Banking Ordinance of Hong Kong (Cap. 155), regulated by the Hong Kong Monetary Authority in Hong
Kong. Bank of Singapore Limited, its employees and discretionary accounts managed by Bank of Singapore Limited may have long
or short positions or may be otherwise interested in any of the financial products (including derivatives thereof) referred to in this
article. Bank of Singapore Limited forms part of the OCBC Group (being for this purpose OCBC Bank and / or its subsidiaries,
related and affiliated companies).
Companies in the OCBC Group may perform or seek to perform broking, banking, and other investment or securities-related
services for the corporations whose securities are mentioned in this presentation as well as other parties generally. Past
performance is not always indicative of likely or future performance. All investments involve an element of risk, including capital
loss.