DBS: Interest rate cuts and other factors will drive the stock market to continue rising; investors should ensure a diversified asset portfolio | Lianhe Zaobao

From technology stocks to gold to cryptocurrencies, risk assets are expected to "break through the roof" in 2025. According to an analysis by the Chief Investment Office (CIO) of DBS Bank, this extraordinary surge is anticipated to continue, primarily driven by the U.S. Federal Reserve beginning to ease monetary policy. The futures market pricing has indicated five interest rate cuts by the end of 2026. However, there are still certain risks in the market, and DBS advises investors to seize opportunities and reduce downside risks through portfolio diversification. It points out that the current optimistic sentiment among investors sharply contrasts with the reality of tariff policies and the fiscal situation in the United States. The effective tariff rate in the U.S. has risen to its highest level since the 1930s, which is expected to put pressure on corporate profits and domestic consumption in the coming months. At the same time, the "Beautiful Package" initiative launched by U.S. President Trump has reignited concerns about excessive U.S. fiscal spending, driving up long-term U.S. Treasury yields and causing a sharp decline in the dollar. DBS Group Chief Investment Officer Hou Weifu stated at a press conference on Monday (October 13) that the market is therefore worried about the so-called "Fiscal Dominance" phenomenon, where fiscal needs drive central bank decisions, leading to a loss of independence and control over inflation by the central bank. He warned that the risk of stagflation is rising. He believes that the global economy will slow down, but the U.S. is unlikely to fall into recession due to significant capital expenditures related to artificial intelligence (AI), Trump's fiscal stimulus measures, and a series of interest rate cuts by the U.S. Federal Reserve. Further Reading How to Make Defensive Investments Amid Market Volatility? Analysis: AI Stocks Have Good Prospects, But Investors Should Be Aware of Price Volatility In the current macroeconomic context and outlook, the stock market still has the potential for good performance. Therefore, DBS continues to be optimistic about the stock market, especially highly recommending technology stocks. The bank believes that the current AI boom is not a bubble, unlike the speculative situation during the internet bubble era. The technology giants leading in the field of artificial intelligence continue to generate strong cash flow and have solid fundamentals. Moreover, the AI market is still in its early stages, with significant growth potential in the future. It is expected that the number of AI users will increase 86 times in the next three years. In terms of price-to-earnings ratio, AI-related stocks appear high, but when looking at the forecasted price-to-earnings ratio, they are still cheaper than stocks in some other sectors. Given the multiple risks currently facing the market, including excessive concentration (the top 10 companies in the S&P 500 index account for 38%), overall valuations nearing historical highs, unclear policy outlook (such as the ongoing uncertainty regarding tariff policies), and market concerns about fiscal dominance over monetary policy, DBS recommends that investors adopt a diversified asset allocation strategy to effectively manage downside risks while seizing opportunities. DBS suggests an asset allocation of 45% stocks, 28% bonds, with the remainder in alternative investments, including gold, private equity, and private credit. Although gold prices have surged 40% this year, gold will continue to be favored, supported by factors such as central bank purchases and interest rate cuts