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DBS CIO: Bitcoin a Viable Portfolio Diversifier, But Don't Expect Quick Gains

The bank also sees a soft landing for the US economy and recommends overweighting risk assets like equities and alternatives.

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Singapore's DBS, a leading financial services group in Asia, sees Bitcoin and cryptocurrencies as potential diversifiers for investors' portfolios, but with some key considerations.

Responding to Blockhead's questions at its 2H2024 Chief Investment Office Market Outlook session, Daryl Ho, senior investment strategist at DBS, said Bitcoin's limited supply makes it a compelling alternative, mirroring gold's scarcity. "The profiles of Bitcoin and gold are quite similar," said Ho.

"So I think that's the narrative. You're hearing about Bitcoin becoming increasingly acceptable, and that's just a positive sign on its own." He highlighted the recent approval of spot Bitcoin ETFs by the US Securities and Exchange Commission (SEC) as a major step forward for mainstream adoption.

However, Ho noted Bitcoin's lack of history compared to gold, a proven store of value for millennia. "Gold has 6,000 years of human history behind it," he said. "You don't have that for Bitcoin."

DBS recommends investors to focus on stocks, bonds, and traditional assets in their portfolios. Hou Wey Fook, chief investment officer, emphasized this point. "We treat cryptocurrency as a satellite, so it doesn't sit within our core portfolio construct," he said.

Investors hoping for quick gains from crypto might need to be patient, according to Ho. "The easy money has already been made," he said, referring to the past surges linked to major catalysts like halving events and the SEC approval.

Ho emphasized the role of external factors like monetary policy in influencing Bitcoin's price. Historically, Bitcoin bull runs have coincided with periods of quantitative easing (QE) or fiscal stimulus by governments. "If you look at the past bull runs," Daryl said, "the halving occurring approximately every four years tends to catalyze the movement, but I think on the back of that it's also quite coincidental that there were also external factors that were supporting the space." He cites past QE programs and the 2017 tax cuts in the US as examples of such external factors.

With current economic conditions featuring high inflation and strong growth, Ho believes there's little incentive for the Federal Reserve to loosen monetary policy. This, in turn, could limit crypto's potential for explosive growth in the near future. "If you want to make that quick buck in crypto, it's not going to work for you so soon," he said.

In conclusion, Ho said he views Bitcoin as a long-term play, similar to digital gold but with higher volatility. "It's a bit like digital gold," he said. "If you are a bit more forward thinking you might want to allocate a little bit as a satellite play... but it's not going to give you accelerated gains until you have the combined factors of the halving and the effects of either monetary or fiscal stimulus."

DBS anticipates sideways movement for crypto in the second half of 2024 due to the absence of additional catalysts.

Risk Assets in Play

The bank's CIO Insights for the second half of 2024, titled "Risk Assets in Play," presented a positive outlook for risk assets in the coming quarters.

From left: Yeang Cheng Ling, North Asia CIO; Joanne Goh, Senior Investment Strategist; Hou Wey Fook, Chief Investment Officer; Daryl Ho, Senior Investment Strategist, Dylan Cheang, Senior Investment Strategist (Image: DBS)

"Stay with quality companies with deep moats for equities, investment-grade with longer duration for bonds, and overweight gold and alternatives like private assets. Such a portfolio construct will demonstrate superior risk-reward over market cycles, while harnessing “risk premiums”, or incremental returns over cash," DBS said.

Key highlights of its outlook include:

  • Soft landing: The US economy appears to be headed for a soft landing, with tapering growth and inflation. This scenario, with the Federal Reserve gradually reducing interest rates, is historically bullish for risk assets like stocks.
  • Broadening equity rally: While DBS remains optimistic about technology stocks, the bank expects the rally to encompass other sectors. Financials, energy, healthcare, and emerging markets are poised to benefit, Hou said.
  • Extended bond duration: With recent yield curve adjustments, longer-dated investment-grade bonds have become attractive. DBS recommends extending portfolio duration to 5-7 years in these bonds.
  • Overweight alternatives: To enhance portfolio resilience and returns, DBS suggests incorporating alternative assets like gold, hedge funds, and private assets. These offer diversification benefits and lower correlation with traditional stocks and bonds, Hou said.

New Investment Theme: Space

During the market outlook session, DBS also introduced a new investment theme: space technology. Hou highlighted the growth of the "space economy" as a natural progression from the innovations driving Big Tech's recent success. The bank cited cost reduction via the operationalization of reusable rockets, proliferation of small satellites, and increased government spending in the industry as reasons for a promising future for space-related ventures.

The space economy is projected to experience significant growth, reaching an estimated $772 billion by 2027. Key investment themes identified by DBS within this booming sector include companies providing the infrastructure and support systems for space exploration, technologies facilitating accurate positioning and navigation in space, utilizing space-based technologies for monitoring and analyzing Earth's environment, and the emerging market for space travel experiences.