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Singapore’S Authority Is Aligned with the Monetary Amongand Major Uncertainty Geopolitical Economies

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Singapore’S Authority Is Aligned with the Monetary Amongand Major Uncertainty Geopolitical Economies Investment Highlights 2020 NOV Singapore Performance Review Investment Outlook The performance of Singapore bond portfolios was mixed against their Global manufacturing Purchasing Managers’ Indexes (PMIs) reached a new benchmarks in November. Our underweight in duration was positive for cycle high of 54.2, up from 52.9 in September with expansion seen in most portfolio returns given the bear-steepening of the Singapore govern- economies led by industrial recovery despite a resurgence of infections ment securities (SGS) curve. Sector allocation contributed positively to in the west. The US Institute for Supply Management for manufacturing performance. In light of the underperformance in the long end of the rebounded to a two-year high of 59.3 in October, from 55.4 in September. SGS curve, curve positioning was a detractor given our overweight. Issue China’s industrial output levels have now surpassed pre-pandemic levels selection contributed positively. Credit selection continued to contribute of output in 4Q19 even as global industrial utilization remains up to 10% to performance in terms of carry, with the high quality bias benefitting below capacity. China’s leadership in the recovery is also clear, with China’s the portfolio given the challenging liquidity concerns over smaller bond share as a destination of exports rising to 11%, the highest level since the issuers and refinancing risks for weaker credits. 1980s. The November Federal Open Market Committee (FOMC) meeting outcome was slightly dovish, in line with expectations. In particular, Market Review Federal Reserve (Fed) Chair Jerome Powell reiterated that the Fed remains In Singapore, the Singapore Government Bond Market saw losses committed to support the recovery and has powerful tools, which it can of 0.40% in November, bringing year-to-date gains to 7.78%. The expand if needed. Powell confirmed an expanded discussion on the asset three-month SIBOR rate was unchanged at 0.41%. The SGS curve saw purchase program and its role in supporting the recovery. Importantly, a bear-flattening, with yields in the long end higher by up to 8 basis Powell did not appear to try to pass the baton to fiscal policy, even as points (bps) even as the front end finished the month higher by up to he noted recent concerning developments, moderating US growth 3 bps. SGS underperformed US Treasuries (USTs) on the whole during momentum and the importance of fiscal stimulus. the month. USTs saw yields flatter with the long end of the UST yield curve outperforming. Control of the US senate rests on two run-off elections to be held in Georgia in January. Biden faces politicking almost immediately given that he is Industrial production (IP) growth fell sharply to -0.9% year-over-year (YoY) expected to be a one-term president and 2024 candidates from both in October, after surging 25.6% in September, well below market expecta- camps will have to start posturing soon. Republicans are also poised to tions (consensus: 7.3%). The negative surprise was driven by a sharp decline take back the House in the 2022 mid-terms. With a potentially divided in volatile pharmaceutical output growth, which fell to 14.6% YoY after a government, there is likely to be minimal health care reform, fewer anti- 113.5% YoY surge in September. Electronics production fell 9.6% MoM trust and regulatory actions against Big Tech, and no cut-backs in defense seasonally adjusted (sa), largely due to a 11.4% decline in semi-conductor spending. Most Fed officials have probably assumed $1 trillion+ in fiscal production. While this translated into a YoY fall of 0.6%, last year’s high base stimulus this year, which is unlikely to materialize either speedily or at also played a part. Singapore’s final 3Q20 GDP growth was revised higher that scale. On top of that, COVID-19 cases are surging across the US and to -5.8% YoY (+9.2% quarter-over-quarter (QoQ) sa) from the advance also skewing near-term growth risks to the downside. Biden’s immediate print of -7.0% YoY (+7.9% QoQsa) due to strong manufacturing activity in focus will be to manage the pandemic. The primary risk, though, is that of September. As a result of this upward revision in 3Q20 GDP, 9-month-2020 Trump escalating tensions with China to create a contrasting tone while GDP growth now stands at -6.5%. The government also narrowed its 2020 staging his plans either for re-election in 2024 or for him to maintain his growth forecast to the range of -6.5% to -6.0% from the range of -7.0% political grip over the party in view of the mid-terms in 2022. A reset of to -5.0%. For 2021, the government forecasts GDP growth in the range US-Asia, EU ties is not going to be a reversal but more of a recalibration, of 4.0% to 6.0%. with foreign policy that emphasizes multilateralism and an acceptance of international norms for dispute resolution instead of unilateral US sanctions. October’s core Consumer Price Index (CPI) fell below expectations for the However, Biden is not going to go all out to embrace globalization; Biden’s first time since January 20 at -0.2% YoY (consensus: 0%, September: -0.1%). economic plans include prominent “buy American” provisions and House On a sequential basis, core CPI edged higher by just 0.02% (September: Democrats have displayed little enthusiasm for relaxing trade rules. The 0.16%; August: 0.15%) despite the jump in 4Q20 regulated electricity tariffs underlying driver is frustration in the US business community of limited (2.4% of core CPI) by 9.3%. In its 3Q20 growth report, the government also access to China’s markets, while China’s assertiveness is driven by its leader- highlighted growth risks, including potential financial market stresses due ship’s need to maintain a rising power narrative. This is unlikely to reverse to higher leverage and slow growth recovery, premature policy tightening course. Janet Yellen’s nomination to be Secretary of the Treasury sends a and geopolitical uncertainty among major economies. The risk of premature clear message that President-Elect Biden is aiming for a broadly appealing, policy tightening is aligned with the Monetary Authority of Singapore’s well-regarded centrist-to-moderately-liberal economic programme. The (MAS) stance, which is likely to stay accommodative for some time. close coordination with the Fed would see an alignment of monetary, fiscal Singapore and administrative policies in spite of a potentially Republican Congress. peak of 15%, last seen in 2016. Most of Asia continues to outperform At the same time, inflation expectations have drifted lower since the Fed’s on COVID-19 containment measures. This should support broad-based annual Jackson Hole meeting, which means that the markets are just not recovery of business and consumer sentiment, which is key to anchoring buying into the Fed’s new average inflation targeting framework. The growth. The IMF projects Asia’s GDP to shrink 2.2% in 2020 and rebound implication is that normalisation of Fed policy will get pushed further out. by 6.9% in 2021 led by China, Korea and Taiwan, even as Asia continues to have either monetary or fiscal policy space (and in some richer economies, More lockdowns in Europe and a rise in COVID-19 cases in the US will both if necessary) to support growth. Inflation is not a key concern given hamper consumption and resumption of broad-based economic activity. still significant excess capacity and low wage growth pressures—though However, the impact on financial market sentiment will be more muted, an uptick in oil prices will have a subdued impact on headline inflation. with the central banks backstop in place, more knowledge of the virus and While we do not expect aggressive easing of monetary policy, there is its risks and fiscal expansion likely to continue. Rising debt levels and its room for limited easing in India, Indonesia, Thailand and Malaysia. attendant risks are being capped by central banks’ commitment to keep borrowing costs low. The worst aspect of the pandemic is likely behind us Singapore’s near-term growth outlook remains challenged alongside other both medically, and in terms of the fear of the unknown and broad-based, open economies as the impact from a lockdown of borders continues to large scale shutdowns. Even as subsequent waves of infection continue weigh on tourism, business travel and auxiliary demand from services to to plague Europe and the US, it has been proven in Asia that preventive commercial property. The structural shifts as a result of trade tensions, measures, socially responsible behavior at the individual level as well as however, will create opportunities as firms see Singapore as a relatively effective testing, tracing and containment at the government level are solid base of political and social stability as a regional outpost. For as key to managing the pandemic. As news of various vaccines spur bouts long as policymakers are able to manage domestic sociopolitical chal- of optimism, significant hurdles remain regarding broad-based immunity. lenges arising from the economy’s openness and continue to be an ideal Logistical, last-mile challenges, on top of administrative and tracking regional hub in various sectors, structural growth opportunity will persist. requirements, will be challenging for even most developed economies. A strong reserves position, political stability and fiscal space will allow for Further, even with successful vaccination, the need for rapid effective policy response should headwinds arise from either increasing geopolitical testing will still be necessary before unconstrained travel can resume. tensions or a resurgence of COVID-19 even as the government seeks to pave Trust, either of individuals in the vaccination or in immunity, as well as trust a path back to normalcy.
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