The second half of this year was initially predicted to be a strong one. However, the Covid-19 pandemic — which has dragged on longer than expected — has put most investors in a quandary. Even before the pandemic wreaked economic havoc around the world, there were a few geopolitical issues, like the ongoing US-China trade dispute and Brexit, says Maybank Singapore’s head of private wealth and head of products and investment solutions Alice Tan in an interview with The Edge Singapore. Even so, the current volatility is enough for the house to keep a defensive position when it came to investments.
“After a long rally in the equity market, we advocated a more selective approach towards investments and focused on managing risks, especially when the valuation of several markets and asset classes were looking quite stretched,” she continues.
But the onset of the pandemic has added on to the bearish view of Maybank’s 2020 global GDP forecast, which was later revised from a growth of 2.8% to contraction of –4.9%. “However, we note that the various governments have come in very aggressively with monetary and fiscal stimulus implemented and that have helped to put a floor on the equity markets. So we have seen a strong rally since March and April till now. So, given the less negative outlook now, we’ve recently shifted to a more neutral stance. But remaining very selective on investments,” says Tan.
The need to be selective on specific sectors and stocks has become more important given that the economy worldwide is in the doldrums. On July 14, the Ministry of Trade and Industry announced that 2Q gross domestic product (GDP) declined at an annualised 41.2% from the previous three months, the biggest quarterly contraction on record. This is also a clear signal that the city-state’s economy has plunged into recession, amid businesses shuttering during the “circuit breaker” period put in place to slow the local transmission of the virus. However, retail spending was decimated as a result.
On a y-o-y basis, GDP fell by 12.6% in the second quarter of this year, and the government is projecting a full-year economic contraction of 4% to 7%. To stem the contraction, the government has allocated a $92.9 billion rescue and support package announced over four instalments to help keep businesses afloat and prevent a surge in unemployment.
Tan agrees with the government’s current stance that Singapore’s recovery will be slow following the circuit breaker. “Given the cautious approach towards reopening the economy, we are projecting a 6% decline for Singapore’s GDP in 2020, which is on the lower end of the official GDP forecasts,” Tan says.
With no Covid-19 vaccine in sight and several countries seeing a second wave of infections, the world’s economic future remains uncertain. “We have to wait and see how the economy will adapt to this pandemic. We don’t have a crystal ball that will tell us how long this pandemic will be, but we are hopeful that if there is a drug or vaccine introduced, life can go back to ‘normal’ more quickly,” says Tan, who also predicts that going back to a “new normal” could be some time next year, in view of the test cycle that is required for any vaccine to come into effect.
The rest of this year will be challenging and the government is expected to introduce more measures in the near- and mid-term to further revive Singapore’s economy. The advent of the pandemic has also pushed businesses across the globe to digitalise. With lockdowns occurring everywhere, the only way for any trade to still be relevant to consumers stuck at home is to go online. According to a survey by personal finance platform Singsaver, 70% of Singaporeans have been banking online since the pandemic emerged. Among these respondents, 80% said they will likely continue this even after Covid-19 subsides. Meanwhile, another 70% also said that they are more likely to continue shopping online for groceries and other essentials in the future.
While the Singapore government has long encouraged businesses to digitalise, Covid-19 has definitely sped up the Republic’s plan of moving towards building a Smart Nation. Tan believes that the need for Singaporeans to stay connected is essential, especially when the new norm is moving towards communicating, working, shopping and banking online from home. In a Aug 6 report, Maybank Kim Eng flags NetLink NBN Trust as a stock for investors to keep an eye on amid the rising trend in telecommuting, home-based learning, as well as better offerings for SMEs. As the sole nationwide provider of passive fibre network infrastructure, this stock does not face risk of DPU cut and competition unlike other yield plays. “We continue to like NetLink as 95% of its 1QFY2021 revenue is pegged to recurring cash flows and long-term contracts. Its [estimated] FY2021 yield of 5% offers a better dividend visibility than other yield plays given its stable business,” says Maybank Kim Eng analyst Kareen Chan, who has a “buy” call and target price of $1.07 on this stock. Apart from that, Tan also said there is a selective focus on REITs and specifically the more resilient industrial and logistics segments, which she says presents a good yield hunting ground.
Banking on tech
If banks provide some semblance of income, then the tech sector is where investors should look at for capital gains. This is especially so as the demand for internet, cloud computing and connectivity increases amid this pandemic. “From a global perspective, the tech sector is something that we like. If we were to take a step back and look at this pandemic, there has been a large shift in terms of consumer and working behaviour, resulting in the accelerated adoption of digital trends, which was not prevalent in previous recessions,” notes Tan.
Companies that are “well-connected” to the internet — be it from the retail, entertainment, gaming, education or healthcare sectors — are all key beneficiaries to the pandemic. With working-from-home arrangements commonplace, the technology providers that can offer and support remote working solutions are likely to see profit growth. “Investors will likely do well If they focus on companies that can benefit from this circular growth trend,” she adds.
Another SGX-listed tech stock favoured by Maybank Kim Eng is AEM Holdings, whose key customer is chip giant Intel. On Aug 4, following AEM’s better-than-expected results and higher revenue guidance, analyst Lai Gene Lih gave this stock a higher target price of $4.26, from $4.04. Lai has recently also turned more positive towards another tech stock, contract manufacturer Hi-P International. On Aug 2, sensing that the prospects have turned better, he kept his “hold” call but upgraded his target price to $1.23 from 78 cents.
The global healthcare sector is an additional market Tan is positive on, especially as Covid-19 rages. Tan notes that there have been several developments in the bioscience and biotech spaces. “These are spaces that we want to look and pay more attention to, as we think it would be beneficial [to invest in],” she says.
This pandemic has also helped boost a trend that was just gaining some leverage before the Covid-19 came about — the importance of Environmental, Social and Governance (ESG) investing. There were several reports that countries during lockdown saw cleaner air and waterways, as human activities were halted during that period. As the circuit breaker restrictions are gradually lifted, Tan expects more scrutiny to come forward on how businesses manage and help their employees amid the pandemic, as well as continue their shift towards being more sustainable as it can lead to an expanding pool of sustainable investment opportunities across different asset classes.
“These companies [that embrace ESG practices] will potentially emerge as winners. Investors can also leverage on some of these opportunities to potentially enhance their portfolio returns at the same time doing good,” adds Tan.
Alternative investments
Gold has always been a safe haven for investors to run to, especially during volatile times. And year-to-date, the price of gold has increased by some 34.5% to about US$2,040 ($2,796) per ounce on Aug 5. Although this is a high for gold prices, Tan believes that there is still room for the price to trend higher.
“And in this current situation with several economic and geopolitical uncertainties, investors have again gone back to their safe havens, which includes gold. The speculative position in gold remains moderate, suggesting that we have not reached that overbought level,” she reasons. But at this juncture, interest rates have remained low and that will lend support to gold prices, which have historically been negatively correlated to interest rates.
Apart from gold, the US Treasuries have also historically been a safe haven asset that investors would turn to in a recession. Tan says in view of the low nominal yields, the US Treasuries are still a good investment, but will probably gain as much flight to safety at this juncture. She also likes the Japanese yen as an investment to consider amid tough times. Tan says that the yen could continue to be a good hedge against potential downside risks, including the potential second wave of Covid-19 infection.
