SINGAPORE (June 17): Being a small and open economy, Singapore has suffered a brutal hit from the ongoing Covid-19 pandemic. The lockdowns across various countries have stalled tourism, while the state has adopted ‘circuit breaker’ measures in a bid to stem the spread of the virus.
Year to date, the MSCI Singapore Free Index Futures has slumped 17.4% in light of the virus. According to Tan Min Lan, Asia-Pacific head of UBS Wealth Management’s chief investment office, the Singapore economy is “one of the worst performing markets” for the year. Valuations wise, equities in Singapore are trading at slightly below one time on a price to book value basis, similar to the market bottoming during the 2008 Global Financial Crisis.
Singapore is UBS’ most preferred equity markets in this region and Tan urges investors to look past the short term challenges, and stay vested and bullish.
“The current valuations do suggest that the recession is priced in, and the recession is going to be deep this year,” says Tan. “But the level of fiscal and monetary stimulus is also very significant, and we think this will help cushion the impact on the downside,” she adds, referring to the $93 billion that Singapore has doled out across four Budgets.
While a second wave of infections in China have reignited fears across the globe, Tan says that another round of “draconian and drastic measures” such as nationwide lockdowns are unlikely as governments have spent the past five months or so improving their infrastructure to deal with burgeoning case counts.
“Once you have healthcare infrastructure in place and you’re confident that healthcare facilities are not going to be overwhelmed, most governments around the world will not be reverting back to complete lockdowns of economies,” stresses Tan.
Remain selective amid uneven recovery
With low interest rates and heightened volatility, investors are scouring the market for high yields and attractive valuations. Tan says that Asian markets, in particular, remain attractive due to their earnings and valuations. According to her, investors can expect a 20% upside in Asian markets from now till the end of 2021.
“For 2020, Asian earnings are expected to be flat compared to a near 20% decline globally, and we expect revisions to trough in the next couple months, which historically has been a good indicator for a market rebound,” observes Tan.
While the region is well-placed, Tan advises investors to remain selective as the impact of recovery can be “differentiated and uneven” across or within sectors.
“Some companies are set to have a lot more clout coming out of this crisis, while others will have to reassess their business models,” says Tan.
According to Tan, the selected cyclical and value stocks will begin to close the gap with growth stocks as economies start to reopen. These include defensive yielders such as industrial REITs, transport operators and telcos. Banks, she adds, are also likely to do well amid their current 5-6% dividend yields.
Apart from these, Tan also identifies areas of opportunity for investors as the pandemic has accelerated trends such as sustainable investing, automation and robotics, fintech and healthcare.
As always, investors need to be cautious about protecting their portfolios against the volatile economic environment. Gold, credit and hedge funds remain top picks.
Supply chain shifts
The ongoing US-China trade war remains a key downside risk for global markets, especially since tensions are flaring up again. While Tan thinks the Phase One deal inked back in January is likely to hold, she admits actions of the US have “certainly set in motion an inevitable decoupling of the two markets” especially since the presidential elections are set to take place in four months.
“In aggregate, the economic measures by the US still contain more bark than bite,” says Tan. “There are ways for China to work around them to minimise the impact, and they have been very restrained in terms of response to the measures,” she adds.
Inevitably, the tensions will prompt companies to reassess their supply chains. Tan anticipates that more companies will move to a “China plus” strategy - which means a company will keep its existing productions in China but build incremental investments elsewhere.
“Every company will have to be thinking of diversification of their supply chains,” says Tan. “What this means is that single sourcing will be out and diversification will be in.”
Countries such as Japan, Korea and Taiwan have been the most active in shifting their production back home, while India, Malaysia and Vietnam are benefitting the most from non-China supply chains.
Tan observes that Singapore is in a good position to benefit from supply chain shifts as it has demonstrated its reliability during the crisis. During the circuit breaker measures, the state had kept industries that were key to global supply chains open, so as not to cause any disruptions. These included sectors such as semiconductors and petrochemicals.
“In that regard, we have differentiated ourselves. That’s a plus, and it would count when companies think about strategising and diversifying,” says Tan.
“Any economy that’s able to demonstrate its control at the height of a crisis, would probably come up quite strongly when companies decide whether or not they would like to base a portion of their supply chain in that country,” she adds.
