Strong ESG credentials strengthen the case for Singapore as a leader in Asia of the post-Covid recovery. Our panel discusses the risks and opportunities.
(Managing director, head of investment solutions APAC, Franklin Templeton)Sashi Reddy
(Lead Manager of the Worldwide Leaders Sustainability strategy, Stewart Investors Sustainable Funds Group (SFG))Ashmita Chhabra
(Managing director, business development, Asia-Pacific, Apex Group, and chair of the Singapore Fund Administrators Association)
(Executive director and CEO, Gordian Capital Singapore)
(Chief commercial officer – Asia, IQ-EQ)
Funds Global – The first half of this year saw an uneven recovery of capital markets across different regions, in part due to the varying pace of Covid-19 vaccine rollouts. What is your overall investment outlook for Singapore and Asia more widely for the coming six to 12 months?
Ashmita Chhabra, Singapore Fund Administrators Association (SFAA)
– Overall, the global economy is showing encouraging signs of recovery. Reopening efforts remain on track as Covid vaccination rates keep climbing. There is concern around inflation, but the spike so far is seen as more transitory.
Singapore is experiencing a good recovery as the manufacturing and finance sector continues to grow with pick-up coming through from outward-oriented sectors. Singapore’s GDP growth forecast was recently upgraded for 2021, to 6-7%, from earlier forecasts of 4-6%, and this again is based on the economic recovery, which is stronger than expected in the first half of the year. So, from a Singapore perspective, things are looking strong, and the recovery will continue to be supported by external demand, including probably domestic consumption and investment.
In Asia more broadly, exports have led to recovery and will continue to drive the growth as consumption continues to play catch-up. In the asset management markets that Apex operates in, and we see from our SFAA member firms that the expectation is a good second half of the year.
Subash Pillai, Franklin Templeton
– We continue to favour risk assets, we’re overweight on equities across all of our portfolios. However, when we think about the regions that we are most optimistic about, it’s developed markets – Europe and the US. We’re quite cautious and underweight on China, and that pervades through much of the region.
What underlies our positive view on risk assets is global growth. It’s been great, it’s still looking like it’s going to be very good. The kind of trajectory that we’re seeing developed economies on is one that can probably afford a little bit of a reduction in the accommodative nature of monetary policy.
We view the inflation that we’re seeing as predominantly transitory, which affords the ability for the US Federal Reserve (Fed) to ultimately reduce accommodation, but to do so gradually and very well telegraphed.
What makes parts of Asia less attractive at the moment, specifically China, is changes we’ve seen this year in growth leadership. So, coming out of the pandemic, China was the first leader. It rebounded quickly, so you saw in the early part of 2021 China started to tighten its policy. Growth leadership is no longer with China given the recovery in developed markets. Additionally with China, we are cognisant that regulatory risks have grown as the Chinese authorities look to focus on delivering common prosperity.
In the APAC region we are laggards in terms of vaccinations. While Singapore is a leader, the majority of our region – Thailand, Indonesia, the Philippines, Malaysia, Japan, Australia, New Zealand – are laggards in terms of vaccinations and so we are not getting as much of this reopening boost to activity, which of course drives services growth in the economy. Finally, we have to remember that there are many emerging economies in the region, so as much as we are quite sanguine about the eventual Fed taper, there could be initial underperformance in emerging markets driven by that taper.
The next 12 months are going to be very important in terms of when do you actually get really optimistic around Asia? We’re seeing a pivot in terms of monetary policy in China, it’s a gentle one, and we’re monitoring to see the credit impulse in China start to accelerate. It’s starting to look like it’s troughing. You’ve got to be very mindful that the vaccination laggards of today very quickly become tomorrow’s fastest reopeners. If you look at some of the things that are happening in Australia and the pace of catch-up that you’re seeing in vaccination, that suggests at some point in the near future, that economy’s going to open up and it’s going to be very positive. Finally, headwinds become tailwinds. We think the taper, if it has a disruptive influence, will be short-lived, so a key question for us is when to be more positive on Asia?
Singapore is certainly better placed than most of those Asian economies, but if we’re coming at this not from the point of view of predicting economic growth but predicting market performance, we need to be mindful that Singapore is part of this region. So yes, we do have a positive view, but we think right now developed markets are a better place to be, and we will be hopefully transitioning in the coming 12 months.
Sashi Reddy, Stewart Investors Sustainable Funds Group (SFG)
– There are 4 billion people in this region who are at different stages of development and they present wonderful growth opportunities for many of our companies, so we are quite excited about Asia as an investment destination for many decades to come. Yes, in the short term there are headwinds, but these are just opportunities to invest in very high-quality companies. China is throwing up fantastic opportunities in some companies which are well positioned for the sustainable development of the country in the coming decade.
Mark Voumard, Gordian Capital Singapore
– I would agree that most of the EU and the US, and to a certain degree Asia, has seen a big rebound and will continue to see a big rebound in GDP due to pent-up consumer spending and government stimuli; that’s already translated into some very nice moves and will likely support equity prices despite some obvious risks.
For Asia in particular, one key risk is China. I agree with Sashi there are some brilliant companies there on a five to ten-year view, but I also agree with Subash that there are some short-term risks. The key challenge for China is how successfully it can manage to deflate certain parts of the private economy. The government’s key target there is the construction, property and related subsectors of the industry, equal to about 25% of GDP, and that’s about three times the relative weighting of the same sector in the US in 2007, and we all know what happened after that. Those same sectors account for about 44% of local government revenue, which is obviously critical, that’s coming from land sales and fees, so we may see potentially a bit of a hard landing over the next six to 12 months as the Chinese government starves the construction sector of credit. It’s not only that sector – this is part of an ongoing pushback against the private sector in China, which is about 60% of GDP and accounts for most of the technological innovation that China has shown over the last two decades.
India is another very large economy and market that has a fertility rate of 2.3 and if it keeps that up, then the population will become larger than China between probably 2024 and 2027. Despite the very large impact of coronavirus on India, retail investors have rushed to invest in the stock market. There’s a lot of liquidity in the system, offshore investors and a lot of significant private equity, real estate, venture capital, long-term investments continue to flood into the country.
Jimmy Leong, IQ-EQ
– We’ve talked about equity markets and how they remained resilient during this pandemic, and a big part of that was because of pent-up demand. When the pandemic first hit, everyone went quiet for one or two months and then everything picked up really quickly. From our perspective, we work with fund managers and private clients and have seen an increase in new fund managers.
We’ve seen an increase in real estate managers, particularly in Japan, where we’ve seen a lot of interest in real estate. The market is adjusting to this ‘new norm’ and there’s a lot of dry powder out there. I believe it’s going to remain high because there’s not a lot of quality deals out there. Everyone’s after the same deals and there’s only so much you can get, so that’s going to be a challenge.
One key concern is the vaccination programme to immunise the population. Singapore has done very well, about 80% now of the population has been vaccinated, but the problem is, we’re getting all these huge numbers every day. That’s concerning to us, but in the medium to longer term, easing measures have to be implemented to help bolster these investment sales.
China’s recovery in the longer term is expected to continue. A big part of Chinese markets is very reliant on exports, and household consumption is another one, despite the market adjusting now. The rest of Asia, markets like Taiwan, Korea, Vietnam, are also very reliant on the export market, so as long as that export piece continues to recover, all these markets in the long term would recover accordingly.