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28 September, 2020 Chief Investment Office

Markets Outlook

Jeff Ng Senior Treasury Strategist

jeffng@hlbank.com.sg

Markets Outlook: Update on H2-2020 Themes We update our 2H themes, expecting near-term volatility and diversion from traditional patterns

Stocks and the dollar may be affected by event risks until November, before volatility fades

Strategy: Look for some defensive plays and hedges to protect against current unpredictability

Summary & Key Calls

The global economic recovery has slowed down recently. US-China

event risks still call for some diversion in trade and supply chains,

favouring Southeast Asia. The tech sector has not been spared from a

market correction, despite long-term potentials. Recent volatility may

persist until November, where the US election is due to be held. Despite

some reversals for now, the trend of a weakening dollar may resume for

the medium-term.

We have updated our asset class views, favouring some rotation.

Consumer staples and real estate will likely be more defensive from

recent volatility, benefitting from resilient demand for the former and

low interest rates for the latter. Energy may still face headwinds in

contrast. There may be scope for some resilience within Asia.

For FX, we favour JPY, CNY (CNH) and have a pessimistic view on GBP.

We have made modest adjustments on our FX forecasts – CAD on oil

prices and GBP from Brexit risks.

Summary of Key Asset Class Views

Asia equity (particularly China / Hong Kong) Consumer staples sector Real estate sector (Honourable mention to healthcare and communications) JPY CNY or CNH

Government (sovereigns) rates Asia credit Investment grade fixed income

? US equities EUR (AUD and NZD to lesser extent)

Energy sector (Tech correction near-term) High yield fixed income (slightly) GBP

Source: HL Bank

Figure 1: Asset Class Dashboard

Level MTD (%) YTD (%)

Equities

MSCI World 2,327 -5.2 -1.3

S&P 500 3,298 -5.8 2.1

Euro Stoxx 50 3,137 -4.1 -16.2

China "A" 4,570 -5.1 11.6

China "H" 9,303 -6.9 -16.7

Hang Seng Index 23,235 -7.7 -17.6

Straits Times Index 2,472 -2.4 -23.3

Fixed Income

US 3M LIBOR (%)* 0.22 -0.023 -1.691

US 10 Year (%)* 0.65 -0.050 -1.263

SG 3M SIBOR (%)* 0.41 0.002 -1.367

US Investment Grade -0.2 5.1

US High Yield -2.4 -5.7

Asia Credit -0.8 3.8

FX

DXY 94.64 2.7 -1.8

EUR/USD 1.16 -2.6 3.7

GBP/USD 1.27 -4.7 -3.9

USD/JPY 105.58 0.3 2.9

AUD/USD 0.70 -4.7 0.1

USD/MYR 4.17 -0.2 -1.9

USD/SGD 1.38 -1.3 -2.3

Commodities

WTI ($/bbl) 40.25 -5.5 -34.1

Brent ($/bbl) 41.92 -7.4 -36.5

Gold 1,861.58 -5.4 22.7

Note, level as of 25 September close; * change in bps instead of %. Source: Bloomberg, HL Bank

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Updates to Chief Investment Office Themes

We update our Chief Investment Office Themes, reinforcing strong convictions on the Diversion and Volatility themes (2 and 4). We maintain our view of a weaker dollar, after some correction near-term. However, the economic recovery will be more gradual than what we thought three months ago. Technology has lost its “flavour of the month” status but remains relevant long term.

1. The “Great” Economic Recovery (Continue with less conviction)

At current levels, the economic recovery has hit some headwinds. Figure 2 shows that the recent PMI recovery among major economies is positive (above 50) but not improving further. We will likely need to wait some months before seeing clearer improvements in fundamentals. The global economic recovery needs to be synchronised. A vaccine for Covid-19 or a return to some normality can help with the recovery.

2. Supply Chain and Trade Diversion (Continue with more conviction)

US-China relations stay tricky as a potential “decoupling” is under way. This will likely increase demand for more production centres and regional trade linkages (cue Southeast Asia). Singapore’s non-oil domestic exports stay a supportive sector for economic growth despite headwinds.

3. Technology (Pause this theme)

Tech stocks has now entered bumpy ground after gaining earlier. Near-term, uncertainty and valuations will likely dampen a rebound in tech stocks. There may also be some rotation towards other less overvalued sectors.

4. Volatility to Stay (Continue with more conviction)

We said in June that this may come from threat of second waves in Covid-19 infections, US-China relations, and Asia geopolitics. These still matter. Now, we expect volatility to stem firstly from US elections.

5. Expect A Weaker USD (Continue)

We still expect a weaker USD as market sentiments improve, despite recent volatility. We expect the weaker dollar theme to persist in 2021. Our expectations of some dollar rebound late-2021 is likely to be postponed, given that the US will likely keep rates near-zero until 2023 earliest.

Market Implications

We maintain a similar approach for October compared to September’s edition. At this stage, diversification is likely needed to hedge between potential returns and risks.

Equities – US Volatility, Asia Opportunity

Asia equity, particularly China and Hong Kong – communications and technology, healthcare and financial sectors

Consumer staples sector: Less volatile than consumer discretionary (other honourable mentions include: healthcare, communications)

Real estate sector: Singapore REITs for instance, benefit from prolonged low interest rates in the US and Singapore

Figure 2: Economic recovery looks stretched at current levels (composite PMIs)

Source: Bloomberg, HL Bank

Figure 3: Stocks have recently corrected, dragged by the US

Source: Bloomberg, HL Bank

Figure 4: Sector performance MSCI World movements, by sector (%)

Source: Bloomberg, HL Bank

10

20

30

40

50

60

Jan-20 Mar-20 May-20 Jul-20 Sep-20

US Eurozone China

20,000

25,000

30,000

2000

2500

3000

3500

4000

02-Jan 27-Mar 20-Jun 13-Sep

S&P 500 STI Hang Seng (RHS)

-2.5-0.2

2.3-2.1

12.9-47.1

-25.02.0

-6.2-16.1

21.0-8.4

1.5

-60 -40 -20 0 20 40

MSCI WorldMaterials

CommunicationsConsumer Staples

Cr DiscretionaryEnergy

Financial ServicesHealthcareIndustrials

Real estateTechnology

UtilitiesMetals & Mining

YTD MTD

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? US equity: US election, US-China relations are key risk factors

Energy sector: Need a faster rate of economic recovery and oil prices to move higher than USD 45/bbl (technology sector will be a longer term play, watch for some nice price entry points)

Fixed Income – Prioritise Selectivity

Asia credit: Already at stretched levels, hence prioritise selectivity

Investment grade: Can be slightly positive during periods of risk aversion

Sovereigns: Low interest rates to stay (3m LIBOR forecast of 0.25% end-2020 and end-2021; 3m SIBOR forecast of 0.4% end-2020 and end-2021)

High yield (slightly): May be risky with volatility

FX – Volatile Clouds Weaker USD Trend

Figure 5 shows AUD and NZD have been the more volatile currencies in 2020. Alongside GBP, they will be vulnerable to USD strength if it persists near-term. In contrast, JPY and CNY (CNH) have been relatively stable.

JPY: Domestic stability post leadership transition, little likelihood of further stimulus, and possible global volatility (Figure 6)

CNY (CNH): Recent outperformer in fundamentals, China allowing stronger yuan (this may also benefit SGD to a lesser extent)

?

EUR: After strengthening previously, looking for next impetus for further strength; possibly dollar driven (similar for AUD and NZD)

USD: Huge and sustained long-term Fed accommodation to drive USD weakness. Near-term we expect some strength/volatility.

GBP: Looks adversely affected by risk of disorderly Brexit and Covid-19 management (Figure 7); forecasts revised down

Table: FX Forecasts

2Q-20A 25-Sep A 4Q-20 1Q-21 2Q-21 3Q-21 4Q-21

DXY 97.391 94.642 89.0 88.0 87.0 89.0 90.0

USD/CAD 1.3576 1.3386 1.31 1.30 1.29 1.31 1.33

EUR/USD 1.1234 1.1631 1.23 1.24 1.25 1.22 1.20

GBP/USD 1.2401 1.2746 1.29 1.30 1.31 1.29 1.27

USD/CHF 0.9473 0.9283 0.88 0.87 0.86 0.88 0.90

AUD/USD 0.6903 0.7031 0.75 0.76 0.77 0.75 0.73

NZD/USD 0.6454 0.6546 0.69 0.70 0.71 0.69 0.67

USD/JPY 107.93 105.58 103 102 101 103 105

USD/MYR 4.2863 4.1705 4.13 4.10 4.08 4.10 4.15

USD/SGD 1.3936 1.3776 1.34 1.33 1.32 1.34 1.35

USD/CNY 7.0699 6.8284 6.80 6.75 6.70 6.80 6.90

Note: Changes in read. Source: HL Bank

Figure 5: FX performances this year, using DXY highs (20 March) and lows (30 August)

Source: Bloomberg, HL Bank

Figure 6: USD/JPY vs. US-JP interest differentials

Source: Bloomberg, HL Bank

Figure 7: GBP/USD vs. UK-US interest differentials

Source: Bloomberg, HL Bank

2.4-2.6

-2.3-4.8

-2.2

-4.1-2.5

0.50.3

-0.9

0.3

-20 -15 -10 -5 0 5 10 15 20 25 30

DXY

CADEUR

GBP

CHFAUD

NZDJPY

MYR

SGDCNH

31 Dec to 20 Mar 21 Mar - 30 Aug

30 Aug - 25 Sep

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

95

100

105

110

115

120

125

Jan-16 Jan-17 Jan-18 Jan-19 Jan-20

USD/JPY US10Y-JP10Y

-2.0

-1.5

-1.0

-0.5

0.0

1.1

1.2

1.3

1.4

1.5

Jan-16 Jan-17 Jan-18 Jan-19 Jan-20

GBP/USD UK10Y-US10Y

Brexit referendum

Trump election

BOJ yield curve control

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