1
28 September, 2020 Chief Investment Office
Markets Outlook
Jeff Ng Senior Treasury Strategist
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
2
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
3
? 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
4
Strategist’s Declaration
The strategist, analyst or economist (together “Strategist”) who prepared this report certifies that the opinions contained in this report accurately and exclusively reflect his
or her views about the securities of the listed entity or the currency involved, and that he or she has taken reasonable care to maintain independence and objectivity in
respect of the opinions in this report.
The Strategist who wrote this report does not hold any financial interests in the listed entity or the currencies referred to. The Strategist’s connected persons, (as defined
in the Securities and Futures Act (Chapter 289) of Singapore, do not hold any financial interests in the listed entity or the currencies referred to.
The Strategist does not receive compensation directly or indirectly related to the specific recommendations or views expressed by that Strategist in this research report.
The reporting line of the Strategist is separate from and independent of the business solicitation or marketing departments of HL Bank, Hong Leong Bank Berhad or
Hong Leong Group Malaysia.
The Strategist confirms that he or she, and the Strategist’s connected persons (as defined in the Securities and Futures Act (Chapter 289) of Singapore, does/do not
serve as directors or officers of the listed entity, and the listed entity or other third parties have not provided or agreed to provide any compensation or other benefits to
the Strategist and the Strategist’s connected persons, (as defined in the Securities and Futures Act (Chapter 289) of Singapore, in connection with this report.
General Disclaimer by the Bank
This report is for information purposes only and does not take into account the investment objectives, financial situation or particular needs of any particular recipient. The
information contained in this report does not constitute the provision of investment advice and is not to be regarded as an offer to sell or a solicitation of an offer to buy with
respect to the purchase or sale of any of the financial instruments mentioned in this report and/or to participate in any trading strategy. This report will not form the basis
or a part of any contract or commitment whatsoever.
The information contained in this publication is derived from data obtained from sources believed by HL Bank to be reliable and in good faith, but no warranties or guarantees,
representations are made by HL Bank with regard to the accuracy, completeness, correctness or suitability of the data. Any opinions expressed reflect the current judgment
of the authors of the report and do not necessarily represent the opinion of HL Bank or any of the companies within the Hong Leong Bank Group (“HLB Group”). The
opinions reflected in this report may change without notice and the opinions do not necessarily correspond to the opinions of HL Bank. HL Bank does not have an obligation
to amend, modify or update this report or to otherwise notify a reader or recipient in the event that any matter stated in this report, or any opinion, projection, forecast,
valuation or estimate in this report, changes or subsequently becomes inaccurate. The information contained in this report may be incomplete, condensed and it may not
contain all material information concerning the company or currency referred to in this report.
HLB Group, their directors, employees and representatives do not have any responsibility or liability to any person or recipient (whether by reason of negligence, negligent
misstatement or otherwise) arising from any statement, opinion or information, expressed or implied, arising out of, contained in or derived from or omission from the
reports or matter nor will any liability be accepted for any loss whatsoever that may arise from any use and/or reliance on this report. HL Bank may, to the extent permitted
by law, buy, sell or hold significantly long or short positions; act as investment and/or commercial bankers; be represented on the board of the issuers; and/or engage in
‘market making’ of securities or currencies mentioned in this report. The past performance of financial instruments is not indicative of future results. The value of and the
income that is produced by the financial instruments mentioned in this report may fluctuate so that an investor may get back less than originally invested. Whilst every
effort is made to ensure that statements of facts made in this report are accurate, all estimates, projections, forecasts, expressions of opinion and other subjective judgments
contained in this report are based on assumptions considered to be reasonable as of the date of the document in which they are contained and must not be construed as
a representation that the matters referred to therein will occur. Any projections or forecasts mentioned in this report may not be achieved due to multiple risk factors
including without limitation market volatility, sector volatility, corporate actions, the unavailability of complete and accurate information. No assurance can be given that any
opinion described in this report would yield favorable investment results. Recipients should seek the advice of their independent financial advisor before taking any
investment decision based on any recommendations that may be contained in this report. Any recommendation that may be contained in this report does not consider the
specific investment objectives, financial situation, suitability and the particular needs of a particular customer. This report is for the information of the addressee only and
is not to be taken in substitution for the exercise of judgment by the addressee who should obtain separate independent legal or financial advice.
Past performance does not always indicate future performance or future results. The value of any investment or income from any investment may go up as well as down.
All investments involve an element of risk including the potential to lose the entire amount that is invested.
HL Bank may provide hyperlinks to websites of entities mentioned in this report, however the inclusion of a link does not imply that HL Bank endorses, recommends or
approves any material on the linked page or accessible from it. Such linked websites are accessed entirely at your own risk. HL Bank does not accept responsibility
whatsoever for any such material, nor for consequences of its use.
This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any state, country or other jurisdiction
where such distribution, publication, availability or use would be contrary to law or regulation. This report is for the use of the addressees only and may not be redistributed,
reproduced, copied, duplicated or passed on to any other person or published, in part or in whole, for any purpose, without the prior, written consent of HL Bank. The
manner of distributing this report may be restricted by law or regulation in certain countries. Persons into whose possession this report may come are required to inform
themselves about and to observe such restrictions. By accepting this report, a recipient agrees to be bound by all limitations contained in this report.
This report is being distributed in Singapore by HL Bank (Company registration number S56FC1182L) to Accredited Investors, Expert Investors or Institutional Investors,
as defined in the Securities and Futures Act (Chapter 289 of Singapore). HL Bank is an Exempt Financial Adviser, as defined in the Financial Advisers Act (Chapter 110
of Singapore), and regulated by the Monetary Authority of Singapore. HL Bank is a branch of Hong Leong Bank Berhad, a limited liability company incorporated in Malaysia.
HL Bank holds a full bank license in Singapore. Hong Leong Bank Berhad is also a member of the Hong Leong Group Malaysia.