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COVID-19 isn’t just another economic crash, it is a global pandemic that has taken millions of lives and affected billions of people worldwide. The financial markets reacted accordingly, with one of the worst stock market crashes in March 2020, as major financial indexes such as the S&P 500 plunged more than 30% within weeks.
Singapore’s open and trade-centric economy contracted 5.8% in 2020 based on advance estimates shared by the Ministry of Trade and Industry (MTI). This makes it the worst recession in Singapore’s history, despite the government delivering unprecedented support packages worth close to S$100 billion over 4 national budgets in 2020.
While things are looking brighter in 2021, we still need to remain vigilant. Government stimulus measures in Singapore and globally have largely prevented economic collapse. However, this has driven interest rates back to near-zero levels.
Singapore and many other countries are starting their vaccination programmes and striving towards reconnecting to the world, once it’s safe to do so. Pockets of the economy are also emerging out of the doldrums, while new and old sectors are riding on digital trends in the new normal. However, risks of sudden rotations – in the sectors or asset classes that outperform – will continue. Through all of this, Asia has been put in the driving seat to steer the global economy out of the current lull.
Broader trends in sustainability and doing good – focusing on ESG – have also remained sticky, with an increasing number of investors preferring companies that seek good outcomes for society as a whole, rather than only maximising profitability.
There are both risks and opportunities for investors as the global economy restarts, resets and reopens. To help us identify some of the investment themes in 2021, we read the Asia Outlook 2021 report published by Fidelity International.
# 1 Low Interest Rates Will Likely Persist
While interest rates were creeping upwards pre-COVID-19, the pandemic has led many central banks including the Federal Reserve (U.S. Central bank) to cut interest rates to near-zero.
One reason is to encourage businesses and people to borrow to invest or consume, in order to get the economy going again. Another side-effect of this is that it increases the amount of money in circulation.
As pointed out by Steve Ellis, Global Chief Investment Officer (CIO, Fixed Income) at Fidelity International, in the Asia Outlook 2021 report , money supply (M2) growth is usually at 7% a year. Currently, it’s at 23%, a level not seen since the 1960s.
Source: Fidelity International, Asia Outlook 2021
At the risk of oversimplifying this, when money supply increases, it has an inflationary effect on asset prices. As we can observe around us, prices of properties, equities, bonds, gold and even alternative asset classes such as cryptocurrencies are rising. This may also extend to potentially rising consumer prices.
Even with vaccinations now available, we can expect interest rates to remain low in the near-term as the U.S Federal Reserve has pledged to keep interest rates near-zero until 2023.
In such an environment, sitting on cash isn’t an option as its value gets eroded by inflation. While the valuation or pricing of various asset classes, including equities and bonds have risen, there remain pockets of investment opportunities. ESG (Environmental, Social and Governance) and climate funds have outperformed conventional funds in 2020 and Fidelity’s Steve Ellis expects this to continue in 2021. “Funds like these are able to provide more secure income streams over the long term… quality credit issuers with high ESG ratings can offer a smoother return profile over the coming years than those with weaker ESG credentials.”
Steve Ellis also pointed out that “central banks must keep refinancing cost low”. However, this will make “the financial system more vulnerable to a sudden increase in yields, whether triggered by signs of inflation, better growth prospects or a policy mistake similar to the reduction in the Fed’s balance sheet that triggered a market tantrum towards the end of 2018.”
#2 Asia Could Be At The Forefront Of The Economic Recovery
When recovering from past recessions, Asian countries usually took the lead from major Western economies. However, in 2021, this may not be the case.
Many Asian countries seem to have done a generally better job in containing the COVID-19 outbreak. The benefit of this extends to the economy as it allows the country to recover more quickly.
As mentioned by Paras Anand, CIO (Asset Management) for Asia Pacific at Fidelity International in the Asia Outlook 2021 report, another “key trend that was already underway due to rising trade tensions is greater intra-regional reliance. The pandemic has only accelerated this phenomenon, with important parts of supply chains being brought closer to home in Asia, especially in China.”
In fact, despite being the first country to report the coronavirus in December 2019, China was one of the only economies in the world with a 2.3% GDP growth in 2020. In particular, Chinese e-commerce companies have done remarkably well in 2020, accelerated by COVID-19. While interest rates in China have been reduced slightly, it’s not to the extent of the rate cuts in the U.S, making Chinese bond yields particularly attractive in a weaker dollar and low yield environment.
According to Paras Anand, “across Asia as a whole, if current trends continue and the region does not suffer the setbacks of further waves of the virus, then the recovery is likely to broaden out. Countries that have been left behind such as India could catch up fast in 2021, with more value trades working in Asia than in Western economies due to the greater strength and more linear shape of the Asian economic recovery.”
#3 Environmental, Social & Governance Will Be In Focus
In the past, investors’ focus was usually on profitability, business growth and a strong balance sheet. While these are still essential factors for good companies today, what has become equally important are companies that do well on the ESG front.
The general idea behind ESG is that investors want to invest in companies that not only provide positive monetary returns, but also impact society and the environment positively.
The push to focus on ESG in investments can be seen in the Singapore Exchange’s (SGX’s) announcement in December last year that it would strengthen its commitment to sustainability with a S$20 million plan. Funds will go towards SG-focused products, services and platforms and into capacity building for the financial ecosystem, strengthening internal capabilities and increasing CSR (Corporate Social Responsibility) commitments. SGX also has its ESG stock rating, where it rates how well listed companies manage ESG issues that are material to their businesses.
Mapping out Asia’s place in the world of sustainable investing, Fidelity’s Paras Anand believes that Asia is catching up fast on ESG. “This creates an opportunity for Asian companies to add value not just in terms of continuing growth trends, as they have focused on in the past, but also in terms of attracting greater levels of investor capital through better sustainability characteristics.”
#4 Do We Need To Invest Beyond Traditional Asset Classes?
In the past, asset allocation typically comprises two main asset classes – equities and bonds, with some holding cash as a reserve.
As observed by Henk-Jan Rikkerink, Global Head of Solutions and Multi Asset at Fidelity International, in the Asia Outlook 2021 report, one thing that happened during the March 2020 crash was how many of the safe haven assets failed to provide the protection that investors expected.
But what should investors consider doing? Henk-Jan Rikkerink suggests some alternatives.
If we want a resilient portfolio, we have to constantly review the correlation of the assets we invest in. After all, if the point of investing in multiple asset classes is to enjoy the benefits of diversification over the long-term, we need to ensure that the investments we make are not highly correlated.
Are Markets Already At Their Peak?
With the pandemic still ravaging many countries, most of us know that the world’s economy is far from fully recovered. Simultaneously, equities, bonds and other asset classes are seemingly trading at a high valuation already.
So, what happens next?
Will these assets climb even higher when the global economy recovers from COVID-19? Or is the expected future recovery in the economy already priced into current asset valuations?
According to Romain Boscher, Global CIO (Equities) at Fidelity International, it is likely “that asset prices have shot ahead of earning expectations in 2020, thanks largely also to the fiscal and monetary response to the economic damage caused by COVID-19.”
Romain also mentioned in the Asia Outlook 2021 report that while investors are banking on a best-case V-shaped recovery, for example with expectations that the US$600 paid every week to US citizens will continue with the new US government, it’s possible that a “K-shaped outcome” may happen, “where valuations diverge sharply between those sectors and stocks perceived to be winners and those spurned as losers.”
We need to stay invested in 2021. However, we cannot ignore the fundamentals of a company we invest in. After all, high valuations in equities need to be matched by earnings and earnings growth. Unless earnings meet current expectations, stocks that are trading at a higher-than-usual valuation will be vulnerable.
Read Also: 4 Job Sectors In Singapore That Will Do Well In 2021
If you are keen to find out more about the various investment themes and what to look out for as an investor in 2021, we encourage you to read the Asia Outlook 2021 report by Fidelity. This will give you a better idea of some of the macro trends that we discussed in this article and other areas that may also be important.
Disclaimer: While we reference information found on the Asia Outlook 2021 report by Fidelity International, all views expressed are our own and not to be taken as financial advice offered by Fidelity International or DollarsAndSense.sg.
