SINGAPORE (June 10): The outlook for 2H2019 is downbeat, as analysts see slowing growth — as a result of US protectionism — and shifting supply chains affecting markets. The Straits Times Index — which started 2019 at 3,068 — is still in positive territory. Although valuations are undemanding — Bloomberg has STI’s price-to-earnings ratio at 12.6 times and its price-to-book at 1.05 times — sentiment is fragile. For instance, the STI’s downward drift has taken it below its key 200-day moving average.
Most of the damage to the market was done when Chinese telecommunications giant Huawei Technologies was added to the Entity List by the Department of Commerce’s Bureau of Industry and Security on May 15, following an executive order from President Donald Trump that effectively bans Huawei from US communications networks.
Huawei’s supply chain is vast and many companies will inevitably have to either defy the US or change their business models.
While fund managers had articulated that they do not invest based on presidential tweets, as the Trump presidency wears on, investors are increasingly doing just that — investing on a tweet. “US President Trump’s tweets have always been closely monitored by market watchers for trading directions, as his tweets serve as obvious hints for market direction and often influence market directions,” notes Samuel Siew, an analyst at Phillip Futures, via email. “This was observed since the day he became president, when share prices of companies moved in response to his tweets.
The recent Sino-US trade [war] escalation was sparked off by two of his tweets, and markets reacted negatively.”
On May 31, in another off-the-cuff tweet, Trump said the US would impose a 5% tariff on all goods from Mexico if immigrants did not stop flowing into the US across its southern border. Separately, on June 1, the US revoked India’s designation as a developing nation. This eliminates the duty-free status of some 2,000 products from the country.
With the US seemingly provoking other countries into trade wars using tariffs, it is expected to further add to global trade tensions, leading to more market jitters, Siew says in a June 3 market update.
As the global supply chain shifts in response to US tariffs, global productivity growth is likely to be affected in the near term, Citi notes in an update on May 31. “China’s domestic growth momentum is weaker than the US’ going into these tensions, but China has greater ability and willingness to use fiscal space than the US,” says a Citi report dated May 31.
According to Citi, Taiwan, Korea, Singapore and Malaysia look relatively more exposed on disruption and income effects from the China-led slowdown. “It is hard to be constructive on risk assets in Asia at this juncture,” Citi says.
Rate cuts ahead, say analysts
US data such as manufacturing and services purchasing managers’ index has been lacklustre, while inflation has remained muted. “This has caused some US Federal Reserve members to consider the possibility of rate reduction towards the end of the year, and the same is indicated of US interest rate futures,” says Siew of Phillip Futures.
JP Morgan is also expecting rate cuts ahead as a result of slowing growth. “Following the recent escalation of trade tensions, we have revised down growth across emerging-market Asia, reflecting weaker sentiment, with its knock-on to global capex. We have also now pencilled in two cuts in the Fed funds rate by year-end, with 25 basis points in September and another 25bps in December,” it says.
One way to play the expected rate cuts is to buy US Treasuries. “We are overweight US Treasuries as a hedge against a protracted growth slowdown, or a scenario in which the Fed eases,” Citi says.
Siew has a different idea on how to play the Fed rate cuts should they materialise. “The current ongoing economic and geopolitical strife caused investors to be more risk-averse, and some have chosen to increase their cash buffer,” he says. “Such reactions could benefit safe-haven currencies — such as the Singapore dollar — which are not directly affected by the trade wars.”
Elsewhere, Siew expects further weakness for the renminbi. “A weaker renminbi may be beneficial for the Chinese economy, as it could offset the negative impact from the US tariffs,” he says. “China is also using a number of easing policies to protect its economy from the Sino-US trade war, which is expected to keep the renminbi supressed against the Singapore dollar.”
Outlook for equities downbeat
Siew reckons that equity indices are “still relatively on the high side with regard to valuations”. Yet, the economy is weaker than it was in 2018. “The rally thus far could hence be faux, and could have been driven by positive market expectations despite a negative backdrop,” he says.
Although 1QCY2019 corporate earnings beat expectations, this was partly because earnings outlook had been revised downwards earlier. “Should the global economic slowdown trickle down to corporates, or if poor earnings start becoming more apparent, fear could be sparked in the markets,” Siew warns. In addition, the effect of higher tariffs for a longer period may not have been fully priced in by markets.
Since trade tensions will lead to a rise in volatility, “a trading approach to capitalise on such volatility could benefit investors better”, Siew says. Alternatively, investors should also include yield assets (see chart) and safe-haven instruments (such as gold) in their portfolio, he adds.
