SINGAPORE (July 1): The high drama and sudden moves of Singapore’s 2020 general elections may have enthralled the general public, but investors are unlikely to be moved by the republic’s unusual election. All eyes are instead turned to the US presidential elections in November, which analysts expect to have a greater impact on Singapore markets.
“From past [Singapore] election results, there is likely to be little, if no impact, on the economy and the market,” predict analysts Lim Siew Kee and Jeremy Ng from CGS-CIMB. Election fever appears not to have influenced markets yet with most sectors trading range-bound aside from utilities, which outperformed the market.
Deal-related stocks like PREH, SCI and YOMA saw the largest gains last month while JCNC, MCT and CT saw a difficult month. In terms of financial flows, institutional sell-off/retail accumulation persisted for the fifth straight month, with funds conducting broad-based selling in all sectors except technology. Outflows were the greatest in Financials, REIT and Telcos, but this was offset by increased retail investor demand for these sectors.
Bank of Singapore’s (BOS) Eli Lee and Conrad Tan note, however, that developments in an increasingly divided US could have a far greater impact on local economic performance. President Donald Trump’s approval rating continues to tank amid poor handling of Covid-19 and widespread protests against police violence against African-Americans.
BOS believes that a Biden win with a Republican Senate and Democratic house would be the most favourable outcome for markets. Lee and Tan are hoping for a more measured approach from a Democrat-controlled White House towards the US-China relationship while a Republican Senate would use its power of the purse to defend market-friendly Trump tax cuts. This would see not only a more stable global trading environment, so the reasoning goes, but also one where tax risks are likely to be minimal, helping investors maximise capital gains. Short of that, they claim that a second term for Trump would be the second-best outcome.
The outcome the analysts fear most is a Democratic clean-sweep of the Presidency and Congress, since this will likely lead to higher corporate and capital gains taxes. This is especially in light of growing apathy towards rising social inequality in the US, brought into stark contrast by the unequal access to healthcare across different socio-economic strata. With the Trump’s administration’s disastrous handling of Covid-19 brought into the spotlight, betting markets and polls in key states and risky Republican seats hint at a blue wave in November.
“Historically, the US election comes into focus as a market driver in the second half of election years. As we enter into the third quarter of 2020, rising odds of a feared Democratic sweep might prove to be a stumbling block for the torrid market rally which has so far been driven by unprecedented stimulus from policymakers and optimism over the post-pandemic economic rebound,” warn the analysts.
Covid catastrophe?
Adding to this uncertain situation is the rising number of Covid-19 cases, leading to speculation that a second wave is imminent. The situation remains uncertain in the US, with numbers climbing in US states like Florida, Texas and Arizona. Overall death rates, say the BOS team, currently paint a less worrying picture than the rapid infection rate: though the 7-day infection rate for the US-at-large excluding New York rising about 50% over the month to date, mortality rate has in fact declined by around 30%. This could slow the lifting of lockdown measures and by extension, the pace of economic recovery.
This uncertainty has made its mark on the Singapore economy. Despite the Straits Times Index finishing 79.16 points higher m-o-m (3.15%) following Phase 2 of circuit breaker lifting, Singapore’s non-domestic oil exports fell 4.5% y-o-y, with non-electronic exports declining 8.8% y-o-y. Petrochemical, food preparation and non-electric engines exports were the worst hit, but strong performance from electronics managed to offset these losses due to growing technology demand arising from Work-from-home policies. The biomedical industry, which has performed well over recent months, has experienced a 7% y-o-y decline in exports due to a high base year.
MAS predicts that FY20 GDP will fall 5.8% y-o-y in FY2020, with CGS-CIMB’s 4.9% contraction prediction not far behind. The chase for liquidity in these difficult times has seen a rise in home sales, with URA reporting that May 2020 home sales were up 75% m-o-m despite circuit-breaker measures making house viewing more difficult. Increased housing demand has largely been concentrated in the periphery and suburban regions, while demand in the more expensive core central region (CCR) saw a 50% m-o-m decline.
Technical analysis hints at market pessimism over the economic and pandemic pressure alike. The Straits Times Index (STI) tested a key resistance level of 2840 points with a 61.8% Fibonacci retracement level, with a sharp sell-off since 9 June illustrating a bearish complexion to Singapore markets. The index is back below the 20 and 60 day moving averages since 19 June and broke above its uptrend line in the last week of June -- omens of bad news ahead.
Lim and Ng reckon that this bearish momentum is set to continue as the STI drifts lower to the 2500 support area. Should STI break beyond this key psychological level, they expect markets to accelerate downwards with a downside target of a 2300 support level. Key overhead resistance levels of 2670-2720 will likely remain the ceiling for the STI.
Choppy waters
BOS recommends an asset allocation strategy that is firmly invested in the market, holding an overweight stance in fixed income by placing greater emphasis on emerging market (EM) high yield bonds. This will provide an attractive carry for investors in the present market landscape, defined by search-for-yield and relatively firm bottom-up fundamentals in certain areas.
In terms of equities, Lee and Tan expect the longer-term risk-reward cycle is likely to be sound as the global economy eventually transits from the Covid-19 recession and into its next expansionary cycle, prompting an equal weight stance on equities. Yet, the near-term is likely to see greater than average equity volatility, especially since valuations have priced in initial recovery to 2021. US elections and US-China geopolitical tension will likely only add to the state of uncertainty within financial markets.
To defend against increasingly volatile equity markets, Lee and Tan think that effective hedges must be introduced to anchor portfolios from violent headwinds. Good additions would be insurance (e.g. vanilla puts options) US Investment Grade Credit, hard currency EM bonds, gold, JPY versus USD and USD vs EM FX are all effective hedges against equity drawdowns.
The BOS analysts do not recommend aggressively leaning into equities at this juncture, seeing the present market as one for stock picking and selective purchases. In particular, they recommend cyclical and value names that remain undemanding in terms of valuations. Stocks that would benefit from a global economic reopening would also make good additions.
