The English expression “May you live in interesting times” is said to be a translation of a traditional Chinese curse. While it appears to be a blessing, given the last few years where the year suffix BC now stands for “Before Covid” instead of Before Christ, perhaps investors may recognise that being unexciting may not be a bad thing after all.
For a greater part of the year, many analysts tried to squirm and wiggle their way through the “volatility” — a euphemism for the marauding bear that has pummelled major markets from the US to China. In contrast, the Straits Times Index (STI), inclusive of dividends, returned more than 7% last year. So, there is a lot to be thankful for and it was not all due to luck.
December was largely peaceful for most, except for the Ukrainians who had to endure continuous missile barrages from Russia and killer drones of Iranian origin. They were not the only ones though. Americans, already putting up with ageing infrastructure, endured yet another “once in a century” storm, grounding planes and bringing traffic to a standstill. Similarly, across the pond, Britons suffered from sky-high energy prices and strikes even as the cracking National Healthcare System soldiers on stoically.
For much of December, I was on the road. Back home for the last week of the year, it struck me how many Singaporeans have been moaning about their First World problems of higher inflation and GST, even as they jet off to Tokyo and Bangkok between Christmas and the New Year.
In the lead-up to the new year, crowds continue to throng the malls. Anecdotally, they were not there to beat the GST hike by snapping up big-ticket items but to form queues at mid-end restaurants or fill up the reservation list of high-end ones.
Presumably, the various government support packages have given some assurance that employment remains strong or, at the very least, should prevent the bottom from falling out of the economy. It was gratifying too that many have heeded the call to donate and enjoy some tax benefits in the Season of Giving.
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Rounding up
As this column had postulated in November, markets played a muted tune approaching the yearend. The US and Europe were weighed down by expectations of a recession this year and ended 2022 lower by 20%–30%. China and Hong Kong managed to avoid revisiting their October lows but the sharp recovery has since taken a pause.
Most recently, China’s rollback of its long-held zero-Covid policies led to the biggest reopening surge of the pandemic through Beijing, Shanghai, Chongqing and even rural China days before the Spring Festival travel season kicks off. As travel restrictions into China further eased on Jan 8, the prospect of Chinese revenge tourism is making me reconsider travel plans and forcing countries to evaluate whether to impose travel curbs, lest new variants emerge.
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When I declared Singapore the best-performing equity market of 2022, I was met with some objections. True, the Nifty 50 had a slightly higher percentage gain last year. However, it was not just STI’s 4% yield that made a bet on Singapore a better carry. India’s single-digit equity gain was more than offset by the rupee’s double-digit fall against the US dollar. With the Singapore dollar the strongest currency in 2022 alongside the US dollar, I stand by my assertion, unless one plans to retire in India.
The wild forex moves had afflicted markets elsewhere. For Singdollar or US dollar-based investors, currency movements added a 25% decline to the 10% fall in the Nikkei 225. It makes economic sense for Singaporeans to rush to travel as our dollar goes further. In another example, the Egyptian pound was 15 to the US dollar in 2019, pre-Covid. With the pandemic and the Ukrainian war, this net importer of wheat was squeezed hard by food inflation. The International Monetary Fund extended a loan in December and the official rate was 25 to the US dollar while the black market rate was as low as 30 to the US dollar when I was there in December. The strength of the Singdollar has also helped keep households here somewhat insulated from imported inflation while currency gains have helped offset surging freight costs for some imported goods and the cheaper euro kept prices of designer brands in check.
Pandora not Avatar
Readers of this column will know that I am home-biased and lucked out in 2022 largely because of an outsized allocation here. This year, I intend to “stay home” again as “interesting times’’ are seen to continue into 2023.
The McKinsey Global Institute describes three expanding and interlocking balance sheets of the financial sector, the financial system and the real economy at between US$500 trillion ($672.6 trillion) and US$600 trillion each, driving up real assets and networths to the highest levels relative to GDP historically.
While continued urban agglomeration and a shift to services had contributed to real estate being a growing store of value, debt levels peaked in early 2022. The resulting deleveraging from interest rate rises finally capped runaway property prices globally. The fluff that this column spoke about — including meme stocks, growth-at-all-cost business models and extreme crypto punts with no intrinsic value — accelerated during the pandemic. Indeed, once interest rates rose, there was blood in the markets across equity, debt and speculative assets.
McKinsey has identified four potential pathways that may take place in 2023 with the usual caveats that “different economies” may take “different paths”. Scenario 1 bets that economies will resume growing after 2022’s sharp pullback. Inflation is transitory, rates come down and GDP and paper wealth grow again like Goldilocks. Scenario 2 postulates productivity acceleration, where the real economy is supported by greener and cheaper sources of energy, together with macro prudential policy capping debt and asset price growth. GDP growth catches up with the global balance sheet as human innovation and ingenuity save the day.
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Scenario 3 paints an inflationary way out where higher and higher rates will curb asset price growth and debt formation while leading to fast nominal GDP growth — causing almost a stagflation like in the 70s. Last but not least, Scenario 4 is one where asset prices see a correction and deleveraging like in the US in the 1980s, with financial shock helping to reset further.
With that, will we end 2023 in a Japan post-bubble or the Keynesian Great Depression of the 1930s? Geeky economists like myself will recall the Paradox of Thrift, where well-meaning individuals save collectively, leading to shrinking output as no one spends and invests.
Look to the Rising Sun
I certainly hope that it will be the first two scenarios. Unfortunately, some pain from the sins of the past committed by Western markets and fluffy assets will continue to drag with shades of Scenario 3 if not 4 at least for the first half of the year. Growth and tech stocks are more likely to rise in China as it reconnects with the world post-Covid for the first two scenarios to take place and will outperform the STI (albeit from a lower base). Singapore’s fortuitous position economically and politically continues to support capital inflows, real assets and stock markets, which makes it a defensive weight with secular growth prospects still.
Although this is a consistent view, my epiphany — while trying hard to redeem saver tickets from Singapore Airlines last week a full year in advance — is that Japan will be the dark horse of 2023. Yes, I do have some First World problems too. The tea leaves look like this. For the first time since the bubble burst, Japan is experiencing domestic inflation. Its biggest tourism market, China, is starting to reopen. I dread that my search for zen trips to Japan will revert to the BC priority of avoiding overcrowded tourist attractions where possible. Already, Singaporeans, if not flooding one another’s Facebook feeds with photos of plates of gleaming sashimi or bowls of Ichiran ramen, are bumping into friends in person while catching the next shinkansen or on the ski slopes of Hokkaido. Add to that revenge travel from package tour Chinese nationals.
More significantly, Bank of Japan’s governor Haruhiko Kuroda in December signalled a shift from the three-decade-old policy on interest rates. Almost immediately, the yen appreciated by 3%–5%. There is 25% more to go to “normalise” BC. In 2023, Japanese exporters will continue to post a forex gain translating back overseas earnings to yen. Any slowdown in overseas demand could be offset by forex and also its relatively lower base in terms of market share versus the Koreans from 2021 or 2019. An uptick in domestic consumption and domestic demand, with a reversal of the rate cycle where the US Fed peaks and trickles down, will reverse any carry trades further strengthening the yen.
Although nominal real asset and stock prices do not have to go up, Singaporeans with a yen for a bargain, should not just be taking holidays there now. If it strengthens, perhaps we should hedge our future holidays with some choice investments there. On this track, a bit of SIA or SATS may work alongside REITs and business trusts with assets in Japan including Daiwa House Logistics Trust, Frasers Hospitality Trust and ParkwayLife REIT — or other companies which recently made acquisitions in Japan.
Unlike my profitable China call in early November which could be expressed through ETFs Lion-OCBC Securities China Leaders and Lion-OCBC Securities Hang Seng TECH, no Japan ETFs are listed on the Singapore Exchange, likely due to a lack of demand. Perhaps, it is time for one and sooner rather than later.
Chew Sutat retired from the Singapore Exchange after 14 years as a member of its executive management team. During his watch, the exchange transformed from an Asian gateway into a global multi-asset exchange and he was awarded FOW’s lifetime achievement award. He serves as chairman of the Community Chest Singapore
