Banking Privilege

A more favourable outlook in 2024

2024 is widely anticipated to be better than 2023 and suffice to say is off to a pretty good start. Rate cut expectations were still the main driving force for the move higher by risk assets last month, as can be seen by Wall Street which continued its move up after a monster rally in December last year. All three main bourses notched gains, with the Dow Jones up 1.22%, the S&P500 for 1.59%, and the tech-heavy Nasdaq Composite moderately at 1.02%. While risk assets appreciated, the bond market was relatively calm considering the current headwinds markets are facing; the 10Y US Treasury was trading stably at 3.9% for the whole of last month. With inflation expected to drop significantly in January, risk appetite remains strong amongst investors even though equity indices are currently at historically high levels. However, Jerome Powell had reiterated that rate cuts may not come as soon as the market expects it to initially, sounding hawkish enough to push rate cut expectations from March to May or June. From a growth perspective, developed economies are expected to experience slower growth this year.

In Europe, the European Central Bank (ECB) and the Bank of England (BoE) is expected to begin easing in the end of second quarter or early third. Inflation is still higher here than in the US but is on the right track according to their government and central banks.  On the geopolitical side, the ongoing war between Russia – Ukraine and Israel – Palestine remain a dampening sentiment for financial markets, although now have significantly lower impact in terms of market movement. However, if dragged too long, may spark new geopolitical tensions such as the proposed sanctions by the EU on several Chinese companies accused of helping and enabling Russia on its war efforts against Ukraine.

Moving East, China recorded its 4^th quarter 2023 GDP at 5.2%, up from 4.9% but still a bit lower than market expectation of 5.3%. The subdued growth, although pretty much in line with the government’s target, was driven by several factors such as the nation’s deflationary issue, weak consumer confidence, as well as the property sector ongoing crisis. More monetary stimulus and fiscal easing will be needed to revive the economy this year. In Japan, The Nikkei 225 index currently hovers in its highest since 1989, above the psychological handle of 35,000. Japanese Yen weakness has supported risk assets adamantly while the BOJ has yet to declare anything concrete in regard to their monetary tightening schedule.

Looking inward, domestic fundamentals remain strong. The recently released GDP numbers for Q4 2023 has surpassed market expectation, climbing from 4.94% to 5.04% in the last quarter of last year mainly driven by solid to robust consumption – with the central bank rate nudging higher last October until now at 6.00%, which last seen in mid-2019. From an inflation perspective, headline CPI slightly dropped from 2.61% to 2.57%, just slightly above the 2.53% estimate; still well in range with the government’s desired target. PMI Manufacturing for the month of January also went up from 52.2 to 52.9, confirming the business sector’s optimism as elections are just around the corner.

Equity

The JCI slightly declined in the first month of 2024, recording a drop of 0.89%. The move down comes after the bourse was able to notch a new all-time high record of 7,359.8 on the 4^th of January. From a sectoral point-of-view, the move down was led by the Technology and Healthcare sectors which dropped 6.93% and 4.33% respectively. The majority of local investors sought to exit from risk assets after the significant rally in the previous month. On the other side, foreign investors recorded quite a significant inflow – USD$534.2 million in just the first month of 2024. Domestic stocks are favoured as it is fairly more attractive compared to other EM risk assets. From a valuation perspective, the JCI currently sits at 15.4x P/E ratio and is considered quite a fair value given where the index currently trades at.

The early outcome of the recently held general election was cherished by markets as the number 02 candidate pair - Prabowo Subianto and Gibran Rakabuming Raka, eldest son of current President Joko Widodo dominated votes with a quick count result in most surveys at the range of 57 – 59%. With that achievement, the pair will be able to win the general election in just one round. Historically, quick count result has only little deviation with the real count result, prompting victory speeches and declarations by the candidates. For the equity market, this introduced a new kind of optimism as political uncertainty starts to fade. But what’s more important is that this victory means that there will be policy continuation – such as the capital city migration from Jakarta to Nusantara and focus on the down streaming industry. Foreign Direct Investment (FDI) is expected to increase in coming months which will help propel economic growth in the coming years.

Bond

Similarly, fixed income assets were also under pressure last month. At the start of the year, the 10-year government bond yield quickly jumped to around 6.72% before gradually going down, and finally closed the last trading day of January up 10bps from where it started at 6.58%. Nonetheless, volatility remains high as global central banks, including Bank Indonesia are starting about to start a new rate cycle down from where it currently is. However, it seems unlikely for Bank Indonesia to take a pre-emptive move to cut rates before The Fed – keeping in mind the pressure Rupiah has been facing these last few weeks due the Fed’s somewhat hawkishness. Foreign investors did neither collect nor sold domestic bonds significantly last month, netting only an outflow of USD$0.7 million. Even though Real Yields remain a big incentive for our fixed income assets, rising yields globally and a stronger dollar seem to be a challenge. Nonetheless, bond yields are still on a positive trajectory and is currently well positioned for new and existing investors who wish to add on to their fixed income portfolio as monetary easing is expected to start in a couple of months.

Currency

The Rupiah depreciated against the USD last month, with the currency pair USD/IDR trading at Rp15,783 by month-end. The greenback gained as much as 2% against the Rupiah in January as hawkish comments by The Fed officials keep investors’ rate cut expectations at bay. Markets are currently pricing in the first 25bps rate cut to happen either in May or June. Should The Fed feel the same way, Bank Indonesia would most likely follow in their footsteps in the third quarter of this year.

Juky Mariska, Wealth Management Head, OCBC Indonesia

GLOBAL OUTLOOK

A More Favourable Outlook in 2024

The economic outlook is set to be more favourable for financial markets this year compared to 2023. – Eli Lee

The economic outlook is set to be more favourable for financial markets in 2024.

First, inflation is falling fast. The global surge in goods prices during the pandemic has eased as supply disruptions have diminished. Similarly, the reopening boom in services is abating after central banks hiked interest rates rapidly in 2022 and 2023.

Second, the Fed and its peers are preparing to reduce interest rates as inflation falls back to their 2% targets. We expect the Fed will start cutting its fed funds rate from 23-year highs of 5.25-5.50% in June. We also expect the European Central Bank (ECB) and the Bank of England (BoE) to begin easing from the summer. The People’s Bank of China (PBOC) has already lowered banks’ reserve requirements in January. And, while the Bank of Japan (BOJ) is set to lift rates for the first time in nearly two decades, dovish officials are only likely to raise the BOJ’s deposit rate from -0.10% to 0% this year.

Third, easing inflation and interest rate cuts will support the outlook for bonds. We forecast 10Y US Treasury (UST) yields to fall back to last year’s lows of 3.25%. But faster declines in inflation will allow fixed income assets to provide positive real returns still.

Last, we expect the expansion of artificial intelligence (AI), and the prospects of more rapid productivity growth to buoy equity markets in 2024.

There are still risks to the outlook this year. The US, UK, Eurozone, China and Japan are all likely to suffer slower growth or even recession – as our table of GDP forecasts shows – as reopening tailwinds fade and interest rate hikes from 2022-2023 curb activity. The elections in 2024, above all else in the US, will also increase uncertainty. But falling inflation, central bank rate cuts, positive real returns for fixed income assets and enthusiasm about AI in equity markets are all likely to outweigh such concerns.

Investors should thus start 2024 with a moderate Overweight stance towards risk assets.

AS - Fed to dominate 1H2024, election in 2H2024

The Fed’s interest rate decisions are set to dominate the outlook for financial markets in the first half of the year, before attention turns to the November presidential election in the second half.

The Fed is almost certain to start reducing its fed funds rate from 23-year highs of 5.25-5.50% sometime in the coming months as inflation is falling fast back towards its 2% target. The central bank’s target measure of inflation – changes in core personal consumption expenditure (PCE) prices – has declined from four-decade highs of 5.6% in 2022 to 2.9% now after the Fed’s aggressive interest rate rises over the last two years.

Despite the decline in inflation, we think that Fed officials will be more cautious and wait for further evidence that inflationary pressures are fully abating before starting to gradually lower the fed funds rate from June by 25bps and again in September and December. We thus forecast the fed funds rate to fall to 4.50-4.75% by the end of 2024.

The decline in the Fed’s key interest rates is likely to benefit financial markets this year. We see 10Y US Treasury yields falling back to 3.25% as the table of forecasts shows. We also expect the Fed’s easing will support risk assets even if the US economy suffers a mild recession which remains our base case for 2024.

The outlook in the first half of this year is thus likely to be buoyed by the Fed.

In the second half, however, financial markets may be adversely affected if the polls show that former President Donald Trump is well ahead of President Joe Biden. We see four key risks here.

First, Trump is considering a 10% tariff for all goods imports. This would spark inflation, stop the Fed cutting rates and make the US Dollar surge. Second, a replay of his first term’s corporate tax cuts may spur equities but a larger budget deficit and spiking US Treasury yields could be a worse risk. Third, Fed independence may be threatened and, finally, uncertainty about the rule of law – if Trump targets opponents at home – and the global order if the US pulls out of NATO, may also hurt risk assets. Investors are thus likely to track US politics closely as November’s election draws closer.

China - Subdued growth

China’s growth continues to be subdued. The latest data shows the economy expanded by 5.2% in 2023. This was up from 3.0% in 2022 when lockdowns were still enforced. But even with last year’s tailwinds from reopening, GDP growth was still well below its 6.0% rate in 2019 before the pandemic emerged in 2020.

China’s outlook remains challenging after the shocks of 2020-2022: strict lockdowns, regulatory hits, property weakness, recessions abroad and geopolitical risks. Of the economy’s four engines for growth, consumers are cautious after three years of lockdowns, higher unemployment and falling property prices; investment is also being held back as business sentiment continues to be lacklustre; exports are constrained by weak demand abroad and government leaders are wary of taking on more debt.

This year, we forecast GDP growth to stay subdued at 5.0%. Officials have stepped up efforts to aid growth in recent months including more government spending, easier liquidity conditions from the PBOC and support for loans to property developers. But given the weakness of consumer confidence and real estate, fresh monetary and fiscal easing will be needed to stop growth sliding further and to revive the economy’s “animal spirits” this year.

Europe – Only slowly emerging from recession

Both the Eurozone and the UK suffered weak growth of only 0.5% last year. This year, we expect GDP to just expand by the same modest rates again. The energy shock from the war in Ukraine and the rapid increases in interest rates by the ECB to a record high of 4.00% last year and the BOE to 5.25%, caused Europe’s two largest economies to come close to a recession in 2023. This year, we expect the ECB and the BOE to start cutting interest rates from June and August respectively, providing support to financial markets. But with unemployment still very low after the pandemic and wage growth strong, we expect both central banks will only reduce interest rates in 25bps steps this year.

Japan – Dovish official bolster the outlook

Japanese stocks rallied in January 2024 as the return of inflation after three “lost decades”, corporate governance reforms and the weak Yen pushed the Nikkei 225 Index closer to its all-time high from 1989.

Financial markets are likely to stay supported by the BOJ. In January, the dovish BOJ left its deposit rate at -0.10% as widely expected. Following the shocks of the pandemic and the war in Ukraine, inflation has reached four-decade highs with core inflation around 4%. But the BOJ is keeping interest rates negative until it feels confident inflation will settle at its 2% target.

If Japan’s upcoming annual spring wage round is firm, we expect the BOJ to increase its deposit rate back to 0% from April. But officials are unlikely to make any further rate hikes this year while they wait to see if inflation will be able to stay around its 2% target in future. Thus, the BOJ is set to remain dovish throughout 2024 and keep supporting Japan’s financial markets despite it being the only major central bank likely to raise interest rates this year.

Source: Bank of Singapore

EQUITIES

Japan’s January

Valuations in Japan remain undemanding due to an attractive expected earnings profile, and we maintain our Overweight stance for Japan. – Eli Lee

US – Goldilocks expectations fuelling bullish investor sentiment

Prior to the latest reports from the US earnings season, consensus expectations were for earnings per share (EPS) growth of 3% YoY for the S&P 500 Index in 4Q23 - marking the first quarter of growth expectations since 3Q22. Like our observations in prior quarters, share prices of companies that disappoint on EPS appear to be more severely punished than those that have outperformed.

The outlook for US banks remains mixed as earnings growth could continue to be lacklustre this year amidst soft net interest income (NII) and loans growth in 1H24, although non-interest income could see a more meaningful recovery. Consumption still appears to be relatively resilient, as evidenced by comments from consumer-facing companies such as Visa and American Express. Within Technology, there have been several notable disappointments within the semiconductor space, although the sector could remain largely buoyant on the generative artificial intelligence (AI) narrative.

We continue to hold a Neutral weight position in the US at this juncture.

Europe – Hoping for an alleviation in Red Sea tensions

Since the Russian invasion of Ukraine in February 2022, equity fund flows into Europe have been negative, with domestic investors selling equities and allocating more to cash and bonds. But for every stock sold, there must be a buyer, so who has been buying? In net terms, the large buyer of European stocks was the corporate sector via buybacks.

But for equity flows to improve, economic performance and expectations are key. We are forecasting subdued economic growth of 0.5% for the Eurozone this year, while consensus EPS growth expectations of 5.3% looks vulnerable should Red Sea tensions result in a longer-than expected and more severe disruption in supply chains. On a more positive note, the European Central Bank (ECB) may start cutting rates around the middle of this year which would support valuations. We maintain Neutral on European equities.

Japan – Ready, set, go!

The Japanese equity market has had a bright start to 2024, with the MSCI Japan Index up 6.1% year to date (YTD) as of 26 January 2024 in Yen (JPY) terms, although returns were more muted at +1.0% in US Dollar (USD) terms given the depreciation of the JPY back to about the 150 level. Currency volatility is set to continue, but our house view on the USDJPY remains at 130 over a 12-month horizon. The decent performance of the MSCI Japan Index was likely underpinned by the weakening of the JPY and potentially higher retail participation in stock markets following improved tax incentives that came into effect on 1 January 2024 under the Nippon Individual Savings Account (NISA) scheme. Looking ahead, attention will be focused on the earnings season and commentaries during the Monetary Policy Meetings by the Bank of Japan.

Asia ex-Japan – Upgrading South Korea to Overweight

The MSCI Asia ex-Japan Index started 2024 on a sour note, declining as much as 7.3% YTD in mid-January before recovering some ground due to more policy easing measures announced by the Chinese government and media. We remain Neutral on Asia ex-Japan but we are monitoring developments emanating from China closely. Within the Index constituents, we are upgrading MSCI Korea by one notch to Overweight, while downgrading MSCI Philippines to Neutral at the same time.

China/HK – Balancing between growth and risk containment

The People’s Bank of China (PBOC) announced a 50 basis points (bps) reserve ratio requirement (RRR) cut and a 25bps cut for relending and rediscounting rates after the recent State Council meeting. The timing and the magnitude of the RRR cut were modest positive surprises. Also, it has been reported that a stabilisation package is under consideration, which could amount to CNY2.3t. If confirmed, it could help to boost market sentiment and liquidity in the near term. While the rate cuts alone may not be sufficient to address fundamental issues (e.g., the real estate downcycle, debt restructuring), it is an encouraging starting point, nonetheless. Follow-on measures involving a coordinated and comprehensive package would be needed to address these structural issues and support a sustainable re-rating of equities.

We are still of the view that consensus earnings estimates for the MSCI China Index looks optimistic and are likely to be vulnerable to a downward revision, especially going into the corporate reporting season in March 2024.

With China in transition and the US heading into a rate cut cycle, we advocate focusing on three key investment themes:

1. the proliferation of generative AI,
2. identifying quality growth and market leaders amid a bumpy recovery, and
3. yield plays to cushion market volatility.

Global Sectors - Information Technology and Communication Services lead the pack

The global sectors that have outperformed markets YTD are the Information Technology, Communication Services and Healthcare sectors, while the Materials, Real Estate and Utilities sectors have lagged. In Materials, after a December rally in the stock prices of mining companies, January saw a correction with the pull back in iron ore prices amidst a softer outlook due to Chinese demand. European chemical companies are also sounding caution on potential supply chain woes due to the Red Sea tensions. We believe the above factors are likely to continue to weigh on the broader Materials sector for now.

On the other hand, we remain constructive on US Tech as encouraging advertising trends.

BONDS

Fed policy to drive bond markets 

The timing and trajectory of the Federal Reserve’s rate policy will continue to be the primary driver of fixed income performance in 2024. – Vasu Menon 

We expect the timing and trajectory of the Federal Reserve (Fed) rate policy to be the primary driver of fixed income performance in 2024. Given their higher duration (interest rate sensitivity), Developed Markets (DM) Investment Grade bonds (IG) and US Treasuries should be well positioned to achieve solid returns in this year’s anticipated declining interest rate environment, and we therefore accord these asset classes Overweight recommendations. However, a Fed pivot and a resulting declining interest rate environment should be broadly beneficial for fixed income securities. Hence, we are Neutral on DM High Yield bonds (HY), Emerging Markets (EM) IG and EM HY.

Rates

While Fed rate cuts are on the radar, the key question remains about the pace and timing of rate cuts. From pricing in sharp 165bps of rate cuts in mid-January, the market has scaled back expectations. In addition, the market has also pared back sharply the odds of the first rate cut at the March meeting which stood at 90% in late December.

Developed markets

The current pause and anticipation of Fed policy easing in mid-2024 drives our Overweight recommendation for DM IG. With historically tight credit spreads, rates are now the primary driver of returns for DM IG. Given our expectations for lower US Treasury yields by the end of 2024, DM IG should be well placed to benefit given that the sub-asset class possess the highest duration amongst the credit classes under our coverage.

Emerging markets

We maintain a Neutral rating on EM HY and EM IG with a preference for the former. Favourable top-down factors including declining rates and a waning US Dollar should underpin performance. After two years of elevated defaults, we expect 2024 to return to levels that are more indicative of long-term averages. Finally, the EM HY space has also become more geographically diversified over the past several years, which should mute volatility going forward.

Asia

We maintain our recommendation of Asia IG and Asia HY at Neutral. Within IG, most issuers have relatively stable credit fundamentals and would continue to benefit from government ownership and implicit support. Within Asia HY, China HY Property outperformed YTD on supportive measures from the government, but the sector is still marred by mishaps i.e., Evergrande’s liquidation proceedings and the lack of sales recovery. Overall, higher carry of Asia HY and lower year-on-year (YoY) default expectations should support returns in 2024.

FX & COMMODITIES

Ample supply   

While simmering geopolitical tensions could support prices for now, ample non-OPEC+ supply, especially from the US, Canada, Brazil and Guyana, point to a looser oil market ahead.  – Vasu Menon

Gold

Gold prices have been range bound since the start of 2024 at just over USD2,000/oz, held back by a moderation in exuberant Federal Reserve (Fed) easing expectations.

Despite the choppy price action year-to-date, an eventual Fed easing, heightened geopolitical risks and strong central bank buying should benefit gold prices in 2024. While there is much uncertainty on the timing and extent of Fed rate cuts, the bigger picture is that the Fed looks set to ease monetary policy and US interest rates are likely to head lower in 2024. This is bullish for gold. Heightened geopolitical risks also supports the case for gold as a portfolio diversifier.

We expect central bank buying to continue, given economic risks and the prospects for a weaker US Dollar in 2024. The safe haven status of US debt has been brought into question by the recent credit downgrades. While gold exchange traded funds (ETF) continued to liquidate holdings of the precious metal in 2023, investors are expected to rebuild their gold allocations this year which should eventually manifest in a renewed increase in ETF inflows into gold.

Oil

Oil prices moved backed up over the past month on the back of elevated tensions in the Middle East. The Red Sea disruptions resulted in a rerouting of ships and tankers, which by themselves would not affect oil supply very much. But that changed after Houthi forces hit a fuel tanker carrying Russian refined oil products. The risk of the US getting dragged into the conflict is also rising following the drone strike on US forces at a military base in Jordan.

While simmering geopolitical tensions could support prices for now, ample non-OPEC+ supply – especially from the US, Canada, Brazil and Guyana - points to a looser oil market ahead. US oil production was aided by a strong increase in well productivity, despite limited growth in drilling activity. We reduce our 12-month Brent forecast to USD75/barrel from USD85/barrel previously. Supply management by the OPEC+ alliance, strategic restocking by China and the US, and a mild recession risk should limit the downside risk to oil prices. OPEC+ appears determined to prop up prices through supply cuts, and we expect supply discipline to stay in place throughout 2024.

Currency

The US Dollar (USD) traded in a holding pattern during the second half of January, following the rally seen in first half of the month. Markets were unwinding some of their aggressive bets on rate cuts by the Federal Reserve (Fed). The key message out of the recent Federal Open Market Committee (FOMC) policy meeting on 31 January was that the Fed endorses a pivot but at the same time, signalled that it is in no hurry to cut rates. Data-dependence remains key and should continue to drive USD volatility.

By the March FOMC, the Fed would have two more Consumer Price Index (CPI) readings to assess if they have greater confidence that inflation is moving towards its target. Overall, the Fed’s latest comments suggested that a May cut could be the base case, similar to what markets expect. Markets are pricing in about six rate cuts of 25 basis points (bps) each at every Fed policy meeting, starting in May till the end of year. We are still in favour of a weaker USD as the Fed is done tightening and should embark on rate cut cycle soon. Softer core PCE inflation data for December 2023 (2.9% y-o-y) and easing tightness in the US labour market reinforces how entrenched the US disinflation trend is. If the disinflation trend persists and labour market tightness eases further, this could cause the USD to trade on a backfoot. That said, the USD is not a one-way trade. It remains a safe-haven proxy. If the Global/China growth momentum sputters and geopolitical tensions escalate, we could still see the USD finding intermittent support on dips. Our bias is to sell the USD on rallies.

Better prospect in 2024

US equity rallied in November, responding to Fed’s decision to keep interest rate at 5.25 to 5.5%. During his speech, Fed Chairman, Jerome Powell quoted that current interest rate is slightly below neutral. This statement not only spurred the equity performance but managed to push the US Treasury 10Y yield lower to 4.3% at the end of the month. US inflation was released steady at 3.1% y-o-y. The dovish tone has pushed the rate cut expectation to come earlier in 2024, as US economy moves toward soft landing. During December FOMC, Fed pencilled at least three interest rate cuts in 2024, anticipating 1.5% in reductions in 2024.

Moreover, interest rate policy would not be the only supportive sentiment for US equity next year. US Presidential race, which will be held in November 2024, has been historically evidenced as positive catalyst for equity market. This euphoria would normally start few months prior to the electoral vote.

Moving to the other western counterpart, Eurozone is also seen to almost reaching end of the hike cycle. Equities rallied despite soft economic data. October inflation was stable at 2.9% y-o-y, unemployment rate was also steady at 6.5%. ZEW Economic Sentiment, which projects economic confidence index for the next 6 months, increased to 12.8 in December, compared to previous 9.8. The zone economy is projected to grow at 0.5% in 2024, slightly increased from 2023 estimate at 0.4%.

From the eastern part of the globe, rating agency, Moody’s cut outlook on China’s sovereign debt from stable to negative, while keeping the current rating at A1 level. Moody’s expected China annual GDP growth to slow to 4% in 2024 and 2025 and average 3.8% from 2026 to 2030. During this year alone, the government has introduced a number of targeted policies to support the property sector and propel the equity market. However, the effort has not been able to support sustainably. Fundamentally, manufacturing activity started to expand at 50.7, followed by improving retail sales at 7.6%.

Meanwhile from the domestic economy, Indonesia November inflation was released at 2.86% y-o-y. The stable inflation and Fed dovish tone have prompted the central bank to keep current benchmark rate of 7-day reverse repo rate at 6 percent. According to recent survey of Bloomberg analysts, Bank Indonesia will start lowering the interest rate in Q3- 2024.

Equity

Jakarta Composite Index, rallied 4.87% in November, led by technology and infrastructure sector by 20.51% and 19.52% respectively. The Organisation for Economic Cooperation and Development (OECD) estimated that the Indonesian economy would grow 5.2% in 2024 and would remain stable the following years. The positive outlook was seen as a continued result from this year improvement. Furthermore, starting at the end of 2023, all eyes are moving toward the presidential election, which will be held on Feb 14th, 2024. Historically, election period has been seen as positive catalyst for the equity market.

Bond

Following the developed market trend, the domestic bond market also improved in November, where US Treasury yield had moved lower. 10Y ID government bond yield declined from 7.1% to 6.62% at the end of November. Foreign investors booked net buy of IDR 23.5 trillion in the government bond market. The decline in oil price has also supported rally in the bond price.

Moving forward, government aimed bond issuance will reach IDR 666.4 trillion in 2024. The figure increased compared to 2023 at IDR 362.93 trillion. Maturing debt refinancing climbed marginally from IDR 482 trillion in 2023, to IDR 565 trillion in 2024. Fundamentally, investing in bond still offers attractive yield, that receives continued support from stable domestic inflation, potential rate cut in 2024, and the narrow deficit gap.

Currency

Rupiah moved stronger against the greenback by 2.36% in November, to IDR 15,510 per US Dollar. The US Dollar Index or DXY was down 2.47% to 103.49 in November. Coming into 2024, the dovish Fed will remain as sustenance for Rupiah against the US Dollar.

Juky Mariska, Wealth Management Head, OCBC Indonesia

Global Outlook

A pivotal year

In our base case scenario, as the lagged effects of higher rates continue to drag on US growth with fiscal policy turning less stimulatory, the US labour market and consumer confidence will further weaken. In this scenario, the US economy experiences a mild recession for two quarters in mid-2024 while core inflation eases below 3%. – Eli Lee

After a challenging 2023, the economic outlook will be more favourable for financial markets next year. Falling inflation and fears of recession are likely to make central banks pivot from rapid interest rate hikes to measured rate cuts in 2024. Risk assets are thus set to benefit from policymakers seeking to reflate their economies rather than aiming for further disinflation.

We think next year’s shift by central banks from tightening to easing is likely to be the key driver for financial markets, overcoming concerns of a recession and falling growth across the major economies.

United States

In 2024, we expect a slowdown in US activity and for core inflation to fall below 3% after the Fed’s rapid interest rate hikes over 2022 and 2023. The central bank will thus be able to start cutting its fed funds rate from June. The economy is likely to suffer a mild recession, contracting for two quarters in 2024.

Our base case for the Fed pivoting to rate cuts next year is supported by the following factors:

• Easing US consumer spending as excess savings built up during the pandemic run down.
• The Fed’s rate hikes are feeding through into the broader economy; US credit card delinquencies and corporate bond defaults are increasing as 2023 ends.
• US fiscal policy will be less stimulatory in 2024 amid bipartisan politics, as the Republican House of Representatives is unlikely to authorise fresh spending by the Democrat government ahead of the November elections.
• Rising unemployment; in December 2023, the jobless rate ticked up from 54-year lows of of 3.4% this year to 3.9% now.
• Inflation appears on track to return close to the Fed’s 2% target by 2025.

Core inflation as measured by personal consumption expenditure (PCE) prices has fallen from 5.5% in 2022 to 3.5% now. Once core PCE inflation falls below 3% in 2024, we expect the Fed will pivot from rate hikes to cuts, lowering its fed funds rate by 25bps in June, September and December.

We expect the US economy will still suffer a mild recession despite the Fed’s rate cuts so the combination of weaker growth and easier monetary policy is likely to lead to US Treasury (UST) yields falling substantially over the next 12 months as our forecasts in the table below show. We think our base case of quarterly rate cuts from June and a mild recession has a 50% probability.

We also think there is a 30% chance of a more market-friendly soft landing where the US avoids recession while core inflation falls below 3%, and a 20% probability of a hard landing where core inflation stays above 3%, preventing the Fed from easing and thus causing a deeper downturn in 2024.

Similarly, we expect the other major economies will also slow or suffer sluggish growth next year.

Eurozone / UK

Both are at risk of contracting in the second half of 2023 - under the impact of higher interest rates and energy costs from the war in Ukraine - and are only likely to slowly emerge from recession next year.

Falling inflation should allow the European Central Bank (ECB) to start cutting interest rates from its current record level of 4.00% from June 2024 and the Bank of England (BoE) from 5.25% in the second half of next year.

But we forecast GDP growth will still be only around 0.5% in 2023 and 2024 for both economies.

China

In 2023, China’s recovery been challenging, and we anticipate China’s uneven reopening from the pandemic to slow further in 2024.

Looser fiscal policy will help, and we maintain our forecast for GDP to rise solidly by 5.4% in 2023. GDP may expand slowly by 5.0% in 2024 with more fiscal, monetary and property easing measures still needed to keep growth supported.

But confidence remains low especially around the weak property sector. Exports are also likely face headwinds from falling global growth.

Japan

We think Japan’s economy will also slow in 2024 as this year’s tailwinds from reopening ebb. We also anticipate the Bank of Japan (BoJ) will finally exit its long period of negative interest rates in 2023 as inflation becomes entrenched in Japan.

Summary

Global growth overall may slow for the third year in a row in 2024 but with the Fed, ECB and Bank of England (BoE) pivoting to rate cuts, the economic outlook is set to turn more favourable for financial markets next year.

We recommend a modestly Overweight stance towards risk assets as 2024 starts, with a preference for high quality Treasury and corporate bonds in fixed income – as hedge against recession risks – and a modestly Overweight stance in equities as upcoming rate cuts support investor sentiment.

EQUITIES

Outlook largely favourable

In equities, we upgrade our overall stance from Underweight to modestly Overweight. We upgrade Europe from Underweight to Neutral, remain Neutral on US and Asia ex-Japan, and Overweight on Japan. We favour quality growth sectors, including Technology, and defensive value sectors, including Healthcare, Consumer Staples, and Utilities. – Eli Lee

US

We see cyclical pressures increasingly setting in from the delayed impact of prior rate hikes, declining household excess savings and tighter bank lending standards. On the other hand, robust operating metrics for large-cap tech firms looks set to continue, while generative artificial intelligence (AI) continues to be accretive to selected tech beneficiaries.

The presidential election could be a source of market volatility, though likely more pronounced only in 2H2024. We remain Neutral on the US at this juncture.

Europe

The European Central Bank (ECB) may finally cut rates in 2H2024, which would support risk assets. including European equities.

However, earnings growth is still expected to be muted, along with downside risks of a recession. Europe itself is also navigating a tricky geopolitical balancing act between China and the US.

Japan

We have an Overweight position in Japan as several drivers for outperformance remain: continued corporate reforms leading to increased dividends and share buybacks; an acceleration of cross-shareholding unwinding; higher retail participation given changes to the Nippon Individual Savings Account (NISA) scheme; and wage growth which could drive consumption and support higher prices, thus alleviating potential margin pressure.

We prefer companies with higher exposure to domestic consumption over exporters, and would also relook at the mega-cap Japanese banks and life insurance companies on share price pullbacks.

Asia ex-Japan

We maintain our Neutral rating on the MSCI Asia ex-Japan Index. The recent dips in the 10Y UST yield and oil prices, coupled with more aggressive policy easing measures by the Chinese government could provide some near-term support to share prices. However, rising risks of a recession in the US, uncertainties arising from elections in the region (Taiwan, Indonesia and India) and structural challenges in China are potential offsetting factors for 2024.

China/ HK

Despite recent macro data being mixed, the expectation of peaking US rates and therefore the stabilisation of US-China yield spread would help bring the focus back to companies’ fundamentals and support a trading rebound in the near term.

However, consensus earnings estimates for offshore Chinese equities appear to be optimistic and vulnerable to downward revision. We believe a sustainable re-rating would hinge on further coordinated policy support, a recovery in the real estate market and corporate earnings outlook.

With light positioning and undemanding valuations, risk-return could become more favourable if these concerns subside.

Global sectors

We advocate a mix of quality growth sectors (with names in the Communication Services, Information Technology sectors) and defensive value sectors (such as Healthcare, Utilities and Consumer Staples).

We favour companies with sustainable dividends and free cashflow yields especially going into 2024 where macroeconomic uncertainty is still prevalent.

As such, we are upgrading the Global Information Technology and Communication Services sectors from Neutral to Overweight. 10Y UST yields trending towards our target of 3.25% in 12 months without a deep recession in the US should be a constructive backdrop for Technology and long-duration risk assets.

Within Developed Markets (DM), we continue to be selective as valuations are not cheap given the

recent broad rally.

We are also upgrading the Global Real Estate sector from Underweight to Neutral on expectations that the Fed rate hike cycle is likely behind us, coupled with extreme negative positioning.

Finally, we are downgrading the Global Financials sector from Neutral to Underweight. Although we acknowledge that forward P/E for the sector is low, the cyclical nature of the sector typically leads to share price underperformance during recessions. Headwinds from more stringent regulatory capital requirements and thus higher capital buffers, muted loans growth, credit quality concerns and uncertain recovery prospects of capital market activities keep us on the sidelines.

BONDS

Waiting for policy easing

In fixed income, we remain Overweight on Developed Market Investment Grade bonds and upgrade our Underweight position in Developed Market High Yield bonds to Neutral. – Vasu Menon

With the Federal Reserve expected to pivot to rate cuts by June 2024, US Treasury (UST) yields would rally significantly and be poised for returns of up to 12% in 2024. Although we see the risk of near-term volatility, we expect 10Y UST yields to settle lower at 3.25% over the next 12 months. We thus recommend extending duration, favouring maturities in the 8-15Y bucket.

Developed Markets Investment Grade

We maintain our Overweight recommendation on the back of a mild US recession and a 12-month forecast of 3.25% for the 10Y UST yields. As the credit asset class with the highest duration, it should be the major beneficiary once Fed policy easing commences, likely in the 2H2024. Furthermore, as yields are still attractive on a historical basis, it should benefit from a rotation out of cash-like assets during the policy easing cycle.

Developed Markets High Yield

We are upgrading our recommendation to Neutral and expect returns of 8-9% for the next 12 months. While we expect defaults to increase, and spreads to widen modestly, starting yields above 8% should provide a significant buffer. Finally, maturities for 2024 remain modest, which should provide a positive technical backdrop for the asset class.

Emerging Markets

We maintain a Neutral rating on EM HY and EM IG with a preference for the former. The EM HY space has also become more geographically diversified over the past several years, which should mute volatility.

Asia

Demand from the onshore Chinese market and attractive all-in yields are market technicals that should support the Asian bond market. We revise our recommendation of Asia IG and Asia HY to Neutral from Underweight. Within IG, most issuers in the segment should have relatively stable credit fundamentals and would continue to benefit from government ownership and implicit support.

Summary

Policy easing is likely to begin in the 2H24. Hence, we maintain our Overweight call on Developed Markets (DM) Investment Grade (IG) and US Treasuries (UST), which should be major beneficiaries of a more dovish Fed policy. We upgrade our call on DM High Yield (HY) to Neutral and maintain our Neutral calls on Emerging Markets (EM) HY and EM IG. We remain cautious of China HY property on concerns over the sector’s long-term fundamentals.

FX & COMMODITIES

A gradual descent

A more entrenched disinflation trend and further easing of labour market tightness and activity data in the US in 2024 could weigh on the greenback. – Vasu Menon

Gold

Gold’s respectable performance is likely to extend into 2024. Being a long duration zero coupon asset, investment demand for gold will benefit from a weaker US Dollar environment and lower US Treasury (UST) yields as the Federal Reserve (Fed) starts its easing cycle in mid-2024.

Declining US real interest rates are set to push gold prices to a new nominal high of US$2,200/oz by end-2024. Gold should be supported by robust central bank buying activity.

Gold also looks compelling as a reliable diversifier against a potential increase in geopolitical risk and a crowded global elections calendar in 2024. Many of these elections will be relatively routine affairs but there can be surprises. The US presidential election in November, and Taiwan’s election in January are among the key ones to watch.

Oil

Our Brent oil price assumptions remain at US$85/bbl for end-2024. The recent decline in prices is driven by concerns over: (i) slowing global economic growth, and thus oil demand, as the sharp rise in interest rates bite and (ii) stronger than expected non-OPEC+ production.

However geopolitical factors, such as the Israel-Hamas and Russia-Ukraine conflicts, and OPEC+ discipline are set to help place a floor under crude oil.

OPEC+ agreed to make 2.2mb/d of supply cuts recently. Incremental voluntary cuts add up to 900kb/d, of which 200kb/d from lower oil products exports from Russia and 700kb/d spread between six OPEC+ members. The cuts will be in place through 1Q2024, when global oil demand is seasonally the weakest. OPEC+’s move again underlines determination to defend an oil price floor around USD80/bbl.

Currency

The US Dollar (USD) index fell by 3% in November. The USD narrative is starting to shift, led by softer US data.

We remain biased to adopt a “sell-on-rally” for the USD. The extent of USD decline is highly dependent on: (i) how much markets expect the Fed to cut rates by; and (ii) the timing of the first rate cut. That said, even with US Treasury yields easing, the USD still retains some degree of yield advantage and is a safe haven proxy to some extent.

The Euro (EUR) appreciated by 3.2% (versus the USD) in November, riding on the USD’s pullback and the ECB’s hawkish rhetoric. Over a broader time-horizon, we still see room for the EUR to recover as the USD adjusts lower on the shifting USD narrative.

The Pound (GBP) rose sharply (4% versus the USD) in November on a combination of drivers, including hawkish BOE rhetoric and not-as-bad-as-feared UK data and government finances. We are mildly constructive on the GBP’s outlook with UK demand growth proving resilient. Potential BOE-Fed policy divergence would be supportive of the GBP.

Troubling Times

Global risk assets were under quite heavy pressure in the month of October. In the US, the Dow Jones, S&P500, and NASDAQ each recorded decline of -1.36%, -2.20%, and -2.78% respectively. The FOMC Meeting held in September echoed higher for longer interest rate environment, also putting pressure on fixed income assets. The US Treasury was briefly seen hovering at 5.018% on the last trading day of last month. However, the narrative had changed during November FOMC Meeting held at the beginning of the month, in which The Fed decided to maintain its Federal Funds Rate at 5.25% - 5.50% as widely anticipated by market participants. The move was supported by several economic indicators that had shown signs of softening, such as the unemployment rate which climbed to 3.9% while inflation remain relatively high.

Moreover, the ongoing geopolitical conflict between Israel and Hamas also weighed on global equities, especially in the US. The first attack, launched on the 7th of October have ignited a war that is very much still ongoing right now with both sides launching retaliatory attacks. However, this conflict should not prompt significant increase in the oil price, since both countries are not major oil producers, therefore oil was seen trading at US$82.11/ barrel at the end of October.

With that being said, Eurozone inflation also improved as commodity prices moderated, currently at 4.3% - a reading that is in line with market expectation. This has prompted the European Central Bank to hold rates at their last meeting at 4.5%. The ECB does not see any urgency right now to hike rates again as inflation is starting to come down quite successfully and is well within expected trajectory. Not only that, PMI numbers from the manufacturing and services side also improved last month although still in contractionary territory, at 43.7 and 58.6 respectively.

In Asia, major bourses also recorded declines last month and this can be confirmed by the -4.11% drop by the MSCI Asia Pacific ex-Japan index. High economic uncertainty in China is still the main driver for the move down by risk assets. The ailing property sector is still one of the mostly watched theme, even though the government have provided multiple stimulus while maintaining its loan prime rate at relatively low levels, 3.45% for the 1-year and 4.20% for the 5-year. However, sentiment surrounding the property sector remain dampened with no signs of reversal just yet.

Domestically, Bank Indonesia surprised investors by hiking its 7-day reverse repo rate to 6.00% at their last meeting. The 25bps hike was done to maintain the exchange rate stability between the Rupiah and the Greenback, in lieu of the domestic currency depreciation towards Rp 16,000/USD. In addition to that, the rate hike was also meant to maintain the spread between Bank Indonesia and The Fed’s main interest rates.

Equity

The JCI dropped for as much as -2.70% in the month of October in line with the other global equity markets. The move down was led by the technology and transportation & logistics which recorded significant declines, down -11.08% and -9.34%. The move lower by domestic equities was also driven by foreign outflow, which as of end of last month amounted to USD$ 865.2 million. Amid high economic uncertainty in developed markets, Indonesia’s economy is still projected to grow 5.0% to 5.3% this year. Moreover, with elections coming up next year, several sectors in the economy will be positioned for more advantage, which includes the financial, infrastructure, and industrials sector.

Bond

Similar to what happened in developed markets, domestic bond market was also under pressure last month along with the move up also by the US Treasury yield. The 10-year government bond yield also climbed, at one point reaching its highest at 7.26% around the 24th of October post Fed hawkish commentary. This was also another contributor to the 25bps rate hike done by Bank Indonesia to 6.00%. With growing uncertainty in the fixed income class, short term volatility may still be quite high.

Nonetheless, the prospect for bond market remain attractive from a fundamental perspective as the year issuance by the government is currently lower than initially planned, with improving current account deficit, moderating inflation, and relatively low foreign ownership on domestic bonds (currently stands at 14.77%), the current volatility is believed to be short-lived. From a portfolio point of view, investors should remain selective while staying invested on fixed income assets.

Currency

The Rupiah depreciated against the US Dollar quite significantly last month, down 2.71% to Rp 15,885 by month-end. The depreciation comes along the move up by the Dollar Index (DXY) against all major currencies which was on average of 106.8 level for the whole month of October. In the short term, volatility may persist in the midst of elevated global economic uncertainty and the higher for longer narrative by The Fed.

On the other hand, foreign reserve for October was recorded at USD$ 133.1 billion, equivalent to 6 months’ worth of imports and foreign debt payments. Bank Indonesia had reiterated their commitment to maintain the exchange rate stability of the rupiah through various macroprudential and payment systems, such as the Local currency Settlement (LCS), the Domestic Non-Deliverable Forward (DNDF), and the Foreign Exchange Export Proceeds (DHE).

Juky Mariska, Wealth Management Head, PT Bank OCBC NISP Tbk

GLOBAL OUTLOOK

Troubling times

Over the next 12 months, we are concerned that the growth outlook for the global economy will face significant uncertainties from tighter financial conditions, waning pandemic savings and peaking US government spending.

– Eli Lee

The economic outlook continues to be challenging for financial markets.

First, 10Y US Treasury (UST) yields have reached 5.00% for the first time since 2007.

The Federal Reserve (Fed) has paused its interest rate hikes since raising its fed funds rate to 5.25-5.50% in July. But the central bank continues to warn it may need to increase rates further still to curb inflationary pressures.

UST yields are also being supported by the surprisingly strong US economy. In 3Q23, GDP expanded at a rapid 4.9% annualised rate - despite the Fed’s interest rate hikes over the last several quarters - as consumption stayed buoyant. In addition, large-scale borrowing by the US Treasury to fund the federal government’s major budget deficit of 8% of GDP is pushing up bond yields too.

In the near term, UST yields are likely to stay volatile for the rest of the year while the Fed keeps its hawkish bias that interest rates may still be raised further. We also expect the central bank will maintain its fed funds rate at 5.25-5.50% for as long as next summer to keep pushing inflation back towards its 2% target.

But over the next 12 months, we are concerned that tighter financial conditions, waning pandemic savings and peaking government spending will cause the US economy to fall into a recession by contracting for two consecutive quarters during 2024.

We thus expect UST yields will be substantially lower over the next 12 months as our forecasts in the table shows. We also anticipate the Fed will respond to recession by starting to cut interest rates each quarter by 25bps from the middle of 2024.

The second risk to the outlook is the outbreak of war in Israel and Gaza. The conflict is already keeping energy prices at elevated levels. But if other countries become embroiled across the Middle East, then oil prices could surge above USD100/barrel as occurred last year when Russia invaded Ukraine.

Third, recession fears continue to cloud the outlook for Europe. October’s purchasing manager indices (PMIs) - an important measure of business sentiment, indicate activity may contract in both the Eurozone and UK in the second half of the year after the European Central Bank (ECB) pushed interest rates up to a record 4.00% and the Bank of England to 5.25% to curb inflation.

We forecast the Eurozone will experience declining GDP for both 3Q23 and 4Q23. The region is therefore set to suffer recession for the first time since the pandemic emerged in 2020.

Fourth, China’s uneven reopening from the pandemic is also weighing on the outlook.

This year, China’s recovery has been challenged by confidence faltering after the shocks of 2020-2022: strict lockdowns, regulatory hits, property weakness, recessions abroad and rising geopolitical risks. Thus, almost all of China’s engines of growth – consumption, investment, local government spending and exports – have been under pressure, and fears have grown that insufficient demand will cause the economy to fall into a deflationary trap. In September, China’s consumer price index (CPI) inflation was 0%.

In contrast, the central government is the only actor in the economy with low debts and able to increase spending significantly, bolster demand and ensure China does not suffer prolonged deflation as Japan experienced during its “lost decades”. In a key announcement last month, China’s National People’s Congress standing committee approved CNY1t in additional central government bond issuance to support infrastructure investment.

By taking the rare step of lifting its fiscal deficit within the year from 3.0% to 3.8% of GDP, the government is set to become a crucial engine of growth with CNY500b from its new bond issuance expected to be deployed in 4Q23 and the other CNY500b during 2024.

We therefore anticipate China’s official GDP target for 2023 of “around 5%” growth will be met and maintain our forecast for GDP to expand by a solid 5.4% this year compared to just 3.0% in 2022.

But confidence remains low especially around China’s weak property sector. October’s official PMI survey deteriorated. Thus, despite the surprise increase in the central government’s budget deficit for 2023, more measures may still be needed to stop sentiment sliding further. For example, mortgage restrictions on real estate purchases could be eased further or banks’ reserve requirement ratios (RRRs) lowered again.

The fifth risk to the outlook comes from the Bank of Japan (BoJ) preparing to exit its long period of negative interest rates as inflation become entrenched in Japan.

We do not expect the BoJ to increase interest rates until next year. But a hasty exit would shock global financial markets by causing Japanese government bond yields to soar and push UST yields higher too.

Investors should therefore maintain an overall cautious stance given the uncertain economic outlook as year-end approaches.

Source: Bank of Singapore

EQUITIES

Cloudy outlook

In equities, apart from our Neutral rating on the US, we remain Neutral on Asia ex-Japan, Underweight on Europe, and Overweight on Japan. In terms of equity sectors, we continue to favour Healthcare, Consumer Staples, and Utilities. – Eli Lee

The market turned more risk averse in October and investors’ jitters were clearly seen during this 3Q23 earnings season. Earnings have been mixed so far, and market reactions to strong results performances were generally overshadowed by cautious sentiments around higher rates and economic uncertainty. Similar to what we saw during the 2Q23 results season, companies that reported earnings beats saw a smaller boost to share prices while those that missed expectations experienced larger negative price moves.

Rising tail risks from the conflict in the Middle East, along with an uncertain growth outlook with record high interest rates reaffirm our Underweight stance in equities, and we maintain our Underweight rating for Europe, Neutral rating for the US and Asia ex-Japan, and Overweight rating for Japan. We are keeping a close eye especially on China, where the authorities have been pushing out easing measures to support growth.

US – Running into significant uncertainty ahead

The US earnings season is now underway with more than 75% of S&P 500 companies that have reported have registered earnings per share (EPS) beats. However, unlike previous quarters, beats do not appear to be significantly rewarded (from a share price perspective) while misses have been penalised relatively heavily. We continue to lean defensive and maintain our preference for sectors such as consumer staples, utilities, and healthcare.

Europe – Unattractive risk-reward profile

As of 27 October, about a third of European companies have reported 3Q23 results and only 27% of these companies have beaten consensus expectations at the top line versus 40% that have missed. Meanwhile, as is typical in mid-October, EU governments have submitted their 2024 draft budgets to the European Commission (EC). About seven countries plan to breach the 3% budget deficit limit in 2024, and attention is likely to turn to how strictly the EC will apply the rules. Overall, fiscal consolidation is likely to weigh on growth going forward.

Japan – Policy direction the key market focus

The MSCI Japan Index suffered negative returns in both US Dollar and Yen terms for the month of October, which was unsurprising given higher geopolitical tensions and the spike in long-term rates with the US 10Y Treasury (UST) yields breaching 5%. Idiosyncratically, we are seeing a push for more positive corporate reforms in Japan, as the Tokyo Stock Exchange recently announced that it will begin to publish a list of companies that have responded to its requests on corporate governance reforms, starting from 2024.

Asia ex-Japan – Focus on upcoming earnings season

Market sentiment was the continued downward earnings revisions by the street, with the MSCI indices of Hong Kong, China and Taiwan seeing the largest consensus EPS cuts for 2024 estimates over the past three months. On the other hand, Indonesia, Philippines and Korea received upward revisions to their 2024 EPS estimates during the same period.

There were no major surprises on the central banks front in the region, except for Indonesia, where Bank Indonesia (BI) unexpectedly raised its benchmark rate by 25bps to 6.0% in October despite preliminary headline inflation coming in at 2.3% on a year-on-year (YoY) basis, with a clear downtrend. This was BI’s first hike since January 2023.

China/HK – Effectiveness of easing measures in focus

The Hang Seng Index and MSCI China Index fell by around 2-3% last month, performing largely in-line with the broad Asia ex-Japan market.

China’s policymakers sent out further signals to support growth momentum with a fiscal budget expansion within a year and the approval of the issuance of an additional CNY1t sovereign bond (CGB). The format of budget revision within a fiscal year is a rare move and is a positive surprise. It would lift fiscal deficit to 3.8% of GDP. Coupled with what the “National Team” purchases in the A-share market, it has sent a strong signal that growth is a top priority and should be supportive to market sentiment.

BONDS

Advocate a barbell strategy

Although we believe that long-dated yields will settle at lower levels in 12 months, we cannot rule out further overshooting and volatility in long-dated yields in the meantime, which means that longer dated Investment Grade bonds can provide more long-term appreciation potential but with greater volatility. – Vasu Menon

In fixed income, we favour Developed Markets (DM) Investment Grade (IG) bonds which tend to be hedges against recession and geopolitical risks. While longer-dated UST yields could remain elevated and volatile, we believe that they will settle at lower levels in 12 months. We advocate a barbell strategy in terms of duration: the short-end of the curve offers attractive carry opportunities, especially for hold-to-maturity investors, while the long-end of the curve offers greater long-term price appreciation with higher volatility.

October was another month where the rise in rates dampened performance in the fixed income asset class. Credit spreads which have been relatively resilient for the most part, have shown signs of weakness in the latest rounds of rates sell-off, along with geopolitical concerns and energy prices. US 10Y Treasury yields breached 5% briefly in October while the 30Y yield hit 5.17%. Financial conditions continue to tighten and the full effects of the policy lag will eventually be felt in various parts of the market. Our house view is the US will enter into a recession in 2024, pulling 10Y US Treasury (UST) yields back to 3.25% over the next 12 months. We continue to prefer duration over credit; and prefer Investment Grade (IG) over High Yield (HY) bonds.

Negative returns

Returns were negative across the asset class with the biggest underperformance in Developed Markets (DM) HY (-1.5%) and DM IG (-1.3%) as compared to Emerging Markets (EM) IG (-1.1%) and EM HY (-1.2%). Spread movements were more muted in DM; with DM IG widening 5bps while DM HY 6bps wider. In EM, IG spreads widened by 15bps while EM HY 45bps wider.

Developed market bonds

A combination of elevated bond yields, mixed 3Q23 earnings, weaker guidance, geopolitical concerns and high oil prices have weighed on both the DM IG and HY universe. Year to date (YTD) total return dipped into negative territory given higher rates and wider spreads.

Emerging market bonds

Spreads in EM bonds widened last as market sentiment and liquidity deteriorated. We retain our preference for IG over HY amidst global macro uncertainty and the implicit support of a high percentage of quasi-sovereigns (around 35%) in the EM IG Universe.

Asian bonds

We maintain an Underweight in EM Asia. We continue to prefer IG over HY within Asia, with a preference for short-term carry within IG as we await rates stabilisation. Investors should stay nimble on duration as rates remain volatile. As for HY, we reiterate staying with quality names and favour non-China HY with fundamentally strong credits and low refinancing risks.

FX & COMMODITIES

Gold: A risk diversifier

The risk of geopolitical escalation bolsters the case for gold, but our positive view for gold in 2024 hinges more on the Fed rate hike cycle nearing an end. This will result in retreating US yields, reducing the opportunity cost of gold. – Vasu Menon

Gold

The risk of geopolitical escalation led to the flight to safety that bolstered gold’s strength. Fear that the Israel-Hamas conflict could escalate into a regional conflict has been growing, and diplomatic efforts to contain it have stepped up.

The influence of geopolitics is made clearer given that the rally in gold has been concurrent with a back-up in US yields. The extensive rise in US Treasury bond yields and a stronger US Dollar previously dragged gold prices to a low of USD1,820/oz in early October. However, this weakness was abruptly reversed as the threat of a broader Middle East conflict escalated, giving gold a strong haven demand bid. Gold’s role as a geopolitical risk hedge could keep prices supported for now. But gold’s geopolitical risk premium tends to be volatile, is not typically a durable medium-term driver for prices and could prove fleeting. Our positive view for gold in 2024 hinges more on the Fed rate hike cycle nearing an end. This will result in retreating US yields, reducing the opportunity cost of gold.

Oil

Oil prices have reversed higher since June on tighter supply. Supply tightness was visible following multiple rounds of OPEC production cuts and signs that Russia is making good on its pledge to curb exports. Our view is that oil prices could stay elevated and may test USD100/barrel this quarter as we expect the crude market to remain in deficit. Tensions in the Middle East due to the Israel-Hamas conflict add to a war risk premium in crude prices given the risks of escalation. Still, lower oil prices may be in store for 2024, with oil prices likely to ease back toward the mid USD80s/barrel in a year’s time.

However, there are two key risks that could push oil prices much higher for longer. First, there are concerns that if Iran is drawn into the conflict, this could result in a stricter enforcement of US sanctions on oil from Iran. Second, the attack by Hamas on Israel has raised geopolitical tensions in the world’s largest oil-producing region. An escalation of hostilities to neighbouring regions may impact Saudi Arabia’s willingness to raise oil output.

Currency

The US Dollar (USD) index was choppy in October. Geopolitical tensions, the swing in US Treasury yields, the surprise tilt in Fed rhetoric to becoming less hawkish and a mixed bag of corporate earnings were some of the drivers of the volatility.

Meanwhile, the Israel-Hamas military conflict that broke out on 7 October was the latest risk event to confront markets. Near term, geopolitical uncertainties may drive safe-haven demand and that could favour the US Dollar, the Swiss Franc, and Gold. However, geopolitical developments remain fluid, and if the situation is more isolated and does not spread to the rest of the Middle East, then some of these haven-demand could unwind.

At the recent Fed policy meeting on November 2nd, the US central bank kept its benchmark interest rates on hold for the second consecutive meeting, but also kept open the option for additional tightening later this year or next year if inflation proves more sustained than expected. The Fed noted that economic activity has been expanding at a strong pace, well above expectations, and that the labour market remains tight, but supply-demand conditions are coming into balance. Fed Chair Powell also told reporters during a press briefing that slowing down gives Fed officials a better sense of how much more they need to do, if they need to do more. Powell also appeared to have downplayed the September dot-plot and brushed aside concerns over rising inflation expectations. Overall, the Fed’s messaging indicated a positive assessment of growth and economic activity, but the messaging also contained hints of an extended pause, and to some extent that Fed may be done hiking rates in the current cycle.

We believe the Fed is probably done with tightening in the current cycle as inflationary pressure is already coming off, alongside inflation expectations. Also, real rates at more than 2.4% (which is more than a 10-year high) is already restrictive. We reckon that the hurdle for the Fed to tighten again would be high if incoming data shows slowing inflation and further softening in the labour market.

Challenging yield

Global risk assets were under significant pressure in the month of September. The three main bourses of Wall Street recorded quite a drop, with the Dow jones index down 3.5%, 4.8% for the S&P500, and 5.81% for the NASDAQ. The hawkish pause by the Fed to maintain the main rate at 5.25% - 5.50% during the last FOMC Meeting was widely anticipated by investors. However, Powell in his testimony left markets questioning as to the probability of another rate hike this year while maintaining rates at a level higher for longer. Moreover, with oil prices on the rise currently at around it highest level for the year, will put extra pressure on equities as the threat of inflation increases.

This has propelled the US Treasury (UST) yield to rise above 4.6%, which is its highest in the last 16 years. Fear of a higher for longer interest rate environment have triggered a sell-off in the fixed income market.

The fear of inflation was also felt throughout Europe with the German DAX down 3.91% and the Eurostoxx50 for as much as 3.15%. The ECB unexpectedly hiked rates to 4.5% last month, putting more weight onto its ailing and recovering economy. Second quarter growth was at 0.5%, lower than the previous quarter which was at 0.6%. And finally, PMI numbers wasn’t promising enough both from the manufacturing and services side, still in contraction territory at 43.5 and 46.7 respectively.

In Asia, the majority of risk assets also recorded declines and this can be verified from the 3.86% drop recorded by the MSCI Asia Pacific ex-Japan index last month. High uncertainty regarding the prospect of the Chinese economy has prompted investors to be more risk averse. The suffering property sector is still very much in focus, as investors digested news surrounding the inability for several companies to fulfil their obligations. From a fundamental perspective, latest economic indicator suggests that the economy is indeed recovering. Manufacturing PMI climbed up to expansive territory at 50.2, while industrial output grew 4.5% in August and retail sales at 4.6%.

Domestically, Bank Indonesia held rates at 5.75% as expected at their September meeting. The decision comes as the central bank reiterated its commitment to keep inflation at a relatively low level and in the target range of 3 ±1%. In regard to trade, a surplus of USD$ 3.1 billion was notched last month, much higher than the USD$ 1.5 billion recorded on the previous month. Not only that, but consumer confidence was also up from 123.5 to 125.2 while Manufacturing PMI remained in expansive territory at 53.9.

Equity

The JCI last month was closed 0.19% lower, with the property and consumer cyclicals sectors leading declines by 4.41% and 3.98%. The move down by domestic risk assets was also supported by the foreign outflow, which since the start of the year have amounted to USD$ 308 million.

Despite the high uncertainties globally, mainly in the US and Europe, Indonesia’s economy is still projected to grow 5.0 – 5.3% this year. The equity market is believed to be able to gain momentum with the help of several favoured sectors such as the financial, infrastructure, and industrials. Historically, these sectors have performed well approaching and during general elections.

Bond

Similar to what happened to global bond markets, domestic fixed income assets depreciated amid the rise of US Treasury yields. The 10Y government benchmark yield climbed to 6.91%, driving down prices. The move up by yields continued in the month of October, with the benchmark yield can be seen briefly trading above the psychological handle of 7%. The rise in oil prices also played a role as it re-introduced the threat of inflation by rising commodity prices.

With uncertainty in the fixed income market currently increasing, short term volatility will very much persist. But domestic fixed income assets remain fundamentally attractive as the government plans to lower issuance for this year, lower current account deficit, low inflation, and a historically low foreign bond ownership which is currently at just around 15%; should minimize volatility by foreign money. Bond investors should remain selective in the current environment and take advantage of any price depreciation.

Currency

The Rupiah weakened against the US Dollar last month for as much as 1.39% to Rp 15,460/USD, with the US Dollar Index (DXY) climbing 1.86% to 106.17 by month-end. And the same can be said as well for other global currencies which depreciated against the greenback in September. Moving forward, volatility will remain for the currency pair as the Fed held on to the higher for longer interest rate narrative. Nonetheless, Bank Indonesia promised to maintain the stability of the exchange rate through several accommodative policies such as the Local Currency Settlement (LCS), Domestic Non-Deliverable Forward (DNDF), and also the Devisa Hasil Ekspor (DHE) policy. Foreign reserves was recorded ample and stable at USD$ 134.9 billion, equivalent to six months’ worth of imports and foreign debt.

Juky Mariska, Wealth Management Head, Bank OCBC NISP Tbk

GLOBAL OUTLOOK

Over the next few months, US Treasury yields are set to remain volatile. Investors should therefore maintain a cautious stance while the economic outlook remains uncertain. – Eli Lee

10Y US Treasury (UST) yields have surged to 16-year highs above 4.50%, challenging financial markets across the globe.

First, UST yields have increased because the Fed remains hawkish. Last month, the central bank left its fed funds interest rate unchanged, at 5.25-5.50% as officials wait for more data to see if earlier rate hikes will be sufficient to push inflation back towards the Fed’s 2% target. But the Federal Open Market Committee (FOMC) kept its hawkish bias. Its statement left the door open for further rate hikes by still referring to “the extent of additional policy firming that may be appropriate to return inflation to 2% over time.” The FOMC also updated its forecasts, still projecting another 25 basis points (bps) rate hike this year while only anticipating two 25bps rate cuts next year. Thus, officials expect the fed funds rate to remain elevated throughout the next few years to curb inflation at 5.00-5.25%, 3.75-4.00% and 2.75-3.00% at the end of 2024, 2025 and 2026 respectively.

Second, the US economy remains surprisingly resilient despite the Fed’s aggressive interest rate hikes, keeping upward pressure on UST yields. A measure from the New York Fed that tracks the growth of US GDP on a weekly basis, shows that activity has slowed this year. But the US economy seems unlikely to contract now in 2023. We had expected the Fed’s rate hikes would cause a recession in the second half of the year. But we have now upgraded our growth forecasts for 2023 to be similar to 2022 at around 2% of GDP - as our GDP growth outlook table shows. US consumers continue to spend their pandemic savings, the government is running a major budget deficit that is above 5% of GDP and households and firms are still benefitting from locking in low borrowing rates during the pandemic.

Third, oil prices have increased sharply to almost USD100/barrel, raising fears that higher energy

costs will fuel inflation and keep UST yields higher.

Fourth, a potential US government shutdown and this year’s US debt ceiling impasse have caused the major ratings agencies to either downgrade US’ sovereign rating (in the case of Fitch) or warn about the outlook for USTs (as Moody’s recently has).

Last, decisions by the BOJ and the ECB to tighten monetary policy have also pushed up government bond yields. Over the next few months, UST yields are set to stay volatile. We do not expect that the Fed will raise its fed funds rate anymore from 5.25-5.50% 2023. But the risk of further interest rate hikes is likely to keep yields elevated in the near term. Yields may also stay high until the US economy slows more.

We thus raise our 3 and 6-month forecasts to 4.25% and 3.75% respectively for 10Y UST yields from 3.70% and 3.50% previously. Crucially, a US recession, however, may only have been delayed rather than averted. In 4Q23, GDP growth is set to slow with a potential government shutdown in November, workers at three major US automakers on strike, and a moratorium on student loan payments ending.

During 1H24, we expect slowing growth will give way to an outright downturn as consumers’ pandemic savings run out, the government’s large budget deficit starts to fall and tighter financial conditions from the Fed’s aggressive rate hikes curb borrowing. We thus keep our 12-month forecast that 10Y UST yields will fall back to this year’s lows of 3.25%.

Central to our view of lower UST yields in the long term is our assumption that the Fed, like the ECB and the Bank of England (BOE), has finished increasing interest rates now to curb inflation. The current fed funds rate of 5.25-5.50% is highest since 2001. We expect the central bank will not need to raise interest rates any further now, as inflation is falling slowly back towards its 2% target. The Fed’s target measure of inflation – changes in core personal consumption expenditure (PCE) prices, a broader measure of inflation for the US economy compared to changes in US consumer price index (CPI) – peaked last year at 5.5% with core inflation is now below 4.0% at 3.9% for August 2023. Over the next few quarters, we think core PCE inflation will keep subsiding as the US economy slows and recession risks increase. Thus, the Fed may be able to avoid increasing interest rates any further now. Subsequently, if the fed funds rate remains at its current level of 5.25-5.50% and core PCE inflation falls below 3% by next summer then we expect the central bank will be able to start slowly reducing interest rates from June 2024 by 25bps every quarter, especially if the US economy has fallen into a recession by then.

Investors should therefore maintain a cautious stance given that the economic outlook remains uncertain. In the near term, UST yields are set to stay volatile. But over the next 12 months, the risks of the US suffering a recession and lower inflation may allow the Fed to slowly begin reversing its rapid rate hikes of 2022-2023, allowing yields to fall significantly again during 2024. We therefore keep favouring UST and Developed Markets (DM) Investment Grade (IG) bonds as safe haven hedges against recession risks and the uncertain economic outlook. The US economy has also been strong. In 2Q23, GDP grew at an 2.1% annualised rate. Stronger retail sales in July and still rising payrolls in August have added to hopes the Fed can reduce inflation to its 2% target without causing recession.

Source: Bank of Singapore

EQUITY

Hampered by rising yields

The recent rise in bond yields and the corresponding downward move in equities point to near-term consolidation risks as the markets evaluate an uncertain macro picture. – Eli Lee

US – Running into significant uncertainty ahead

The Federal Reserve’s (Fed) recent hawkish posture and the spike in US Treasury (UST) yields have weighed on the S&P 500 Index as investors start to discount the possibility of rates staying higher for longer.

At the same time, growth uncertainties are mounting, with the latest Conference Board’s consumer confidence measure coming in surprisingly negative while oil prices continue their upward trajectory.

Europe – Unattractive risk-reward profile

The MSCI Europe Index has been trading within a range for the most of this year so far and is now at February levels. Economic data coming out of Europe remains soft and risks of stagflation appear significant. Concerns about China’s macro momentum is also unhelpful for the European narrative.

Japan - Policy direction the key market focus

The Bank of Japan (BOJ) kept its policy rate unchanged at -0.1% in September 2023, and Governor Ueda recently highlighted that the key to the BOJ’s direction on its monetary policy would depend on whether inflation is driven by robust wage growth and consumption instead of cost pressures from higher import costs.

At this moment, the BOJ still has doubts over whether wage growth will accelerate, while there remain concerns over China’s economic slowdown. Another potential driver of Japanese equities stems from the ongoing Tokyo Stock Exchange (TSE)-led governance reforms.

Asia ex-Japan – Focus on upcoming earnings season

Optimism over policy easing measures in China appears to have fizzled out, as the MSCI Asia ex-Japan Index turned in another month of negative returns in September.

One of the main reasons for the lacklustre market performance was due to the hawkish Fed meeting. Although the Fed unsurprisingly kept its fed funds rate unchanged during the meeting, committee members signalled the likelihood of another rate hike in 2023.

The recent strength in the USD and rise in oil prices could put further pressure on the performance of the regional Asian equity markets.

As investors look forward to another round of earnings season from October, we note that South Korea, Taiwan and Thailand have seen the largest consensus EPS cuts year to date (YTD) within Asia ex-Japan. On the other hand, Singapore, Philippines and Indonesia recorded the most positive EPS revisions by the street. We turn Neutral on India (from Overweight) and Taiwan (from Underweight).

China/HK – Effectiveness of easing measures in focus

The Hang Seng Index and MSCI China Index pulled back by around 5% over the past month, whereas A-shares (CSI 300 Index) edged down by about 2%, based on 28 September 2023 prices. A series of easing measures have been announced since late August. More recently, Guangzhou relaxed home purchase restrictions, making it the first among Tier 1 cities to make such a move.

We expect the equities market to stay range bound in the near term as the market is closely monitoring the effectiveness of easing measures that have been announced so far. Looking ahead, policy tone coming out from the October Politburo meeting will be another key area of focus.

Global Sectors

The Global Energy sector was the outperformer in the month of September with the rise in crude oil prices. Now with Brent crude prices rallying and amidst supply driven factors, US and European Energy equities have been supported as well. we maintain our Neutral rating for the Global Energy sector along with uncertainties relating to a global recession ahead.

For the Global Information Technology and Communication Services sectors, we maintain our Neutral rating at this juncture. Higher yields and more pronounced cyclical headwinds could create a challenging setup for the tech complex in the near term. In terms of subsectors, we prefer Internet, Software and Semiconductors, in this order.

BONDS

Higher rates roil bond markets

In fixed income, we favour Developed Market Investment Grade bonds which tend to be recession hedges. We are Underweight Developed Market High Yield bonds given the unattractive risk-reward trade-off at current valuations and an uncertain growth outlook. – Vasu Menon

Some stronger-than-expected US economic data in September stoked fears of economic reacceleration and resulted in higher US Treasury (UST) yields. The Federal Open Market Committee (FOMC) maintained its fed funds rate at 5.25-5.50% in September but noted that policy would have to be “higher for longer”. This hawkish hold threw cold water on the soft-landing scenario as the Federal Reserve (Fed) lowered its 2024 rate cut projections to 50 basis points (bps). Markets reacted violently to the news, with the 10-Year UST breaching 4.6% and the 30-Year above 4.7% - levels last seen in 2007 and 2011 respectively. Our house view is that the Fed’s cumulative rate hikes will result in a recession in 2024.

We advocate a barbell strategy in terms of duration: the short-end of the curve offers attractive carry opportunities while the long-end offers greater long-term price appreciation with potentially higher volatility.

Mixed bag for credit spreads

Developed Markets (DM) Investment Grade (IG) spreads held in well, with US IG tightening 4-5bps and European IG 2-3bps tighter. DM High Yield (HY) fared less well with US HY 10bps wider and European HY 15bps wider. Emerging Markets (EM) HY stood out among the higher risk assets with spreads tightening 9bps. While EM IG also tightened 5bps during the month.

Higher for longer and its pitfalls

The key takeaways from the September FOMC meeting were that rates were left unchanged with another hike likely, and the Committee signalled that rates may need to be higher for longer to cool the economy and reduce inflation toward its targeted 2% rate. Meanwhile, the Fed boosted its hawkish signalling, raising its 2023 GDP forecast to 2.1% (from 1.0% in June), lowering unemployment rate estimates by 30bps to 3.8% and indicating that the Fed funds would be 5.125% at end 2024 (up 50bps from 4.625% in June).

Underweight DM HY

A hawkish hold by the Fed, muted growth and a recession in 1H24 could prove a significant headwind for DM HY. A “higher for longer” rate environment could erode debt affordability and spur higher defaults in HY markets.

Neutral EM

We maintain our Neutral rating on EM Corporates. Many EM countries are further along than the DM with respect to their rate cycles, which could result in rate cuts over the coming months for select cases.

Underweight EM Asia

We maintain an Underweight in EM Asia given our cautious stance towards China amidst the slowing economic momentum and deepening property sector downturn. Spreads widened for both IG and HY, at 3bps and 9bps respectively.

FX & COMMODITIES

Tighter now but looser later

Strong refined product markets and supply tightness have lifted crude oil prices. Brent crude could hit or even surpass USD100/barrel this quarter, which could complicate the disinflation narrative. – Vasu Menon

Gold

The relentless rise in US real yields is dampening the investment appeal of long duration zero-yielding asset like gold. Favourable rate differentials in the US and stagflation angst fuelled by higher oil prices have supported the safe haven USD, which has also contributed to the dip in gold price. Investors are adjusting to the anticipation that the Federal Reserve (Fed) is unlikely to ease monetary policy quickly next year. Rising yields are weighing on fund flows into gold exchange traded funds (ETF) too.

The outlook for gold is likely to remain subdued in the short term. But we remain positive on gold and silver prices over a 12-month horizon although the expected rebound in prices is pushed forward sometime to late 1H24. We think that signs of softer US growth will mount by then, which will lead to increased worries about growth risks. US yields should then move lower from current levels in anticipation of a Fed rate cutting cycle to the benefit of gold.

Oil

Strong refined product markets and supply tightness should continue to support crude oil prices for now. The former reflects strong demand for the core transportation fuels such as gasoline, diesel and jet fuel. Supply tightness is also visible following multiple rounds of OPEC+ production cuts and signs that Russia is making good on its pledge to curb exports. Saudi Arabia’s voluntary 1 million barrels per day cut stabilised the oil market in July and helped trigger a rally that has seen prices gain by more than 20% over the past two months. Its decision to extend those cuts until the end of the year also exceeded market expectations.

Brent crude could hit or even surpass USD100/barrel over this quarter. But lower oil prices may still be in store for 2024, with oil prices likely to ease back toward the mid USD80s/barrel in a year’s time, amid slowing oil demand and as OPEC+ phases out production cutbacks. With global GDP growth set to moderate in 2024, especially in developed markets, global oil demand growth will also moderate.

Currency

Market narrative of rates staying high for longer continues to underpin support for the US Dollar (USD). Recent Fed rhetoric may seem mixed but what is consistent is that “high for longer” regime remains intact and rate cuts are not likely soon.

We may have to be a bit more patient on the point of USD inflection, as peak rate uncertainty remains, and a dovish pivot is yet in sight. But what is perhaps reassuring is that Fed Chairman Jerome Powell did acknowledge that rates will need to fall in the future to keep real rates at an appropriate level. However, "It's just not something the Fed is thinking about at all right now." Technically, given the USD’s sharp run-up in September, we do not rule out a retracement in October, especially if US data surprises to the downside.

While the door remains open for another Fed rate hike, we believe that the Fed is likely done with tightening in the current cycle as inflationary pressure is already coming off, while US monetary policy is already restrictive. We reckon that the hurdle for the Fed to tighten again would be high if incoming data continues to show slowing inflation and further softening of the labour market. An eventual dovish re-pricing can weigh on the USD.

Uneven Growth

The world’s major economies have diverged over the summer. Growth in the US and Japan has been surprisingly strong. In contrast, Europe is sliding towards recession again and China’s reopening from the pandemic has continued to flag. Uncle Sam notched a higher-than-expected growth of 2.4% last quarter and is still expected to grow moderately in the third quarter amid interest rates being at its highest level since 2001. The narrative of a “higher for longer” rate that initially weighed heavily on market sentiment can be seen slowly fading away as jobs data start to soften, especially with the latest unemployment rate reading that saw quite a significant jump from 3.5% to 3.8%. Now, a growing number of investors and analysts are becoming more and more confident that rate cuts may start to occur in the second quarter of next year. At the annual Jackson Hole Symposium held last month, Jerome Powell mentioned that higher rates may be needed, and the Fed will have to move ‘carefully’; a less hawkish remark compared to previous statements by the Fed President. From a risk asset perspective, global equities recorded a drop in the month of August as investors tend to secure gains from the not- so-long ago rally.

Europe paints a different picture. The ECB did not have a monetary meeting last month, while the BOE continued its rate hike last month for as much as 25 basis points (bps), following a 50-bps hike in the previous month. The main rate for ECB and BOE currently stands at 4.25% and 5.25%, their highest since the 2008 global financial crisis. Moving away from monetary policy developments, investors are also keeping an eye on commodities, particularly the spike in oil prices nearing the end of last month due to planned production cuts by Saudi Arabia and Russia. The price of WTI crude oil jumped 6% from its lowest point to close August in the range of $83 - $84 per barrel.

In Asia, the MSCI Asia ex-Japan index recorded quite a significant drop of 6.6%, mainly led by A-shares and H-shares due to China’s worsening economic prospect. Developments surrounding the property & real estate sector, which contributes roughly 30% of the nation’s GDP have been the biggest obstacle for China’s road to recovery. Nonetheless, the government along with PBOC have on numerous occasions reiterated their commitment to support the ailing economy and capital markets through various policy tweaks, such as the lowering of loan prime rates and reducing the stamp duty tax on equity trades. On the other hand, as mentioned before, growth in Japan has been surprisingly strong recording an annualized growth rate of 4.8%, revised down from the initial 6.0% release.

Domestically, fundamentals remain strong in the month of August. Manufacturing PMI continued to climb, currently at 53.9 which is a level last seen in November 2021. In regard to inflation, CPI YoY climbed to 3.27% from previously 3.08%, but positively still lower than market expectations. On the bright side, core inflation dropped more than expected, giving more flexibility for Bank Indonesia in terms of monetary policy adjustments moving forward. Investors’ focus is getting more and more geared towards the 2024 elections as we soon enter the last quarter of this year, with political uncertainties remaining at an elevated level. However, it seems that from a households and business point-of-view, the outlook of the economy as we approach the end of 2023 is quite promising as consumer confidence was also recorded higher last month, up from 123.5 to 125.2.

Equity

The JCI surprisingly held its own in the month of August. While the majority of risk assets took a hit, the JCI was able to climb 0.32% to 6,953.26 with the Basic Materials and Infrastructures sector leading the charge, up 9.81% and 6.24% respectively. However, the psychological handle of 7,000 remain a strong resistance level as market participants demand more external support to trade comfortably above it. In terms of valuation, the JCI is trading on a P/E ratio of 14.4x and EPS growth of 20% according to Bloomberg Estimates. Foreign investors recorded a net sell of $1.4 billion in the month of August, confirming domestic investors’ risk appetite remain high as the equity market was still able to remain in the green at the end of last month.

With elections just around the corner, investors are adopting a more tactical trading strategy on risk assets as the political uncertainty remain high. As we enter the fourth quarter, developments surrounding politics and 2024 elections will have even more potential impact for domestic capital markets. Nonetheless, we remain optimistic with the outlook next quarter and entering 2024 as the resiliency of our capital markets and domestic economy have been on full display since the start of 2023.

Bond

Unlike domestic risk assets, fixed income prices dropped in the month of August although insignificant. The 10-year government bond yield climbed from 6.25% to 6.38% by the end of the month. Domestic yields mirrored the movement of the UST yield which also spiked above the 4% handle. Higher for longer rates in the US is still the main catalyst for bond yields to stay at elevated levels. Moreover, foreign investors also got rid of their holdings, although not as much as in the equity market, for as much as $540 million throughout last month. Last but not least, the depreciation of the Rupiah also contributed to the move up by yields. Looking ahead, with the 10-year government bond yield at 6.6% in the second week of September, the downside potential should be limited. With our Real-Yield currently at approximately 3.3% and a lower target issuance for bonds this year by the Ministry of Finance; should provide a baseline support for fixed income assets.

Currency

As mentioned earlier, the Rupiah depreciated against the Greenback in August as the Dollar Index (DXY) steadily climbed back to the 104, a level last seen in early June. The currency pair USDIDR was trading at Rp 15,080 at the start of August and was hovering around Rp 15,230. Similar to fixed income, downside risk for Rupiah is limited. From a data standpoint, foreign reserves remain steady at $137.7b. Foreign reserves remain ample as it is equivalent to 6 months’ worth of imports, while the international standard is currently only at 3 months’ worth of imports.

Juky Mariska, Wealth Management Head, Bank OCBC NISP Tbk

GLOBAL OUTLOOK

STRENGTH, WEAKNESS AND CAUTION

The world’s major economies have diverged over the summer. Growth in the US and Japan has been surprisingly strong. In contrast, China’s reopening from the pandemic has continued to flag and Europe is sliding towards recession again. – Eli Lee

US

The US economy has also been strong. In 2Q23, GDP grew at an 2.1% annualised rate. Stronger retail sales in July and still rising payrolls in August have added to hopes the Fed can reduce inflation to its 2% target without causing recession.

The stronger US data caused US 10Y Treasury (UST) yields to hit 17-year highs of 4.36%. The summer surge has also been driven by the US Treasury forecasting larger bond sales, the rating agency Fitch’s surprise downgrade of US sovereign debt and the BOJ allowing Japanese 10Y government bond yields to trade in a higher range.

In the near term, UST yields are set to remain volatile. But over the long term, we anticipate 10Y UST yields will fall back to April’s 3.25% lows in the next 12 months. The US economy is set to slow as pandemic-era cheques are run down.

The full effects of the Fed’s rate hikes over 2022- 2023 will also weigh on growth, and the central bank may keep its fed funds rate elevated at 5.25-5.50% until as late as June 2024. We do not expect the Fed will cut rates until 2Q24 – even if the economy suffers recession as we anticipate as officials want to see more evidence inflation is falling back to their 2% target.

We therefore doubt the Fed will achieve a soft landing and pivot quickly to early rate cuts. Instead, we think the Fed will need to induce a recession to lower inflation to its 2% goal. The economy’s current strength cuts the chances of recession starting this year. But the risks from fading fiscal stimulus, “higher for longer” interest rates and the Fed aiming for 2% inflation makes recession our base case – beginning in 4Q23 or 2024.

This summer’s volatility in the bond markets is thus likely to give way to lower yields over the next 12 months. We therefore keep favouring USTs and Developed Markets (DM) Investment Grade (IG) bonds as safe haven hedges against recession risks.

China

We think the world’s second largest economy is at a critical juncture. In 1Q23, GDP jumped an impressive 2.2% QoQ after the country reopened from the pandemic. But the economy only expanded by 0.8% QoQ in 2Q23 as confidence faded in the recovery. In 3Q23, growth has continued to be weak.

Despite this year’s strong reopening, China’s economy is suffering from a clear lack of demand. Inflation has vanished. In July, China’s consumer price index (CPI) inflation fell into deflationary territory with prices 0.3% lower than a year ago.

The shocks from 2020-2022 – strict lockdowns, regulatory hits, property weakness, recessions abroad and geopolitical risks – all appear to have hurt China’s engines of growth this year.

For example, consumers have turned cautious again after an initial burst in spending when China reopened at the end of last year. In July, retail sales were only 2.5% higher than a year ago. In contrast, retail sales were expanding by 8.0% a year at the end of 2019. Increased job insecurity during the pandemic, China’s limited social safety nets – despite its strict lockdowns, the government did not follow the US, Europe or Japan in providing largescale support to households – and falling property prices are all keeping consumers cautious.

Investment is also lacklustre. In July, fixed asset investment was only 3.4% lower than a year ago. half its rate at the start of the pandemic in 2020.

Regulatory shocks and US’ imposition of export controls have hurt investment in the Technology sector. Falling real estate prices, unfinished projects and defaults by developers are spurring households to delay new purchases, thus causing property investment to contract. Infrastructure investment is also being held back too. As the economy’s reopening stalls, local government financing vehicles (LGFVs) are paying back debts – rather than borrowing to undertake new projects.

Lastly, trade is another engine of growth under pressure. Weak demand abroad resulted in exports falling 14.5% in July compared to a year ago.

Faced with weaker-than-expected growth, policymakers have begun to respond with limited measures to revive demand. In August, the People’s Bank of China (PBOC) cut its 7-day interest rate by 10bps to 1.80%. But to stop China falling into a prolonged deflationary trap, officials will need to step up with concerted action on three fronts: major fiscal easing, efforts to stabilise the property sector and rapid interest rate cuts. Currently, we forecast China’s GDP to expand by 5.4% in 2023 – compared to its lacklustre growth of just 3.0% in 2022 – as last year’s lockdowns fade.

If officials remain reluctant, however, to take decisive measures to revive demand and confidence, then China’s GDP growth is likely to fall short of the government’s 5% target in 2023. In that case, the risks of a more prolonged deflationary slump will rise.

China’s uncertain outlook keeps us Neutral on the country’s equities.

Europe

We have also been cautious this year on Europe’s outlook. In contrast to the Fed, BOJ and PBOC, we expect the European Central Bank (ECB) and Bank of England (BOE) will both increase interest rates by 25bps in September to 4.00% and 5.50% respectively as inflation remains stubbornly. At the same time, however, August’s purchasing manager indices (PMIs) show growth in 3Q23 is faltering again in both the UK and the Eurozone. We thus maintain our recommendation for investors to stay Underweight Europe’s stock markets.

Japan

We think investors’ optimism is justified towards Japan is justified. Japan’s 2Q23 GDP data shows the economy is finally leaving behind its three lost decades of deflation after Japan’s great bubble burst in 1990.

In 2Q23, GDP expanded rapidly by 1.5% quarter-on-quarter (QoQ). This was double the rate expected by investors. 1Q23 GDP was also revised up to show strong growth of 0.9% QoQ. We think Japan’s growth will stay firm in the second half of the year and revise our full year forecast up from 1.4% to 2.1%. This exceeds our forecasts for growth in the US, the Eurozone and UK in 2023.

More significantly, the total size of Japan’s economy – its nominal GDP including inflation and growth – hit an all-time high near JPY600t in 2Q23, after stagnating for three decades.

We think Japan’s growth will stay upwards now. First, core inflation has hit four-decade highs above 4% from the shocks of the pandemic and the war in Ukraine. Thus, the economy is finally expanding again in nominal terms. Second, the dovish Bank of Japan (BOJ) is keeping its deposit rate below zero to let inflation become entrenched around its 2% target after Japan’s three lost decades of deflation.

We thus recommend investors stay Overweight on Japan’s equities. The return of inflation and nominal GDP growth for the first time in more than 30 years will support local firms’ profits and revenues again.

Source: Bank of Singapore

EQUITIES

Hoping for more in China

Given that asset prices are heavily influenced by US Treasury yields which form the risk-free rate, overshooting yields over the near term could set off some near-term market volatility, especially if the 10Y yield continues to test new highs. – Eli Lee

US – Hunting for opportunities while navigating complex cross-currents

As the bellwether for artificial intelligence (AI), Nvidia’s results did not disappoint, but the broader technology complex is reporting more cautious enterprise spending, while high levels of inventory for semiconductors remains a concern. We believe that the near-term outlook appears muted, given tighter credit and liquidity conditions, overly optimistic “goldilocks” expectations, and the delayed impact of rate hikes suggest challenging conditions for a sustained rally. Within the US, we prefer: i) large-cap banks over regional banks; ii) Internet, Software and Semiconductors (in that order); iii) Medical Tech and Healthcare Services; iv) beneficiaries of secular growth themes within the Industrials complex and; v) Consumer Staples over Discretionary in general.

Europe – Weakening data points

Latest data coming out of Europe has been weak – the Euro area composite flash PMI decreased 1.6 percentage points (ppt) to 47.0, below consensus expectations, on the back of a further meaningful decline in services activity.

Expansionary fiscal policy is arguably a key reason why economies have not succumbed to tighter monetary policy yet, but looking ahead, the former impulse is likely to slow while the lagged impact of prior rate hikes should kick in.

Japan - Strong 2Q23 GDP and corporate earnings growth affirms our positive stance

Japan’s 2Q23 GDP growth came in above expectations, posting a strong growth of 6.0% quarter-on-quarter (QoQ) annualised. Corporate earnings for the April to June 2023 quarter were also relatively strong, with sales growing 7.1% and net income growing 21.4% year-on-year (YoY) for the TOPIX Index. Positive contributors to earnings growth came from the Automotive, Banks, Industrials, Food and Utilities sectors. The Japanese stock market has also seemed to digest the yield curve control (YCC) change well, initially declining in August 2023 but has since recovered to the levels seen early in the month. We continue to remain positive on Financials, Consumer, Industrials and Healthcare which will benefit from various tailwinds such as a relatively loose monetary policy, robust domestic consumer and tourism growth and the recovery of automotive production.

Asia ex-Japan – Uplift in sentiment as policy easing hopes rise

The MSCI Asia ex-Japan Index registered negative returns in August, but performance towards the end of the month was largely positive as rising policy easing hopes in China buoyed sentiment for the regional equity markets.

We believe one of the reasons for the overall subdued market performance in August was due to the relatively soft earnings season for 2Q23/1H23. India, Indonesia and Philippines are the top three markets which are running ahead of the street’s expectations. On the other hand, Malaysia, Hong Kong and Thailand are falling behind and thus face potentially larger consensus earnings estimate cuts ahead.

As we move towards the end of the earnings season, investors’ focus will likely shift towards further policy actions in China, especially on the property market, the Federal Reserve’s (Fed) rate decision during the September Federal Open Market Committee (FOMC) meeting and other economic data points.

China/HK – More supportive policy tone

Hong Kong and Chinese equities corrected 7-8% in August, along with the correction in the broader Asia ex-Japan market. Recent measures, such as the cut in loan prime rate (LPR), relaxation of the definition of “first-time homebuyers”, and a series of targeted measures to support the A-share market, including cutting the stamp duty, would be supportive for a trading rebound in the near-term. The next few weeks remain as a key period for policy actions. Hence, equities may be range bound in the meantime as it will take time for measures to work through the system.

Global Sectors

As of end August 2023, the MSCI ACWI Financials Index has delivered flattish performance since the start of the year, and we maintain our Neutral stance on the sector. In terms of preference, we favour higher quality large caps names such as Wells Fargo, Bank of America and Citigroup over the regional banks. For the Global Information Technology and Communication Services sectors, we also maintain our Neutral rating, driven by a mixed picture. While fundamentals remain resilient, we see the outlook as Neutral over the near-term as valuations appear relatively full, especially for semiconductors and software. We continue to have a relative preference for Internet over Software and Semiconductor companies.

In the Consumer space, though we prefer Consumer Staples over Consumer Discretionary given anticipated growth challenges ahead, we see different dynamics impacting different sub-sectors.

BONDS

Barbell strategy

Within fixed income, we remain Overweight in Developed Market Investment Grade bonds, which are recession hedges. We advocate a barbell strategy in terms of duration – we believe that the short-end of the curve offers carry opportunities while the long-end offers greater long-term price appreciation with potentially higher volatility. – Vasu Menon

After a stellar performance since the start of the year, returns in August for both Developed Markets (DM) Investment Grade (IG) and High Yield (HY) bonds were negative due to rates volatility. During the month, DM IG and HY registered losses of 0.9% and 0.31% respectively. Spreads on DM IG closed the month flat at 137 basis points (bps) while DM HY was at 382bps.

We maintain Overweight recommendations on DM IG while staying Underweight on DM HY.

Powell keeps markets guessing

Yields were challenged in August. After spiking to a 17-year high of 4.36%, 10Y UST yields eventually drifted lower to 4.11%. Likewise, 2Y UST yields touched 5.10% briefly before easing to 4.89%.

While our base case is that the Fed has reached the end of its tightening cycle, views on the Fed could continue to shift in response to data over the coming weeks. Softer-than-expected data releases had derailed the growing narrative that the Fed would still deliver another rate hike in the current cycle. We now expect the US economy to fall into a recession in either 4Q23 or 2024. We see duration moving from a headwind to performance to a potential tailwind. We expect 10Y UST to drift to 3.25% over the next 12 months.

We reiterate our preference for a barbell strategy in duration positioning. The front-end has the most attractive yield profile and these attractive short end interest rates could disappear relatively fast, especially when focus shifts from inflation to growth concerns.

Underweight DM HY

A restrictive pause coupled with muted growth and an ultimate recession could prove a significant headwind for DM HY. A “higher for longer” rate environment could erode debt affordability and spur higher defaults in the HY markets.

Remain neutral on EM corporate bonds

We maintain our Neutral rating on Emerging Markets (EM) corporates. Many EM countries are further along than the DM with respect to their rate cycles, which could result in rate cuts over the coming months for select cases.

Underweight Asia

Within EM IG and HY, we move to Underweight Asia given our cautious stance towards China amidst slowing economic momentum and a deepening property sector downturn. We remain concerned about the long-term fundamentals of the property sector as well as the wider implications to the financial sector, and advocate using market bounces to reduce exposure to China Property.

Prefer Asia IG within EM IG

We continue to prefer IG over HY within Asia. Within Asia IG, we reiterate our preference for Indian and Indonesian issuers with strong balance sheets and government support. We remain selective in HY and favour the Indian renewable energy sector, given increasing focus on ESG and stable fundamentals for most covered credits.

FX & COMMODITIES

Stronger demand & tighter supply

Strong refined product markets and supply tightness should continue to support crude oil prices. We expect the crude market to remain in deficit in 2H23. But oil markets could return to modest oversupply in early 2024 as oil demand slows and as OPEC+ phases out production cutbacks. – Vasu Menon

Gold

US data resilience has pushed up longer-dated US real yields and lifted the US Dollar (USD). This has taken some sheen from gold in the short term. Gold ETF outflows have been steady, and futures investors have de-risked. Investment demand is lacklustre, as investors wait for the Federal Reserve (Fed) to end its tightening cycle. Our base case remains that the Fed would not need to proceed with another rate hike.

The headwinds from the stronger USD and higher US real yields may start to ease somewhat as recent US data shows further signs of a gradual economic slowdown. We remain positive on gold in the medium term. Unlike industrial commodities that will likely struggle under a slower US growth scenario, gold should benefit, as a US slowdown brings about a Fed rate cutting cycle. The risk of a US recession is not completely off the table, which should attract safe haven fund flows into gold into 2024. While central bank gold buying in 1H23 slowed, demand impulse is likely to remain positive, helping to support bullion prices and dampen volatility.

Oil

Strong refined product markets and supply tightness should continue to support crude oil prices. The former reflects strong demand for the core transportation fuels – gasoline, diesel and jet fuel. Jet fuel demand is a sweet spot for oil demand, as air travel hits pre-pandemic highs. Supply tightness is also visible following multiple rounds of OPEC+ production cuts and signs that Russia is making good on its pledge to curb exports. This could be compounded by Russian Urals crude rising above the G7 price cap and narrowing against Brent. The waning benefits of Asian buyers importing Russian oil is likely to increase competition for Brent oil.

Inventory draws have recently come through in a convincing fashion, and we expect the crude market to remain in deficit in 2H23. But oil markets could return to modest oversupply in early 2024 as oil demand slows and as OPEC+ phases out production cutbacks. With inventories still low, we expect Brent to remain supported at USD85/barrel in a year’s time.

Currency

Market narrative of rates staying high for longer continues to underpin support for the US Dollar (USD). Recent Fed rhetoric may seem mixed but what is consistent is that “high for longer” regime remains intact and rate cuts are not likely soon.

Fed Chair Powell’s remarks at Jackson Hole on 25th August was largely a reiteration of the “high for longer” narrative with little deviation from previous communication. He took opportunity to emphasize deploying a risk management strategy, to proceed carefully as Fed officials decide whether to tighten further or hold rate constant and await data.

Overall, we retain our view for a moderate-to-soft USD profile as the Fed is likely done with tightening for this cycle. But as rates remain high for longer in the interim, any USD dips may be shallow for now as a dovish pivot is still not in sight. The USD inflection point would come when the market narrative shifts into trading the expectations for “more rate cuts in 2024” and this is highly dependent on how data pans out. A more entrenched disinflation trend and more material easing of labour market tightness should bring about the shift and cause the USD to trade softer. For now, the USD still retain a significant yield advantage and is a safe haven proxy to some extent. As such, there will still be some room for USD upticks especially if global and China growth momentum stay subdued.

Opportunities Amid Uncertainties

Wall Street closed the month of July higher, with the three main bourses recording quite significant gains with the Dow Jones, S&P500, and NASDAQ up 3.11%, 2.99%, and 4.04% respectively. The move up was mainly supported by the promising growth of the US economy in the second quarter of this year. The US grew 2.4% last quarter and 2.6% on a year-on-year basis. The data erased recession fears amongst investors amid the most aggressive monetary policy tightening in the last 22 years. The labour market has proven to be more resilient than initially forecasted, with the unemployment rate dropping back to 3.5% from 3.6%. Positive economic indicators may affect and change the direction of The Fed’s monetary policy, which is already expected to be near the end of its rate hiking cycle. The expectation that rates will be higher for longer have induced volatility on capital markets.

In Europe, rate hikes continued last month with the ECB raising rates by 25 bps to 4.25% and the BOE also as much as 25 bps to 5.50%. However, the hikes were widely anticipated as inflation in these areas are still persistently high, especially amongst developed nations. Eurozone recorded a drop in its July inflation number from 5.5% to 5.3%, while the UK inflation also dropped from 8.7% to 7.9%. In the UK, markets are starting to price in the terminal rate to be in the range of 6.5% to 7.0% by year end.

Moving East, Asian equities also notched gains with the exception for Japanese equities. At the beginning of the month, Japanese risk assets was able to appreciate but was unable to maintain the move due to the massive selling by investors to secure gains. The tweaking of the yield curve control (YCC) threshold by the Bank of Japan last month from 0.5% to 1.0% generated quite a shock in markets but is expected to support inflation and economic growth moving forward.

Domestically, the most recent data releases have shown ongoing recovery for the domestic economy. July inflation continued its way down to 3.08% YoY, moving closer to the government’s target of 3 ± 1%, in which Bank Indonesia responded by holding the 7-day reverse repo rate steady at 5.75%. In terms of growth, the economy recorded a 5.17% YoY GDP growth during the second quarter of this year. A post pandemic path of recovery better than many have been the driving force for such an achievement, with domestic mobility and consumption playing a significant part in addition to the continuity of infrastructure projects.

Equity

The JCI recorded its best monthly performance, up +4.05% in the month of July led by the Energy and Basic Material sectors which climbed +10.71% and +10.19%. However, currently investors are more likely to be in a more wait & see phase toward risk assets as uncertainties ranging from the credit rating downgrade of the US government to the geopolitical tension in Europe and Asia. Both foreign and domestic investors seem to adopt a more cautious approach.

We still see the Presidential election next year to be a catalyst for our equity market and is expected to be one of the main driving forces for growth in the last quarter of this year and next year. Looking at the bigger picture, emerging market risk assets with Indonesia included should benefit moving forward with valuations much more attractive than developed market risk assets.

Bond

Bond yields tumbled last month with the benchmark 10-year government bond yield dropping -0.16% to close the month at 6.25%, which when translated means a spike in prices although not significant. One of the main reasons was the outlook upgrade by one of the largest Credit Rating agencies in Japan, the Rating and Investment Information (R&I) from stable to positive. R&I maintained the nation’s credit rating at BBB+, which is two levels above the investment grade floor rating.

Moreover, with inflation continuing its downward trend in July, the central bank will have more flexibility in regard to its monetary policy in the second half of this year. From a foreign perspective, a lower inflation translates to a higher real yield, making domestic fixed income assets a more favourable investment when compared to other bonds in the same category.

Currency

In the currency market, the Rupiah was somewhat stable against the greenback, trading around Rp 15,085 per USD at the end of July. The stability of the USDIDR is supported by the surplus recorded from trading activities (trade balance) in June, and still expected to be in the positive territory in July. Not only that, the central bank’s foreign reserves remain ample at US$ 137.7 billion as per July, equivalent to 6.2 months’ worth of imports, way above the standard international requirement of 3 months. These data should support the stability of the Rupiah moving forward.

Juky Mariska, Wealth Management Head, Bank OCBC NISP Tbk

Global Outlook

Resilience now, weakness later

While the global economy has been more resilient than anticipated in 2023, the lagged effects of monetary tightening continue to weigh on growth. A US recession may still be necessary to fully lower inflation to the Fed’s 2% goal. – Eli Lee

Financial markets are hopeful that central banks can achieve a soft landing by reducing inflation to their 2% targets without causing recessions. Resilient 2Q23 US GDP and easing inflation data are boosting confidence that the Fed and its peers will pivot from interest rate hikes to cuts later this year. But we are more cautious. A US recession may still be necessary to fully lower inflation to the Fed’s 2% goal. Europe’s major central banks are set to hike rates further despite weak growth and China’s reopening continues to disappoint. In contrast, only Japan’s outlook remains clearly positive. Thus, we remain wary of the key risks for other major economies.

US

The US economy has been more resilient than we had anticipated despite the Fed increasing interest rates over the past year. For a recession to occur, GDP needs to contract for at least two quarters in a row. But the 2Q23 data showed that US growth quickened. We have thus revised our US GDP forecasts up for 2023 from 1.2% to 1.8% growth. In addition, June’s data showed inflation has peaked, raising hopes the Fed can achieve a soft landing. However, we are more cautious, on the economic outlook than the current consensus.

First, we think the Fed’s 25bps rate hike to 5.25%- 5.50% last month may be its last now as inflation eases. But we expect the central bank will likely still have to induce a recession in the US economy to fully lower inflation back to its 2% goal.

Though 2Q23 GDP growth beat forecasts, consumption still slowed from 4.2% on an annualised basis in 1Q23 to 1.6% in 2Q23. We anticipate the US economy will slow further as the full impact of the Fed’s aggressive rate hikes over the past few quarters weaken activity over the next few quarters. Our base case thus remains for the US GDP to experience two consecutive quarters of contraction starting from 4Q23 at the earliest.

Moreover, the Fed remains committed to returning inflation to 2%. We do not expect interest rates will be reduced before 2Q24 now. Instead, officials will likely wait for core PCE inflation to fall from its current rate of 4.1% in June to below 3.0% before considering any rate cuts. Thus, the central bank could leave its fed funds rate elevated at 5.25%-5.50% for almost a year still to keep squeezing inflation out of the economy.

As our table of interest rate forecasts shows, we therefore continue to see US Treasury yields falling over the next 12 months as growth weakens under the impact of the Fed’s earlier interest rate hikes.

Europe

Elsewhere, the ECB and the Bank of England (BOE) are likely to increase interest rates further this year to curb inflation despite weak growth in the Eurozone and UK.

Eurozone inflation in July was still far above the ECB’s 2% target at 5.3% while core inflation was even higher at 5.5% even though the central bank increased its deposit interest rate again by 25bps to 3.75% last month.

Similarly, inflation in the UK remains far above the BOE’s 2% goal at 7.9% in June and 6.9% when excluding food and energy prices. We thus forecast the ECB will lift its deposit rate again by 25bps to 4.00% in September and the BOE to increase its bank rate by as much as 50bps in August and a further 25bps in September to reach a peak of 5.75%.

Both central banks are likely to keep tightening monetary policy despite growth being weak in Europe following last year’s energy shock from Russia’s invasion of Ukraine. We expect the Eurozone to only grow by 0.6% in 2023 having experienced recessionary conditions at the turn of the year and for the UK economy to not expand at all.

China

Meanwhile China’s reopening continues to disappoint. In 1Q23, economic activity bounced strongly as consumers returned in force. But in 2Q23, China’s post-pandemic recovery slowed sharply as consumers turned cautious again, firms lacked confidence, the property sector stayed subdued, and exports contracted.

The lack of momentum appears to have carried over into 3Q23. July’s purchasing manager indices (PMIs) – an important measure of business sentiment – showed that manufacturing continues to exhibit signs of contraction while confidence in China’s services sector keeps ebbing.

Japan

In contrast, only Japan’s outlook remains clearly positive to the benefit of the country’s risk assets. The world’s third largest economy is in a sweet spot as the country reopens from the pandemic, inflation returns at last after three “lost decades”, the Yen remains weak and the Bank of Japan (BOJ) continues to be dovish.

Recently, the central bank tweaked its longstanding cap on Japanese 10Y government bond (JGB) yields. The BOJ said it would still aim for 10Y JGB yields to fluctuate in a range of +/- 50bps around 0.0% but this would only be a “reference” target now. Instead, as inflation returns to Japan after the pandemic and yields rise, the BoJ said it would only formally cap 10Y JGB yields at 1.0%. The move marks the gradual end of yield curve control. But officials are set to keep the central bank’s deposit interest rate below zero at -0.1% this year to ensure inflation becomes entrenched around its 2% target.

The BoJ’s dovish stance contrasts with the Fed’s, ECB’s and other central banks – this has benefitted Japanese equities.

EQUITY

Japan’s sun is still rising

We see opportunities in Asian equities, driven by accommodative monetary policies, resilient growth and attractive valuations. Amongst global peers, Japan continues to stand out, with its economic outlook enjoying multiple tailwinds and likely to remain relatively resilient. – Eli Lee

US – Mixed bag of results across the reporting season

Thus far, company fundamentals appear to be broadly intact, but elevated valuations, lofty investor expectations across pockets of the market, and cracks in high-end consumption leave us somewhat cautious on the outlook ahead. Generative artificial intelligence (AI) continues to be an area with longer-term monetisation potential but remains insufficient to fully offset some of the cyclical headwinds faced by selected tech companies in the near term. The rally has recently broadened out beyond the mega-cap names, but index returns are still fairly concentrated in a selected number of stocks. We continue to believe that it would be prudent to lean defensive at this juncture, and to seek out selected opportunities across more defensive sectors such as Utilities, Consumer Staples, and Healthcare.

Europe – Cautious market reaction to softer earnings

On the 2Q23 earnings season, as of end July, earnings have been in line with expectations but what is notable is the low number of positive beats; only 30% of companies beat consensus estimates by more than 2% - below the long-term average of 40% and levels seen in recent quarters.

Over the longer-term, the ECB remains relatively hawkish among Developed Markets central banks, which is a headwind for asset prices, and recent softer economic data in Europe (not helped by a weaker-than-expected recovery in China) highlights a softening growth momentum amidst a weakening credit cycle.

Japan - Still the relative economic outperformer amongst global peers

While the slowing global economy continues to pressure Japan’s external environment, its exports have been more resilient than expected. The domestic economy continues to see gradual improvement, with lending and tourism activity still robust. In the most recent BOJ meeting, the central bank made small incremental hawkish moves by keeping the yield curve control rate cap at 0.5% but guided that this rate cap will be a reference limit rather than a hard limit, which effectively allows the BOJ to move rates above 0.5% if needed. This could drive increased volatility within the Japan stock market in the near term, but the BOJ’s monetary policy is still relatively loose versus other global central banks.

Asia ex-Japan – Subdued start to earnings (South East)

The MSCI Asia ex-Japan Index outperformed for the month of July, buoyed by the Chinese and Indian markets. On the policy front, investors were clearly focused on the outcome of China’s Politburo meeting and subsequent supportive measures being rolled out, especially for the beleaguered property sector.

The start of the 2Q23 earnings season has been subdued thus far. Approximately 13% of MSCI Asia ex-Japan Index’s market capitalisation has released results, and year-on-year (YoY) net profit growth has come in at -26%. Consensus expectations are for quarterly net profit to decline 9% YoY, with the drag mainly to come from South Korea, Taiwan and Thailand.

China/HK – More supportive policy tone

Hong Kong and Chinese equities outperformed the broader Asia ex-Japan market in July on the back of a more dovish policy tone and messages from the July Politburo meeting statement. Policymakers acknowledged a more challenging macro environment and vowed to enact more countercyclical measures to reach this year’s goals.

Global Sectors

We see a favourable backdrop for the Healthcare, Consumer Staples and Utilities sectors which are trading at undemanding valuations and have historically exhibited more resilience during a recession as they are less sensitive to the economic cycle.

Within Healthcare, we see opportunities in drug manufacturers, healthcare providers, diagnostics and research, to name a few. Conversely, we see fewer undervalued stocks in the medical distribution industry.

For the Information Technology and Communication Services sectors, we continue to believe that software and internet will be long-term beneficiaries of broad adoption of AI technologies within the economy. However, in the short term, we remain concerned about inflated expectations about the impact of AI on company financial numbers. Lofty valuations and recent sell-offs in certain AI beneficiaries such as Microsoft and ServiceNow despite achieving decent 2Q23 earnings also highlight the short-term risks in the segment. We continue to have a relative preference for internet over software companies within the sector.

BONDS

Barbell strategy

Within fixed income, we remain Overweight in Developed Market Investment Grade bonds, which are recession hedges. We advocate a barbell strategy in terms of duration – we believe that the short-end of the curve offers carry opportunities while the long-end offers greater long-term price appreciation with potentially higher volatility. – Vasu Menon

Our house view is that Fed rate hikes will result in a recession in the coming year, causing us to retain our preference for duration over credit.

Rates likely to be higher for longer

As widely expected, the Fed delivered a 25bps hike at its policy meeting in July, bringing the fed funds rate to 5.25%-5.50%. The Fed leaned on the cumulative tightening to date, saying the “fed funds rate is at a restrictive level now” and can move back to neutral if inflation comes down credibly.

Ongoing resilience of US data from a strong labour market, sturdy consumer spending and real GDP are keeping rates high. In addition, global policy developments are also increasingly influencing the direction of US Treasury (UST) yields.

Remain neutral on EM corporate bonds

We maintain our Neutral rating on Emerging Markets (EM) Corporates. Many EM countries are further along than the DM with respect to their rate cycles, which could result in rate cuts over the coming months for select cases. Additionally, technical factors should remain broadly supportive as there is typically a lull in new issuance during the summer. We retain our preference for IG over HY amidst global macro uncertainty and the implicit support of a high percentage of quasi-sovereigns (around 35%) in the EM IG Universe.

Maintain underweight DM HY

A restrictive pause coupled with muted growth could prove a significant headwind for Developed Markets (DM) HY. A “higher for longer” rate environment could erode debt affordability and spur higher defaults in HY markets. Moody’s expects this to continue to rise, eventually peaking at 5.0% in April 2024. We maintain our Underweight recommendation on DM HY as spreads are not sufficiently pricing in our base case of a recession sometime in the next 12 months.

Prefer Asia IG within EM IG

We maintain our preference for Asia IG within EM IG. Within Asia IG, we see more value in “BBB” names, particularly in Indonesia and India while “AA” names are starting to appear rich. Within Asia, we continue to favour IG and remain selective in HY. We retain our preference for fundamentally strong credits in India and Indonesia HY.

FX & COMMODITIES

Staying positive on Gold

We remain positive on gold in the medium term. Unlike industrial commodities like oil or copper that will likely struggle under a slower US growth scenario, that eventually prompts the Fed to ease, gold should benefit. – Vasu Menon

Gold

The Federal Reserve (Fed) delivered what might have been the last hike of the cycle in July amid a firmer disinflation trend. But a resilient US growth backdrop makes it tough to completely rule out additional Fed hikes. For a long duration, zero coupon asset such as gold, the high opportunity cost to owning it unless the Fed pivots quickly to easing, is likely to restrain yellow metal’s upside in the short term after having recovered from below USD1,900/oz recently.

Oil

Brent oil is back above US$80/barrel, marking a step change from the US$70-75/barrel range of recent months, when the US regional banking sector problems and the ensuing recessionary fears depressed the price. Oil prices will likely remain supported. But macro concerns and prospects of a gradual build-up in stocks should limit oil price upside.

Currency

The US Dollar (USD) index looks on track to close weaker for the month of July. Softer-than-expected US jobs data and underwhelming US inflation data so far were the main triggers for the sharp turn lower in the USD. The shift in market narrative from “higher for longer” to “end in sight” or “peak rates” and “more cuts in 2024” has probably started.

Fed fund futures have started to price in about 4 rate cuts for 2024, an increase from about 2-3 cuts previously priced in at the start of July. The eventual shift to pricing in more rate cuts, should see US Treasury yields falling. In that scenario, the USD would have more room to head south. Some beneficiaries that could see more sustained gains as a result include currencies in Asia ex-Japan, the Japanese Yen (JPY) and even Gold.

Challenges abound

The month of June saw a significant move up by Wall Street, with the Dow Jones, S&P 500, and NASDAQ indexes notching gains of 4.6%, 6.5%, 6.6% respectively. The risk-on move weighed on safe-havens, as the US Treasury yield climbed 20 basis points to close the month at 3.84%. At their June meeting, The Fed decided to pause their rate hiking cycle for the first time in the last ten months, although investors are now starting to realize that it was indeed a hawkish pause. Policymakers are currently projected to still raise rates twice this year, bringing the Fed terminal rate to the 5.50% to 5.75% range. Nonetheless, the economic outlook remains challenging for investors.

In Europe, rate hikes continued last month with the ECB raising rates by 25 bps to 4.00% and the BOE raising rates by 50 bps to 5.00%. The 50 bps move by BOE came as a surprise to market participants that initially expected a softer hike of 25 bps. The move beyond the norm was driven by the latest inflation numbers from the Great Britain that showed no decline and is currently still at 8.7% YoY, one of the highest among developed countries. Investors currently perceive that the BOE main rate may hover in the range of 6.5% - 7.0% by year-end.

Moving further East, Japanese equities captured headlines as the NIKKEI 225 index recorded a significant jump of 7.5% in the month of June, closing the first half of 2023 on such a strong note. Japan is seen to be the most prominent alternative for risk assets outside the US and Europe as it saw massive foreign inflows last month. H-shares and A-shares also appreciated, although not as significant due to the fact the investors are still pessimistic on China’s economy and its outlook for the rest of the year. Numerous big banks have downgraded their growth forecasts for China, although mostly still believe that the world’s second largest economy will still be able to achieve the 5% growth target set by the government.

Domestically, from a fundamental perspective the economy showed more and more resilience. Inflation recorded another more than expected drop to 3.52% YoY. With the latest release, June’s CPI figure is currently at the government’s preferred target range of 3 ± 1%. Not only that, core inflation was also released better than expected at 2.58% YoY. Suffice to say, domestic consumption has been recovering well and is currently above pre-covid levels. Moreover, PMI manufacturing rose quite significantly, up from 50.3 to 52.5 last month as the latest sign of a healthy recovering economy. In the meantime, a big uncertainty comes from the political ground, as the country will soon enter electoral campaign, and more parties are expected to join forces. This has caused the equity market to move rather sideways in the past few months.

Equity

The JCI recorded a slight gain of 0.43% for the month of June, still far from recuperating its drop in the previous month where the stock market dropped more than 4%, which is the largest monthly decline since March 2021. Investors adopted a more wait & see approach toward risk assets as external uncertainties dominated sentiment. Whether it was anticipation of higher for longer interest rate environment or geopolitical tensions in Europe and Asia, a more cautious tone is being set both by local and foreign investors. With that in mind, foreign outflow was recorded at US$ 93 million last month. From a valuation’s perspective, the JCI is currently standing on a Price/EPS ratio of 14.1x; levels last seen in June 2020 during the start of the pandemic.

As previously mentioned, political uncertainty has triggered assumptions among market participants as to what next year would look like, hence causing the risk averse behaviour. Nonetheless, historically elections have been a prominent driver of consumption domestically and is believed to be one of the main catalysts for growth next year. All in all, the second half of 2023 should be more favourable for emerging markets including Indonesia as valuations in developed markets are relatively high at the moment and should drive investors to bargain hunt elsewhere, which already happened in Japan last month.

Bond

On the other hand, the bond market continued its move up last month with the 10-year bond yield trading at 6.26%. The benchmark yield fell below the 6.3% mark for the first time since December 2021 as yield hunters stayed and continued to accumulate domestic fixed income assets. Foreign investors played quite a huge role in June, recording a total net buy on the bond market for as much as US$ 1.98 billion as real yield remains highly attractive as opposed to ASEAN peers. At their June meeting, Bank Indonesia had kept the 7-day reverse repo rate unchanged as the market expects which should have been a catalyst for domestic bonds and currency. However, the hawkish pause by The Fed which was then followed by pro-tightening remarks by Fed President Jerome Powell helped push the strengthening of the USD. Nonetheless, in the medium term, cooled inflation and an attractive real yield will continue to charm foreign investors to our domestic bond market.

Currency

In the currency market, the Rupiah depreciated against the greenback for as much as 3.4% and was trading at Rp 15,066 at month-end. The USDIDR currency pair crossed back above the Rp 15,000/USD psychological handle last month, back to levels last seen in March. The move was mainly driven by the still pro-tightening stance adopted by the Fed amid their hawkish pause last month. Meanwhile, the latest FX Reserves number showed another decline from US$139.3 billion to US$ 137.5 billion, mainly due to the payment of foreign debt; but still equivalent to 6 months’ worth of imports and total foreign debt payment.

Juky Mariska, Wealth Management Head, Bank OCBC NISP Tbk

GLOBAL OUTLOOK

In the longer-term, investors should continue to focus on opportunities in Asia as the region is set to regain its place as the main engine of growth for the global economy following the end of the pandemic. – Eli Lee

The economic outlook remains highly challenging for investors. First, inflation continues to be persistently strong. Headline inflation rates have fallen from four-decade highs hit last year. For example, US consumer prices increased by more than 9% in the 12 months to June 2022 before slowing to a 4% pace in May this year. But after excluding volatile food and energy costs, core inflation rates remain high above 7% in the UK, around 5% in the US and Eurozone and even above 4% in Japan. Inflation is staying far above central banks’ 2% targets owing to strong demand as economies reopen from the pandemic, tight labour markets and ongoing supply chain disruptions. Policymakers are thus being forced to continue increasing interest rates this year even after last year’s rapid rate hikes.

In June, the Fed left its fed funds rate unchanged for the first time in 11 meetings at 5.00-5.25% to assess the impact of last year’s rate hikes on the US economy this year. But the central bank forecasts that it is likely to increase interest rates two more times this year if core inflation continues to be elevated. We anticipate at least one more 25 basis points (bps) rate increase when the Federal Open Market Committee (FOMC) meets on 25-26 July lifting the fed funds rate to 5.25-5.50%, its highest level since 2001.

Similarly, the ECB and BOE are set to continue increasing interest rates over the summer. The ECB raised its deposit rate by 25 bps in June to a two-decade high of 3.50% and signalled that another increase in July was likely while the BOE surprised by returning to 50bps hikes last month, lifting its bank rate to 5.00%.

Other central banks that have been forced by persistent inflation to resume interest rate increases after pausing earlier include the Reserve Bank of Australia (RBA) and the Bank of Canada (BoC). In contrast, only the Bank of Japan (BoJ) and the People’s Bank of China (PBOC) remain dovish. The BOJ is determined to keep its deposit rate below zero to allow Japan to finally escape its three lost decades after its bubble burst in 1990. Conversely, the PBOC has trimmed interest rates this year as China’s reopening from the pandemic has flagged.

Second, the economic outlook continues to be threatened by the risks of recession as interest rate hikes restrict consumption and slow growth. Amongst the major economies, the Eurozone is already in recession. The latest economic data for 2Q23 has also been soft, and we expect higher ECB interest rates will keep any rebound in GDP growth in 2024 modest. Similarly, the UK’s economy has stagnated for the last four quarters and GDP growth too is only likely to rebound modestly next year.

The US, however, has been more resilient despite the Fed increasing interest rates aggressively over the past year. We still expect the US economy will suffer a recession during 2023 or 2024 as the Fed will need to meaningfully slow the economy to curb persistent price pressures and help lower inflation towards its 2% target over the next couple of years. Weekly jobless benefit claims are starting to increase, an early warning sign that the economy may be heading into a downturn now.

Third, the economic outlook is also being undermined by uncertainty over China’s recovery. China’s reopening has flagged after a strong rebound at the start of the year. In 1Q23, economic activity bounced back as consumers returned in force. But in 2Q23, growth has lost momentum as confidence in the recovery has faltered. We thus lower our 2023 GDP forecast from 5.9% to 5.4%. For 2024, we see more trend-like GDP growth of 5.0% in China. In contrast, Japan is the one major economy that is set to grow well above its long-term trend in 2023 and 2024 as the country fully reopens from the pandemic, exports benefit from the weak Yen and the BOJ’s very dovish stance keeps stimulating activity. We forecast GDP to expand by 1.4% and 1.2% in 2023 and 2024 respectively.

For the world as a whole, global GDP growth is set to remain weak, below 3.0% in 2023 and 2024 owing to rolling recessions in Europe and UK first, the US later in 2023 and 2024, and due to China’s weaker-than-expected rebound from the pandemic. In contrast, the world economy expanded by 3.5% each year on average from the end of the Cold War in 1989-1990 to the start of the pandemic in 2020.

Investors should thus stay cautious on the near-term outlook.

In equities, we advocate a modestly Underweight stance, Neutral on the US and China, Overweight Japan as its economy finally recovers from three decades of lost growth, and Underweight Europe’s markets. Similarly, in fixed income, we see the Fed refraining from rate cuts in 2023 as the central bank keeps prioritising its fight against inflation over supporting growth. We thus expect the Fed’s hawkishness and likely recession will push US Treasury (UST) yields down over the next 12 months.

Asia’s economies are thus likely to outperform the US, UK and Eurozone over 2023 and 2024 due to the tailwinds from reopening and lower headwinds from central bank interest rate rises. Source: Bank of Singapore

EQUITIES

Pockets of opportunities

Growth concerns continue to weigh on the global equity outlook, but we see pockets of opportunities. Japan equities stand out as the economy remains on a recovery path. – Eli Lee

US – Potential headwinds in 2H23

Markets are discounting a more hawkish Fed, as expectations now reflect a further 25 basis points (bps) hike in July without any rate cuts this year. Despite the strong start to the year, the S&P 500 Index has recently shown some signs of consolidation. Aside from elevated interest rates, we see other potential headwinds for the US economy in 2H23, including tighter liquidity conditions arising from greater Treasury bill issuances and tighter lending standards to enterprises.

The S&P 500 Index’s narrow breadth rally stemming from the artificial intelligence (AI) narrative leaves the index vulnerable to pull-backs, while a rally broadening beyond tech to the other index constituents would be positive. All considered, we maintain an overall Neutral position in US equities at this juncture and prefer quality companies and dividend growers.

Europe – Underperforming other key regions

Month to date, the MSCI Europe Index has underperformed other key regions such as Japan, the US and Asia ex-Japan in terms of price performance. The ECB remains relatively hawkish among DM central banks, which is a headwind for asset prices, and recent softer economic data in Europe, highlight weakening growth momentum amidst a weakening credit cycle. Our downgrade of the Global Materials sector to Underweight reflects our concerns relating to demand in the face of slower global growth ahead, Europe has meaningful exposure to these sectors, and for now we await better entry opportunities for quality companies.

Japan - Continued economic recovery driven by strong services sector

June continued to be a good month for Japan equities. While external economic indicators such as trade growth continue to decline in line with slowing global manufacturing, other economic and monetary indicators

such as loan growth, money supply M2 growth and wage growth are still resilient or even improving at the margin. Manufacturing and service purchasing managers’ indices have also been improving for Japan since the bottom in late 2022 and early 2023. Comments from the recent BOJ meeting also suggest the central bank is likely not in a hurry to tighten its monetary policy stance, preferring to let the economic recovery go on for longer due to a deflationary environment in Japan over the past 30 years. Within Japan, we prefer Financials, Consumer, Industrials and Healthcare which will benefit from loose monetary policy, recovery in domestic consumer and tourism growth, and the recovery of automotive industry production.

Asia ex-Japan – Don’t dismiss China

The MSCI Asia ex-Japan Index had a volatile trading month in June, initially outperforming before erasing most of its gains due to the drag from China and Hong Kong.

Within the ASEAN region, growth prospects could be stifled in the near-term given China’s stuttering recovery momentum. ASEAN economies are dependent on China for trade and inbound Chinese tourism. While the former would likely remain lacklustre, we see room for the latter to rebound more strongly in 2H23, given rising Chinese household savings and potential pent-up travel demand being unleashed. This would benefit industries such as accommodation, retail, food & beverage and gaming in these countries.

China – Expectations building up for targeted easing

Hong Kong and offshore Chinese equities generally performed in line with the broader Asia ex-Japan market in the past month. There have been signs of further stabilisation in US-China tensions which is one of the key positive catalysts. US Secretary of State Anthony Blinken visited China visit in June, while US Treasury Secretary Janet Yellen visited in July.

Investors have been anticipating a step up in targeted easing measures after the State Council meeting and the July Politburo meeting. Our base case is that we do not expect a massive broad-based easing like those in previous easing cycles. Investor confidence may stay muted and market indices may remain range-bound until there is more clarity on growth momentum sustainability and further stabilisation in US-China tension. We advocate a barbell strategy, preferring quality dividend yield plays and potential stimulus beneficiaries.

Global Sectors

We are downgrading the Global Materials sector from Neutral to Underweight on the back of muted demand in the face of slower global growth ahead, impacting firms ranging from metal miners to chemical companies.

Although we have Neutral ratings for Information Technology and Communication Services, we highlight nuances in the subsectors. We are positive on the software and internet space as beneficiaries of AI-driven demand over the long-term. However, in the short term, we are concerned about inflated expectations and have a relative preference for internet over the software segment, and are also selective in our preferences for AI beneficiaries. These include names like Amazon, Alphabet and Salesforce.

An area where we also see continued growth over the longer term is the electric vehicle (EV) segment, which is led by the Chinese market.

BONDS

Barbell strategy

In fixed income, we favour Developed Market Investment Grade bonds. We advocate a barbell strategy in terms of duration - on a tactical basis, we believe that the short-end of the curve offers attractive carry opportunities, while the long-end offers greater long-term price appreciation upside with potentially higher volatility. – Vasu Menon

June proved to be a momentous month for fixed income markets. The lowest US consumer price index (CPI) print in two years was followed quickly thereafter by a Federal Reserve (Fed) pause after ten consecutive rate hikes. However, via a hawkish rhetoric and a dot plot that suggested two additional rate hikes this year and no pivot until 2024, the Fed underscored that this was a “hawkish pause”. In Europe, the European Central Bank (ECB) took a more aggressive stance with another 25-basis point (bps) rate hike. The US Treasury (UST) market factored in a more hawkish stance by the Fed, with two-year yields rising to their highest since early March.

Massive spread tightening globally

Global High Yield (HY) bonds outperformed Investment Grade (IG) bonds in the month of June, with massive spread tightening. As of 26 June 2023, US HY, European HY and Emerging Markets (EM) HY spreads tightened by 24bps, 29bps and 37bps month-to-date (MTD) respectively. Global IG spreads narrowed by a small extent, with US IG, European IG and EM IG tighter by 6bps, 8bps and 13bps MTD respectively.

Barbell strategy

We forecast another 25bps rate hike at the Fed’s meeting in July following the Fed’s hawkish stance at its June Federal Open Market Committee (FOMC) meeting. In the short term, the higher Fed funds path will translate into rates staying high over the next few months. We therefore expect the UST yield curve to shift upwards, but more so at the front end. We have revised the 3-month 2Y UST yields forecast upwards by 50bps to 4.50% and raised the 10Y UST yields forecast by 20bps to 3.70%.

Remain neutral on EM corporate bonds

We maintain our Neutral rating on EM Corporates as company fundamentals remain broadly resilient with leverage at its lowest in a decade. Technicals should remain largely supportive as robust new issuances in recent years have removed the need for most companies to tap an uncertain and volatile new issue market. We retain our preference for IG over HY amidst global macro uncertainty and the implicit support of a high percentage of quasi-sovereigns (around 35%) in the EM IG Universe.

Maintain underweight DM HY

A restrictive pause coupled with muted growth could prove a significant headwind for Developed Markets (DM) HY. A “higher for longer” rate environment could erode debt affordability and spur higher defaults in HY markets, which have already increased to 3.4% in May on a last 12-month basis. We maintain our Underweight recommendation on DM HY as spreads are not sufficiently pricing in our base case of a recession sometime in the next 12 months.

Prefer Asia IG within EM IG

We maintain our preference for Asia IG within EM IG. Within Asia IG, we continue to like the “AA”- rated South Korean quasi-sovereigns and “BBB”- rated India and Indonesia high quality corporates and quasi-sovereigns.

FX & COMMODITIES

Oil’s cautious mood

Oil prices have been languishing as concerns over demand continue to build. We have lowered our 12-month Brent forecast to US$85/barrel from USD92/barrel previously. We still expect higher oil prices in 6-12 months, but upside is likely to be more limited. – Vasu Menon

Gold

The pullback in gold price is panning out as we expected amid short-term headwinds from rising yields globally. Resilient labour markets and sticky services inflation are increasing the possibility of the US Federal Reserve (Fed) remaining hawkish for a bit longer despite pausing in June. Central bank purchases, which were a key support for gold prices in 2022, also turned negative in April for the first time in 12 months.

Oil

We have lowered our 12-month Brent oil forecast to US$85/barrel from US$92/barrel. We expect Brent oil prices to move sideways over this quarter before grinding higher on the back of OPEC discipline, US SPR refill and rising China demand.

Currency

There is a confluence of themes at play: 1) Global growth concerns somewhat still weigh on certain currencies (i.e., Korean Won, Australian Dollar and New Zealand Dollar) that are sensitive to growth cycles, while 2) USD yield advantage continues to contribute to the USD’s outperformance against the lower yielders (i.e. Gold, Thai Baht, Japanese Yen). These themes can continue to drive currency moves in coming weeks until there is greater clarity on whether the Fed tightens further, if inflationary pressures do ease off and if China-stimulus is forthcoming. In the meantime, fears of more Fed rate hikes, “higher for longer” rates in developed markets and rising concerns of global growth could weigh on sentiments and underpin the US Dollar’s (USD’s) strength.

As for the Euro (EUR), short term risk of further softness may persist if the Fed does walk its hawkish talk, but we believe EUR-softness may be temporary. The ECB is still on a tightening bias with another 25bps rate hike likely in July while Lagarde said “we are not thinking about pausing”. This remains in line with our view that the ECB is still on tightening mode while the Fed is nearing its end. Potentially, the Fed may even be closer to a pivot as early as 1Q 2024 versus the ECB in 2H 2024. Convergence in ECB-Fed monetary policies can help to narrow EU-UST yield differentials, and this is supportive of the EUR.

MONTHLY OUTLOOK JUNE: Peak Rates

Stock market volatility remain high throughout the month of May, driven by several factors such as the ongoing war between Russia and Ukraine, high global inflation, and the uncertainty of debt ceiling talks in the US which finally had been resolved by the White House, avoiding a first-ever default. Not only that, from a data perspective, released indicators have not been stable and encouraging enough to erase fear amongst investors. For instance, unemployment rose from 3.4% to 3.7% on its latest reading while the ISM Manufacturing PMI number recorded another contraction at 46.9. However, currently investors’ focus is geared towards the FOMC Meeting in June where The Fed is expected to hold rates at 5.00% - 5.25% with the probability of rate cuts happening in the second semester.

In Asia, China’s economy still has not shown the degree of stability that market participants expect. The latest Trade data was a disappointment, showing that exports contracted by 7.5% compared to an expansion of 8.5% in the previous month. With that drop, China’s trade balance experienced a massive deceleration to US$ 65.81 billion from previously US$ 90.21 billion. Nonetheless, the Chinese government through its central bank the PBOC still held firm with their accommodative and supportive policies, such as lowering their loan prime rate and reserve requirements to support the economy.

Domestically, growth is currently still on the right track and is expected to remain so, aligned with the government’s target of 5%. Consumer confidence rose last month from 126.1 to 128.3 verifying optimism within the population. Investors’ optimism is also supported by the fact that the country is entering elections next year, which historically have proven to be a good attraction for foreign investments and domestic consumption. From the central bank’s standpoint, inflation decelerated from 4.33% to 4% on a yearly basis (YoY). This should open the possibility of rate cuts in the second half of this year even though currently most estimates still point towards a rate – hold at Bank Indonesia’s next RDG meeting.

Equity

The equity market declined for as much as 4.08% last month, with the Energy and Basic Materials sector leading the drop by 18.39% and 16.02% consecutively. The move lower was also contributed by the foreign outflow during the month for as much as US$ 13.9 million.

However, the government remain confident and positive that growth can still achieve a number in the range of 5.0% - 5.3% this year. The performance of the stock market in 2023 should gain support from several major sectors such as Consumption, Finance, Telecommunication and Healthcare primarily because the kick-off on political campaigns will happen in the second semester and entering 2024.

Bonds

On the other hand, the bond market went on a rally in the month of May, this can be seen by the move down by the 10-year benchmark yield to hover around 6.33% at the end of the month. Unlike in the equity market, foreign investors continued to accumulate domestic fixed income assets, driving foreign ownership to 15.26% which is equivalent to Rp 829.36 trillion. Foreign appetite for domestic bonds is propelled, and not limited to, the US central bank’s shift towards a more dovish tone. The Fed had somewhat indicated that they would end their hiking cycle once they see a significant and stable drop in their CPI numbers, while recession risks subside.

Moreover, with inflation currently at 4%, Bank Indonesia will have room for rate cuts to start happening in the second half of this year, which will ultimately benefit the bond market. From a foreign investors’ perspective, this would imply a relatively high Real-Yield for Indonesian government bonds and will be a more attractive asset compared to other comparable investment grade bonds.

Currency

In the currency market, the Rupiah depreciated against the greenback last month to approximately Rp 14.994/USD. The move was propped by the uncertainty of The Fed’s monetary policy previously, which had been a driving force for the US Dollar. However, since The Fed shifted to a more dovish tone, the greenback can be seen starting to lose steam and should sooner or later start depreciating.

The somewhat stability of the Rupiah is also supported by the continuity of trade balance surplus in the month of Mei, where it recorded a surplus of US$ 3.94 billion. Not only that, foreign reserves were also at a satisfying level even though it recorded a slight decline to US$ 139.3 billion which is equivalent to 6.1 months’ worth of import or 6 months’ worth of import and foreign debt, while the international standard for economies is only at 3 months’ worth of import.

Juky Mariska, Wealth Management Head, Bank OCBC NISP Tbk

GLOBAL OUTLOOK

Unusually uncertain

The economic outlook is unusually uncertain, and inflation is proving stubbornly high despite central banks’ rapid interest rate increases over the last year and a half. Thus, investors should not rule out further bouts of turbulence in financial markets. – Eli Lee

The economic outlook is unusually uncertain. In the US, activity has been surprisingly resilient but the Federal Reserve’s (Fed) goal of curbing inflation seems likely to cause recession. In Europe, stubborn inflation is set to keep the European Central Bank (ECB) and Bank of England (BoE) increasing interest rates despite weak growth. In China, reopening is boosting the economy but less vigorously than hoped while in Japan, the ‘lost decades’ of deflation finally appear to be ending but the Bank of Japan (BoJ) still needs to exit its policy of capping bond yields without hurting markets. Investors should thus maintain a cautious stance until the outlook becomes clearer.

Be wary of the Fed

The US economy is slowing. GDP growth fell from an annualised 2.6% pace in 4Q22 to 1.3% in 1Q23 and we forecast recession in 2H23 is likely as last year’s rate hikes hurt activity this year. But investors should still be cautious about the Fed as inflation does not appear to be trending back towards the Fed’s 2% target. There have been no dovish signals from the Fed that the central bank will pivot to rate cuts later in 2023 if the US enters recession as we forecast.

Also bear in mind that the Fed is shrinking its balance sheet – quantitative tightening – to curb inflation. This will reduce liquidity in the financial sector, threaten more failures for smaller US banks struggling to retain deposits and tighten credit. The Fed warned: “tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring and inflation.”

Further rate rises are likely in Europe

Stubbornly high inflation in Europe also signals that the region’s central banks are likely to keep raising interest rates. In the Eurozone, we expect the ECB to make at least two more 25bps hikes in June and July, lifting its deposit rate to 3.75%, its highest level since 2001. Similarly, we now forecast the BoE to make two further 25bps rate hikes in June and August, raising its bank rate to 5.00% after April’s UK inflation data was worse than feared. Easing food and energy costs reduced headline inflation from 10.1% to 8.7%. But core inflation rose to 6.8%, its highest since March 1992.

China’s reopening boom eases

Inflation remains tame in China as its economy reopens from the pandemic. In April, consumer prices only rose 0.1% compared to a year ago. Thus, the People’s Bank of China (PBoC) is highly unlikely to undermine the economy’s recovery by increasing interest rates to curb inflation.

But after a strong start to the year in 1Q23, China’s reopening boom appears to be easing in 2Q23. April’s purchasing manager indices (PMI) dipped for both manufacturing and services, credit growth expanded less than expected and retail sales, fixed asset investment and industrial production all missed forecasts. However, we expect China’s GDP growth will still almost double from 3.0% to 5.9% this year.

Japan’s lost decades may be ending

Japan has attracted fresh attention as the Nikkei 225 Index made new 33-year highs as the economy finally appears to be escaping from its three “lost decades” of deflation and weak growth after its huge 1980s bubble burst at the start of 1990. In 1Q23, GDP expanded at an annualised rate of 1.6%, well above expectations, on stronger consumption and capital expenditures. At the same time, Japan’s core inflation rate, excluding food and energy, has reached four-decade highs above 4%.

Japan’s markets have also become attractive to global investors as the Japanese Yen (JPY) is trading at very weak levels. The BoJ is likely to lift its cap on 10Y bond yields this year as inflation firms – a risk that may cause near-term volatility in asset markets. But the central bank is set to maintain its deposit rate at -0.10% in 2023 to ensure inflation is sustained around its 2% goal. Thus, the BoJ’s dovish stance on interest rates is likely to keep supporting risk assets in Japan this year.

EQUITIES

Recalibrating our views

Given Japan’s firm economic outlook, accommodative policy stance and upside from corporate governance reforms, we upgrade Japan equities from Neutral to Overweight. Meanwhile, given increased growth uncertainties in China, we downgrade China/Hong Kong to Neutral. – Eli Lee

US – Wary of near-term volatility

The concerns around a potential US debt default have eased as the debt ceiling has been suspended till 1 January 2025. However, the US Treasury will now have to rapidly replenish its cash balance by selling more than USD1 trillion of Treasury securities through the rest of 2023. This could be a headwind for equities, as liquidity will be withdrawn from the system in parallel with the ongoing quantitative tightening being conducted by the Federal Reserve (Fed). We prefer to hold a Neutral stance at this point, as tighter credit conditions and stronger macro headwinds leave the S&P 500 Index susceptible to near-term pullbacks.

Europe - Resilient earnings in 1Q23 but ECB to continue tightening versus the Fed’s likely pause

The 1Q23 earnings season has ended with corporate earnings remaining resilient and prompting slight upward revisions by the street. Meanwhile, the Fed hiking cycle may be coming to an end, but the European Central Bank (ECB) continues to tighten policy. Such a scenario could result in European equities underperformance versus the US.

Japan - Continued economic recovery driven by strong services sector

Japan printed an annualised 1Q23 GDP growth of 1.6%, coming in above expectations, driven by stronger consumption and capital expenditures. While the Manufacturing sector remains weak, being affected by a global slowdown in tech and industrial exports, purchasing managers’ index (PMI) data indicates that the services segment is still strongly expansionary, driven by the recovery in domestic spending post-Covid, stronger wage gains and recovery in inbound travel. We continue to expect potential yield cap adjustments later in the year by the Bank of Japan (BoJ), although monetary policy is likely to remain accommodative. Therefore, we upgrade Japan from Neutral to Overweight

Asia ex-Japan - Tempering our earnings growth expectations

Besides our downgrade of China and Hong Kong to Neutral, we also lower our rating on Taiwan from Neutral to Underweight given rising geopolitical tensions and unattractive valuations. On the other hand, we have upgraded India from Neutral to Overweight, on account of increasingly positive economic data, such as declining inflation and increase in services PMI to 62, the highest level since mid-2010.

We adjust our earnings per share projections downwards, and now expect the MSCI Asia ex-Japan Index to record earnings per share growth of 1.5% and 18.0% in 2023 and 2024, respectively. Both are below consensus’ forecasts, but growth magnitude would still be slightly above other key regions such as the US and Europe.

China – Increased growth uncertainties

Both offshore (MSCI China Index) and onshore (CSI 300 Index) Chinese equities pulled back in the past month, driven by weaker-than-expected activity data and concerns over US-China tensions. More incremental targeted easing will be needed to sustain the growth momentum and we judge that growth uncertainties have risen. We downgrade China and Hong Kong equities from Overweight to Neutral.

The silver lining is that MSCI China Index’s earnings estimates revision has stabilised at +0.1% MoM. Overall 1Q23 earnings rose by about 7% YoY, with the Internet sector having the strongest earnings performance due to disciplined cost control. Despite subdued macro data, earnings momentum should be supported by lower commodity prices. In the medium-term, we focus on key investment themes that align with policy priorities, i.e. boosting domestic consumption, accelerating technology and innovation, and “Digital China”.

Global Sectors

Over the past month, global sectors that outperformed were, Information Technology and Communication Services, while Energy was the worst performing. On the other hand, US technology stocks have been supported by stabilising end demand and the generative AI theme. In the near-term, we think consumer spending could continue to be resilient as inflation fears subside, as inflation fears subside.

As for Chinese internet companies, we remain broadly positive on the sector on the back of rising earnings expectations and attractive valuations.

Meanwhile, volatility persists in the US Banking sector, especially for regional banks. We are cautious on a negative feedback loop, as deposit outflows and more restrictive credit availability could result in tighter lending conditions. In terms of positioning, we prefer large cap banks over the regional banks.

BONDS

Prefer investment grade bonds

In fixed income we remain Overweight on Developed Investment Grade Bonds and maintain Underweight on Developed Market High Yield bonds as spreads in US High Yield are not sufficiently pricing in our base case of a recession in the 2H23.– Vasu Menon

Credit markets largely stable

Except for Emerging Markets (EM) High Yield (HY) bonds, spreads were generally stable to marginally tighter in the month of May. Global Developed Market (DM) Investment Grade (IG) Credit was flat while Global DM HY was 9bps tighter. In EM, IG spreads tightened by 5 bps while HY widened by a considerable 45 bps.

Duration is back in vogue

At current US Treasury yield levels, we think that investors should extend into longer duration to lock in higher yields as we approach the end of the Fed hiking cycle. History from the previous five hiking cycles dating back to 1994 shows that longer maturities in US Treasuries (10Y+) consistently outperformed front end (1-5Y) and intermediate (5-10Y) maturities at the conclusion of rate hiking cycles, over 3, 6 and 12 months after the last rate hike.

Underweight DM HY

Tighter lending standards and credit conditions, and lower corporate profitability could erode credit quality and spur higher defaults in the HY markets, which have already increased year-to-date, albeit from historically low levels. Both S&P and Moody’s expect the US HY default rate to reach 4% by December 2023. We maintain our Underweight recommendation on DM HY as spreads in US HY are not sufficiently pricing in our base case of a recession sometime in the 2H23.

Neutral rating on EM

We maintain our Neutral rating on EM Corporates as company fundamentals remain broadly resilient. Technicals should remain largely supportive as robust new issuances in recent years have removed the need for most companies to tap an uncertain and volatile new issue market. We retain our preference for IG over HY amidst global macro uncertainty. EM HY has underperformed sharply over the past month. Nonetheless, we believe that the worst in spread widening is largely behind us.

Maintain preference for Asia IG

We maintain our preference for Asia IG within EM IG. Amidst global market volatility during the past month, Asia IG held up relatively well, with YTD total returns at 3.0% as of 24 May 2023, outperforming most other IG segments. HY/IG spreads may have widened from 781bps at the start of the year to 830bps as of 24 May 2023. However, we continue to favour IG and remain selective in HY within Asia.

FX & COMMODITIES

Oil languishing on mixed signals

Brent oil prices have been languishing in the mid-USD70s/barrel on mixed signals. OPEC cuts and Strategic Petroleum Reserve refills should limit the downside for oil prices. – Vasu Menon

Gold

The resolution of the US debt ceiling standoff could see gold price giving up gains in the near term. There is also a risk that further Federal Reserve (Fed) rate cuts in 2023 getting priced out could result in a stronger US Dollar (USD) that will weigh on gold in the short-term, especially in the context of disappointing China and European data.

The medium-term outlook for gold is positive. Gold’s appeal should strengthen anew in tandem with a weaker USD by early 2024, dragged down by the approaching Fed easing cycle amid a US recession and subsiding US inflation.

Central banks’ gold purchases led by emerging markets will continue to be an important source of demand as elevated geopolitical tensions heighten sanction risk. While gold is not a complete hedge against sanction risks until it is stored domestically, it does play a role in mitigating the impact of sanctions.

Oil

Brent oil prices have been languishing in the mid-USD70s/barrel on mixed signals. We expect Brent oil prices to largely move sideways this quarter although we look for a pick-up in 2H23 towards USD92/bbl in a year’s time – above current forward prices. All eyes now turn to OPEC. The recent 1.6mb/d output cut is only a month old, but recent weakness in oil prices have raised the prospect the group may reduce output even further. The market is also getting increasingly frustrated with Russia’s promise to reduce supply. Russian crude oil exports are edging lower but still show no signs of the 0.5mb/d cut it insisted the country is making.

Currency

Seasonality trends in May gained the upper hand with the US Dollar (USD) broadly firmer against most currencies. Key drivers behind the move include (i) a return of global growth concerns after Germany entered a technical recession while China’s reopening hopes faded on a poor run of economic data; (ii) US inflation (actual and expectations) unexpectedly rebounded; (iii) hawkish remarks made by Fed officials; (iv) a less pessimistic US growth outlook as the second reading of the 1Q GDP growth was revised higher; (v) a sharp unwinding of dovish Fed expectations. However, The Fed nearing an end of its tightening cycle typically implies limited room for USD upside. Softer US labour data and a more entrenched disinflation trend may help to keep USD bulls from breaking higher.

The Euro (EUR) continued to trade lower, owing to the USD’s resurgence. We opine that the Fed is probably closer to a pivot than the ECB and the resumption of the convergence in ECB-Fed policy should still support the EUR. As it stands, markets are still looking for about two more rate hikes from ECB this year, thus should provide support for the EUR’s recovery.

The offshore Renminbi (CNH) has weakened against the USD. A disappointing set of China activity data, a significant slowdown in loans and credit growth, softer manufacturing PMIs and very subdued inflationary pressure were evidence that China’s reopening story is losing momentum and markets are increasingly impatient. Overall, path of least resistance for the CNH versus the USD is to is for further weakness, considering negative RMB carry, push-back in China’s reopening momentum and foreign outflows. A recovery in the CNH will probably require some of these conditions to play out: (i) Fed goes on an extended pause or cuts rates; (ii) global growth prospects improve; (iii) China’s reopening boost materialises; (iv) foreign fund inflows return.

MARKET OUTLOOK MAY: Build To Last

The first quarter of earnings season, which started in the second week of April, became the global economic condition references for both developed and emerging countries. According to FactSet data at the end of April 2023, 79% of companies listed in S&P 500 index, have reported positive earnings, amongst 74% reported earnings exceed expectations. This has spurred optimism in the global indices.

However, global financial market continues to face challenges. Ongoing conflict of Russia-Ukraine, US-China tension on Taiwan related issue, also the looming uncertainty over the US debt ceiling which may trigger default. Treasury Secretary, Janet Yellen warned the US government would encounter default of its debt by June 1^st, 2023, should no agreement to raise or pause the US$ 31 trillion ceiling is reached.

In Asia, China's economy seems to struggle. Manufacturing PMI in April contracted at 49.2, compared to 51.4 previously. Dampened recovery path in China's manufacturing sector correlated with low market demand. However, IMF raised its 2023 Asia Pacific Region economic growth projection to 4.6% from 4.3%. IMF noted that the economic recovery in China and India would become the key factor in driving growth in Asia Pacific region.

Moving to domestic market, Indonesian economic growth for the first quarter of 2023 was reported at 5.03%, higher than consensus 4.97%. Contributing to economic growth, were the rising domestic consumption, especially in the transportation and warehousing sectors. Furthermore, inflation figure in April came softer at 4.33%, compared to 4.97% previously, as commodity prices continue to move downhill. On the policy side, Bank Indonesia (BI) maintained the BI 7-Day Reverse Repo Rate at 5.75%. BI consider the decision is sufficient to keep the price at around 3.0 ± 1% until the end of 2023.

Equity

The JCI recorded an increase 1.62% throughout April. Shares in Property and Real Estate sectors led the increase of 1.94% and 1.83% respectively. On top of improved market sentiment, the rally was also supported IDR 13.3 trillion foreign inflow throughout 2022.

Amid loomingconcerns of slower growth, especially from US and Europe, the domestic economy is estimated to grow at around 5 to 5.3% in 2023. Improved economic backdrop will continue to provide support for the stock market, especially for consumer, financial, telecommunication and healthcare sector in 2023, as the political year jumpstarts in the next semester.

Bonds

Bond market improved in April. The 10Y Indo Government Bond Yield declined by 4.17% to 6.48% level, which signaled the bond price increase. Foreign investors booked net purchase of IDR 3.6 trillion throughout the month. Rising risk appetite was also prompted by market expectation that Fed may reach the peak of tightening cycle, amidst persistent inflation and rising global recession risk.

Recent rally in the bond market may potentially trigger investors to secure gains. However, in medium term, cooled inflation and attractive real yield (spread between yield and inflation) will continue to charm foreign investors to continue entering the domestic bond market.

Currency

Rupiah strengthened throughout April against US Dollar by -2.48% Rp. 14,600. Growing market expectation on Fed’s rate hike pause has supported Rupiah to move stronger. Contributing to stronger Rupiah, also came from USD 2.9 billion surplus trade balance in March 2023, and FX Reserve at USD 144 billion, which equivalent to 6.4 months of imports financing 6.4 months or 6.3 months of imports and repayment of the government's foreign debt, and also above the international adequacy standard of around 3 months of imports.

Juky Mariska, Wealth Management Head, Bank OCBC NISP Tbk

GLOBAL OUTLOOK

Outlook still challenging

The economic outlook continues to be challenging and investors should therefore maintain a cautious stance. Inflation remains well above central banks’ 2% targets while recession risks in the US are rising as the banking sector pulls back on lending. – Eli Lee

The economic outlook continues to be challenging in the first half of 2023. Investors should therefore maintain a cautious stance.

First, inflation has peaked in the major economies but remains well above central banks’ 2% targets. In the US, UK and Eurozone, consumer prices are 5.0%, 10.1% and 6.9% respectively, higher than a year ago. Even in Japan, despite three decades of deflation and weak inflation, consumer prices are rising by more than 3.0%. The shocks of the pandemic, the war in Ukraine and the populism that emerged from the UK’s vote in 2016 to leave the European Union and the election of Donald Trump are keeping inflation far above the 2% goals of the Fed, the ECB, the Bank of Japan (BoJ) and the Bank of England (BOE). Only in China is inflation-tame below 1.0% as the country reopens from the pandemic.

Second, recession risks in the US are rising as smaller banks struggle for deposits while growth also remains weak in Europe. Only China is set to experience faster growth this year as the country reopens from the pandemic.

The threat of US recession is a major risk to the outlook.

Last year, the US economy expanded by 2.1%, close to its long-term GDP growth rate. Unemployment fell below 4% and core inflation reached as high as 5.4% (the Fed tracks inflation using changes in personal consumption expenditure (PCE) prices).

This year, we think there is only a slim chance of the economy remaining overheated as the Fed has increased its fed funds interest rate rapidly from near zero levels during the pandemic to 5.00-5.25 % in May to curb inflation. We therefore expect US growth will fall below last year’s 2.1% rate. Ideally, the Fed’s rate hikes would cause a soft landing for the economy by lowering core inflation back to below 3.0% by the end of the year and thus on track to hit the central bank’s 2% target in 2024.

At the same time, if unemployment stayed low below 4.0% then the impact on growth from the Fed’s rate hikes would be limited, therefore shielding investor sentiment and risk assets.

But we think the most likely scenario is for the US economy to suffer a recession in the second half of 2023 - through GDP contracting for two quarters in a row. Core PCE inflation is still running at 4.6% this year. Thus, the Fed will need to keep interest rates elevated around 5% for the rest of 2023 to continue slowing the economy and reducing inflationary pressures. Even then, we expect core inflation is still likely to be above 3.0% at the end of the year. This will prevent the Fed from cutting interest rates even if its tight monetary policies push unemployment up from 3.5% currently to over 4.0% by the end of 2023.

The rise in unemployment is likely to be sufficient to tip the US economy into recession in the second half of 2023. As the chart above shows, historically all US recessions since the Second World War have been preceded by the unemployment rate – on a 3-month moving average basis - rising by 0.5 percentage points or more from its low of the last 12 months. This is the Sahm Rule, named after a former Fed economist who highlighted the relationship between a weakening labour market and the rising risks of recession. For 2023, the unemployment rate would need to increase from its low of 3.4% in January to around 4.0% by the end of the year for the Sahm Rule to signal the economy will suffer recession.

Smaller US banks have been suffering as the Fed’s interest rate rises increased bond yields, hitting the banks’ holdings of Treasury bonds. At the same time, higher interest rates have caused smaller US banks to struggle to retain deposits as money market funds offer much higher returns. Thus, US depositors have been shifting funds to larger banks for safely, making smaller banks less willing to lend to borrowers. That, in turn, increases the risk of a credit crunch and the US economy falling into recession.

In response to March’s bank failures, the Fed set up a new Bank Term Funding Programme to allow illiquid banks to borrow against the face value of their Treasury bonds. But the central bank is carrying on shrinking its balance sheet - quantitative tightening (QT), the opposite of quantitative easing (QE) - to curb inflation. This will keep reducing the overall levels of bank deposits and liquidity in the US financial sector to the detriment of the smaller banks this year.

We forecast the Fed’s 25 basis points (bps) rate rise in May to 5.00-5.25% will be the peak of its tightening cycle. Similarly, we think the ECB’s and the BOE’s benchmark interest rates will peak near 4.00% and 4.50% respectively in the current quarter. But we do not expect any of the major central banks will be able to cut interest rates later this year even if recession strikes as inflation is set to remain well above their 2% targets by the end of 2023. Investors should therefore maintain a cautious stance and not expect central banks to turn dovish and pivot towards early interest rate cuts in the second half of the year.

EQUITIES

We maintain our regional allocations with Neutral weights on the US and Japan, Underweight on Europe and Overweight on Asia ex-Japan.– Eli Lee

Financial volatility eases, but risks remain

Following flashes of volatility in March related to US and European bank failures, markets turned calmer in April. In the US, the looming debt ceiling negotiations could introduce volatility across risk assets, while in Europe, stronger-than-expected economic data and core inflation numbers could lead to further monetary tightening later this year. In Japan, we expect monetary policy to lean more hawkish later this year as the Bank of Japan (BOJ) prepares to exit its yield curve control (YCC) policy.

US - Debt ceiling coming into focus

The latest earnings results suggest that the lagged effects of tighter monetary policy are starting to take a toll on earnings, albeit from still healthy levels. Deposit outflows across US banks have broadly stabilised but net interest margin (NIM) pressures continue to mount as the health of weaker regional banks remain a concern. While an agreement to lift the debt ceiling is by far the most likely outcome, any significant cutback on growth initiatives spending could weigh on market sentiment.

Europe - Monetary tightening still set to drag growth

Relatively healthy economic data has emerged from Europe, but at the same time this also gives greater room for the European Central Bank (ECB) to lean more hawkish ahead. As it stands, core inflation in Europe remains strong and we expect monetary tightening to continue. This would likely result in tighter credit conditions and lending standards, which would weigh on both economic and profit growth going forward.

Japan - Attention on new fiscal year guidance as earnings season kicks off

Like recent US economic indicators, there is an ongoing moderation in Japan’s growth and its manufacturing sector. We favour a selective approach with key bottom-up picks in defensive consumer staples ideas, reopening beneficiaries and select growth plays trading at undemanding valuations.

Asia ex-Japan - Upgrading India and Philippines and downgrading Taiwan

The MSCI Asia ex-Japan Index declined for the month of April largely due to increased geopolitical tensions, a soft start to the 1Q23 earnings season and subdued foreign inflows to the region.

We are making some rating changes. First, we downgrade MSCI Taiwan to Neutral due to its outperformance YTD, coupled with rising cross strait tensions and weaker FY23 outlook on the semiconductor sector, which carries a significant weightage in the MSCI Taiwan Index.

Second, we upgrade MSCI India from Underweight to Neutral, as its underperformance YTD has brought its forward price-to-earnings (P/E) valuation to more reasonable levels relative to its historical average and its premium to the MSCI All Country World Index (ACWI) has also narrowed materially. Furthermore, the decline in India’s inflation rate and pause in rate hikes by the Reserve Bank of India would provide some support to investor sentiment, in our view.

Third, we upgrade MSCI Philippines to Overweight on account of its cheap valuations, with its forward P/E multiple coming in more than two standard deviations below its historical 10-year average, coupled with decent earnings growth in FY23 and FY24 and the likelihood that its inflation has peaked.

China/HK - Rebalancing policy priorities

April saw a pullback in Chinese and Hong Kong equities. However, looking ahead, robust macro data should support earnings stabilisation and recovery in 2H23. Domestic consumption is expected to further recover. Travel bookings for the Labour Day holiday appear to have surpassed 2019 levels. Amid concerns on resurfacing of US-China geopolitical tension, it was reported that US President Biden will sign an Executive Order that will restrict US direct investment in certain high-tech areas.

Sector views

Over the past month, sectors that were more defensive in nature outperformed, with Consumer Staples, Healthcare and Utilities leading the pack. These three are also among those which we have Overweight ratings on currently.

BONDS

Prefer investment grade bonds

We continue to maintain Overweight position in Developed Markets Investment Grade bonds amidst a recessionary backdrop and as a hedge against rising event risks from the debt ceiling, geopolitical tensions and concerns about US regional banks. – Vasu Menon

Global credit markets were in calmer waters in April after a turbulent March. Credit spreads have generally retraced their prior widening, and volatility across global markets have also receded from elevated levels. Nevertheless, economic uncertainty remains as investors await further clarity about the Fed’s policy path and the broader US economic outlook. Under such a backdrop, we retain our preference for high-quality Investment Grade (IG) names and reiterate a defensive positioning in the High Yield (HY) space. On the macro side, while the economy is showing signs of softening, the labour market remains strong while inflation stays sticky.

Relatively calmer credit markets after volatile March

Except for Emerging Markets (EM) HY, spreads were generally stable to marginally tighter in the month of April. As of 27 April 2023, EM IG tightened by 5 basis points (bps) to 222bps, while US IG and HY spreads narrowed by 1bps and 4 bps to 144bps and 451bps respectively. In contrast, EM HY spreads widened by 21bps to 655bps, largely driven by China HY.

Maintain Overweight in US Treasuries as the debt ceiling comes into focus

The US debt ceiling debate has come into focus, with Treasury Secretary Yellen announcing that the potential timing of the debt-ceiling risks may be as early as June, closer than earlier anticipated.

We continue to maintain Overweight in UST amidst a recessionary backdrop and as a hedge against rising event risks from the debt ceiling, geopolitical tensions and regional banking concerns.

Overweight Developed Markets (DM) IG; decent fundamentals to weather slowing growth

Spreads have recouped most of the March bank selloff, with the JPMorgan US Liquid Index spreads ending at 154bps as of end April. Moving forward, we see a challenging credit backdrop – inflation stays sticky, monetary policy remains tight for much longer and the tight financial conditions weighing on the economy, leading to a recession. In addition, the US regional bank crisis, commercial real estate credit risks and geopolitical tensions are likely to keep risk appetite weak.

US HY not pricing in recession risk

Tighter financial condition, a pullback in consumer spending and lower corporate profits could erode credit quality and spur higher defaults. S&P ratings expects the US HY default rate to reach 4% by December 2023. We maintain an Underweight stance on US HY as spreads are not sufficiently pricing in these.

Overweight Asia

We maintain our Overweight Asia in the HY space, reflected in select Overweights in Indonesia, India and the broader Asian Credit space. We continue to favour non-China HY and remain cautious of China HY.

Like EM HY, we would also Overweight Asia IG, driven by a barbell strategy consisting of combining “AA” rated South Korean names with selected “BBB” names in Indonesia and India.

FX & COMMODITIES

Gold: Pullback before grinding higher

Gold could see a short-term pullback as the Fed dampens market expectations for rate cuts in 2H23. However, we reiterate our 6 to 12-month forecast of USD2,050/oz. Supporting our gold forecast is our view of medium-term US Dollar weakness, increased recession risk and simmering geopolitical tensions. – Vasu Menon

Gold

Easing US banking sector stress saw gold giving up gains. Gold prices hovered slightly below USD2,000/oz, as market expectations around Fed rate hikes increased, capping gains in the near term. We do not expect the first Fed fund rate cut until 1Q24, in contrast with market expectations of rate cuts in 2H23. Technically, gold could see a short-term pullback to as low as USD1,900/oz, which we would look to hold.

We reiterate our 6 to 12-month forecast of USD2,050/oz. Supporting our gold forecast is our view of medium-term US Dollar weakness. Increased recession risk and simmering geopolitical tensions could stimulate more strategic investments in gold. Central banks will likely continue to add more gold to their reserves to hedge against geopolitical and economic risks. Increased recession risk should sustain gold ETF flows, which turned positive in March after 10 months of outflows. Investor holdings are low, leaving room for accumulation, which could offset any weakness in physical demand caused by higher prices.

Oil

Oil markets have weakened despite the initial boost from the surprise OPEC+ cut last month amid lingering demand concerns. While we expect Brent oil prices to largely move sideways this quarter, we look for a pick-up in prices in 2H23 and USD92/bbl in a year’s time – above the current forward prices. China’s reopening has led us to revise upwards our 2023 growth forecast for the country to 5.9% from 5.2% previously. Most of the demand recovery is set to occur within the jet fuel market, although China is still slow to reopen its borders, thereby limiting the number of international flights.

The market will be watching OPEC+’s resolve to keep the inventory situation in check. The OPEC+ agreement to cut output by 1.1m b/d - above the already announced Russian cuts for this spring of 500,000 b/d - officially begins this month.

Currency

Our view for a moderate-to-soft US Dollar (USD) profile remains intact. Softer US data including the slump in US consumer confidence, softer factory orders, the decline in retail sales, the continued sell-off in US regional banks and rising concerns about the US commercial real estate sector added to worries of a US recession. Price-related data somewhat suggests that the disinflation trend in US remains intact. Headline consumer price inflation fell more than expected to 5% year-on-year in March while producer price inflation saw a sharp sequential decline to -0.5% month-on-month and import/export prices fell more than expected.

Going forward, Fed officials may potentially be looking for data to justify reasons to pivot (or basically to signal a cut). The next FOMC on 13-14 Jun will contain a new set of economic projections and dots plot, and that will provide a new set of clues as to whether officials are still looking for an extended pause this year or potentially a cut. But prior to that, there are two more sets of employment and inflation data for markets to digest. But we argue that the room for upside may also be limited with the Fed potentially close to the end of tightening cycle while expectations for rate cuts beyond 2023 continue to mount.

MARKET OUTLOOK APRIL: Challenges Continue

US equities rallied in the final month of the first quarter, led by the technology index NASDAQ for as much as 6.7% in March followed by the S&P500 for 3.5%. Rising market expectation that The Fed will soon end its rate hike cycle had spurred a rally for global equities. Market participants now see an increasing probability that in the second half of the year, Jerome Powell may start cutting rates amid the growing recession risks.

In Europe, most major indexes also notched gains following the footsteps of Wall Street. However, UK's bourse the FTSE 100 took a dive, down 3.1% for the month of March. Recently, investors were quite surprised with the decision by OPEC+ to cut its daily oil production as much as 1.1 million barrels per day, led by Saudi Arabia which noted a cut of 500k per day. Investors now fear a reversal of the normalization of Energy and Commodity prices that happened recently. WTI Crude climbed from its March low of US$67/b to currently above the US$80/b level. Rising oil and other commodity prices will make it more challenging for global central banks to tame and bring down inflation in the upcoming months.

Looking East, most equity markets also recorded gains. But the mainland Chinese CSI 300 index was unable to perform and ultimately recorded a slight decline. China's economic recovery somewhat fell short of market expectations, and this can be seen through the latest PMI numbers. The Caixin PMI Manufacturing number went down from 51.6 to 50.0, well below estimates, while the Services sector went up from 55.0 to 57.8. When an economy sees growth in its Services sector but a contraction in its Manufacturing sectors, some believe this to be a recession indicator.

Domestically, from a fundamental perspective, investors cheered on the latest inflation numbers which showed steep declines. Headline inflation dropped from 5.47% to 4.97% YoY and core inflation from 3.09% to 2.94% YoY. Entering the holy month of Ramadhan, domestic consumption is expected to spike as the majority of the country will go on a shopping and travelling spree. The Minister of Tourism and Creative Economy, Sandiaga Uno predicted that the economic impact of Eid al-Fitr to reach Rp 150 trillion. Foreign Reserves climbed up from previously US$ 140.3b to US $145.2b as the Rupiah continue appreciating against the Greenback. On the Manufacturing side, PMI climbed to its highest level in 6 months, up from 51.2 to 51.9, which indicates business optimism.

Equity

The JCI recorded a decline in the month of March, down 0.55% to close the first quarter of 2023 at 6,805.28. Every sector other than Energy took a dive, with Transportation and Technology leading the drop with -7.58% and -5.29% respectively. Foreign investors recorded a net inflow of USD$336.8 million in March in the midst of the global banking turmoil, primarily in the United States and Europe. With the Price Earnings Ratio (P/E) at 13.7x, its lowest since March of 2020, our stock market looks like quite a bargain. The normalization of Energy Prices is expected to weigh down on the JCI as Indonesia is a net exporter for commodities. However, earlier this month, the oil cartel OPEC+ decided to cut its daily production of oil for as much as 1.1 million barrels a day. This has significantly boosted oil prices since then and may impact other commodity prices as well, translating positively for the domestic equity market.

A dovish tilt by the Fed and the worries of the banking industry subsides, we believe there is room for gains. Nonetheless, we remain neutral towards the equity market and still hold firm our previous forecast of EPS growth 4% to 5% for 2023.

Bond

On the other hand, the bond market recorded gains last month, as can be seen by the 10bps drop in the benchmark 10-year government bond yield from 6.9% to 6.8%. Just like in the equity market, foreign investors also accumulated domestic fixed income assets with a net buy of USD$1.12 trillion during the month. The expectation of a more dovish Fed amidst softer inflation figure, has helped bond markets all over the globe to appreciate. Meanwhile, Bank Indonesia is also expected to maintain its policy rate at 5.75% for the remain of the year as inflation continues to fall. Seasonal pick-up in inflation may be seen in April's figure, however this should be transitory.

Currency

The anticipation of a softer monetary policy by the Fed weighed heavily on the Greenback, with the Dollar Index (DXY) dropping down from 105.0 to 102.5 by the end of March. Simultaneously, the Rupiah appreciated against the US Dollar in March, up 1.7% against the Greenback and hovered around the psychological threshold level of Rp 15,000/USD. The Rupiah is still expected to strengthen against the US Dollar for the near future, as the expectation of The Fed switching to an easing cycle later this year grows higher.

Juky Mariska, Wealth Management Head, Bank OCBC NISP Tbk

GLOBAL OUTLOOK

“In Equities, we have an overall Neutral position. We maintain our regional allocation with a Neutral rating for the US, Underweight for Europe, and Overweight on Asia ex-Japan.” - Eli Lee

The first quarter of 2023 ended with the S&P 500 Index rallying, credit spreads tightening and the US Dollar falling on hopes the Fed will soon pivot away from inflation-curbing interest rate hikes. Investors are betting the Fed will start cutting rates and stop shrinking its balance sheet for three reasons.

First, recession risks are rising as the lagged impact of last year's interest rate hikes affects economic activity this year. We forecast the US will suffer a recession in the second half of 2023, thus keeping the economy from expanding for the whole year as our table of GDP growth projections shows.

In addition, unemployment may be starting to increase now as the US economy slows. February's employment report showed America's jobless rate rose from a 53-year low of 3.4% to 3.6%. Unemployment remains very low. But historically, if the US unemployment rate increases by 0.5 percentage points within a 12-month period, the deterioration in employment conditions has been sufficient to push the US into recession each time since the Second World War.

Similarly, the US Treasury (UST) market has been highlighting recession risks. The yield curve has been inverted for nine months now as the next chart shows. Thus, short-term 2Y UST yields, that track the Fed funds interest rate closely, have traded above longer-term 10Y US Treasury yields, signaling the US economy is at risk of contracting.

Second, hopes are rising that central banks are near the end of their year-long campaign of interest rate hikes because inflation is peaking. Third, last month's failure of several small US banks is likely to tighten financial conditions and thus reduce the need for further Fed rate hikes to curb inflation.

In response to last month’s bank failures, the Fed set up a new Bank Term Funding Programme to allow illiquid banks to borrow against the face value of their Treasury bonds. This has led to the central bank’s balance sheet rising suddenly.

With the Fed more cautious, we now forecast only one last 25bps rate hike in May with Fed funds peaking at 5.00-5.25%. But we do not think the central bank will be able to cut interest rates later this year even if the US economy suffers a recession because inflation is likely to remain sticky.

We think core inflation will stay above the Fed’s 2% target at the end of 2023 and 2024 at around 3.5% and 2.5% respectively. We thus anticipate the central bank will only start cutting interest rates from March 2024.

EQUITIES

“In Equities, we have an overall Neutral position. We maintain our regional allocation with a Neutral rating for the US, Underweight for Europe, and Overweight on Asia ex-Japan.” – Eli Lee

March continued to be an uncertain time for global equities as turbulence in thebanking sector dampened market sentiment. We maintain our regional allocations with a Neutral rating for the US, Underweight for Europe, and Overweight on Asia ex-Japan. Within our sector allocation, we are upgrading Consumer Staples and Utilities to Overweight, as we add defensiveness within our equity allocations. We also continue to prefer quality names and those exposed to positive structural themes such as the energy transition and generative AI spending over the longer-term.

Different regions, different tales

Recent turbulence in the US and European banking sectors over the past month have resulted in higher recession risks given an environment where commercial, industrial and consumer lending conditions were already tightening. In China, we continue to see resiliency, especially in the onshore A-shares market. Over the next few years, key structural investment themes in China will be technology and innovation, rising domestic consumption and prevention of financial risks.

US - Recessionary risks increasing

Within a matter of weeks, investors’ focus has shifted from concerns around tighter monetary policy to increasing recession risks resulting from stress in the regional banking sector. The risks are not trivial, as regional banks in aggregate are crucial for the US economy, given that their loan books account for nearly 40% of total credit creation in the US.

Europe - Sentiment dented by reality check

Sentiment in European equities has been dented by the events of the past few weeks, which reminds us of the consequences of monetary tightening. Companies and individuals are starting to feel the effects, and recent developments also remind us that fault lines can show up in unpredictable ways under this high interest rate environment. Along with our expectations of slowing growth, elevated risk premia and fading EPS expectations, we favor a more defensive tilt in the portfolio, and advocate shelters in Consumer Staples, Healthcare and Utilities

Focus shifts to new fiscal year guidance and policy direction from the new BoJ governor

April will bring changes to Japan, as a fresh fiscal year kicks off and a new BOJ team headed by Ueda comes on board. We expect markets to focus on the initial FY24 (fiscal year ending in March 2024) corporate earnings guidance which is expected to moderate to +4.1%, from +6.5% in FY23. With a new BOJ leadership team, we do not expect immediate changes to Japan’s low interest rates, following Ueda’s agreement with outgoing governor Kuroda that inflation looks transitory.

Asia ex-Japan - Focus on macroeconomic and geopolitical events post-earnings wrap

The MSCI Asia ex-Japan Index experienced another volatile month but ended March on a more positive note on account of the Federal Reserve’s dovish 25bps rate hike and strengthening of Asian currencies which helped drive foreign inflows into Asia ex-Japan.

Slightly more than 80% of MSCI Asia ex-Japan Index’s market capitalization have reported their 4Q22 and 2022 results, as at 24 March 2023. Year-on-year growth has come in at -26% and -3%, respectively, coming in below the street’s expectations. Markets which have disappointed the most include Hong Kong, Thailand and South Korea. On the other hand, Singapore, Indonesia and China have exceeded earnings expectations.

China/HK - The State Council institutional reform signals policy priorities

The onshore A-shares market has proven to be more resilient than Hong Kong and offshore Chinese equities amid the elevated volatility across different asset classes. Indeed, the CSI 300 Index has outperformed the Hang Seng Index and the MSCI China Index over the past month.

Within the onshore A-share markets, we prefer the CSI 500 Index given it has a lower exposure to the Financials sector and higher exposure to Consumer (ex-internet), Industrials and IT that should be better positioned to benefit from favorable policy tailwinds. The restructuring and establishment of various government entities are aiming to provide more targeted support for acceleration in technology and innovation, the development of “Digital China”, and the prevention of financial risks. These, together with boosting domestic consumption, will be the key focus in the next few years and hence, key investment themes, in our view.

BONDS

“In Fixed Income, we are Overweight Developed Markets Investment Grade bonds which are recession hedges. Over a 12-month period, we see the bias for lower yields.” – Vasu Menon

March was arguably fixed income markets’ most volatile month ever. The spark proved to be the second largest US bank default, the relatively unknown Silicon Valley Bank, then shortly thereafter the collapse of Signature Bank. When Credit Suisse collapsed less than two weeks later, there was palpable fear about a full-blown banking crisis and the impact on global growth. Caught between the rock of pervasive inflation and the hard place of preserving financial stability, the Fed raised rates by 25 basis points (bps) but indicated that the rate hike cycle was close to done. Credit spreads rose globally on concerns that tighter lending standards could prove detrimental to global growth and companies’ financial performance. A tighter financial condition brought on by the stress in the banking system and the resultant headwind to growth suggests less room for the Fed to hike rates.

Maintain Overweight in DM IG and Underweight DM HY

As risk to the US economy has increased, we recommend being Overweight in DM IG. Fixed income and IG bonds in particular offer a more attractive risk-reward profile than HY bonds based on current market pricing and possible macro scenarios. With the highest duration in the global credit space, the asset class should serve as a flight to quality destination in case of a recession and should be well-placed to benefit if the Fed ultimately cuts rates to stimulate the economy after our expected 2H23 recession. We are maintaining our Underweight call on DM High Yield (HY), as current valuations appear somewhat stretched on a risk-reward basis

Stay defensive with DM Banks

G-SIBs (globally systemic banks) have strongly outperformed as the flight to quality part of the financial universe. The large US G-SIBs have strong deposit franchises and solid liquidity buffers as compared to the regional US banks which typically have more concentrated positions and weaker deposit franchises. Until volatility subsides, we think investors should err on the side of caution and maintain a defensive tilt within the DM Banks sector.

Higher risk premium required in European banks’ AT1

We expect investors to demand a higher risk premium for holding the European banks’ AT1 securities following the Credit Suisse event. In addition, we think the recent sell-off in the AT1 space has increased extension risks as it will be costlier for banks to call and replace their AT1 instruments. We recommend investors to reduce concentrated positions and be well-diversified as a crisis of confidence can be unpredictable.

In EM HY, Overweight Asia

We maintain our Overweight on Asia, reflected in select Overweighs in Indonesia, India and the broader Asian Credit space. We had previously argued that Chinese performance had outrun fundamentals in the Chinese Property space and recent underperformance seems to bear this out. Similar to EM HY, we would also Overweight Asian IG.

Asia Credit relatively resilient though not immune

While Asia Credit remains relatively resilient amidst worries over the US and European Financial sector and future economic growth, the segment is not entirely immune to global market volatility. Within Asia IG, long duration and lower beta geographies outperformed, including Hong Kong, Singapore, Thailand and Indonesia. Meanwhile, within Asia HY, losses in China HY deepened and is replaced by Indonesia HY as the outperformer. Post Credit Suisse, we opine that Asia bank AT1s’ premium over their European peers is still justified given that Asian banks are more likely to be bailed out by the government directly or indirectly ahead of point of non-viability and the Asian AT1s have lower call risks.

FX & COMMODITIES

“We have nudged up our 12-month Brent oil target by USD2/barrel to USD92/barrel given the lower OPEC production path. We also continue to like gold, especially on any pullback, as a hedge against US recession risk.” – Vasu Menon

Gold

Our positive gold view has played out faster than expected. We remain constructive on precious metals. From here, we think gold may have some modest downside in 2Q23 as risk sentiment benefits from a calming of bank sector tumult. We expect a pullback in bank credit in the coming months, but not enough to spark a Fed easing cycle this year. We expect another 25-basis points rate hike in May, with the Fed set to keep policy rate steady at 5.00-5.25% for the rest of the year. We continue to like gold, especially on any pullback, as hedges against a US recession risk. Gold is set to grind higher in 2H23 amid rising recession risks. We upgrade our 6-month and 12-month gold forecast to USD2,050/ounce. Central banks will likely continue to add more gold to their reserves to hedge against geopolitical and economic risks.

Oil

Hopes are high for more policy support from the Chinese government. Oil experienced a bumpy ride over the past month as prices plunged in mid-March on fears that the banking sector stress could spark a full-blown recession. The decision by the US to hold off refilling the Strategic Petroleum Reserve despite a commitment to buy back barrels when US crude prices were “at or below about” USD67 to USD72 a barrel also contributed to softer oil prices.

Our base case remains for crude oil to recover from banking concerns as supply risks re-emerge and the demand outlook improves. The oil market is set to gradually tighten on the back of a reopening-led demand recovery in China. OPEC surprised the market with a production cut of 1.1m barrel per day (b/d). Saudi Arabia is leading the group with a 500,000 b/d cut of its own, while Iraq is promising 211,000 b/d less oil. We have nudged up our 12-month Brent oil target by USD2 a barrel to USD92 a barrel given the lower OPEC production path.

Currency

For the first quarter, the US Dollar Index (DXY) was down nearly 1% while in terms of monthly change for March, the DXY was down 2.28%. The surprise market event in March was the sudden collapse of the three US banks within a week, which probably underscores how restrictive the Fed’s monetary policy is and potentially flags how other smaller and mid-sized US banks may be vulnerable.

Overall, we keep to our view for a moderate-to-soft USD profile as the Fed’s tightening goes into late cycle, with an “end-in-sight” potentially on the horizon. A more entrenched disinflation trend would also support the “end-in-sight” view and cause the USD to weaken.

Assuming that bank contagion risk is limited, a less severe global growth slowdown will also be supportive of pro-cyclical currencies, including currencies in Asia ex-Japan and the Australian Dollar while the counter-cyclical USD stays on the back foot.

The Euro (EUR) had its fair share of choppy price action in March before closing the month 2.5% higher versus the USD. Banking problems in the US and Switzerland have led to concerns about Europe’s banking sector.

But barring any extended global sell-off and assuming the Euro-area banking sector stays resilient, weakness in the EUR could be seen as an opportunity to buy dips, on the back of a still hawkish ECB amid inflationary pressures and resilient growth in the Euro-area.

The Pound (GBP) traded higher (+2.6% versus the USD) in March. BOE Governor Andrew also sounded relatively hawkish in his remarks recently. Overall, a moderate-to-soft USD profile, tentative signs of improvement in the growth outlook and fading Brexit concerns should allow the GBP to recover, although pockets of concerns remain on some aspects of domestic fundamentals (stagflation risk, consumer squeeze, etc.), and the prospect of the BOE turning less hawkish remain (which may restraint the GBP’s recovery).

The USD fell 1.2% against the offshore Renminbi (CNH) for the month of March. Much stronger than expected China PMI for March brought cheer to the China reopening narrative and helped boost momentum and sentiment

In the last week of March, there were also some positive developments onshore: 1. Alibaba’s break up into 6 main units (may potentially give capital markets a jolt); 2. Jack Ma’s return to China may be an indication that the regulatory crackdown in private sector could be nearing an end; 3. The Big three tech companies – Baidu, Alibaba and Tencent reported better-than-expected earnings.

A continuation of good data should disappoint China bears and result in more fund going into underweight Chinese assets – which will benefit the RMB.

One of the main risks we must keep in view is the ongoing geopolitical tension between the US and China. Deterioration of relations could undermine the RMB.

The USD traded 1.3% lower against the Singapore Dollar (SGD) for the month of March as markets re-priced for a tamer Fed tightening following the banking crisis in US. Meanwhile there are still expectations for the MAS to tighten.

However, headline CPI at 6.3% is still closer to MAS’s upper bound expectation of 5.5% to 6.5%. It may be too soon for the MAS to pause its tightening cycle. Beyond the near term, we still retain a slight bullish outlook for the SGD due to resilient macro-fundamentals and China’s reopening optimism.

MARKET OUTLOOK MARCH: Focus on Resilience

Solid jobs growth indicated that the health of US corporations is still conducive, and economic growth momentum is very much going on. This has prompted President Joe Biden to consider raising taxes for companies and individuals, putting more pressure on the stock market which has seen a steep decline last month due to a more hawkish sounding Fed. Moreover, on the second week of March, market participants were shocked by the collapse of the 16^th largest bank in the US; Silicon Valley Bank (SVB). Major withdrawals by depositors have caused a bank run on SVB, so much that it caused liquidity problems for the bank. Fortunately, The Fed swiftly stepped in and intervened with the “Bank Term Funding Program” as sort of a backstop for the crisis which allows temporary loans to provide liquidity of up to one year, with SVB fixed income securities held as collaterals. Moreover, the FDIC also assured depositors that they will get their money back, regardless of the amount. However, the risk of having a domino effect on the banking sector still dampens sentiment, dragging the banking sector down quite significantly.

The possibility that the collapse of SVB would introduce a new kind of systematic risk have pushed market expectations of a dovish tilt by The Fed. Bloomberg analysts now see that the Fed Terminal Rate this year will be at around 5%, much lower than previously anticipated of 5.5% - 5.75%. The US Treasury, a safe-haven asset, saw its yield tumble pointedly from 4% to 3.6%.

In Asia, equity markets also recorded declines in the month of February. Geopolitical tension between the US and China was again in the spotlight, triggered by the Chinese spy balloon incident. On the other hand, China's economy reopening is expected to generate a positive impact on the global economy, mainly in Asia although it might take longer than market had initially anticipated.

Domestically, Indonesia' recovery can be confirmed through its economic indicators. Inflation had risen last month, up 0.16% MoM and 5.47% YoY, slightly higher than the 5.28% recorded in the previous month. CPI numbers are expected to climb temporarily as the country enters the month of Ramadhan this March. The central bank had kept its 7-Day Reverse Repo Rate at 5.75% with the expectation that The Fed too will pause their rate hikes post SVB collapse. Bank Indonesia would want to maintain the stability of Rupiah and safeguard the economic growth momentum in the midst of global recession risk.

Equity

In the month of February, the JCI was able to remain steady while bourses in the US and China dropped. The equity market moved rather sideways, closed the monthly slightly higher at 0.06%. The move verified that investors remain optimistic with the prospect of domestic risk assets. From a sectoral perspective, Transportation and Logistics recorded the highest gain for as much as 10.26%, followed by Consumption Cyclicals at 2.93%. The move up was also supported by foreign capital inflow of USD$23.4 million, bringing the year-to-date number at USD$196.6 million. However, entering the month of March, external events such as the collapse of SVB may put pressure on the JCI. Corporations are expected to record a lower EPS growth in 2023 compared to 2022 but is still projected to be in the 4% to 5% range. Hence, the current move lower by risk assets may present a better opportunity for bargain hunters to start accumulating at a more attractive valuation and lower prices.

Bond

A hawkish Fed was on the back of the rise in our 10-year government bond yield which shot up to above the 7% threshold by the end of February and beginning of March. For the month of February, foreign investors had net sold fixed income securities for as much as USD$497.5 million. But, the collapse of SVB quickly drove down the benchmark yield to approximately 6.7% as investors contemplated the idea of a more dovish Fed, along with a new kind of systemic risk for the banking sector. Looking forward, we see that the domestic bond market should be quite resilient amid a looser monetary policy by the Fed, capped supply of fixed income assets, and relatively stable inflation numbers.

Currency

The Rupiah depreciated against the US Dollar last month, moved up from 15,000/USD to 15,244/USD. A more hawkish Fed last month was a major catalyst for the US Dollar, which supported its appreciation against other major currencies. However, the SVB scandal has plunged the Dollar Index (DXY) as market participants now see a more dovish Fed. With strong fundamentals and an accommodative stance held by Bank Indonesia, the Rupiah is expected to be stable moving forward for the foreseeable future.

Juky Mariska, Wealth Management Head, OCBC NISP

GLOBAL OUTLOOK

Watch Inflation

Expectations of a “goldilocks” outcome is being reassessed as sticky inflation and strong macroeconomic data raises the prospect of a more hawkish Fed.”– Eli Lee

Financial markets' strong start to the year was challenged in February by inflation which proved to be more persistent in economies as far apart as the US, Eurozone, Japan and Australia. The S&P 500 Index fell from a six-month high of 4,195 in February. US Treasury (UST) bonds have weakened with 10Y UST yields rising sharply from 3.30% in January to almost 4.00% in March. Lastly, the safe-haven US Dollar has appreciated as investor sentiment has turned less bullish.

The rise in inflation globally appears to have peaked now, but inflation is falling slowly back towards

central banks' 2% targets. Excluding volatile food and energy costs, core inflation is currently at 5.6%, 5.3%, 5.8% and 3.2% in the US, Eurozone, UK and Japan respectively. Only China's core inflation remains tame at 1.0%.

Inflation is still elevated because the world's major economies remain surprisingly resilient despite central banks increasing interest rates at their fastest pace since the 1980s. For example, in January, all the major US data releases were much stronger-than-expected. Payrolls surged by more than 500,000 jobs. The unemployment rate fell to a 53-year low of 3.4%. Core consumer

price index (CPI) inflation only dipped marginally from 5.7% to 5.6%. Similarly, core producer price index (PPI) inflation remained strong at 5.4%. In addition, retail sales jumped by 3.0% during the month.

The resilience of the US and other major economies are largely due to their labor markets remaining very tight. During the pandemic, governments supported growth with stimulus cheques, causing savings to soar. When economies reopened in 2021 and 2022, consumers were flush with cash, driving strong rebounds in economic activity and pushing unemployment down to record lows. In turn, employers increased wages to attract workers, fueling inflation.

Thus, central banks still need to slow overheating labor markets to curb upward pressure on wages and return inflation to their 2% targets. Officials have little choice but to keep increasing interest rates over the first half of this year, despite having already tightened monetary policy aggressively last year.

Following the very strong US economic data for January, we have added a further 25 basis points (bps) interest rate increase to our forecast for the Fed's tightening path and now expect the Fed to undertake three more 25bps rate hikes in March, May and June, lifting its Fed funds rate up to a peak of 5.25-5.50% by the summer.

If our forecast for the Fed is right over the next few months, then the central bank will have increased its key interest rate far above the 2.50% level that officials estimate is the 'longer run' neutral interest rate that neither simulates nor restricts the US economy.

By increasing interest rates to a peak of around 5.50%, the hawkish Fed will restrain activity and help lower inflation back towards its 2% target over the next 2-3 years. But over the next few months, the central bank's actions will continue to test US equity markets and risk assets globally.

Over a longer-term 12-month horizon, however, we expect 10Y UST yields will drop from their current levels close to 4.00% back to around 3.50%. We forecast the Fed's prolonged interest rate hikes in 2022 and the first half of 2023 will push the US economy into recession in the second half of the year. Moreover, given core inflation is still likely to be above 3.0% by the end of 2023, the Fed is unlikely to cut interest rates this year even if the US suffers a recession. The central bank's priority to curb inflation rather than support growth will likely cause longer-term 10Y and 30Y UST yields to fall during 2023 as bond investors shift attention from near-term inflation risks to longer-term growth concerns.

Similarly, we expect the ECB to increase its deposit rate by 50bps again in March and a further 25bps in May to 3.25% to help push Eurozone inflation back towards the ECB's 2% target. We also see central banks, like the Fed, keeping interest rates elevated in the second half of the year rather than making early rate cuts. This will increase the risk of the Eurozone suffering a recession in 2023 as well.

Our outlook for major economies like the US and Europe implies that this year's strong start to financial markets will likely be tested further over the first half of the year until the major central banks stop increasing interest rates.

Our more defensive stance on risk assets is driven by concern that the Fed and the ECB will stay hawkish this year to keep pushing inflation down - even if the US and Eurozone suffer recession. On that note, we do not rule out the Fed returning to 50bps rate increases if the US labor market

continues to generate large surges in payrolls similar to January's half a million new jobs. A re-acceleration in the pace of Fed rate hikes would cause sharp falls in global financial markets.

In contrast, the end of zero-Covid policies significantly improves China's outlook for 2023. Surveys of business sentiment - as reflected in purchasing manager indices (PMI) each month - have rebounded this year for both manufacturing and services in China.

We forecast China's GDP to expand by 5.2% this year compared to 3.0% growth last year and thusbe the only majoreconomy to experience faster growth in 2023 than in 2022. We therefore maintain our Overweight stance on Chinese equities given the favorable macroeconomic outlook for the world's second largest economy.

STOCKS

Wary of volatility

"We are overall Neutral on equities, with an Overweight position in Asia ex-Japan offsetting an Underweight position in Europe.“– Eli Lee

We keep our regional equity allocations with a Neutral rating for the US, Underweight for Europe and Overweight for Asia ex-Japan. Within Asia ex-Japan, we continue to favor Hong Kong/China, Singapore and Taiwan equities.

USA - Can't defy gravity

The S&P 500 Index has registered some weakness on the back of concerns that inflation is likely to be sticky, labor market is still running hot, and that ultimately the Federal Reserve (Fed) will need to lean more hawkish.

consensus expectations for EPS growth in 2023 has moderated to 0%, this is likely to trend lower. History does suggest that the S&P 500 Index could see downside risk when there is a shift from positive to negative forward EPS growth.

Europe - Improvement in sentiment driving re-rating

The equities market has re-rated with improved sentiment due to falling natural gas prices which are contributing to easing inflation, and lowering the chances of a hard landing, alongside China's reopening.

However, we note that overtightening risks by central banks remain high, and ongoing tightness in labor markets along with strikes and pressure on wages are likely to put pressure on margins as well.

Japan - Market focus on upcoming BOJ policy direction

Expectations for further policy changes from the Bank of Japan (BOJ) have risen, which include the removal of its cap on 10Y government bond yields, following its surprise yield curve control (YCC) adjustment on 20 December 2022 and a new governor from April 2023.

The Japanese government has proposed Kazuo Ueda as the next Bank of Japan (BoJ) governor to succeed Mr Haruhiko Kuroda from 9 April 2023. the equity market traded firmer last month supported by hopes for a dovish policy under the next governor.

Asia ex-Japan - Remain Constructive notwithstanding recent pullback

The MSCI Asia ex-Japan Index saw a correction in the month of February after making a solid start in January 2023. This pullback could be attributed to the rise in geopolitical tensions, uptick in the US 10Y Treasury yield and downward earnings revisions for the region.

Based on Refinitiv's consensus estimates, MSCI Asia ex-Japan's FY23 EPS is projected to increase by 0.9%, as compared to 6.3% at the start of 2023. However, Refinitiv's consensus projections are pointing to a rebound in FY24 EPS by 18.5%, as at 21 February 2023.

China - Relative preference for the onshore A-share markets

Hong Kong and offshore Chinese equity markets pulled back in February, largely driven by heightened Fed rate hike expectations, resurfacing of US-China tensions and concerns on increasing competition in the internet and platforms space.

We believe Hong Kong and the offshore Chinese equity markets are likely to consolidate in March, given there is a policy vacuum period before the NPC, the earnings season where valuations will be cross-checked with growth outlook, and the re-assessment of Fed rate hike expectations.

Sector views

As the earnings season progresses, we are gaining more clarity from companies on earnings guidance and outlook. For Global Industrials, we are upgrading our rating from Neutral to Overweight. CAPEX is expected to be more resilient in the US, and Europe has also come up with its own version of the Inflation Reduction Act, against a backdrop of higher energy costs in the region.

BONDS

Selective opportunities

“In fixed income, we remain Overweight on Developed Market Investment Grade bonds, which should serve as a flight to quality destination in case of a recession.” – Vasu Menon

The volatility in fixed income this year has remained elevated thus far and this could still be the case in the near-term. Interest rate futures now point to a market aligned with the Fed, anticipating three additional rate hikes and a terminal rate of 5.25-5.5%. Credit spreads, which had been tightening consistently over recent months, consolidated as the market begins to price in a higher likelihood of a 2023 recession.

Investors will need to remain disciplined and selective when buying. We retain our Overweight for Developed Market (DM) Investment Grade (IG) bonds as a hedge against the continued risk of recession, particularly in developed economies.

Maintain Neutral EM corporates

The outlook for EM Credit appears much improved over 2022. China's reopening has provided a catalyst for economic growth within the country. Moreover, it also has positive second-order impacts globally, ranging from increased energy and commodities demand from Sub-Saharan Africa to South America to increased tourism in Southeast Asia. Other positive headwinds for the asset class include waning US Dollar strength, improving fundamentals with declining defaults and robust inflows. Conversely, after the spread rally in recent months valuations appear less compelling.

Overweight against DM IG bonds and DM HY

We maintain our Overweight recommendation on DM IG. With the highest duration in the global credit space, the asset class should serve as a flight to quality destination in case of a recession and should be well-placed to benefit if the Fed ultimately cuts rates to stimulate the economy after our expected 2H23 recession. We are maintaining our Underweight call on DM High Yield (HY). Current valuations appear somewhat stretched on a risk-reward basis, trading more than 100bps inside the 21st century average and more than 400bps inside levels reached during stress periods such as the 2011 European crisis and the 2015-2016 commodity bust.

Overweight Asia - Overweight Asia

We would Overweight Asia in the EM HY space, driven by China’s reopening. However, after the recent rally we think prices have run ahead of fundamentals in Chinese Property. Hence, we would express our Asian Overweight via select Indonesian and Indian names.

We would also overweight Asian IG driven by a barbell strategy consisting of combining “AA” rated Korean names with select “BBB” names in Indonesia and India.

FX & COMMODITIES

Oil market to gradually tighten

“The oil market is set to gradually tighten on the back of a reopening-led demand recovery in China and we continue to target a moderately higher Brent oil forecast of USD90 per barrel in 12 months' time.” – Vasu Menon.

Gold

Incoming US data have come in better-than-expected for January/February and remain consistent with a message of resilience in activity, persistence in inflation, and strength in labor markets. This boosted expectations that the Federal Reserve (Fed) will continue monetary tightening longer than anticipated, renewing US Dollar strength while weighing on gold. The market for physical gold is softening as demand in India and China remains lackluster. But central bank purchases are still strong.

We maintain our 6 to12-month gold forecast of USD1,970/oz as headwinds from higher US rates are likely to ease in the medium-term. We continue to expect US 10Y Treasury yields to ease towards a 12-month target of 3.5%, in line with historical moves lower following a Fed pause.

Oil

Brent prices have been range-bound, as stronger-than-expected exports of both crude oil and oil products from Russia offset the pick-up in China oil demand. Russian oil is finding a home in Asia thanks to strong demand there, but risks to Russian supply have not gone away, with Europe sanctioning its oil product exports.

We continue to target a moderately higher Brent oil forecast of USD90 per barrel in 12 months' time. The oil market is set to gradually tighten on the back of a reopening-led demand recovery in China. Travel so far seems to be a major beneficiary of the reopening. Road traffic congestion is rising in Asia, particularly in China, while busier flight schedules have firmed up the outlook for jet fuel demand. Hopes are high for more policy support from the Chinese government.

Currency

he US dollar (USD) index saw its first monthly gain in February since September 2022.  Hawkish Fed repricing was a key catalyst following better-than-expected US economic data, while geopolitical uncertainties also weighed on investor-sentiment. The hotter-than-expected data even raises the prospects that there may be no hard landing in the US this year and the economy could withstand further rate hikes.

To add to concerns, the disinflation trend in the US is starting to look a little bumpy. All of these led to hawkish Fed repricing and led markets to expect higher for longer rates.

Fears of a more aggressive Fed may keep the USD supported in the short-term but a pause in hawkish Fed repricing can bring about an interim top for the USD. Between now and next Fed policy meeting in late March, there will be more inflation data for the markets to digest. In the meantime, strong US data could push the USD higher, but if growth momentum outside of the US picks up, then USD strength may be curtailed. A more resilient global outlook and not just US growth outperformance, should be supportive of pro-cyclical currencies while USD weakness could resume when the hawkish Fed repricing ends.

The Euro (EUR) fell by about 2.6% against the USD for the month of February. Broad USD strength and renewed focus on geopolitical risks were the main triggers. Russia's announcement in late February that it is suspending its participation in a nuclear treaty with US has led to some concerns that the war in Ukraine will evolve into nuclear war (although this is not our base case scenario). That said, we note that the pace of the EUR's declines this time around has been rather moderate relative to previous episodes of declines in 2022 when parity was broken. Possible hawkish ECB rhetoric, a less grim EU growth outlook and a sharp plunge in gas prices are some of the factors that are likely to have cushioned the EUR. Overall, we remain neutral-to-mildly-constructive on the EUR's outlook. Key risks to watch that may weigh on the EUR's outlook include: (i) if growth momentum in EU sputter; (ii) whether there will be a further escalation in Russian-Ukraine tensions (which poses risks to energy prices and the inflation outlook) or whether there will be a ceasefire; (iii) if USD strength returns with a vengeance (i.e., global sentiment turns risk-off or the Fed resumes aggressive tightening); (iv) if the ECB unexpectedly signals a dovish tilt.

GBP traded modestly softer (-2.4% vs the USD) for the month of February. The relative resilience was likely due to fading pessimism about UK's economic outlook and in response to EU-UK agreement over the Northern Ireland protocol. That said, we caution that the deal still needs to clear the DUP party. Elsewhere, comments from BOE officials are taking a dovish tilt. For example, Silvana Tenreyro (a Member of BOE's Monetary Policy Committee) said that she sees risk of overtightening rates in that UK squeezing wealth and bringing down inflation. Meanwhile BOE Chief Economist Huw Pill signaled a quarter-point rate hike or even a pause, saying there is a risk of “overtightening” if the pace over the past few months in maintained. We remain neutral on the GBP's outlook as the UK's growth outlook may not be as bad as feared while softer energy prices offer relief to government finances, businesses, and households. 4Q22 GDP confirmed that the UK narrowly avoided entering a technical recession. Earlier, a UK think tank, National Institute of Economic and Social Research (NIESR) predicted that the UK is likely to avoid a recession this year. The think tank predicts the economy will grow by just 0.2% this year, and 1% in 2024. That said, stagflation concerns remain, and the UK still needs to undergo a painful but necessary phase of fiscal consolidation and there is a risk of the BOE turning more dovish going forward.

Many central banks around the world including the Fed, ECB, RBNZ, RBA are highlighting their determination to combat inflation expectations. For instance, RBA minutes revealed that a 50bps hike was considered at the last policy meeting, although 25bps was eventually delivered, but with a pivot to a hawkish stance considering the high inflation and the tight labor market in Australia. Not forgetting that the RBNZ also delivered a hawkish 50bps hike despite a state of emergency in New Zealand. The BOK was also said to have judged whether its policy rate needs to rise further (keeping the doors open for another hike if conditions warrant). The “higher for longer” theme may continue to undermine sentiments, and this may continue to weigh on risk proxy currencies such as the Korean Won as well as currencies where there is little room for rate hikes, such as the offshore renminbi (CNH).

USDCNH rose 2.8% for the month of Feb. The move was largely due to: (i) the unwinding of China reopening trade; (ii) hawkish repricing of the Fed rate hikes (which translated to a stronger USD) and (iii) renewed focus on geopolitical tensions.

The USD has appreciated against the Singapore Dollar (SGD) for the past few weeks, amid broad USD strength that came on the back of hawkish Fed rhetoric. Softer-than-expected Singapore headline inflation data for January (6.6% vs consensus forecast of 7.1%) somewhat disappointed SGD bulls as bullish bets were unwound. Elsewhere, the EUR and Renminbi's (RMB's) underperformance also weighed on the SGD. Hawkish repricing of Fed rate hikes and RMB softness could keep the SGD under pressure for now. But beyond the near term, we still retain a slight bullish outlook on the SGD due to resilient macro-fundamentals and China's reopening optimism (supportive of sentiments and regional growth). The case for further MAS tightening is still plausible if inflationary pressure in Singapore continues.

Staying the Course

The first month of 2023 was coloured with optimism of a dovish tilt by The Fed, shifting to a lower gear in their rate hike cycle, sparking a global rally in risk assets. The Dow Jones was up 3%, the S&P500 for 8.5%, and the depraved NASDAQ was up more than 15% as technology stocks recorded massive gains. At their January meeting, The Fed President Jerome Powell iterated that their fight against stubbornly high inflation have been successful so far and can be verified from the latest CPI data that showed a drop from 7.1% to 6.5% YoY in December 2022. Market participants now expect The Fed to just deliver 2 more 25-bps hikes in March and May. The Q4 GDP numbers was also released above market expectations at 2.9%, adding more cause to the rally in Wall Street. As per first week of February, 69 percent companies in S&P500 have reported earnings above estimates, however this figure missed the 5-year average of 77 percent. From an earnings perspective, most businesses which had reported their financials paints quite a gloomy picture of the economy. However, the immediate drop in inflation, along with the China reopening have spurred market speculations that US may escape from recession this year and prompted global equity higher.

Moving to another western counterpart, European equities also recorded massive gains in January as investors bargain hunted on risk assets. The sentiment in Europe also gained support from the normalisation of energy prices, which was previously one of the biggest uncertainties to growth. The Russia – Ukraine war is still going on, but with its impact to financial markets becoming less and less dominant. From a monetary policy standpoint, the ECB and BOE decided to hike rates 50-bps at their latest meeting. Both central banks reiterated their commitment to bring inflation down this year by any means necessary.

Asian equities, as can be seen from the MSCI Asia Pacific index also went on quite a roll last month, recorded a massive gain of 7.8% to kick-off 2023. China economy reopening was the main driver for gains by regional risk assets, as the second biggest economy in the world exits their Zero – Covid Policy. Hong Kong, Asia’s prominent financial hub also lowered their quarantine and travel restrictions last month, making it and China more accessible now after years of isolation.

Looking inward, from a fundamental perspective Indonesia continued its recovery with every economic indicator released better than expected. The latest CPI number showed that inflation went down from 5.51% to 5.28%, well below the expected 5.40% while core inflation went down from 3.36% to 3.27%. Being able to do that, Bank Indonesia have restored some level of confidence in markets that the domestic economy has brighter path ahead. However, this has not been reflected by the performance of domestic capital markets. Manufacturing PMI went up from 50.9 to 51.3, and Q4 GDP 2022 numbers released was also above expectations at 5.01% vs 4.92%. All in all, Indonesia’s resiliency was on full display at the start of 2023, with the government projecting a growth of 4.9% - 5.3% this year (Source: Bank Indonesia).

Equity

In the month of January, JCI was unable to sync along with the other global indices. The index moved rather sideways, recording a slight decline of 0.16% in the midst of a broader rally in risk assets. This is to be expected considering the index was still able to close 2022 in green territory, unlike the majority of other stock indexes that saw huge declines last year. From a sectoral point-of-view, technology and consumer cyclicals led declines, down 4.75% and 3.49% respectively. Foreign investors continued its outflow last month, recorded a net sell of USD $182.11 million for the whole month. In terms of expectations, investors do still see a high probability for the JCI to record another yearly gain this year, backed by potential rise in the consumer spending as electoral campaign may commence in the second half of the year. Meanwhile, commodities which have been a major driver of domestic stock market will start to lose steam this year as price starts to normalize. Thus, our we view that JCI will be trading in the range of 6,900 – 7,300 in the first half of 2023.

Bond

The underperformance of the equity market at the beginning of 2023 translated positively for the bond market. The 10-year benchmark yield dropped to 6.7% at the end of the month. The rally in the US Treasury market, driven by optimism of a more dovish fed at the start of the year helped spark a rally in the domestic bond market. Moreover, the appreciation of Rupiah to below 15,000 per USD in January, also became a dominant factor in the attractiveness of our fixed income market. Foreign yield hunters recorded a massive net buy of USD $4.125 billion last month on our fixed income market, contributing to the rally in bond prices. We perceive that the bond market will have better performance this year, as rate hike cycle nearing its end, cooled inflation, stable domestic currency, and higher yield among emerging markets.

Currency

The Rupiah, as previously mentioned, appreciated quite significantly against the Greenback, up from 15,600/USD to 15,000/USD in the month of January. Market expectation that Fed’s rate hiking cycle may soon be coming to an end heavily weighed on the US Dollar. This can also be seen from the Dollar Index (DXY) that recorded a drop from 104.5 to 102.1 by the end of January. With the USD losing steam, the Rupiah can now be traded at a more comfortable level.

Juky Mariska, Wealth Management Head, OCBC NISP

GLOBAL OUTLOOK

Central banks stay centre-stage

We expect the US Federal Reserve and European Central Bank to keep rates in restrictive territory to curb inflation, likely causing a recession. – Eli Lee

Financial markets have started the year strongly. Three key developments across the globe have boosted confidence.

First, inflation appears to have peaked in the major economies. By the end of 2022, consumer prices were rising at a significantly lower 6.5% rate YoY. Similarly, Eurozone and UK inflation seems to be peaking after hitting four-decade highs last year too. Thus, investors have become more optimistic that central banks will soon finish raising interest rates this year and be able to tame inflation without causing recessions.

Second, a very mild winter has allowed Europe to avoid a severe energy crisis despite the war in Ukraine. We still expect the US, Eurozone and UK to suffer recessions in 2023 as higher interest rates and inflation from last year erode consumption and growth this year. But Europe’s downturn is likely to be much less deep than earlier feared as the unusually good weather has helped the region avoid rationing energy supplies after Russia cut off gas exports to the European Union in 2022.

Last, China’s economy has begun to reopen from the pandemic after three years of isolation from the rest of the world. We think the end of zero-Covid policies significantly improves China’s outlook for 2023.

Significantly, we think the Fed and the ECB will still be hawkish over the first half of 2023. Both central banks are aiming to return inflation to their 2% targets. We thus expect both the Fed and the ECB to continue to increase interest rates until at least this summer.

Despite the Fed’s slower pace of rate hikes, we expect the central bank will undertake at least two more 25bps rate rises in March and May to bring the fed funds rate up to 5.00-5.25%.

In short, the Fed’s monetary policy will keep bearing down on US consumer price rises over the next few quarters and ensure inflation can return to the central bank’s 2% target by the middle of the decade. It is also likely to keep US 10Y Treasury yields higher than last year at around 3.50% for 2023.

In contrast, financial markets are anticipating both central banks will start cutting interest rates before the end of 2023 as growth slows and recession risks rise. We, however, are more negative on the outlook here: we think the US and the Eurozone will suffer recession or stagnant growth this year while officials will be unable to cut interest rates to support their economies as inflation will likely still be above the Fed’s and the ECB’s 2% targets in 2023.

EQUITY

A dose of caution

Despite the bright start to global markets in January 2023, we advise a healthy dose of caution on markets. – Eli Lee

Markets delivered a rebound in the month of January, with outperformance driven by Asia ex-Japan, specifically the China and Hong Kong markets. As inflationary pressures have eased slightly recently, this has improved sentiment. However, we believe the market is not fully pricing in the upcoming negative growth in earnings, which will likely become more visible in the reporting seasons ahead.

US – Markets overly optimistic

The US earnings season is currently underway. In general, we observe that overall consumption is still holding up, but cracks are forming.

On a year-to-date basis, the S&P 500 Index has staged a robust performance. We think this is likely due to increasing expectations that the economy will see a soft landing, and that the Federal Reserve (Fed) will cut rates in the second half of the year. We believe this is overly optimistic, given the tight labour market and stickiness of wage growth. We continue to expect a volatile bottoming process in 1H23, followed by a more sustained recovery in 2H23.

Europe – Better news to start the year

European natural gas prices have fallen considerably, aided by i) a milder winter, ii) lower demand for gas, and iii) record liquefied natural gas (LNG) imports at high prices.

We have revised the Eurozone 2023 GDP forecast from -0.8% to -0.1%, aided by better-than-expected economic data and China’s reopening, but we note that overtightening risks by the ECB remain high.

Japan – Growing expectations for further policy changes

Expectations for further policy changes from the Bank of Japan (BoJ) have risen, which include the removal of its cap on 10Y government bond yields, following its surprise yield curve control (YCC) adjustment on 20 December 2022 and a new governor from April 2023.

Asia ex- Japan – Buoyed by faster-than-expected reopening of China

The MSCI Asia ex-Japan Index has made a bright start to 2023, outperforming other major markets we track due largely to the faster-than-expected reopening of China. Besides the China and Hong Kong markets, Korea and Taiwan have also performed robustly, underpinned by strong foreign inflows.

China – Stay constructive

In January, the Hang Seng Index (HSI), MSCI China Index and CSI 300 Index turned in strong performances. While the strong rebound in Hong Kong and China offshore equities since November could prompt profit taking and the market could consolidate in the near-term, we stay constructive on Chinese equities and expect onshore A-shares to catch up.

Sector views

Last year we adopted a defensive stance in the face of market volatility, but looking ahead at the start of 2023, we had opted for a more balanced profile and therefore upgraded Consumer Discretionary, Materials and Industrials from Underweight to Neutral.

we expect that companies exposed to China’s reopening would continue to be supported by the positive momentum, and they include hospitality, travel and consumption-related companies.

Meanwhile, for the technology sector, we prefer China Internet > Global Semiconductors > US Software > US Internet, in this order. This view is predicated on an estimate where we think these sub-sectors are in the market cycle today, and how they will evolve going forward.

BONDS

Overweight Developed Market Investment Grade Bonds

We retain our Overweight for Developed Market Investment Grade bonds, as a hedge against the continued risks of recession, particularly in developed economies, in the later part of the year. – Vasu Menon

Over the past three months, spreads have tightened considerably. Emerging Market (EM) High Yield (HY) led the way with a 300-basis point (bps) decline while EM Investment Grade (IG) tightened by 70bps. In Developed Market (DM) Credit, HY tightened 44bps while IG tightened by 20bps.

Maintain Neutral EM corporates

The outlook for EM Credit appears much improved over 2022. China’s reopening has provided a catalyst for economic growth within the country. Moreover, it also has positive second-order impacts globally, ranging from increased energy and commodities demand from Sub-Saharan Africa to South America to increased tourism in Southeast Asia.

Maintain Overweight on DM IG and Underweight on DM HY

We maintain our Overweight recommendation on DM IG. With the highest duration in global credit, the asset class should serve as a flight to quality destination in case of a recession and should be well-placed to benefit if the Fed ultimately cuts rates to stimulate the economy after our expected 2H23 recession. We are maintaining our Underweight call on DM HY.

Strong performance in Asia

Outside of the Adani complex, Asia Credit was generally well supported by China’s reopening. Strong performance continued through the month of January 2023, with China HY Property outperforming.

Looking ahead, we think the landscape of the property sector remains mixed. Policy actions have alleviated the tail risks of a continued downward spiral and placed a floor on fundamentals and valuation.

Overweight Asia

We would Overweight Asia in the EM HY space, driven by China’s reopening. However, after the recent rally we think prices have run ahead of fundamentals in Chinese Property. Hence, we would express our Asian Overweight via select Indonesian and Indian names.

We would also overweight Asian IG driven by a barbell strategy consisting of combining “AA” rated Korean names with select “BBB” names in Indonesia and India.

FX & COMMODITIES

Gold down but not out

Strong US jobs data is a short-term headwind for the gold price, but a pause in the Fed’s tightening cycle in 2H23, rising recession risks, further US Dollar weakness and strong central bank buying will be supportive of gold’s medium-term outlook. – Vasu Menon

Gold

Gold prices started the year with a bang only to pullback somewhat alongside some consolidation of the US Dollar (USD). We believe gold will largely be guided by US economic data. Jobs data has been strong despite aggressive rate hikes, necessitating the Fed to remain hawkish and delaying any rate cut until inflation comes into its target range. This is a short-term headwind for the gold price.

We maintain our 6–12-month gold target at USD1,970/oz to express a positive medium-term view for gold for the following reasons:

1. A potential pause in the Fed’s interest rate cycle in 2H23. Gold tends to outperform other commodity sectors when monetary policymakers pivot away from tightening.
2. Rising recession risks.
3. Potential downside in the USD. Gold should benefit from concerns about USD debasement.
4. Strong physical demand supported by central bank buying interest. Especially from Russia and China given longer term de-dollarization and reserve diversification strategies.

Oil

A significant slowdown in global manufacturing activity driven by rise in central bank rates to fight inflation led to lower oil prices in 2H22. But the oil market is set to gradually tighten on the back of a reopening-led demand recovery in China. China’s recovery has been gaining steam recently and still has significant room to run, especially in the civil aviation sector. We revise our 12-month Brent oil forecast to USD90/barrel (previous: USD85/barrel) with global growth likely to hold up better than feared as China reopens faster than expected and Europe avoids an energy crisis.

Currency

While the US dollar (USD) index has weakened quite significantly in the past few months, there are now emerging signs of the USD turning higher, from its near 10-month lows. This is due to a change of expectations for a more hawkish US Federal Reserve (Fed) after strong US employment and ISM services reports for January. It underscores our caution that the USD decline is not a one-way street. There will be instances of intermittent and sporadic USD upticks as the currency still retains a yield advantage and the Fed is still tightening (but at a slower pace). Looking ahead, a lot hinges on how US inflation data pans out in the coming months. If the disinflation trend in US shows signs of slowing (even if its temporary), then risk sentiment could come under pressure and the USD may find further support. However, if the disinflation trend proves entrenched and inflation data comes in softer than expected, then a resumption of USD softness could return.

Looking out, we continue to emphasise that US data will increasingly play a bigger role in the direction of the USD, especially when rates have entered restrictive territory. But beyond the near-term USD rebound from its 10-month low, we retain the view that the upside for the USD may be limited as the pace of Fed tightening slows. An entrenched disinflation trend and signs of slowing activity supports the case for the Fed to slow its pace of rate hikes with a potential pause in the 2Q23. Overall, we continue to look for a moderate-to-soft USD profile.

2023: A Year of Two Halves

Needless to say, 2022 was a highly challenging year for the global economy and capital markets. The path taken by The Fed in regard to their rate hikes has been nothing but extravagant, up from 0.00% - 0.25% to 3.75% - 4.00% in just nine months. The war between Russia and Ukraine is still very much going on, resulting persistent high inflation mainly due to a spike in energy prices. Moreover, China is still currently upholding its Zero-Covid policy and only succeeded in recording economic growth of about 3% this year, well below its initial target of 5%. On the bright side, the second largest economy had only recently eased curbs surrounding its Zero-Covid policy following major unrest by its civilians.

From an inflation perspective, CPI had cooled off in the United States last month, dropping from 8.2% to 7.7% YoY; and still expected to move further to the south. Economists and investors now expect that The Fed will end its rate hikes in the first quarter of 2023 if further economic data moves favourably.

In Europe, the ongoing geopolitical tension is far from over and the energy crisis is still very much a concern for investors. Inflation is standing still at double-digits in Eurozone and UK. With energy prices still at record levels during the winter, it would be hard not to contribute towards the persistently high inflation numbers. On the other side, oil prices saw major declines last month dropping from around USD$90/b to USD$80/b, currently as of this writing at around USD$70/b.

Domestically, Covid numbers briefly jumped in the beginning of November due to the rapid spread of the new XBB variant. Positively, daily cases have now been subdued and the threat of Covid restrictions such as the PPKM previously implemented by the government should not happen. From a fundamental perspective, inflation continued its way down last month, recording another drop from 5.71% to 5.42% with core inflation also released below expectation. With the current Bank Indonesia 7-day reverse repo rate at 5.25%, domestic consumption seems to be well under control. However, PMI data released last month was less convincing after dropping from 51.8 to 50.3 and the consumer confidence index was slightly down from 120.3 to 119.1.

Strong commodity prices have provided Indonesia with some immunity against the recession risk this year. However, as US Dollar may move stronger, and imports may continue to accelerate as results of recovering domestic demands, this may put some pressure on the domestic growth in the first quarter of 2023. Yet, next year theme is political year, as the country will enter the presidential election as early as February 2024. This should bring more optimism in the capital market due to increased consumption during electoral campaigns.

Equity

In the month of November, the JCI moved rather sideways, recording the lowest monthly drop this year’s seasonality of only 0.23%. The equity market was unable to continue climbing up due to several reasons, mainly external factors such as the threat of a global recession induced by The Fed’s rate hike cycle as well as the ongoing geopolitical tensions.

Entering the last month of this year, the equity market has been burdened by the significant underperformance of the technology stock which is GoTo. The merger between Gojek and Tokopedia that happened earlier this year was very highly anticipated but has seen a very sharp drop in share price since the end of lockup period for early investors on the 30th of November. Moreover, the rather gloomy earnings released at the end of November, highlighted the decacorn company has expanding loss by 75.5% YoY, putting another pressure on the stock price.

Although the ongoing volatility may still persist, we still see there is a probability of Window Dressing although not that significant, with the JCI projected to hover around the 6,800 – 7,100 by the end of the year.

Bond

In the fixed income market, the 10-year benchmark yield recorded the largest monthly drop of almost 8% to close the month at around 6.94%. The drop of almost 50 basis points was supported by optimistic bargain hunters, the depreciation of the US Dollar, as well as promising monetary policies. Bank Indonesia had iterated that its monetary policy will be front-loaded and can be verified from the decision to increase the 7-day reverse repo rate by another 50 basis points (0.5%) at its meeting last month. The governor Perry Warjiyo had emphasized that adjusting interest rates early is necessary to control inflation, in which the theory have been proven. Rate hikes also supported the Rupiah against the greenback for the month of November.

Going forward, the benchmark yield still has the potential to move upwards continuing its current trajectory. Therefore, investors must still remain prudent and cautious when selecting fixed income assets and approaching year-end.

Currency

The USDIDR moved rather sideways in the month of November, slightly moving up from just under 15,600/USD to 15,730/USD by month-end. The 50-point rate hike by Bank Indonesia was not a strong enough catalyst to help drive the domestic currency against the greenback. The Rupiah is expected to still remain under pressure entering 2023, with The Fed currently still on its rate hiking cycle. A dovish tilt from Fed policy may relieve some pressures off for the USD/IDR.

Juky Mariska, Wealth Management Head, OCBC NISP

GLOBAL OUTLOOK

Fewer red cards

The first half of 2023 is likely to be testing as Europe suffers a downturn and the US faces imminent recession. But as 2023 unfolds, central banks are likely to pause rate increases and Beijing should loosen its virus stance. – Eli Lee

The economic outlook has been highly challenging in 2022. The risk of a prolonged downturn in Europe, the war in Ukraine and the threat of a mild recession in the US are headwinds for investors in the new year. But as 2023 unfolds, the economic outlook should turn more favourable owing to two likely key changes.

• First, major central banks are likely to stop raising interest rates in early 2023 as inflation finally peaks in the US, Europe and many other economies around the world.
  
  We expect core PCE inflation will finish 2022 below 5% before falling further to around 3.0-3.5% by the end of 2023 and below 2.5% by the end 2024. This slow disinflation will likely allow the Fed to finish increasing interest rates by early next year. Following its 75bps rate hikes at its last four meetings, we think the Fed will slow down to 50bps rate hikes in December and February before ending its current tightening cycle with fed funds peaking at 4.75-5.00%.
  
  But the end to the Fed’s aggressive interest rate hikes will be very important for financial markets. In our forecast table, we anticipate US 10Y Treasury yields will peak around 4% and fall to 3.50% over 2023.
  
  Similarly, we expect the European Central Bank (ECB) and the Bank of England (BoE) to also finish raising interest rates early next year at 2.25% and 4.00% respectively. Though inflation is far above each central bank’s 2% target, officials are likely to expect inflationary pressures will fall as the Eurozone and UK suffer prolonged recession during 2023.
  
  With the People’s Bank of China (PBoC) easing conditions to support growth in China and the Bank of Japan (BoJ) under Governor Kuroda expecting inflation to be only transitory in Japan, major central banks will therefore have all stopped tightening monetary policy in the first half of 2023.
• The second key change to the outlook in 2023 is likely to come from Beijing finally loosening its strict zero-Covid stance.
  
  We expect the authorities will move to significantly loosen China’s zero-Covid policy in line with the rest of the world in 2023. But by the spring of 2023, Beijing is set to begin easing stringent lockdowns to support stronger growth.
  
  We thus forecast China’s GDP growth will remain subdued at 3.0% in 2022 after last year’s strong 8.1% rebound from the pandemic. But in 2023, we project a stronger 4.5% GDP growth rate.
  
  Over the course of next year, we therefore expect more stable US Treasury yields as central banks finish increasing interest rates and firmer growth in China to present fresh opportunities for investors.
  
  Though recession risks will rise next year, peaking global government bond yields will allow US Treasury and developed market investment grade bonds to act as safe haven hedges against weak global growth.
  
  In addition, the likely shift away from China’s stringent zero-Covid stance will help cushion growth in Asia including Japan from Europe’s prolonged downturn in 2023 and a likely mild US recession - to the benefit of the region’s risk assets.

Source: Bank of Singapore

EQUITY

2023: A year of two halves

2023 is poised to be a year of two halves with global equities experiencing a volatile bottoming process in the first half before a broad recovery in the second half. We believe global equities are likely to show positive returns on a year-on-year basis at end 2023. – Eli Lee

As we approach 2023, the outlook for global equities continues to remain highly volatile and uncertain, tainted by elevated inflation, hawkish central banks, and a potential US recession.

We see 2023 to be a year of two halves and expect global equities to broadly experience a volatile bottoming process in 1H23 before a recovery in 2H23 with mostly positive gains on a year-on-year basis.

• US – A bumpy recovery
  In the US, we see downside risks in the next six months given the negative earnings revisions that are likely to come. However, multiples could re-rate in 2H23 should recessionary pressures help to moderate inflation, while markets could start to price in a Federal Reserve (Fed) pivot more actively.
• Europe – Recession to be felt more in 2023
  In Europe, price-to-earnings (P/E) ratios should also be supported if inflation starts to slow and monetary policy tightening abates. However, the market would also need to work through a period of earnings decline as Europe experiences a recession.
• Japan – Reopening tailwinds underway
  Japan’s GDP growth is expected to moderate to 0.9% in 2023, with external headwinds from a US recession mitigated by supportive domestic reopening.
• Asia ex- Japan – Sentiment remains soft
  We are upgrading our rating on the MSCI Asia ex-Japan Index from Neutral to Overweight as we head into 2023. This is largely driven by upgrades to our regional ratings by one notch on MSCI Taiwan to Overweight, and one notch on MSCI Korea to Neutral.
• China – Looking beyond the 20th Party Congress
  In China, we are encouraged by the recent wave of policy signals relating to China’s reopening, which we believe represents a turning point for markets. We prefer selected consumer plays and internet/platform names that can ride on China’s bumpy but eventual reopening.

Sector views

We have been adopting a defensive stance in the face of market volatility, but looking ahead at 2023, we seek a slightly more balanced profile and upgrade Consumer Discretionary, Materials and Industrials from Underweight to Neutral.

BONDS

Turn the page

We expect a resurgence in Fixed Income markets in 2023 and we are upgrading all our global credit recommendations except Developed Market High Yield bonds. Developed Market Investment Grade bonds remains our top pick with an upgrade to Overweight. – Vasu Menon

We consider the recent consumer price index prints to be watershed moments for the Fixed Income market. Admittedly, one below-consensus inflation print does not mean that the Federal Reserve (Fed) is going to declare victory against inflation. However, we believe that it will enable the Fed to “step down” from its recent spate of mega-75 basis point (bps) rate hikes to a more palatable 50bps in December. Perhaps even more importantly, the market’s focus can now move from inflation to economic growth/recession, with the last Fed rate hike expected in February 2023 and a rally in US Treasuries into the yearend. In this environment we expect a resurgence in Fixed Income in 2023 and are upgrading all our Global Credit recommendations except Developed Market (DM) High Yield (HY). We expect DM Investment Grade (IG), with the longest duration, to be particularly well placed. It remains our top pick with an upgrade to Overweight.

Significant spread widening in 2022

Despite the recent spread rally in global corporates, the widening in spreads in 2022 was acute and comparatively worse in Emerging Markets (EM). EM HY widened almost 200bps year to date (YTD) while EM IG widened 56bps YTD. Meanwhile, DM HY widened 105bps while Investment Grade widened a comparatively modest 38 bps.

Upgrade to Neutral on EM Corporates

The secular outlook for EM Credit over the coming year looks more promising based on the following factors: 1) Nascent signs of China re-opening via a step back from its zero-Covid policy along with incipient support for its beleaguered property sector; 2) waning global geopolitical tensions; 3) declining USD strength (along with rates).

Upgrade to Overweight on DM IG but maintain Underweight on DM HY

We are upgrading our recommendation on DM IG to Overweight. With the highest duration in global credit, the asset class will be well placed for a reversal in interest rates as the Fed “steps down” to mitigate the demand destruction expected from its hawkish efforts to lower inflation.

Neutral on Asia HY and IG

We are Neutral on Asian HY. However, given the likelihood of a Fed induced recession reverberating globally, we would tend to favour defensive parts of the market such as renewable energy, food and agribusiness, telecommunications, and utilities that possess more resilient and predictable cash flow streams.

FX & COMMODITIES

Gold to shine again

Gold may face headwinds in the next few months as the Fed tightens policy into 1Q23. But a rebound towards US$1,850/oz in 6-12 months is possible if the Fed pauses by mid-2023 causing US yields to drift lower and taking the sting out of the US Dollar. – Vasu Menon

Gold

It has been tough going for gold in 2022 as a hawkish Federal Reserve (Fed) boosted US yields and the US Dollar (USD). But mixed feelings for gold are starting to turn for the better given expectations of a Fed pause in 2023 even as Bitcoin remained under pressure amid the crypto crunch.

We cannot rule out headwinds for gold in the next few months with the Fed still expected to tighten monetary policy into 1Q23. But prices for the yellow metal could see further upside in 2023. We still see gold prices rebounding towards USD1,850/oz in 6-12 months’ time as the Fed goes on hold by mid-2023 and US yields begin to drift lower, taking the sting out of the USD as well. The fact that gold has responded to even faint hopes of a monetary policy pivot lately, convinces us that gold will react ahead of when the Fed starts to signal an intention to start moving off the restrictive trajectory.

Oil

Oil prices have gradually declined after hitting a peak in June. Concerns over weaker demand is behind the lower oil price. First, major central banks have tightened monetary policy to fight inflation. Rising recession risk is weighing on oil prices. Second, Covid-19 resurgence in China has hurt mobility.

Many cities have once again tightened Covid-19 measures. Our bias is to the downside for oil prices over the next one to two quarters. But we keep our 12-month Brent forecast steady at US$85/barrel. Oil prices could firm back up in second half of 2023 as China reopening gains traction or if the European energy crisis intensifies anew on the back of a colder winter. Tight supply conditions should also limit oil price downside risk. We see OPEC policy bias sticking to production discipline.

Currency

At one point in September this year, the US Dollar (USD) Index was up by as much as 20%. The allure of higher US rates and yields, and haven demand, were the main factors underpinning USD strength.

However, the tide appears to have turned. The long USD trade that has been a consensus trade in 2022 is looking uneasy with USD longs rushing for exit. We attribute the sharp turn lower (about 6% from the peak in November) to two main drivers: (1) the softer than expected October US Consumer Price Inflation (CPI) report released in early November and (2) the dovish minutes from the Fed policy meeting (FOMC) in November.

Softer than expected economic data has also led to expectations for a step-down in the pace of Fed rate hike in December 2022 or even February 2023 and this implies room for the USD to head lower. That said, we retain some degree of caution as policy calibration does not mean that the Fed is done with tightening. Rates are still elevated and going higher, albeit at a potentially slower pace. Hence a moderate-to-softer USD profile rather than an outright massive decline in the USD is likely.

Testing Time

Towards the end of the year several concerns still loomed over capital market movements, such as negative sentiment coming from a potential recession as well as a more aggressive cycle of interest rate hikes resulting from persistently high inflation. As a result, the US Dollar continued to strengthen, resulting in the performance of several asset classes weakening in October. However, quite some relief news came from the US in the second week of November. US inflation in October decreased to 7.7% YoY, compared to the previous month at 8.2% YoY. Not only that, the third quarter of US GDP data was also released quite encouraging with an increase of 2.6%, after experiencing a negative contraction in the previous two quarters. The Fed's aggressive rate hikes are starting to look effective at controlling the pace of inflation without pushing the U.S. economy into the brink of a deeper recession.

Meanwhile, the era of rising interest rates continues in other developed countries, such as Europe and the United Kingdom. The European Central Bank (ECB) and the Bank of England (BoE) have tightened their monetary policy by 75 basis points at the last monetary policy meeting, in line with the Fed. Inflation in both countries remains high in line with soaring energy bills and food prices. The risk of stagflation to recession still threatens Europe and the UK, coupled with several indicators that indicate that the economy will contract until 2024.

Entering the Asian region, economic challenges due to the Zero Covid Policy are still occurring in China along with the increase in the number of daily cases of Covid-19. China's trade sector is still weak, as can be seen from the decline in export values, a slowdown from the domestic side, and the threat of a global recession that hits international trade. Towards the end of the year, however, the Chinese government appeared to be starting to show softening signals regarding quarantine rules and flight bans.

Turning to the country, good news came from the national economy, which managed to grow in the third quarter of 2022 by 5.72% YoY, higher than the level before the COVID-19 pandemic in 2020. As countries fall into recession, Indonesia's continued economic recovery is a positive thing. Other economic data also show that Indonesia's fundamentals are still solid.

Indonesia's manufacturing is still in the expansion zone, even though it is lower than last September. This level is still very good amid declining demand due to weakness in developed countries. On an annual basis (YoY), inflation fell to 5.71% for the period of October 2022. Inflation in Indonesia is stable and in line with the projections of Bank Indonesia and the Government. Meanwhile, foreign exchange reserves for the October period remained high at USD 130.20 billion and remained adequate in line with maintained economic stability and prospects

Equity

In October, JCI recorded a gain of +0.83% to a level of 7,098.89. Indonesia's solid fundamentals are a positive catalyst amid various negative global sentiments. In terms of the company's revenue report, the majority of issuers reported performance above expectations for the third quarter of 2022. The consistently increasing trend of economic growth is expected to be an attraction for investors to enter the Indonesian stock market amid ongoing uncertainty. JCI is estimated to be in the range of 7,200-7,500 until the close of 2022.

Bond

In the bond market, the benchmark 10-year yield rose to a range of 7.537% in October, signalling a weakening in terms of prices. The weakening occurred amid the aggressiveness of the Fed in raising the Fed funds rate, and Bank Indonesia (BI) which again raised the BI 7 days Reverse Repo Rate to 4.75%. Going forward, more limited supply and an operation twist policy from Bank Indonesia are expected to dampen the increase in bond yields in line with the continued increase in interest rates.

Rupiah

In terms of currency, the Rupiah remained under pressure against the US Dollar by 2.44% to a level of 15.598 /USD at the end of last October. The weakening trend has been going on for 3 consecutive months. The Fed's aggressiveness made the Dollar Index (DXY) look strong at 111.52. Going forward, adequate foreign exchange reserves and rising interest rates by Bank Indonesia are expected to strengthen exchange rate stability in line with the fundamental value amidst high global financial market uncertainty.

Juky Mariska, Wealth Management Head, OCBC NISP

GLOBAL OUTLOOK

Testing times

The economic outlook continues to be challenging as 2022 draws to a close with risks from inflation, recession, the pandemic, and further central bank interest rate hikes all testing investors. – Eli Lee

The Federal Reserve (Fed) has increasing interest rates aggressively by 75 basis points (bps) at each meeting to curb inflation. China’s economy remains subdued by the government’s strict zero-Covid stance. The Eurozone and the UK are both near recession owing to the energy shocks induced by Russia’s war in Ukraine, and Japan’s currency has fallen to its weakest levels since 1990. Investors should thus remain cautious in the near-term, as the outlook is tested by inflation, recession, and risks of further central bank interest rate hikes.

We expect the Fed will continue to increase interest rates until its fed funds rate reaches 4.75-5.00% by early 2023 to help lower inflation. The Fed’s rapid interest rate hikes have pushed US Treasury yields to their highest level since the 2008 global financial crisis. In the near-term, the benchmark 10Y yield may stay around 4.00%.

The second risk to the outlook comes from uncertainty over China’s strict zero-Covid stance. The key challenge to the investment outlook was the lack of any signal that the government’s stringent approach to Covid would be loosened soon. Another weakness is property. Property investment stayed weak, falling by 8.0% YoY. This year we expect China’s overall GDP growth will remain subdued at 3.0% in 2022 after last year’s strong 8.1% rebound from the pandemic. The third large risk is that Europe’s economies may fall into recession before the end of 2022. Europe’s economies have been significantly affected by the shock to energy prices caused by Russia’s invasion of Ukraine.

The risks are that Europe’s central banks tighten monetary policy too much just as their economies are set to enter a recession. We think the ECB will only be able to increase interest rates further by 50bps in December and 25bps in in February before recession forces it to stop with its deposit rate at just 2.25%. Similarly, we think the BoE is only likely to raise its Bank Rate by 50bps more in December and again in February before recession in the UK also forces it to stop tightening with its Bank Rate peaking at 4.00%, well below the Fed’s interest rate.

The fourth risk to the outlook comes from the Japanese yen falling to its weakest levels since 1990 at almost 152 against the US Dollar (USD) as the Bank of Japan (BoJ) stays dovish on inflation. Thus, we remain cautious on the JPY as the contrast between the BoJ’s dovish stance and the hawkish Fed is keeping Japan’s currency weak.

Given all the risks to the economic outlook, we think investors should thus stay cautious. We continue to recommend being underweight risk assets. We expect that the Fed and other major central banks will end their rate hikes early next year to the benefit of financial markets. But until then the outlook is likely to keep testing investors for the rest of the year.

Source: Bank of Singapore

EQUITY

Stay defensive

As central banks continue to remain hawkish and signs of financial unease grow, we continue to remain defensive and retain our underweight rating on equities. – Eli Lee. We are downgrading Global Financials from overweight to neutral on the back of our forecast for a US recession in 2023. With this, we have an underweight rating on most of the cyclical sectors including Financials, Consumer Discretionary, Industrials, Materials and Real Estate. We remain overweight on Healthcare.

We see the macro environment as largely unchanged– central banks remain hawkish, inflation remains high, and macro uncertainty pervades.

• US – Looking for a recession ahead
  The 3Q22 earnings season is currently underway, and corporate results appear fairly mixed. In the US, consumption remains broadly resilient, especially for services.
  
  Looking ahead, we believe consensus expectations for earnings per share (EPS) in 2023 likely remain too optimistic. Our macro team is calling for a recession next year. Coupled with tighter financial conditions, this set up will be challenging for corporates in general.
• Europe – Looking beyond winter
  Much has been done on the efforts of governments to build up gas supply through this winter, but concerns are likely to re-centre on the longer-term outlook and the prices that the EU would have to pay for energy without cheap Russian gas.
  
  In 2Q22, EU gas consumption was already 16% lower YoY. As mentioned in our earlier reports, heavy industries such as Chemicals and Industrial cyclicals would see the greatest impact, and we continue to underweight cyclicals vs defensives.
• Japan – Caution advised
  Japan’s re-opening and weak Japanese Yen themes remain relevant for the rest of this calendar year as borders re-opened from 11 October, which should benefit hospitality, air/rail transportation and select consumer plays as inbound demand improves.
  
  However, we advise caution as we await news of the next Bank of Japan Governor, who should come in early 2023. The change in leadership may come with increased risks of a less dovish policy stance.
• Asia ex- Japan – Sentiment remains soft
  The MSCI Asia ex-Japan Index (MXASJ) endured another difficult month in October 2022, with negative returns. This contrasted with other major equity markets such as the US, Europe and Japan. The drag from MXASJ largely came from China, Hong Kong, Singapore and Taiwan, with significant volatility seen post the 20th Party Congress in China.
  
  Although Bank Indonesia was late to the game in terms of raising rates, it appears to be playing catch up, having hiked its benchmark rates by 50bps in October to 4.75%, the second consecutive month of 50bps increase.
• China – Looking beyond the 20th Party Congress
  The 20th Party Congress concluded with a new Politburo Standing Committee – the total number of Standing Committee members stayed unchanged at seven, with four newly appointed members. The new economic team will be unveiled at the National People’s Congress (NPC) in March 2023.
  
  Hong Kong and equities markets appear to discount for a low growth with no re-opening assumption for next year. MSCI China is trading at 0.99x forward price-to-book (P/B), which is close to trough levels in previous downcycles. We expect the onshore equities market will continue to outperform offshore as the former can benefit from liquidity easing in the onshore market.

Source: Bank of Singapore; Updated on 28 October 2022; Total returns are based on index’s locl currency terms

BONDS

Under pressure

The fixed income market continues to wilt under pressure from inflation which is the highest in forty years and prospects that the Fed may cause a recession in 2023 in the process of restoring price stability. – Vasu Menon

The global fixed income market continues to wilt under the pressure of two significant headwinds:

• An inflation rate which is the highest in forty years and has so far proved amazingly resilient in the face of the Federal Reserve’s (Fed) hawkish actions and
• the prospect that the Fed may cause a recession in 2023 in the process of restoring price stability.

The market continues to reprice the Fed’s terminal rate higher, and it now stands at close to 5.0% in May 2023. Moreover, US Treasury yields continue to move higher, with the ten-year yield rising for thirteen consecutive weeks: the longest streak in forty years. Bond volatility in the government securities market remains near the fifteen-year peak while liquidity is poor.

We maintain our neutral call on Developed Market (DM) Investment Grade (IG) bonds given our view of a likely recession in 2023. Also, once the market believes that the Fed has passed the peak of its rate hike efforts, focus will shift to the timing of a dovish pivot and a neutral position makes an effective hedge.

We are maintaining our underweight call on DM High Yield (HY) bonds as current spreads have remained amazingly resilient and are still trading well inside the stress periods of 2011-2012 and 2015-2016.

Underweight EM

We maintain our underweight call on both Emerging Market (EM) HY and EM IG bonds but with a relative preference for the latter. While the Chinese economy has already been chafing under the zero-Covid policy, President Xi’s election for a third five-year term and seeming consolidation of power exacerbated volatility and creates near-term uncertainty.

Neutral Asia in EM HY and IG space

We are maintaining our neutral call on Asia in the EM HY space. However, given the likelihood of a Fed induced recession reverberating globally, we would tend to favour defensive parts of the market such as renewable energy, food and agribusiness, telecommunications and utilities that possess more resilient and predictable cash flow streams.

In Asia, stay defensive and high quality

We prefer IG over HY and favour long dated bonds. For China IG, we prefer top tier systematically important central SOEs but are mindful of rising geopolitical and sanction risks.

FX & COMMODITIES

Tough going

The going will likely remain tough for a zero-yielding asset like gold for the time being as a hawkish Federal Reserve boosts US yields and the US Dollar. – Vasu Menon

Gold

The backdrop for gold will likely remain tough for the rest year as stubbornly high core US inflation keeps the Fed hawkish. A positive turn for gold could come by mid-2023 once we are past peak inflation and a US recession becomes a reality.

Prices for the yellow metal could bottom by early 2023 and see some upside against the backdrop of rising recession risks and prospects of a Fed pause in 2023. Overall, we still see gold prices at USD1,700/oz in three months’ time before rebounding towards USD1,850/oz in six to 12 months as the Fed goes on hold and US yields begin to drift lower, taking the sting out of the USD as well.

Oil

OPEC+ agreed to cut supply quotas by 2 million barrel per day (b/d) from November, the largest reduction since the response to Covid-19. However, the group will use outdated production baselines to measure the curbs. That could see the actual fall in production limited to only half that amount. There is also significant uncertainty concerning the path for Russian supplies with the implementation of EU sanctions, especially given the noise around a potential price cap.

But with demand concerns still at the forefront, the OPEC+ supply cut may only provide temporary support to prices. Crude oil prices could decline further as deteriorating global economic growth raised demand concerns. Aggressive monetary tightening to curb soaring inflation has started showing up across markets from manufacturing to a property slowdown. China’s oil demand remains weak due to intermittent lockdowns in response to Covid-19 flare-ups. We continue to target Brent oil at USD85 per barrel in 12 months’ time.

Currency

The US Dollar Index had a wild ride in October due to the tug of war between hopes that the US Federal Reserve (Fed) would slow down the pace of its rate hikes versus fears of more tightening.

While it may be too early at this point to wish for a dovish pivot as inflationary pressures remain elevated, we believe a potential calibration in the pace of tightening should not be ruled out in coming months, especially if inflationary pressures do show more convincing signs of slowing down.

Several Fed officials and recent Fed policy minutes have also started to hint at the Fed potentially calibrating its pace of tightening at some point as it re-assesses the effects of cumulative policy adjustments. For instance, Mary Daly, President of the San Francisco Fed, was the latest to weigh in, saying it is time to start talking about slowing rate hikes. Policy calibration implies that the pace of US Dollar (USD) strength should moderate. That said, we retain some caution as policy calibration does not mean the Fed is done with tightening. Rates are still elevated and going higher, albeit at a slower pace potentially. We look for a moderation in USD strength going forward.

Tide of volatility

Memasuki kuartal terakhir di 2022, kekhawatiran mengenai resesi global dan laju kenaikan suku bunga Fed, masih menjadi perhatian utama para pelaku pasar. Konflik Rusia – Ukraina yang sudah berlangsung sejak awal tahun, yang telah mendorong kenaikan sejumlah komoditas energi dan pangan, turut menambah kekhawatiran terhadap perkembangan perekonomian dunia. Kebijakan suku bunga yang agresif untuk menahan laju inflasi, tidak hanya datang dari bank sentral AS, namun juga Bank of England (BOE) yang menaikkan suku bunga menjadi 2.25 persen di bulan September. Inflasi yang tinggi juga terjadi di kawasan Eropa di 10% y-o-y pada bulan September. Survei dari analis Bloomberg, memprediksi bahwa kawasan Eropa memiliki probabilitas sebesar 75 persen untuk memasuki resesi.

Sementara itu di Asia, perhatian para pelaku pasar tertuju pada kongres nasional Partai Komunis China ke-20 yang akan dilangsungkan di bulan Oktober. Pertumbuhan ekonomi China dikhawatirkan akan sulit mencapai 5 persen di 2022. Hal ini diakibatkan oleh kebijakan Zero Covid Policy yang menyebabkan terhambatnya aktivitas ekonomi. Kongres nasional China diperkirakan akan fokus pada exit strategy dari Zero Covid Policy serta kebijakan ekonomi yang lebih suportif untuk pertumbuhan ekonomi.

Dari dalam negeri, sejumlah indikator ekonomi Indonesia menunjukan hasil yang positif, dimana hal ini merujuk pada ketahanan ekonomi Indonesia yang baik. Aktivitas manufaktur Indonesia di bulan September masih bertahan di level ekspansi pada level 53.7. Kenaikan konsumsi domestik di tengah pemulihan ekonomi, serta kenaikan harga BBM subsidi di bulan September, mendorong inflasi naik ke 5.95% secara tahunan. Bank Indonesia pun menaikkan suku bunga acuan 7-day Reverse Repo Rate menjadi 4.25%. Di saat yang sama, untuk mengantisipasi potensi penurunan daya beli akibat kenaikan harga BBM tersebut, pemerintah juga memberikan santunan dalam bentuk bantuan langsung tunai kepada 20.65 juta masyarakat Indonesia dengan total besaran sebesar Rp 12.4 triliun. Kebijakan ini disambut positif oleh para pelaku pasar, mengingat program bantuan pemerintah ini dirasakan lebih tepat sasaran kepada masyarakat Indonesia yang terimbas dari kenaikan harga BBM. Bank Indonesia memperkirakan pertumbuhan ekonomi Indonesia di 2022 akan bertumbuh di kisaran 4.5 hingga 5.3 persen.

Equity

Indeks Harga Saham Gabungan (IHSG) mengalami penurunan -1.92% sepanjang bulan September. Pelemahan terbesar dialami oleh sektor teknologi -10.9% dan sektor transportasi -10.76%. Konsolidasi saham sektor teknologi terjadi seiring dengan turunnya kinerja dan proyeksi pertumbuhan perusahaaan e-commerce akibat kenaikan laju inflasi. Inflasi yang tinggi berpotensi menurunkan daya beli serta meningkatkan biaya operasional perusahaan-perusahaan yang bergerak di bidang teknologi tersebut. Namun demikian, aliran dana investor asing pun masih masuk sebesar Rp32 Triliun selama bulan September, atau Rp69.47 Triliun sejak awal tahun. Negara penghasil komoditas seperti Indonesia cukup diuntungkan dengan kenaikan harga komoditas yang cukup tajam di tahun ini, sehingga Indonesia masih mencatatkan surplus dari neraca perdagangan. Tak hanya itu, konsumsi domestik yang merupakan tulang punggung perekonomian Indonesia diharapkan akan mengurangi potensi efek domino seandainya terjadi resesi global.

Obligasi

Imbal hasil obligasi pemerintah Indonesia 10 tahun mengalami kenaikan di bulan September menjadi 7.37%. Hal ini disebabkan oleh kebijakan Fed yang kembali menaikkan suku bunga acuan sebesar 75 bps di bulan September. Langkah untuk menaikkan suku bunga juga diikuti oleh Bank Indonesia, yang juga kembali menaikkan suku bunga acuan sebesar 50 bps, lebih tinggi dari konsensus para analis, menjadi 4.25%. Pemerintah menargetkan sisa penerbitan SBN melalui lelang mingguan sebesar Rp75 Triliun di kuartal IV, turun dari jumlah lelang di kuartal III yang mencapai Rp166 Triliun. Dengan supply yang lebih terbatas serta adanya kebijakan operation twist dari Bank Indonesia, diharapkan akan meredam kenaikan imbal hasil obligasi yang diakibatkan dari potensi kenaikan suku bunga lanjutan.

Currency

Mata uang Rupiah bergerak melemah namun relatif stabil sepanjang bulan September, yang berada di kisaran Rp14,850 – 15,200 per Dolar AS. Keputusan Bank Indonesia yang kembali menaikan tingkat suku bunga 7DRRR juga memberikan dukungan atas stabilitas nilai tukar. Selain itu, surplus neraca perdagangan yang berlanjut lebih dari 20 bulan terakhir, bahkan posisi terakhir meningkat dibandingkan sebelumnya di level US$ 5.76 Miliar turut membuat posisi Rupiah relatif aman. Hal ini juga diperkuat oleh posisi cadangan devisa Indonesia yang berada di level US$ 130.8 Miliar, dimana angka tersebut setara dengan pembiayaan 5.9 bulan impor atau 5.7 bulan impor dan pembayaran utang luar negeri pemerintah, serta berada di atas standar kecukupan internasional sekitar 3 bulan impor.

Juky Mariska, Wealth Management Head, Bank OCBC NISP

Volatilitas Berlanjut

Volatilitas pada prospek ekonomi masih akan berlanjut ditengah beberapa sentimen negatif di tahun ini – Eli Lee

The Federal Reserve (Fed) memproyeksikan kenaikan suku bunga lebih lanjut untuk mengekang inflasi di AS

Proyeksi median atau rata-rata FOMC untuk puncak siklus pengetatan suku bunga Fed naik menjadi 4.50%-4.75% pada awal 2023. Kami memperkirakan The Fed akan menaikkan suku bunga lagi sebesar 75 bps pada bulan November, 50 bps pada bulan Desember dan 25 bps pada bulan Februari untuk membawa suku bunga naik menjadi 4.50- 4.75%.

Dengan demikian, sikap hawkish The Fed berpotensi terus menekan aset berisiko tahun ini sampai siklus pengetatan Fed mendekati akhir di awal 2023. Tetapi kenaikan suku bunga akan memperlambat pertumbuhan ekonomi dan menjadi fondasi dari pergerakan imbal hasil US Treasury kedepannya (kami melihat pertumbuhan PDB AS turun dari 1.6% tahun ini menjadi hanya 0.8% pada tahun 2023 dengan risiko resesi tahun depan sebesar 50%). Oleh karena itu, kami terus memperkirakan 10Y US treasury tahun AS menetap di sekitar 3.50% selama 12 bulan ke depan.

Pemotongan pajak pemerintah Inggris yang baru telah memicu krisis kepercayaan investor

Krisis Inggris akan terus berlanjut. Pemerintah saat ini telah membatalkan proposal yang paling kontroversial untuk menghapuskan tarif pajak penghasilan tertinggi (45%). Tetapi ini hanya akan menutup sekitar GBP 2-3 Miliar dari pendapatan yang hilang. Dengan demikian, pemerintah perlu mengurangi pemotongan pajak lebih lanjut dan mendanainya melalui pengurangan pengeluaran yang akan memperdalam kemungkinan resesi Inggris. Atau BoE harus menaikkan suku bunga, saat ini di 2.25%, dengan perkiraan kami ke level 4.00% pada awal 2023 untuk mengekang inflasi yang lebih tinggi yang disebabkan oleh penurunan GBP dan peningkatan pinjaman pemerintah. Oleh karena itu, kami sangat mewaspadai prospek Inggris selama beberapa bulan ke depan dengan ekonomi akan berkontraksi sebesar 0.8% pada tahun 2023.

Blokade penuh Rusia terhadap pasokan gas ke Eropa telah meningkatkan inflasi hingga 10.0% di Zona Euro, dan mendorong terjadinya resesi

Kami memperkirakan PDB zona euro akan terkontraksi sebesar 0.8% pada tahun 2023. Pada saat yang sama, Bank Sentral Eropa (ECB) kemungkinan akan menaikkan suku bunga sebesar 75 bps lagi pada bulan Oktober dan sebesar 50 bps lebih lanjut pada bulan Desember untuk menaikkan suku bunga deposito dari 0.75% saat ini menjadi 2.00% pada akhir 2022 untuk mengekang inflasi, meskipun Zona Euro kemungkinan memasuki resesi. Dengan demikian, prospek jangka pendek untuk aset berisiko Eropa tetap sangat menantang.

Kebijakan Zero Covid di China membuat pertumbuhan lemah

Kami memperkirakan PDB China hanya akan berkembang sebesar 3.0% tahun ini setelah pertumbuhan yang kuat sebesar 8.1% tahun lalu karena lockdown yang kembali diberlakukan menahan konsumsi.

Ketahanan ekonomi Jepang tidak mencegah Yen mencapai posisi terendah 24 tahun terhadap Dolar AS

Tahun ini, ekonomi Jepang terbukti lebih tangguh dibandingkan dengan perlambatan tajam di AS dan China serta meningkatnya risiko resesi di Eropa. Kami meningkatkan perkiraan PDB kami dari pertumbuhan 1.2% menjadi 1.6% pada tahun 2022, dan memproyeksikan pertumbuhan 0.9% pada tahun 2023 karena ekonomi akan menghindari resesi. Risiko BoJ yang kurang dovish dengan demikian membuat kami tetap netral pada prospek ekonomi Jepang meskipun ada ketahanan tahun ini.

Mengingat bahwa prospek global kemungkinan akan tetap bergejolak hingga akhir tahun 2022, investor harus tetap berhati-hati, tetap mempertahankan aset berisiko underweight. Hanya ketika The Fed dan bank sentral lainnya menurunkan suku bunga yang cepat, prospek ekonomi kemungkinan akan berubah menjadi menguntungkan lagi.

Source: Bank of Singapore

EQUITIES

Berhati-hati pada pasar ekuitas

Kami masih menyarankan sikap defensif secara keseluruhan, terlihat dari posisi underweight kami pada ekuitas. – Eli Lee.

Kami overweight pada sektor kesehatan, dan underweight pada sektor consumer discretionary, industrial, real estate dan material.

Dengan latar belakang kenaikan biaya modal, likuiditas yang lebih rendah dari neraca The Fed, dan potensi revisi pendapatan negatif selama beberapa bulan ke depan, secara teknis kami melihat risiko penurunan untuk Indeks S&P 500 kedepan.

Inggris telah menarik banyak perhatian setelah rencana fiskal pemerintah baru-baru ini. Keadaan di Inggris masih menjadi kekhawatiran, dan kami memperkirakan volatilitas pasar yang berkelanjutan seiring dengan meningkatnya risiko.

Di China, semua mata tertuju pada Kongres Partai ke-20, di mana implementasi kebijakan yang lebih baik dan kejelasan arah diantisipasi.

AS – Perkiraan EPS konsensus 2023 masih terlalu tinggi

Kami memperkirakan bahwa indeks S&P 500 menghadapi risiko jangka pendek. Dalam pandangan kami, perkiraan konsensus untuk FY2023 masih terlalu tinggi, dan dapat menurun menuju musim pendapatan Q3. Pada saat yang sama, premi risiko ekuitas (selisih antara imbal hasil forward earnings S&P 500 dan imbal hasil US Treasury 10-tahun) tetap berada dibawah rata-rata pasca krisis keuangan global, sehingga mengurangi daya tarik relatif ekuitas AS. Dengan latar belakang kenaikan biaya modal, likuiditas yang lebih rendah dari neraca Fed, dan potensi revisi pendapatan negatif selama beberapa bulan ke depan, secara teknis kami melihat risiko penurunan untuk indeks S&P 500.

Eropa – Tetap underweight

Euro dan Pound yang lemah dapat memiliki beberapa manfaat, terutama bagi perusahaan internasional yang lebih besar yang memiliki operasi bisnis luar negeri yang substansial. Pertama, pendapatan dan keuntungan yang dihasilkan dari segmen luar negeri, ketika dikonversi kembali ke mata uang negaranya. Kedua, daya saing biaya meningkat ketika perusahaan memproduksi di Eropa dan mengekspor ke AS dan pasar Dolar AS lainnya. Akibatnya, kami memperkirakan kinerja yang lebih baik dari FTSE 100 vs FTSE 250.

Jepang – Membuka kembali perbatasan

Perdana Menteri Kishida telah mengumumkan bahwa perbatasan akan terbuka untuk turis masuk mulai 11 Oktober 2022, menggarisbawahi perkiraan kami sebelumnya untuk pembukaan kembali dan penerima manfaat Yen yang lemah. Dengan Yen mendekati level terendah 24 tahun yang mendukung pariwisata masuk, prospek pertumbuhan untuk perjalanan (maskapai penerbangan, kereta api), perhotelan, dan penerima manfaat konsumsi terpilih (departmental store, makanan dan minuman) akan mendorong secara bertahap walaupun merupakan segmen utama wisatawan Mainland China.

Asia ex- Japan – Headwinds

Menurut pandangan kami, perkembangan terbaru dalam lingkungan ekonomi makro, seperti suku bunga yang lebih tinggi, prospek pertumbuhan ekonomi yang lebih lambat, dan Dolar AS yang kuat menjamin ekspektasi yang lebih rendah untuk Indeks MSCI Asia ex-Japan. Kami memperhitungkan basis pendapatan yang lebih rendah karena Dolar AS yang kuat, yang biasanya berdampak negatif pada kinerja pasar Asia ex-Japan. Kongres Partai ke-20 China akan menjadi acara penting lainnya yang akan menjadi perhatian pasar.

Source: Bank of Singapore; Updated on 30 August 2022; Total returns are based on index’s locl currency terms

BONDS

Masih netral terhadap obligasi DM IG

Di negara maju, kami masih netral terhadap obligasi layak investasi (IG) akibat beberapa hal. – Vasu Menon

Pasar obligasi masih tertekan akibat sikap hawkish bank sentral AS The Fed yang menaikkan suku bunga acuan sebesar 75 basis poin untuk yang ketiga kali nya tahun ini, membawa kenaikan suku bunga acuan sejak awal tahun sebesar 300bps.

The Fed menaikkan proyeksi suku bunga acuan nya ke level 4.6% untuk kuartal satu 2023 ditengah pernyataan Ketua Fed Jerome Powell bahwa pihaknya rela mengorbankan pertumbuhan ekonomi demi mengendalikan inflasi. Imbal hasil antara obligasi 2 tahun dan 10 tahun mencapai level inversi tertinggi nya dalam 15 tahun terakhir. Hal tersebut memicu premi risiko untuk pasar kredit global naik signifikan, mencerminkan potensi tekanan apabila terjadi nya resesi dengan obligasi High Yield (HY) yang akan lebih terdampak.

Underweight negara berkembang (EM)

Kami mempertahankan pandangan underweight terhadap obligasi IG dan HY negara berkembang, dengan preferensi yang lebih besar terhadap kategori IG. Pengetatan kebijakan moneter secara global, penguatan mata uang USD, dan juga beberapa tensi geopolitik yang kian meningkat masih menjadi beberapa risiko utama.

Masih netral terhadap IG dan underweight terhadap HY negara maju

Kami juga masih mempertahankan pandangan netral terhadap obligasi IG negara maju karena beberapa faktor seperti: 1) Seiring dengan perkiraan kami atas tinggi nya potensi untuk perlambatan ekonomi global atau bahkan resesi global di tahun 2023, kami masih netral terhadap obligasi-obligasi dengan volatilitas terendah, rating tertinggi dan yang memiliki durasi terpanjang. Kemudian juga 2) disaat pasar sudah melihat siklus kenaikan suku bunga acuan telah memuncak, fokus akan tertuju pada kapan perubahan sikap dovish oleh The Fed

Netral terhadap obligasi HY Asia

Kami masih mempertahankan pandangan netral terhadap obligasi HY Asia. Namun, seiring dengan meningkatnya potensi resesi akibat pengetatan kebijakan moneter yang terlalu agresif, maka kami cenderung lebih menyukai sektor-sektor industrial seperti energi terbarukan, pangan dan agrikultur, telekomunikasi, dan utilitas.

Di Asia, kami overweight terhadap obligasi IG China dan India, dan obligasi HY Indonesia

Di kategori IG, kami masih overweight terhadap China yang dimana pasar kredit didominasi oleh perusahaan-perusahaan BUMN dan yang penting secara sistemik terhadap perekonomian. Di India, kami menyukai obligasi dengan durasi panjang yang diterbitkan oleh sektor industrial yang lebih aman dari segi hutang dan tahan terhadap tekanan siklikal.

FX & COMMODITIES

Kenaikan suku bunga adalah tantangan untuk emas

Federal Reserve yang lebih hawkish di tengah inflasi inti AS yang sangat tinggi adalah tantangan untuk emas dalam jangka pendek – Vasu Menon

Emas

Fed yang lebih hawkish di tengah inflasi inti AS yang sangat tinggi dapat membuat harga emas menjadi lebih rendah dalam jangka pendek, namun harga emas dapat menjadi lebih tinggi nanti jika resesi menjadi kenyataan. Menyusul kenaikan tajam dalam imbal hasil 10Y US Treasury bergerak mendekati target 3 bulan kami sebesar 4%, kami yakin risiko penurunan emas dari imbal hasil AS yang lebih tinggi akan lebih terbatas. Namun kenaikan imbal hasil negara lainnya, terutama imbal hasil negara kawasan Eropa dan kekhawatiran atas intervensi mata uang lebih lanjut yang perlu diatur oleh beberapa penjualan aset USD, dapat terus menambah tekanan pada imbal hasil US Treasury – yang merugikan emas dalam waktu dekat.

Harga untuk emas dapat turun pada awal 2023 dan melihat beberapa kenaikan dengan latar belakang meningkatnya risiko resesi dan prospek The Fed mulai memperlambat laju pengetatan di akhir tahun. Perkembangan terakhir antara Rusia dan Ukraina, termasuk ancaman nuklir dari Putin, memperkuat emas sebagai lindung nilai risiko.

Minyak

Harga minyak terus menurun di tengah kekhawatiran permintaan yang lebih lemah dan penguatan dolar AS. Permintaan minyak global terganggu oleh lockdown China, sementara prospek ekonomi makro memburuk lebih cepat dari yang diharapkan di Eropa dan harga yang tinggi mengurangi permintaan AS. Tetapi permintaan bisa meningkat, karena harga gas Eropa yang tinggi mempercepat peralihan ke minyak.

Kami menargetkan minyak Brent pada USD 85/barel dalam waktu 12 bulan. Perkiraan dasar kami terus melihat perekonomian global yang menghindari “garden variety recession” - yaitu, skenario resesi dengan pengangguran yang meningkat pesat, dan kebangkrutan rumah tangga dan perusahaan. Namun jika terjadi penurunan global yang lebih dalam, harga minyak bisa dengan cepat jatuh ke USD 55-70/barel.

Currency

Dolar AS (USD) terus diuntungkan dari permintaan safe haven dan daya tarik suku bunga AS yang lebih tinggi dan imbal hasil obligasi. Dalam beberapa minggu terakhir kami telah melihat revisi substansial dalam ekspektasi Fed mengenai suku bunga acuan. Ditambah dengan pernyataan hawkish dari berbagai pejabat Fed menggarisbawahi tekad bank sentral AS untuk memperketat kebijakan dalam menghadapi inflasi, bahkan dengan mengorbankan pertumbuhan.

Sentimen risiko yang lemah karena kekhawatiran perlambatan pertumbuhan global yang tajam dan serangan ketegangan geopolitik, terus menopang permintaan USD. Meskipun demikian, kami masih mengharapkan perubahan dalam USD pada tahap tertentu, terutama ketika tekanan inflasi menunjukkan tanda-tanda perlambatan yang lebih meyakinkan, yang dapat membuat Fed memberi sinyal perlambatan laju pengetatan.

Dalam waktu dekat, kami percaya otoritas regional terus mencermati pasar dan dengan demikian, dapat terus menerapkan langkah-langkah stabilisasi lebih lanjut jika volatilitas pasar meningkat. Dengan demikian, langkah-langkah stabilisasi ini dapat membantu memulihkan kepercayaan pasar dan bertindak sebagai penahan untuk memperlambat laju depresiasi mata uang lokal yang bergerak cepat. Namun, upaya ini mungkin hanya memberikan kestabilan sementara bagi pasar. Pada akhirnya, tren USD yang lebih kuat perlu mereda untuk pasar mata uang termasuk di Asia ex-Japan untuk menjaga kestabilan yang lebih berarti.

Concern about the pace of the Fed's rate hike to contain inflation, as well as the slowdown of the global economy are still the main fears of market participants. Several indicators of US economic activity during August remained mixed, with the S&P Global US Composite PMI survey index contracting to 44.6. However, at the same time the Citi Economic Surprise Index, which measures expectations of economic improvement, in August showed an increase compared to last July.

More aggressive interest rate policies also occurred in the European region with the European Central Bank (ECB) deciding to raise interest rates by 75 bps to 1.25% at its September meeting. Inflation rate in the region also continued to increase from 8.9% to 9.1% YoY in August. On the other hand, the ongoing Russia-Ukraine conflict remains one of the main factors contributing to the increase in the inflation rate, which is contributed by the energy sector.

Meanwhile, Asia's largest economy, China, is also struggling to cope with the economic slowdown. A few stimulus measures was released by the Chinese government, ranging from lowering interest rates on short-term loans, releasing mega infrastructure projects worth 1 trillion Yuan, to providing government guarantees for corporate bonds issued by several property developers who have experienced funding difficulties for more than the past year.

Domestically, if the economic growth of developed countries and several countries in Asia indicates a slowdown, on the other hand, Indonesia economic recovery will continue. Indonesia's economic growth for the second quarter of 2022 was better than the previous quarter, recording growth of 5.44% YoY, higher than expectations of 5.17%. The recovery in domestic consumption as a result of the relaxation of PPKM as well as increasing state revenues from rising global commodity prices pushed the economy to continue its expansion. This economic recovery, which was offset by an increase in the inflation rate, prompted Bank Indonesia to raise the benchmark 7-day Reverse Repo Rate to 3.75% after tightening banking liquidity through a gradual increase in Reserve Requirements, which reached 9% in September.

The existence of differences in domestic and global economic conditions certainly makes market players need to be more careful, considering that inflation that is starting to rise from within the country and fears of a global recession can trigger the release of foreign investors' funds from the capital market to safe-haven assets.

The Jakarta Composite Index (JCI) rose 3.27% in August, driven by gains in the infrastructure and technology sectors. Throughout 2022, the JCI recorded an increase of 9.07 percent until the end of August 2022. Foreign investors funds recorded a net inflow of Rp. 71 trillion during the same period. On the other hand, the increase in fuel prices is expected to push inflation up more quickly. The increase in fuel prices is unavoidable considering the high increase in world oil prices, resulting in a state budget burden of Rp 500 trillion. To overcome the decline in the purchasing power of the poor because of this policy, the government released direct cash assistance to compensate for this fuel price increase. In the future, although stock market volatility will still occur, the JCI still has the opportunity to test to the 7,500 range until the end of the year, supported by the economic recovery, as well as rising commodity sector prices that have pushed up the corporate profit in 2022.

The bond market movement in August was relatively stable. This can be seen from the movement of the 10-year benchmark yield which did not experience significant changes compared to the position at the beginning of the month at the level of 7.128%. The increase in the benchmark interest rate in August by 25 bps did not result in significant price volatility. Foreign investors who recorded a net purchase of Rp 5 trillion also supported the bond market. The difference between inflation and real bond yields or real yields of 2.47, is a wider range compared to the average for other developing countries, so that it will attract foreign investors to enter the domestic bond market.

The Rupiah currency moved relatively stable throughout August, as seen from its movement which did not change much in the range of Rp 14,800 – 14,900 per US Dollar. Bank Indonesia's decision to increase the 7D RRR interest rate provided support for exchange rate stability.

In addition, the trade balance surplus that has continued for more than the last 20 months, as well as Indonesia's foreign exchange reserves are maintained at the level of USD 132.20 billion. The position of foreign exchange reserves is equivalent to financing 6.1 months of imports or 6 months of imports and servicing government external debt and is above the international adequacy standard of 3 months of imports.

Investors continue to face stark challenges across the globe as inflation rates near 10% are forcing central banks, especially the Fed, to increase interest rates aggressively. – Eli Lee

The threat of Russian gas being fully cut off before winter, in retaliation for sanctions imposed after the invasion of Ukraine, is causing energy prices to skyrocket in Europe. In China, fresh lockdowns to achieve zero- Covid cases have set back the economy’s reopening. Investors should thus stay cautious in the near-term and remain underweight equities and bonds. Investors should heed the old market adage: “don’t fight the Fed” as the central bank is set to stay hawkish until inflation in the US shows clear signs of finally easing.

At the end of August, Chairman Powell gave his most hawkish speech of the year at the Fed’s annual symposium in Jackson Hole, showing the central bank remains strongly committed to returning inflation to its 2% target.

Following his speech, we think the chances of a 75bps rate hike this month have risen and will watch August’s consumer price index (CPI) inflation report closely before the Fed meets on 20-21 September. We also expect the Fed funds rate will hit 4.00% by early 2023 and remain there throughout next year.

US Treasury yields are also likely to rise further still as the Fed keeps lifting interest rates towards 4.00% as our table of interest rate forecasts shows.

In Europe too, the outlook is highly challenging. We think the Eurozone and the UK are set to enter recession before the end of the year. Surging gas prices – as Russia cuts off supplies in retaliation for European Union war sanctions – will push inflation into double digits across Europe, sharply hurting consumption and keeping the Euro and Pound weak against the US Dollar.

Rounding off the challenging outlook is China. Renewed economic weakness over the summer prompted the People’s Bank of China (PBoC) to lower key interest rates by 10bps in August, similar to its rate cuts in January. The PBoC’s seven-day reverse repo rate now stands at 2.00% and its 1Y medium-term lending facility (MLF) rate is 2.75%.

The hawkish Fed in the US, rising recession risks in Europe and renewed lockdowns in China thus keep us cautious on the near-term outlook for risk assets. But longer-term opportunities remain for investors this year.

In contrast, we think a longer-term rebound in risk assets still requires inflation to start abating and the Fed to turn less hawkish. But the experience of 1994 – the last time the Fed raised interest rates rapidly in 50bps and 75bps moves – shows that when the central bank neared the end of its tightening cycle, forward-looking financial markets began to rally strongly from 1995. We continue to look for a similar long-term turn and recovery in risk assets even if now is not the time to fight the hawkish Fed.

Source: Bank of Singapore

We remain overall Underweight on equities, given hawkish central banks and elevated recession risks. Some areas of opportunities, however, have emerged and we remain constructive on China. – Eli Lee.

• US – Recent rally seems unsustainable
  
  The S&P 500 Index witnessed strong momentum from mid-June to mid- August, registering gains of about 17%.
  
  We believe that the Fed will need to maintain tight monetary conditions as inflationary pressures remain persistent. However, we also note that firms have begun to consider recessionary scenarios ahead more actively.
  
  
• Europe – Bracing for higher energy cost
  
  The macro situation for Europe has deteriorated further as gas prices have surged to new highs.
  
  Overall, the Russia-Ukraine war and ongoing disruptions to Europe’s energy supplies remain a key overhang as Europe heads into the winter months. We remain Underweight Europe in equities and prefer to look for opportunities emerging elsewhere.
  
  
• Japan – Earnings boost from weak Yen & re-opening tailwinds
  
  Japan’s preliminary 2Q22 (April-June) GDP expanded at an annualized pace of 2.2%, below forecast of 2.6% but nevertheless reflected the economy’s recovery to pre-pandemic levels as of end-2019.
  
  The April-June reporting season saw select companies benefiting from re-opening and Yen depreciation tailwinds reporting solid earnings despite higher raw material costs and supply limitations.
  
  
• Asia ex- Japan – Downgrading India to underweight
  
  The MSCI Asia ex-Japan Index underperformed other major markets again in Aug 2022, largely due to declines seen in China, Hong Kong, Malaysia and South Korea.
  
  Following the strong rally in the MSCI India Index since the middle of Jun 2022, it is trading at a forward 12-month price-to-earnings (P/E) multiple of 21.6x, which is 1.5 standard deviations above the 10-year average of 17.5x.
  
  Besides expensive valuations, we see risks from continued hawkishness by the RBI, given that India’s inflation remains above the central bank’s upper tolerance level of 6%.
  We see room for downward earnings revisions ahead. Hence, we downgrade our rating on Indian equities from Neutral to Underweight.
  
  Indonesia’s central bank also raised its benchmark rate by 25 bps to 3.75% in late Aug 2022. This was the first rate hike by Bank Indonesia for a while as benchmark rates had stayed at 3.50% since Feb 2021. With the conclusion of the earnings season, investors’ focus would turn toward economic data points and corresponding central bank actions.
  
  
• China – Constructive outlook despite short-term pain
  
  As we head into the final months of the year, the government’s zero-Covid policy continues to be a significant near-term headwind for China’s economy. Our macroeconomics team has thus lowered our China GDP growth forecast for this year to 3.0% from 3.5% previously.
  
  The housing slowdown in China also remains a key concern and a significant drag on sentiment in the near term.
  
  Nonetheless, Chinese policymakers are continuing to gradually ease, rather than tighten, monetary and fiscal policy, in contrast to developed markets. This remains a supportive factor for overall Chinese equity prices.
  
  Some areas of opportunities, however, have emerged and we remain constructive on Chinese equity with a preference for the onshore A-share market.
  
  
  
  Source: Bank of Singapore; Updated on 30 August 2022; Total returns are based on index’s locl currency terms

Maintaining a Neutral position on Developed Market Investment Grade bonds makes sense given its lower volatility, higher credit rating and higher duration. We remain Underweight on High Yield bonds as we do not think that current spreads impute the potential for a recession – Vasu Menon

In Developed Markets (DM), we maintain our Neutral call on Investment Grade (IG) bonds given our view that there are significant risks for a severe economic contraction or even recession in 2023. From a portfolio management perspective, maintaining a Neutral position on the lowest volatility, highest rated and highest duration credit class seems prudent. We maintain our Underweight call on High Yield (HY) as we do not think current spreads impute the potential for a severe economic downturn or recession. In Emerging Markets (EM), we maintain our Underweight call on both HY and IG bonds.

On duration, we believe that the Fed’s signalled intention to hike rates toward 4.00% coupled with more aggressive quantitative tightening will result in rising yields in short-dated US Treasury securities, and further flattening/inversion of the US Treasury curve. We have therefore revised our previous barbell strategy to one that emphasises bonds with a maturity of 10 years or more, as a useful hedge against a sharp economic contraction.

We maintain our Underweight call on both EM HY and EM IG bonds but with a relative preference for the latter. Powell’s Hawkish Jackson Hole speech solidified the reality that the Fed would tolerate a significant economic contraction as a casualty in its battle to reign-in inflation.

We are maintaining our Neutral call on Asian HY. However, given a daunting combination of a robust US Dollar, rising rates and slower economic growth, we would tend to favour defensive parts of the market such as oil and gas, renewable energy, food and agribusiness, telecommunications, and utilities that are better equipped to deal with these headwinds.

We are Neutral on Asian IG. The Chinese IG landscape is dominated by largely state-owned enterprises and systemically important companies.

Chinese property bonds recovered from their lows during the month of August driven by several supportive measures. These include a 15 basis point cut to the 5Y loan prime rate (LPR) to support mortgage loan demand; a CNY200b program funded by policy banks to support the construction of unfinished/delivery overdue projects; and liquidity support to selected developers via guaranteed bonds on the onshore interbank bond market.

We have lowered the 12-month Brent oil forecast by a cumulative USD15/barrel to USD85/barrel since early July. The risk of supply shortages remains high and could limit oil price downside. But oil prices could quickly fall to USD55-70/barrel if a garden variety recession unfolds. – Vasu Menon

After pushing up to USD1,800/oz over the first two weeks of August, gold surrendered most its gains amid US Dollar (USD) strength, higher US yields and looming Federal Reserve (Fed) tightening. Fed Chair Powell delivered a relatively hawkish speech at the annual Jackson Hole forum, which could keep the USD supported for the time being – to the detriment of gold. Powell emphasised that policy would turn restrictive, and then remain so for a while. While there are some signs that US inflation might have peaked, the Fed is unlikely to be convinced. A re-test of the medium-term support of USD1,685/oz is possible although our base case is for gold to continue to carve out a range above the support.

Oil markets have passed peak tightness as rising recession risks cool oil demand. There are also signs that high prices are sapping purchasing power, taking the edge off gasoline demand. US gasoline driving season has been lacklustre this summer, and US retail prices have fallen from their peak of USD5 a gallon in mid-June. We have lowered the 12-month Brent oil forecast by a cumulative USD15/barrel to USD85/barrel since early July.

Risks of supply shortages remain high and should limit oil price downside; most of the European Union’s (EU) plan to phase out Russian crude oil imports do not occur until 4Q22. Russia’s decision to cut gas flows to the EU through the summer months has also tightened the European gas market further, boosting prospects of incremental demand from gas-to-oil switching.

The US Dollar (USD) Index (DXY) appreciated 2.6% in August on the back of better US economic data, a hawkish US Federal Reserve (Fed) and growing fears of a global recession. At the Fed’s Jackson Hole Symposium in late August, Fed Chairman Jerome Powell said that the US central bank will use its tools “forcefully” to fight inflation and guided for interest rates to be higher, for “some time”. Despite this, we continue to look for signs of USD gains slowing in the coming months.

We believe three factors need to play out for USD gains to slow:

1. US price pressure needs to ease decisively. ISM manufacturing prices, PCE core prices and average hourly earnings are already showing tentative signs of slowing. Further pullbacks in US inflation-related data could suggest that the Fed may not need to tighten as aggressively as anticipated and that can slow the DXY’s pace of appreciation.
2. The Fed needs to signal a less hawkish stance. The next FOMC policy meeting outcome on 22 September will be key – uncertainty remains as to whether the Fed will hike rate by another 75 basis points or if it will step down its pace of tightening after two super-sized rate hikes in June and July. A more measured pace of tightening may slow the DXY’s appreciation.
3. How the Euro (EUR) copes will also matter. Stabilisation in the EUR could help to limit the DXY’s upside. Overall, we expect the DXY to stay supported on dips, but its upside could still be constrained.

Selective Opportunities Emerging

High inflation and recession probability are still the main sentiments that are currently driving markets. Developed countries such as the United States, United Kingdom, and Eurozone are currently experiencing very high inflation, which have prompted their central banks to continue with their monetary tightening by hiking rates even further sparking recession fears. High commodity prices is also one of the main drivers of global inflation, which is magnified by the ongoing war between Russia and Ukraine. On the other hand, the World Bank recently downgraded their global growth projection for 2022 from 4.1% to 2%. The probability of global recession will still propel market volatility.

Solid jobs growth last month indicated that inflation will still remain at elevated levels for the foreseeable future. Non-farm payrolls recorded a staggering 528 thousand jobs, while the unemployment rate dropped to 3.5%. Those releases have increased expectation that The Fed may be more aggressive going forward. Investors are currently second – guessing how much The Fed will raise their main rate at their next meeting in September.

Looking inward, Badan Pusat Statistik (BPS) recorded domestic inflation for the month of July went up to 4.94% YoY, its highest since October 2015. However, core inflation is only at 2.86% YoY. Compared with the other G20 nations, domestic inflation is relatively lower and maintained. Furthermore, the economy grew more than expected, for as much as 5.44% during the second quarter of this year. That GDP achievement confirmed that this country is nowhere near recession. As a net commodity exporter, the country benefitted from rising commodity prices and high consumption during Ramadhan also contributed significantly toward growth. Last but not least, PMI Manufacturing climbed to 51.3 last month.

Unlike central banks in developed nations, Bank Indonesia is not in a hurry in raising rates due to the fact that core inflation is still believed to be well maintained. Raising rates prematurely may cause economic growth to slow down. On the other hand, the central bank has started its tightening process by increasing the Reserve Requirement Ratio (RRR); in which it had already sapped liquidity of as much as Rp 219 trillion. Banking RRR is currently at 7.5% and is projected to hit 9% in the month of September.

Equity

In the month of July, the JCI recorded a gain of 0.57% to close the month at 7,070.56. The gain is driven by a rally in energy, industrials, basic materials, financials, and infrastructure sectors. Nonetheless, several weighing sentiments will still overshadow risk assets such as the probability of global recession, high inflation, and an overall more hawkish central banks in developed countries. Foreign investors continued its outflow, recording a net sell of USD$200 million during the month while earnings season are still rolling in. A significant jump in revenue can be seen materializing in the commodities, automotive, and financial sectors. Better than expected earnings releases will still be a supporting factor for the JCI going forward, with the index projected to be trading in the range of 7,200 – 7,500 towards the end of 2022.

Bond

In the bond market, the 10Y yield dropped for as much as 7.164% last month, indicating a rise in prices. The upward movement of bonds is driven by the strong accumulation of large institutional investors and banks. However, as the trend for the US Treasury yield is still heading up, resulting in a lower spread between its yield and developing nation bonds’ yield such as Indonesia, may push foreign investors to start selling their domestic government bond holdings.

From a YTD perspective (as of July 2022), foreign investors recorded a net sell up to Rp 140 trillion on Indonesian government bonds. On the positive side, the ongoing burden sharing scheme between the government and central bank should provide some sort of support for the fixed income market, coupled with an increase in government income contributed to higher commodity prices shall help finance government spending in the future; hence decreasing the need for more bond issuance.

Rupiah

From a currency standpoint, the Rupiah slightly strengthened against the USD to 14,834 per dollar by the end of July, even though the dollar index (DXY) went up 0.76% during the same period of time to 106.56. The Fed’s hawkishness is still the main driving force behind the greenback, as it has been the last few months. In order to maintain ample liquidity, Bank Indonesia have been selling their bond holdings through its open market operation (OMO) in the midst of a performing fixed income market. Furthermore, more than enough foreign reserves will still act as a buffer for the currency market.

Juky Mariska, Wealth Management Head, OCBC NISP

GLOBAL OUTLOOK

Twin threats to economic outlook

The challenging economic outlook continues to threaten financial markets as inflation remains a key issue while recession risk is rising – Eli Lee

First, inflation is still surging. In the US, UK and Eurozone, consumer prices are increasing by 9.1%, 9.4% and 8.9% respectively. Supply chain disruptions as economies re-open from the pandemic, tight labour markets as firms seek employees to increase output and meet strong demand, elevated energy and good prices caused by the war in Ukraine, and massive quantitative easing implemented during the lockdowns of the last couple of years are all combining to raise inflation to levels last seen in the 1980s in the US and Europe.

Second, recession risks are rising sharply. Higher inflation is hurting incomes and consumption. Central bank interest rate hikes are tightening financial conditions.

In our latest GDP growth forecasts, we see world economic growth slowing down sharply from 6.2% last year to 3.0% this year and just 2.4% next year.

On some measures, the US is already in recession. In 2Q22, America’s economy unexpectedly contracted for a second quarter in a row, meeting the criteria for a “technical” recession. GDP fell by 0.2% quarter-on-quarter (QoQ) after declining by 0.4% QoQ in 1Q22, driven by weak inventory accumulation.

We expect US growth to pick up again in the second half of 2022 as firms rebuild inventories. But the 2Q22 GDP data shows the underlying trend of the US economy is clearly slowing owing to higher food and energy prices hitting consumption, and rising interest rates affecting housing and investment. Thus, we think the risks of the US experiencing a real, official recession before the end of 2023 are as high as one-in-two now, especially if unemployment starts rising quickly.

Central banks will still hike aggressively

Despite rising recession risks, however, central banks are set to keep hiking interest rates aggressively given inflation is running far above their 2% targets.

The Fed’s decision was expected and returned the fed funds rate to “neutral” levels that officials believe neither stimulate nor restrict the economy.

We thus expect the Fed will still hike by 50bps each in September and November before pivoting to moderate 25bps hikes only in December and January. We therefore see fed funds reaching 3.75-4.00% early next year, levels that should “restrict” activity and slow inflation.

Similarly, we expect the European Central Bank (ECB) and the Bank of England (BoE), to increase interest rates significantly over the next few months.

Thus, over the next few months, financial markets and global bond yields are set to remain volatile until inflation eases. We therefore think investors should remain cautious given the challenging economic outlook. Nevertheless, once the Fed can shift to moderate rate hikes towards the end of 2022, then risk assets should bottom out and start rallying. This occurred at the end of 1994 when that year’s rapid rate hiking cycle neared its end, leading to a major bull run in equities from 1995 to 2000.

Source: Bank of Singapore

EQUITY

Stay cautious

While we remain overall Underweight on equities, we believe that the long-term risk-reward for Chinese equities has turned compelling. Globally, we remain Overweight on the Healthcare and Utilities sectors. – Eli Lee.

US – Technical recession has arrived

The US earnings season is well underway; corporate results are somewhat mixed though beating earnings per share (EPS) estimates on average. Under the hood, firms are undoubtedly facing macro headwinds, which is translating into concerns such as potential CAPEX cuts and elongated sales cycles. Companies across sectors are also feeling the impact from the strong US dollar.

The US economy has also entered a technical recession in the first half of the year, though the economy is not (yet) experiencing a broad-based, sustained contraction in activity.

Europe – Time for solidarity

The threat of a disruption in gas supplies also remains significant, testing European solidarity and pushing European gas prices further. Together with tightening financial conditions, the outlook for Europe remains fraught with uncertainties.

Japan – Focus shifting to earnings season

Market attention should turn to the ongoing earnings season, pace of economic recovery and potential changes to the national security policy. The government has upgraded its economic outlook as normalisation activities continued to support a gradual recovery, with recent improvements in private consumption, employment, and imports.

Asia ex- Japan – Earnings and economic trajectory in focus

The MSCI Asia ex-Japan Index underperformed other major markets in July 2022, largely due to the drag from Chinese and Hong Kong equities.

Based on the International Monetary Fund’s (IMF) latest World Economic Outlook report published in late July 2022, it pared its 2022 and 2023 GDP growth projections for major Asian economies, such as China, India and South Korea. Notwithstanding concerns over economic growth, central banks in Asia ex-Japan region have had to maintain a relatively hawkish policy stance to combat inflation.

China.HK – Constructive on second half outlook

Going into 2H22, we maintain our constructive stance on Chinese equities – the easing policy bias, the current account surplus, the gradual recovery and re-opening, and undemanding valuations would support the relative outperformance of Chinese equities.

Views on sectors

In early July, we downgraded Energy from Overweight to Neutral, and upgraded Healthcare and Utilities from Neutral to Overweight.

The Healthcare sector provides shelter during times of uncertainty as earnings are relatively more resilient with stronger pricing power. For Utilities, investors would also turn to this relatively defensive sector during times of volatility.

Source: Bank of Singapore; Updated on 1 August 2022; Total returns are based on index’s locl currency terms

BONDS

Developed Market IG upgraded

We recently upgraded Developed Markets Investment Grade bonds to Neutral from Underweight as the market narrative has shifted towards concerns of a recession due to the hawkish Fed. – Vasu Menon

Inflation continues to traumatise the fixed income market. During 1H22, fixed income markets were fixated by the medicine for red hot inflation, i.e., higher rates, with credit delivering its worst 1H results in over a century. However, in recent weeks the market has pivoted toward an increased likelihood of recession as the primary market driver. Key indicators that track the economy such as oil and copper have retraced significantly from recent highs while the US Dollar remains robust as the preferred flight to quality currency. In the Treasury market, rates have rallied, while the 2-10Y spread, a fairly accurate predictor of a future recession, has reached its most negative level since 2000. On 27 July 2022 the US Federal Reserve (Fed) delivered its second consecutive 75 basis points rate hike, but Chairman Powell’s comments were perceived by the capital markets as largely dovish.

Underweight EM

We maintain our Underweight call on both Emerging Market (EM) High Yield (HY) and EM Investment Grade (IG) bonds. In recent weeks, as the market narrative has shifted towards concerns surrounding a recessionary outcome from a hawkish Fed, EM Credit has underperformed in a flight to quality trade.

Upgrade Developed Market IG to Neutral

We recently upgraded our call on Developed Market (DM) IG to Neutral. The rationale for the change was based on several factors, the most important of which were:

1. with our house view of a 2023 recession at 50-50, from a portfolio management perspective moving the lowest volatility, highest rated and highest duration credit class to Neutral seems prudent and
2. should the market pivot later in the year because they believe either inflation is waning or from fears of a recession, a Neutral position on the highest duration asset class makes an effective hedge. We are maintaining our Underweight call on DM HY as we do not think current spreads impute the potential for a severe economic downturn or recession.

Maintain Neutral call on Asian HY

We are maintaining our Neutral call on Asian HY. However, given a daunting combination of a robust US Dollar, rising rates and slower economic growth, we would tend to favour defensive parts of the market such as oil and gas, renewable energy, food and agribusiness, telecommunications, and utilities that are better equipped to deal with these headwinds.

Overweight Asia IG

We are maintaining our Overweight call on Asian IG. Unlike in the HY market, the Chinese IG landscape is dominated by largely state-owned enterprises and systemically important companies.

FX & COMMODITIES

Gold outlook improves

Gold price could bottom before year-end and see some upside against the backdrop of slowing growth, rising recession risks, and the risk of the Fed starting to slow the pace of tightening later in the year. – Vasu Menon

Gold

Gold prices have been weighed down by a hawkish Fed, higher real yields, a strong US Dollar and the erosion of Russia-Ukraine geopolitical risk premia. But rising US recessionary concerns have started to benefit gold since mid-July.

The risk of the Fed slowing the hiking cycle to 50bps at the September Federal Open Market Committee (FOMC) meeting has risen, as the US economy slipped into a technical recession in 1H22. However, another 75bps rate hike cannot be ruled out, especially if inflation prints going into the meeting remain sticky. That said, gold price could bottom before year-end and see some upside against the backdrop of slowing growth, rising recession risks, and the risk of the Fed starting to slow the pace of tightening later in the year. Growing US recession odds should continue to see gold outperforming base metals like copper.

Oil

The oil market is tight, but it is loosening. High oil prices continue to drive up rig counts in the US. We expect strong production growth going forward. Rising growth concerns as central banks speed up tightening to tame inflation has shifted the focus from supply side issues to demand in the oil market. Covid-19 cases could continue to disrupt a full revival of industrial activity in China.

Signs of slowing growth in the US and Europe could cool oil markets further. We have lowered our oil price forecast by another USD5/barrel as slowing global growth could constrain oil demand. Our 12-month price forecast for Brent stands at USD$85/barrel while that for WTI is USD$82/barrel. In the event of a severe global downturn, OPEC+ may well act again to support prices around the USD60/barrel levels.

Currency

It was again a month of two halves for the broad US Dollar. The subdued risk sentiment and central bank dynamics – the difficulty to out-hawk the Fed in the near-term - extended the broad Dollar’s strength into the early part of July. Since mid-July, US recession fears coupled with increased hawkishness at the BoE and the ECB have pushed the US Dollar index (DXY) lower. The Fed did deliver another 75 basis points hike in July, but the FOMC outcome was seen as dovish in that the US central bank dropped forward guidance, and Powell mentioned the pace of tightening has to slow at some point – although this was not entirely unexpected. The softness of the broad Dollar came earlier than we had expected. We do not see the FOMC outcome as dovish, and we continue to expect the Fed funds target rate to rise to 3.25-3.50% by year-end. Still, with other central banks catching up, the broad dollar has started to show some signs of softness as the monetary policy gap may not widen further.

The Fed goes back to 1994

1994 was the year the Fed last hiked its main rate for as much as 75 basis points (bps). That year, the US central bank doubled its fed funds rate from 3.0% to 6.0% as it tried to cool down an overheating economy. What happened in the first half of this year reminded seasoned investors of what happened back in 1994. The Fed itself is still projected to hike more rates to the range of 3.25% - 3.75% for the remainder of 2022. As inflation proved to be stickier than previously predicted, the probability of recession in the US is still the biggest uncertainty for capital markets. Global growth is currently on its path to record a growth of below 3.0% this year and next. Not only in the US, the UK and Eurozone also have a high chance of suffering a recession this year or next, given Europe’s vulnerability to further energy supply disruptions from Russia as the war in Ukraine extends throughout 2022.

In Asia, with China still enforcing its Covid Zero policy is still be the biggest concern for investors. Although the Chinese government have reiterated multiple times its commitment to achieving its targeted growth of 5.0% this year, it looks more and more unlikely for the now largest economy in the world to reach that goal. Elsewhere, central banks in Taiwan, Macau, Hong Kong, India, South Korea, and Singapore have started their fight against inflation by hiking rates with Philippines and Thailand could be next ones to follow.

Domestically, on the manufacturing side, PMI data recorded a drop from 50.8 to 50.2 for the month of June, still able to maintain a slight expansion. While the June CPI continued to climb to 4.35% y-o-y, well above estimates and up from 3.55% previously, Bank Indonesia decided to keep rates at 3.50% at its June meeting, indicating that the central bank still maintains its accommodative stance going into the second half of 2022. Although this may change at their policy meeting in July. The “behind-the-curve” stance, on top of elevated global recession angst, has sent Rupiah to breach the psychological level of 15,000 per USD, earlier this month. Although the government and central bank prefers a weaker currency to support export and overall trade, going above the threshold may impact the capital market more negatively than it does right now.

Equity

In the month of June, the JCI recorded a drop of 3.3% to 6,911.58, the biggest monthly decline so far in 2022. The external factors such as the ongoing geopolitical tension in Western Europe and most of all the hawkishness of global central banks to combat elevated inflation have been the major contributor of the correction. Foreign fund outflow last month reached US$220.4 million from the equity market as foreign investors reduced their exposure to risk assets in emerging markets. Although macroeconomic indicators still show a strong recovery, fear of higher interest rates globally and an overall a more hawkish policy will still be the main negative sentiment for risk assets in the near term.

Bond

As for the fixed income market, the 10-year benchmark government bond yield climbed to 7.22% by the end of June; indicating a fall on bond prices although not significant. Foreign investors recorded a net sell of US$737.3 million for the whole month. At one point, yield briefly hovered at around 7.5%, highest level since June of 2020. Yet, the burden sharing scheme is still in play between Bank Indonesia and the government for the remainder of this year. Moreover, Finance Ministry will lower the bond auction target which is currently held biweekly. Stabilizing bond price through these supply-demand control should provide buffer to higher yield which is driven by both higher Fed rate and global inflation.

Rupiah

In regard to the Rupiah, the currency depreciated 2.23% against the greenback to 14,903/USD to close the month of June. The dollar index itself (DXY) recorded an increase from 101.7 to 104.7 during the same period of time. A hawkish Fed has been the driving force for the US Dollar since March and is still expected to hike rates to the range of 3.25% - 3.75% to close out 2022. The 15,000/USD is a closely watched threshold among investors as it is a psychological handle in terms of conversion rate. Investors currently pricing in a 25-bps rate hike at the central bank meeting this month in an effort to tame soaring inflation and ease the pressure to the domestic currency.

Juky Mariska, Wealth Management Head, OCBC NISP

GLOBAL OUTLOOK

The Fed goes back to 1994

We think the chances of US GDP experiencing two consecutive quarters of outright contraction – the technical definition of recession – are now close to one-in-two in the next 18 months. – Eli Lee

The Fed has begun raising interest rates by 75 basis points (bps) for the first time since 1994, a year we think offers key lessons for 2022.

In 1994, the Fed doubled its fed funds rate from 3.00% to 6.00% by early 1995, hiking by 50 bps at every meeting including one 75 bps increase. This year, Fed tightening will likely be similarly rapid, lifting fed funds from almost 0.00% to 4.00% by early 2023.

The Fed’s aggressive tightening to return inflation back to its 2% target over the next couple of years is set to slow the US economy sharply. We now forecast US GDP to expand by 1.8% in 2022 and 1.4% in 2023 compared to 5.7% in 2021. Global growth is thus likely to be below 3.0% this year and next now.

Weaker growth increases the risk of recession. We think the chances of US GDP experiencing two consecutive quarters of outright contraction - the technical definition of recession - are now close to one-in-two in the next 18 months.

However, it’s not all gloom and doom. 1994 provides investors with a potential silver lining. As in 1994, risk assets may rebound later in 2022 when the Fed’s hiking cycle peaks. In 1994 once it became clear the Fed’s hiking cycle was over at the end of 1994, 10-yer US Treasury yield peaked above 8% and started to fall. Subsequently, US equities had a huge bull run from 1995 until the bubble in internet stocks burst in 2000.

Therefore, in 2022, investors should not indiscriminately “sell everything” as risk assets may rebound once the Fed’s tightening cycle peaks. This year, the peak in the Fed’s current hawkish stance may last until 4Q22. Only when the central bank sees clear evidence US inflation is starting to fall back towards its 2% target, most likely towards the end of the year, then Fed officials may slow the pace of interest rates hikes from 50-75 bps over the summer and autumn to 25 bps moves during the winter. Thus, we think it is too early to start picking bottoms in equities, Treasuries, credit and emerging markets.

In 1994, the Fed’s tightening cycle was harsh but, unusually, it was over within a year. Similarly, in 2022, the Fed’s tightening cycle may also only last a year, starting from the Fed’s first hike in March 2022. We expect the fed funds rate to peak around 4.00% in early 2023 and for 10Y Treasury yields to reach 4.00% too as the table shows.

EQUITY

Stay cautious

While we may not have reached a bottom in equities, it is likely that at current levels we have already worked through a significant part of the peak-to-trough downside. We maintain our overall underweight position in global equities. – Eli Lee.

In equities, we remain overall underweight through our underweight position in Europe, which is highly exposed to both short- and long-term fallout from the Russia-Ukraine war. We continue to advise against bottom-fishing given the wide range of potential outcomes to the war, policy responses from Ukraine’s allies, retaliatory actions from Russia, as well as sustained inflationary pressures in many major economies and a hawkish Fed.

In developed market equities, we continue to prefer Value versus Growth, large cap over small cap, and companies with resilient margins and pricing power in an inflationary environment.

Within Asia ex-Japan equities, we maintain our overweight position on China, Hong Kong, and Singapore.

What if there is a recession?

In the event of a recession scenario, we are cautious that the deterioration of corporate earnings could lead to further valuation downside for global equities. Additionally, historical analysis of bear markets also shows that the market low on average takes place about six to nine months before corporate earnings start to rise again. These analyses suggests that we may not have reached a definitive bottom in equities if a recession scenario takes place. That said, at current levels we have likely already worked through a significant part of the peak-to-trough downside. Also, in a 2023 recession scenario, considering that a typical recession lasts for three to four quarters, we could see equities put in a bottom in 2H22 or 1H23.

United States

Going into 2H22, we believe markets are increasingly weighing the possibility of a recession given higher interest rates and tighter financial conditions. Our macroeconomics team has reduced our US GDP forecasts and now sees 50-50 odds of a recession in 2023. Nonetheless, despite the various concerns, we note that the US remains a net energy exporter with low existing housing inventories and broadly healthy banks. We maintain our neutral call on US equities.

Europe

Valuations for the MSCI Europe Index have fallen considerably, though we note that valuations were even lower during the Covid-19 pandemic in 2020, the Euro area crisis in 2011, and the Global Financial Crisis in 2008. Indeed, Europe is still being impacted by shocks.

The war in Ukraine has amplified an inflation shock that was already larger than anticipated, and the sharp fall in consumer confidence is concerning. The threat of a disruption in gas supplies also remains significant. Finally, there is a risk that the surge in inflation leads to second-round effects via wages and inflation expectations, which would call for a more aggressive European Central Bank (ECB) response.

Japan

While the MSCI Japan Index returns have been modestly negative this year in JPY terms, which underscores our neutral stance, the equity market has fallen in line with the MSCI All Country World Index in USD terms as JPY depreciation accelerated towards a 24-year low last month.

Asia ex-Japan

Overall, we maintain our Neutral view on Asia ex-Japan and are cautious on rising US recession risks, higher interest rates and USD strength, but maintain overweight on China, Hong Kong, and Singapore within the region.

China

We maintain our relative preference for onshore A-share equities and focus on industries that are likely policy beneficiaries such as construction and infrastructure-related plays including renewables.

BONDS

High yield bonds downgraded

We recently lowered our rating on Emerging Market and Developed Market High Yield bonds to underweight. Should markets become convinced of the potential for a recession, High Yield credit spreads would be susceptible to further spread widening. – Vasu Menon

Inflation dominated the discussion in fixed income markets in June. High headline inflation data removed any lingering hope that the Fed had inflation under control and initially boosted US Treasury yields. Subsequently however, the market focus shifted toward the narrative that a more aggressive Fed policy response would increase the potential for a Fed policy mistake and cause a recession. This view was reinforced in late June by the Fed Chairman Powell who re-focused attention on moving inflation toward the 2% mark, ostensibly even at the risk of a potential recession.

Spreads markedly wider on ongoing recessionary fears

Emerging Market (EM) High Yield (HY) and Investment Grade (IG) spreads widened 104 basis points (bps) and 19 bps respectively in June. Developed Market (DM) HY spreads widened 143 bps while US IG widened 23 bps. Underweight all global credit classes

In mid-June we lowered our rating on EM and DM HY to underweight, joining our already underweight calls on EM and DM IG. Increasingly pervasive and persistent inflation will likely compel the Fed to implement an increasingly hawkish policy going forward, which suggests a higher path for US Treasury yields. Furthermore, should the market become increasingly convinced of the potential for a recession, HY credit spreads would be susceptible to further spread widening. Over the next few months, we believe that inflationary and recessionary risk concerns will continue to be the primary drivers of overall credit market performance.

Focus on defensive sectors in EM HY

Given a daunting combination of a robust US Dollar, rising interest rates and slower economic growth, we would tend to favour defensive parts of the market in the EM HY space such as oil and gas, renewable energy, food and agribusiness, telecommunications, and utilities that are better equipped to deal with these headwinds.

Overweight Asia IG

We are maintaining our overweight call on Asian IG. Unlike the HY market, the Chinese IG landscape is dominated by largely state-owned enterprises (SOEs) and systemically important companies. However, in a broader context we would also tend to favour the same type of defensive industries and companies as we do with EM HY.

FX & COMMODITIES

Recession fears underpin gold

We tweaked our gold forecast to reflect a more range-bound view. Front loading of rate hikes by major central banks, especially the Fed, could limit the potential for gold to rally on a 3-month timeframe while rising recession risks and no quick end to the Russia-Ukraine war could limit gold’s downside on a 6- to12-month timeframe. – Vasu Menon

Gold

Frontloaded monetary tightening, rising real yields, and a stronger US Dollar have overtaken geopolitical risks to drag gold price lower. That said, gold continues to perform its role as a portfolio diversifier, having outperformed stocks and bonds this year.

We tweaked our gold forecast to reflect a more rangebound view. Frontloading of rate hikes by major central banks, especially the Fed, could limit the potential for a gold rally on a 3-month timeframe while rising recession risk and no quick end to the Russia-Ukraine war could limit gold’s downside on a 6- to12-month timeframe.

Oil

While central banks’ fight against inflation have driven losses in equities and credit, oil prices have remained elevated until recently on tight supply.

Oil prices had risen earlier as European sanctions on Russian oil should tighten the market over coming months. While OPEC+ agreed to raise output at a faster rate, it will fall short of plugging the gap left by Europe’s ban on Russian oil. US shale producers are likely to just continue their gradual production ramp-up.

However, rising growth concerns as central banks speed up tightening to tame inflation has switched the focus from supply side issues to demand in the oil market. While demand from China could recover as lockdowns are eased, signs of slowing growth in the US and Europe, could take further heat out of the oil markets. We have nudged down our oil price forecast as slowing global growth could constrain oil demand.

Currency

The US Dollar (USD) Index (DXY) rebounded in the first half of June before consolidating afterwards, as the Fed turned more hawkish while global growth concerns intensified. It appears difficult for the European Central Bank (ECB) or the Bank of England (BoE) to out-hawk the US Federal Reserve (Fed) in terms of near-term rate hikes, while our Risk Sentiment Index has stayed in the risk-off zone. This backdrop should support an extension the broad Dollar strength into the early part of Q3.

The Pound (GBP) was under pressure and the GBP/USD touched a recent low of 1.1934 in June, amid negative Brexit headlines and growth concerns. The Euro (EUR) has been weighed down by perceived fragmentation risks, but market pricing of ECB rate hikes has turned more hawkish as we had expected, lending some support to the EUR. While ECB President Christine Lagarde has hinted strongly at a 25 basis points (bps) rate hike at the July policy meeting, the decision is data dependent.

Of late, the Offshore Renminbi (CNH) seems to have stabilised around the 6.7000 handle against the USD, as recent data underpins the notion that markets have likely gone past the peak pessimism for China’s growth. However, China sticking with the dynamic zero covid policy means that the risk of small-scale lockdowns remains. On balance, we expect USD/CNH to trade in a range of 6.6500-6.7500.

From inflation fears to recessions risks

In the month of May, investors’ focus is still geared towards several prominent negative sentiments such as the geopolitical tension in Eastern Europe, rising inflation propelled by increasing commodity prices, as well as the zero covid policy China still upheld, have subdued growth and activity levels. With inflation at record levels in a number of developed countries, central banks are still expected to maintain a hawkish stance. For example, The Fed is still projected to hike rates for as much as 5 times this year. The hike – fear have pushed the US Treasury yield to trade in the range of 2.9% - 3.1% currently. The possibility of a stagflation, with very high inflation in the midst of slowing growth, the uncertainty remains high right now with the probability of recessions occurring.

Domestically, unlike what is happening with developed nations, the prospect of recovery for Indonesia’s economy remains positive. Manufacturing levels, although recorded a decline, still recorded an expansion at 50.8 in May. Moreover, trade balance numbers was at a surplus of USD$7.56 billion during the same time, up from previously USD$4.53 billion. From an inflation perspective, prices rose at a rate of 3.55% YoY last month. The recovery path for economic and social activity is still on the right track, supported by increasing mobility and the containment of coronavirus.

Equity

Several external factors shadowed the JCI in May, driving volatility in the domestic equity market. High global uncertainty have driven capital outflow from the stock market. Moreover, the CPO ban that was previously imposed also weighed on risk assets; due to the fact that CPO is still one of the main exporting commodity for Indonesia. On the bright side, the ban has been lifted nearing the end of May. This has helped the market to rebound from its low of 6,597 in the second week of May to close the month at 7,148, recording a decline of only 1.1% during the month.

Looking forward, external risk factors will persistently still drive volatility in risk assets. However, with the current economic recovery in a positive trajectory coupled with increasing demand by foreign investors, the JCI is expected to trade in the range of 7,200 – 7,500 year-end.

Bond

Last month, the benchmark 10-year government bond yield rose significantly during the first half from 6.99% to 7.41%, but then closed the month at around 7.04%. Domestic yield movement will mirror its US counterparts during these times.

Although the possibility of rising yields may trigger capital outflow from domestic fixed income market, foreign ownership is currently at historic lows; only around 16.5%. With lower reliance toward foreign investors, those external risks may not cause the market to fluctuate as it once did before. With inflation levels relatively low, real yield is still at a staggering 3.4% for government bonds. Therefore, higher yield may be an incentive for investors to accumulate bonds as a buffer and a rebalancing act for their portfolios.

Currency

In the currency market, the Rupiah depreciated 0.53% against the USD in the month of May, closed at 14,578/USD by month-end. The Rupiah is still expected to remain under pressure as The Fed remains aggressive with its rate hike cycle. On the other hand, Bank Indonesia held its benchmark 7-day reverse repo rate (7DRRR) at 3.5% at its last meeting but agreed to start increasing reserve requirements for banks in an attempt to subdue inflation dan limit liquidity, creating more stability for the Rupiah.
Juky Mariska, Wealth Management Head, OCBC NISP

GLOBAL OUTLOOK

From inflation fears to recessions risks

The economic outlook continues to be very challenging, and recession risks have replaced inflation fears as the main concern for investors. – Eli Lee

No recession in 2022

We do not expect any of the world’s major economies to suffer recession – technically defined as two consecutive quarters of contracting GDP – in 2022 unless another shock were to hit the global economy.

Our base case remains for global growth to slow sharply but not cause a recession this year.

We therefore expect the major central banks will keep increasing interest rates quickly throughout 2022 to return inflation to their 2% targets over the next couple of years.

Fed to continue increasing rates until early 2023

US inflation is at four-decade high even when excluding food and energy prices. The Federal Reserve (Fed) has been wrongfooted by how quickly inflation has taken off this year. As the pandemic receded in the US, supply chains globally remained disrupted and the war in Ukraine led to surging oil prices.

We expect the Fed will keep on increasing its fed funds until it reaches 2.75-3.00% by early next year.

Other central banks to hike rates as well

Similarly, we expect the European Central Bank (ECB), faced with record Eurozone inflation, to start increasing its deposit rate in July. Thus, we anticipate the ECB lifting its deposit rate by 25bps moves at its July and September meetings so that it reaches zero by the end of 3Q22 and subsequently continues to be raised every quarter until reaching 1.00% in 2023.

The Bank of England (BoE) is facing decades high inflation in the UK too. Thus, the BoE has increased its bank rate steadily to 1.00% during 2022 and we expect at least two more 25bps rate rises at its upcoming meetings in June and August.

The Bank of Japan and the People’s Bank of China are the two notable central banks refraining from raising interest rate this year given the prolonged weakness of core inflation in Japan and the current slowdown of China’s economy.

10Y Treasury yield to stay volatile

Rising interest rates from the Fed and its peers are therefore likely to keep government bond yields volatile to the detriment of risk assets over the next few months.

We expect 10Y Treasury yields will continue to be volatile but if we prove correct in our view that the US economy won’t suffer a recession this year then 10Y Treasury yields are likely to trade up towards 3.00% again rather than fall back towards the sub-2.00% levels reached by the benchmark US government bond during the pandemic in 2020 and 2021.

The economic outlook of high inflation, sharply slowing global growth, synchronized interest rate hikes by central banks around the world, and volatile government bond yields is likely to keep investors risk averse still over the summer.

Source: Bank of Singapore

EQUITY

Remain underweight in equities

Beyond a relief rally, over a 12-month horizon we do not believe a definitive market bottom has been made, although a significant part of the downside has likely been worked through at these levels. – Eli Lee.

Markets are increasingly pricing in a recession scenario on the back of multiple global headwinds, including the Federal Reserve’s (Fed) focus on decisively curbing inflation and its impact on growth and corporate profitability. We maintain our overall Underweight position in global equities at this juncture. Still, we continue to expect long-term outperformance from the energy sector, companies that benefit from re-opening trends, those that enjoy pricing power in an inflationary environment, and favour value stocks versus growth stocks.

United States

Corporate 1Q22 earnings results have largely been resilient. However, cyclical concerns have been rising among investors following earnings reports from major retailers, especially around margin pressures, lower-end consumer demand, as well as excess inventory build. The macro environment also appears to be increasingly challenging to names leveraged to online advertising. Although downside risks are certainly building, households still have low debt service ratios and elevated savings, while corporates are also placing increasing importance on expense rationalisation. All considered, we maintain our neutral call on the US equities.

Europe

The macro backdrop remains difficult for stocks given concerns of slowing global growth and monetary tightening. At the same time, geopolitical risks in Europe remain elevated. MSCI Europe’s risk-reward is unappealing, with a curtailment of Russian gas imports a key risk, although the European Union seems to have softened its stance in its standoff with Moscow over energy supplies, allowing firms to keep Russian gas flowing. Looking ahead, the earnings-per-share (EPS) downgrade cycle may start in 2H22 as margin pressures start to bite.

Japan

Corporate guidance was generally conservative given continued global growth and inflation headwinds expected. MSCI Japan trades near -1 standard deviation to its 10-year historical average P/E multiple, reflecting modest expectations although USD-based investors should still hedge their Japanese Yen-denominated positions.

Asia ex-Japan

We see downside risks to our below-consensus earnings forecasts for Asia ex-Japan, given the worse-than-expected impact of Covid-19 resurgence in China and increasing inflationary pressures. As such, we are trimming our base case FY22 EPS forecasted growth from 7% to 6%.

China

The weaker-than-expected April economic data highlighted the impact of lockdowns in China. Meanwhile, discussions and announcements of stimulus policies have gathered pace recently. Key developments include the reduction of the 5-year Loan Prime Rate, which is the benchmark for mortgage rate; and the 33 comprehensive stimulus measures announced by the State Council.

Over the past month, A-share equities (CSI 300 Index) have continued to be more resilient and outperformed Asia ex-Japan equities. We continue to prefer onshore A-share equities and we expect the relative outperformance will continue going into 2H22 when easing measures intensify and activities normalise. We maintain our view that value stocks will outperform growth stocks in 2Q. We continue to prefer companies with defensive dividends and/or share buyback support, Hong Kong reopening plays and policy beneficiaries.

Views on sectors

In general, sectors that are more defensive such as Utilities and Healthcare would perform relatively better in periods of risk aversion. However, we highlight that there are other factors worth keeping in mind such as time horizon and industry specific dynamics.

BONDS

Maintain underweight bonds

In fixed income, we expect credit spreads to remain elevated, with ongoing choppy market conditions and an overall lack of direction over the next few weeks as markets assess incoming data for signs of a recession or a soft landing for the global economy. – Vasu Menon

Rampant inflation, geopolitical fall-out from the Russia-Ukraine war, and flailing Chinese growth continue to weigh on overall capital market sentiment, resulting in ongoing downward movement in bond prices. And “fear of the cure” – i.e. rapid and substantive Federal Reserve (Fed) rate hikes and balance sheet reductions – exacerbates the downward pressure on risk markets, as the potential for a growth scare or even recession seems to become more prevalent. US Treasury markets have been vacillating with increased volatility as the “hard landing” and “softish landing” narratives wage an existential battle for the hearts and minds of investors. We expect ongoing choppy market conditions with an overall lack of direction over the next few weeks.

Overall, we remain Underweight in fixed income, with Underweight positions in both Developed Market (DM) and Emerging Market (EM) Investment Grade (IG) bonds; and Neutral or Market Weight positions in EM and DM High Yield (HY) bonds. Careful selection of individual credits is critical in this environment.

Maintain neutral weight on EM HY

Absent market perception of an impending severe economic contraction or recession, we believe that most of the damage has already been done year-to-date (YTD) in EM HY. Russia is out of the JP Morgan CEMBI Broad Index and China HY is only half the size of what it was last year. The result is a less risky and more diversified EM Corporate Credit universe. Bottom-up fundamentals remain broadly supportive.

Maintain Market Weights on all three regions for EM HY with a focus on defensive sectors

We are maintaining our neutral call on Asia, Latin American (Latam) and CEEMEA (Central and Eastern Europe Middle East and Africa). However, given a daunting combination of a robust USD, rising rates and commodity prices, and slower economic growth, we would tend to favour defensive parts of the market such as oil and gas, food and agribusiness, metals/mining, telecommunications, and utilities that are better equipped to deal with these headwinds.

Overweight Asia IG

We are maintaining our Overweight call on Asian IG. Unlike in the HY market, the Chinese IG landscape is dominated by largely state-owned enterprises and systemically important companies. However, in a broader context we would also tend to favour the same type of defensive industries and companies as we do with EM HY.

FX & COMMODITIES

Gold caught in a tug-of-war

Our 3-month gold forecast also reflects caution that rising geopolitical risks could boost the demand for gold as a safe haven asset. But we believe new lows for gold price will ultimately be made, as the Fed succeeds in taming inflation and as concerns around a potential US recession ease. – Vasu Menon

Gold

Gold is caught in a tug-of-war between bullish and bearish forces. The sell-off in risky assets failed to attract safe haven flows toward gold. Fed tightening and its resolve to lower inflation have created headwinds, as the opportunity cost of holding gold increased amid higher real yields and a stronger US Dollar.

The near-term gold outlook is likely to remain volatile as rising concerns over US growth could temporarily turn more gold supportive. Our 3-month gold forecast also reflects caution that rising geopolitical risks could boost the demand for gold as a safe haven asset. We believe new lows for gold price will ultimately be made as the Fed succeeds in taming inflation and as concerns around a potential US recession ease. We lower the 12-month gold forecast to USD1,750/oz (previous: USD1,825/oz).

Oil

A higher for longer oil price outlook remains our base case. The releases from government-controlled Strategic Petroleum Reserves (SPRs) can only provide so much relief. The physical oil market went through a soft patch during April and early May, largely driven by COVID-related lockdowns in China. But the outlook for Chinese oil demand is improving amid easing restrictions on travel as lockdowns are lifted. Russian oil supply could drop further and add to an already tight global oil market following the EU’s decision to ban Russian oil imports by sea.

Currency

From here, the broad USD (DXY) is likely to undergo a period of consolidation over the coming weeks, rather than embarking on a steady downtrend at this stage. First, the shift in central bank dynamics is mainly reflected in rhetoric, rather than actual action so far. Second, the DXY has been moving broadly with the overall risk sentiment still uncertain.

Both the Euro (EUR) and Pound (GBP) garnered support from increasingly hawkish central bank prospects. ECB’s Lagarde essentially pinned down a total of 50bps rate hikes at the July and September meetings as the central bank aims to bring interest rate out of negative territory by end-Q3. Market pricing has increased as we had expected, to a total of 115bps of rate hikes by year-end.

Among commodity currencies, the Canadian Dollar (CAD) has fared better in line with our expectation, as the BoC remains one of the most hawkish central banks. The CAD is well positioned to take advantage of the softer or consolidating USD, with the next support for USD/CAD at 1.2560. Elsewhere, market pricing of RBA action stays overly hawkish. There appears to be no impetus to push AUD/USD higher in the near-term.

Trimming Exposure to Risk

In the beginning of May, the US central bank decided to continue its rate hiking path pushing the fed funds rate to 1%; en route to its projected 2.75-3.00% target range by early 2023. Not only that, The Fed will also start shrinking their balance sheet in the month of June for as much as USD$47.5 billion per month, and USD$90 billion from September onwards. These steps are being taken to ensure the fight against high inflation can be successful, as hyperinflation may push the economy to stagflation and a slower economic growth. This sentiment has propelled the US Treasury yield to as high as 3.1% in recent weeks.

Moreover, other than the uncertainty caused by aggressive rate hikes by The Fed, several negative sentiments still linger in capital markets. Central banks in other developed countries are also considering hiking rates to combat inflation, followed by the ongoing invasion of Russia in Ukraine, as well as sanctions imposed on Russia that may disrupt supply chain and push commodity prices even higher. Last but not least, lockdowns in China is another weighing sentiment for risk assets.

Domestically, fundamental related data shows a promising road to recovery in the midst of global turbulence. Manufacturing data continued its expansion in the month of April to 51.9, previously recorded at 51.3. GDP for Q1 2022 notched a better than expected result, while inflation for the month of April grew to 3.47% YoY. Economic activity is starting to go back to pre-pandemic levels, as COVID-19 becomes more and more subdued.

Equity

The JCI recorded quite a massive gain of +2.22% in the month of April, as foreign investors kept pouring in with a total net buy of USD$2.783 billion for the month. Investors are becoming more and more optimistic with the economic prospect. However, looking forward, there are still some risks to be considered such as rising inflation that may push the central bank to start hiking rates. Nonetheless, as the economy continue its positive trajectory assisted by increasing demand and commodity prices, the JCI should be trading in the range of 7,200 – 7,500 by year-end.

Bond

For the month of April, the 10-year government bond yield climbed from 6.728% to 6.986%. The jump followed similar movement of the US Treasury yield as The Fed started its rate hiking process. While rising bond yields may spark capital outflow from the fixed income market, its impact shouldn’t be too great as foreign ownership is currently underweight below the 20% mark. Moreover, with the benchmark yield above 7%, this should act as an incentive for the credit market yield hunters. The 10-year government bond yield is expected to be around 7.15% for 2022.

Currency

As for the currency market, the Rupiah depreciated 0.83% last month, closed at 14,482 per USD by month-end. The depreciation is still expected to continue as long as policy tightening by The Fed remains aggressive. On the other hand, the central bank will monitor the exchange rate and keep its stability as they had previously mentioned. The Rupiah is expected to trade around 14,408 this year.

Juky Mariska, Wealth Management Head, OCBC NISP

GLOBAL OUTLOOK

Darker outlook

The economic outlook continues to be very challenging, Europe faces months of war, US inflation is at its highest in four decades and China is struggling to contain Covid-19 outbreaks. – Eli Lee

Financial markets are thus likely to stay volatile in May.

Growing fears of a recession

Global growth seems likely to slow sharply this year, that is also stoking fears of recession.

For the global economy overall, the risks of recession in 2022 still seem limited. Reopening economies, high savings, pent-up demand, and tight labour markets are all likely to support global growth this year despite tighter monetary policy and surging commodity prices.

For 2023, however, the risk of the world economy suffering recession are increasing. This year’s interest rate hikes are likely to be felt more fully in 2023 and tailwinds from reopening are also likely to fade by next year.

Central banks to accelerate rate hikes to ensure inflation peaks in 2022

The Fed is set to increase its fed funds rate by 50 basis points (bps) in June and again in July after its initial 50bps in May to 0.75-1.00%. The Fed is also likely to keep raising interest rates until the fed funds rate reaches 2.75-3.00% by early next year. Thus, the Fed is set to lift interest rates to levels that will restrict growth in 2023.

Similarly, the BOE is likely to keep increasing interest rates in May and again either in June or August by 25bps until its Bank Rate reaches at least 1.25%.

The ECB is also likely to bring forward interest rate hikes this year given Eurozone inflation is at record highs. We now expect the ECB to end its quantitative easing over the summer and to start raising its deposit rate from -0.50% by 25bps increases every three months from July.

In contrast, we expect the BOJ to keep its deposit rate unchanged at -0.10% as inflation, excluding food and energy costs, remains well below its 2% target in Japan, and for the PBOC to refrain from rate hikes as China’s growth suffers from strict zero-Covid lockdowns.

Global bond yields to rise further

We forecast US Treasuries will trade in a higher 2.70-3.00% range compared to 1.50% for 10Y Treasury yields at the start of 2022. If inflation starts to peak in the next few months, then global yields will stop surging.

Last, the safe-haven USD is set to stay in demand across the board with the Euro, Yen and Renminbi all weakening sharply against the greenback.

The combination of elevated inflation, sharper slowdowns, accelerated rate hikes, rising government bond yields, and a stronger USD reflect the very challenging outlook for the global economy.

EQUITY

Reduce risk

We have downgraded Asia ex-Japan equities from Overweight to Neutral, bringing our overall position in Global equities from Neutral to Underweight. At a sector level, we continue to favour Energy over the longer-term, supported by ongoing geopolitical developments and the drive for energy security among countries. – Eli Lee.

United States

US companies are in the thick of the reporting season, and thus far a large majority of the S&P500 companies have reported beats on EPS estimates. Several management teams have given more cautious guidance, and this could lead to 2H22 EPS downward revisions.

Europe

European equities have lost some ground recently along with other major indices on concerns of slowing global growth and monetary tightening. Looking ahead, growth in the Euro area may weaken over the coming months on the back of the energy price shock and a potential fading of the re-opening boost.

Risks are skewed to the downside, but we also highlight nuances within the region. UK equities, for instance, with their relatively higher weights in sectors such as Energy, Commodities and Financials offer a better hedge.

Japan

Japan equities have been resilient this year, falling by a relatively more modest extent compared to world equities in local currency terms. In US Dollar terms, however, the equity market has lagged world equities meaningfully due to sharp currency depreciation of the Yen. In the current results season, we expect firms to guide more conservatively for the new fiscal year due to ongoing external uncertainties and inflationary concerns.

Asia ex-Japan

The MSCI Asia ex-Japan Index capped off another challenging month in April. One common trend was the rise in inflationary pressures in the region and the resulting monetary policy tightening in some countries.

Given Indonesia’s outperformance since our recent upgrade to an Overweight rating, we take the chance to lock in some gains and downgrade our rating to Neutral, as valuations have also risen following its outperformance.

China

The recent modest reserve requirement ratio (RRR) cut and no change in policy rates missed market expectations. Going further into 2Q22, we expect stepping up of policy responses.

We remain constructive on Chinese equities and see long-term investment value. While we continue to prefer onshore A-shares within Chinese equities, we expect that relative outperformance will resume in 2H22 when easing measures intensify.

Views on sectors

We are downgrading our Financials and Industrials sector ratings from Overweight to Neutral after upgrading them more than a year ago. The Financials sector would be impacted by rising global growth concerns, and while banks will benefit from a new rate hike cycle, meanwhile In Industrials, supply chain and logistics issues are likely to persist for now, especially with the Covid-19 situation in China.

The Energy sector remains the best performing sector year-to-date after topping last year as well. Barring unforeseen developments in the Russia-Ukraine war, there is potential for a slowdown in demand growth in the near-term due to Covid-related lockdowns in China.

However, over the longer-term, the demand for energy will remain robust as economies recover from the depths of the pandemic, and a key finding from a recent JP Morgan study is that by 2030, energy demand growth will exceed supply growth by about 20% based on current trends, mainly driven by emerging economies and their efforts to develop and lift citizens out of poverty.

BONDS

Underweight bonds

In fixed income, we expect credit spreads to remain elevated, and we remain Underweight overall on bonds, with Underweight positions in both Developed Market and Emerging Market Investment Grade bonds, and Neutral positions in High Yield bonds. Careful selection of individual credits is critical in this environment. – Vasu Menon.

If investors were hoping that with a new quarter would come a rejuvenated credit market, they were terribly disappointed as the poor performance continued. During 1Q 2022, the narrative was dominated by the Russia-Ukraine war and fear of a hawkish pivot by the Fed and other central banks in response to increasingly pervasive inflation. April saw inflation ratchet up another notch to a record 8.5% with renewed lockdowns in China adversely impacting both Chinese and global economic growth. Meanwhile, the Fed turned up its hawkish rhetoric, and the market is now pricing multiple 50 basis point (bps) rate hikes in the coming meetings.

Maintain neutral weight on EM HY

Emerging Market (EM) credit is currently being pounded by a powerful mixture of detrimental economic forces – economic warfare with Russia over its invasion of the Ukraine and persistently high inflation that has been exacerbated by the further feedback loop of asset supply disruption emanating from the Russia-Ukraine conflict.

Meanwhile, China faces uncertainty both domestically and externally. A deterioration in the housing market coupled with weakness in consumer services and consumption from prolonged Covid-19 lockdowns has adversely impacted economic growth and ratcheted up the potential of a hard landing.

And looming above all of this is an increasingly hawkish Fed that is poised to begin aggressively raising rates and cutting bond purchases in a matter of weeks. However, we believe that after the sharp drop in prices year-to-date (YTD), risks are to some extent already priced into current valuations.

Hence, we are maintaining our Neutral call on EM HY. Moreover, the asset class is the most attractive from a valuation perspective, and its credit spread cushion should offset the negative impact from rising rates to some extent.

In HY we retain preference for positioning within defensive sectors and focusing on companies with strong balance sheets.

Maintain overweight call on Asia IG

We are maintaining our overweight call on Asian Investment Grade (IG). Unlike in the HY market, the Chinese IG landscape is dominated by largely state-owned enterprises and systemically important companies. However, in a broader context we would also tend to favour the same type of defensive industries and companies as we do with EM HY.

FX & COMMODITIES

Volatile near-term gold outlook

Geopolitical risk has not disappeared while inflation remains elevated globally. But gold is coming under pressure as market anticipation of stepped-up Fed tightening lifted the US Dollar and nudged the 10-year US real rates into positive territory. – Vasu Menon

Oil

Narrowing backwardation suggests oil market tightness is temporarily easing, moderated by the release of 180 million barrels of oil from the US’s strategic reserve over the next six months and weaker demand growth due to lockdowns in China. Refinery rates in China dipped as higher prices hurt refining margins and mobility restrictions weaken gasoline demand.

With Europe set to stop Russian oil imports by the end of the year, the US is increasingly acting as the barrel of last resort for an Atlantic Basin that is scrambling to find alternatives in place of Russian crude oil and petroleum products. The tight oil supply backdrop is likely to keep oil prices volatile and higher for longer. With today’s price environment sufficiently high to add considerably to producers’ bottom line, US oil production from shale is set to gradually increase.

Gold

The near-term gold outlook is likely to remain volatile. More sanctions by EU on Russian energy or the threat of Russia blocking energy supplies to more EU countries could worsen stagflation risk and drive gold back up in the near-term. But geopolitical crises do not last forever. If the Russa-Ukraine conflict deescalates and inflation moderates globally by year-end, the bullion’s safe-haven and inflation hedging appeal is likely to diminish over the medium-term. Barring a hard landing that forces the Fed to reverse its rate hikes, an eventual soft landing of the US economy, as we expect, is unlikely to provide much relief for gold.

Currency

The central bank dynamics theme has remained in play, but investors appear to have put more weight on the uncertainty regarding the growth outlook. The US Dollar has benefitted and may continue to do so from a combination of a hawkish monetary policy outlook and growth concerns.

ECB rhetoric has become more hawkish over the past couple of weeks, while market pricing of rate hikes has also increased. Room for the ECB to further step-up its policy normalisation will give some support to the Euro. However, such support or even mild improvements in the yield differentials favouring the Euro is likely to be short-lived as the Fed is more hawkish than the ECB.

The BoE was among the first to act but it may also be the first to blink given recent soft economic data. On balance, we maintain our strong US Dollar view against the Yen, Euro and Pound. Commodity currencies have not been able to sustain their gains, as some commodity prices have retraced given growth concerns, including that on China. While lockdowns in China may extend supply-chain disruptions, energy price inflation is likely to give way to growth concerns among investors in the near-term.

Inflation but no stagflation

Geopolitical conflict between Russia and Ukraine have been a catalyst for rising commodity prices, especially for those energy related; such as the price of oil that once reached USD$120 dollar per barrel. Sanctions and bans on oil imports from Russia have disrupted supply, in the midst of growing demand as the global economy reopens more and more. On the other side, inflation have been a key element that market participants are currently monitoring. The concern is that if inflation keeps on rising may push the economy into a “stagflation” phase; while growth remains low and unemployment remains high globally.

The rise in inflation also sparked recession fears in the future. The US Treasury yield curve inverted in the beginning of this month, wherein the yield on shorter duration bonds yielded higher than of those with longer durations, which is a commonly interpreted as a sign of possible recession and slowing economic growth. However, demand and consumption will remain supported as the global economy reopens, hence the economy should be able to evade both stagflation and recession.

Domestically, the government is confident that the economy is currently on the right path towards recovery, even though COVID-19 is still exist. This can be verified by the inflation data for last month, which saw a sharp increase to 2.64% YoY. Other macroeconomic indicators have displayed similar characteristics. PMI Manufacturing was recorded at 51.3, proving that the industry remains at elevated levels. Moreover, in terms of trade the nation recorded a trade surplus last in the month of March for as much as USD$3.8 billion; much higher than the previous achievement of USD$1.7 billion.

Equity

The JCI notched another gain in the month of March of as much as 2.66%, trading comfortably above the psychology handle of 7,000 by the end of the month. Outperformance of the equity market is propelled by constant foreign inflow since the start of the year. The month of April alone foreign investors recorded a net buy of more than Rp 10 trillion, in line with the expectation of higher economic growth this year. Investors’ confidence has also been restored towards the equity market, as the government’s efforts in containing the virus have proven to be efficient and correct; being able to suppress transmissions for as much as 90% since its peak in mid-February. Looking forward, risk assets still has significant upside potential. With projected earnings growth in the range of 15-20%, the JCI is expected to close the 2022 in the 7,200 – 7,500 range. Bonds

As for the bond market, the month of March recorded another losing streak, as can be seen through the rise in 10-year government bond yield from 6.51% to 6.73% by month end. The rise in yields mean that prices are lower. Foreign investors recorded a net sell of as much as Rp 43 trillion during the month, pushing down foreign ownership to a fraction of what it was at 17.5%. The pressure experienced by the bond market can be translated as well from the rise in US Treasury yield, as the US central bank remains hawkish and committed to a more aggressive approach in terms of monetary policy; as inflation is at its highest level in four decades. However, the bond market should still be supported by the government’s commitment to lower bond issuance this year, and the burden sharing scheme between the government and central bank which is still in place. Those two factors should be able to help control supply in the market.

Currency

From a currency standpoint, the Rupiah traded stably at 14,300 per USD for the month of March. Investors have priced-in a hike of 25bps since before, therefore there were no more surprises during the actual hike. The central bank kept the exchange rate in a stable manner through several policies such as the B20 policy to reduce the nation’s reliance on oil imports, increasing import taxes, and even pushing for more tourism to contribute towards foreign reserves. Hence, the USDIDR is expected to hover between 14,300 to 14,450 in the short term.

Juky Mariska, Wealth Management Head, OCBC NISP

GLOBAL OUTLOOK

Inflation but no stagflation

The economic outlook remains challenging, but we do not expect stagflation this year. The tailwinds from reopening, pent-up demand and strong labour markets should support growth despite the risks from surging oil price, potentially larger Fed hikes and US yield curves tilting towards inversion. – Eli Lee

Major headwind from record oil prices

Russia’s war with Ukraine is becoming a more protracted conflict. Western nations will respond with even greater sanctions, and this is set to keep energy prices high. This can have major implications for the economic outlook this year.

• Oil prices are set to remain near record levels. We forecast Brent crude prices will stay above USD100/barrel during 2022.
• Global growth will slow more sharply this year than anticipated previously. Global activity, however, will still be buttressed by economies reopening this year.
• Inflation is set to worsen with elevated oil prices.
• US Dollar will stay in demand as volatile markets keep investors risk averse.
• Bond yields are set to rise further. We expect the benchmark longer-term 10Y Treasury yield will increase further to 2.55%.

The outlook thus remains challenging. Strikingly, US yield curves have flattened, and in some cases inverted, as investors fear the Fed may shift to 50bps rate hikes at its upcoming meetings in May and June to fight inflation more vigorously.

Historically, an inversion of the 2Y-10Y Treasury curve has reliably signalled that a US recession is coming. The Fed’s rate hikes push up short term 2Y yields while 10Y yields lag as bond markets mark down future growth prospects. When 2Y yields exceed 10Y yields and the curve inverts, investors fear the Fed has raised interest rates to the point where the economy will contract.

But even if the Fed starts hiking rates in larger 50bps steps this year - compared to our base case of seven 25bps moves - we do not expect the US economy will suffer a recession in 2022, nor do we anticipate the global economy will succumb to stagflation this year.

We expect the Fed will start shrinking its balance sheet from May to curb inflation, in addition to increasing interest rates. Such quantitative tightening is likely to put upward pressure on longer-dated yields and thus counter the recent flattening of both the Treasury and swap curves.

Economic fundamentals continue to support growth firmly. Real interest rates are negative in many major economies, labour markets have recovered from the pandemic. Reopening, pent-up demand and high savings are other strong tailwinds for global growth. We thus see the risks of stagflation as still being low this year despite surging oil prices, potential 50bps Fed rate hikes and yield curves inverting.

EQUITY

Stay diversified amidst uncertainties

We retain our neutral position in equities and prefer defensive large caps, quality and value stocks, especially those with resilient profit margins and pricing power. We maintain our overweight position in Asia ex-Japan and continue to favour sectors such as Energy, Financials and Industrials. – Eli Lee.

United States

Tailwinds and potential upward earnings per share revisions for the Energy sector are likely to be offset by challenges faced by other sectors arising from decelerating consumption spend and margin pressures from higher costs for raw materials, intermediate goods, labour and financing.

Europe

European equities fluctuated along with headlines relating to the Russia-Ukraine war, hitting a low on 8 March but recovering thereafter. Although all regions would be impacted by higher energy prices, Europe is in the eye of the storm not just because the war is happening on European soil, but also because of Europe’s heavy reliance on Russian energy for day-to-day needs.

Japan

Japan equities added decent gains in terms of the Yen in March. Sector rotation was volatile with gains led by cyclical/value sectors while Consumer Staples and Discretionary sectors lagged with rising inflation concerns.

Asia ex-Japan

The MSCI Asia ex-Japan Index endured another volatile month with wild swings in share prices, especially for the Chinese market. Amid macroeconomic uncertainties, we expect ASEAN to remain relatively resilient, and are upgrading our rating for Indonesia from neutral to overweight.

China

Hong Kong and China equities had a roller coaster ride in March on the back of rising geopolitical tensions and its potential spillover impact on China.

Vice Premier Liu’s comments, directly addressing market concerns, drove a relief rebound. The Hang Seng Index was the best performing market thanks to its relatively high exposure to Financials.

While the latest Omicron outbreak in China and associated lockdown in Shanghai has weighed on market sentiment, we believe a short and sporadic lockdown should have a manageable impact on manufacturing activities. That said, retail and services will take a longer time to recover. We maintain our view that consumption recovery will gain more traction in 2H22.

Views on sectors

The global sectors that we are overweight on are Energy, Industrials and Financials.

Although we expect financial markets to remain volatile in the near-term, we see tactical opportunities for relative outperformance in sectors that are better positioned to benefit from widespread inflation, rising interest rates and elevated commodity prices. We also see opportunities emerging from broad policy shifts and new strategic priorities, including enhancing defence capabilities and energy security.

As for Financials, we remain constructive on the sector and favour Banks in particular, which are direct beneficiaries of higher Fed funds rates. We are projecting seven rate hikes of 25 bps each this year, compared to five previously.

BONDS

Underweight bonds

Given rising interest rates, we remain underweight in fixed income through our underweight positions in both Developed Market and Emerging Market Investment Grade Bonds. However, we are neutral on High Yield bonds. – Vasu Menon.

The dismal performance of fixed income markets in the first quarter marked the worst start to a year ever for the asset class. Markets have been roiled by two severe supply shocks: the pandemic supply shock followed closely behind by the Russia-Ukraine conflict, with the most detrimental by-product being rocketing oil and commodity prices, and higher inflation. As a result, the Fed turned decidedly more hawkish, raising rates 25bps in its first rate-hike since 2018, and then hinting at another 50bps rate hike to follow.

Volatile month ends up where we started

Emerging Market (EM) High Yield (HY) and Investment Grade (IG) spreads widened 110bps and 40bps respectively before rallying and essentially ending last month unchanged. US HY spreads widened 50bps before a huge rally left spreads 35bps tighter on the month. We saw a similar trend in US IG where a 25bps widening gave way to a rally to end the month 5bps tighter.

Maintain neutral weight on EM HY

EM credit is currently being battered by powerful economic forces – economic warfare with Russia over its invasion of the Ukraine and persistently high inflation that started with the pandemic but was subsequently supported by the further feedback loop of asset supply disruption emanating from the Russia-Ukraine conflict.

Hence, we are maintaining our neutral weight on EM HY. Moreover, the asset class is the most attractive from a valuation perspective, and its credit spread cushion should offset the negative impact from rising rates to some extent. Furthermore, its lower duration also leaves its less susceptible to rising rates. Finally, bottom-up fundamentals have been improving in recent quarters, and aside from Chinese Property, defaults should remain below historical averages.

Greater focus on defensive sectors

We are maintaining our neutral call on Asia HY. However, given a daunting combination of geopolitical tensions, rising rates and rising commodity prices, we would tend to favour defensive parts of the market such as oil and gas, food and agribusiness, metals/mining, telecommunications, and utilities, that are better equipped to deal with these headwinds.

Maintain overweight call on Asia IG

We are maintaining our overweight call on Asian IG. Unlike in the HY market, the Chinese IG landscape is dominated by largely state-owned enterprises and systemically important companies. However, in a broader context we would also tend to favour the same type of defensive industries and companies as we do with Asia HY.

FX & COMMODITIES

Oil price to stay higher for longer

Oil prices are likely to remain volatile and higher for longer. Our 12-month Brent oil forecast remains unchanged at USD100/barrel. However, we lower the 3-month Brent oil target to USD120/barrel from USD140/barrel previously. The largest ever release of US oil reserves and the dent to oil demand from the lockdowns in China, should help lower risk of a near-term oil price spike. – Vasu Menon

Oil

The White House announced that it is planning to release as much as 1 million barrels per day from US oil reserves, potentially over several months that could amount to as much as 180 million barrels. This dwarfs the recent releases the government had announced, such as 50 million barrels in November and 30 million barrels earlier this year.

This release will serve as a bridge until the end of the year, when domestic production ramps up by an additional one million barrels per day this year and nearly another 700,000 barrels per day in 2023. The move by the Biden administration to limit the energy price shock from the Russia-Ukraine war reflects concerns over inflation domestically and to show support for joint energy security with American allies.

Gold

Gold’s status as a safe-haven asset has shone brightly over the past month following Russia’s invasion of Ukraine. Gold should continue to benefit from stagflation concerns fuelled by the risk of higher for longer oil prices. A more uncertain economic outlook and the potential for higher volatility across bonds and equities, also presents gold as a viable alternative asset to diversify and hedge portfolios.

But geopolitical crises do not last forever. Easing stagflation concerns amid perception of progress in Russia-Ukraine peace talks and a more hawkish Fed could limit gold’s upside potential.

Currency

The initial shock caused by geopolitics has faded. If the military conflict in Ukraine de-escalates, expect the markets to refocus on other themes like the growth-inflation nexus, central bank dynamics, and the elevated commodity prices.

In terms of central bank dynamics, the hawkish Fed is in focus as an increasing number of FOMC members seem comfortable about a 50bps rate hike at the upcoming FOMC meeting in May.

However, in the near-term there may be greater focus on the ECB if a significant de-escalation in Ukraine removes a roadblock to ECB’s hawkish intentions. This would allow the market to more confidently price in ECB rate hike expectations in-line with a growing group of ECB members looking for 2022 rate hikes. We continue to look for Japanese yen (JPY) and Pound weakness on a longer-term horizon, although the recent extensive move in the USD (US Dollar)-JPY cross leaves room for a technical retracement.

Elsewhere, the BOJ conducted unlimited bond-buying in late-March to keep the Yield Curve Control targets intact. Latest comments from the BOE also focused on the economic uncertainty ahead, attracting some scepticism over its rate hike commitment.

Pains of War

In the month of February, the world was shocked by the rise of geopolitical conflict between Russia and Ukraine, that led to an invasion by Russia to overthrow the Ukrainian government. Several economic sanctions have been applied to Russia by other nations, which is also projected to contribute towards rising inflation in the coming months since Russia is a major player in the commodities market, especially for nickel and oil. Moreover, Ukraine is also considered a significant supplier of wheat and sunflower seeds. The sanctions in place may create a global supply chain disruption which will trigger cost push inflation.

From a virus perspective, more and more countries have started the process of economic reopening amid the Omicron variant, with most embracing that the current situation as a “new normal” and made peace with living side-by-side with the virus. But China and Hong Kong still exercise their zero COVID policy. On the other hand, investors are also monitoring the development of The Fed’s monetary policy, in which the central bank is expected to raise its main rate at their March 2022 meeting.

With geopolitical tension still high, expectation that inflation will still rise, and the start of rate hike cycle by The Fed; global growth is expected to moderate in the year 2022. However, domestically inflation is still at a relatively low rate at 2.06% and foreign reserves latest reading recorded at USD$141.30 billion, GDP growth for Indonesia is still projected at a staggering 5% - 5.5% for this year.

Equities

During the second month of 2022, the JCI recorded a gain of 3.87% to 6,888.17. The climb up was propelled by a waterfall of foreign inflow towards the equity market for as much as USD$1.96 billion. A lower hospital occupancy ratio (HOR) also provided a positive sentiment for risk assets, with vaccination rate still going strong as the government is still vying for herd immunity status for its people. However, geopolitical uncertainty in Europe will still be a key risk for equities market in the coming months, both globally and domestically.

Fundamentally, the bullish trend of stocks was also supported by the recovering sentiment of investors towards economic recovery. The infrastructure sector went up 8.81% in February as the government is on the process of reverting back COVID-19 spending towards infrastructure this year. Consumption sector was second in line after infrastructure, with a gain of 6.17% last month. With growth forecast at approximately 15% this year, we see that the JCI should continue its upward trajectory and will trade in the range of 7,200 – 7,500 for 2022.

Bonds

Unlike the equity market, the bond market was recorded down last month; as can be verified by the rise in 10-year yield for as much as 1.18%, up from 6.44% to 6.52%. The rise in domestic yields moved in tandem with the US Treasury yield, in which it saw a climb above the 2% threshold, its highest level since the start of the pandemic.

However, according to the latest FOMC Minutes, the Fed shifted into a less hawkish tone. Although a March rate hike can be assured, the move has been widely priced-in by investors. With a significant spread between domestic and the US Treasury yield, we believe that pressure towards the bond market will be subtle.

Moreover, with projected issuance for 2022 to be lowered than last year, this should support the fixed income market from a supply standpoint. Simultaneously, the burden sharing scheme between the government and central bank that is still going to continue in 2022 should act as a buffer for demand. With that in mind, the 10-year government bond yield should be trading in the range of 6.6% - 6.9% in this first semester of 2022.

Currency

As for the currency market, the Rupiah depreciated against the US Dollar in the month of February for as much 0.1% to 14,382 per greenback. Geopolitical conflict between Russia and Ukraine have been a driving force for the USD, as can be seen through the rise of the Dollar Index (DXY). Although there is still room for depreciation of the Rupiah, the central bank’s accommodative policy and significant foreign inflow towards the equity market should be able to help counter the move down, providing some sort of stability for the currency market. All in all, the USD/IDR should be trading in the range of 14,200 – 14,500 during this first half.
Juky Mariska, Wealth Management Head, OCBC NISP

GLOBAL OUTLOOK

Growth Outlook Downgraded

The global economy is set to face a severe oil shock. This will have major implications for the macroeconomic outlook this year.

Eli Lee, Head of Investment Strategy, Bank of Singapore

Russia’s invasion of Ukraine is a major test for the global economy. Financial market volatility has shot up as investors have reacted strongly to the uncertainty. The rouble has plunged against the US Dollar (USD). Russian stocks have lost more than half their value. Global equities have also fallen sharply while safe havens including US Treasuries, the USD, and gold have rallied. Energy prices have surged as investors fear Russia’s oil and gas exports will be disrupted. Conversely, European currencies including the EUR and GBP have weakened as the Eurozone and the UK face squeezes on gas supplies.

In response to Russia’s actions, the US, the European Union (EU) and its allies have imposed harsh sanctions targeting the Central Bank of Russia, excluding many Russian banks from the SWIFT global payments system, and freezing the assets of Russia’s leaders and prominent businesspeople. By isolating Russia’s economy, weakening its currency, spurring inflation, and causing bank runs, Western countries aim to make the costs of the invasion so high that Moscow ceases hostilities.

Severe energy price shock will hurt global growth

The situation in Ukraine continues to deteriorate. The likelihood of a more protracted conflict, disruptions to Russia’s energy exports and massive flows of refugees causing Ukraine’s allies to take a harder stance against Russian aggression all suggest the next few months will see greater uncertainty, soaring energy prices and even tougher sanctions. The global economy is thus set to face a severe oil shock. We downgrade our forecasts for global growth to 3.7% in 2022 from 4.6% previously.

No recession anticipated for now

The world economy’s recovery from the pandemic will slow sharply from last year’s five-decade high of 6.0% growth in 2021. Global growth, however, will still be buttressed by economies reopening this year. Thus, our lower forecast of 3.7% is still above the 3.0% average annual growth rate achieved by the world economy since the 1970s. We therefore do not anticipate the global economy as a whole to experience recession in 2022.

Europe is in the eye of the storm

Although all regions would be impacted by higher energy prices, Europe is in the eye of the storm with its heavy reliance on Russian energy – a key reason why the EU has been reluctant to join the US in banning energy imports from Russia.

Inflation could worsen

Inflation is set to worsen with the oil price shock. Thus, despite slowing growth, we expect the Fed and BoE will raise interest rates steadily this year. We anticipate five rate hikes by the Fed and four by the BoE in 2022, lifting the fed funds interest rate to 1.25-1.50% and the Bank Rate to 1.25% by year end respectively, as each central bank aims to bring inflation back towards its 2% target over the next few years.

Bottomline

In short, increased uncertainty, soaring energy prices and even further sanctions are set to slow global growth more sharply this year, raise inflation, force central banks – especially the Fed – to increase interest rates where growth is still firm.

Source: Bank of Singapore

EQUITY

Downgrading equities

We are adopting a more defensive stance in our asset allocation strategy by downgrading Europe equities from Neutral to Underweight. This reduces our overall equities exposure to Neutral.

Eli Lee, Head of Investment Strategy, Bank of Singapore

United States

While the current geopolitical situation in Russia-Ukraine is a major headwind - looking at 16 significant geopolitical events since the 1960s, we see that the S&P 500 index has been relatively resilient with the median maximum drawdown in the following 6 months just at -4% as the market tends to react to the threat of geopolitical events rather than the act itself. Still, prolonged tensions can lead to general business uncertainties, while persistent energy price spikes and the risk of an aggressive Federal Reserve focused on inflation could hurt sentiment and growth.

Europe

Higher oil and gas prices would have a greater impact on Europe, and if there is a significant disruption in energy supplies, the fundamental economic shock to Europe would be greater than other regions.

Japan

Japanese equities declined in February as investor caution increased with intensified geopolitical tension relating to Russia and Ukraine. With the Federal Reserve poised to start its rate hike cycle in March, our house view is for an initial 25bps hike and a total of five (or more) hikes this year, although the evolving Russia-Ukraine situation and knock-on implications for global growth and inflationary pressures are key risks for Japanese equities.

Asia ex-Japan

The MSCI Asia ex-Japan Index ended February on a volatile note, and this was seen across global equity markets due to Russia’s invasion of Ukraine. Outside of China, the Bank of Korea opted to keep its benchmark rate unchanged despite increasing its inflation forecast for the year. ASEAN countries such as Indonesia and Thailand are looking to gradually reopen their borders to foreign travellers, and this could provide a boost to their economic growth this year.

China

China is less vulnerable to shocks as it lacks both Europe’s exposure to Russian natural gas and the tight labour market in the US. The People’s Bank of China is also on a policy easing path, diverging from the policy trajectories of central banks in other key regions. Valuations are undemanding and we retain our Overweight on Asia ex-Japan and China equities, though we caution that rising Covid-19 cases in China and Hong Kong may dent sentiment in the near term.

Opportunities can still be found despite crisis

On a broader market perspective, we currently prefer Asia ex-Japan from a regional equity allocation perspective, relative to the US, Europe, and Japan. While we see more opportunities in Asia ex-Japan, we would also highlight that pockets of opportunity exist in the other regions.

For instance, sustained high energy prices would increase the incentive for businesses to pivot more towards renewables, benefiting certain companies in the Industrials and Utilities sectors. On a geographical basis, countries that are more energy self-sufficient and have higher reserves would also stand in better stead to ride out the energy crisis.

BONDS

Neutral high yield bonds

In fixed income, we expect credit spreads to remain elevated and we remain underweight overall on the asset class, although we are neutral on High Yield bonds. Careful selection of individual credits is critical in this uncertain environment.

Vasu Menon, Executive Director, Investment Strategy, Wealth Management Singapore, OCBC Bank

Global risk assets, including credit, were squeezed by the toxic combination of synchronized global monetary policy tightening and geopolitical uncertainty arising from geopolitical tension in Russia-Ukraine. Early in the month, US Treasury (UST) yields soared as a red-hot January 2022 CPI print of 7.5% stoked concerns that the Federal Reserve (Fed) was behind the curve in controlling inflation. However, the inexorable push higher in UST yields was later counterbalanced by a risk-off rally as Russia invaded Ukraine, which saw volatility in the UST market soar to its third highest level in the past fifteen years.

In fixed income, we expect credit spreads to remain elevated, and we remain underweight overall, with underweight positions in both Developed Market (DM) and Emerging Market (EM) Investment Grade (IG) bonds; and neutral weight positions on EM and DM High Yield (HY) bonds. Careful selection of individual credits is critical in this uncertain environment.

Historically poor performance for global credit continued in February

The downward momentum in global credit continued in February. EM HY spreads widened roughly one-hundred basis points to reach its widest level since July 2020 while EM IG widened some forty basis points to reach its widest level since October 2020.

DMs fared comparatively better, with US HY widening only ten basis points and US IG widening only fifteen basis points.

Maintain neutral weight on EM HY

The forces adversely impacting the asset class at present – synchronized global monetary tightening, geopolitical tensions arising from the Russian/Ukraine conflict, and regulatory tightening with the potential risk of a hard landing in China – are powerful and undeniable.

Last month, we lowered our overweight recommendation on Asia HY to neutral as the recovery in China Property has not come about as vigorously or as quickly as we had originally forecast.

Caution towards China Property into March earnings season

Over the past month, we have seen more demand side fine-tuning measures in China’s Property sector. Following Haze in Shandong, more cities have also lowered mortgage down-payment ratios to 20% for first home purchases. We note that this is not a new policy as the central government has allowed 20% minimum down payment in cities without home purchase restrictions since 2016, but many cities have adopted more stringent measures over the past few years amid policy tightening.

FX & COMMODITIES

Energy price shock

This explicit targeting of Russia’s energy exports by the US and its allies, and the deteriorating situation in Ukraine, means that oil prices are set to trade near record levels. We now forecast Brent crude prices will trade in an elevated range of USD110-170/barrel over the next few months.

Vasu Menon, Executive Director, Investment Strategy, Wealth Management Singapore, OCBC Bank

Oil

As the Russia-Ukraine conflict escalates, the response from Ukraine’s allies has intensified. Developments have now moved beyond the self-enforced buyer's strike on Russian crude oil to the launch of official sanctions by the US and the UK on Russian energy exports. Similar sanctions by Europe may not be feasible for now, given that they would be hugely disruptive for its economies.

The US has banned imports of Russian oil and gas, the UK said it would phase out its oil imports by year end and the EU announced a plan to reduce its gas imports by two-thirds within a year but stopped short of a ban. This explicit targeting of Russia’s energy exports and the deteriorating situation in Ukraine means that the world is set to face a severe oil shock.

Oil prices are set to trade near record levels. We now forecast Brent crude prices will trade in an elevated range of USD110-170/barrel over the next few months and our 3-month forecast is USD140/barrel, far above the USD80 levels seen at the start of the year.

Gold

Gold is a beneficiary of stagflationary concerns fuelled by the spike in energy prices. We think gold prices could break above historical highs on escalating stagflation risk to hit USD2,200/oz in 3 months’ time. We have low conviction whether gold can continue to stay high beyond the near term. We adjust our 12-month gold target to USD1,900/oz (previous: USD1,700/oz) assuming a soft global landing but could upgrade our forecast more forcefully if global recessionary risk escalates.

Currency

The top performers against the US Dollar (USD) since geopolitical tension started escalating in Ukraine around 11 Feb are the Australian Dollar (AUD) and the New Zealand Dollar (NZD) due to higher commodity prices.

We have a slight preference for the commodity currencies, but we prefer not to chase them outright against the USD. We are negative on the Euro (EUR) and Pound (GBP). In terms of the impact on growth, the Russia-Ukraine conflict will be most keenly felt in Europe. The GBP has been more resilient to the heightened political tension, but the spill-over from the EUR could become more evident if the situation drags on. Summing up, our near-term playbook points to holding existing USD-JPY longs and expecting downside for the EUR and GBP against the commodity currencies.

Also, expect the winners/losers in Asia to be drawn along commodity lines. The currencies of net commodity importers like Thailand and India should underperform relative to the currencies of Malaysia and Indonesia, where commodity exports make up a larger share of the economy.

The recovery remains strong

At the beginning of 2022, financial markets went through quite a rough start. Investors kicked off the year with a lower appetite for risk. The underperformance of equity markets moved in tandem with the bond market, where the 10-year US Treasury yield recorded a jump from 1.5% to 1.78% by month-end. The move was mainly propelled by the hawkish tone adopted by the US central bank, wherein now markets are already pricing-in four to five quarter-point hikes in 2022 as inflation and the labor market continues to deliver robust data periodically. The hawkish tone is also adopted by its European counterparts with ECB is expected to hike rates in the 3rd or 4th quarter this year.

Regarding to COVID-19, January saw a spike in transmissions globally. However, investors seem to be more occupied with the probability of a higher interest rate environment. More and more countries, mainly in Europe, now choose to live alongside the virus as they prioritize economy reopening. Moving east, sentiment in Asia is still dampened by the uncertainty in China’s property sector, tech crackdown by the Chinese government, and the resurgence of COVID-19 in several developing nations. Nonetheless, the global economy is still expected to record a moderate growth of 4.7% this year, down from more than 6.0% last year.

Domestically, from a fundamental perspective, the economy is well on track for a continued strong recovery. The economy grew at a staggering 5.02% in the last quarter of 2021, bringing the 2021 full-year growth at 3.69%; well in range with the central bank and government forecast. Inflation is steadily climbing, up from 1.87% to 2.18% for the month of January, while PMI Manufacturing data remain at favourable levels, currently at 53.7 well above the expansionary threshold, indicating that recovery is in place.

Equities

After a volatile trading month, the JCI recorded a gain of 0.75% to close the month of January at 6,631.15. Positively, foreign investors recorded an inflow of USD$425 million last month. The Omicron variant started to take off in January, where local transmissions went from 500 a day to 10,000 by the end of the month. The government had previously stated that they are committed to bringing COVID-19 treatments accessible to the public in the first half of 2022, while targeting 100% vaccination rate by March 2022.

On the fundamental side, risk appetite is also boosted by confidence in the domestic economy recovery. After multi-years running for twin deficits between current account and budget deficit, Indonesia appears to be narrowing the gap. Furthermore, the transition of reallocating the pandemic budget back to infrastructure spending would be another positive catalyst for growth this year.

If that were to happen, in addition to another year of strong earnings growth, the JCI should be able to trade in the range of 7,000 – 7,500 for the remainder of 2022.

Bonds

On the other hand, the bond market recorded a loss in the month of January. The 10-year yield ended the month at 6.44%, up from around 6.38% at the start of 2022. The move up by domestic yields mirrored the movement of its Western counterparts, US Treasury yield.

However, with our current real yield being comparatively higher than those of other ASEAN countries, we do offer better trade from a fixed income perspective. Hence, with the increased uncertainty caused by a hawkish Fed, we now see our 10-year yield to be trading in the range of 6.4% - 6.8% for the remainder of 2022.

Currency

From a currency standpoint, the Rupiah depreciated against the Greenback last month, with the USD IDR recorded up 0.74% to close the first month of 2022 at 14,368.00/USD. A more hawkish Fed has been the core of a strengthening dollar, as can be seen too from the dollar index (DXY) currently on an upward trajectory. Going forward, although there is more room for the Rupiah to depreciate, the move will not exaggerate. As inflation starts growing in the second half of the year, Bank Indonesia may need to reconsider the interest rate policy, while maintaining supportive level for exports; the USD/IDR should be trading in the range of 14,400 – 14,800 for the remainder of 2022.

GLOBAL OUTLOOK

The recovery remains strong

Increased uncertainty is likely to keep financial markets volatile in the near-term. But strong global growth in 2022 will continue to broadly support the post-pandemic rally in risk assets ahead. – Eli Lee

Financial markets have had a challenging start to the year, reflecting the more uncertain economic outlook. The global recovery from the pandemic remains strong with Omicron having much less impact compared to earlier variants. But the Federal Reserve is preparing to raise interest rates to curb inflation while Russia’s stand-off with Ukraine is also affecting investor sentiment.

Global growth expected to remain strong

Strikingly, the global economy continues to rebound vigorously from the pandemic. Last year world GDP expanded by more than 6.0% - its fastest pace in five decades - and this year we expect global growth to remain strong at 4.7%. Thus, economic activity is likely to increase much faster again in 2022 than the average 3% growth rate achieved by the world economy each year since the 1970s.

In the first quarter of this year, economic growth is set to be curbed by the more infectious Omicron variant. But its emergence has had significantly less impact compared to earlier rounds of the virus. We have thus shaded down our GDP growth forecasts for 2022 for the US, UK, and Eurozone to 4.2%, 4.7%, and 4.2% respectively from 4.8%, 5.5%, and 4.7%. But, our projections this year for the US and Europe remain far above their pre-pandemic growth rates of 2019.

China outlook turning more constructive

We have also kept our 2022 GDP growth forecasts for China unchanged at 5.5%. China’s outlook is turning more constructive this year after the economy slowed sharply in the second half of 2021. Consumption was hit by Beijing’s strict zero-Covid cases strategy leading to stringent lockdowns.

The main downside risk to the outlook is the concern that Beijing will retain its strict zero-Covid policy until after China’s National Party Congress is held in November. Consumption continues to be hurt by strict lockdowns to contain the virus.

In 2022, however, we expect monetary and fiscal easing should help push China’s GDP growth rate back to 5.5%, up from its pace of 4.0% YoY at the end of 2021.

The Fed is the key risk to the outlook

January’s Federal Open Market Committee (FOMC) meeting marked the start of the Fed tightening monetary policy as it shifts from supporting the US recovery from the pandemic to curbing inflationary pressures.

Inflation has jumped to its highest level in decades, well above the Fed’s 2% target. Thus, at January’s meeting, the central bank confirmed it will end its quantitative easing (QE) in March. The Fed also clearly signaled it will start raising its fed funds interest rate from 0.00-0.25% at its next meeting in March. It outlined plans to start reversing its pandemic QE by cutting the size of its balance sheet when it has begun to increase interest rates. Such quantitative tightening (QT) helps to reduce inflationary pressures alongside interest rate hikes.

Financial market implications

We think the more uncertain outlook will have the following implications for financial markets.

First, increased uncertainty is likely to keep financial markets volatile in the near-term.

Second, strong global growth is still likely to support the post-pandemic rally in risk assets this year. The long-term outlook thus continues to favour overweight positions inequities.

Third, the combination of tighter Fed monetary policy, looser PBoC policy, and firmer Chinese growth prospects may benefit Asia ex-Japan equities relative to US stock markets now.

Last, the risk of the Fed undertaking more than the four-to-five 25bps rate hikes now expected by financial markets in 2022 may cause more volatility in bond markets globally including emerging markets.

The more uncertain outlook thus may have significant near-term implications for financial markets. But over the longer-term, strong global growth this year will continue to favour investing in risk assets.

EQUITY

Move equity Overweight to Asia ex-Japan from US

Overall, we believe that the broad post-pandemic equity bull market is still intact. We remain Overweight inequities, but we move our Overweight to Asia ex-Japan from the US given a more attractive relative risk-reward profile. – Eli Lee.

United States

The S&P 500 index has had a rough start to the year, and we think volatility is unlikely to abate soon. While companies are generally delivering beats on earnings, the outlook appears somewhat mixed. Selected cloud and semiconductor companies continue to witness healthy demand, but certain work-from-home beneficiaries are experiencing a more muted outlook. Historically, the S&P 500 underperforms when tightening is triggered by a high-inflation environment. While our base case is for inflation to peak in the spring, thereby allowing the Fed to stick to quarterly rate rises in 2022.

Europe

In 2022, European equities should ultimately provide another year of positive returns, but this would come with considerably more volatility given increasing macro cross-currents – strong but maturing growth against a backdrop of reduced policy support.

Japan

In 2021, MSCI Japan delivered +14% in total returns. In USD terms, however, the market’s total returns of +2% lagged world equities’ +23% returns despite a bounce in 2H2021 on stimulus hopes. For 2022, we have a constructive stance with earnings prospects firming up. The light foreign investor positioning following the market’s under-performance suggests relatively more limited downside risks with continued global economic recovery.

China

While we maintain our preference for the onshore A-share market, we also like Hong Kong equities owing to the relatively high exposure to the Financials sector (accounts for more than one-third of the Hang Seng index) which would benefit from the US Fed rate hike cycle.

In the near-term, MSCI China could stay range-bound due to the Chinese New Year holiday and the market waiting for more pro-growth supportive policies at the upcoming National People’s Congress. In the medium-term, we are getting more constructive on MSCI China after the upcoming results season in March as the pressure of earnings downward adjustment moderates and further supportive policies and measures are steadily roll out.

Views on sectors

The start of 2022 ushered in a violent rotation in equity market leadership, with high-multiple growth stocks falling sharply and cyclicals enjoying a healthy start to the New Year. As\ such, it is not surprising that the sectors which have performed the best last year (Energy, Financials) are currently leading the pack.

While we maintain our value/cyclical tilt in our sector preferences, we continue to highlight companies which are exposed to positive structural trends over the longer term.

BONDS

EM High Yield downgraded from Overweight to Neutral

In fixed income, we move our position in Emerging Market High Yield bonds from Overweight to Market Weight given the anticipated headwinds from rising yields and a muted outlook for the Chinese Property sector. – Vasu Menon.

In our view, the outlook for EM HY has become more challenging. The re-pricing of the US interest rates outlook has set up a tougher backdrop for EM HY, with the rate trajectory being more aggressive than previously anticipated. The outlook in the Chinese real estate sector, which is the biggest exposure in EM HY, has also been muted.

There is no doubt that policy support is turning accommodative in China, as we have seen from the reduction in interest rates and bank reserve requirements. However, consumers, financial institutions, and onshore investors remain quite cautious, and credit flow to weaker parts of the real estate market has remained limited, triggering more defaults or debt extensions.

With property sales in China likely to remain soft, more measures and policy fine-tuning to ease credit and capital crunch are necessary before we turn more positive.

Lastly, increased geopolitical tensions (e.g., Russia/Ukraine) are expected to drag on EM HY overall. We maintain a market weight position in the developed market (DM) HY and underweight positions in investment grade (IG) in both DM and EM.

Outside of the real estate sector, however, we remain broadly confident of the China economic outlook this year. The first rate-cuts by the People’s Bank of China (PBoC) since April 2020 are clear signals that the authorities are turning a lot more accommodative.

Lower recommendation EM HY to Market Weight

We are reducing our Overweight call on EM HY to Market Weight. Our rationale is based on the following factors: 1) A rise in interest rates that has been more rapid and faster than we had originally thought leading to an upward bias in our forward rates view; 2) A broad-based recovery in the Chinese Property sector that has yet to materialize; 3) Lack of supportive market technical factors.

Overweight Asian IG

We are moving to Asia, which sports the lowest duration to overweight. Furthermore, unlike in HY, Chinese IG is dominated by largely state-owned enterprises and systemically important companies.

FX & COMMODITIES

Oil market is tight for now

Supply risks, such as potential outages if Russia-Ukraine tensions worsen, along with resilient oil demand and low inventories, could keep oil prices higher and volatile in the short- term. We raise our 3-month Brent price forecast to USD95/barrel. – Vasu Menon

Oil

Oil prices rebounded despite an increase in US oil inventories in recent weeks. This suggests that geopolitics, rather than fundamentals, are currently dominating price movements, which we believe will remain volatile. Geopolitical tensions in Ukraine pose the risk of sanctions on Russia, heightening worries of disruptions to oil flows from Russia.

Given the near-term oil market tightness, we increase our 3-month Brent oil forecast to USD95/barrel (old: USD80/barrel). We cannot rule out further near-term price overshoot above USD100/barrel if geopolitical tensions worsen. But medium-term price risks remain to the downside as the oil market is set to become better supplied by 2H22.

Gold

Drag from a more hawkish Fed is starting to weigh more heavily on gold in the tug-of-war against the support from flight-to-safety driven by geopolitical tensions. We remain cautious about the gold outlook.

A combination of rising tensions between Russia and Ukraine, risk-off led by equity markets and the severe price correction in crypto markets could have caused gold to earlier defy the gravity of rising US real yields. But with Fed Chair Powell leaving the door open to more than four rate hikes in 2022, the hawkish Fed signaling acted as a reality check for rich gold valuations and is starting to erode gold’s resilience.

Currency

The events surrounding the decision from the January meeting of the Federal Open Market Committee (FOMC) shows that the US Federal Reserve (Fed) remains the main game in town. The two well-established US Dollar (USD) drivers - a relatively more hawkish Fed and risk-off sentiment, have started to exert greater influence on the USD since late Jan, and this could spill over into February.

Fed Chairman Jerome Powell was non-committal in his January FOMC press conference which was interpreted by markets as opening the possibility to steeper Fed rate hikes in 2022. This has allowed the USD to appreciate against the Euro and Yen, which have been resilient so far this year.

In the Asian currencies space, the elevated yield environment in developed markets (DM) and jittery risk sentiment imply greater downside risk in the near term for these currencies. In particular, the higher DM yield environment should start to weigh more on the high yielders like the Indonesian Rupiah (IDR). On the other hand, expect the Korean Won and Thai Baht to be more sensitive to risk-off dynamics. While Singapore Dollar may weaken against the USD.

A Brave New World

The global recovery seems to be going on a healthy trajectory, especially with certain countries already starting to open their borders for international travellers. The Fed’s monetary policy remains the same as its initial plan, the lowering of asset purchases by USD$15 billion per month. In regard to interest rates, The Fed President Jerome Powell stated that hiking may only be considered if economic data remains supportive, with an emphasis on the labour market. The Omicron variant initially sparked fear that it would hinder global recovery but did not materialise in the capital markets due to lack of evidence that it may. Scientists and experts believe that the new variant, although may be more transmissible, does not generate worse symptoms when compared to other variants.

Domestically, things are even looking better as the COVID-19 daily numbers remain at its low, faster vaccination rate, and economic data that is evidence of a stable recovery. Inflation climbed to 1.77% YoY in the month of November, showing signs of accelerating consumption levels in the midst of the economic recovery. On the other hand, PMI manufacturing recorded a decline last month, recorded at 53.9 down from 57.2. The increase in raw material prices have been passed on to consumers, leading to a drop in demand. Nonetheless, the market seem to be positively responding towards the cancellation of PPKM level 3 by the government, that was initially proposed to be activated during Christmas and New year. This would enable both social and economic activity to still perform at current levels, even though several restrictions would still be in place to prevent a spike in cases after the holiday season.

Equity

The JCI recorded a decline of -0.87% in the month of November 2021, which was widely anticipated by market participants as historically, the month of November was more often than not a “profit taking” month for investors. Foreign investors sold as much as USD$73.7 million of equities during the month in the midst of all the Omicron headlines taking center stage in the news. On the bright side, daily cases domestically is still within the government’s target range at 200 – 300 cases per day. With Omicron news starting to subside, investors both foreign and domestic are expected to turn back into “Risk-On” mode. The JCI is projected to be able to hover around the 6,700 – 6,800 range by the end of the year.

Bond

As the Fed’s tone tilted more hawkish towards tapering, the 10-year government bond yield remain at steady levels around 6.07% to close the month of November. The stability of the bond market is supported by several factors such as the burden sharing scheme of Bank Indonesia and the ending of government bond auctions for 2021. Moreover, domestic sentiment towards fixed income assets are still positive in what is now a “low rate environment”, which is good for bond prices. In the short term, the 10-year government bond yield is expected to be in the range of 6.1% to 6.4% year-end.

Currency

In the month of November, the Rupiah depreciated against the USD for as much as 1.5% to 14,335 per dollar by the end of the month. The move was driven by a more hawkish Fed which has stated that tapering may be accelerated, and the interest rate hikes may start sooner in 2022. An increase in demand for the safe haven currency will put pressure on the Rupiah. However, with the domestic economy currently in its recovery phase, economic growth is projected to accelerate next year as well. With that in mind, the Rupiah shall be traded in the range of 14,300 – 14,550 for the remainder of 2021.

GLOBAL OUTLOOK

A brave new world

The world economy is again likely to expand strongly as countries reopen, following this year’s record rebound, although the outlook faces fresh risks. – Eli Lee

We think global growth overall will be close to 5% in 2022. Thus, the world economy would, for the second year in a row, expand at a much faster pace than its average 3% annual rate recorded since the 1970s.

But the new Omicron variant is concerning…

The macroeconomic outlook, however, continues to face fresh risks. First, the new Omicron variant, initially identified in South Africa, may be a highly infectious strain of the virus, even more so than Delta, and could prove to be more resistant to currently available vaccines.

It is likely to take researchers until the middle of December to assess how infectious Omicron is compared to other variants.

Thus, economic activity across the globe may be dented as 2022 starts. But the risks to growth from Omicron are likely to be tempered by the knowledge governments, central banks, companies, employees, and households have gained during the pandemic since the start of 2020.

…and inflation is proving to be sticky

The second risk to the outlook is inflation. Consumer prices are rising by more than 6.0% YoY in the US and over 4.0% YoY in the UK and Eurozone. Soaring demand from economies reopening and supply disruptions are pushing inflation up to levels last seen thirty years ago in western economies. In contrast, inflation across Asia is more muted.

We will monitor these risks closely as 2022 starts. But economic activity remains far more robust as 2021 ends compared to 2020 when the virus first emerged. And we expect central banks will stay dovish if the global recovery falters - and will therefore keep supporting risk assets.

The Fed remains central to 2022 prospects

Central to the outlook in 2022 will be how quickly the Federal Reserve dials back the huge monetary stimulus it provided in 2020 at the start of the crisis.

Testifying to Congress on November 30, Chairman Powell hinted strongly the Fed may consider reducing its quantitative easing at a faster pace when it meets in December.

Faster tapering gives the Fed the option to start rate hikes earlier from next summer if inflation remains elevated. But officials will still want to see progress on unemployment and the pandemic and will stress the bar for beginning rate hikes is higher than that for tapering quantitative easing.

Thus, we retain our view that the central bank may wait until 2023 before increasing interest rates while reviewing our forecasts after each upcoming Fed meeting.

We therefore see the major central banks continuing to support risk assets in 2022. We think the benchmark 10-Year Treasury yield will rise over time but only reach 1.90% over the next year, reflecting our view that overall borrowing costs will remain low despite the current surge in inflation.

EQUITIES

Bumpy road ahead

We remain constructive on equities in 2022, although we remain mindful of tail risks, such as re-opening headwinds associated with the Omicron Covid-19 variant. – Eli Lee.

United States

Looking into 2022, we remain constructive on equities, as expressed through our overweight position in the US. The US remains our preferred spot going into 2022. In the US, inflationary pressures have been firmly in the limelight, but we believe that drivers of inflation include robust consumer demand and expansion in output driven by still-intact broad re-opening trends. The Fed will be closely monitoring incoming data to determine how quickly to wind down its asset purchases; any adjustments to its pace of tapering could result in further market volatility. The Fed will be closely monitoring incoming data to determine how quickly to wind down its asset purchases; any adjustments to its pace of tapering could result in further market volatility.

Europe

In Europe, we note that economic recovery is coming through, though activity data in some areas do show signs of slowing on the back of factors such as supply chain constraints and high energy prices. Over the longer term, Europe’s recovery should continue, but at a moderated pace.

Japan

Looking ahead, we expect more stable politics given the vote of confidence won by the Kishida administration. While the earnings season has delivered more positive surprises than negatives, the proportion of firms beating estimates moderated.

China

We maintain our Neutral stance on MSCI China as earnings downward revisions are likely to continue (especially for offshore internet and platform industries), but we are closely monitoring the window for a potential upgrade and watching for a more pro-growth policy tone and stabilisation in earnings downward momentum. Within Chinese equities, we re-introduce our relative preference for A-shares due to their narrowing valuation premium against the MSCI China, relatively low correlation to other markets, and greater exposure to sectors that will benefit from policy tailwinds.

Global sectors

Going into 2022, we remain comfortable with our value/cyclical tilt which we have moderated from an earlier heavy weighting. However, investors are advised to be more selective and adopt a stock-picking approach at current levels. Certain names in sectors exposed to positive structural trends like technology and healthcare also warrant a place in one’s portfolio, as some could be compounders over a longer time frame.

BONDS

Positive on EM High Yield

Our overweight call on Emerging Market High Yield for 2022 is underpinned by supportive fundamentals and attractive valuations, after a difficult 2021. – Vasu Menon.

November turned out to be one of the most momentous months in recent memory for Fixed Income markets. Early in the month, the Fed’s long-anticipated and well-choreographed taper announcement finally came, albeit with accompanying dovish rhetoric. October’s year-over-year inflation print of 6.2% was the highest in over three decades and US Treasury bonds across the curve notched their highest yield increase since early in 2020.

In fixed income, we remain overweight in Emerging Market (EM) High Yield (HY) bonds, where valuations still look attractive. But we stay underweight in both Developed Market (DM) and EM investment grade (IG) bonds, as these segments face greater headwinds from rising interest rates.

Better results expected for Emerging Market bonds in 2022

In EM HY, broad based regional gains were more than erased by an epic melt-down in the Chinese Property sector, leading to roughly a -2.5% return so far in 2021. In IG, a rapid rise in interest rates also contributed to a modest -0.4% return for the corresponding period, despite spread contraction. For 2022, we are expecting an improvement in HY driven by easing liquidity and better funding conditions in the Chinese property market, while in IG, the rise in rates should be more subdued than in 2021.

Top-down and bottom-up fundamentals broadly supportive

For 2022, broad-based EM economic growth should be adequate (the IMF is forecasting 5.1% growth) and enough to underpin ongoing investment in EM corporate bonds. Company balance sheets have displayed marked improvement over the past year and robust earnings releases in recent quarters suggest ongoing credit strengthening.

Valuations less challenging after a difficult year, particularly for HY

Driven by concerns over excessive Chinese HY Property leverage, overall spreads in EM HY widened some ninety basis points during the year. Hence, the current valuations for HY are attractive both on a historical relative basis and versus US HY.

Overweight Asia in High Yield

In HY we are raising our recommendation on Asia to overweight. Our upgrade is based on the belief that the spread tightening in Chinese Property that began in November will continue into 2022 as fine-tuning efforts from Chinese authorities to relax regulations and improve funding and liquidity continue.

FX & COMMODITIES

Cautious on gold

Prospects for higher US real yields and a stronger greenback are likely to weigh on gold in 2022, although investors will maintain exposure to gold for diversification. – Vasu Menon

Oil

A recovery in oil price from the recent sharp decline is still possible on relief from the Omicron scare and if OPEC+ dials back its output trajectory amid the uncertainty over Omicron. We have lowered the 3-month Brent oil forecast to US$80/barrel (bbl) (old: US$85/bbl) to factor in the greater risk of countries slowing the re-opening of their borders to buy time to boost vaccination rate. Inflation, made worse by high oil prices, is becoming a political problem in the US. The US may step up ways to limit the increase in oil price beyond the recent release of strategic reserves, in coordination with other oil consuming nations.

Gold

Prospects for higher US real yields and a stronger US Dollar outlook are likely to weigh on gold in 2022. We target gold price to decline to US$1,620/oz by end-2022. Investors will maintain exposure to gold for diversification. But allocations are likely to be smaller than before. We expect the Fed to maintain credibility in being willing and able to head-off higher inflation. This should limit the allure of gold as an inflation hedge. However, gold prices could stay higher for longer if monetary policymakers are prompted to take a more cautious stance towards tightening. This could happen if the Omicron variant proves to be a material challenge to global recovery.

Currency

We have seen a resurgence of sorts for the COVID-19 pandemic, first through the rapid rise in cases in Europe and then the Omicron variant. Europe has re-imposed restrictions, to the detriment of the Euro and the European complex. The Omicron variant has not changed our macro-outlook, but it is likely to dominate market attention in early December. Our short-term playbook is a defensive one - stay short on the AUD-USD and USD-JPY as a risk hedge.

Further out, we do not believe that recent COVID-19 developments will upend the monetary policy landscape into 1H 2022. The hawkish Fed continues to be the central assumption. The Fed narrative seems to be turning to a faster pace of tapering, which may then develop into possibly rate hikes in 2022. This implies the Fed may catch up with elevated market-implied rate hike expectations and this should be fundamentally US Dollar (USD) positive.

A Brave New World

The global recovery seems to be going on a healthy trajectory, especially with certain countries already starting to open their borders for international travellers. The Fed’s monetary policy remains the same as its initial plan, the lowering of asset purchases by USD$15 billion per month. In regard to interest rates, The Fed President Jerome Powell stated that hiking may only be considered if economic data remains supportive, with an emphasis on the labour market. The Omicron variant initially sparked fear that it would hinder global recovery but did not materialise in the capital markets due to lack of evidence that it may. Scientists and experts believe that the new variant, although may be more transmissible, does not generate worse symptoms when compared to other variants.

Domestically, things are even looking better as the COVID-19 daily numbers remain at its low, faster vaccination rate, and economic data that is evidence of a stable recovery. Inflation climbed to 1.77% YoY in the month of November, showing signs of accelerating consumption levels in the midst of the economic recovery. On the other hand, PMI manufacturing recorded a decline last month, recorded at 53.9 down from 57.2. The increase in raw material prices have been passed on to consumers, leading to a drop in demand. Nonetheless, the market seem to be positively responding towards the cancellation of PPKM level 3 by the government, that was initially proposed to be activated during Christmas and New year. This would enable both social and economic activity to still perform at current levels, even though several restrictions would still be in place to prevent a spike in cases after the holiday season.

Equity

The JCI recorded a decline of -0.87% in the month of November 2021, which was widely anticipated by market participants as historically, the month of November was more often than not a “profit taking” month for investors. Foreign investors sold as much as USD$73.7 million of equities during the month in the midst of all the Omicron headlines taking center stage in the news. On the bright side, daily cases domestically is still within the government’s target range at 200 – 300 cases per day. With Omicron news starting to subside, investors both foreign and domestic are expected to turn back into “Risk-On” mode. The JCI is projected to be able to hover around the 6,700 – 6,800 range by the end of the year.

Bond

As the Fed’s tone tilted more hawkish towards tapering, the 10-year government bond yield remain at steady levels around 6.07% to close the month of November. The stability of the bond market is supported by several factors such as the burden sharing scheme of Bank Indonesia and the ending of government bond auctions for 2021. Moreover, domestic sentiment towards fixed income assets are still positive in what is now a “low rate environment”, which is good for bond prices. In the short term, the 10-year government bond yield is expected to be in the range of 6.1% to 6.4% year-end.

Currency

In the month of November, the Rupiah depreciated against the USD for as much as 1.5% to 14,335 per dollar by the end of the month. The move was driven by a more hawkish Fed which has stated that tapering may be accelerated, and the interest rate hikes may start sooner in 2022. An increase in demand for the safe haven currency will put pressure on the Rupiah. However, with the domestic economy currently in its recovery phase, economic growth is projected to accelerate next year as well. With that in mind, the Rupiah shall be traded in the range of 14,300 – 14,550 for the remainder of 2021.

GLOBAL OUTLOOK

A brave new world

The world economy is again likely to expand strongly as countries reopen, following this year’s record rebound, although the outlook faces fresh risks. – Eli Lee

We think global growth overall will be close to 5% in 2022. Thus, the world economy would, for the second year in a row, expand at a much faster pace than its average 3% annual rate recorded since the 1970s.

But the new Omicron variant is concerning…

The macroeconomic outlook, however, continues to face fresh risks. First, the new Omicron variant, initially identified in South Africa, may be a highly infectious strain of the virus, even more so than Delta, and could prove to be more resistant to currently available vaccines.

It is likely to take researchers until the middle of December to assess how infectious Omicron is compared to other variants.

Thus, economic activity across the globe may be dented as 2022 starts. But the risks to growth from Omicron are likely to be tempered by the knowledge governments, central banks, companies, employees, and households have gained during the pandemic since the start of 2020.

…and inflation is proving to be sticky

The second risk to the outlook is inflation. Consumer prices are rising by more than 6.0% YoY in the US and over 4.0% YoY in the UK and Eurozone. Soaring demand from economies reopening and supply disruptions are pushing inflation up to levels last seen thirty years ago in western economies. In contrast, inflation across Asia is more muted.

We will monitor these risks closely as 2022 starts. But economic activity remains far more robust as 2021 ends compared to 2020 when the virus first emerged. And we expect central banks will stay dovish if the global recovery falters - and will therefore keep supporting risk assets.

The Fed remains central to 2022 prospects

Central to the outlook in 2022 will be how quickly the Federal Reserve dials back the huge monetary stimulus it provided in 2020 at the start of the crisis.

Testifying to Congress on November 30, Chairman Powell hinted strongly the Fed may consider reducing its quantitative easing at a faster pace when it meets in December.

Faster tapering gives the Fed the option to start rate hikes earlier from next summer if inflation remains elevated. But officials will still want to see progress on unemployment and the pandemic and will stress the bar for beginning rate hikes is higher than that for tapering quantitative easing.

Thus, we retain our view that the central bank may wait until 2023 before increasing interest rates while reviewing our forecasts after each upcoming Fed meeting.

We therefore see the major central banks continuing to support risk assets in 2022. We think the benchmark 10-Year Treasury yield will rise over time but only reach 1.90% over the next year, reflecting our view that overall borrowing costs will remain low despite the current surge in inflation.

EQUITIES

Bumpy road ahead

We remain constructive on equities in 2022, although we remain mindful of tail risks, such as re-opening headwinds associated with the Omicron Covid-19 variant. – Eli Lee.

United States

Looking into 2022, we remain constructive on equities, as expressed through our overweight position in the US. The US remains our preferred spot going into 2022. In the US, inflationary pressures have been firmly in the limelight, but we believe that drivers of inflation include robust consumer demand and expansion in output driven by still-intact broad re-opening trends. The Fed will be closely monitoring incoming data to determine how quickly to wind down its asset purchases; any adjustments to its pace of tapering could result in further market volatility. The Fed will be closely monitoring incoming data to determine how quickly to wind down its asset purchases; any adjustments to its pace of tapering could result in further market volatility.

Europe

In Europe, we note that economic recovery is coming through, though activity data in some areas do show signs of slowing on the back of factors such as supply chain constraints and high energy prices. Over the longer term, Europe’s recovery should continue, but at a moderated pace.

Japan

Looking ahead, we expect more stable politics given the vote of confidence won by the Kishida administration. While the earnings season has delivered more positive surprises than negatives, the proportion of firms beating estimates moderated.

China

We maintain our Neutral stance on MSCI China as earnings downward revisions are likely to continue (especially for offshore internet and platform industries), but we are closely monitoring the window for a potential upgrade and watching for a more pro-growth policy tone and stabilisation in earnings downward momentum. Within Chinese equities, we re-introduce our relative preference for A-shares due to their narrowing valuation premium against the MSCI China, relatively low correlation to other markets, and greater exposure to sectors that will benefit from policy tailwinds.

Global sectors

Going into 2022, we remain comfortable with our value/cyclical tilt which we have moderated from an earlier heavy weighting. However, investors are advised to be more selective and adopt a stock-picking approach at current levels. Certain names in sectors exposed to positive structural trends like technology and healthcare also warrant a place in one’s portfolio, as some could be compounders over a longer time frame.

BONDS

Positive on EM High Yield

Our overweight call on Emerging Market High Yield for 2022 is underpinned by supportive fundamentals and attractive valuations, after a difficult 2021. – Vasu Menon.

November turned out to be one of the most momentous months in recent memory for Fixed Income markets. Early in the month, the Fed’s long-anticipated and well-choreographed taper announcement finally came, albeit with accompanying dovish rhetoric. October’s year-over-year inflation print of 6.2% was the highest in over three decades and US Treasury bonds across the curve notched their highest yield increase since early in 2020.

In fixed income, we remain overweight in Emerging Market (EM) High Yield (HY) bonds, where valuations still look attractive. But we stay underweight in both Developed Market (DM) and EM investment grade (IG) bonds, as these segments face greater headwinds from rising interest rates.

Better results expected for Emerging Market bonds in 2022

In EM HY, broad based regional gains were more than erased by an epic melt-down in the Chinese Property sector, leading to roughly a -2.5% return so far in 2021. In IG, a rapid rise in interest rates also contributed to a modest -0.4% return for the corresponding period, despite spread contraction. For 2022, we are expecting an improvement in HY driven by easing liquidity and better funding conditions in the Chinese property market, while in IG, the rise in rates should be more subdued than in 2021.

Top-down and bottom-up fundamentals broadly supportive

For 2022, broad-based EM economic growth should be adequate (the IMF is forecasting 5.1% growth) and enough to underpin ongoing investment in EM corporate bonds. Company balance sheets have displayed marked improvement over the past year and robust earnings releases in recent quarters suggest ongoing credit strengthening.

Valuations less challenging after a difficult year, particularly for HY

Driven by concerns over excessive Chinese HY Property leverage, overall spreads in EM HY widened some ninety basis points during the year. Hence, the current valuations for HY are attractive both on a historical relative basis and versus US HY.

Overweight Asia in High Yield

In HY we are raising our recommendation on Asia to overweight. Our upgrade is based on the belief that the spread tightening in Chinese Property that began in November will continue into 2022 as fine-tuning efforts from Chinese authorities to relax regulations and improve funding and liquidity continue.

FX & COMMODITIES

Cautious on gold

Prospects for higher US real yields and a stronger greenback are likely to weigh on gold in 2022, although investors will maintain exposure to gold for diversification. – Vasu Menon

Oil

A recovery in oil price from the recent sharp decline is still possible on relief from the Omicron scare and if OPEC+ dials back its output trajectory amid the uncertainty over Omicron. We have lowered the 3-month Brent oil forecast to US$80/barrel (bbl) (old: US$85/bbl) to factor in the greater risk of countries slowing the re-opening of their borders to buy time to boost vaccination rate. Inflation, made worse by high oil prices, is becoming a political problem in the US. The US may step up ways to limit the increase in oil price beyond the recent release of strategic reserves, in coordination with other oil consuming nations.

Gold

Prospects for higher US real yields and a stronger US Dollar outlook are likely to weigh on gold in 2022. We target gold price to decline to US$1,620/oz by end-2022. Investors will maintain exposure to gold for diversification. But allocations are likely to be smaller than before. We expect the Fed to maintain credibility in being willing and able to head-off higher inflation. This should limit the allure of gold as an inflation hedge. However, gold prices could stay higher for longer if monetary policymakers are prompted to take a more cautious stance towards tightening. This could happen if the Omicron variant proves to be a material challenge to global recovery.

Currency

We have seen a resurgence of sorts for the COVID-19 pandemic, first through the rapid rise in cases in Europe and then the Omicron variant. Europe has re-imposed restrictions, to the detriment of the Euro and the European complex. The Omicron variant has not changed our macro-outlook, but it is likely to dominate market attention in early December. Our short-term playbook is a defensive one - stay short on the AUD-USD and USD-JPY as a risk hedge.

Further out, we do not believe that recent COVID-19 developments will upend the monetary policy landscape into 1H 2022. The hawkish Fed continues to be the central assumption. The Fed narrative seems to be turning to a faster pace of tapering, which may then develop into possibly rate hikes in 2022. This implies the Fed may catch up with elevated market-implied rate hike expectations and this should be fundamentally US Dollar (USD) positive.

Prudently Riding the Wave

Strong third quarter corporate earnings have been the driving force at Wall Street in the month of October. Mostly beat earnings estimates underpinned the notion that the private sector is on a clear upward trajectory. Rising inflation has been a friend to risky assets, but not so much for the bond market. The Fed had recently announced a dovish tapering will commence by the end of November. The bond buying program, from previously US$120 Billion per month is reduced US$15 Billion to US$105 Billion. On the plus side, The Fed President Jerome Powell reiterated that the central bank will not hike the main rate any time soon, currently at 0.25% at least until the labour market showed significant signs of improvement.

As for the Asian Markets last month, after quite a volatile trading month, the market closed sideways, at the same level as during the month opening. Corporate earnings weren’t as satisfying in Asia as to those of developed countries, and there are still several negative sentiments such as the flare up in COVID-19 transmissions in several countries. But the biggest contributor towards the underperformance of Asian equities was the concern over the debt crisis caused by Chinese property sector.

Domestically, things were starting to look better both from a COVID-19 perspective and prospect for economic growth. The economy recorded a growth of 3.51% during the 3rd quarter, proved that the economy is on its path of recovery. In regard to policy changes, the government again lowered mobility restriction through the downgrade of PPKM, to level 2 in October for Jakarta. This means that more people are allowed to go back to the office, and less operating restrictions for businesses.

Equity

The JCI climbed 4.8% in the month of October, posting the 2nd largest monthly gain of 2021. Market sentiment have been supported by several factors. The foremost positive catalyst being that the daily number of COVID-19 transmission were at its lowest, which was less than 500 per day. Economic data also confirmed that we are currently in the recovery phase. Moreover, the appreciation in the equity market was also driven by foreign inflow, which was recorded at US$918 Million. Lastly, earnings season, both domestically and globally, have been a driving force for the JCI.

After a strong rebound last month, we expect the JCI will be volatile this month with more downward pressure. Nonetheless, given our view that the month of December will be the month for window dressing, we see the JCI to close the year in the range of 6,700 – 6,900.

Bond

Ahead of tapering, bond market continued to rally. The 10-year government bond yield dropped from 6.26% to 6.06% in October. The continued support from the central bank in the burden sharing scheme, along with the reduced bond supply, have provided catalysts for the bond market. The rally was supported as well by the strengthening of the Rupiah last month.

With the announcement recently made by The Fed, to start winding down asset purchases by the end of November at a very gradual phase, this would put some pressure for bond market. However, in the early week of November, Government announced to halt the remaining bond auctions as the 2021 target has been fulfilled. Thus, we now see that the 10-year government bond yield to be trading in the range of 6% - 6.3% by year end.

Rupiah

The Rupiah also appreciated against the greenback in October, going from 14,313 to briefly under 14,100, but then closed the month at 14,168 per USD. With the economy now on its recovery phase, the prospect for economic growth now presents a clearer picture. With that being said, we now see the USD/IDR to be trading in the range of 14,150 – 14,450 for the remainder of 2021.

GLOBAL OUTLOOK

Testing time for global recovery

The global recovery from the pandemic faces significant challenges. Inflation is proving more persistent than central banks expected but the overall outlook is still supportive of risk assets. – Eli Lee

As 2021 draws to a close, the global recovery faces significant challenges and risks:

• Inflation increases are more persistent
  The first risk is inflation. Consumer prices have rebounded on soaring demand for goods and services as economies have reopened. The consumer price index (CPI) inflation has exceeded 5% in America, 4% in the Eurozone and 3% in the UK. But increases in inflation as economies reopen are proving more persistent than central banks expected.

  Investors are thus fearful that the dovish stance of the major central banks, that has been key to risk assets hitting all-time highs this year, will be abandoned if inflation doesn’t start subsiding over the next few months.

• Energy prices are surging
  The second risk is the current surge in oil, natural gas and coal prices. Increased energy prices can cause broader inflation to take-off if firms pass on higher fuel costs to consumers by raising prices for goods and services.

  Investors thus closely follow how central banks react to the impact of oil shocks. If policymakers in energy-importing economies decide to increase interest rates quickly to reduce inflationary pressures, then risk assets are likely to suffer.

• Fresh virus cases continue to flare-up
  The third risk is the continuing flare-ups of fresh virus cases. However, the impact of the pandemic on economic activity is far less than the first two waves of 2020 and the spread of the delta variant during the summer of 2021.

• China’s slowdown continues
  New virus cases resulted in strict lockdowns that hit consumption. Sentiment is also likely to have been undermined by the recent spate of regulatory announcements covering sectors as diverse as tuition, gaming, data storage and payments.

  However, we think it is unlikely that China’s economy will suffer a major downturn that would hit risk assets globally. The authorities’ success in limiting fresh virus outbreaks has resulted in lockdowns already being lifted. The PBoC is likely to follow up its July cut in banks’ reserve requirement ratios (RRRs) with further moves to free up liquidity if activity in China keeps softening.

The Fed remains key for the outlook

Aside from China’s slowdown, the Fed’s stance remains key to whether inflation risks, surging energy prices and fresh winter virus waves will derail risk assets.

We expect the Fed to stay dovish and only turn hawkish if supply bottlenecks and inflation doesn’t ease from the spring of 2022 (somewhere between March and June next year).

We retain our view that the Fed will wait until 2023 - while the labour market keeps recovering - before lifting interest rates.

EQUITIY

Still overweight equities

Within our asset allocation strategy, we maintain a moderately risk-on stance, keeping our overall overweight position in equities with a preference for US equities. – Eli Lee.

We remain watchful of rising Covid-19 cases in much of Europe, while we highlight the potential risk of markets not fully pricing in potential earnings downgrades in China. On a sector basis, we maintain our preference for Energy, Financials, Industrials and Real Estate.

United States

Most of the S&P500 companies that have reported third quarter earnings have beaten revenue and earnings expectations. While companies do appear to be facing increased cost pressure, higher sales and operating leverage appear to be able to alleviate some of those headwinds thus far.

Despite the commencement of tapering, our view is that the Fed will maintain its dovish stance and is unlikely to raise rates in 2022. Also, we believe that the lack of support from all 50 Democratic senators to increase the statutory corporate tax rate could provide some EPS relief in 2022.

Europe

Economic data shows that activity is slowing in more parts of Europe as the effects of supply chain constraints are being felt in more sectors of the economy. exacerbated by higher energy costs which are having far-reaching effects across value chains.

Although investor focus on Covid-19 has declined as the pandemic turns more endemic, However, we remain cautious. Covid-19 cases are rising again across much of Europe, and in some countries, this is accompanied by a rise in hospitalisations. Should there be a fourth wave of Covid-19, the wave is also likely to be uneven across Europe.

Japan

Consensus corporate earnings growth estimates improved to about 33% for FY3/22. Overall, we are constructive given the market’s under-performance this year, which suggests relatively light foreign investor positioning.

Asia ex-Japan

The MSCI Asia ex-Japan Index rose marginally for the month of October after a negative performance in September. Looking ahead, we believe investors would be focusing on the remainder of the 3Q21 earnings season and policy direction from China’s sixth plenum in November.

China

Chinese stock markets have been clouded by regulatory guidance, concerns of an Evergrande spill over and the potential impact of power rationing on corporate earnings. While we believe the market should have largely priced-in the first two issues, we expect downward corporate earnings revision will continue.

Despite the potential earnings downgrade risk, the “green economy” theme, i.e., companies focusing on renewables and new energy vehicles, has continued to gain traction recently. We maintain our view that renewables would be a multi-year investment theme to watch out for.

Global sectors

Interest in the energy transition theme is also high with the recent rise in prices of energy commodities.

Next is Financials, which has been supported by expectations of rising yields and a recovering global economy. Information Technology is ranked third, followed by Real Estate and Industrials.

BONDS

Remain positive EM High Yield bonds

Given our view of rising rates over the next several months, we are maintaining our overweight stance on Emerging Market High Yield bonds. Elsewhere, we are neutral on Developed Market High Yield bonds and Underweight on Investment Grade bonds. – Vasu Menon.

October proved to be another tumultuous month for Fixed Income. The ten-year U.S. Treasury rose 25 basis points intra-month to its highest level since March amidst concerns that inflation, stoked by an energy crunch and supply-induced bottlenecks could impede the nascent economic recovery. In China, the economy stumbled in the third quarter due to a power crunch, property woes and creeping regulation.

EM corporate spreads widen driven by Chinese High Yield

Spreads in Emerging Credit (EM) widened in October. High Yield (HY) widened fifty-seven basis points driven by China, which widened an incredible five-hundred basis points. Outside of China, spreads in HY were generally tighter except for Brazil, which widened twenty basis points on fiscal concerns. Investment Grade (IG) spreads were much more resilient, widening a modest five basis points during the month.

Wide dispersion in regional returns

In October we saw a broad dispersion in regional returns. Central Europe Middle East Africa (CEEMEA) was basically flat, Latin America was down -0.3% while Asia was down -7.5%. Asian underperformance was driven by China which down a remarkable -13.3%. The other major Asian countries did well with Indonesia and India both up 0.8%.

Policy support underpins our still constructive thesis on Emerging Market Credit

We expect the Fed to engineer a taper without a tantrum. Furthermore, softening in Chinese Policy tone designed to cushion the property market appears to be part of a “start-stop” effort that is part of President Xi’s efforts to restructure key industries and reduce leverage without causing systemic hurt to the Chinese financial system or broader economy.

But potential pitfalls remain

New Covid-19 outbreaks in Northwest China and Eastern Europe remind us of the pandemic’s resilience and adaptability. This could further exacerbate China’s economic growth slowdown amidst policy reforms and macroprudential measures that have recently become much more impactful and pervasive.

Chinese offshore bond market finding a bottom

Confidence in China bond market remained at multi-year low, especially for the HY sector. Evergrande’s surprise coupon payments were overshadowed by scepticism over whether such payments will last, and more defaults among HY developers.

Overweight EM HY and underweight EM IG

Given our view of rising rates over the next several months, we are maintaining our overweight stance on HY and recommending an underweight on IG based on the following rationale:

1. HY is much more attractive on a relative and historical valuation basis;
2. The duration for IG is much higher than HY (essentially double) and therefore more exposed to rising rates,
3. A lower spread component on IG leaves less of a buffer against the adverse impact of rising rates and
4. Largely positive quarterly earnings announcement should maintain the recent trend of positive credit momentum.

FX & COMMODITIES

Oil prices close to a peak

We maintain the 3-month Brent oil forecast at US$85/barrel as part of our base case, with risk skewed towards a brief overshoot to US$90/barrel before growing supply results in prices decline after winter. – Vasu Menon

Oil

Oil prices have climbed, encouraged by a shortage of natural gas that increased demand for other energy sources. We maintain the 3-month Brent oil forecast at US$85/barrel as part of our base case, with risk skewed towards a brief overshoot to US$90/barrel before growing supply see prices decline after winter. Despite calls for more oil than its scheduled 400,000 barrel per day monthly increase, OPEC’s reluctance to add more barrels of oil to the market should keep oil prices supported. But early signs of an easing energy crunch following the decline in Chinese coal and European gas prices could signal that oil prices may be close to a peak.

Gold

Gold made a modest comeback, buoyed by stagflation concerns. Expectations of slow growth over the medium-to-longer term kept 10-year US real rates pinned down to the benefit of gold despite the move higher in nominal yields.

Temporary rallies are possible if stagflation concerns worsen but US$1,840/ounce should serve as a soft cap.

First, stagflation concerns should give way to at least a combination of slower inflation and stable but still-strong growth in 2022. Second, the Fed’s hawkish tilt is set to hasten the US Dollar’s transition onto a stronger path over the medium term

Despite our concerns about gold price, we still see a case for investors to have some gold in their portfolios. We are living in unprecedented times as the world gradually emerges from a crisis unlike anything it has seen for nearly a century.

Gold price tends to go up when interest rates go down along with a weak economy. In this sense, gold can serve as a hedge against economic uncertainties or even a potential recession.

Currency

In October, we experienced one of the fastest pricing in of rate hike expectations by central banks in recent memory. There appears to be a concerted effort by traders to push the dovish- central banks, such as the ECB and RBA, to turn more hawkish.

Rate hike expectations have in turn led to concerns about growth and a flattening of yield curves.

Secondly, as more central banks move to the hawkish end of the spectrum, there is a need to differentiate within this hawkish group. Which of these central banks are best positioned to hike rates without impacting growth detrimentally? In this regard, the US Dollar (USD) is likely to still come up on top, with the Euro and Japanese Yen at the other end of the spectrum.

In Asia, the Chinese domestic macro backdrop continues to see no improvement. However, that does not impact the Renminbi, so long as trade and portfolio inflows remain supportive. Given this backdrop, the USD-Asia pairs could diverge in performance depending on their exposure to the commodities complex. We therefore continue to prefer the Malaysian Ringgit and Indonesian Rupiah compared to the Indian Rupee and the Korean Won.

Recovery Faces Fresh Tests

Recently, the movement of global financial market is experiencing a few sentiments. From the tapering plan from the Fed at the end of this year, the uncertainty regarding US debt limit, liquidity crisis of Chinese property companies, to the global energy crisis which had pushed oil price to its highest level since 2014. It appears that in order to recover, there are new challenges to overcome.

In the US, the newest employment data shows that non-farm payrolls only increased by 194 thousand in September. Meanwhile, unemployment rate in the US has dropped to 4.8% from 5.2% in August. However, there is still a possibility for tapering at the end of the year even though employment data has yet to recover because of the latest projected interest rate which the Fed is going to increase faster than the previous projection in 2023. Moving forward, US stock market is still going to be volatile amid the present sentiments. The season of financial reports in Q3 will begin, where investors will begin to pay closer attention again on the issues of global supply chain and the shortage of labours experienced by US companies.

Domestically, the relaxation of PPKM and the acceleration of vaccination to 2 million dosages per day have successfully handled the pandemic in Indonesia. The good handling of this situation has supported economic activities in September. Domestic factories have become more expansive, with the PMI Manufacture index raising to 52.2. Whereas inflation data has been recorded to increase by 1.6% YoY. Bantuan Program Pemulihan Ekonomi Nasional (PEN) also helps supporting this cause, where 54.3% of this year’s total amount of IDR 744.77 trillion has been successfully distributed per September 2021.

Equity

IHSG strengthened +2.22% to 6,286 in September. Historically, the movement in September had been shadowed by a weakening. IHSG’s strengthening is supported by the heavy inflow of foreign investors since last month. Foreign investors have noted a net buy of IDR4.3 trillion in September only. Energy sector, which used to be considered as old economy, is leading the strengthening with the jump in price of coal and oil commodities. The increase in energy sector and recovery of domestic demand are aligned with the relaxation of PPKM and is expected to help push IHSG up even further to 6,500 until 6,700 by the end of this year.

Bond

At the end of September, Indonesian government bond yield of 10-year tenor experienced an increase, from 6.06% at the beginning of the month to 6.26%. The yield increase is aligned with the US Treasury due to the concern of inflation. For bond market, we expect high real yield and low supply risk to become a positive catalyst for Indonesian bond market. These factors are attractive for investors, especially foreign investors; Hence, bond yield is predicted to be approximately 5.8-6.3% by the end of the year.

Currency

Meanwhile, Rupiah has weakened 0.32% within last month, closed at 14,313 at the end of September. At the end of September, Rupiah weakened in response to the Chinese PMI Manufacture data release which has experienced a lower number consecutively for the past six months. On the other hand, Bank Indonesia reported that the foreign exchange reserves at the end of September amounts to USD146.9 billion, the highest record in history. This is expected to help stabilize the exchange rate of Rupiah. Rupiah is projected to be approximately 14,150-14,350 by the end of 2021.

GLOBAL OUTLOOK

Recovery faces fresh tests

Despite near-term risks to growth in the US and China, the outlook remains favourable. This is supported by the ongoing global recovery from the pandemic and dovish central banks which are tolerating modestly above-target inflation rates and keeping monetary policy accommodative. – Eli Lee

We trim our growth forecasts

The global recovery from the pandemic, however, faces fresh challenges.

In the US, the spread of the delta variant, shortages of labour as workers fear returning to jobs during the pandemic, and supply bottlenecks have halted the economy’s reopening in 3Q21.

Similarly, in China, economic activity has also been curbed during Q3Q21 by regional outbreaks of the delta variant prompting the authorities to impose strict lockdowns in line with China’s “zero cases” response to the pandemic.

The US and China have the world’s two largest economies. By downgrading their forecasts, we thus also lower our global growth projections from 6.1% to 5.8% for 2021 and from 5.0% to 4.9% for 2022.

Despite the downgrades, we still see global growth remaining very strong this year and next year. Thus, while the outlook has moderated on slower activity in the US and China, the likely pace of global growth in 2021 and 2022 is still supportive of risk assets.

Rising bond yield

The other key risk to the global recovery comes from government bond yields starting to increase again.

Since the middle of September, bond yields have jumped with 10-year Treasury yields exceeding 1.5% for the first time since June.

Yields are rising as the Fed is now preparing to start tapering its quantitative easing as early as its next meeting in November. By reducing its bond buying to stop the US economy from overheating, the central bank will remove downward pressure on yields.

Government bond yields are also likely to keep rising in the near term as supply chain bottlenecks, labour shortages and energy price increases - caused by supply struggling to meet demand as economies reopen - all keep upward pressure on inflation in the near term.

However, we don’t expect 10-year Treasury yields to exceed 2% on a 12-month horizon. This is because we do not think the Fed will not start increasing its fed funds rate for another two years until 2H23 when the US labour market has fully regained all the jobs lost during the pandemic. We therefore expect government bond yields to keep trading at historically low levels to the benefit of risk assets.

Thus, while the global recovery faces near-term risks to growth in the US and China, and the current re-pricing of Treasury yields may cause more volatility in financial markets over the next few weeks, the overall economic outlook continues to support risk assets.

EQUITIY

Remain overweight equities

As we begin the fourth quarter, we remain positive on equities overall within our asset allocation strategy, with a preference for US equities, where the earnings outlook remains well-supported by strong economic growth momentum. – Eli Lee.

Global equities experienced a challenging September. Uncertainties over Evergrande, the second largest developer in China, led to a souring of risk sentiment globally, while US equities performance was also hobbled by fears of fiscal risks and monetary policy concerns. Nonetheless, we continue to maintain our overweight position in equities and see reasons to remain optimistic on the US.

United States

With the recent volatility in the S&P 500 index, we believe that some investors are increasingly concerned over potential tax headwinds from 2022, corporate margin pressures, downside risks from hawkish monetary policy, and the transition past peak economic growth.

However, we also see reasons for optimism that, we believe that depressed levels in the inventory and capex cycles as well as a continued labour market recovery leaves room for further growth.

Europe

The MSCI Europe index has been correcting in tandem with key regions such as the US and Asia ex-Japan. It is very much international-focused, and subject to the vagaries of the global economy. Hence given our moderate risk-on stance for global equities, we had opted to keep the region at neutral, considering that we are already overweight on US equities.

A variety of metrics are showing significant rebounds, such as mobility, corporate earnings, and inflation data sets. However, as we move towards the later part of the year, the picture is likely to become more mixed and nuanced as investors seek to decipher the full impact of the Delta variant on growth, which seems to be manageable for now.

Japan

The Liberal Democratic Party (LDP) election was won by Fumio Kishida. Market attention should focus on his new cabinet formation and potential stimulus package. Further normalisation of economic activities as Japan’s vaccination drive picks up pace should also support corporate earnings, although our economist has highlighted near term risks from Delta variant infections. Overall, we retain a bottom-up rotational strategy.

China

The Chinese equities market was clouded by regulatory guidance, power shortages and the Evergrande overhang in September. We believe the market will take time to digest the impact and valuation re-rating is unlikely in the near-term. We maintain our relative preference for onshore A-share equities and retain a cautious stance on industries with policy headwinds. However, industries that are aligned with China's new policy priorities should get support.

BONDS

Remain positive EM High yield bonds

In fixed income, we remain overweight in Emerging Market High Yield bonds, where valuations still look attractive. However, we are underweight in both Developed Market and Emerging Market Investment Grade bonds, as these segments offer limited buffer against rising interest rates. – Vasu Menon.

September proved to be one of the most tumultuous and action- packed months in recent memory. Initially, Evergrande spooked markets with the fear that it could spread contagion that might derail the Chinese economic recovery. Moreover, later in the month, yields rose to the highest level in months as Fed tapering appeared likely to being as early as November. We remain overweight Emerging Market (EM) High Yield (HY) bonds, given improving top-down and bottom-up fundamentals and attractive valuations.

EM HY spreads widened while Investment Grade spreads was flat

Spreads in EM Credit widened in September, particularly in China, driven by investor concerns surrounding Evergrande and its wider impact on the Chinese Economy. HY spreads widened by fourty points driven by Asia, which was sixty basis points wider. Conversely, Investment Grade (IG) spreads were essentially flat widening less than one basis point during the month.

New bond issuance returns despite market volatility

After an unusually weak month of issuance in August, the new issue market roared back despite the volatility created by the ongoing Evergrande saga. As of 29 September, there was USD52.7bn in new EM corporate bond issuance with Asia comprising 60% and HY an unusually high 40% considering the volatility impacting the sector. For the year, issuance has been strong at USD433bn.

Policy support underpins still constructive thesis on EM Credit

While recent Fed comments indicate that tapering could begin sooner than expected (perhaps in November), ongoing dovish support should enable the Fed to engineer a taper without a tantrum. Our central thesis also remains that Chinese policy makers remain committed to ensuring that the Evergrande crises remains largely ringfenced and does not turn into something more systemic.

Overweight EM HY and underweight EM IG

Given our view of rising rates over the next several months, we are maintaining our overweight stance on HY and underweight recommendation on IG based on the following rationale:

1. HY is much more attractive on a relative and historical valuation basis;
2. The duration for IG is much higher than High Yield (essentially double) and therefore more exposed to rising rates,
3. A lower spread component on IG leaves less of a buffer against the adverse impact of rising rates and
4. Largely positive quarterly earnings announcements should maintain the recent trend of positive credit momentum.

FX & COMMODITIES

Commodities' paths diverge

We remain sceptical that the current oil upswing is a “super-cycle”. We forecast the oil rally should continue, upgrading our 3-month Brent forecast to USD85/barrel but a drift back to below USD80 remains likely in a year’s time as OPEC+ unwinds its supply curbs and US shale producers ramp up production. – Vasu Menon

Oil

Commodities are making a comeback after losing steam in mid-2021. But unlike the broad-based boom earlier this year, the commodity upswing is likely to be more differentiated. We remain positive on oil prices for the rest of this year. First, low inventory cushion poses significant upside risk for oil price in the near term. Second, the improving Covid-19 and vaccination backdrop, both in the US and globally, provides scope for renewed optimism over global growth. Third, surging natural gas prices, especially in Europe - in part due to reduced Russian gas supply - could trigger gas-to-petroleum switching for power generation to the benefit of oil.

Gold

Gold still has a place in investor portfolios, but allocations are likely to be smaller than before. Gold fears improving global growth expectations and a more hawkish Fed. The Fed earlier made it clear that it will likely start tapering at its November meeting and Powell expects the tapering to conclude around the middle of next year. The Fed’s Summary of Economic Projections was more hawkish, with the dot plot showing 50/50 odds of a 2022 hike and projecting a steeper trajectory of rate hikes post-lift off. We remain cautious on gold on expectations of increased economic activity, COVID recovery and rising US yields. A grind lower in gold price remains the most likely outcome over the next 6 to 12 months. We downgraded our 12-month gold forecast to USD1620/oz from USD1675/oz previously.

Currency

The US Dollar (USD) remains in favour in 4Q2021. The two legs of USD strength – the slowing pace of global recovery and hawkish Fed expectations – remains intact. In terms of the global recovery, while we do not anticipate a recession, the signs are now clear that the peak-recovery is past us. This is a normal development in any recovery path but has nonetheless weighed on risk sentiment since late-2Q. Recent idiosyncratic events, such as Evergrande, is also a near-term trigger for this underlying softening of risk sentiment. This supports the haven status of the USD, especially against cyclicals like the Australian Dollar (AUD).

Fed taper but no tantrum

Having dominated headlines and investors’ concern the past few months, the FOMC Meeting result indicated that The Fed may start tapering or reduce their asset purchases in the last quarter of 2021. During his testimony at the Jackson Hole Symposium end of August, Jerome Powell confirmed that direction the central bank may pursue. On the positive side, The Fed will maintain near-zero rates for the time being even though there is spike in inflation, since it is believed to be a temporary spike. Moreover, the US central bank reaffirmed that the recovery of the labor market have so far been on track, although currently have not gone back to pre-pandemic levels. All in all, the market believes that any form of tightening being conducted will be mild and gradual.

Domestically, with nationwide vaccination rate currently above the 30% mark, the decline in transmission numbers clearly portrays that the country is on the right path. The latest PMI Manufacturing data still indicated a contraction at 43.7 for the month of August, recorded higher than the previous month which was previously at 40.1. In addition to that, inflation data for last month was released at 0.03% MoM and 1.59% YoY: up from 1.52% YoY during the previous term. With the government that has recently eased PPKM restrictions, accelerated vaccination process, and still providing a variety of stimulus; the economy is believed to be able to grow in the range of 3.7% to 4.5% for the full-year 2021.

Equity

Historically, the month of August have been associated with the correction of the Jakarta Composite Index (IHSG). However, this have not been the case this year whereas the index climbed 1.32% during the month. The easing of PPKM restrictions last month and decline in COVID-19 transmission numbers have successfully propelled the JCI. In regard to foreign investors, an inflow of Rp 4 Trillion have been recorded in the month of August. The optimism surrounding the economic recovery have been the foundation of the equity market’s appreciation, hence believed to be able to close out the year in the range of 6,400 to 6,700.

Bond

By the end of August, the 10Y government bond yield had declined to 6.07%. The decision to extend the burden sharing scheme between the central bank and government have been one of the catalysts for the bond market. Through this scheme, Bank Indonesia have committed in purchasing bonds worth up to Rp 215 Trillion in 2021, and Rp 224 Trillion in 2022. In addition to that, the government last month announced that there will be a tax incentive on bond coupons, lowering it down from 15% to 10%. The decision was responded positively by investors and is believed to be able to support domestic demand for bonds and maintain its stability. The 10Y government bond yield should close out 2021 in the range of 5.75% to 6.25%.

Currency

Aside from the capital markets, the foreign exchange market also appreciated in the month of August, where the Rupiah strengthened 1.07% against the Greenback to close last month at around 14,200. Mild suggested tapering has driven the Rupiah. From a foreign reserves’ standpoint, the latest reading showed an increase to USD$144.8 Billion from previously USD$137.3 Billion. This have somewhat given the domestic currency cushion against the USD. Hence, the Rupiah is expected to be in the range of 14,150 – 14,350 going forward.

GLOBAL OUTLOOK

Recovery is defying the risks

We expect the global recovery from the pandemic to continue to defy the risks, while the major central banks will keep setting very low interest rates and governments will provide further fiscal aid to enable economic activity to continue rebounding. – Eli Lee

Fed taper but no tantrum

Speaking at the Fed’s annual gathering in Jackson Hole in August, Chairman Powell reinforced the FOMC’s message that tapering of the central bank’s bond buying could start this year.

To reduce the risks of another taper tantrum, we expect the Fed to wait until as late as November before announcing that it will begin reducing its USD120 billion a month pace of bond buying, starting with a USD15 billion cut in December.

This gradual timeline for reducing quantitative easing would benefit risk assets as the Fed would still be printing money until late 2022. We expect 10Y yields to stay at very low levels below 2% over the next 12 months if the Fed only slowly tapers its quantitative easing. Low yields should continue supporting risk assets.

Delta variant is denting but not derailing the recovery

The new virus strain is especially threatening to emerging economies where weaker healthcare systems are struggling to deal with surging infections, vaccination rates remain low, and lockdowns are causing economic recoveries to stall again.

But the major economies - with their faster pace of vaccinations and stronger budgetary resources - appear to be more resilient to the delta variant.

China’s soft patch may not lead to a larger slowdown

China’s soft start to Q3’21 was due to outbreaks of the delta variant prompting strict lockdowns. But we expect vaccinations and increased local government borrowing to finance infrastructure spending should help activity rebound later this year. We thus continue to forecast strong GDP growth overall for China in 2021.

Conclusion

We think the economic outlook continues to favour risk assets. Rising vaccinations are enabling economies to stay open. The major central banks are set to keep interest rates at near zero levels for several more quarters and governments are preparing further aid. The US administration is working with Congress to approve new spending worth up to USD3.5 trillion. The European Union’s new EUR750 billion Recovery Fund agreed last year will start disbursing money in the second half of 2021. Japan’s government is likely to announce another supplementary budget, and local governments in China still have considerable quotas this year to issue bonds to finance new spending. We thus expect the global recovery to keep defying the risks to the benefit of financial markets.

EQUITIY

Invest prudently

Within our asset allocation strategy, we remain positive on equities overall with a preference for US equities. Firm price trends over the next few months should keep cyclical sectors and companies that are beneficiaries of inflation relatively supported over the near term. – Eli Lee.

US equities remain buoyant on the back of a risk-friendly stance by the Federal Reserve, while investors continue to digest the impact of government actions on various industries in China. We maintain our overweight position in equities, as expressed by our overweight view in the US.

United States

The 2Q 2021 earnings season has been a strong one. Furthermore, the Delta variant does not seem to have impacted mobility as significantly versus the earlier outbreaks prior to the rollout of vaccines.

We are of the view that the Fed will only announce tapering in November and begin reducing its asset purchase in December. Such a set-up, in our view, should continue to be broadly supportive of risk assets this year, and we continue to remain constructive on US equities.

Europe

As Europe emerges from the depths of the pandemic, year-on-year comparisons are currently drawn against the worst of the Covid-19 impacts in 2020, making corporate and economic recovery appear very strong against a low base.

A variety of metrics are showing significant rebounds, such as mobility, corporate earnings, and inflation data sets. However, as we move towards the later part of the year, the picture is likely to become more mixed and nuanced as investors seek to decipher the full impact of the Delta variant on growth, which seems to be manageable for now.

Japan

Japanese equities added modest gains last month. With the Olympic games successfully concluded, the next domestic events ahead are the Liberal Democratic Party presidential and lower house general elections.

Following a solid set of earnings results released with most companies beating estimates, earnings growth forecasts have been modestly lifted to about 27% for the fiscal year ending March 2022. Further normalisation of economic activities as the vaccination drive picks up pace should continue to support corporate earnings.

Asia ex-Japan

The MSCI Asia ex-Japan Index saw another month of negative performance in August given further news on China’s regulatory tightening, coupled with concerns over the Delta variant impact and Fed tapering.

China

In light of the rebalancing initiatives, we maintain our view that regulatory headwinds are likely to persist in 2H21, and sectoral regulations will likely continue to be realigned with the broader policy priorities.

Considering elevated volatility and significant relative outperformance in selective industries, we would recommend investors to accumulate on pull backs.

Sector calls

With worries of slowing global growth due to the Delta variant, as well as sector specific factors, the past month saw sectors such as Materials (which we downgraded to Neutral last month) and Consumer Discretionary lagging the pack. Financials fared well on sector positive news such as the European Central Bank’s announcement that it would not extend restrictions on dividends and share buybacks beyond end-September 2021.

BONDS

Remain positive EM High Yield bonds

In fixed income, we remain positive on Emerging Market High Yield bonds, where valuations still look relatively attractive and should offer a buffer against the adverse impact of rising rates compared to other fixed income segments. – Vasu Menon.

The well-telegraphed and well-choreographed performance by the Fed in recent months (and capped off by the Jackson Hole speech by Fed Chairman Jerome Powell) gives us confidence we should see tapering without the tantrum. This should prove supportive for risk assets. We therefore maintain our overweight position on Emerging Market High Yield (HY) bonds driven by more attractive valuations. However, we remain cautious on both Developed Market (DM) and EM Investment Grade (IG) bonds, where historically rich valuations leave little buffer against rising rates. We are neutral on DM HY bonds.

No “Delta Blues” for EM bonds

In August, the Delta Covid variant continued to have an adverse impact on US economic growth. However, this ironically created a more benign environment for bond investing. Economic growth that was “dented but not decimated” by the Delta variant reduced inflationary pressures, which resulted in the 10Y US Treasury yield holding steady in the 1.25% range. Furthermore, 2Q earnings in Emerging Markets came in strong, largely above consensus, and with robust earnings guidance.

New bond issuance goes on summer holiday

While summer is typically slower for new issuance, it was particularly subdued in August as the USD16.3 billion in new issuance was the lowest in about a year and a half, and less than half of the July issuance. With earnings out of the way and a dovish Fed as a backdrop, we would expect an acceleration of issuance after the upcoming labour-day holiday in the United States.

Strong inflows in EM funds

Year-to-date, EM funds have experienced inflows of USD26.4 billion, well above the USD15.8 billion in inflows for the full-year 2020.

Potential pitfalls remain

While concerns surrounding the potential for the Delta Covid-19 strain to derail the global recovery appears to be waning, we remain ever vigilant toward a virus that has proved amazingly adaptable and resilient since early 2020. Moreover, the breadth and depth of China’s economic growth amidst policy reforms and macroprudential measures have recently become much more relevant and pervasive.

A nuanced and discerning approach toward high yield required.

While we remain overweight HY, we believe that this will not be a “buy the market”, beta kind of investment climate over the remainder of the 2021. Volatility and dispersion of returns between and even within countries and industries remain elevated.

Chinese offshore bond market finding a bottom

YTD Aug 2021, China IG bonds returned 1%; while China HY bonds returned -8.3% although it turned positive in August with a monthly return of 3.7%.

FX & COMMODITIES

Drag on oil unlikely to last

We see higher Brent oil prices of USD80/barrel by end-2021, as the Delta variant dents but does not derail global oil demand. Oil price is likely to decline moderately to USD76/barrel in 12 months’ time on a less supportive fundamental backdrop that could lead to inventory builds. – Vasu Menon

Oil

The recent Delta variant spread, especially in China, has raised concerns about the sustainability of the global economic recovery. But the cloud cast by the Delta variant over the oil market is set to clear as the Covid outbreak comes under control in China while mobility continues to hold up in Europe and the US. Further drawdowns in US oil inventory suggest demand is withstanding the outbreak of the Delta variant. This in turn adds to prospects that oil prices can regain lost ground. Our base case still sees higher Brent oil prices of USD80/barrel by end-2021, as Delta variant dents but does not derail global oil demand.

Gold

Gold still has a place in investors’ portfolios, but allocations are likely to be smaller than before. We see three reasons to stay cautious on the gold outlook given prospects for rising US yields over the next 6-12 months.

1. The bipartisan infrastructure bill, which is set to be passed by the Congress, should act as a little bit of a tailwind for US growth.
2. The Delta variant drag on US growth is likely to be much more modest compared to past waves of infection.
3. The July US employment report, points to robust gains in labour supply that sharply lowered the unemployment rate.

A grind lower in gold price remains the most likely outcome, with the downside cushioned by a possible paring of US Dollar (USD) gains as global risk sentiment stabilises. We continue to target gold to decline gradually below USD1,700/oz in 6-12 months' time.

Currency

Dovish soundbites from Fed Chairman Jerome Powell at Jackson Hole boosted risk appetite further and has kept the US Dollar under pressure. The near-term momentum for the USD is negative given this extended risk-on tilt. Overall, we see the USD in a near term bearish phase, amid a medium-term upward trajectory. Going forward, the key driver will be the pace of tapering. This would then in turn, influence the timing of the first Fed rate-hike.

Delta delays do not derail

This high rate of complete vaccination in the US, which has reached about 50% of the population, boosts confidence in further economic recovery. The US GDP growth rate in the second quarter was reported to have expanded by 6.5%. The consumption rate reportedly jumped 11.8%, which contributes 69% to US GDP. Towards the end of the second half of 2021, it is expected that the growth rate will slow down. Especially, with the unemployment social assistance stimulus due to expire in September 2021. On the other hand, the Fed maintains a relatively more dovish outlook and predicts that interest rate increase can begin in 2023.

Domestically, economic growth in the second quarter increased by 3.31% on a quarterly basis or 7.07% on an annual basis. This figure increased significantly compared to the first quarter of 2021 which contracted -0.74% on an annual basis. PPKM and the spread of the Delta variant that took place during the month of July have put pressure on manufacturing activity. The Purchasing Manager Index for manufacturing contracted to 40.1. The inflation rate in July recorded a slight increase of 0.08%, with the health sector experiencing the highest increase.

Anticipating the impact of PPKM on the community, the Ministry of Social Affairs has budgeted IDR 2.3 trillion in social assistance funds which is expected to support consumption levels. Additionally, the decrease in the hospital bed occupancy rate and the number of daily positive cases are also expected to encourage the loosening of PPKM as soon as possible and prevent the possibility of economic slowdown in the third quarter.

Equity

In June, the JCI moved higher in the range of 5,985 – 6,070, closing the month with an increase of 1.41%. This strengthening was also aided by the flow of foreign funds that returned to the domestic stock market and was recorded at IDR 482.4 billion. Bukalapak's IPO at the beginning of August also became the focus of investors because it pioneered the technological revolution in Indonesia, initiating the transition from the old economic order to the new economic order. Additionally, the GoTo IPO which is planned for the fourth quarter of 2021 is expected to be a catalyst for the domestic stock market resulting in the JCI being projected to be in the range of 6,500 – 6,800 by the end of the year.

Bond

The bond market recorded a significant strengthening in July 2021. The 10-year government bond yield fell 4.49% and closed at 6.294%. The surge in positive cases due to the Delta variant and the low inflation rate prompted investors to re-accumulate bond assets. The SUN auction in early August recorded the highest spike in demand since the beginning of the year at IDR 107.7 trillion, with auction absorption of only IDR 34 trillion. The Minister of Finance, Sri Mulyani, is planning to reduce the issuance of SUN in the second half of this year by IDR 219.3 trillion, in line with the lower estimation of this year's budget deficit. The limited supply of bonds, high real yields, low inflation, and expectations of interest rates being held at a low level will boost bond performance; thus, bond yields are expected to remain stable in the range of 6.0 - 6.5% until the end of the year.

Currency

Rupiah strengthened 0.26% against the USD in July. The Dollar Index (DXY) decreased from 92.43 to 92.17 at the end of the month, in line with Jerome Powell's statement that he will not do tapering in the near future. Moreover, the monetary policy, which remains the same, puts pressure on the US Dollar. However, the Rupiah is predicted to stay in the range of 14,300 – 14,500 until the end of the year.

GLOBAL OUTLOOK

Recovery continues

The global recovery faces fresh risks from the Delta variant, China’s regulatory actions and rising inflation as economies reopen. But we expect the overall macroeconomic outlook will continue to favour risk assets this year. – Eli Lee

Vulnerable countries in Asia are at risk from the new virus strain. But we expect it will only delay rather than derail the global rebound. We also see China still growing firmly and central banks remaining dovish.

Delta delays not derails recovery

First, the new virus strain is threatening vulnerable countries, particularly those in emerging markets where healthcare systems are struggling to cope with surging infections, vaccination rates remain low, lockdowns are being reimposed and tight fiscal budgets are limiting social spending.

In contrast, we expect the Delta variant may only delay rather than derail recoveries in the major economies given their faster pace of vaccinations and stronger fiscal positions to support domestic activity.

We therefore keep our forecasts largely unchanged for the US, UK, Eurozone, China, and Japan as well as for advanced regional economies in Asia including Hong Kong, Singapore, South Korea and Taiwan.

We thus continue to see the global economy expanding by over 6% this year, its fastest pace in five decades.

China is unlikely to slow significantly

China’s regulatory actions over the last few months - from technology to education - have caught investors by surprise and increased volatility in China’s equity markets. But the economy’s V-shaped rebound this year is still likely to remain intact.

In July, the People’s Bank of China cut commercial banks’ reserve requirement ratios (RRRs) to free up liquidity and ensure banks can lend more in the second half of 2021 after a significant slowdown in credit growth in the first half of this year.

We keep our forecast for China’s GDP to expand by 8.7% this year based on strong external demand for China’s exports - as the rest of the world reopens again - and on firmer consumption, as vaccinations accelerate within China.

Central banks remain dovish despite inflation

Rebounds in consumer prices as economies reopen from the pandemic have pushed inflation above central banks’ 2% targets. Thus, the major central banks remain dovish, refraining from raising interest rates this year and thus continuing to support risk assets.

We therefore see the global rebound from the pandemic remaining intact despite fresh risks to the recovery from the Delta variant, Chinese regulatory actions and increases in inflation. The economic outlook is thus likely to keep favouring risk assets during 2021.

EQUITIY

Maintain overweight

While we continue to maintain our overweight position in equities, we bring China and Hong Kong down to neutral, on the back of the regulatory overhang and potential downward earnings adjustments ahead. – Eli Lee.

Within our asset allocation strategy, we maintain an overall overweight position in equities with a preference for US equities.

While we believe inflationary pressures are likely to begin easing from current high levels in 2022, the strong price trends over the next few months should keep cyclical sectors.

Due to concerns over the Delta variant and the growth outlook, we see selective opportunities in solidly run companies with strong balance sheets and health earnings profiles in reopening related sectors.

United States

Most companies within the S&P 500 index that reported second quarter earnings have beaten expectations on both the top and bottom-line. Mega-cap tech firms have in general delivered strong scorecards.

While there have been concerns over the rising virus case counts in the US (and globally) due to the Delta variant, we believe this should pose minimal risk to the US equity market, given widespread vaccinations and strategies focused on containment.

Europe

Meanwhile in Europe, what will be more closely monitored is likely hospitalisation data, which could be a bigger factor in responding to the pandemic. Should this be kept under control such that we do not see significant restrictions that hamper businesses, investors are likely to look past the short term rise in cases as vaccinations continue.

Japan

Japanese equities were muted last month, with a fourth state of emergency declared from 12 July to 22 August that implies some further drag on domestic consumption near term.

Asia ex-Japan

The MSCI Asia ex-Japan Index had a poor performance for the month of July, with the drag coming mainly from China and Hong Kong.

China

The Chinese offshore equities market has been negatively surprised by a wave of regulatory guidance in July, which has triggered broad-based selling as concerns rise over regulatory action. We expect the regulatory overhang to linger on in 2H21 especially in light of the latest move by authorities to set up a special task force to regulate the internet sector.

Sector calls

We are now downgrading the Materials sector from Overweight to Neutral, on the back of our house view that the recent surges in inflation may only be transitory.

The education tech industry clearly faces a difficult and uncertain restructuring path ahead as business models will be substantially impacted because of the latest regulatory directives. At this point in time, we do not advise bottom-fishing in the sector.

Within the Technology sector, there was also weakness in Chinese names due to fears of contagion from the developments in the Education Tech space. In developed markets, we remain relatively sanguine as major technology firms have broadly turned in healthy scorecards. Finally, we also like the semiconductor space with the ongoing push towards increasing automation and digitalisation worldwide, as well as China's drive towards self-sufficiency.

BONDS

Still favour EM High yield bonds

We believe that the reflation theme will reassert itself over the coming months, with the 10-year US Treasury yield rising to 1.75% by year-end 2021. In this environment, we favour Emerging Market High Yield Corporate Bonds. – Vasu Menon.

The market pushed back on the reflation trade in July. Concerns on slowing growth crystallized around two factors: 1) Adverse impact of the Delta variant and 2) Slowing growth among Chinese company amidst greater political and regulatory scrutiny and reforms. As a result, the ten-year U.S Treasury yield fell to below 1.2% last month and U.S Treasury curves continued to flatten. Nonetheless, we believe that the reflation theme will reassert itself over coming months, with the 10-year US Treasury yield rising to 1.75% by end-2021.

In this environment, we remain overweight Emerging Market (EM) High Yield (HY) bonds where valuations still look relatively attractive and should offer a buffer against the adverse impact of rising rates compared to other fixed income segments. We stay underweight in both Developed Market (DM) and EM Investment Grade (IG) bonds, where historically rich valuations leave little buffer against rising rates.

High Yield have outperformed Investment Grade bonds

After rising over 80 bps to end the 1Q at 1.74%, the 10-year US Treasury yield fell to below 1.2% in July. This has enabled the higher duration IG asset classes to recoup much of their initial year losses. While both DM and EM IG were deep in the red earlier HY asset classes, where the higher spread component has provided a buffer against still higher year-to-date interest rates.

New issuance in Emerging Market Credit remains robust

Based on data from JP Morgan, year-to-date new issuance as of 26 July was USD354.4bn, well ahead of last year’s record pace. Issuance from HY has been particularly robust, comprising 36% of 2021 issuance versus 27% in 2020. New issuance in Asia as a percentage of total was 57% thus far in 2021. This compares to 63% in 2020 and 60-65% in the previous several years.

Overweight EM HY and underweight EM IG

Given our house view of rising rates into year-end 2021, we are maintaining our overweight stance on HY and Underweight recommending on IG based on the following rationale: 1) HY is much more attractive on a relative and historical valuation basis; 2) The duration for IG is much higher than HY (essentially double) and therefore more exposed to rising rates and 3) a lower spread component on IG leaves less of a buffer against the adverse impact of rising rates.

FX & COMMODITIES

Gold to grind lower

Prospect of an acceleration in US job growth and strengthening confidence that the Delta variant is not a serious threat to global growth, could drive US real yield back up to the detriment of gold. – Vasu Menon

Oil

Fundamentals remain supportive of higher oil prices in 2H 2021. The release of inventory data in the US showed that concerns of weaker economic growth weighing on oil demand are unfounded. We continue to forecast a rise of Brent to USD80/bbl in 6-12 months’ time. As a result, the global economic recovery should continue to the benefit of oil.

Gold

We agree with US bond market’s sanguine assessment of inflation risks. But the decline in US real yields seems to have overstated growth anxieties. Prospects for an acceleration in US jobs growth by September onwards, as extended unemployment benefits expire nationwide, could drive US real yield back up to the detriment of gold. A grind lower in gold price remains the most likely outcome, with the downside cushioned by paring of USD gains once risk sentiment stabilises. We continue to forecast gold a USD1675/oz in a year’s time. If the Fed loses control of inflation and the USD collapses, this would be bullish for gold.

Currency

The currency market’s reaction towards the July Fed policy meeting (FOMC) was decidedly dovish, taking the US Dollar (USD) lower in the sessions that followed. Fed Chairman Jerome Powell’s reluctance to explicitly commit to a tapering timeline weighed on the USD. However, so long as tapering is still on the table in the next six months or so, we expect the Fed to be among the less-dovish major central banks. This should provide the USD with some support. In the meantime, the USD may trade sideways as the market awaits a concrete tapering timeline from the Fed.

Fed takes centre-stage

The US Federal Reserve (Fed) surprised markets in June by discussing when to taper its quantitative easing program. The central bank also forecasted that interest rate hikes may begin in 2023, earlier than it had before. Despite its hawkish tweaks, the Fed is only likely to exit its dovish policies gradually - starting with slowing its bond buying from early 2022. The Fed’s caution dan prudence should keep benefiting risk assets for the remainder of 2021, while maintaining their current fed funds rate at 0.00% - 0.25% and still buying USD$120 billion worth of bonds per month to support its economy.

Domestically, the insurgence of the COVID-19 Delta variant has been the most prominent news in the month of June; with many experts stating that an extra vaccine shot should be considered in order to gain extra protection from the new variant. Earlier this month, the government introduced a new measure to decrease domestic mobility called “Pemberlakuan Pembatasan Kegiatan Masyarakat” or “PPKM”, with Emergency status that is to be applied from the 3rd of July until the 20th to subdue the COVID-19 infection rate.

In regard to economic data, the mostly watched was the inflation numbers for the month of June that saw a decrease from 1.45% to 1.33%. June’s PMI Manufacturing also recorded a slight decrease, from 55.3 to 53.5. At its June meeting, the Bank of Indonesia held the 7-Day Reverse Repo Rate at 3.50% as expected. However, ever since that June meeting, daily new cases have jumped almost three-fold. Therefore, the July meeting of Bank Indonesia will be an event closely watched event, as investors will want to know more of what steps will be taken in regard to monetary policy in the coming months.

Equity

In the month of June, the JCI moved rather sideways in range of 5,950 – 6,100, closing the month just up 0.64%. The biggest threat currently for the stock market is the probability of a full lockdown, which the government appears to be trying so hard to evade. With the spike in daily new cases last month, investors adopted more of a wait & see stance rather than a panic selling attitude. Looking forward, calm, and opportunistic investors will be looking to bargain hunt stocks on underperforming sectors in June such as the transportation & logistics (-6.72%), properties & real estate (-5.54%), and consumer non-cyclicals (-3.39%).

The planned IPO for GoTo and Bukalapak next month will also be the focus of investors as it would spearhead the technology revolution in Indonesia, helping to shift the Old Economy into the New Economy. We still see there is substantial upside in the stock market, with a year-end projection of 6,400 – 6,800.

Bond

The bond market recorded a loss in the month of June. The 10-year government bond yield went up 2.62% to close the month at 6.59%, levels last seen in April. The move was propelled by a variety of factors such as the COVID-19 Delta variant that dampens sentiment, and the depreciation of the Rupiah. However, foreign investors still recorded an inflow of Rp 18.07 trillion in June which means that most of the selling action is dominated by domestic investors. With a relatively higher Real-Yield offering by domestic bonds, we believe that the bond market should still be supported for the remainder of 2021. We still maintain our previous year – end projection for the 10-year government bond yield at the range of 6.15% - 6.50%.

Currency

The Rupiah depreciated against the USD for as much as 1.54% last month, moving in tandem with the Dollar Index (DXY) that went up from 89.8 to 92.4 by the end of the month. As inflation and tapering fears in the US have supported the US Dollar, it has in return applied pressure to the Rupiah. Moreover, the current situation surrounding COVID-19 in Indonesia is also a concern for investors, as it would derail the originally planned recovery path of the economy. Hence, volatility for the USDIDR will persist in the coming months. We expect the USDIDR to close out 2021 in the range of 14,300 – 14,500.

GLOBAL OUTLOOK

Fed takes centre-stage

Despite hawkish tweaks at its June policy meeting, the Fed is only likely to exit its dovish policies gradually - starting with slowing its bond buying from early 2022. – Eli Lee

Fed tweaks it dovish stance

Since the pandemic first emerged in early 2020, massive monetary easing by the Fed and other major central banks have helped the world economy start recovering from the shock of the COVID-19 virus.

But central banks are now starting to gradually exit their ultra-loose monetary policies as vaccinations allow lockdowns to be lifted and economies to reopen.

At its June meeting, the Fed surprised financial markets by making hawkish tweaks to its overall dovish stance.

The FOMC published new economic forecasts showing that the median - or average - member of the Fed’s decision-making committee now projects the central bank to start lifting its fed funds rate in 2023 by two 25bps increases - rather than waiting until at least 2024 before considering increasing interest rates.

Equity markets and other risk assets turned more volatile immediately after the Fed’s meeting in June. Long-term 10Y and 30Y yields fell towards 1.45% and 2.00% respectively as investors marked down future growth prospects.

Fed leadership remains dovish

Despite the hawkish tweaks, we think the central bank’s leadership remains more dovish than the new median FOMC forecasts imply.

Following the adverse market reaction to its June meeting changes, Chairman Powell stressed the Fed would remain patient to enable a full US recovery. Interest rates would not be lifted prematurely until the Fed thinks that employment is too high or because it fears the possible onset of inflation.

Our forecast for 10Y yields, however, is still 1.90%. The strong US recovery, buoyant risk assets, Fed tapering and increases in inflation as America reopens are set to push the benchmark Treasury yield closer to 2% over the next 12 months.

Despite the Fed’s tweaks in June and our own interest rate forecast changes, the macroeconomic outlook remains supportive risk assets this year. Treasury yields are set to stay low by historic standards.

The Fed’s moves, however, have increased expectations that the central bank will start to exit its ultra-loose stance sooner rather than later. Its changes are thus likely to increase volatility in risk assets for the rest of 2021 even if the Fed does not begin tapering until early 2022.

EQUITIY

Still a favoured asset class

As policymakers start to stage their gradual exit from record levels of stimulus, we believe the outlook for returns on risk assets over the next 12 months remains positive but lower, with greater scope for market volatility. – Eli Lee.

In the second half of 2021, many investors are asking whether we will see a continuation of the bull market in risk assets or fall into a bear market. We believe the reality is likely to be far more nuanced. As policymakers start to stage their gradual exit from record levels of stimulus, we believe the outlook for returns on risk assets over the next 12 months remains positive but lower, with greater scope for market volatility.

United States

Despite fears of the economy approaching peak growth, strength on the consumer and capex fronts leaves us still cautiously optimistic on the prospects for US equities.

Europe

Although we had mentioned that the picture for Europe continues to improve, with progress in the vaccine roll-out and reopening optimism, we will be closely monitored for any pick-up in Covid-19 cases that may result from the Delta variant.

Japan

While investor sentiment has been weighed down by the modest pace of vaccinations ahead of the Summer Olympics starting on 23 July and the extension of a state of emergency to contain Covid-19 through 20 June, we believe an acceleration in the pace of vaccinations in the coming months could help narrow Japan equities’ year-to-date underperformance relative to world equities

Asia ex-Japan

Earnings revision for Asia ex-Japan remains on the uptrend, although we note that momentum has moderated. According to Refinitiv consensus forecasts, earnings per share (EPS) growth for FY21 is projected to come in at 37.1% (as of 23 June 2021), versus 35.4% at the end of May this year.

Sector calls

The Energy sector continues to perform and has led the pack year-to-date. Buoyed by higher oil and natural gas prices, optimism has returned but too much of a good thing would be self-defeating if marginal suppliers are encouraged to activate wells again.

Another sector that we have had a positive view on is Financials, and it is the second-best performing sector year -to-date. For the Technology sector, which is all about innovation and disruption, we have been seeing increasing interest in various segments. For instance, Chinese internet related companies are trading at more attractive valuations.

BONDS

EM High yield bonds still favoured

In fixed income, we remain overweight in Emerging Market High Yield bonds, where valuations still look relatively attractive and should offer a buffer against the adverse impact of rising rates compared to other credit segments. – Vasu Menon.

Rates remained rangebound as investors weighed the copious positive economic releases against the potential adverse impact of the Delta Covid variant. A stable interest rate environment proved salutary for Credit, which saw spreads continue to grind tighter. Going forward we expect the positive economic growth story to dominate; coupled with manageable inflation we expect a period of modest upward movement in rates.

High Yield have outperformed Investment Grade bonds

Rates continue to be the main driver of performance in Global Credit. Based on data from Bloomberg Barclays and JP Morgan, US Investment Grade (IG) bonds with the highest duration delivered the weakest year-to-date performance (-1.9%) followed by EM IG (-0.7%).

Rates to remain a headwind in 2H 2021

After rising eighty-five basis points in the 1Q of 2021, the 10-yr US Treasury yield rallied twenty-five basis points in the 2Q amidst concerns that the Fed would turn hawkish given surging growth and inflation. However, we believe that the reflation trade still has legs, supported by ongoing dovish Fed monetary policy. Our house view is for the 10-yr US Treasury yield to finish the year at 1.75%. As such, we advocate a below average portfolio duration.

Overweight EM HY and underweight EM IG

Given our house view of rising rates into year-end 2021, we are maintaining our overweight stance on HY and underweight recommending on IG based on the following rationale: 1) HY is much more attractive on a relative and historical valuation basis; 2) the duration for IG is much higher than HY (essentially double) and therefore more exposed to rising rates and 3) a lower spread component on IG leaves less of a buffer against the adverse impact of rising rates.

FX & COMMODITIES

Oil price to stay buoyant in 2H21

Fundamentals are likely to support further oil price gains in 2H21 although we remain unconvinced that commodities are about to enter a new super cycle. – Vasu Menon

Oil

We upgrade our 6 and 12-month Brent forecasts to US$80/barrel, mostly on the strength of pent-up leisure demand. As the world emerges from lockdown, 'buying stuff' makes way for 'doing things'. Pent-up demand for domestic travel in the summer holiday season in Western countries should lift oil demand. Higher oil demand and normalised oil inventories will require OPEC+ to raise output further to stop the market overheating.

Gold

Our expectation that gold will find it hard to shrug off Fed taper talk have proven true. We continue to believe that the gold price cycle peaked in 2020 and that markets will fail to surpass of US$2,000/ounce in the base case outlook. Reduced portfolio hedge demand for gold may be reflective of macro recovery that favours industrial commodities to gold.

Gold could yet stage a tactical bounce after the sharp late June decline triggered by a hawkish Fed surprise. But the risk of strong US jobs/inflation data translating into higher US real yields rather than break evens keeps us cautious on gold’s medium-term outlook. We cut our 12-month gold price forecast to US$1675/ounce.

Currency

Looking into the second half of this year, vaccination, and reopening will increasingly become the base case for global economies. Even for those that are still fighting renewed spikes in case counts, the experience they now have in dealing with such outbreaks, should imply that the market impact will be more contained.

We view the June FOMC as a key turning point that should set the stage for how currency markets do in the second half. Notably, rate hike expectations, as seen from Eurodollar futures, have showed no signs of retracing to pre-FOMC levels. This suggests that they are now being priced in by the markets.

In Asia, the recovery in the USD has affected Asian currencies via-a-vis the greenback. Nevertheless, the USD-G10 currencies is where the main battleground is, not USD-Asian currencies.

Navigating the next phase

Closing the Q2 of this year, global recovery appears stronger. US employment data shows improvement every month. Additionally, US inflation is still the market focus, where inflation increased 4.2% YoY in April 2021. Meanwhile, Personal Consumption Expenditure (PCE) which is the inflation reference of The Fed, increased 3.6% YoY. However, the Fed sees that the increasing inflation’s nature is only temporary. Therefore, tapering is predicted to not occur anytime soon, keeping the US Treasury yield stable and supporting risk assets.

Moving into domestic market, a few sentiments influence Indonesia’s market. In addition to the anxiety about increasing US inflation, market players also pay careful attention towards COVID-19 situation which shot up in some countries in Asia. On the other hand, Cryptocurrency volatility has also gained attention lately.

Approaching June, economic data release shows improvement within the country. First, Manufacturing PMI data increased from 54.6 in April to 55.3 in May. Moreover, inflation is also reported to increase 1.68% YoY in May, from only 1.42% YoY increase in April.

Moving forward, investors are expecting better economic growth in Q2 of 2021 when compared towards Q1’s data which recorded contraction of -0.74% YoY. As of now, the economic growth still shows a positive trend from -2.19% in Q4 2020. Bank Indonesia projects an economic growth of approximately 4.1-5.1% for this year and 5.0-5.5% for 2022. The economic growth is supported by the improvement of the vaccination program where the target of 1 million dosage per day is predicted to be achieved in mid-June. On top of that, the budget realization of Pemulihan Ekonomi Nasional (PEN), which is expected to accelerate economic recovery, has achieved 24.6% by mid-May 2021.

EQUITY

Throughout May, IHSG recorded a weakening of -0.80%, closed at level 5,947. IHSG is still unable to strengthen above the psychological level of 6,000. Market players appear to wait and see about the COVID-19 situation in the country, especially regarding the effect of long Hari Raya holiday. We see a potential improvement of IHSG, reflected on the improvement of economic activities. The addition of new sectors, health care and technology, on the index is expected to return liquidity on IHSG. IHSG is predicted to be between 5,900-6,300 in the short term.

BONDS

In contrast with the stock market, bond market has strengthened in the last month. The Yield of 10-year government bond decreased -0.60% to level 6.422% by the end of May. The low reference interest rate has caused Indonesian bond market to be more interesting. This is reflected by the demand of investors at the auction at the end of May, where the incoming bid touched IDR 78 trillion, a significant increase in comparison to previous auctions. The yield of US Treasury has slowed down, causing the inflow of bond market to improve.

CURRENCY

Rupiah currency has strengthened against USD as much as 1.14% in May and is closed at level 14,280. Bank Indonesia’s decision to maintain interest rate at level 3.5% also supported the domestic currency. Moving forward, Rupiah still has potential to strengthen due to its value that is still fundamentally undervalued and the support of economic recovery. We are predicting USDIDR will be exchanged at level 14,200-14,400 for rest of Q2 of 2021.

GLOBAL OUTLOOK

Global recovery remains resilient

The global recovery from the pandemic remains resilient despite fresh risks to the outlook, but global growth is expected to broadly peak in 2021 as the strength of global stimulus impulse begins to wane as we enter 2022. – Eli Lee

The strong US rebound is pushing consumer prices up. But the Federal Reserve sees summer increases in inflation above its 2% target being only temporary. Europe’s economy is also booming as activity reopens and while Asia is suffering new virus waves. This year’s lockdowns however are not as severe as last year.

Robust recovery despite new risks

We expect the world economy will expand by more than 6.0% this year. The global rebound is being led by economies that have successfully kept the virus under control during 2021 (China and South Korea), quickly vaccinated significant shares of their populations this year (the US and the UK) or begun to ramp up the pace of injections rapidly (the Eurozone).

In contrast, some Asian economies are suffering fresh virus outbreaks. But this year’s lockdowns have been much less severe than last year, and strong global growth is keeping demand firm for Asia’s exports.

US inflation likely to be temporary

Asia’s virus waves are one of the new key risks to the outlook. The other main threat comes from higher US inflation rates over the summer.

The Federal Reserve’s target measure of inflation - changes in personal consumption expenditure (PCE) prices - is now running well above the central bank’s 2% goal.

US core inflation jumped from 1.9% in March to 3.1% in April after PCE prices - excluding food and energy costs - rose more than expected by 0.7% m-o-m as the US economy reopened.

The Fed, however, expects summer increases in inflation above its 2% target will only be temporary. The economy’s reopening is causing consumer prices to jump as demand outstrips supply in the near term. But the US central bank forecasts that inflation will settle down again once supply catches up over the rest of the year.

The Fed’s dovish stance is keeping bond yields at low levels despite US core inflation increasing to around 3% in April. Over the next 12 months, we expect the benchmark 10Y yield will only rise to 1.90% as strong US growth this year enables the Fed to start tapering its quantitative easing from early 2022.

For the rest of 2021, historically low Treasury yields and strong growth in the US, China, UK and increasingly the Eurozone are set to keep supporting risk assets.

EQUITIES

Remain positive on markets

We continue to believe that it is too early to call time on the rally in cyclicals given the gradual reopening of economies and maintain our overweight calls on Energy, Financials, Industrials, Materials and Real Estate. – Eli Lee.

We remain positive on the broad market and maintain an overall overweight position in equities by keeping our overweight in US equities.

We bring Asia ex-Japan one notch down to neutral as we see potential over-optimism over the earnings recovery, especially given the worsening COVID-19 situation in several key economies in Asia. Within Asia ex-Japan equities, we are positive on China, Hong Kong and Singapore, and cautious on India and Thailand.

We remain constructive on cyclicals and would advocate hedging against inflation tail risks.

United States

We remain optimistic, given a combination of factors - global reopening, elevated consumer savings, as well as strong corporate operating leverage – all of which can help to drive sharp recoveries in both economic and earnings growth. It is also prudent to recognise potential risks such as larger-than-expected tax reforms, inflationary risks and tightening of monetary policy. However, we believe that talk of tapering by the Fed is likely to be premature.

Europe

The picture for Europe continues to improve, with progress in the vaccine roll-out and re-opening optimism. On the earnings front, the recent results season has been an encouraging one, with companies posting good earnings. At the time of writing, consensus expectations for 2021 earnings growth have been revised upwards to 42%.

Japan

Japanese equities were largely range-bound in May, as investor sentiment remained cautious in the wake of Japan’s state of emergency and extended until end-May due to a rapid increase in COVID-10 infections and still slow vaccine rollout pace. Looking ahead, we view earnings growth momentum as key to the equity market performance; consensus forecasts have been shaved to 18% for FYE March 2022.

Asia ex-Japan

While risks for Asia ex-Japan such as worsening COVID-19 situation have increased over the past month, some of the supporting factors for the region could stem from expected continued weakness in the USD, as emerging market equities tend to be inversely correlated to the strength of the USD. Strong capital inflows to the Chinese onshore market may also provide a sentiment and liquidity boost to the region.

China

We maintain our relative preference for the onshore A-share market as it is more sensitive to policy support, and it has less exposure to sectors that are under regulatory tightening. We remain constructive on the Chinese market and recommend investors to focus on the four key investment themes that could ride on the 14th Five-Year Plan (FYP). Domestic consumption is one of the key initiatives in the 14th FYP. In general, we prefer consumer discretionary to staples.

BONDS

EM High yield bonds still favoured

We expect bond yields to continue rising at a modest pace, but interest rates should remain low by historical standards and this, along with attractive valuations, should continue to favour Emerging Market High Yield bonds. – Vasu Menon.

Overall, we remain overweight in Emerging Market (EM) High Yield (HY) bonds, where valuations still look attractive. We are neutral of Developed Market (DM) HY bonds and remain underweight in both DM and EM IG bonds, which face headwinds from a steeper yield curve.

The vigorous new issue market shows few signs of abating. In April we saw a record for new issuance. In May, the US HY market again surpassed its previous record set in 2020, with supply reaching just under USD 47bn, making May 2021 one of 10 busiest months ever. While US IG is behind last year’s record issuance, it is still on pace for the second highest issuance this century. In EM, year-to-date corporate issuance of USD 246bn is running ahead of last year’s record pace.

While rates have moved sideways over the past month, our house view is still for rising rates over the coming seven months of the year. Hence, we consider it prudent to continue to maintain a below-market duration on bond portfolios. However, if we have a repeat of what happened earlier in the year, where rising intermediate and long-dated bond yields caused prices to fall to attractive levels - we would see this as an opportunity to selectively buy US dollar denominated bonds.

We are maintaining our overweight stance on EM HY and underweight recommendation on EM IG based on the following rationale: 1) HY is much more attractive on a relative and historical valuation basis; 2) The duration for IG is much higher than HY and therefore more exposed to rising rates and 3) A lower spread component on IG leaves less of a buffer against the potential adverse impact of rising interest rates.

FX & COMMODITIES

Gold likely to face headwinds

Despite its recent strength, gold faces challenges given the risk of Fed taper talk. It still has a place in investor portfolios, but allocations are likely to be smaller than before. – Vasu Menon.

Oil

We expect the oil upswing to stay intact in the second of half of this year with the outlook turning neutral in 2022. Pent-up demand for domestic travel in the summer holiday season in Western countries should lift oil demand. We could also see investors using oil as an inflation hedge. We stay upbeat over the next 6 months but the outlook for oil turns neutral in 2022. Oil market will then probably have to contend with rising supply from OPEC, US shale and possibly Iran.

Gold

Gold seems to have benefitted from bitcoin’s recent sell-off. Investors appear reluctant to buy the crypto dip. This is set to test bitcoin’s ‘store of value’ proposition as digital gold. The sharp rise in bitcoin's volatility could reduce its attractiveness versus traditional gold in institutional portfolios. Gold may overshoot and linger slightly above USD1,900/oz in the near-term.

Currency

The broad US Dollar (USD) remains at the cross-roads, with the DXY Index close to year-to-date lows, and major currency pairs stuck within recently established ranges. Fed tapering/rate hike expectations will still be the main determinant of USD directionality in June. Any material shift on this front is likely to have a big impact on the greenback’s direction.

As such, US data releases in the run-up to the June FOMC policy meeting will be closely watched by currency markets. The other thing that markets will be paying close attention to, is whether Fed will mention tapering after its June FOMC or whether participants will discuss about it at the meeting.

A Turning Point

The increase of daily COVID-19 cases in some countries have gained market attention in the last few weeks, especially in India. India has reported daily case of 300,000 cases with almost 3,500 deaths a day, which is the highest record since the beginning of the pandemic. A few developed countries like the US and Europe, where the advancement of vaccination has led to loosened health protocols, showed an increase in daily cases again. Therefore, some local authorities have set a stricter quarantine.

The recovery process of global economy is still in progress with the help of economic stimulus and lowered interest rate. Manufacture and services activities have expanded. The labour data in the US has weakened slightly with unemployment rate increasing 6.1%. However, this event is received positively by market players with hope that flexible stimulus will continue being enforced to maintain the economic recovery.

This condition was also seen in Indonesia where the growth of domestic economy for Q1 -2021 is still in the recession zone with recorded contraction of -0.96% annually. In Q1, the government had continued to limit activities to curb the spread of virus. As of May 2021, the government has recorded over 21.7 Million vaccine doses given. In other words, 3.1% of population has received complete vaccination.

The government has continued to push economic recovery, including with cash assistance and fiscal incentives. In line with the government, Bank Indonesia has continued more flexible regulations, keeping the interest rate low and ensuring the liquidity of financial markets.

Equity Market

JCI noted slight increase of 0.17% in April. The stagnant movement is reflected on the daily sales which is down to IDR 9 Trillion, whereby previously it had been at IDR 10 trillion at the beginning of the year. A few analysts suggest that lower equity market transaction is influenced partly by the movement of investors from retail to crypto. Additionally, some are waiting for the IPO of Unicorns. Some BUMNs are also projected to take the floor in the stock exchange in 2021. This is predicted to increase equity market capitalization. Entering May, investors will continue paying attention towards the daily case of COVID-19 and the acceleration of national vaccination. Therefore, for short term, JCI is predicted to move sideways at IDR 5,900 to IDR 6,100.

Bond Market

Throughout April, the vibrant bond market is reflected on the movement of return of the 10-year government bond which experience a fall of -4.46%. This fall is influenced by the -3.9% lowering of US Treasury yield. The easing of anxiety regarding the tightening of US Monetary regulation is one of the factors pushing the increase of domestic bond price. Moving forward, domestic bond market is still seen to be promising, with considerably high Real Yield, predicted to return foreign fund to SUN. The yield of 10-year government bond is predicted to be at 6.25% - 6.50% for medium term.

Currency

Rupiah moved stably throughout April although the movement was only between IDR 14,000 – IDR 14,500. Entering May, Rupiah has continued to strengthen up to IDR 14,200.

The trade balance surplus and the high foreign exchange reserves of Indonesia at USD 138.78 Billion, which has been the highest level in history, in addition to the weakening of US Dollar Index post the easing of US Inflation anxiety have made the investors more certain regarding Rupiah. In short term, Rupiah is predicted to move with spread between IDR 14,000 – IDR 14,400.

GLOBAL OUTLOOK

Peak growth propels markets

We see peak global growth in 2021, still strong growth in 2022 and low government bond yields continuing to favour risk assets. – Eli Lee

Economies successfully containing the pandemic are rebounding faster than expected while those suffering fresh virus waves are seeing delayed recoveries.

Higher peak in global growth

The global recovery from the pandemic is set to peak over the next few months at a higher-than-expected rate as countries that have successfully contained the virus lift restrictions and re-open their economies.

We are now projecting the global economy to rebound by 6.2% in 2021 compared to our earlier estimate of 5.8% growth.

Looking ahead to 2022, we expect the global economy will continue to experience fast growth next year - albeit at a slower pace than the peak growth of 2021. Our GDP forecast table shows we project the world economy to expand by 4.8% next year.

Peak global growth this year and still strong growth next year will keep continue to propel equities, commodities, emerging markets and other risk assets.

US and China leading the global recovery

The recovery is being led by the world’s two largest economies - the US and China - with important economies including the UK also rebounding more quickly than anticipated now.

The Biden administration’s fast roll-out of vaccinations, its USD 1.9 Trillion fiscal stimulus approved by Congress in March and its proposed USD 2.3 Trillion multi-year infrastructure investment programme to begin later in 2021 are all helping the US economy rebound faster this year.

We have revised up our forecasts for UK growth to 6.0% for 2021.

Cautious on India

In the near term we turn cautious on India’s prospects. With new virus cases now exceeding 350,000 a day, the risks are clearly tilted to the downside for growth with the economy likely to experience a second slump over the summer.

Bond yields set to rise but still low by historical standarts

We expect US Treasury yields will increase further over the next 12 months as the US economy recovers from the pandemic and core inflation - excluding food and energy costs - temporarily rises above the Federal Reserve’s 2% target. We only expect 10Y yields to increase to 1.90%. The US central bank’s dovish stance is set to keep Treasury yields anchored at low levels to the clear benefit of risk assets.

EQUITIES

Still Positive

We believe that cyclical stocks still have room to perform ahead as the real economy gradually re-opens. – Eli Lee.

To express this view, we maintain our overweight calls on Energy, Financials, Industrials, Materials and Real Estate.

We maintain our overweight positions in the US and Asia ex-Japan, though we reduce India to underweight on Covid-19 related concerns. In Europe, we maintain our relative preference for UK equities, as data is coming in consistently strong, reflecting the vaccination rollout and better global growth as well.

United States

The 1Q 2021 earnings season is well underway, with a good proportion of S&P500 companies that have reported results beating on both the top and bottom line. We have seen an upward revision of consensus 2021 EPS estimates and we would not be surprised if there were further such revisions.

Proposed tax changes are a source of investor concern. At this juncture, we do not expect that higher tax rates will necessarily result in a sharp sell-off across the broad US equity market, even though their implementation could act as a modest short-term headwind for some companies.

Europe

Covid-19 fatalities are stabilising in Europe and the overall pace of vaccinations is improving. In the UK, data is coming in consistently strong, reflecting the vaccination rollout and better global growth as well.

Japan

Japanese equities underperformed in April, hit by weaker sentiment as the number of cases involving Covid-19 virus mutations increased while vaccine rollout remains slow with less than 2% of the population estimated to have been vaccinated. Looking ahead, earnings growth momentum is key to equity market performance.

Asia ex-Japan

The MSCI Asia ex-Japan Index saw a rebound in April, driven by the North Asian markets, which tend to be more sensitive to interest rate movements, and thus benefited from the recent easing in the 10-year US Treasury yield.

The Covid-19 situation in parts of Asia saw a deterioration, with countries such as India, South Korea and Thailand recording higher daily infection cases over the past month. We see downside risks to its economic recovery and have downgraded the country to Underweight.

China

We remain constructive on the Chinese market given the solid economic recovery and ample room to react on stimulus. Valuations have corrected to a more comfortable level with MSCI China, CSI300 and Hang Seng Index trading at about 16.7x, 14.2x and 12.8x 2021E P/E.

Sector Calls

While we continue to favour value/cyclical sectors such as Materials, Energy, Industrials, Real Estate and Financials, we do see pockets of opportunities in other areas as well, one of them is Aviation sector. Longer-term investors would also focus on companies with higher environmental, social and governance (ESG) standing.

BONDS

Challenging time for bond markets

We still favour Emerging Market High Yield Bonds as the global search for yield looks set to continue.
– Vasu Menon.

After a quarter of rising rates and steepening yield curves, the Fixed Income market pivoted in April as U.S. Treasury yields subsided and curves flattened. However, with strong global growth buoyed by economic openings and underpinned by Central Bank support, we expect rates to continue their upward trend (albeit more modestly than in the 1Q) going forward. In this environment we continue favour Emerging Market (EM) High Yield (HY) bonds.

In the 1Q 2021 the “reflationary” trade had a full head of steam. Anticipated fiscal stimulus with Democratic Presidency and full Congressional control, better-than-expected vaccine roll-out in the US and the ongoing monetary backstop, resulted in a ratcheting up of growth expectations.

However, the narrative has changed abruptly in 2Q 2021, driven by a resurgence in Covid cases in countries like India, contagion from Huarong in China and disappointing vaccine rollouts in many European Countries. Consequently, the 10-year US Treasury yield has fallen to 1.62%, US Treasury yield curves have flattened, and inflation expectations have flatlined.

New issue onslaught continues

The vigorous new issue market shows few signs of abating. After a record for 1Q issuance, the US HY market already surpassed the April record set in 2014. While US Investment Grade (IG) is behind last year’s record issuance, it is still on pace for the 2nd highest issuance this century. In Emerging Markets, year-to-date corporate issuance of USD 200 billion is running ahead of last year’s record pace.

Maintain below average portofolio duration

While rates have moved sideways over the past month our view is still for rising rates over the coming months of the year. Hence, we consider it prudent to continue to maintain a below-market overall duration on portfolios.

Huarong debacle shook the chnese market

The Huarong debacle took centre-stage in April causing turbulence in China’s corporate bond markets. What started as a delayed result announcement eventually took many turns including a rumoured debt restructuring plan coupled with mixed signals on government support for the entity. The event shook the belief that government support is forthcoming even for a large financial company which is perceived to be systemically important by the market.

Maintaining overweight on EM HY and underweight IG

This is based on the following rationale: 1) HY is much more attractive on a relative and historical valuation basis; 2) The duration for IG is much higher than HY and therefore more exposed to rising rates and 3) A lower spread component on IG leaves less of a buffer against the potential adverse impact of rising interest rates.

FX & COMMODITIES

Positive outlook for oil

Re-opening tailwinds and the renewed reach for inflation hedges could benefit oil prices going forward. – Vasu Menon.

Oil

Oil demand is recovering well in the US, Europe and China, with pent-up leisure demand for motor fuels likely to more than offset losses from international aviation and India caused by the spread of Covid-19. Renewed reach for inflation hedges could see oil playing catch-up to the recent rally in industrial metals. OPEC remains confident that recent headwinds will not derail the recovery in oil demand.

Gold

Stalling US yields, the weaker US Dollar and rising inflation expectations have lifted gold price back higher. Rising Asia gold imports have also provided support for gold price. China has given commercial banks permission to import a large amount of gold to meet domestic demand according to Reuters. Indian gold imports rose to a record monthly high of 153 tonnes in March amid strong wedding demand. But fresh lockdown in several states in India in response to rising Covid-19 infections could temporarily stifle gold imports in 2Q21.

Currency

US economic data have been firm throughout April and have mostly outperformed data in other major economies. The April Fed policy meeting (FOMC) statement alluded to the strengthening economy. Nevertheless, Fed chief Jerome Powell’s pushed back on tapering, arguing that the Fed is “going to act on actual data, not on a forecast”, and it needs to “see more data”. Our baseline expectation is for US economic data to remain strong through May, leaving open the possibility that the Fed may sound less dovish in run-up to its June FOMC.

Growing Pains

The continuous economic recovery has given a positive impact; however, more effort is required to get to the pre-pandemic condition.

Global economic recovery is depicted on IMF’s statement regarding the economic growth revision for 2021. It had been previously at 5.5% and now has been revised into 6.0%. For Indonesia specifically, the effort for economic recovery that has been continuously done by the government has shown positive results whereby the activity of Indonesian manufacturers has now rebounded to the level of pre-pandemic condition at 53.2 expansion for March 2021. Inflation rate is being controlled at 1.38% for February 2021.

Additionally, the Indonesian government has been working with Bank Indonesia in order to improve the economy that had been suffering due to the COVID-19 pandemic. President Jokowi stated that the role of Bank Indonesia is not only to maintain the currency, but also to unceasingly support the growth of economy and create work opportunities continuously while maintaining its independence.

Equity

The pressure to JCI has returned at the end of the first quarter of 2021. JCI is stated to has weakened 4.11%. The weakening of the domestic market is due to the IDR 1.16 trillion worth of foreign investment exiting the Indonesia’s equity market throughout March 2021. The lack of domestic catalyst, added by the news of a few company’s stocks being sold by BPJS, has caused the equity market to be weakened.

Nonetheless, together with the vaccine distribution progress, both globally and domestically, we believe that the prospect of equity is positive. In the short term, we predict that the spread of JCI will be approximately 6,000 to 6,200.

Bond

After the weakening of the bond market in March up to the point of the highest yield since the beginning of the year, which is at 6.8%, the yield of government bond with 10-year tenure is finally decreasing in early April. The yield increase of those bonds follows the trend of US Treasury’s bond increase, which is at 1.75%.

The yield increase of both global and domestic bond is due to the rising expectation of US economy recovery, the statement of The Federal Reserve regarding the direction of their monetary policy, and the plan to reduce asset purchase/tapering. Along with the economic recovery process improvement, the inflation rate is predicted to increase faster, which has the potential to push the central bank to tighten its monetary policy even faster. The plan for additional stimulus from Biden for infrastructure purposes also has the potential to push the yield of US Treasury’s bond higher. The yield of US Treasury bond with 10-year tenure is predicted to move with spread of 1.5 up to 2.0% for medium term. This event will in turn push the increase of domestic bond’s yield to approximately 6.5 up to 7.0%.

Currency

After previously being weakened, Rupiah has strengthened slightly against USD for 0.24% and is at approximately IDR 14,505 as of the beginning of April 2021. With the prospect of US economic recovery and the increasing yields of US Treasury’s bond, the US Dollar Index (DXY) seems to have been strengthening since the beginning of the year, which results in the limitation of Rupiah’s movement. We predict that the exchange rate of Rupiah against US Dollar will be at approximately 14,500-14,700 in the short term.

Juky Mariska, Wealth Management Head, OCBC NISP

GLOBAL OUTLOOK

Strong rebound despite new risks

The overall trajectory of the global economic recovery remains intact, pointing to a strong rebound in corporate earnings this year as economies reopen more fully. – Eli Lee

The global economy’s recovery from the pandemic is set to pick up over the second quarter of 2021, as winter virus waves ease and vaccinations accelerate. We forecast global GDP will expand by almost 6% this year - its fastest pace in five decades - after last year’s slump of -3.4%. China and America will lead the rebound among the major economies, with very strong growth of 8.1% and 6% respectively in 2021.

The favourable macroeconomic outlook for risks assets, however, faces three main challenges over the next few months:

• Europe’s slow pace of vaccinations is allowing the pandemic to spread in a third significant wave across the continent.

Extended restrictions on economic and social activity raise the risk that Europe will suffer a second ‘lost summer’ for its important tourism and travel industries.

We thus expect economic growth in the Eurozone will be slower now, and have downgraded our GDP forecasts for 2021 from 5.5% growth to 4.5%

• There is fear of inflation returning when lockdowns ease, forcing central banks to start raising interest rates earlier than expected.

This concern has already driven 10Y US Treasury yields up from 0.90% at the start of the year to over 1.70% as financial markets have become concerned that the Federal Reserve will start lifting its Fed funds rate from current levels of 0.00- 0.25% as soon as next year.

We are less concerned about inflation risks this year. The US economy still has high levels of unemployment and millions of jobs lost during the pandemic have yet to be recovered. We expect the Federal Reserve will not start raising interest rates anytime soon.

• People’s Bank of China (PBoC) may slow activity to counter the build-up of debt in China’s economy.

This fear has increased since March’s National People’s Congress set a GDP growth target this year of “above 6%”.

We believe, however, the PBoC and China’s government will not act to slow growth this year given the still uncertain outlook for the pandemic outside China.

Bottomline

In short, Europe’s vaccinations, America’s inflation fears, and China’s debt concerns may keep financial markets volatile in April. But we expect strong growth, dovish central banks and further fiscal stimulus will continue to favour risk assets this year.

EQUITIES

Broadly, we continue to see equities as relatively attractive and expect equities to outperform bonds in this phase of the business cycle, given that equity earnings yields still far exceed real yields.
– Eli Lee

For equities, we expect to see market turbulence persist over the near term, especially as inflation fears are set to intensify in mid-2021 as inflation measures rise mechanically due to base effects.

We continue to recommend that clients stay invested in risk-assets as the outlook remains favourable, given that a vaccine-driven global economic recovery is firmly underway, super-charged by powerful US fiscal stimulus and ongoing support by major central banks.

Within our asset allocation strategy, we maintain a risk-on stance through our overweight positions in equities, where we prefer the US and Asia ex-Japan. In terms of sectors, we maintain our overweight calls on Energy, Financials, Industrials, Materials and Real Estate.

United States

With the vaccination roll-out and recovery, we believe that profitability for the S&P 500 should rebound in 2021, driven in part by expanding profit margins, which could help support ROE expansion at the index level and particularly for some cyclical companies that suffered the most in 2020.

Europe

Valuations for MSCI Europe remain relatively elevated, but investors do not seem to be particularly worried about the third wave. The region’s bourses has a heavier focus on value/cyclical stocks which stand to benefit from the ongoing economic recovery.

Japan

Following its March 18-19 policy review, the Bank of Japan (BOJ) removed the lower band of its ETF purchase policy that targets an annual ¥6 trillion purchase while retaining the maximum limit of buying up to ¥12 trillion yearly, signalling the central bank’s readiness to step in to support Japanese equities should there be meaningful correction.

Asia ex-Japan

The COVID-19 situation in Asia has seen some stability in recent months. Geopolitical tensions in the region also remain on investors’ minds, as there are increasing concerns over Taiwan and China.

Looking ahead, there has been a gradual upward revision of earnings per share (EPS) projections for 2021 in the region, while valuations also appear more reasonable with the recent correction in share prices.

China

China’s fundamental economic outlook remains positive and we expect its recovery to continue solidly into the remainder of 2021. The recent National People’s Congress signalled clearly the authorities’ intent to take a carefully calibrated approach to normalising monetary policy.

We have highlighted four key investment themes for investors:

1. domestic consumption (mass market and premiumisation);
2. green economy;
3. onshore sourcing and import substitution; and
4. new infrastructure.

We believe that the energy and materials equity sectors are attractively valued and would further benefit from the White House’s subsequent focus on its infrastructure plan to rebuild the country’s aging fixed assets in line with its long-term decarbonisation and sustainability goals.

BONDS

Challenging time for bond markets

The fall-out from the economic reflation on the fixed income markets has been profound. The 10Y US Treasury yield reached 1.75% last month, up more than 80 basis points since the beginning of the year.
– Vasu Menon.

Meanwhile, the US Treasury yield curve, as measured by the gap between the 2Y and 10Y yields, also steepened to widest level since 2015 as investors price in expectations of rising economic growth.” Volatility remains elevated as the market continues to challenge the Federal Reserve with respect to its intentions and strategy toward managing inflation.

On the positive side, expectations for economic improvement and below-trend defaults have underpinned ongoing tightening in credit spreads. New issuance globally in credit markets remains at record levels even amidst rising interest rates.

Maintain below average portfolio duration but remain nimble and opportunistic. Given our view that rates will continue to rise over the coming months, we consider it prudent to continue to maintain a below-market overall duration on portfolios.

Volatile session for China High Yield provides a window to pick up good credits. Month-on-month in March, the China HY segment returned -0.75% while average YTW (yield-to-worst) stood at almost 9%, an increase of 1.5 percentage points since the beginning of the year. Tight onshore liquidity, on-going defaults and profit warnings at certain property companies shook investors’ confidence.

We are maintaining our overweight stance on EM HY and underweight recommendation on EM IG based on the following rationale:

1. EM HY is much more attractive on a relative and historical valuation basis;
2. the duration for EM IG is much higher than EM HY and therefore more exposed to rising rates and
3. a lower spread component on IG leaves less of a buffer against the potential adverse impact of rising interest rates.

FX & COMMODITIES

Oil upswing intact

The cyclical oil upswing has room to run, but it is too early to call for a super-cycle. Higher oil prices will be met with significant additions to supply later, which could temper price increases. – Vasu Menon.

Oil

Our view on oil remains unchanged: near-term weakness before further strengthening. We expect the recent oil pullback to be temporary as OPEC+ acted to offset the European Union demand headwinds caused by renewed lockdowns. OPEC erred on the side of caution by mostly rolling over its production cuts into May, with Saudi Arabia extending its voluntary 1 million barrels per day curb by one more month.

Gold

A bounce in gold is still likely after being challenged by rising US real yields. The outlook for US yields is turning more two-sided in the near-term following the dovish March Federal Open Market Committee meeting. Resumption of US Dollar (USD) weakness and stronger demand for jewellery from China and India as emerging market growth recovers should push gold price back higher. Physical demand is showing signs of revival, with Indian imports getting back on track. We expect gold prices to make a return to US$1850/oz (old forecast: US$1900/oz) in 6 months’ time before drifting lower to US$1800/oz (US$1850/oz) in a year’s time as focus shifts back to anticipating Fed tapering and rate lift-off.

Currency

A number of pro-USD arguments coalesced into a coherent strong-USD theme in March. At the root of it, we think, is the Fed’s position on

1. the US economic growth outlook, which has turned much more positive compared to January; and
2. the higher longer-dated US Treasury yields, where the Fed’s laid-back approach, contrasts with the active clamping down of yields by the European Central Bank and other major central banks.

Stronger prospects, Steeper yields

The “Rising Yields” theme have been the highlight of global capital markets in the month of February. The upward trajectory of the US Treasury yield has been bad news for risky assets as investors become more and more weary of the implications it may arouse.

As for the domestic capital markets, the equity market cherished the declining COVID-19 numbers while the bond market suffered, dragged down by the rising US Treasury yield. From a data perspective, Q4 2020 GDP numbers released at the beginning of February showed that the economy contracted 2.19%; a little bit lower than what had been anticipated by economists and the local government. Inflation numbers for January did not help soothe sentiment at 1.55% YoY, as opposed to 1.68% in the previous month.

An update regarding the government’s continuous effort to support the economy, President Joko Widodo decided to increase the “Pemulihan Ekonomi Nasional” (PEN) program from Rp 300 Trillion to Rp 699 Trillion for 2021. This decision comes as the government continuously assess the economic condition and decided that more help is needed to achieve the 5% growth target for 2021.

Equity Market

The JCI rebounded above the 6,000-psychology handle in the month of February, recording a 6.5% gain to close the month in the 6,200 – 6,300 range. COVID-19 vaccine inoculations have somewhat given a sentiment boost for investors, in tandem with lower daily new COVID-19 cases. However, the equity market has been moving sideways the past few weeks, as domestic investors are seeking for the next possible catalyst to help propel the JCI toward higher levels. Nonetheless, we still see a huge upside potential in domestic stocks, as earnings growth start to materialize in the second quarter of 2021. The IHSG should be trading in the range of 6,200 – 6,500 in the near future.

Bond Market

Domestic bond market mirrored the US Treasury market, recorded steep losses in the month of February. The 10-year government bond yield moved up 650 basis points (6.5%) in February to close the month at 6.6%. More domestic stimulus may lead to more bond issuance, which has experienced a relatively lower figure during the last two auctions, yet still able to hold a bid-to-cover ratio at around 2.5 to 3 times. As global investors are pinning on higher inflation figure due to expected recovery, this may continue to put pressure in the bond price in the near term.

FX

The Rupiah depreciated against the USD for as much as 1.5% in February to close the month at 14,235 per greenback dollar. The decision by Bank Indonesia to cut the 7-Day Reverse Repo Rate by 25 basis point to 3.5% contributed to the weakening of the Rupiah, a move which had been anticipated by most. Along with the aftermath of increased size of PEN, we see the USDIDR to be trading in the range of 14,200 – 14,450 for the remainder of Q1 2021.

Juky Mariska, Wealth Management Head, OCBC NISP

GLOBAL OUTLOOK

Stronger prospects, Steeper yields

The macro environment remains positive. As the vaccine rollout continues, major economies are slated to attain herd immunity over the next 12-24 months. – Eli Lee

This year, government bond yields have increased sharply across the major economies. The surge in yields is driven by higher inflation expectations and stronger economic prospects, as explained by the following factors:

1. Vaccines are enabling activity around the world to start rebounding from the pandemic
2. As global activity recovers commodity prices are also rising
3. Bond markets are also focusing on the risk that over the next few months, inflation rates are set to rise owing to ‘base effects’
4. Inflationary fears are also increasing because of the massive liquidity provided by central banks’ quantitative easing during the pandemic
5. The huge fiscal deficit governments have been running during the pandemic
6. The Fed’s recent shift to a strategy of ‘average inflation targeting’

Over the last decade, core inflation has largely been below the Fed’s 2% goal. Thus, the central bank is now prepared to let inflation moderately exceed its 2% target for up to a full year before it would consider lifting its Fed funds rate from the current 0.00-0.25% range.

We expect government bond yields will rise further during 2021. We now expect the 10Y Treasury yield to reach 1.90% over the next 12 months.

The Biden administration’s new round of emergency aid will still provide largescale stimulus to the US recovery. At the same time, the Fed has tolerated rising yields this year as Treasury rates remain at very low levels.

In the near term, the surge in US yields increases the risk of volatility in financial markets. But the broad rally seen in risk assets over the past year should continue over 2021, as the Fed’s very dovish stance on inflation and unemployment is likely to prevent a major sell-off in government bond markets. Thus, 10Y Treasury yields may rise further but still stay at historically low levels below 2.00%.

Thus, a further surge in yields beyond our new one-year forecast of 1.90% for 10Y Treasuries seems to be the main near-term threat to the global economic recovery. But we would expect the Fed to react if risk assets were to sell off sharply, for example by explicitly delaying the start of tapering.

Source: Bank of Singapore

EQUITIES

Greater focus on value stocks

While a further sharp increase in yields could portend more volatility in equities ahead, we do not expect this upswing in yields to derail the long-term post-pandemic bull market. – Eli Lee

In recent weeks, all eyes have been on rising US Treasury yields and growing inflation expectations, which have led to concerns about short-term turbulence. Still, we believe that the Federal Reserve will keep policy very accommodative, and the ongoing vaccine-driven recovery should keep the broad outlook for risk assets positive.

Cyclical and value sectors are likely to feature favourably, as vaccine rollouts increase investors’ confidence of a gradual push towards reopening of economies. We reflect this view through our overweight calls on Energy, Financials, Industrials, Materials and Real Estate. From a regional perspective, we continue to maintain our overweight positions in the US and Asia ex-Japan.

We continue to remain neutral on Europe but overweight on UK equities, given cheap valuations and an improving outlook. In China, we maintain our relative preference towards the onshore A-shares, given that it offers more sectors and/or companies that could benefit from long-term structural growth opportunities and is relatively less affected by US/China tensions.

Overall, while a further sharp increase in yields could portend more volatility in equities ahead, we do not expect this upswing in yields to derail the long-term post-pandemic bull market.

United States

Following a better-than-expected 4Q2020 earnings season, we are seeing consensus 2021 earnings per share estimates being revised upwards. We believe that corporates, especially in cyclical sectors, will focus on growing revenue and margins, especially as several companies possess significant operating leverage.

Europe

As companies continue to report 4Q2020 earnings, what we are seeing so far is a strong net beat – 62% of companies have beaten expectations and 17% have missed, giving a net beat of 45% – the highest on record in recent history. However, price action has thus far been muted, suggesting that a strong 4Q2020 results season is largely priced into the market.

Asia

As for Asia, markets currently look healthy. Looking at the Covid-19 situation, we note that the number of new infection cases for major economies in Asia ex-Japan has largely been stable in recent weeks. Vaccination roll-outs across Asian countries offer optimism that the path to normalcy may not be too far down the road, although the pace of inoculation in the region remains slow.

And in China, we believe rising US rates and normalising China monetary policy are likely to cap the expansion of valuation multiples. As such, earnings growth would be the key driver for market performance. The upstream sectors, such as energy and materials, have seen the strongest earnings upward revision momentum.

BONDS

Challenging time for bond markets

Given our upgraded forecast for 10-year US Treasury yields to reach 1.90% in 12 months, we are downgrading our position in Emerging Market Investment Grade bonds to underweight from neutral in our overall asset allocation strategy. – Vasu Menon

Bond markets face headwinds from rising yields. Nevertheless, we maintain a risk-on stance in our asset allocation strategy, including an overweight position in Emerging Market (EM) High Yield (HY) bonds, which still offer attractive carry and are a beneficiary of the global search for yield.

However, we are now underweight in both Developed Market (DM) and Emerging Market Investment Grade (IG) bonds, which face headwinds from a further steepening of the yield curve.

We have downgraded our position in EM Investment Grade bonds to underweight from neutral, given our higher forecast for higher 10-year US Treasury yields over the next 12 months.

Rates dominates performance thus far in 2021

In 2021, rates are dominating the performance of the various bond segments. There is an almost 100% correlation between bonds with higher duration and weaker performance, with the lowest duration bond segment - US HY - performing the best. This is followed by EM HY, EM IG and US IG (the highest duration and worst performer).

Fundamentals still constructive

With almost 11 million fewer Americans employed than before Covid-19, we believe that the Fed will continue to remain accommodative, which should underpin support for bonds. Vaccine roll-outs and the opening of economies should bolster top-line growth, while bottom up fundamentals remain more than adequate with below-trend default rates.

Prefer Asia

Being short duration in nature, China HY bonds are less affected by concerns of rising long-term rates, but more of lingering credit fears following on-going onshore defaults as maturity looms. Month-on-month, the China HY segment returned only +0.009% in February while average YTW (yield-to-worst) stood at 8.5% on 25 February compared to other major geographic segments in Asia.

Maintain overweight EM HY and lower EM IG to underweight

We are maintaining our overweight stance on EM HY. From a valuation perspective, it appears the most attractive of the bond segments. Furthermore, its higher credit component should provide.

more of a cushion against what we believe will be rising rates in the coming months. We are lowering our recommendation on EM IG to underweight based on the following rationale:

1. it is far less attractive than HY on a valuation basis;
2. its duration is much higher than HY and therefore more exposed to rising rates and
3. tighter valuations leave less buffer against the adverse impact of rising rates.

FX & COMMODITIES

Gold’s upside potential curbed

Given rising US bond yields, we have cut our 6-month gold price target to US$1900/oz and 12-month target to US$1850/oz from US$2100/oz previously for both. – Vasu Menon

Oil

The oil market is tightening faster than expected. Efforts by OPEC+ to restrain oil supply, along with stronger global oil demand, has propelled Brent crude oil above US$60/barrel, largely erasing its Covid-19 inflicted losses. We raise our 6 and 12-month Brent oil forecast to US$72/barrel respectively. The forecast change anticipates further near-term oil price gains before oil prices plateau by late 2021.

Gold

It’s challenging times for a no-yield commodity like gold as rising US real yields makes it more costly to hold gold. It seems, at the margin, that gold also faces competition from alternative assets such as Bitcoin. While we view investments in cryptocurrencies as a speculative trade, the sheer size of the inflow is likely to have taken some gloss off gold. As such, we cut our 6-month gold price target to US$1900/oz and 12-month target to US$1850/oz from US$2100/oz previously for both.

Currency

The gyrations in US Treasury yields caused currency markets to shift focus from recovery-centric drivers to yield-based arguments. Increased volatility in rates has caused market turbulence and hurt risk appetite. This should spur some safe-haven demand for the US Dollar (USD) while keeping cyclicals under pressure. Thus, there is room for the USD to make further gains in the near term.

Bumpy Road to Recovery

Global economic recovery will be the most anticipated highlight in 2021, after most of the world economy contracted last year. Various fiscal and monetary easing, along with the vaccination process that has begun are expected to be the main drivers for the recovering global economy.

In the United States, the labour market seems to be recovering at a moderate rate. Inflation is still way below the central bank’s target of 2%; the reason why The Fed still maintains its main rate at low levels. The new USD 1.9 trillion fiscal stimulus package that has been approved by the Senate is expected to smoothen the recovery path for the economy.

Looking at Asia, the road to recovery can be verified by looking at manufacturing data in most countries, although a little bit subdued in the last month due to COVID-19 resurgence in several areas. The PBOC have decided to tighten its monetary policy by withdrawing money from its banking system; to mitigate potential risks associated with the system. Nonetheless, the central bank is still determined to support the economy from its policy stance.

Domestically, January 2021 economic data have showed a hint of resiliency for Indonesia’s economy amid this pandemic. PMI Manufacturing went up to 52.2, while the central bank’s foreign reserves reached a new all-time high record at USD 138 billion. For the whole of 2020, GDP recorded a contraction of -2.70%. Overall, the country will rely on its vaccination process that has begun in order to propel the fundamental recovery of the economy.

EQUITY

The January-effect phenomenon only lasted the first two weeks of the month was unable to elevate the JCI; recording a drop of -1.95% in January 2021. The strong rally which has been driven by the initial vaccination process at the start of the month was off-set by the profit taking action by investors at month-end. In the short term, we see persisting volatility in the equities market; with COVID-19 daily numbers still at its high. Nonetheless, vaccination along with governmental support will provide the positive sentiment needed for the equities market in the long run.

BONDS

The bond market was suppressed in January, with the yield on the government 10-year up 5.45% to 6.21%. We think that the bond market is currently at an attractive level, with more upside potential due to a potential rate cut by the central bank, low inflation, and a stable local currency. The government and central bank will continue its joint-efforts to provide an accommodative environment to support the recovering economy. We see the yield on the government 10-year to be in the range of 6.00% - 6.20% in the first quarter of this year.

FOREIGN EXCHANGE

The Rupiah appreciated 0.15% against the USD, successfully closing the month below the 14,000 level. The currency is expected to still strengthen, with the added prospect of more fiscal stimulus in the US which will subdue demand for the greenback as a safe-haven currency.

GLOBAL OUTLOOK

The global recovery is likely to be broad-based with developed economies forecast to expand by 5.3%, and emerging economies to rebound by 6.3% in 2021. – Eli Lee

In 2021, the world’s economy is set to expand at its fastest pace in five decades, as vaccines, monetary and fiscal stimulus, low government bond yields and a weaker USD all spur a strong rebound in global growth led by China and the US. Virus waves, vaccine setbacks, sudden inflation and early monetary tightening are potential threats. But the macroeconomic outlook is likely to keep favouring risk assets.

Key factors that will support recovery in 2021:

• Economic resilience

The pandemic and resulting lockdowns of 2020 are set to give way to a strongly reflationary environment in 2021.

• Fiscal stimulus

Fiscal stimulus in both the US and Eurozone is set to boost economic recovery in 2021.

The USD 1.9 trillion package from Biden administration have resulted in our 2021 US growth forecasts being upgraded from 5.0% to 6.0%.

The European Union’s new € 750 billion Recovery Fund will, providing a boost of more than 2% of GDP a year to the Eurozone’s economy.

• Dovish central banks

We expect the Federal Reserve will not start tapering its current pace of quantitative easing (QE) until 2022, because of employment rate and core US inflation that below the central’s bank 2% goal.

The European Central Bank (ECB) is unlikely to scale back its €1.85 trillion QE Pandemic Emergency Purchase Programme, given core inflation is currently far from the ECB’s 2% target.

Very low inflation rates in China, Japan and the UK will also allow the People’s Bank of China, the Bank of Japan (BoJ) and the Bank of England (BoE) to refrain from raising interest rates in 2021.

• Long term bond yields to remain low by historical standards

The combination of central banks keeping short term benchmark interest rates anchored close to 0% (as in the case of the Fed, ECB, BoJ and BoE) while governments undertake further fiscal stimulus will result in longer term bond yields steepening.

• USD likely to weaken

USD is likely to stay weak in 2021 as risk-seeking investors reduce demand for the safe-haven greenback, and as the Fed keeps interest rates at current near zero levels to push inflation back to a 2% average rate.

EQUITY

The global recovery is likely to be broad-based with developed economies forecast to expand by 5.3% and emerging economies to rebound by 6.3% in 2021. – Eli Lee

We see a conducive setup for global equities, on the back of improved growth prospects, accommodative monetary policy, positive progress in the rollout of vaccines thus far and the reflationary backdrop globally.

Our constructive view is expressed through our overweight positions in US and Asia ex-Japan. On a sector basis, we turn more positive on Financials and Industrials, while maintaining our overweight call on Real Estate, Materials and Energy. Still, the road to recovery is unlikely to be a straight one; expect a bumpy road ahead.

The global recovery is likely to be broad-based with developed economies forecast to expand by 5.3% and emerging economies to rebound by 6.3% in 2021

• United States

With pre-inauguration jitters now behind us, we believe that the US presents interesting opportunities within the Cyclical and Value sectors, as the setup for the Growth sector looks increasingly complex.

We adopt a constructive view on US equities, despite spikes in the rate of COVID-19 infections remaining a potential source of near-term volatility. The combination of an economic recovery and rising inflation from low levels forms a sweet spot for markets. Importantly, in this phase of the business cycle, we believe that there is sufficient leeway for the Fed to maintain a loose monetary policy stance.

• Europe

While the market has cheered positive developments on the vaccine front, consumer confidence in key countries such as France and Germany have been impacted by lockdown restrictions, and we would not be surprised by market caution prior to a wider roll-out in vaccine.

We remain neutral on Europe, we are turning more positive on UK equities, following the Brexit deal in December 2020.

• Japan

While we favour maintaining core positions in select growth stocks, we expect some sector rotation to take place, which should favour last year’s laggard sectors (which offer less demanding valuations), such as energy, financials, industrials and real estate.

• Asia ex-Japan

The MSCI Asia ex-Japan Index has continued its strong momentum in 2021, coming in as the top performer among the major regions. This was driven largely by the Chinese equity market.

• China

We maintain our relative preference towards the onshore A-shares. We believe A-shares offer more sectors and/or companies that could benefit from long-term structural growth opportunities and are relatively less affected by ongoing US/China tensions. In addition, there will be chances of further global index inclusion.

While near-term market pullback is possible, we believe this would offer opportunities to accumulate stocks that are set to benefit from favourable structural trends and supportive government policies in the 14th Five Year Plan.

BONDS

On fixed income instruments, we maintain a positive view on high yield (non-investment grade) bonds in Emerging Countries, which will benefit from investors' need for high yields, - Vasu Menon

Early 2020 did not provide benefits for fixed income instruments, this condition was reflected in the movement of High Yield and Investment Grade bonds from Emerging Countries, which decreased by -0.1% on average, while US bonds decreased -0.8%.

Although so far, capital inflows into Emerging Country bonds are still relatively high, either into major currencies or local currencies, the amount inflows in the first month of 2021 almost matched the total inflows for 2020.

While we may have experienced the worst recession in nearly a century, this is not reflected in EM default rates. EM High Yield's default rate at the end of 2020 was below 3%, below the long-term average. The current default ratio has decreased and is showing no improvement towards default in the near future.

Over the past few weeks, US bond yields have risen, and the yield curve shows anticipation of an increase in fiscal spending, along with the proposed USD 1.9 trillion COVID-19 stimulus assistance package, which is expected to boost economic recovery through increased consumption, thus gradually can end the trend of low interest rates. Keeping the duration of the portfolio lower would be wise to do in current conditions.

We maintain our overweight position on HY bonds in developing countries, but neutral on Investment Grade bonds. With the current risk-on condition, non-IG corporate bonds in Emerging Countries are deemed good for safekeeping, because they will provide more profits. In addition, when compared to US-owned non-IG corporate bonds and historical averages, the valuation is much more attractive.

FX & COMMODITIES

We have upgraded out oil price forecasts on the back of OPEC+ supply discipline and stronger US commodity demand. – Vasu Menon

• Oil

We are revising up forecasts for oil prices. The US oil industry is bracing itself for a period of upheaval following the inauguration of Joe Biden as president. One of his first moves was to block the Keystone pipeline project. Biden has also said he will look to limit the drilling activity on federal land and waters. The initial steps taken by the Biden administration may not have any impact on US near-term producer activity, but it will likely keep shale supply growth in check over the long-term.

• Gold

Gold has been struggling to convincingly recover past the USD 1,850/oz psychological level, held back by concerns of early Federal Reserve tapering. We do not think that the Fed will start slowing or ‘tapering’ its current pace of quantitative easing from USD 120 billion a month of bond buying until 2022. This is because, US unemployment is set to remain above full employment - i.e. jobless rates of around 3.5% of the labour force - for the next couple of years. Similarly, we don’t expect the Fed to start hiking its Fed funds interest rate from the 0.00-0.25% range until as late as 2024 or 2025.

• Currency

We expect relative central bank dynamics to affect currency markets. The major central banks are still in an ultra-accommodative mode. However, there has been signs that some central banks may be exiting (or hint at exiting) earlier than others. Rhetoric out of the Fed and ECB suggest that they will remain on the dovish extreme of the spectrum, especially after renewed concerns over the recovery momentum in the US and Europe.

Overall, expect near term direction of the USD to be affected by equity markets, especially for risk-sensitive pairs like the Australian Dollar-USD. Further out, we are still not detecting sufficient progress on US growth and Fed taper to build a coherent strong-USD thesis. This should leave the broad USD consolidative at best for now.

New Year, New Hope

With the deadline for the final voting results of the US presidential election in December approaching, it is almost confirmed that Joe Biden will be elected as the 46th President of the US. With the election of Joe Biden, it is expected that the US will adopt more diplomatic and lenient trade agreements towards US trading partners, especially China. In addition, the planned appointment of Janet Yellen as Treasury Secretary in the Joe Biden era, can be a positive catalyst for the US economy. Janet Yellen, as a former Fed governor, is notorious for having a very dovish view of the benchmark interest rate policy, which is needed to boost the current economic recovery process. In addition, stimulus negotiations are currently still an ongoing discussion which the Republican and the Democratic party have not been able to see eye to eye. The difference in the scale and amount of stimulus each party proposes presents a challenge in the realization of the stimulus.

From a pandemic risk standpoint, the number of COVID-19 cases globally has reached 68 million, with the US currently still being the country with the highest infection rate with 15 million cases. Several analysts see the risk of case numbers increasing due to Thanksgiving holiday, and as the US enters the winter season. However, investors seem to be prepared and ready for this to happen, especially with the successful trials of a number of pharmaceutical companies such as Pfizer / BioNTech and Moderna. In fact, several vaccine manufacturers have produced and succeeded in distributing vaccines to several countries in early December. Pharmaceutical companies such as Astra Zeneca, although the effectiveness of their vaccine is lower than the other two companies, Astra Zeneca vaccine have the advantage in terms of storing, distribution processes, and more affordable prices, making them the main choice for countries in the world that are currently at war. with the pandemic.

Meanwhile in Europe, increasing COVID-19 infections and the uncertainty over post Brexit UK-EU relations are still the main focus of market participants. Britain claimed itself to be the first country to be able to carry out a mass vaccine in the near future; while social restrictions and regional quarantine policies in Europe have again put pressure on economic activity. A number of economic indicators, such as manufacturing activity and employment have recorded further contraction in November. The European Central Bank is expected to continue providing stimulus to support the economic recovery process in the region.

Regionally, as Asia’s largest economy, China is the only country that is expected to close out 2020 with positive economic growth. China's economic indicators still show some resilience amid the global economic recession. China itself is expected to reach the peak of its economic recovery in the first quarter of 2021. However, the Chinese government's plan to enact new regulations (SAMR) related to the anti-trust law for companies operating in the internet sector could provide negative sentiment for some e-commerce companies originating from China. Short-term risks are also evident from the escalation of trade war tensions against China recently.

Domestically, the economic data released in November have shown a sustained recovery and have provided support for domestic capital markets. The balance of payments figure for Q3 2020 shows a surplus of USD 2.1 billion and this has proven Indonesia's economic resiliency. From the consumption side, inflation in November showed an increase from 1.44% in October to 1.59% in November; meaning that that the purchasing power of consumers is at an incline. The various economic policy efforts undertaken by the Indonesian government and Bank Indonesia have given confidence in the continuation of economic recovery, and this is also evident in the manufacturing PMI activity data for November which showed an expansion from the previous level of 47.8 to 50.6. However, central bank's foreign exchange reserves in November recorded a slight monthly decline due to external debt repayments, falling by USD 100 million in November 2020 and currently standing at USD 133.6 billion.

Equity Market

Last November, the Jakarta Composite Index (JCI) recorded the highest monthly gain throughout 2020 by 9.44%. However, since the beginning of the year, the JCI still posted a decline of 10.9%. The return of investor’s risk appetite is supported by positive developments in the domestic COVID-19 vaccine and abundant global liquidity has successfully boosted stock market performance. Fundamentally, these two things are still expected to support the stock market performance at the end of the year or window-dressing. Amid the risk of continued increase of COVID-19 cases especially due to regional elections and the long holiday period, this can cause a return to social restrictions, which if it happens it can give a technical correction in the stock market. Investors can use this correction to gradually return to accumulating asset classes.

Looking ahead, with the number of domestic vaccines available which are expected to increase at the beginning of the year, risk appetite is expected to continue to improve. Abundant liquidity, low interest rates, improved corporate profits, and Omnibus Law will support the JCI to return to the range of 6,500 - 6,800 in 2021.

Bond Market

Positive performance was also seen in the bond market, with the 10-year government bond yield dropping from 6.6% to around 6.1% at the end of November. Several things have supported the bond market in early Q4 2020 such as the strengthening of the Rupiah which also played a very important role for the bond market in October and early week of last November. Then, with the risk appetite of global investors starting to increase in line with the positive development of vaccines, Indonesia as an EM country will benefit from an abundance of foreign capital flows. Attractive real yields, a low interest rate environment and low yields on global bonds are driving up demand for government bonds.

In the last two auctions of government bonds on 17 Nov and 1 Dec 2020, it was recorded that the total incoming bids reached IDR 198.9 trillion, with the amount absorbed amounting to IDR 50.2 trillion. The increase in demand shows the high interest of investors in domestic bonds, after the cut in the benchmark interest rate by Bank Indonesia from 4% to 3.75%. Going forward, we assess the potential for 10-year government bond yields in the range of 5.8% to 6.2% in 2021, especially with the potential for further interest rate cuts by Bank Indonesia.

Currency Market

Domestic currency, Rupiah is currently showing its best performance in 2020 in line with increasing domestic sentiment. The rupiah strengthened 3.55% against the USD in November 2020, closed the month at 14,120 per USD level, and is currently trading at 14,110 per USD as of December 10, 2020. The US Dollar Index or DXY weakened to reach 90.7 levels in early December. Janet Yellen's nomination as US Treasury Secretary, prompts expectations of a longer low interest rate until 2025. This has resulted in the USD weakening, as investors' risk appetite returns to other currencies and riskier assets, especially to emerging currencies, including Rupiah. But at the same time, of course, with Rupiah strengthen too much, it can also burden to the performance of domestic exports, so that with the potential for further cuts in interest rates by Bank Indonesia to hold back the strengthening of the currency, we estimate that USD / IDR can be traded in the range of 13,800 - 14,300 until early 2021.

Juky Mariska, Wealth Management Head, OCBC NISP

GLOBAL OUTLOOK

New Hope in the New Year

As we head into 2021, the path to a vaccine-catalysed recovery in the new year is becoming increasingly clear, despite near term headwinds from surging new Covid-19 cases in the US, Europe, Japan and the UK. - Eli Lee

The new year is likely to bring new hope to the world economy. The macroeconomic outlook will favour financial markets as global growth rebounds strongly in 2021, new vaccines prevent fresh virus waves, central banks remain very dovish, political risks ease in the US, Europe and Asia, government bond yields stay low and the US Dollar continues to weaken to the benefit of risk assets.

A strongly reflationary outlook

Following the worst shock to the global economy since the 1930s Great Depression, the Covid-19 pandemic and resulting lockdowns of 2020 are set to give way to a strongly reflationary environment in 2021.

There are still several near-term risks to navigate before this year ends. The US, UK, Eurozone and Japan are suffering second or third virus waves. In addition, the European Union and the UK must agree to a fresh trade treaty before the end of December to avoid a chaotic “no deal” exit when their current trading arrangements expire as 2020 finishes. Last, President Trump still has not conceded the US election.

Strong economic rebound in 2021

Despite risks, forward-looking financial markets are likely to discount near term threats and focus instead on the favourable longer-term outlook for risk assets in 2021.

First, the global economy is set to rebound strongly in the new year as the distribution of vaccines allows consumers to spend freely again, releasing pent up demand from this year’s lockdowns.

We project the world economy to expand by 5.6% in 2021 after contacting by -4.1% in 2020. This would be a much faster pace of growth than the 3.5% average annual rate achieved by the world economy over the last five decades.

Further, the global recovery is likely to be broad-based. We forecast China to keep leading the rebound with GDP set to grow by 8.1% in 2021 after a likely 2.5% expansion in 2020.

Similarly, we see other emerging economies in Asia rebounding by 7.9% next year compared to a likely steep contraction of -7.4% this year.

Developed market economies are also likely to experience strong growth in 2021. We forecast the US, Eurozone, Japan and the UK to expand by 5.0%, 5.5%, 3.6% and 4.7% respectively.

Financial markets face further uncertainty. The US elections have now passed but vote counts in several states are being challenged in the courts. In addition, the US, UK and Eurozone are suffering new virus waves.

But once the US electoral results are clear, financial markets are likely to focus again on the favourable outlook for risk assets underpinned by the global recovery, upcoming vaccines, very dovish central banks, low government bond yields and a weaker US Dollar.

Positive developments with vaccines

Second, the development of viable vaccines will prevent fresh virus waves over the next few quarters.

Already, governments have become more effective at managing new virus waves even before the widespread distribution of upcoming vaccines begins in 2021.

During the first lockdowns in the spring of 2020, economic activity plummeted as schools, factories, offices, restaurants and leisure venues were all closed. But in the second lockdowns occurring now this winter, governments in the US, Europe and Japan have restricted gyms, sporting events, indoor dining and other entertainment but have allowed schools, factories and more offices to stay open.

The purchasing manager indices - an indicator of economic activity that signals contraction for readings below 50.0 and expansion for prints above 50.0 - shows that composite PMI has fallen sharply again in the UK and Eurozone in Q4’20. But the monthly PMI surveys are nowhere near as weak as they were during Q2’20.

In 2021, viable vaccines should reduce the outbreak of fresh virus waves and governments will have more experience of limiting the adverse impact on economic activity.

Central banks could add monetary stimulus

Third, central banks are set to remain very dovish and are likely to add further monetary stimulus if needed to support economic recovery.

The Federal Reserve may increase its current pace of bond buying from USD80 billion a month of US Treasuries and USD 40 billion of mortgage-backed securities if the US economy suffers from America’s current virus waves.

Moreover, even if the Fed does not expand its quantitative easing any further, the central bank is likely to keep its fed funds interest rate unchanged at 0.00-0.25% until as late as 2024 or 2025.

Inflation - as measured by changes in core personal consumption expenditure prices (PCE) - remains well below the Fed’s 2% goal at just 1.4%YoY for October. We expect that core PCE inflation may not recover to average 2% for several years given the shock from the pandemic.

Thus, the Fed, having shifted to a new strategy of average inflation targeting in August this year to achieve inflation around 2% over time, appears unlikely to start hiking its fed funds rate before 2024 or 2025.

Similarly, the European Central Bank also seems likely to add further monetary stimulus. The ECB has already signalled it is willing to expand its EUR1.35 trillion Pandemic Emergency Purchase Programme (PEPP) given core inflation is currently just above zero percent in the Eurozone.

We expect the central bank will announce at its last meeting of the year in December that it will increase its planned bond purchases by another EUR500 billion and keep its quantitative easing PEPP in place throughout 2021.

Interest rates to stay very low for next few years

Fifth, government bond yields are likely to stay at very low levels despite the global economy’s rebound in 2021. The improving economic outlook has resulted in our projections for longer term US Treasury yields and swap rates being revised upwards while our forecasts for shorter term bond yields have stayed largely unchanged.

Thus, we now expect 10Y and 30Y US Treasury yields to rise to 1.20% and 2.15% respectively over the next year after hitting our earlier long term forecasts of 0.90% and 1.75%. But we still project government bond yields to stay at historically low levels overall given the Fed will not raise interest rates until the middle of the decade and inflation will likely stay below the central bank’s 2% target on average over the next few years.

US Dollar looks set to keep weakening

Last, the US Dollar is set to keep weakening in 2021 as risk-seeking investors reduce demand for the safe-haven greenback and the Fed keeps interest rates at current near zero levels to push inflation back to a 2% average rate.

Political risks have receded

Fourth, political risks appear set to recede in 2021. The EU and UK remain likely to agree to a trade deal before the end of 2020, President-elect Biden will move into the White House in January and a new US government is unlikely to raise tariffs any further on imports from China, Europe, Mexico and Canada, marking a clear break with the unpredictable trade policies of the Trump administration.

Overall favourable macro outlook

Thus, the macroeconomic outlook is likely to be favourable for financial markets in 2021. The global economy’s rebound in 2021 will contrast strongly with the major shock suffered during the pandemic in 2020.

Thus, the overall macroeconomic outlook – rebounding growth, potentially less political risk, a weaker US Dollar, low bond yields and dovish central banks - continues to favour risk assets despite renewed virus waves as 2020 ends.

EQUITIES

Hopes for a new normal

We hold an overall overweight view on equities, with a preference for Asia ex-Japan markets. In our view, China’s solid growth trajectory will form a key tailwind for Asia’s growth in the post-pandemic economic cycle. – Eli Lee

In our view, the long-term risks for markets have eased significantly with a favourable US election outcome, meaningful progress on vaccine development, and global monetary policy still very supportive of risk asset prices. In the US and Europe, the ongoing surges in Covid-19 cases could inject some near-term market turbulence, though we expect investors to look through this volatility in anticipation of a normalisation of economic activity. In China, data continues to be encouraging while low inflation could also create room for the PBOC to allow the recovery to continue without having to increase interest rates.

Still, we recognize a fair degree of volatility in the near-term, given President Trump’s executive order banning US persons from investing in selected Chinese companies deemed to have ties with the Chinese military, as well as the release of draft anti-trust guidelines against monopolistic practices in the Chinese internet industry.

We had recommended clients with significant exposure in growth/momentum stocks to rebalance into value/cyclical ones – this has indeed been playing out thus far. We believe this rotation story still has legs, with our base-case expectation that at least one major drug-maker would receive regulatory approval by 1Q 2021.

United States

Markets are understandably buoyant for numerous reasons. Uncertainties around the US elections are mostly out of the way, with a Biden Presidency widely expected to see the US adopt a diplomatic approach to global trade deals. Positive vaccine-related news has lifted sentiment, while 3Q20 corporate earnings have broadly been better-than-expected. The Fed is also likely to remain dovish, in-line with our house view that the fed funds rate could remain at 0-0.25% until as late as 2025.

Still, we see potential for near-term volatility; valuations are not cheap, control of the Senate remains in play, and events such as Treasury Secretary Mnuchin’s unexpected request to the Fed to return funds would require investors’ attention. While surges in Covid-19 cases could also inject turbulence ahead, we would be buyers on dips, assuming further encouraging developments on the vaccine front.

Europe

Since Pfizer and BioNTech’s vaccine announcement in early November, followed by updates on other vaccines, investors in Europe have shared in the optimism as seen by the appreciation in asset prices. While the market has cheered positive developments on the vaccine front, consumer confidence in key countries such as France and Germany have been impacted by lockdown restrictions, and we would not be surprised by market caution prior to a wider roll-out of vaccines.

We are also keeping an eye on Hungary’s and Poland’s intention to effectively veto the EU budget on the back of objections against more stringent rule-of-law conditionality of EU funds, which could delay execution of the Recovery Fund. While this throws a spanner in the works, it is ultimately in the interest of key stakeholders on both sides to find a solution within the institutional contours of the multi-year EU budget.

Japan

November was a positive month for Japan equities, as the market kept pace with world equities’ rally following faster than expected Covid-19 vaccine development progress. Last month’s rally was driven by fairly equal buying interest in both value and growth stocks as growth expectations improved, which helped MSCI Japan recoup its year-to-date losses. We expect improvement in corporate guidance ahead and a smaller quarterly contraction in profits as economic activities normalise further, which should be supportive of the equity market.

Asia ex-Japan

2020 has been a volatile but fulfilling year for the MSCI Asia ex-Japan Index in terms of investment returns, as it has been the top performer among the major regions.

As we head into 2021, we see scope for this outperformance to continue, given tailwinds which would lend support to a more favourable outlook. We see positives from a breakthrough on the Covid-19 vaccine front, although we are cognisant that the road to recovery is likely to remain bumpy. The MSCI Asia ex-Japan Index is also projected to see a firm double-digit rebound in earnings per share in 2021 even though earnings growth is expected to be only slightly negative in 2020 due to the Covid-19 pandemic. With Joe Biden as US President-elect, we see a more multilateral approach towards Sino-US relationships, while de-globalisation concerns may also be alleviated. Expectations of strengthening Asian currencies relative to the USD also leaves more flexibility for the central banks to pursue looser monetary policy. These factors could support capital inflows to Asia.

Within ASEAN prefer Singapore and Indonesia

Within ASEAN, our preference is for Singapore and Indonesia. We see Singapore as a key beneficiary of improved business and consumer confidence which would support its Financials, Real Estate and Industrial sectors. The stable political climate and control of the pandemic would also support the recovery of its tourism industry and continue to draw fund flows, especially from family offices. For Indonesia, we see potential tailwinds from i) an increase in foreign fund inflows post the US elections with a rotation to emerging markets, ii) Omnibus Law to drive reforms and attract foreign direct investments, iii) strengthening IDR and room for more monetary easing, and iv) valuations relatively less expensive than regional peers.

One key theme which remains intact in 2021 would be the continued hunt for yield as investors seek opportunities amid a low interest rate environment. We are Overweight on the S-REITs sector to play this theme, given undemanding valuations and we also see a robust recovery in distributions given a low base effect and improvement in macro conditions.

China

We remain constructive on Chinese equities on the back of solid recovery and robust activities. However, there could be overhang in the near-term in light of the executive order that was signed by President Trump in banning US persons from investing in 31 Chinese companies that are deemed to have ties to the Chinese military by the US Department of Defense. There are uncertainties regarding the scope and implementation rules, and there is also the risk of whether the Trump administration will expand the list by adding more companies.

Recent high frequency data, such as industrial profits and PMI indicators suggest a broader economic recovery.

The solid recovery and strong rebound in industrial profits support the performance of “old economy sectors”, especially the upstream sectors, such as materials. At the same time, the 14th Five Year Plan focuses on quality growth, innovation and market reform, and also emphasizes the “dual-circulation” strategy. This should support emerging pillar industries for future growth and development. While detailed sector guidelines and policies have yet to be announced, and the full version will be released only after approval by the National People's Congress in March 2021, we believe it will benefit sectors like clean and renewable energy, domestic consumption, high-end industrials, internet and “new infrastructure”.

Financial sector upgraded

With a steeper yield curve expected over time and improved confidence on the strength of the global economic recovery going into 2021, we have raised our Financials sector rating to Neutral on the view that tail risks are more diminished and the sector should benefit from cyclical tailwinds, as a more conducive operating.

Remain cautious on tech sector

On the Technology front, we have been cautioning clients on the rich valuations and potential for a near-term pullback and this was seen in the recent rotation from growth to value. In addition, China decided to throw a spanner in the works by releasing a draft soliciting public feedback on anti-trust guidelines relating to monopolistic practices in the internet industry. While regulations relating to anti-trust have been rolled out over the years, this is the first time detailed guidelines specifically designed for anti-trust activities in the internet space have been mapped out.

BONDS

Still positive on EM High Yield bonds  

Interest rates in developed markets are expected to stay near ultra-low levels for an extended period. This will drive the search for yield across the investment landscape as we move through 2021, which should benefit Emerging Market High Yield bonds. - Vasu Menon

As we move into 2021, central banks across major developed markets have signalled their determination to keep policy rates at near-zero levels for years to support the post-pandemic recovery. With interest rates pinned at ultra-low levels, we see limited capacity for nominal government bonds to offer a buffer against sharp drawdowns in risk assets within portfolios. Investors will need to seek alternative ways to increase portfolio resilience, including allocating to emerging market high-yield bonds.

Epic November for global corporate bonds

EM HY spreads tightened a staggering 70 basis points (bps) in November. The Total Return of 2.9% makes it one of the top ten performing months for EM HY corporate bonds dating back to 2010. Meanwhile, EM IG spreads tightened an impressive 18 bps. In Developed Markets, US HY spreads tightened an incredible 100 bps for a 3.8% return while US IG tightened 22 bps.

Positive on EM corporate bonds

The outlook for Emerging Market (EM) corporate bonds is currently the most promising it has been in some time. Growth is accelerating and we appear to have an effective vaccine. The US Dollar is weakening, and bellwether commodities such as copper are strengthening - both traditionally positive for EM corporate bonds. Under President-Elect Biden, US Foreign Policy should be more multilateral and policy based, which should also be salutary for the asset class. Furthermore, even under a divided US Congress, we should see a sizable fiscal stimulus bill which should stimulate economic growth and provide an impetus for risk asset deployment. We recommend and overweight on EM High Yield (HY) bonds and a neutral weight on EM Investment Grade (IG) bonds.

Robust inflows into EM corporate bonds

Inflows into the asset class have been consistently strong over the past three months. Total outflows year-to-date (YTD) are now only USD -3.85 bn versus more than USD -20 bn a month ago. Local currency bonds still have outflows of USD -6.2 bn YTD but hard currency inflows are a robust USD 5.85 bn YTD.

EM default rates are not high

While we may have endured the worst recession in almost a century, this is certainly not reflected in EM default rates. Currently, JP Morgan is expecting a year-end 2020 default rate of 3.5% for Emerging Market Credit, which is roughly at the long-run average. They are projecting a further decline to 2.8% in 2021. Distressed ratios, which are a fairly accurate predictor of future default rates at are pre-Covid levels.

Prefer Asia

We are maintaining our preference for Asia in HY. Asia enjoys a yield advantage compared to countries such as Brazil or Russia which have much lower yields. We believe that the recent trends in onshore Chinese defaults merit monitoring, but do not view them as systemic threats to the offshore market. Furthermore, as discussed above, we view a Biden Presidency as more traditional and diplomacy-based than his predecessor, which should result in lower risk premia for Chinese corporate bonds.

Maintain overweight rating on EM HY and neutral EM IG

We are maintaining our overweight stance on EM HY and neutral stance on EM IG. In a “risk-on” environment HY should be well-placed to benefit. Furthermore, its valuations both on a historical basis and relative to US HY appear attractive. Finally, its higher credit component should provide more of a cushion against what we believe will be rising rates in the ensuing months.

FX & COMMODITIES

Glimmer of light for oil markets

There is potential for higher oil prices in 2021 as travel disruptions diminish amid vaccine progress. Oil fundamentals are on the right track to warrant an upgrade of our 12-month Brent forecast to USD56/barrel from USD50/barrel previously. – Vasu Menon

Oil

Oil fundamentals are on the right track to warrant an upgrade to our 12-month Brent forecast to USD56/barrel versus USD50/barrel previously. There is potential for higher oil prices in 2021 as travel disruptions diminish amid vaccine progress and with the OPEC+ likely to delay January's oil-output increase.

Despite new waves of Covid-19 in the US and Europe, the medium-term oil demand outlook is turning increasingly positive amid vaccine progress that could break the link between infection and mobility. Although uncertainties remain on logistics and the roll-out timeframe, vaccine roll-out, when it happens, should lead to normalisation of economic activity, especially in sectors that have a relatively high correlation with oil demand, such as travel, hospitality and food services. US energy demand, for example, is still principally driven by the transportation (68% according to US Energy Information Administration) and industrial (26%) sectors.

We expect OPEC+ will continue to fine-tune the duration of its pledged voluntary supply cuts with market developments. With OPEC+ likely to delay its planned January output increase, this should help limit near-term risk of oil markets tipping back into a glut.

Gold

Prospects of an imminent and effective vaccine could limit the room for extended gains in gold prices over the medium-term. Concerns that vaccine progress could slow or diminish the need for further monetary stimulus, led to higher US yields and lower gold prices. However, it is too early to throw in the towel on gold. We believe gold’s main drivers -- weaker US Dollar and low real interest rates -- are likely to provide support over the coming year. We think US Dollar depreciation can continue into 2021. A lower-for-longer Fed is set to keep the US Dollar, as a funding currency of choice. In other words, low US interest rates makes it attractive for foreign investors to currency hedge US Dollar-denominated assets to guard against a declining greenback.

We are also positive on gold because a lower-for-longer Fed should help limit the rise in the long-end US yields. Gold should benefit from better reflation prospects that pushes up inflation expectations and keeps real interest rates negative. We favour a buy on dip approach and expect gold prices to trend higher to USD2,100 in 6 to 12 months’ time.

Currency

The quick succession of positive vaccine developments, and the fizzling out of Trump’s challenges, allowed the market to move on from the US elections in a rather positive mood. This is offset by the rising Covid cases in the US, and other more risk-positive developments, such as the delay in US fiscal support.

The market has, however, turned largely immune to the rising pandemic cases. Market sentiment has been risk-on, but not bubbling over into a euphoric state. Into December, we expect this to continue. The market will balance expectations of the first vaccine approvals against the rising Covid cases. Questions over the vaccine availability and uptake will be pushed into 2021. Overall, this translates into a rather negative posture for the broad US Dollar (USD), as safe-haven demand continues to fall. Nevertheless, we do not see any immediate catalyst for the broad USD to fall sharply, leaving USD weakness to be more of a slow grind. This provides scope for periodic, technical-driven USD bounces, which we do not expect to negate the currency’s downside bias.

We expect the antipodeans to benefit most from USD weakness. Global risk cues and firmer commodity prices, together with the re-rating of expectations about the Reserve Bank of New Zealand, should augur well for the Australian and New Zealand currencies.

The Euro should also continue to surpass resistance levels against the USD in a largely USD-driven move. Note, however, that the macro picture in Europe is still largely anaemic and it may be difficult to justify a significantly firmer Euro.

The USD-Japanese yen cross may however stay largely range-bound, as USD weakness is offset by risk sentiment.

In Asia, we continue to back Renminbi (RMB) strength. The resilient RMB should continue to help other Asian currencies to strengthen too. In addition, a better growth outlook has also allowed portfolio inflows to return to Emerging Asia, providing further support for the local currencies. These positives are set against increasingly edgy central banks, who are concerned about its negative impact on exports. This should slow down the appreciation of Asian currencies, without necessarily denting its overall trajectory.

For the Singapore dollar (SGD), we expect it to be held within a narrow range on a basket basis. This, however, implies that there will be downward pressure on the USD-SGD amid persistent USD weakness.

A time to heal

The long-awaited US election has finally reached its verdict, in which Joe Biden has been declared as the next and 46^th President of the United States, beating Donald J. Trump 290 – 214 in electoral votes across the 50 states of Northern America. Joe Biden, along with his vice president Kamala Harris, the nation’s first Black woman and first Asian American woman to hold such a position will take their helm in the official inauguration on January 20^th, 2021 for the 2021 – 2025 term. Going forward, though some challenges may persist as the majority of the Senate are still Republicans, investors are quite optimistic as this would provide more balance of interests in the future in passing new policies and regulations.

With everything that’s been going on politically in the United States, the nation has recently surpassed the 10 million mark for COVID-19 infections; which still presents another uncertainty for capital markets. However, investors are becoming more and more resilient towards news surrounding COVID-19, as progress on the vaccine front remains positive. Finally, investors’ focus will now be directed back at the US stimulus package which had been anticipated for months now.

Meanwhile in Europe, rising COVID-19 infection and uncertainty over UK-EU relations post-Brexit are still the two-main headlines for investors. Hotspot countries such as England, Germany, and France have imposed new lockdown measures as daily infection and death numbers keep climbing. From a data perspective, the ongoing lockdowns start taking a toll on the economic activity. Both manufacturing and service activities contracted in October, while unemployment climbed to its highest since 2009 as job cuts soar. If the UK is unable to reach an agreement with the EU soon, the economic impact of COVID-19 on both the economy will become even more devastating.

The MSCI Asia Pacific Index was up 3.43% in October, led by China and is currently on track to making new highs for 2020. China, the only country expected to record growth in 2020, posted its Q3 GDP numbers at a staggering 4.9% growth, recording the highest quarterly growth for any country during this pandemic crisis. Meanwhile, Japan and Hong Kong are still struggling with their demand for consumption. Nonetheless, Asian investors cheered as the spread of COVID-19 has significantly dropped in the area, while the situation in developed countries such as the United States and Europe worsened. In the last quarter of 2020, most Asian nations are well on track for a strong recovery from an economic perspective.

Domestically, economic indicators released early November have shown continued recovery; and have somewhat provided support for capital markets. GDP numbers for Q3 were released at -3.49% YoY, up from -5.32% in the previous quarter; hence verifying that the domestic economy is on a recovery phase in the third quarter. COVID-19 daily infection has also dropped significantly in October, from approximately five thousand a day to one-to-two thousand a day. This has also provided a positive sentiment for markets, especially for conservative investors. In terms of consumption, inflation was steady in October, even slightly higher at 1.44% YoY as opposed to 1.42% in the prior month. The easing of PSBB regulation by DKI Jakarta Governor Anies Baswedan has given a much-needed boost for domestic consumption as well as for October PMI Manufacturing data, which recorded a slight gain from 47.2 to 47.4. On the other hand, the central banks’ foreign reserves recorded another monthly decline due to the payments of overseas debt, down USD$1.5 billion in October and is currently at USD$133.7 billion.

Equity Market

The JCI climbed 5.3% in the month of October, recording its biggest monthly gain of 2020 after falling for as much as 7.0% in September. However, by the end of October, the JCI is still 18.6% lower compared to the beginning of 2020. For technical reliant investors, this would imply that the stock market still has a huge potential to minimize its losses in Q4 propelled by the recovering economy as can be seen from recent economic indicators. The US presidential election results have also been a sentiment booster for domestic markets, along with positive progress on the vaccine front. Foreign investors recorded a net buy in the month of October, which also generates a sort of confidence promoter for domestic investors. Looking inward, investors also cherished the legitimization of Omnibus Law by the Indonesian government, amid a chaotic physical demonstration by the labor market on the streets of Jakarta. The Omnibus Law is believed to be a vital element in the coming quarters as foreign businesses will more likely to consider Indonesia as a viable and attractive place to expand their business, which in return will hugely benefit the stock market. In terms of forward Price-to-Earnings Ratio (PER) for the JCI, it currently stands at 14x-15x. However, with increasing positive forecasts for company earnings in the Q4, we consider the present level would be able to justify stock prices as we get close to year-end. We have upgraded our forecast for the JCI to 5,700 – 5,900 by the end of 2020.

Bond Market

The bond market also appreciated last month, with the 10-year government bond yield dropping from 6.93% to 6.6% by the end of the month; a decline of approximately 4.6%. Even through the first two weeks of November, the yield kept going down and is currently in the range of 6.2% - 6.3%. Several things have supported the bond market at the start of Q4 2020, the first one being the relatively higher real-yield domestic bonds offer. As global investors turn risk-on, EM bonds such as that of Indonesia wouldn’t come as a surprise to once again attract yield hunters. Second, the strengthening of the rupiah also played a crucial role for the bond market in October and the beginning weeks of November. Last but not least, the burden sharing scheme by the government and central bank which provides foundational support for not just the bond market, but the currency market as well, plays a major role in market stability; while still keeping an eye on inflation around-the-clock. We expect the central bank, Bank Indonesia to exercise another rate cut in the near future to give domestic consumption a nudge. We have also revised our year-end forecast for the 10-year government bond yield to the range of 6.0% - 6.5%.

Currency Market

The domestic currency, rupiah is currently on its best run of 2020. Appreciating 1.4% against the USD in the month of October to close the month at 14,600 per USD, and is currently trading at 14,000 per USD as of 11 November 2020. The first main driver for the rupiah these past few weeks is what many would call the “Biden-effect”. With Joe Biden voted as the new president-elect, the probability of a new stimulus package becomes higher; and has pushed investors to leave the safe-haven currency asset. The potential increase in money supply in the US will also put pressure on the greenback. Moreover, increasing inflow towards EM markets such as Indonesia have created extra demand for the domestic currency; with more and more foreign investors needing the local currency to make investments. However, from here onwards we see limited upside for the rupiah as the central bank themselves would not want the currency to be too strong that it may weigh on exports. Therefore, we see the USDIDR to be trading in the range of 13,950 – 14,200 by year-end.

Juky Mariska, Wealth Management Head, OCBC NISP

GLOBAL OUTLOOK

After The US Elections

We see overall world economic growth weakening by 4.1% this year before recovering by 5.6% next year with China’s economy leading the rebound. – Eli Lee

Financial markets face further uncertainty. The US elections have now passed but vote counts in several states are being challenged in the courts. In addition, the US, UK and Eurozone are suffering new virus waves.

But once the US election results are clear, financial markets are likely to focus again on the favourable outlook for risk assets underpinned by the global recovery, upcoming vaccines, very dovish central banks, low government bond yields and a weaker US Dollar.

Pandemic remains a threat but may not derail global recovery

The pandemic’s resurgence across the US, UK and Eurozone is a significant near term threat but the impact of renewed restrictions on social and economic activity in 4Q2020 will be much less severe than those imposed during the first lockdown in 2Q2020. Thus, the global recovery is unlikely to be derailed by second virus waves as 2020 nears the end.

For example, Eurozone’s composite Purchasing Managers’ Index (PMI) - a forward-looking indicator covering both the manufacturing and services sectors - fell from a two year high of 54.8 in July to 50.0 in October. A reading below 50.0 indicates firms are expecting activity to contract while a reading above 50.0 signals companies expect business to expand. For November and December, the Eurozone’s PMI survey is set to fall further as economic activity is restricted to contain the pandemic. But the PMI data is unlikely to return to the very weak levels of March, April and May when the composite survey fell to 29.7, 13.6 and 31.9 respectively.

Though European governments have closed social venues including restaurants, bars, cinemas and sporting events, schools and most businesses remain open. Thus, the economic impact of renewed restrictions is likely to be far less than in the first lockdown in 2Q2020.

We forecast fresh virus waves in 4Q2020 will cause Eurozone GDP to contract by 3.8% QoQ, similar to its decline of 3.7% QoQ at the start of the pandemic in 1Q2020 but much less than the 11.8% QoQ slump of 2Q2020. We also expect US GDP to weaken now by 0.8% QoQ in 4Q2020.

But our overall GDP projections for 2020 remain unchanged for both the Eurozone and the US. This follows much stronger than expected rebounds in 3Q2020 of 12.7% QoQ in the Eurozone and 7.4% QoQ in the US after their economies re-opened during the summer after their first lockdowns.

Thus, as the table shows, we continue to forecast Eurozone GDP contracting by 7.6% this year before rebounding by 5.5% next year. Similarly, we keep our forecasts for a 4.0% decline in US GDP for 2020 before expanding by 5.0% in 2021.

Renewed virus waves have also caused us to lower our GDP forecasts for emerging markets to -3.3% this year with emerging Asia ex-China set to contract by 7.4% now in 2020. But Beijing’s success in containing the pandemic has resulted in our estimate for China’s GDP growth to be raised from 1.7% to 2.5% in 2020 and from 7.1% to 8.1% in 2021.

We thus see overall world GDP weakening by 4.1% this year before recovering by 5.6% next year with China’s economy leading the rebound.

In our view, the overall global recovery will continue despite second virus waves in 4Q2020 with the development and distribution of vaccines in 2021 supporting the economic rebound.

US post-election political scene supportive of risk assets

The US political scene after the election results are confirmed, looks increasingly likely to support the outlook for risk assets.

The prospects of a Biden administration supported by a Democrat House of Representatives and opposed by a Republican majority in the Senate will result in ‘gridlock’ between the White House and Congress.

This may make it difficult to reverse the corporate tax rate cuts undertaken by the Trump administration to the benefit of risk assets. It may also reduce the threat of increased regulation under a Biden administration aimed at sectors like technology.

A gridlocked Washington DC, however, is unlikely to pass a second large scale fiscal stimulus programme to support the US recovery. At the height of the pandemic in March and April, US lawmakers approved a huge US$3.0 trillion of emergency aid for the economy. But government benefits worth around US$1.5 trillion have already expired, leaving the US recovery at risk to another downturn if second virus waves are not contained easily.

We would still expect a fresh fiscal package to be passed by 1Q2021 but a Biden administration faced with a Republican Senate may only be able to get Congress to approve a more limited new round of emergency aid worth US$0.5-1.0 trillion.

Long term 10-Year and 30-Year US Treasury bond yields had steepened in anticipation of the Democrats winning both the White House and the Senate. But under a ‘gridlock’ scenario, we would expect limited fiscal stimulus now to keep US Treasury yields very low by historical standards.

We thus maintain our interest rate forecasts for long term Treasury yields to rise modestly to 0.90% for the 10-Year and 1.75% for 30-Year bonds as the US economy recovers over the next one year. The overall low level of yields will continue to support risk assets.

A Biden administration is also likely to benefit risk assets through pursuing a less aggressive stance on trade. The Trump administration’s tariffs pushed up the US Dollar in 2018- 2019. But we expect the greenback will keep weakening now as demand for the safe-haven currency wanes and exporters in Europe, China, Japan and the rest of Asia benefit from a more predictable trade environment.

Fed to remain dovish for a fairly long time

We see the longer-term outlook continuing to benefit from central banks remaining very dovish.

We think the Federal Reserve will not raise its benchmark fed funds interest rate from its current range of 0.00-0.25% until as late as 2024 or 2025 given the central bank’s recent shift to average inflation targeting.

The Fed is now aiming for inflation to average 2% over the business cycle. As inflation has fallen short of the central bank’s 2% goal for much of the last decade, the Fed is seeking inflation to moderately exceed 2% for the next few years. This makes it very likely the central bank will keep the Fed funds at near the zero levels for up to the next four-to-five years until inflation averages 2% on a sustained basis.

Thus, the overall macroeconomic outlook – rebounding growth, potentially less political risk, a weaker US Dollar, low bond yields and dovish central banks - continues to favour risk assets despite renewed virus waves as 2020 ends.

EQUITIES

Upgrading Asia ex-Japan

We see a Biden presidency and a divided Congress as favourable for Asian equities, particularly Greater China. Hence, we upgrade our position in Asia ex-Japan equities from Neutral to Overweight. – Eli Lee

The US elections have been and continue to dominate headlines globally. With a Biden Presidency and a divided Congress, the expectation is that the new administration will be more strongly qualified to manage the Covid-19 pandemic, will enact a new relief aid stimulus package in 1Q2021, and take a more multilateral approach towards US-China tensions.

We see this as favourable for Asian equities, particularly Greater China, and upgrade our position in Asia ex-Japan equities from Neutral to Overweight. In terms of valuations, we see Asia ex-Japan as relatively undemanding versus global peers.

We believe that the initial phase of the post-election equity rally will be led by growth stocks, such as the key technology sector. But if the recovery continues, and economic activity normalises with vaccines becoming widely available in the middle of 2021, we expect the rally leadership to rotate into value and cyclical segments. This will benefit Asian equities more, as value and cyclical segments form a larger component of the Asian markets compared to the US, which is more dominated by technology.

United States

As at 2 November, based on 62% of S&P 500 companies that have reported thus far, 87% have beaten 3Q2020 earnings estimates while 78% have beaten revenue estimates. Despite high beat rates, the muted to negative price reactions – particularly for companies with strong performance – suggests the market has priced much of the upturn.

We see some positives with a Biden Presidency and a split Congress. Higher taxes and regulatory changes in the near term appear unlikely, bringing relief to certain sectors like Technology and Healthcare. While a more modest relief stimulus package and infrastructure spending is expected (relative to that under a Blue Sweep), these are balanced out against the more robust response that the Biden administration is likely to adopt towards the ongoing pandemic, as well as the tailwinds for corporates from more systematic trade and foreign policy.

Europe

The 3Q2020 earnings season has started and as at the time of writing, about half of the companies in MSCI Europe which are expected to report earnings have reported.

Of these, 59% of companies have beaten EPS estimates by 5% or more, while 18% have missed, resulting in a strong “net beat” of 41% of companies. If maintained, this would represent the broadest beat based on data back to 2007, though this could moderate as the earnings season progresses. Weighted earnings are currently on track to contract by 23% YoY, a sharp improvement from the 61% contraction seen in 2Q2020.

Price action, however, has been negatively skewed so far, suggesting that to some degree, the good news around 3Q earnings was already priced in, and perhaps the bigger drivers for markets are the rising Covid-19 cases in Europe and softer PMIs in the region.

Japan

Japanese equities lagged their global peers in October with select profit taking activities seen in more defensive healthcare and utilities sectors with rotational interest favouring the materials, technology and consumer discretionary sectors.

While the ongoing 2Q earnings releases for companies with February-March fiscal year (FY) end should still result in another quarter of YoY profit decline, we expect relatively less cautious corporate guidance and a smaller quarterly contraction in profits as economic activities continue to normalise. As concerns on the pandemic continue to ease, corporate guidance could also be revised to a more constructive tone, which should help support the market and improve consensus earnings forecasts currently projecting close to -10% earnings decline for FY ending March 2021.

Asia ex-Japan

We are upgrading Asia ex-Japan from neutral to overweight. With a Biden Presidency and a divided Congress, the expectation is that the new administration will be strongly positioned to manage the Covid-19 pandemic and the emergence of a more multilateral and measured trade and foreign policy could potentially reduce uncertainties related to US-China tensions. Asia ex-Japan’s valuations are also more reasonable compared to the US.

In Asia, there has also been some positive developments on the Covid-19 front, as India reported its lowest increase in daily cases since July, while South Korea’s President Moon Jae-in said that his country has contained the virus. Moon also highlighted in his parliamentary speech that his administration is seeking to increase its budget by 8.5% in 2021 to create jobs and aid the economic recovery.

In Singapore, the ongoing earnings season for S-REITs has delivered some encouraging results so far and reaffirms our view that the worst is likely over, although operational performance on a year-on-year basis is still largely soft.

We note that most S-REITs have been able to maintain or even improve their portfolio occupancy rates slightly. However, rental reversions have come under pressure as one of the priorities of REIT Managers is to retain their tenants and minimise vacancy risks, which means that they would have to be more flexible on the rental front.

Looking ahead, this trend would likely continue in the foreseeable future, but sequential improvement in distribution per unit is still possible as long as the number of locally transmitted Covid-19 cases remain stable. The three local banks have also reported their 3Q20 results, with all three beating Bloomberg consensus’ earnings estimates.

China

We continue to remain constructive on China and believe investors should increase exposure to sectors that will benefit from China’s “dual circulation” strategy, which aims to drive domestic consumption, onshore sourcing and import substitution.

The Fifth Plenum of the 19th Party Congress was concluded at the end-October. The key focus is on quality growth, innovation and market reform, and emphasizing China’s “dual circulation” development strategy. Over the next few months, the National Development and Reform Committee will prepare a more detailed draft of the 14th Five Year Plan (FYP) (2021-2025) in consultation and coordination with other government ministries, which will be submitted for final approval at the “Two Sessions” in March 2021. Thereafter, various sector regulators will issue respective sector policies. We would also watch out for the Central Economic Work Conference in late 4Q2020, which will have more details on sector implications and guidelines.

The summary of the plenum reiterated the direction towards quality growth and highlighted the longer-term, non-numerical goals of China’s 2035 development vision and guidelines for the 14th FYP. In terms of its long-term focus, China aims to achieve socialist modernisation with GDP per capita reaching the level of mid-income developed economies by 2035 and to expand its mid-income population, with a strong emphasis on innovation and market reform.

Key highlights of the plenum include:

1. the de-emphasis on growth target expectations, with no specific growth targets for the next five years;

2. “dual-circulation” as a key development strategy alongside other reforms, such as “new urbanisation”, “new infrastructure”, state-owned enterprise (SOE) reform, and market opening up, especially in financial markets and services; and,

3. iii) focus on emerging pillar industries –technology and innovation, and clean and renewable energy.

Both MSCI China (offshore) and CSI300 (onshore A-share) outperformed the regional market over the past month. Valuation of MSCI China has remained elevated at 15.2x FY21E P/E and is trading at more than 2 standard deviations above the historical average. Valuation of CSI300 is relatively less demanding. With MSCI China trading towards the high-end of the trading range, we will focus on the investment theme of key policy beneficiaries.

While detailed sector guidelines and policies have yet to be announced, we believe the emphasis on the “dual circulation” development strategy to support quality growth, innovation and market reform will benefit sectors like clean and renewable energy, domestic consumption, high-end industrial, internet and “new infrastructure” sectors like data centres, artificial intelligence, 5G applications, internet of things, new energy vehicles, electric vehicle charging piles and ultra-high voltage power transmission projects.

We maintain our preference on autos, internet and insurance. We are getting less negative on Chinese banks and expect it to stage a cyclical rebound in the near term. The latest quarterly results highlighted signs of net interest margin compression pressure stabilising and Chinese banks as a sector trading close to the low-end of their valuation.

Tech and energy sectors

The absence of a “Blue Wave” led to a rally in Tech stocks again. We continue to believe that Tech should be a core holding for investors, given:

1) the accelerating secular digital trends as a result of Covid-19;

2) the strong financial positions of key tech names; and

3) our assumption of rising but marginally higher yields.

However, for those with outsized positions in the sector, we have been and continue to recommend investors to rebalance portfolio weights into cyclical and value names with resilient balance sheets and stable business models.

Regulatory risk is also a concern not just for US investors – this risk was highlighted for investors worldwide when ANT Group’s IPO was suspended at the last minute due to new regulations impacting the sector.

As for Energy, the sector has been weighed down by lower oil prices due to the resurgence of Covid-19. On the other hand, in the US at least, a split Congress may mean that legislative options to constrain the oil and gas industry would be more difficult to implement compared to a Blue Wave scenario.

BONDS

EM Bonds Could Benefit From US Elections 

Emerging Market credit posted gains in October despite US election uncertainty. Under a Biden Presidency, the asset class should benefit from a less fractious and confrontational approach to China. - Vasu Menon

Within fixed income, our overall allocation moves to broadly Neutral from Overweight, with the Underweight position in Developed Market (DM) Investment Grade (IG) bonds balanced by our continued Overweight position in the Emerging Market (EM) High Yield (HY) segment, which provides attractive carry in a search-for-yield environment. Within EM HY, we maintain our preference for Asian High Yield.

We reduced our position in DM IG bonds to Underweight from Neutral to position for a steeper yield curve. We forecast 10-year Treasury yields to be 0.90% in 12 months. With DM IG spreads at its current tight levels, we view the return offered by this asset class to be relatively unattractive and see the risk-reward here to be middling.

Emerging Markets should benefit under a Biden Presidency

A Biden Presidency should prove to be salutary for Emerging Market Credit. Foreign policy should be less confrontational, more measured and more deliberate. Consensus building with traditional European allies will also likely be a major objective.

Furthermore, even under a divided Congress, we should see a sizable fiscal stimulus bill which should provide impetus for risk deployment.

Constructive medium-term outlook remains

Recent economic indicators globally point to a gradual if uneven economic recovery. Furthermore, while Covid-19 remains a formidable foe with second wave infections in many places in Europe and the US, overall morbidity rates appear to be largely declining in most countries.

Additionally, under a Biden Presidency the US may implement a more disciplined and coherent approach to the pandemic. Perhaps more importantly, there seems to be little tolerance globally for the crippling lockdowns of the spring. However, the key architect underwriting performance corporate bonds over the medium-term remains the US Federal Reserve, and lower for longer rates has morphed into lower for much longer rates, with Fed funds rates not likely to be raised for a number of years.

Our view remains that the Fed funds rate could stay near zero until as late as 2025. The Fed’s most recent forecasts show core personal consumption expenditures inflation – the Fed’s preferred measure of inflation – returning to 2% only in 2023.

Prefer Asia

In HY, Asia has underperformed in the past several months in what we believe is a “relief rally” in Latin America which has still under-performed year-to-date.

Nonetheless, we are still maintaining our preference for Asia and believe that the recent underperformance has solidified value. The yield advantage for Asia is such that in a constructive or even neutral environment for Credit this incremental “carry” will prove difficult for countries such as Brazil or Russia with much lower yields to overcome.

However, the global economic recovery should reveal opportunities in other countries outside Asia as well; we would look to them for incremental High Yield investments.

In IG we would pivot away from Latin America toward Asia. This change is based on several factors: 1) Under a Biden Presidency, Asia (which is primarily China) should benefit from a less aggressive policy stance and

2) Latin America has a significantly higher duration, which will be a significant tailwind during an expected period of high rates and steepening yield curves.

Weaker sentiments towards China HY

Weak sentiment in the China HY segment continued into October, driven by the general pull back in risk appetite affected by idiosyncratic events of prominent issuers coupled with the US presidential election. The heavy bond supply post Golden Week from Chinese issuers (more IG than HY) also weakened the technical backdrop in the secondary market. Performance of new issuances in the secondary market is mixed; IG bonds have notably performed better than HY bonds signifying the market’s risk-off appetite during the month.

On 29 October, China’s 19th Communist Party of China (CPC) Central Committee released a range of long-term development objectives and draft of the new 14th 5-year plan for the nation. These include building the nation into a technology powerhouse, to develop a robust domestic market and aspire to be a developed economy by 2035.

While not directly benefiting the property sector, the direction of sustained economic growth supported by technological advancement and consumption is supportive of the property sector and the urbanisation trend. This means sustainable stable fundamentals for Chinese property bonds.

Post the US elections, our Overweight in China property bonds remains unchanged supported by stable fundamentals, and good relative value.

Short duration bias

The Fed appears to be committed to keeping short-term rates low (and near zero) for at least the next several years However, the longer end is driven largely by market forces.

Our house view calls for rising longer-rates and further steepening in US Treasury curves over the coming year. As a result, we would maintain a short duration bias in portfolios.

Maintain Overweight rating on EM HY and Neutral EM IG

We are maintaining our Overweight stance on EM HY and Neutral stance on EM IG.

Our constructive view on the HY asset class remains, driven by unwavering support by the Fed, increasingly fewer compelling fixed income alternatives, a gradual improvement in economic growth and a likely fiscal stimulus bill. A Biden Presidency should provide further tailwinds should foreign policy friction decrease.

FX & COMMODITIES

Gold - A Tightly Coiled Spring

The gold rally still has legs and reflation will be gold's new friend. Fiscal relief, accommodative central banks and stronger emerging market demand should keep the backdrop supportive for gold. – Vasu Menon

Oil

The return of oil price pessimism is set to put pressure on OPEC+ to postpone an increase in production currently scheduled for January. OPEC+ has until it's 1 December meeting to decide whether to postpone plans to add 1.9 million barrels per day to crude output as current cuts of 7.7  million barrels per day are eased to 5.8 9 million barrels per day under the original plan.

The near-term outlook for oil prices remains challenging.

First, stagnant crude prices reflect a slowing demand recovery as Covid cases rise again. Surging Covid-19 cases have forced European governments to progressively tighten containment measures, weighing heavily on the short-term economic outlook.

Second, rising oil supply is also a headwind for oil. The Libyan oil supply is returning at an inopportune time. The other bearish risk for oil on the supply front is that a likely Biden victory in the US elections raises prospects of a diplomatic breakthrough between the US and Iran could open the door for the return of Iranian crude.

Gold

The gold market is coiling, a term that is associated with relatively rangy markets that are getting ready to make big moves. The gold rally still has legs in our view.

First, we think post-election reflationary policies will be gold's new friend. Lower real interest rates are positive for gold. Real rates can fall if markets believe that the economy will reflate on the back of the Fed doing more to support the economy with a gridlocked government. Prospects of higher inflation will benefit gold as an inflation hedge.

Second, we are positive on gold because central banks can print money but not gold. Major second Covid-19 waves could lead to more central bank stimulus soon. As central banks step up quantitative easing, currency debasement fears are set to drive gold higher against major currencies such as the US Dollar, Euro and Australian dollar.

Third, emerging market demand for gold jewellery could start to strengthen as growth improves. One bright spot is China where growth pick-up is becoming more broad-based.

A widely available vaccine would make us more cautious of the outlook for gold, but that is more a concern for 2022 or beyond. We continue to forecast gold prices to rise to US$2150/oz in a year's time.

Currency

The “Blue Wave” failed to materialise, and consequently we do not expect the floor under the broad US Dollar (USD) to crumble. Nevertheless, so long as the market remains focused on the US election and its aftermath, the USD may still come under pressure.

Firstly, hopes for a quick fiscal stimulus that is sufficiently large to spur US macro outperformance relative to Asia and Europe has effectively dissipated. With a divided Congress, fiscal stimulus negotiations will likely remain protracted and the final package limited to pandemic relief. This would be USD-negative.

Secondly, the equity markets have found sufficient reasons to turn higher. This should diminish the safe-haven appeal of the USD.

Finally, if the Trump campaign chooses to launch a robust challenge to the election results, this could cause the USD to soften. We prefer to be long on the Japanese yen (JPY) if Trump challenges the election result.

Beyond the elections however, we should not automatically expect the USD downtrend to continue over a one- to three-month time horizon. Much depends on the pandemic situation globally at that time as well.

One thing to note though, is that other major central banks are now moving closer to the Fed in terms of dovishness.

The Reserve Bank of Australia (RBA) has pledged not to raise its policy rate until inflation is sustainably within its target range. This is not unlike the average inflation targeting adopted by the Fed. The RBA and Bank of England (BOE) have also announced asset purchase programmes that are more dovish than initially expected.

The European Central Bank (ECB) may also expand its Pandemic Emergency Purchase Programme (PEPP; a temporary asset purchase programme in response to Covid-19) in December. This contrasts with the Fed, which is not expected to expand its asset purchase programme for now. So, the Fed is no longer the biggest dove in town, and this may prove favourable for the USD.

In Asia, this outcome is arguably the most RMB-positive, and the sharp gains in the RMB points to that. In the medium term, if a new US administration adopts a more conventional and rules-based approach towards China, we may see the risk of geopolitical flare-ups decline. This coupled with the China-centric RMB-positives (eg. economic recovery on-track and yield differentials supportive) should augur well for the RMB in the medium term.

In Singapore, our stance on the Singapore Dollar (SGD) Nominal Effective Exchange Rate (NEER) is unchanged, i.e. we expect it to remain locked within a narrow range just above the parity levels.

This leaves the USD-SGD a by-product of the broad USD and RMB directionality. In the short term if the USD faces some downward pressure, expect the USD-SGD to see some downside pressure as well.

Opportunities amid risks

The global economic recovery is still the main focus for investors right now, where the US jobs data, one of the main economic indicators, continues to show improvement. Unemployment rate recorded another decline in the month of September, dropping from 8.4% to 7.9%. However, the US job market still has a long way to go before going back to pre-pandemic levels. Added risk also comes from fiscal stimulus negotiations, where the government still hasn't been able to reach an agreement on the new package. With the US election just around the corner, volatility may persist as investors’ focus will be geared towards it in the coming weeks.

Meanwhile in Europe, increasing uncertainties come from unsuccessful Brexit negotiations as well as COVID-19 cases which are on the rise again. Some countries in the Euro area include France, Spain, England, and even Russia are currently the new epicentres for the coronavirus. The increasing number of new cases have triggered back lockdown restrictions for some of those countries, which would hinder the recovery for European countries and prolong the recession in Europe.

In Asia, the month of September saw significant volatility. With infection rates increasing in several countries, coupled with several global uncertainties such as US fiscal stimulus and elections have dampened market sentiment. Nonetheless, Asian economic data still show ongoing improvements led by China. China economic recovery is currently on the right track, with PMI Manufacturing data still recorded higher in September compared to the previous month. For this year, China is still expected to achieve positive GDP growth and safe from recession; which may prompt the PBOC to be less aggressive in regard to monetary easing policy, however it will remain accommodative. In addition to that, the initiative by PBOC to make the Yuan currency a major player in the digital currency world will also have an effect on the overall monetary system.

Domestically, the month of September presented quite a challenge for capital markets; with several economic indicators falling from previous levels. Due to the decision of implementing back the PSBB regulation, manufacturing fell back below to contraction levels at 47.2, after having recorded an improvement in the previous month. Deflation happened for the third straight month, which implies that domestic consumption is still weak. Moreover, foreign reserves declined to USD$135.2 billion after hitting a record USD$137 billion in the previous month. The decline was caused by the payment of government loans as well as the open market interventions by the central bank in order to maintain a stable exchange rate for the Rupiah. Overall, we see that Indonesia is still showing fundamental resiliency; taking into account the increase in daily new COVID-19 cases nationwide in the midst of a recovering economy. The Omnibus Law which had recently been passed has the potential to change the climate for Foreign Direct Investments (FDI) in Indonesia, making it more attractive for overseas investors.

Equity

The Jakarta Composite Index (JCI) had a rough month in September, recording a significant decline of 7.03%. The projection of a negative growth for 2020 has produced a negative sentiment that pushes investors to be Risk-Off. The ongoing pandemic has continuously put pressure on the economy, and recession was believed to finally arrive in the third quarter. Moreover, with the implementation of PSBB (lockdown) again in early September for Jakarta, economic activities have been significantly held back; where the capital city Jakarta itself contributes for about 17% of the economy. Total lockdown had been implemented because infection rate has not slowed down. Regarding the handling of the novel virus, the government has so far done a good job in supporting the suffering economy. The central bank is also continuously increasing liquidity to help the credit market.

In the short run, we see that volatility will persist in tandem with the high number of daily COVID-19 cases. Market participants are also still closely monitoring the news surrounding the coronavirus vaccine. External factors such as the uncertainty of another round of US fiscal stimulus, as well as elections have dampened market sentiment. However, with the total lockdown going back into the transition phase in early October, we hope that the economy may resume normality. Aside from that, the newly passed Omnibus Law in early October, including the plans for a Sovereign Wealth Fund is believed to be able to provide a sentiment boost towards the economy as well as capital markets in the long run.

Bonds

The bond market also recorded a decline in September, with the 10Y yield going up 1.32% to 6.96% by the end of the month. Domestic bond market is rather stable considering the various uncertainties present, supported by the burden sharing scheme between the government and the central bank. The burden sharing scheme is estimated to be extended till next year, because the government needs more time to disperse their planned fiscal stimulus. The governor of Bank Indonesia, Perry Warjiyo, issued a statement saying that his administration is closely monitoring the effects of the stimulus on inflation and Bank Indonesia’s balance sheet. Not to mention, we see that demand for domestic government bonds are still high, both for local as well as foreign investors, due to a high Real Yield it offers which makes it an attractive investment. Hence, continuation of the burden sharing scheme and higher capital inflows toward the domestic bond market should push yields lower to the range of 6.5% - 6.6% by year end.

Currency

Like the equity and bonds market, Rupiah also recorded a decline last month. Rupiah weakened by 2.18% against the USD, and ended at 14,880. The decline was caused by high uncertainty in financial markets, both due to global and domestic factors, thus making the high demand of the USD as a safe-haven currency. In the future, Bank Indonesia sees that Rupiah has the potential to strengthen due to its undervalued level fundamentally, supported by the potential capital inflow of Ciptaker Law. A low interest rate policy from the US will also hold the USD relatively weak when compared to other countries' currencies. Thus, rupiah is expected to move in the range of 14,700 – 14,900 until the end of the year.

Juky Mariska, Wealth Management Head, OCBC NISP

GLOBAL OUTLOOK

Navigating near term risks

Despite near-term threats, we see the macroeconomic outlook continuing to favour risk assets. We foresee the global economy recovering further in 2021 and interest rates staying very low as the Fed is likely to leave rates unchanged until as late as 2025 to support the US economy. – Eli Lee

The very clear trends over the summer of buoyant equities, a weaker US Dollar (USD), very low government bond yields, steeper yield curves and record gold prices have given way to renewed financial market volatility.

Investors have become more cautious owing to greater near-term risks to the outlook.

Resurgence of virus in Europe

First, new virus waves across Europe have affected corporate sentiment, as national governments imposed new curbs on economic activity to contain fresh virus outbreaks.

Fading fiscal stimulus

Second, the inability of America’s Congress to approve further fiscal stimulus is raising concerns that the US economy will experience much weaker growth in 4Q 2020 after a strong rebound in 3Q 2020. This is because US$1.5 trillion of the huge US$3 trillion of federal emergency aid passed earlier this year to support the economy at the start of the pandemic has already expired or is becoming exhausted.

So far, US lawmakers have been unable to agree upon fresh fiscal support and are unlikely to do so now ahead of the presidential election on 3 November.

The lack of additional government support, however, may already be holding back growth and thus slowing America’s labour market recovery. Initial jobless benefit claims soared at the start of the pandemic from around 200,000 applications a week to almost 7 million. After Congress authorised emergency aid in March and April, employment began to recover, and jobless claims fell steadily. But, more recently, benefit applications have stopped falling and remain stubbornly high just below 900,000 a week. Similarly, continuing claims - a measure of total unemployment - shows more than 12 million workers are continuing to apply for jobless benefits.

Concerns that US elections may be contested

Third, financial markets have become concerned that a close US election result on November 3 will be disputed and result in voting recounts and court cases lasting for weeks. A contested election outcome could even cause a major constitutional crisis if neither President Donald Trump or his Democrat opponent Joe Biden accept the results.

US-China tension broadening

Fourth, tensions between the US and China continue to broaden across a wide range of issues from trade to technology.

Fears of a chaotic Brexit

Last, the risks of a chaotic ‘no deal’ exit are rising between the UK and the European Union if the two sides cannot reach a fresh trade agreement when their current trading arrangements expire at the end of 2020. Even if a new EU-UK trade deal is finalised before the end of the year, we estimate UK GDP will still contract by -10% in 2020 - a much worse performance than the US, Eurozone or Japan as our table of GDP forecasts shows. But if no deal is agreed by year-end and the UK loses its tariff-free access to EU markets, then Britain will suffer a second serious downturn in 2021.

Risks exists but we are not negative

Significant near-term risks are thus likely to keep investors cautious in October. But financial markets already appear to be pricing in much of the potential bad news - given their recent volatility - and we see the threats as tail risks only to our base case of continued global economic recovery led by China and very dovish central banks keeping risk assets supported over the longer term.

For example, second virus waves across Europe have hurt business sentiment after the summer but governments are using targeted restrictions rather than returning to the broad lockdowns imposed during the first virus waves.

Similarly, fresh fiscal stimulus is unlikely before the US elections, but the prospects will rise again after November’s vote as both parties favour further government aid to support America’s economic recovery.

Further, President Trump - as he remains behind in the polls - continues to claim without any evidence that the increased use of mail-in ballots owing to the pandemic will lead to widespread voting fraud during November’s elections. Thus, investors are concerned that Trump will not accept the results if he loses and will instead demand the Supreme Court override vote counts. But senior Republicans including Senate leader Mitch McConnell and Senator Mitt Romney have rebuked Trump and insisted there will be an orderly transition if the president loses November’s election.

Trump is still likely to dispute the results if he loses. But he will only be able to try if November’s outcome is very tight.

Similarly, the risks of US-China tensions affecting financial markets is limited by the slim prospects of fresh tariffs being imposed before the US elections while the unpopularity of the UK government - due its poor handling of the pandemic - has increased pressure on London to compromise and secure a trade agreement with the EU to avoid a damaging no-deal exit by the end of the year.

EQUITIES

Maintain neutral position in equities

For now, we continue to believe that investors should be positioned for a rotation from growth/momentum to cyclical/value stocks, and we maintain our neutral overall position in equities. – Eli Lee

Despite the bruising performance registered across global markets recently, we believe that volatility is unlikely to recede in the short term. In our view, the upcoming US presidential election would be the key risk event for equity markets, with concerns over a potentially drawn-out contested election process in play.

Still, we remain constructive on the long-term outlook of markets, with China in particular a bright spot, as latest activity data demonstrates that the Chinese economy continues to lead the global recovery in 3Q 2020 after its V-shaped recovery in 2Q 2020.

United States

While we remain constructive over the longer term, we believe that the likely reasons for this recent pullback remain valid in guiding the near-term outlook on US equities. First, there remains significant uncertainty as to whether a stimulus package can be passed before the elections. Second, a renewed wave of Covid-19 infections remains a live possibility. Third, some market participants are concerned that inflation could become a potential headwind for equities, though we would point out that history demonstrates that valuation multiples can remain high or continue to expand when inflation increases from a relatively low starting point. Lastly, and probably most importantly, the possibility of a lengthy contested election process remains a key risk for markets moving forward.

Europe

In Europe, the story so far for 2020 has been a strong multiple expansion to partly offset the collapse in earnings. The key questions now are whether earnings are turning and just how much further P/E multiples can expand. With regards to the former, the latest set of company results have shown that negative earnings revisions are stabilising and that 2Q 2020 may very well mark the bottom, but this is on the assumption that the region does not see renewed large scale lockdowns on the back of rising Covid-19 cases. Currently, the situation is in a flux, as cases seem to be rising again.

Indeed, in the UK, the country seems to be in a more perilous position with regards to Covid-19, along with renewed concerns of a no-deal Brexit. Investors in UK equities may wish to be reminded that domestically exposed UK stocks typically underperform more foreign-exposed ones in periods of sterling weakness and vice versa.

Japan

Following the leadership transition in late September, where Yoshihide Suga won the internal LDP party election and was appointed as the next Prime Minister for ex-PM Shinzō Abe’s remaining one-year term, we expect policy continuity for expansionary fiscal and monetary policies in Japan, with near-term focus on pandemic management and re-opening of the economy. With approval ratings for the new administration rising, an earlier general election may be called before the end of the PM’s official term in September 2021, contingent on the pandemic situation.

With PM Suga’s track record of past reforms in the Abe administration, the market appears to be more hopeful of new structural reforms driving productivity and growth. However, we have a more circumspect view, given that meaningful progress in reforms will take time. Key sectors PM Suga is expected to focus recovery efforts on include tourism and agriculture, while the telecommunication sector is likely to face continued pricing pressure. Valuations remain extended. MSCI Japan last traded at 15.4x forward P/E, close to 2 standard deviations above its 10-year average multiple of 12.8x. Corporate earnings forecast for the financial year ending March 2021 have been trimmed steadily over the past three months, and are expected to contract 7% year-on-year from a year ago, with a stronger rebound of +40% expected in FY March 2022E.

Asia ex-Japan

The MSCI Asia ex-Japan Index reversed three straight months of increases, falling slightly in September. However, performance was relatively more resilient compared to the US market.

There were some positive developments on the geopolitical front, as China and India have held new rounds of diplomatic discussions with the aim of de-escalating tensions given their ongoing border dispute. While the daily number of new Covid-19 cases in India remains high, there appears to be some recovery in consumer demand as lockdowns ease, coupled with an increase in spending ahead of the key festive season.

In Southeast Asia, uncertainties remain over Malaysia’s political landscape. Indonesia’s Parliament approved a state budget for 2021 with a target of bringing GDP growth to 5% and a fiscal deficit estimated at 5.7% of GDP. The Singapore government announced in late September that it was allowing more employees to return to office, although each employee must still work from home at least half the time and no more than half of employees are allowed at the workplace each time. While restrictions are still in place, this slight easing does provide a positive sentiment boost to office REITs, coupled with recent media reports of Bytedance, Tencent and Amazon considering expanding in Singapore. The workplace easing also provides immediate tangible benefits to retail REITs with downtown malls near office buildings such as CapitaLand Mall Trust, Starhill Global REIT and Suntec REIT (35% of Suntec City mall’s tenant mix is F&B). F&B outlets in downtown areas have certainly suffered with a significant proportion of the workforce working from home.

Looking ahead, October will see the start of the earnings season again, with S-REITs kicking it off. While we are expecting a sequential recovery compared to 2Q20 due to the impact of rental concessions given to tenants, performance on a year-on-year basis is likely to remain weak with the exception of data centre and logistics exposed S-REITs. Key indicators to look out for include rental collection rates and pace of recovery of shopper traffic and tenants’ sales.

China

China will hold its plenary session at the end of October to discuss the 14th Five Year Plan (FYP) (2021-2025), which will be a key event to watch out for. We expect the “dual circulation” strategy to be a key policy focus and certain government policies will be needed to facilitate this development. The “dual circulation” strategy will focus on domestic demand as the main driver, supported by a network of domestic and international circulations that complement each other. In our view, this strategy is a shift towards self-reliance and a re-emphasis on the large-scale potential of China’s domestic economy amid an uncertain global environment and ongoing US-China tensions, which have resulted in uncertainty on external demand.

Domestic consumption could be boosted and supported by structural reforms and effective investment not only in traditional infrastructure projects, but also through investment in new infrastructure and new urbanisation projects. As such, potential beneficiaries would be broadened to new infrastructure sectors like data centres, artificial intelligence, 5G applications, internet of things, electric vehicle charging piles and ultra-high voltage power transmission projects. We prefer sectors focused on domestic consumption, such as autos, internet and insurance, and expect these sectors to have more policy support. While the healthcare sector should also benefit, we would only accumulate on dips companies with a domestic focus, given the sector’s outperformance and relatively rich valuations.

BONDS

Remain overweight EM High Yield

Bonds continue to be supported by overwhelming central bank policy support. We remain overweight on Emerging Market High Yield credit and maintain our preference for Asian High Yield bonds.  – Vasu Menon

The rally in corporate bonds ended after four consecutive positive months. Emerging Market (EM) corporate bonds was down -0.3%, EM High Yield (HY) was down -0.8% EM Investment Grade (IG) was down -0.1%. In Developed Markets (DM), HY fell -1.3% while IG was the sole market positive for the month, rising 0.3%.

Over the past month Asia was the clear underperformer in HY, down -2.7% versus -1.5% for Latin America and -0.6% for Europe Middle East Africa (EMEA). The decline in Asia was driven by China (and more specifically China Property), which was down -3.6%. The weakness in Chinese High Yield did not spill over to the Investment Grade market.

Expect turbulence in the short term

US presidential and congressional elections are weeks away and polls forecast a sweeping defeat for both President Donald Trump and the Republican party. This could engender enhanced histrionics or even extreme actions by the incumbent. Additionally, while just a few weeks ago a fourth fiscal stimulus deal was assumed, this seems a distant dream given an increasingly fractious Congress that now appears more consumed with a potential new Supreme Court nominee and does not want to give the other side “a win.” Finally, a second wave of Covid-19 is emerging in major European countries including France, England and Spain. The above factors could cast a pall over corporate bond markets in the coming weeks.

But constructive medium-term view remains intact

Recent published leading economic indicators (housing starts, PMI, retail sales) and high frequency data in the US point to a gradual if uneven economic recovery. Furthermore, while Covid-19 remains a formidable foe, overall morbidity rates appear to be largely declining in most countries. Perhaps more importantly, there seems to be little tolerance globally for the crippling lockdowns of the past. Moreover, in November political uncertainty in the US may ease and we may see a substantive fiscal stimulus bill regardless of the presidential outcome. However, the key architect of the nascent recovery remains the US Federal Reserve, and recent announcements indicate lower for longer rates has become lower for much longer.

Prefer Asia High Yield

In HY, Asia has underperformed in the past several months in what we believe is a “relief rally” in Latin America which has still underperformed year-to-date. Nonetheless, we are still maintaining our preference for Asia and believe that the recent underperformance has solidified value. However, the global economic recovery should reveal opportunities in other countries outside Asia as well.

Despite China HY bonds returning -2.8% month-on-month, our overweight call in China HY especially China property bonds remains unchanged. We continue to prefer BB to B-rated bonds as macro-level uncertainties remain. The drop in the HY Chinese property sector represents a better entry point to add exposure of better quality HY names than last month. Currently, China HY bonds YTM is 9.4% vs Indonesia 9.4% and India 7.43%.

In IG we would prefer Latin America. From a valuation point of view, Asia, and China in particular, appears rich.

FX & COMMODITIES

Strong case for higher gold prices

With the Fed expected to keep interest rates near zero until as late as 2025, there is a strong case for higher gold prices in the medium term. We forecast gold prices to rise to US$2,150/oz in a year’s time. – Vasu Menon

Oil

The near-term outlook for oil prices remains challenging. First, stagnant crude prices reflect a slowing recovery in demand as Covid-19 cases rise again. Traffic and flight data show the recovery is decelerating.

Second, OPEC+ is on a gradual schedule to roll back supply cuts. Third, Libya’s oil supply is returning at an inopportune time after oil production had been previously shut by the ongoing conflict.

However, we expect supply side rebalancing to offset slowing oil demand pickup to keep oil prices supported. While they have not yet been reflected in a decisive downtrend in oil inventories, we think they will in the coming months.

First, we expect OPEC+ collectively to continue to deliver a high level of compliance with its pledged supply cuts for the rest of 2020. Saudi Arabia hinted that it is ready for new production cuts and lambasted cheating OPEC+ members.

Second, radical reductions in drilling across the world should remain in place until oil prices start to rise above US$50/barrel. According to a Dallas Fed Survey, US$50-60/barrel WTI is needed to stimulate fresh drilling activity.

Gold

Gold suffered a bout of liquidation in September, as stronger US Dollar and rising real rates suppressed investors’ appetite.

Increasing growth concerns have weighed on inflation expectations and pushed real rates higher (and gold prices lower) with US 10-year nominal bond yields roughly unchanged.

However, we believe gold’s safe haven appeal will remain strong, as policymakers can ill-afford to ignore a further pickup in volatility in the equity market and allow accidental fiscal policy tightening to happen. The more “risk off” action there is, the more likely that the Fed will also step in.

With the Fed expected to keep its Fed funds rate near zero until as late as 2025, there is a strong case for higher gold prices in the medium term.

We forecast gold prices to rise to US$2,150/ounce in a year’s time.

Currency

As we head into the 4Q 2020, the global environment has turned decidedly more jittery due to several developments.

First is the rising virus counts in Europe that has compelled countries to consider and restart movement restrictions.

Second is the perceived stalling of the global economic recovery momentum.

The reversion to movement restrictions may further impact the services sector in Europe which is already stalling.

Financial markets also perceive that the US economic recovery will fade if the next round of fiscal stimulus fails to materialise.

Finally, central bank-fuelled reflation trades have also started to unravel and put a pause on the risk-on market sentiment.

While each of the factors above, on their own, may not be sufficient to turn around the weak-US Dollar (USD) trajectory, the convergence of these factors has hurt risk appetite and benefited the USD.

If these developments remain in place or worsen, the USD may regain favour on the back of safe haven buying. Given this backdrop, we may see the Euro and Australian dollar underperforming the greenback.

The upcoming key event risk is clearly the US presidential elections. If a contested outcome becomes likely, expect it to translate into a US-centric risk-off episode. This could be near-term negative for the USD. However, USD weakness in this form is likely to be narrowly restricted to other reserve currencies, primarily the Japanese yen. 

In Asia, the structural positives for the Renminbi (RMB) remain very much in place. The post-pandemic economic recovery is arguably the most on-track in China, and favourable yield differentials further support the Chinese currency.

We retain a positive outlook for the RMB, expecting it to strengthen to 6.7100 against the USD in the near term. A steady recovery in China and a firm RMB has allowed markets to overlook the mostly weak state of recovery in Asia (ex-China). This provides a degree of shelter for Asian currencies. So, even if the USD rebounds further, we expect its upside versus Asian currencies to be rather limited.

In Singapore, the macro outlook appears to be improving, even though the overall picture remains soft. With fiscal policy being the preferred tool to support the economy, there may be little pressure on the MAS to further ease monetary policy ahead of its biannual policy meeting. We expect the Singapore Dollar Nominal Effective Exchange Rate policy parameters to stay unchanged during the meeting.  

The Recovery Continues

Continuous recovery headlined the month of August, with global risk assets seen continuing their recent rallies. Tech stocks have been the most prominent in supporting Wall Street, with the likes of Tesla, Apple, Amazon, and Microsoft leading the charge. Jobs data from the US, which is one of the most watched economic indicators that represents the recovering global economy is still showing improvements. Unemployment Rate is finally down to single digits at 8.4%, as opposed to 10.2% in July; due to a jump in Non-Farm Payrolls and a decrease in the weekly Initial Jobless Claims data. Number of COVID-19 case growth in the US has been seen to decrease substantially in August despite the ongoing noise on the reason CDC changed its testing guidelines on COVID-19, where asymptomatic cases may need no testing. 

However, recent weeks have confirmed that investors’ risk appetite have also simmered down since the US elections are just around the corner. Regarding polls and surveys, Joe Biden is the clear favorite as of right now; although the same can be said four years ago by Hillary Clinton. President Trumps’ latest hail-mary would be the next round of government fiscal stimulus; believed to play a crucial role in the probability for his reelection. Investors are taking a more conservative approach towards investments, due to the nature of uncertainty during elections; hence causing the recent correction in its stock market which has rallied on a stretched valuation.

Looking at Europe, the Eurostoxx 600 recorded its best month in August 2020, since 2009. Hopes for a “V-shape” recovery continues to build up; with the government revising up its 2020 GDP growth from -6.3% to -6.0%. However, the Euro area has found itself a new obstacle, present in the inflation numbers for the month of August. The Eurozone experienced a deflation of -0.2%, contradicting market expectation for inflation of 0.2% and well below the inflation target set by the ECB at 2%. ECB President Christine Lagarde believes that inflation would only start to pick up in early 2021, while the remaining of 2020 will still revolt around groundbreaking recovery. The central bank is expected to maintain its bond buying program of 1.35 Trillion Euro, with a probability of increasing it to 1.7 Trillion at its upcoming meeting; while deposit rate remains, and expected to be at -0.5% until the end of 2022.

The MSCI Asia ex-Japan recorded an incline of 3.39% in August, with Chinese stocks leading the charge although economic data from China is showing a slowdown in the economy’s recovery path, as can be seen from the PMI and inflation numbers. The majority of other Asian bourses saw modest gains as well in August. Investors particularly in Asia were shocked upon receiving the news of Japan’s Prime Minister, Shinzo Abe to step down due to health complications. However, it seems that investors quickly indulged the idea of the frontrunner replacement candidate; Yoshihide Suga, the Cabinet Secretary to replace Abe.

Domestically, economic data for August showed an uneven recovery path for the economy. Inflation numbers dropped further to 1.32% from 1.54% in July; bringing the YTD numbers for CPI to 0.93%. Consumption has not picked up and is believed to be subdued for the remainder of 2020. On the bright side, PMI manufacturing data and the consumer confidence index remained on its recovery path. The central bank has also increased its foreign reserves from USD135.1B to USD137.0B to further prove its commitment in keeping economic and market stability.

Equities

The JCI recorded its fifth straight month of gains in August, closed 1.72% higher for the month. The rally in the equities market should have been higher in August if not for the MSCI Index rebalancing, that contributed to a decline of 2.02% in the last trading date of the month. This was immediately followed by a rebound in the next day. However, recent noise on the government plan to revise the central bank’s independency, has brought another jittery in the domestic market, coupled with the negative sentiment on global tech stocks, has successfully toned down the risk appetite of the local investors. As the investors try to balance and observe the situation, the capital city Governor, Anies Baswedan, decided to pull the emergency break of total quarantine, as the number of COVID-19 cases has grown at an exponential rate of more than 3,000 cases a day nationally. The action was deemed necessary to reduce exhaustion on the limited healthcare facilities. Without total quarantine, Jakarta would run out of hospital beds by Sept 17^th. This decision alone caused a stock market rout in the following day. JCI was down more than 5% on the day, and had to be suspended. However, compared to the first total quarantine in the early pandemic, which was considered as lack of guidelines, preparation, or let alone proper health protocol; in the current quarantine, most of the companies and people are well-versed on the work guidelines and health protocol and how to keep the business going with some flexible work arrangement.  Government also allows more sectors to open during the quarantine, as compared to the previous.

The JCI is currently trading at approximately 18 times forward price-to-earnings ratio, but yet also a reflection of a rough 17% earnings downgrade for 2020. Foreign money has also continuously flowed out of the stock market since the start of the pandemic, leaving the domestic investors as the sole supporting pillars for the stock market. The number of local daily stock investors was seen rising from 51k in March to 93k in July 2020 as more and more retail investors take interest in the domestic stock market and boost JCI. Going forward, volatility may still persist, as investors are observing whether or not the quarantine would be extended to more cities, which will mean another break in the economic recovery. Nevertheless, equity market is almost certain as forward looking and will attempt to price-in any economic recovery in the future as the nation is racing on the vaccine development and pouring more fiscal stimulus to avoid the prolonged recession. Thus, JCI is expected to close in a range between 5,000 – 5,400 in the remaining of the year.

Bonds

The bond market closed flat, unfazed in the month of August, as indicated by the yield on the 10Y government bond stayed firm at 6.8%. The central bank and the government have decided to extend their “burden sharing” scheme to 2022, which means the budget deficit will continue to widen due to more bond issuance. This has dampened market sentiment, especially for the bond and FX market. In addition to that, the ongoing discussion on the revision of the central bank’s independency regulation has put more stress on the asset. Nevertheless, as investors’ risk appetite gradually increases over the next coming months, especially after the US elections; domestic bonds will again take the spotlight as it provides a relatively higher real-yield compared to neighboring ASEAN and other EM countries.

The yield on the 10Y government bond should hover in between 6.5% - 7.2% in Q4 2020, with higher probability leaning towards the lower bound due to another potential rate cut by the central bank as well as the improving global economy that would drive investors for better yielding bonds.

Currency

In regards to the Rupiah, the USD/IDR saw some volatility in the middle of August, but closed the month flat at around 14,500; after experiencing a spike to around 14,800 in mid-month. The exchange rate in recent months have been quite stable, implying that what the government and central bank is currently doing are acceptable and good enough for investors. However, volatility in the FX market in the near future is to be expected, with a higher probability for Rupiah depreciation in the near future. This could be off-set by the steadily growing amount of foreign reserves that Bank Indonesia have prepared for in recent months. With the uncertainties present both domestically and internationally, the USD/IDR trading range would most likely be in the range of 14,500 – 15,500; taking into account the total quarantine measure, as well as global risk appetite which may move the greenback to strengthen against Rupiah.

Juky Mariska, Wealth Advisory Head, OCBC NISP

GLOBAL OUTLOOK

The recovery continues

Economic activity around the world has begun to rebound over the summer as the major economies have reopened following their pandemic-induced lockdowns in the first half of 2020. We expect the macroeconomic outlook will continue to support risk assets this year. – Eli Lee

Financial markets have seen very clear trends over recent months, with equities buoyant, the US Dollar weaker, bond yields very low and gold hitting record highs. The broad trends have been driven by the global economy starting to recover from the virus shock and by central banks setting near zero interest rates. We expect the macroeconomic outlook will continue to support risk assets this year.

Economic activity around the world has begun to rebound as major economies re-open following their pandemic-induced lockdowns in the first half of 2020.

The cyclical recovery in the global economy should not be surprising, given the scale of the downturn in the second quarter of 2020.

Emerging economies to rebound in 2H2020

We expect emerging economies in Asia and around the world to recover in the second half of 2020 and during 2021. But only China is likely to experience positive GDP growth this year among the major emerging economies.

We forecast China’s economy to expand by 1.7% in 2020, and by 7.1% in 2021 owing to the authorities successfully containing Covid-19, after China became the first country in the world to succumb to the virus in 1Q2020.

The pace of China’s recovery has slowed in Q32020, compared to its V-shaped rebound in 2Q2020,  when China’s GDP expanded by 11.5% quarter on quarter (QoQ), after its severe -10% QoQ contraction in 1Q2020. But that is not surprising, given that the easy post-lockdown gains have now been largely realised, with industrial production already expanding again by 4.8% year on year (YoY) in July.

China’s consumers, however, have remained more cautious. Retail sales are down -1.1% YoY in July, leaving more scope for China’s recovery to continue if residents become less concerned about the virus or uncertain jobs prospects and instead raise consumption again.

In contrast, we expect all the other major developed economies to contract for the whole of 2020.

US GDP forecast upgraded but Eurozone forecast unchanged

We have upgraded our forecasts for US Gross Domestic Product (GDP) after America’s 2Q2020 data was revised higher, and as the economy kept rebounding in 3Q2020 despite second waves of the virus. We now see US GDP falling by -4.0% in 2020.

We have kept our forecasts unchanged for the Eurozone; we expect the region to suffer a deeper contraction than the US, one of -7.6% in 2020 while we have downgraded our projections for Japan, expecting GDP to fall by -4.4% this year, as the country faces second waves of Covid-19 infections and after its 2Q20 GDP data came in worse than expected.

Macro outlook supportive of equities

Despite all our downgrades to growth and the risks from fresh waves of infection, we think the macroeconomic outlook is now supportive of equities, commodities, emerging markets and other risk assets, as economies recover.

Importantly, forward-looking financial markets are set to keep anticipating a return to more normal growth rates in future once a Covid-19 vaccine is developed and widely distributed. Thus risk assets are likely to stay supported, provided economic activity continues to pick up over the next few quarters (as we are forecasting), assuring investors that the global economy can return to its pre-crisis trend growth rates over time.

Fed turns even more dovish

Last month, the US central bank made a major change by shifting from its strategy of aiming for inflation to hit 2%, to one of seeking for inflation to average 2% over time.

This is in response to the Fed largely missing its 2% inflation goal since it began targeting a 2% rate from 2012. The central bank observed: “Following periods when inflation has been running persistently below 2%, appropriate monetary policy will likely aim to achieve inflation moderately above 2% for some time.”

We think the Fed’s shift to seek inflation modestly above 2% to make up for when inflation has fallen short of its 2% target is very significant. The central bank may now keep its Fed Funds interest rate unchanged at 0.00-0.25% for up to the next five years, and thus support risk assets and gold prices, while weakening the US Dollar through anchoring US Treasury yields at their current, historically low levels.

The Fed’s willingness to allow inflation to moderately exceed 2% is increasing inflation expectations. Longer term 10-year and 30-year US government bond yields are rising, causing the Treasury curve to steepen. But overall, we expect yields to remain very low as strong inflationary pressures will be hard to generate over the next few years, given the shock from the pandemic to employment.

Thus, the broad trends favouring buoyant equities, a weaker US Dollar and record gold prices are all set to remain underpinned by historically low Treasury yields and by the global economy’s recovery over the next few quarters.

EQUITIES

Long-term outlook remains sound  

For equities, we believe the longer-term risk-reward remains sound as we emerge from the Covid-19 recession and enter the next expansionary cycle, and this underpins our equal weight stance in equities in our asset allocation strategy. – Eli Lee

For equities, we believe the longer-term risk-reward remains sound as we emerge from the Covid-19 recession and enter the next expansionary cycle. This underpins our equal weight stance in equities in our asset allocation strategy.

Over the near term, however, we see the risks for equity volatility to be higher than average, considering that valuations have largely priced in the initial phase of the recovery to 2021, and that major risks related to renewed Covid-19 infections, the US elections and US-China geopolitics loom in the background.

In our view, while investors maintain core positions in growth sectors such as technology and healthcare, this is an opportune time to rebalance portfolio weights out of growth and momentum stocks that have outperformed dramatically, and into cyclical and value names with resilient balance sheets and stable business models, as these are the ones likely to benefit from the long-term economic recovery.

United States

The S&P 500 index has surged to all-time high, erasing all Covid-19 related losses. However, there is a clear discrepancy in performance across sectors and names, with key tech firms driving a significant portion of the index’s recovery.

The November US Presidential Election is coming into greater focus. This event historically contributes to rising equity volatility in the months prior to the election. This volatility could be further heightened by the potential inflaming of tensions against China by President Donald Trump, who remains behind in the national polls. Also, a failure by Congress to introduce a new fiscal aid package could see the effects of a sharp fiscal cliff hurting what has been an impressive recovery in US equity markets.

Europe

At the time of writing, about 85% of companies have released 1H2020 earnings, with 65% beating earnings per share (EPS) estimates, surprising positively by 23%, although overall EPS growth is down by 26% YoY. Sectors that managed to deliver positive earnings growth were Healthcare and Technology.

However, markets are always forward looking, and gradual recovery in the economy has led to more interest in cyclical/value sectors such as Industrials and Materials. Assuming the recovery is not halted by a significant resurgence in Covid-19 cases, we see greater scope for cyclical/value sectors to outperform. We note that deeper-value sectors such as European banks and Energy have hardly participated in the recovery rally so far, as both have been held back by factors such as adverse dividend dynamics. We see scope for Energy to participate in the global recovery with expected upside in oil prices.

Japan

Japanese equities kept pace with world equities for most of August, although some uncertainties emerged towards the month-end from Prime Minister Shinzo Abe’s resignation due to ill health.

With limited time left for his successor in his remaining term, expiring September 2021, we expect policy continuity and limited impact from the Bank of Japan’s policies, although sentiment may be weighed down by the political uncertainty. Japanese corporates reported soft 1Q 2020 results, with double-digit declines in earnings from a year ago, although there were some surprises seen in select sectors in materials, communication services and consumer discretionary.

Corporate guidance remains cautious while companies exercise strong cost discipline to mitigate bottom line impact. While various central banks globally have mandated dividend restrictions on banks in their efforts to conserve capital, the base case is that Japan is likely to be an exception. Growth prospects for the banking sector remain modest, although largely reflected in sector valuations. We expect the sector-focus on cost management to remain, with modest room to grow earnings in the subdued economic backdrop, and expectations for net interest margin pressure of  about 4 basis points per year on average over the next few years.

Asia ex-Japan

The MSCI Asia ex-Japan Index appreciated for a third consecutive month in August, in line with the risk-on market sentiment.

South Korea’s central bank kept its benchmark rate unchanged at 0.5%, with the next meeting expected only on 14 October. On the economic data front, South Korea’s industrial production rose 1.6% month on month (MoM), but was down 2.5% YoY, with the latter falling short of Bloomberg consensus’ estimates (-2.0%).

India continues to come under much scrutiny given its worsening Covid-19 situation. Its economy contracted by 23.9% YoY in the second quarter, significantly lower than the street’s expectations for a 18% decline given the impact from the pandemic. A number of key Indian ministers such as Home Minister Amit Shah have also tested positive for Covid-19, underscoring the challenges in coping with the virus. However, Indian banking stocks have seen a rally recently. This was likely fuelled by expectations that the Reserve Bank of India would not be extending a moratorium on debt repayments beyond 31 August.

China

Market concerns over US-China tensions have continued to rise, with the US further restricting Huawei’s access to US technology and US-China financial decoupling appearing to have accelerated recently. This is likely to cap the upside in the offshore equities market in the near-term.

Meanwhile, MSCI China (offshore) and CSI300 (onshore A-share) outperformed regional markets in August. At the market level, the valuation of MSCI China is stretched at 14.4 times FY21 Estimated Price Earnings Ratio (E PER) and is trading beyond the +2 standard deviations above the historical average. Valuation of CSI300 is relatively less stretched at 13.7 times FY21E PER, which is below the +2 standard deviations level.

With the US election approaching, we are mindful of the stretched valuations of MSCI China. Any further escalation of US-China tensions could make the market vulnerable to consolidation and profit-taking.

While we are constructive on Chinese equities, especially with the encouraging earnings recovery, our preference would be the A-share market from a top-down level owing to

1. its low correlation with other markets
2. a relatively less stretched valuation, and
3. more sectors that would benefit from domestic investment and consumption.

On a sector level, we prefer those that benefit from domestic investment and consumption, in light of the government’s focus on its “dual-circulation” strategy. Quality cyclicals can also benefit from improving revenue and a stable operating margin environment. We prefer consumer discretionary, construction and infrastructure-related sub-sectors like machinery and materials. We maintain our underweight recommendations on banks with the earnings contractions.

BONDS

Overweight EM High Yield

Bonds continue to be supported by overwhelming central bank policy support. We remain overweight on Emerging Market High Yield credit and maintain our preference for Asian High Yield bonds.  – Vasu Menon We have an overweight position in fixed income, where we continue to overweight the Emerging Market High Yield (EM HY) segment, which provides attractive carry in a search-for-yield environment. Within EM HY, we maintain our preference for Asian HY, especially in the Chinese property sector, where our view remains constructive over the medium term.

Emerging Market High Yield bonds still attractively valued

EM HY spreads tightened 26 basis points (bps) in August and at +589bps have erased around two third of the loss since 23 March. Nevertheless, EM HY spreads are significantly higher than the spreads for EM Investment Grade (IG) bonds which tightened 18bps in August to +203 bps, still well off the pre-pandemic 2020 tight of +150 bps.

EM HY spreads are also about 71 bps above the 5-year average of 518 bps and 271 bps above the 5-year low of 318 bps.

Prefer Asian High Yield within the Emerging Market space

In HY, Asia has underperformed in recent weeks in what we believe is a “relief rally” in Latin America, which has still under-performed badly year-to-date. Nonetheless, we are still maintaining our preference for Asia.

Within Asian HY, we remain overweight in Chinese property bonds. During August, Chinese HY bonds continue to outperform China IG bonds. We acknowledge that the relative value of Chinese HY bonds now appears less compelling relative to China IG. However, given that we prefer BB over B credit names in the face of uncertainties, including the ongoing Covid-19 impact on the global economy and the US Presidential election in November, we find that relative value in quality Chinese property HY names continue to be attractive.

Under the current market environment, the appropriate strategy for the rest of 2020 is to look for return from higher carry. On the one hand, we see downside supported by stable fundamentals, as the Chinese property sector is domestically focused and less affected by US-China conflicts. On the other , we see that China’s recovery from Covid-19 has largely been reflected in bond spreads, therefore, upside is limited. The US Treasury curve steepening towards the end of August also benefits Chinese HY bonds that are shorter dated.

Maintain overweight rating on High Yield and market weight on Investment Grade

We are maintaining our overweight stance on EM HY and neutral stance on EM IG. However, given the potential for periods of higher volatility emanating from both economic and political noise in the coming months, we would focus on the lower beta “BB” portion of the market. HY has outperformed in recent months, as the markets have pivoted from focusing on worst-case outcomes to better economic data from re-opening of markets and ongoing central bank support, anchored by the Fed. Unless there is a significant recurrence of the pandemic in key markets, we expect this trend to continue in the coming months.

FX & COMMODITIES

Gold to benefit from dovish Fed

If we are right that steepening in the US yield curve is likely to be modest and higher inflation expectations will hold down real yields, low opportunity costs of holding gold, and the potential for a weaker US Dollar could lift gold to US$2,150/oz in 12 months’ time. – Vasu Menon

Oil

The global oil demand recovery from the Covid-19 crater in April continues in 3Q2020, although there are signs that oil demand pick-up is starting to wane. Road fuel demand is making clear strides, with mobility levels picking up but the recovery in jet fuel remains slow. We also wonder to what extent the improvement in road fuel demand is less a sign of any normalisation of economic activity and more a reflection of the sharp increase in people getting to their vacations by car, thus taking their holiday within the country rather than travelling abroad. There remains plenty of uncertainty about whether demand for transportation fuels will ever return to normalcy.

We expect supply side rebalancing to offset slowing oil demand pickup to keep oil prices supported. OPEC+ compliance is likely to remain strong and supportive of oil prices, while radical reductions in drilling across the world should remain in place until oil prices start to rise above US$50/bbl.

Gold

The Fed’s dovish shift to average inflation targeting at Jackson Hole is on balance supportive of gold despite prospects for a steeper US yield curve. The pace of gold ETF inflows slowed in August following robust buying in July. We expect inflows to rebound strongly in September, into and after the September Federal Open Market Committee meeting. The revised Fed policy framework raises the bar for strong inflation or the labour market to trigger hawkish policy shifts. While the combination of significantly higher inflation tolerance in the absence of yield caps suggests nominal long-term interest rates can rise much more than perhaps markets are currently expecting, the Fed is unlikely to welcome yield curve steepening without an attendant rise in inflation expectations. If we are right that the steepening in the yield curve is likely to be modest and higher inflation expectations will hold down real yields, low opportunity costs of holding gold, and the potential for a weaker US Dollar could lift gold to USD2150/oz in 12 months’ time.

Currency

After spending the whole of August in a flat-to-heavy posture, the broad US Dollar (USD) is poised to break lower as USD-negative drivers remain in place. In the near-term, the risk-on/firmer equities market dynamics shows no signs of exhaustion, and the positive correlation between the equity and FX markets leaves the broad USD firmly pinned to the downside.

Further out, there is still limited relief from US fiscal stimulus as the Democrats and Republicans have yet to strike a deal. This keeps the markets cautious on US macro recovery, and the USD undermined from a relative macro outlook perspective. Perhaps more importantly, the Fed has turned even more dovish after the annual symposium at Jackson Hole, effectively committing to an ultra-accommodative monetary policy stance for the foreseeable future. While the other central banks can be expected to follow suit eventually, relative central bank dynamics, as it stands now, is not favourable for the USD.

Thus, the environment remains starkly negative for the USD. One potential positive is back-end rate differentials. If the Fed can engender sufficient market confidence in its new policy framework’s ability to lift inflation down the road, longer dated US Treasury yields may react and move higher. However, for this to gain traction, 10-year US Treasury yields will need to move materially higher towards the 1% area. Overall, with the USD is still biased to the downside as risk sentiment is supported by central bank accommodation. Expect the cyclical currencies (especially the Australian and New Zealand Dollars) to potentially lead the next leg of USD weakness.

In Asia, sentiment remains broadly positive after Sino-US trade relations were reaffirmed, and the market continues to shrug off tensions in other areas. Furthermore, the fact that the Renminbi has strengthened given USD weakness augurs well for Asian currencies vis-à-vis the USD. However, do watch out for idiosyncratic domestic weaknesses, especially from currencies like the Korean Won and the Thai Baht.

In Singapore, the Monetary Authority of Singapore continues to view monetary policy as “appropriate” despite the recent string of subdued data. This leaves us to believe that the underlying Singapore Dollar (SGD) nominal effective exchange rate (NEER) policy will not change just yet. The SGD NEER should remain broadly anchored around the parity level, and the USD/SGD movement reactive to global cues. Expect the SGD to strengthen against the USD given the weaker USD and the stronger Renminbi vis-à-vis the USD.

And the beat goes on

Further recovery of the US economy still provides an ongoing optimism surrounding the markets, driven lately by the latest unemployment rate number that showed a decline from 11.1% to 10.2% in the month of July. This is somewhat proof of an improving economy emerging from recession; which in the second quarter of 2020 saw a contraction of 32.9% QoQ. On the other hand, COVID-19 cases still present a major uncertainty with the US contributing roughly 25% of total cases globally. There are high hopes currently in the race to finding a vaccine by major corporations around the world. Fiscal stimulus talks by policymakers is also another component of the overall positive sentiment felt in markets; but the verdict seems to still be out of reach with the Democrats and Republicans clearly having different views on how much to spend.

The Euro Zone has officially entered recession, with Q2 GDP contracting 15% YoY, due to vast lockdowns in the second quarter of 2020. Spain’s economy was hit the hardest because of it, contracting 22.1% YoY, followed by Germany at 11.7% YoY, while France saw a modest 5% YoY contraction. However, recession was of no surprise as it was anticipated by investors. The 750 Billion Euro stimulus by the ECB in mid-July have helped support markets, with an additional 1.1 Trillion Euro fund prepped to be utilized in 2021 – 2027. These steps taken by the central bank have given a sense of a safe recovery path for the Euro Zone overall.

Meanwhile in Asia, the MSCI Asia ex-Japan soared in the month of July, recording an 8.02% jump. Market sentiment in Asia was also driven by aggressive monetary and fiscal easing by central banks, in the midst of growth uncertainties for Asian countries. For instance, the PBOC have also recently decided to inject another CNY 50 Billion into the financial system to provide ample liquidity. China was still able to record positive growth in Q2 2020, a 3.2% YoY growth after recording a contraction of 5.8% in the first quarter. PMI data in the majority of Asian countries have also shown improvement amidst the New Normal era which had begun. However, escalating Sino tension recently has dampened market sentiment and it is feared that it may hinder global recovery. 

Domestically, the month of July has been the best month for equities in 2020. Economic indicators are also showing signs of an improvement. However, the economy deflated 0.1% in July due to the falling prices of several food ingredients, therefore pushing down inflation to 1.54% YoY. Similar to the majority of nations, Q2 GDP was in the negative territory, recorded at -5.32% YoY. However, foreign reserves at the end of July showed a significant jump from USD 131.7 billion to USD135.1 Billion. The increase was mainly due to the issuance of Global Bonds and also higher borrowing by the government. In addition, PMI Manufacturing numbers also recovered, up to 46.9 from 39.1 in the previous month. Overall, most of the economic indicators are on the positive side; while COVID-19 numbers are still on the rise. The Government’s response and handling of the novel virus is still rated adequate up to this point, in return providing support and optimism for markets.

Equity

The Jakarta Composite Index experienced a 4.91% gain in July, still driven by optimsm about economic recovery, indicating that the stock market has bounced almost 30% from its lowest point in March. The investors responded to positive improvements in July that were seen from business activities and the release of economic data, after being depressed in the second quarter. Currently the price to earnings ratio is in the range of 19x, investors are optimistic enough that the Indonesian economy will recover in the third quarter, with Indonesian economic growth maintained in the range of 0 to 1%.

On the other hand, the COVID-19 case in Indonesia is still not showing a declining trend. There is also an increasing tension between the US and China, that can be a risk for the equity market. However, with the various roles of Indonesian government that are quite evident in supporting Indonesia's depressed economy due to COVID-19, and also the cooperation between Indonesian company Bio Farma with the biotechnology company China Sinovac to produce vaccine which is currently in the third stage of clinical trials, JCI has the potential to continue its uptrend. Thus, the correction on the equity market can be utilized as a momentum to invest in the equity market.

Bond

The bond market also recorded a gain in July, with a government 10-year benchmark yield declining from 7.2% to 6.8%; and stable enough in the range of 6.8% until the middle of August. High demand from both foreign and domestic investors in the bond markets shows that Indonesia's bonds are still quite appealing. Capital flows to emerging economies, including Indonesia began to recover after a massive capital outflow in March. Foreign investors today are seen continuing to add ownership to the Indonesian bonds market. The burden sharing scheme between Bank Indonesia and the government has also started to run, which in the beginning of August is the first transaction for the fulfilment of some public goods financing has been done by the government. The issuance of debt with the private placement scheme to Bank Indonesia reached a total of Rp 82.10 trillion. This burden sharing scheme is expected to reduce the supply burden on bonds. Therefore, government 10-year benchmark yields are expected to continue to strengthen amid the low inflation rate, as well as further interest-rate cuts to boost the economy.

Currency

Unlike the equity and bonds market, Rupiah ended up weakening 2.35% against the greenback at the end of July, at the level of 14.600. The Rupiah underwent a weakening trend in the first three weeks, and improved in the last weekend. The surge in cases that still occur in different countries makes investors sell the Rupiah and move to safe haven assets, even gold records a strengthening of nearly 11% during the month of July. Demand for the US dollar as a safe haven currency is also still high, along with the uncertainty that still struck. With further interest rate cut, the Rupiah is expected to move in the range of 14.500 – 15.000 until the end of 2020.

Juky Mariska, Wealth Advisory Head, OCBC NISP

GLOBAL OUTLOOK

Rebound amid continued uncertainty

The recession is officially over, as restrictions ease and economic activity picks up, but business conditions are likely to remain very difficult. – Eli Lee

While we believe the low of the cycle is behind us, a full recovery to pre-Covid-19 levels of output will not happen until 2022.

China now seems likely to record positive GDP growth for the  full 2020 year, while Europe is set to contract by 7.9% and the US by 5.1%, both slightly worse than previously expected. As a result, world Gross Domestic Product (GDP) is set to fall 2.2% in 2020, with the improved outlook for China accounting for an upward revision from last month’s forecast of -2.5% global GDP growth.

After widespread shutdowns in Q2 2020, we should not be surprised that simply turning the lights on again resulted in an initial sharp spike of growth from an extremely low base. The danger lies in extrapolating this initial sharp bounce to a complete V-shaped recovery. The path of global recovery remains highly uncertain and heavily dependent on ongoing policy support.

Reduced policy support and, in some cases, renewed outbreaks of Covid-19 will undermine momentum. In many developed economies, activity will not return to pre-crisis levels until late in 2021 or 2022. As a result, policymakers are likely to proceed with caution when attempting to unwind policy support measures.

Overall, the pace of economic recovery worldwide is set to become more uneven after the initial surge that followed the easing of lockdowns.

Growth momentum plateauing

In our base case, the reality of a drawn-out recovery process will be uneasy with the optimism in markets today, and already we are beginning to see signs of growth momentum plateauing.

In the US labour market, after 15 weeks of consecutive declines in initial jobless claims numbers, from its peak in March at 6.9 million to 1.3 million, the figure has turned and increased in the two weeks to 24 July. Of note, the Conference Board Consumer Confidence index also fell in July, to 92.6 after three consecutive months of increase to 98.3 in June.

Even in China, which is more advanced in the process of controlling the pandemic, high frequency monitors suggest that the pace of normalisation in activity is moderating. This should not be surprising, given that global economic weakness is posing a significant headwind for China, for which international trade and exports are major economic components.

Rising infection trends unlikely to lead to widespread shutdowns

The recovery momentum has been hindered by rising infection rates in various hotspots. In the US, the good news is that the rate of new cases has started to decline.

We do not expect US policymakers to return to widespread lockdowns, given reduced political will and a more subdued death rate due to the lower average age of those infected.

In the absence of an effective vaccine however, the threat of subsequent waves of infection will continue to loom large. This continues to affect the pace of re-opening and negatively impact consumer and investor confidence.

Wide-ranging stimulus to remain

At the July Federal Open Market Committee meeting, the Federal Reserve reiterated their “whatever it takes” stance to support the recovery.

The Fed also extended seven of this year’s crisis programmes, including the Primary and Secondary Market Corporate Credit programmes and the Paycheque Protection Programme Liquidity Facility, all due to expire over September to end-December.

In 2H 2020, we further expect the Fed to further strengthen their commitment to keeping rates at near-zero levels, using an ‘average inflation targeting’ framework which effectively represents a further easing in US monetary policy.

On the fiscal side, coming on the heels of the historic €750 billion stimulus passed in the European Union, we expect another US fiscal package soon.

Vaccine race gathers momentum

The successful eventual release of Covid-19 treatments should limit the long term impact of the virus on global growth.

As we move through the second half of 2020, scientists around the world are racing against time to overcome the overwhelming Covid-19 related hurdles that stand in the way of a full re-opening of the global economy.

At the end of July, there were at least 139 candidate vaccines in pre-clinical evaluation, and 26 candidate vaccines in the clinical evaluation stage.

Given the speed of clinical trials progression amid the deepening health crisis, there is limited clarity and alignment at this point from various regulators globally on what constitutes acceptable standards for a safe and effective vaccine. This poses a challenge.

Definitions of a successful vaccine can vary as well, given that some vaccines work on triggering the immune system to fight as opposed to preventing infection, while others do not produce sterilising immunity (production of neutralising antibodies blocking the virus from entering the cells).

EQUITIES

Maintain neutral position  

We continue to maintain our equal-weight position in equities given the risks and uncertainties ahead, even as economic data offer some support as economies re-open. – Eli Lee

For equities, we see the longer-term risk-reward to be sound as we emerge from the Covid-19 recession and enter the next expansionary cycle, and this underpins our equal weight stance in equities in our asset allocation strategy.

Over the near term, however, we see the risks of equity volatility to be higher than average, considering that valuations have largely priced in the initial phase of the recovery to 2021, and that major risks related to renewed Covid-19 infections, the US elections and US-China geopolitics loom in the backdrop.

In our view, while investors will need to maintain core positions in growth sectors such as technology and healthcare, this is an opportune time to rebalance portfolio weights out of growth and momentum stocks that have outperformed dramatically, and move into cyclical and value names with resilient balance sheets and stable business models, as these are expected to benefit from the long-term economic recovery.

United States

The 2Q2020 reporting season saw consensus expecting a deep 42% year-on-year (y-o-y) decline in earnings per share for the S&P 500 index.

The pull-forward of digital trends, as well as an environment of low rates provide conducive conditions for the strong year-to-date performance of growth stocks in the US. However, record market concentration represents a risk to aggregate index performance. Exceptionally large index weights of mega-cap technology names could result in the S&P 500 index being susceptible to sector- or company-idiosyncratic shocks.

In our view, potential catalysts for a rotation from growth to value/cyclicals include

1. an abatement in new Covid-19 cases in the US and advances in a vaccine development
2. positive earnings revision for adversely affected sectors, and
3. further fiscal stimulus in coming weeks.

Europe

Europe did not disappoint when all came together to approve the European Union (EU) Recovery Fund. The approval was amply reflected in the foreign exchange market with the prompt appreciation of the EUR.

In equities, however, the price action of European indices such as MSCI Europe has been relatively muted, with the already rich valuations. Though this development should lower the risk premium of the region, the direct impact of the measures is more medium-term in nature (rather than short-term) and hence is unlikely to be reflected in earnings forecasts anytime soon. Furthermore, the massive Euro rally would be negative for exporters that derive a significant portion of revenue overseas.

Looking ahead, investors are likely to focus on how smooth the recovery trajectory will be for various economies, and managements’ commentary on the outlook during this earnings season, after a record number of companies withdrew guidance in the last round of earnings.

Japan

With limited growth drivers, Japan’s equities trailed its global peers and moved in a tight range for July, with some rotational buying interest continuing in small and mid-cap stocks with higher growth exposure. During the month, the raising of the alert level in Tokyo on renewed viral infection cases weighed on investor sentiment and diminished some of the risk-on appetite.

Near term, we expect further market consolidation with subdued sentiment, due to ongoing concerns over Covid-19 resurgence, heightened US-China tensions and subdued guidance expected from the 1Q2020 reporting season. Attention should focus on Japanese corporates’ first full year guidance and outlook statement, given this was previously put on hold due to dim visibility from the Covid-19 outbreak during the FY2019 reporting period.

Overall, valuations of the Topix index at 16-17 times forward FY2021E price-to-earnings ratio (PER) level appears to have priced in recovery scenarios, although buoyant market liquidity could continue to lend support to extended valuations. Within the current modest growth environment, we prefer accumulating quality names in stages, given our view that consensus estimates remain on the optimistic end.

Asia ex-Japan

The MSCI Asia ex-Japan Index appreciated for a second consecutive month in July, following a firm rebound in June.

However, the fallout from the Covid-19 pandemic has continued to exert pressure on the financial system, as illustrated by the Reserve Bank of India’s latest Financial Stability Report. It highlighted that the gross non-performing ratio of all commercial banks may increase from 8.5% in March 2020 to 12.5-14.7% by March next year.

S-REITs kickstarted the earnings season in Singapore. What we have seen is an affirmation of the trend where the logistics and data centre sub-sectors have been resilient, while performance for the retail and hospitality REITs were lacklustre. However, for retail, there is some optimism based on operational data, where occupancy rates and rents have only come off slightly for the suburban malls. Asset valuations in Singapore have also unsurprisingly seen some impairment by low-to-mid single-digits. This was largely due to rental assumptions being moderated.

What did come as a surprise to the market was the announcement by the Monetary Authority of Singapore (MAS) to call for the locally-incorporated banks headquartered in Singapore to cap their total dividends per share (DPS) for FY2020 at 60% of FY2019’s DPS, and also to offer shareholders the option of receiving their dividends in scrip instead. While the latest dividend cap for the banking sector is a disappointment for investors this year, mandating prudence on capital usage is largely in line with regulators’ cautious stance globally amid the Covid-19 outbreak. We believe Singapore banks are still relatively less constrained than European banks despite this latest development.

China

2Q2020 macro data showed economic activities continuing the path to recovery, with better-than-expected infrastructure and property activities. While headline retail growth was still in negative territory, the robust momentum for online retail sales remained intact. The rebound in 2Q2020 could lower the government’s incentive to ramp up the intensity of policy support in the near term, but we believe the possibility of lowering policy rates remains.

The onshore A-share market outperformed offshore China equities, Hong Kong and Asia ex-Japan in July. Comparing the strong outperformance of the China A-shares market with the previous rally in 2014-15, our view is that the current situation is relatively healthy, with better control in overall leverage and a more targeted and disciplined monetary easing. We believe the government would be ready to step in to pre-empt a replay of the “2015-rally” if needed.

At current levels, PER valuations of MSCI China index look stretched and are beyond the +2 standard deviation level to historical average. The launch of the Hang Seng TECH Index would be positive for market sentiment and is expected to draw passive fund flows with the expected launch of exchange-traded funds (ETFs) tracking the HS TECH index.

Given the stretched valuations, the market is set to be more volatile and vulnerable to consolidation and profit taking on the back of renewed US-China tensions and potentially disappointing 2Q2020 results. Multiple headlines on US-China tensions would add to uncertainties in the near-term and this remains our biggest concern for the Chinese equities market.

BONDS

Still positive on EM High Yield

The extent to which the second wave of Covid-19 infections adversely impacts the global economic recovery remains the biggest risk facing corporate bond markets. – Vasu Menon

For the third straight month, global corporate bonds rallied strongly, helped by policy support from the Federal Reserve. Emerging Market (EM) corporate bonds were up 2.2%, with High Yield (HY) up 2.3% and Investment Grade (IG) up 2.1%. In Developed Markets (DM), IG rose 3.1% while US HY rose a remarkable 4.4%.

Emerging Market spreads stage big rally

EM HY spreads tightened 26 basis points (bps) in July and at +630 bps have erased around 60% of the loss since 23 March. Meanwhile, EM IG spreads tightened 20 bps to +270 bps, still well off the pre-Covid-19 tight of +190 bps.

Technical picture improves with positive inflows

For the week ending 29 July, EM bonds recorded net inflows of US$0.18 billion on top of the US$ 1.22 billion and USD 1.89 billion in positive inflows the previous weeks. Despite the more positive recent numbers, there has still been outflows of USD 47.4 billion during 2020. However, outflows in hard currency bonds have been much more muted, accounting for only US$7.1 billion of this total.

Prefer Asian High Yield

We remain overweight in Asian HY, especially Chinese HY property bonds. During July, Chinese HY outperformed its IG counterparts, reflecting the optimism from the reopening of China’s economy, continuous recovery in sales for the property development sector, and the abundance of market liquidity from central bank stimulus. The credit spread margins between Chinese IG and HY sector tightened to 587bp from 671bp at end-June. This compares to 473bp at the beginning of the year. It means Chinese HY bonds are still better relative value. The plentiful market liquidity also limits a major risk -- refinancing risk -- for HY issuers. These factors continue to support our overweight call for the Chinese HY property sector.

We acknowledge intensifying uncertainties in the coming quarter as the US presidential election in November this year approaches, given that China-US relations is perceived to be a strategy to win votes. Any escalation of conflict between the two countries could cause volatility, more so in Chinese HY bonds. As a result, we prefer quality HY names and investors should become more selective than previously, given the rally of HY bonds versus IG bonds since the March low.

Maintain overweight rating on High Yield and market weight on Investment grade

We are maintaining our overweight stance on EM HY and neutral stance on EM IG. However, given the potential for periods of higher volatility emanating from both economic and political noise in the coming months, we would focus on the lower-beta “BB” portion of the market.

HY has outperformed in recent months as the markets have pivoted from focusing on worst-case fat-tail outcomes to better economic data from re-opening of markets and ongoing central bank support, anchored by the Fed. In the absence of a significant recurrence of the pandemic in key markets, we expect this trend to continue in the coming months.

FX & COMMODITIES

Higher for longer gold prices

The possibility of central banks attempting to inflate away a debt overhang in a world of near-zero interest rates and worries of currency debasement, means that gold will remain attractive as a safe-haven – Vasu Menon

Oil

We are raising the 12-month Brent oil price target to US$50/barrel versus US$45/barrel previously. Oil prices could be choppy for a bit longer as another wave of infections and recovering North American oil supply will likely weigh on oil price sentiment. The rise in gasoline and distillate inventories, which come amid the US summer driving season -- when demand usually rises sharply, and inventories normally fall -- also warns that easy gains in oil prices are behind us. This all comes as the market is preparing for the OPEC+ alliance to pull back from unprecedented production cuts in August. But any weakness in oil prices is likely to be temporary.

We expect oil demand to continue to grind higher and next year might surprise on the upside if international trade recovers. In addition, OPEC+ compliance is likely to remain strong and support oil prices, while radical reductions in drilling across the world should remain in place until oil prices start to rise above US$50/barrel.

Gold

Gold has outshone other reserve currencies such as the US Dollar (USD), Japanese Yen (JPY), Euro (EUR) and Swiss Franc (CHF) this year. Risk of central banks attempting to inflate away a debt overhang in a world of near-zero interest rates and worries of currency debasement should keep gold as a “haven” asset of choice.

Gold is well supported by falling US real yields. This will limit corrections and keep gold as a “haven” asset of choice versus other traditional “safe assets” such as government bonds, given that the benefits of declining nominal yields are mostly exhausted with interest rates at virtually zero in the US and little indication that the Fed intends to drop them into negative territory.

Gold’s rise is also an indication of currency debasement fears stoked by expansion of central bank balance sheets. Gold does not have the comparative negatives of other “haven” currencies such as the USD, JPY, EUR or CHF, as central banks can print money but cannot print gold.

Currency

The broad US Dollar (USD) decline has accelerated over the past four weeks, and there may be little in the horizon that could halt this decline. What we may be seeing is a broad-based USD sell-off beyond the typical risk-on/risk-off dynamics.

In the near term, the virus situation in the US remains severe, and it is a negative factor for the USD. Uncertainty about fiscal policy support for the US economy also weighs on the greenback and may even be structural negative for the greenback. Meanwhile, a dovish Federal Reserve means US Treasury yields will be depressed, further compromising the rate differential advantage of the USD.

Thus, USD-negative drivers are in plain sight. The issue is that everyone is on the same side of the boat now, and price movements are starting to look stretched. This leaves room for a potential USD rebound. In particular, the major currencies are running into key support/resistance levels against the USD, and any sign of fatigue may quickly develop into a stronger USD as profit-taking kicks in.

In Asia, broad-based USD weakness means stronger Asian currencies against the greenback. However, we see several factors that are also supportive of the USD vis-à-vis Asian currencies.  In the near term, Sino-US tension and a tight correlation between USD-CNH (Chinese currency) and selected USD-Asia currency pairs, may offer support to the USD vis-à-vis Asian currencies.

Portfolio inflows into Asia have also softened. In addition, we note the ongoing weakness of aggregate Asian economic prints (except for China) relative to the US and Europe. This should also limit the room that Asian currencies have to appreciate.

On the Singapore Dollar (SGD) front, even though the USD/SGD has broken lower, the SGD NEER (nominal effective exchange rate) remains anchored to the parity level. This suggests that the USD/SGD decline reflects broader USD weakness, rather than any domestic SGD-positive drivers.

Note that the correlation between the USD/SGD and the DXY (USD) Index is also tight. Thus, do not rule out further declines in the USD/SGD, especially if the broad USD continues to capitulate.

Rebound amid continued uncertainty

The easing of lockdowns has clearly sparked optimism that the economy is on the path of recovery. One of the main scopes to gauge the improvement is by looking at the bettering of job numbers; nonfarm payroll employment rose 4.8 million, pushing the unemployment rate down from 13.3% to 11.1% as the US employment situation has taken a big leap out of its darkest times. However, the unemployed persons number still stood at 17.8 million nationwide. Meanwhile, the COVID-19 infection rate has not shown improvement as major states start contemplating softer physical distancing measures to keep it under control. Also, global investors are warming up to the idea of having Joe Biden as the next 46^th President of the United States as Joe Biden of the Democratic party is currently leading the polls versus its counterpart.

The UK is evidently the worse region compared to other developed nations such as the US and Japan. While EU, as a whole, has shown improvements in the past few months but apparently still causes pessimism amongst policymakers as the bloc’s growth projection has been lowered by a full point to -8.7% this year. In regards to Brexit, Prime Minister Boris Johnson has been clashing with the bloc over trade relations, among other things. The European Union had encouraged Johnson to postpone the timeline for Brexit until 2021, but the idea was turned down by the Prime Minister. Johnson had iterated that England would leave the Union, regardless of whether there is a trade deal or not on the table.

Moving towards Asia, the MSCI Asia ex-Japan index recorded a gain of 5.4% in June, the best performing month during the COVID-19 era. Sentiments are lifted in Asia as the second wave of COVID-19 is not as bleak as expected. Countries such as China, Korea, Japan, and Singapore have seen declines in terms of daily new cases even though their economies have resumed towards New Normal. However, as long as COVID-19 vaccine is still unavailable there is always be a threat of a resurgence in the novel virus. Asian investors’ focus is now geared more towards the geopolitical tension between several nations such as US-China, China-Hong Kong, and China-India. These political tensions may hinder economic recovery even more; especially if tensions rise.

Domestically, the month of June has been good towards capital markets. Fundamentally, June economic indicators have leaned towards signs of recovery. The central bank also lowered its main rate 25bps to 4.00% for the 7-Day Reverse Repo Rate. Although inflation was recorded lower due to subdued demand for consumption, dropping from 2.19% to 1.96% from May to June; other indicators were seen otherwise. Foreign Reserves rose from USD130.5B to USD131.7B, and has provided positive sentiment towards the appreciation of domestic currency. The amount is equal to 8.1 month of imports plus international debt payment. Finally, PMI Manufacturing data showed a spike in reading, leaping from 28.6 to 39.1. All in all, it is evident that the reopening of our domestic economy has put us on the path to recovery sooner than it had been anticipated.

Equity

The stock market rallied for 3.19% in June, stipulated by the growing optimism on the reopening of the economy through New Normal. Currently trading at 17.2 times of forward price-to-earnings ratio, above the five-year-average, the investors are pricing in a potential recovery in the second half of the year, having downgraded the corporate earnings to roughly 15 to 20% in last April. Domestic investors remain the major player that dominated the trading activity. However, as the number of cases continued to rise domestically, the government has shown dissatisfaction towards the budget utilization on COVID-19 related. This has sparked speculation on the imminent cabinet reshuffle. Historically, during Jokowi’s first term, cabinet reshuffles had a positive impact on the capital market.

Although equity has rebounded as much as 29% from March low, one should stay reminded that Jakarta Composite Index is still trading at discounted of 21% from the January high. As the economy and corporate earnings continue to recover through 2021, JCI is estimated to retrace previous highs. However, looming risks include the growing tension of US-China, and should the number of COVID-19 cases continue to rise exponentially. Therefore, investors are advised to manage risk by dollar cost averaging, by utilizing market correction as an entry window.

Bonds

The bond market weakened in the month of June, with the government 10-year benchmark yield recording an increase from 7.15% to 7.21%; somewhat of a flat movement due to relatively balanced in and out flows by mainly domestic investors. Suffice to say, most predicted that the bond market would be under more pressure with the government’s plan to increase state issuance to help finance the planned COVID-19 fiscal stimulus of about Rp 695.2 trillion equal to 6.34% of national GDP to support the hurting economy. Oversubscriptions have verified the attractiveness of global bonds issued this year as well, and have been nothing short of expectation both for domestic and foreign investors. From June to December this year, the government still plans to issue another Rp 990 trillion worth of government bonds, including Samurai and Diaspora bonds to cover the widening deficit.

In early July, Bank Indonesia has agreed on burden sharing to absorb the zero coupon bonds issuance in 2020 as much as Rp 397.56 trillion through private placement, which will be allocated for public goods spending. Moreover, BI will continue to participate through market mechanism to support funding to non-public goods up to Rp 505.9 trillion, by receiving a discounted interest for 2020. The move is expected to provide demand support as the issuance increases, as well as reducing volatility. Domestic investors, namely banks, have overtaken the bond ownership. Ownership increases from 26% in January to 33% in June.

Hence, we believe the yield on the government 10-year benchmark should be in the range of 6.8% - 7.2% for the remainder of this year, with a higher chance of it being in the lower bound by year end.

Currency

In regard to the Rupiah, volatility has been high in the 6^th month this year which ended roughly 1.0% appreciating against the greenback. For a brief moment, the USDIDR took a dive in the first week of the month slipping below 13,900; lowest level since February. However, the exchange rate has gone back to 14,265 by the end of June and is currently in a depreciating trend against the USD. Several factors both domestically and globally have caused this trend shift;

1. The resurgence of COVID-19, especially in the US has prompted demand for safe haven assets as can be seen in the price of Gold. The USD which is still the number one safe haven asset will without a doubt gain back the attention which it has lost in the last couple of months. Demand for the greenback in the near future will remain quite high, as uncertainty surrounding the novel virus is still the global priority.
2. A lower interest rate, just a while ago, Bank Indonesia decided to continue pursuing growth by slashing the 7-day reverse repo rate to 4.25%. While inflation reading continues to move lower, below 2%, this has created an extra buffer for the central bank to cut the interest rate further in the future. With the Rupiah well below 14,000/USD in June, numerous exporters can see their financials taking a hit. Trade balance numbers for the month of June are yet to be released, but are expected to go down more than 50%; from USD2.1 billion to just USD$895 million. With the Rupiah depreciating, this outcome may be somewhat subdued.

The Rupiah should be in the range of 14,300 – 14,750 for the remainder of 2020, as the government will keep more of a close eye towards it for the remainder of this year.

Juky Mariska, Wealth Advisory Head, OCBC NISP

GLOBAL OUTLOOK
Rebound amid continued uncertainty

Economies are rebounding as coronavirus-related restrictions ease, but there is still a lack of clarity over the depth of the slump and the speed of the recovery. – Eli Lee

The “base case” for forecasts of economic growth or corporate earnings is that the shock to activity quickly fades as containment measures ease. Excess capacity is then absorbed over the next one-to-two years, supported by government policy stimulus and healthcare innovations, such as more effective testing, treatment and prevention.

Hopes for the “bull case” – that summer weather or early discovery of a vaccine would lead to a rapid rebound have diminished over the past couple of months. However, the risk of a “bear case” – where renewed outbreaks lead to further dips in activity – is still alive. Restrictions in Beijing have been re-imposed after infections spread, while several large US states continue to see cases rise. The bear case does not necessarily depend on government measures – it could be that a frightened public decides to self-quarantine in response to

Chinese economy on the mend

The latest data from China does not capture the recent outbreak and shows a pattern of what we can expect in other economies, as it was the first to impose, and then ease, restrictions. Manufacturing has recovered quickly, whereas the service sector is understandably lagging, although both sides of the economy have shown a sharp improvement in just a few months.

European economies doing poorly

In terms of economic performance, among developed economies Europe is clearly faring the worst, due to the combination of the severity of the outbreak and the harshness of the counter-measures. The UK is one of the few countries to produce a monthly GDP series and that showed activity in April almost 25% lower than a year earlier, suggesting the country could see around a double-digit decline for the full year. As a whole, the EU has not been as badly affected as the UK, but is still set to see output decline by far more than the US or Japan in 2020. Factoring in the weak monthly data for the region, we have cut the 2020 forecast from -5.4% to -7.7%.

US and Japanese economy faring better than Europe

In contrast, economic releases in the United States and Japan have been surprisingly solid over the past month. In particular, the US housing market looks reasonably resilient, perhaps helped by lower borrowing costs, while softness in consumer and small business confidence looks relatively moderate compared to the scale of the short-term shock to the economy.

Mixed views from Fed officials about US economy

The Fed’s policy meeting in mid-June illustrated the diversity of opinions, as they updated their medium-term forecasts. FOMC members saw the drop in GDP in the year to 4Q20 in a range between -10.0% and -4.2%, while the unemployment rate by the end of 2021 was put at 4.5% to 12.0%. Full employment is only a touch below 4.5%, while 12.0% is still worse than the trough of the 2008-09 recession, so the range of views is extraordinary.

Fed sees no change in interest rates for a long time

Despite the stark difference of opinion inside the Fed, there was an overwhelming majority expecting no change in interest rates even by the end of 2022. This looks reasonable, considering the short-term deflationary shock from the current recession, as well as the time needed to reverse the damage to labour markets. As Fed Chair Powell remarked, they are “not even thinking about thinking about raising rates”. Remember that it took over six years after the end of the 2008-09 recession before the Fed started to raise rates and the current downturn is much more severe.

Other central banks are also ready for aggressive policy action

Reflecting the scale of the task ahead, central banks across developed markets are intent on allowing no room for doubt about their determination to leave the liquidity tap fully open. Over the past month the European Central Bank and Bank of England announced increases to their respective quantitative easing programmes, while the Bank of Japan took similar steps in late May. The effectiveness of these measures is debatable now that financial markets have stabilised, but the signalling is clear.

Fed against negative rates

The Fed seems to be clear in its rejection of negative interest rates. If it decides that further measures are warranted then some form of yield curve control looks more likely. This could see the Fed commit to purchasing US government bonds in order to hold yields below, say, 1% in order to aid the recovery and limit the strains on government finances.

Fiscal policy needed for economic support

Most of the potential for further economic support lies with fiscal policy, although the sense of urgency has clearly faded. The main issue to be resolved is whether the European Union can take a step towards a region-wide fiscal policy, effectively increasing the scale of transfers to the poorer members. At a time of budgetary stress everywhere, the proposal is unsurprisingly controversial, even though there is a clear need for more government support.

In the US, discussion has again turned to a large-scale infrastructure programme. This looks unlikely to progress ahead of the November election, regardless of the merits of the different plans, due to disagreement over whether to provide funding through higher taxes. Each side also seems wary of allowing the other to claim a political victory so close to a major election.

EQUITIES

Tread carefully 

In the second half of the year, we believe that increasing uncertainties related to the US Presidential elections as well as the state of US-China tensions will come into focus as key market drivers. –Eli Lee

A rising tide of Covid-19 outbreaks in the US and grim forecasts by the IMF have brought renewed focus to the stark disconnect between equity markets and feeble economic conditions. While a risk-on approach did well in April-May, we believe that a neutral stance is now more appropriate and this is a conducive environment for selective stock-picking, given that valuations are less attractive at current levels.

The longer-term risk-reward for equities is still sound as we emerge from the Covid-19 recession and enter the next expansionary cycle. This underpins our neutral stance in equities in our asset allocation strategy. Over the near term, however, we see the risks of equity volatility to be higher than average considering that valuations have largely priced in the initial phase of the recovery to 2021, and that major risks related to rising infections, the US elections and US-China geopolitics loom in the backdrop.

Meanwhile the race for a vaccine continues and fuels intermittent bouts of hope. At the end of June, there were at least 132 candidate vaccines in preclinical evaluation and 17 candidate vaccines in the clinical evaluation stage under development at various universities, biotech firms and pharmaceutical groups globally, according to the World Health Organisation.

United States

Several concerns lead us to question the sustainability of stretched valuations in the US.

First, with Biden leading in the polls, there could be increasing investor worries over the possibility of a Democratic sweep of the Presidency and Congress. This could result in the rollback of the Tax Cuts and Jobs Act signed in 2017, which were a boost to corporates then. Separately, we are also seeing increasing regulatory pressure on Big Tech firms, which could increase market volatility, given that they constitute a large proportion of the overall S&P 500 index.

Second, while US-China tensions continue to manifest in key areas such as investments and tech, there is now the potential for new tariffs on imports from the European Union and United Kingdom, injecting further geopolitical uncertainty into the equation.

Lastly, second waves of infections are appearing in several US states, and this should put in perspective the prior optimism that the market had about the reopening of the US economy.

Europe

Moving into the second half of this year, investors will focus on the re-opening trajectories of economies, further stimulus measures by European Union members, and whether the EU Recovery Fund will live up to its promise. Clearly, the most aggressive pocket so far in terms of fiscal stimulus has been Germany, and the question now is whether this will encourage others to follow suit, if they are able to afford it.

On the other hand, the perceived political risk in Europe is likely to remain at the forefront. Rumours of yet another possible anti-establishment party in Italy seeking Italexit (although unlikely for now) remind us of potential confrontations with the Union, an issue which looks to be further stressed during the upcoming Recovery Fund negotiations. Fears of un-equitable access to a vaccine for Covid-19 could also lead to tensions further down the road. With the MSCI Europe Index trading at a forward price-to-earnings ratio (PER) of close to 18x, it is likely that little of the negatives have been priced in for now.

Japan

Near term, we expect market consolidation after the rebound driven by re-opening optimism, with potential risks of second wave, heightened US-China tensions and subdued guidance expected from the upcoming results season likely to weigh on sentiment. Consensus earnings estimates for the financial year ending March 2021 of about 10% remain optimistic, which should be revised after corporates provide earnings guidance, previously withheld due to limited visibility on the Covid-19 outbreak. After the gains on re-opening optimism, valuations of Japan equities have expanded. We advise to lock in selective profits, and we continue to favour a mix of quality defensive consumer staples and cyclical beneficiaries for investors with long term positions.

Asia ex-Japan

Besides the continued focus on the Covid-19 situation, geopolitical tensions between China and India remain high, with border skirmishes between the two nations resulting in casualties. This comes at an inopportune time as the region is grappling with a tepid economic outlook. India recently saw the largest GDP growth forecast downgrade amongst the major economies by the IMF. Growth is projected to come in at -4.5% for 2020, versus its previous forecast for a 1.9% expansion. The downgrade was the result of a longer period of lockdown and slower recovery as previously anticipated. In South Korea, its Finance Minister highlighted that its third supplementary budget which is pending approval in Parliament could be the last for the year, given that the economic shock from the Covid-19 crisis may have bottomed.

Singapore

Historical trends have shown that there is no clear correlation between Singapore’s general elections and performance of the stock market. July will also see the start of the 2Q earnings season with S-REITs kicking it off in Singapore. This will attract much scrutiny as it is likely to be one of the darkest quarters ever, given the impact from the circuit breaker period, rental concessions given by landlords and border shutdowns. We expect declines in the DPU for the retail and hospitality sub-sectors.

China

Southbound inflows have also been robust with year-to-date net inflows at US$37.8bn, surpassing the net inflows in 2019. We believe ample liquidity could support the market to overshoot in the near term. However, investors should be mindful of the stretched valuations and any disappointment or the re-emergence of US-China tensions could render the market vulnerable to consolidation and profit taking.

We continue to favour rising online engagement as an investment theme given that the pandemic has accelerated online adoption. This structural trend will continue to bode well not just for e-commerce plays but also for companies that are leaders in digital adoption as they are best positioned to gain market share.

Having said that, we advocate that investors be mindful of potential risks and tensions associated with US restrictions, which are likely to result in heightened volatility in the sector. In the next few months, there are key milestones relating to the Holding Foreign Companies Accountable Act which could be key drivers to the share price performance of American Depositary Receipts (ADRs) in the near term.

In addition to the investment themes highlighted, we also identify laggards with an improving operating environment. Chinese insurance sector is trading at an attractive valuation and could benefit from the recovery in equity markets and a stabilisation of bond yields. Considering a robust consumption recovery with online retail sales continuing its uptrend and rising 23% year-on-year in May, we maintain our preference for domestic consumption.

Finally, with China calling on banks to forgo CNY1.5 trillion in income to support the real economy, we expect market sentiment for the sector to be negative and banks to underperform the broader market.

BONDS
Search for yield to continue

The post-March Emerging Market (EM) bond rally appears intact, supported by the Fed’s monetary policy largesse and growing market confidence in an economic rebound, as EM countries gradually ease their lockdowns.  – Vasu Menon

Within our tactical asset allocation, we are overweight bonds, where we continue to overweight the Emerging Market High Yield (EM HY) segment, which provides attractive carry in a search-for-yield environment. Within EM HY, we maintain our preference for Asian High Yield, especially in the Chinese property sector, where our view remains constructive over the medium term.

Market momentum continues, thanks to the Fed

EM bonds are up 0.6% year-to-date (YTD), with Investment Grade (IG) bonds up 2.6% and High Yield (HY) total returns still down 2.5%. EM HY still trades at a pretty wide 409bps above EM IG, which still offers around 60-65bps of spread pickup over US IG; while EM HY is now trading about 50bps below US HY. However, current market euphoria belies our more caution outlook on EM corporate and macro fundamentals, following the damage wrought by Covid-19 related disruptions. Despite this, we expect the near-term trend to remain positive for EM bonds – thanks to the unprecedented market underwrite of the US Federal Reserve Board.

Issuance has picked up while outflows have eased

EM bond issuance volumes picked up substantially in June, with roughly USD254bn worth of debt issued YTD. This is now almost on par with the USD259bn raised by the same time last year when market conditions were less volatile. Issuance remains uneven across regions, with most volumes still concentrated in the IG segment (68% of total issuance) and Asia (63%), while in Latin American issuance activity outside of the IG, sovereign and quasi sovereign space has virtually dried up since the March sell-off. The top three issuing sectors YTD have been Financials (32% of total issuance), Real Estate (16%) and Oil and Gas (14%).

Recent EM bonds flows also support a relatively benign backdrop, with fund outflows from EM bond funds having slowed down substantially since the end of March. Indeed, the month of June saw net positive inflows of over USD3bn, as of 22^nd June. Despite the more positive recent indications, YTD flows are still negative (about USD25.0bn), following sharp outflows from the asset class in March.

Still favour Asian High Yield with a preference for China

We continue to have an overall preference for EM HY over IG – albeit with judicious positioning within the more defensive segments of EM HY. This means our HY bias is overwhelmingly tilted towards Asia/China and Chinese property sector bonds, followed by selective cherry-picking in the other regions. The Chinese property sector (about 50% of the country’s HY sector) remains in relatively good shape, post-pandemic – as exemplified by the rapid recovery in developer pre-sales from their Covid-19 troughs. From a macro standpoint, China currently enjoys the “best of all worlds”: Its post-pandemic recovery has been exemplary thus far, while its HY bonds currently offer spread pickup over IG credits in excess of 600bps – with room for further tightening as its economic recovery is cemented. IG bonds in China offer protection to be sure but appear fairly valued at current valuations – even if selective entry opportunities may avail themselves, as market sentiment ebbs and flows into the second half of the year.

Downside risks to the current outlook

There is risk of current market momentum being reversed by several factors, which investors ought to keep in mind:

1. A re-escalation of trade tensions between the US and China has the potential to disrupt current market momentum, aggravated by the recent poisoning of Sino-US relations over legislative events in Hong Kong. While this issue did not crack the previous EM bond rally, tensions may be further amplified as President Trump likely adopts a more bellicose posture towards China in the run-up to US elections in November.

2. Worsening geopolitical sensibilities across Asia, following recent skirmishes between China and India and increased tensions in the Korean peninsula, could weigh on regional (and EM-wide) asset performance.

3. Secondary wave infections of Covid-19 across the world, including in China recently, risk setting back economic recovery across the world. In addition, persistently negative news flow from the US, which is grappling to contain a recent spike in post-lockdown infections, also poses risks to the current market momentum.

4. Corporate defaults and bankruptcies across EM have increased, post-pandemic. Consensus thinking among rating agencies and sell-side analysts points to corporate default rates remaining elevated post-pandemic. While predictions range between 5-10% for EM credit in 2020, our own sense is that the rates of default will likely touch the lower end of that broad range, as default rates are still around 2% and given there will likely be a lag in deterioration of corporate credit health into 2021.

FX & COMMODITIES
Gold forecast upgraded

We have upgraded our 12-month gold price forecast to US$1,900/ounce from US$1,800/ounce due to several factors including continued Covid-19 uncertainties, trade tension and ultra-low real interest rates – Vasu Menon

Oil

Signs of US oil production returning and risk of oil demand being susceptible to new coronavirus outbreaks are set to slow the climb in oil prices. Crude oil inventories in the US are at a record high. There is also a risk that gains in oil prices recently could see some US shale producers restart wells, which could disturb the US oil market rebalancing process.

Easing lockdowns are allowing an oil demand recovery. But the rate of change in oil demand fundamentals is likely to moderate as incremental demand improvement will depend more on consumer behaviour than the loosening of enforced lockdowns. The positive start to reopening does not resolve the uncertainties about a potential second wave of infections or of a more difficult recovery beyond the easier gains of the first few months driven by pent-up demand. If the virus spread continues to worry individuals, mobility demand will likely remain subdued. A reluctance of consumers to hit the roads could dent expectations of a recovery in demand for gasoline during the US summer.

Gold

Our 12-month gold price forecast has been upgraded to US$1,900/oz from US$1,800/oz. First, the Fed seems intent on shifting to average inflation targeting before the end of this year to reinforce its commitment to keeping interest rates low for longer. The aim for inflation to exceed the 2% goal over the next few years to make up for past inflation shortfall under an average-inflation targeting regime will not only make investors nervous about inflation risks over time but also keep real yields low – all of which could fuel USD debasement fears to gold’s benefit.

Second, while the pandemic continues so will uncertainty, and trade tension is not helping. Together they should see strong safe-haven demand for gold. Gold remains a valid hedge against macro uncertainty, as any adverse growth shocks will likely lead to more monetisation of fiscal stimulus, which could add to worries of significant inflation pick-up further down the road.

Currency

Global risk dynamics have entered an uncertain and tentative patch. There remains an underlying risk-on bias on the back of some outperforming economic data and central bank policy support. However, this bias is fragile and vulnerable to periodic bouts of negative news and events.

Nevertheless, some complacency may have slipped into currency markets, judging from the lower implied volatility in the G10 and EM Asia currency space.

For now, the greenback’s prospects remain broadly consolidative and sideway trading is expected, with the US Dollar (USD) index (DXY) likely to range-trade between the 96 and 98.

In July, we are on the look-out for potential negative factors to see if they can gain sufficient traction to tilt the balance to a risk-off situation.

The immediate event-risk is a reversion to tighter restrictions amid the resurgence of COVID-19 cases in the US. There are already signs of this, with quarantines on interstate travel and halted re-openings in the most affected states. The market is still pricing in a rather swift macro recovery, and this presents a risk further out as it remains likely that the pace of recovery may not be as strong as anticipated, especially as fiscal stimuli globally start to wane. If these risk events materialise, expect volatility to spike once again.

Putting aside risk dynamics, the Pound (GBP) continues to be undermined by the risks associated with the EU-UK trade talks, and the New Zealand dollar (NZD) by its central bank’s soft policy stance. On the other hand, the Australian dollar (AUD) is supported by a rather confident sounding central bank, although it is vulnerable to developments in China. Overall, any risk-off preference may be better expressed through a short GBP or NZD position, while a risk-on bias may be better reflected through a long AUD position. Meanwhile, the Canadian dollar is likely to be subjected to the vagaries of oil prices.

Elsewhere, Asian currencies vis-à-vis the US Dollar (USD-Asia) remain exposed to divergent drivers, with positives from economic re-opening and mostly strong inflows, being increasingly offset by virus anxiety. Going forward, we expect USD-Asia to be choppy until there is a clear winner in this tussle. In the interim, domestic drivers may take centre-stage.

As for the USD-Singapore dollar (SGD) pair, we expect limited near-term movement. With the SGD Nominal Effective Exchange Rate (NEER) supported near the strong-end of the recent range, the downside for the USD-SGD from current levels appears to be limited, barring a broader capitulation in the USD.

The Reopening

As numerous economies start to emerge from lockdowns, we can see that global capital markets have cherished on and benefitted from the optimism that the global economic activity is finally going to resume. With both developed and developing nations' economic stand-still about to end, investors can be seen shifting from havens toward riskier assets. One of the main sentiment driver comes from the most recent US job numbers that indicated a gain of about 2.5 million jobs in the month of May, pushing down the unemployment rate from 14.7% to 13.3%. However, fear of the COVID-19 "second wave" still persists as retail stores start to open, and restaurants start serving dine-ins. Moreover, the rising tension between US and China will still be the biggest source of uncertainty in markets, especially if it keeps dragging on nearing the Presidential elections in November. Hence, capital market gains will be subdued due to the uncertainties that may lie ahead.

Europe, which has been one of the closely watched hotspots for COVID-19 recorded saw its capital markets gain modestly in May, as the economy started easing lockdown restrictions. European policymakers are still pushing for additional fiscal stimulus packages, in order to soften the harsh damage caused by COVID-19. The gloomy forecast by the OECD states that the Eurozone may potentially contract about 9.0% in 2020, with Italy, France, and the UK going over 11.0%. As for commodities, it's been a fairly good month for Gold; up 2.6%, while WTI crude oil soared 62.6% in one month close to USD$40/b due to a unified action taken by OPEC+ members to curb output. However, Saudi Arabia has announced that production cuts would not go beyond June 2020, which implies that oil's run may hit a roadblock pretty soon, unless demand picks up.

In Asia, the outcome of rising tension between the US and China still remains the key geopolitical risk for ASEAN countries. The MSCI Asia ex- Japan was unfortunately in the red, down 6.8% in May. Considering the rally seen in developed markets like the US and Europe, Asian equities seem to have lagged quite significantly. However, we believe that as valuations in developed markets start to rise, there will be an inflow of capital towards Asia and other emerging markets as investors would start hunting for assets that provide more attractive returns and valuations. Another geopolitical uncertainty that is currently brewing would be the United States' role and response towards the newly imposed Hong Kong national security law by China, which will also raise the question of what that would affect the current tension amongst the world's two largest economies.

Domestically, May economic indicators suggest that Indonesia is a quite resilient nation, both from COVID-19 as well as the ongoing geopolitical uncertainties. That assumption can further be verified by the central banks' decision to hold interest rates at 4.5%. In addition to that, inflation numbers declined from 2.67% to 2.19% in May, which means that the central bank still has leg-room to cut rates, if need be. Another positive data that lifted market sentiment would be the increase of foreign reserves from USD$127.9 billion to USD$130.5 billion. The government reportedly increased its foreign funding, which showed its commitment to do whatever is needed to support the local economy. In terms of COVID-19, recent numbers suggest that the rate of infection is currently on the rise. However, it seems that capital markets itself is pretty resilient, likewise the larger economy. With the so-called PSBB policy in the process of being lifted up, investors seem to be unbothered as long as the economy is stable and healthy.

Equity

The JCI took flight in the month of May, recorded a shocking jump of 10.4%, beating the majority of other Asian bourses; hence making it the best performing month of 2020 so far. However, since the start of the year the index is still down approximately 20%, which indicates that there is more upside potential than there is downside risk. Compared to the S&P500 that had recently just surpassed 3,230, which is the level in which the index opened 2020; which means the JCI still has a long way to go to catch up. We firmly believe that once investors realize that Asian equities strikes a better bargain than developed market equities, foreign inflow towards domestic capital markets will resume.

The biggest potential domestic risk for capital markets remains the COVID-19 which is expected to start peaking right now in early June. As the government eases restrictions, it is apparent that the infection rate would gradually increase as well. So far, it seems that equity markets have been somewhat resilient towards the growing COVID-19 numbers domestically; currently at approximately 1,000 new cases daily. Under these circumstances, our projections for the JCI at year-end would be in the 5,300-5,700 range, factoring in a roughly 15% earnings downgrade. However, if daily infection rate soars to 4,000-5,000; the government would need to impose stricter lockdown measures to contain the virus, hence putting the economy back on pause mode while investors will again hunt for safe-haven assets.

Bond

Alongside the equities market, the bond market also had a beautiful run in May. The 10-year government bond yield plunged from above 8.0% all the way to 7.35% by the end of May, as domestic investors dominated the rally alongside the equities market. Foreign inflow towards the bond market has been shocking in the month of May, as global investors hunt for high yield government bonds and developed market bond yield hovered near 0%. The biggest force in the rise of the bond market is the surprising appreciation of the domestic currency, the Rupiah. The fact that the government have been issuing more bonds did not seem to weigh down the price movement for bonds. Local demand, namely banks, has sustained the majority of the auction demand. Banks ownership recently increased to 31% of the local government bond, as compared to 26% at the start of the year. As low rates environment and the relaxed reserve requirement ratio pumped more liquidity into domestic demand.

Under these circumstances, we see the 10-year government bond yield to hover in the range of 6.8% - 7.3% by year end, while high volatility is still to be expected in the short to medium term. Nonetheless, with the relatively high real-yield that domestic government bonds provide; compared to other ASEAN and emerging markets, it would be hard for global investors to turn their heads away, regardless of the domestic COVID-19 current situation.

Currency

The Rupiah continued its rally against the greenback, up 1.83% in May continuing an astonishing appreciation since April. Currently, the Rupiah has been just under 14,000/USD compared to 2 months ago at almost 17,000/USD. The strengthening of the domestic currency is also caused by the quantitative easing measures taken by the US central bank, that had the US dollar losing ground to most of its major peers in the month of May. However, the government would be keeping an eye on the strength of the Rupiah as they would not want exporters to be hit more than they already have. A stable currency right now would be better than a strengthening one. We see the exchange rate for the USD/IDR to be in the 13,500 - 14,500 range for the remainder of 2020.

Juky Mariska, Wealth Management Head, OCBC NISP

GLOBAL OUTLOOK
Signs of a recovery

The path for the global recovery from the coronavirus-driven recession is becoming clearer, as more countries start to emerge from their lockdowns and activity picks up. - Eli Lee

The path for the global recovery from the coronavirus-driven recession is becoming clearer, as more countries start to emerge from their lockdowns and activity picks up. Estimates of the magnitude of the downturn are still unavoidably wide, but information over the past month does not point to any major reassessment of the scale of the damage.

Most developed economies are likely to report an unprecedented drop in output when 2Q2020 GDP data is released in late July/early August. It looks like May was a little better than April, while June should be significantly stronger. 3Q2020 should show a good rebound, although activity is unlikely to reach 2019 levels until late 2021 or 2022.

There is little change in our economic growth forecasts this month, with global GDP expected to shrink 2.1% in 2020, before rebounding by 5.3% in 2021. The primary risk to this outlook is a second wave of infections and renewed lockdowns that push recovery well into 2021.

China offers hope

China offers a blueprint for what to expect in developed markets, even though magnitudes will differ. Reflecting its position as the source of the virus, China was the first to shut down parts of its economy and the first to come out on the other side.

China's recent National People's Congress took the pragmatic step of not producing a GDP target for the year, but instead put the emphasis on job stability. Plans for a moderate amount of bond issuance point to some restraint on fiscal stimulus, which is perhaps an indication of confidence in the economic rebound.

If the government can use this opportunity to move away from the custom of GDP targeting, then in future it could allow focus to shift to a better quality of growth as well as helping to control excessive credit. President Xi Jinping can reasonably claim that China met its target of doubling incomes by 2020 and move away from a raw growth target.

Fiscal policy may be scaled back

As economies emerge from lockdowns, the focus is shifting towards finding ways of re-opening the economy and scaling back various subsidy programs. It is a fine balance between providing the right incentives to start to normalise, while avoiding too much stress on companies. The hit to the public finances has been brutal and governments are aware that they are facing many years before deficits come under control.

Monetary policy will remain loose

Monetary policy responded rapidly and aggressively to the crisis. Low interest rates look set to remain around current levels through to the end of 2021 and probably beyond.

The US Federal Reserve continues to push back against suggestions that it needs to adopt negative interest rates, while the Bank of England seems to be wavering. On balance, negative interest rates appear to provide some additional stimulus if they are well structured.

Negative rates are often labelled as a "tax on savers" but that is the basic role of interest rate cuts - they reduce the motivation to save and raise incentives to spend or invest.

Will inflation or stagflation become an issue in time?

The short-term impact of the virus-driven recession is deflationary. Demand has collapsed while the plunge in oil prices adds further downward pressure on prices, so inflation has already dipped.

Longer term, the tail risk of inflation merits attention. Supply is set to shrink and that will be exacerbated by further de-globalisation. After years of increasingly favouring capital, the pendulum is set to swing towards labour, as the crisis has highlighted the vulnerabilities of low-skilled workers. The explosion of monetary growth points to a further risk.

Inflation (or stagflation: inflation with low economic growth) is hard to imagine at the bottom of the cycle. However, it could become a concern over the next two to three years if activity rebounds and policymakers struggle to remove the array of emergency measures enacted in recent months.

Questions about the scale of monetary stimulus can translate into concern about the longer-term consequences of such an aggressive expansion of central bank balance sheets.

Global growth outlook

EQUITIES
Staying balanced

Remain neutral in equities, where we believe a balanced stance is optimal given current valuations after a sharp rally that has priced in much of recent positive developments, and still-limited earnings visibility. - Eli Lee

Multiple positive factors drove market optimism over the last few weeks, including the massive stimulus packages globally, as well as the fact that we may be past the worst of the global Covid-19 crisis as economies start to re-open. However, these are balanced out against significant risks including:

1. Uncertainties over the trajectory of the post-Covid-19 path to normalcy which could be tenuous and long drawn out,
2. Less attractive global valuations following the recent market rally, and
3. A ratcheting up of US-China tensions, which underpin our overall neutral view of equities.

United States

Despite dire economic fundamentals and the lack of earnings visibility, the S&P 500 index's rally since 23 March has been breathtaking. Still, we believe investors should adopt a more cautious stance, with three key risks worth considering.

First, tensions between US and China are escalating, and these are manifested in areas such as politics, financial markets, and technology. This is likely to remain as a headline risk going into the November US presidential elections.

Second, the heavy concentration of the S&P 500 Index's market cap in just 5 (tech) stocks also calls into question the durability of the rally without broader participation across sectors, and the ability of long-only funds to maintain increasingly concentrated portfolios.

Third, while lower rates are positive for multiples, they could be neutral for profit margins in the short term, given the high proportion of fixed-rate corporate debt, while the rebuilding of cash buffers through debt capital markets reduces credit risk but at the expense of lower profitability.

Europe

This earnings season will likely be remembered as one of the dimmest in terms of forward visibility in history. Of the 200 companies that reported where management commented on guidance, 42% removed guidance, 32% held, 23% cut and only 3% upgraded. The ones that raised guidance were mainly in Pharma/Healthcare. Looking at all the sectors in Europe, those that have the greatest visibility ahead are Pharma, Telecoms and Utilities, while those with the least visibility are Capital Goods and Chemicals.

Looking ahead, the extent to which the gradual reopening of economies is protracted and fragmented would likely be a key catalyst going forward. Hopes were lifted, however, by the European Union's proposal for a EUR750 billion recovery fund to help restart the region's economy.

Japan

Reflecting the urgency on mending the economic damage from the Covid-19 outbreak as daily infection rates eased, Japan lifted its state of emergency slightly earlier than scheduled last month and announced additional stimulus which included more support for small to medium sized enterprises.

While the worst in the fall in consumption may have passed, we see a subdued road to recovery ahead, with potential risks including heightened US-China tensions. Market valuations however, are at undemanding levels of about 1.1x price/book, near the previous lows of 0.9x over the past decade. We recommend a barbell approach for long term investors, favouring a mix of quality defensive consumer staples and cyclical beneficiaries.

Asia ex-Japan

The MSCI Asia ex-Japan Index corrected mildly for the month of May after seeing a good rebound in April. While the world's attention is undoubtedly focused on rising US-China tensions, there are also signs of geopolitical risks brewing within Asia, as China and India have both moved in more troops along a section of their border amid a border dispute.

In China, the MSCI China index has rebounded since its low on March 2020. During the same period, consensus earnings forecasts have been revised downwards by 5% and we believe there is still downside risk, with consensus forecasting 3% earnings growth this year. Concerns of a re-escalation of US-China tensions are likely going to persist into the US presidential elections this November.

The latest flare-up has expanded beyond trade and tariffs-related issues and broadened to technology (Huawei and semiconductor sectors), capital flows and access to the US capital markets (increasing uncertainties related to possible de-listing of Chinese ADRs), and more potential US responses in relation to the passing of the national security legislation at the National People's Congress.

All these uncertainties are likely to cap any significant valuation multiple expansion and we urge investors to remain cautious and selective. Any pullback in the market would offer opportunities to accumulate companies that can benefit from structural themes, such as our investment theme of rising online engagement, which should benefit internet and e-commerce related players.

BOND
Benefiting from a search for yield

Aggressive monetary easing by the major central banks has driven already low interest rates even lower, enhancing the appeal of emerging market high yield bonds among investors who are in search for yield. - Vasu Menon

We see interest rates staying at current ultra-low levels for a significant period and believe that the hunt for yield will be supportive of Emerging Markets (EM) High Yield (HY) bonds over the long term despite the scope for some near-term volatility. Within EM HY, we maintain our preference for Asia, driven by our constructive outlook for China, which continues to outperform other emerging markets.

Bond markets' strong performance in May

For the second straight month, global corporate bonds rallied strongly. EM bonds were up 3.8%, with HY up 5.6% and Investment Grade (IG) up 2.7% on optimism towards global economies opening. In Developed Markets (DM), IG bonds rose 1.2% ,while HY bonds added 4.9%.

Emerging Market Credit had an outstanding month in May as investors shifted their focus away from worst-case "left tail" outcomes towards a more sanguine outlook as hopes grew that Covid-19 may lose momentum.

Emerging Market spreads stage big rally

EM HY spreads tightened an incredible 123 basis points (bps) in May and at +765 bps have erased half the loss since 23 March. Meanwhile, IG spreads tightened 50 bps to +308 bps, still well off the pre-Covid tight of +180 bps.

Several weeks ago, the Federal Reserve had also introduced a Special Purpose Vehicle to purchase US IG bonds on the open market, with the intention of unfreezing the credit markets. This is also supportive of our neutral position on DM IG bonds.

Nascent signs of optimism in EM

There are cautious green shoots of optimism in EM. The Fed's actions to calm markets and stabilise liquidity were not targeted at EM bonds specifically, but had a salutary impact, nonetheless. The aggressive monetary and fiscal easing in EM has not led to a widespread tightening of financial conditions, and capital flight has improved demonstrably since March. Furthermore, EM currencies have been relatively stable since March and oil is at its highest level in three months. From a technical perspective, the new issue market remains robust, with massive oversubscriptions.

Prefer Asian High Yield

China continues to outperform other EM year-to-date and our preference remains for China within Asia in the HY space. Despite Sino-US tensions, we continue to see value in Chinese HY USD denominated bonds in the medium term based on several factors.

Firstly, China's economy continues to recover in May. Secondly, governments around the world, including China, continue ensuring that plentiful liquidity is available in the market, by fiscal or monetary means, to curb further defaults in the economy. This would ensure keeping the lid on any potential credit crunch. Thirdly, Chinese HY names, especially properties, continue to offer good relative value against other EM counterparts.

During May, more high-yield issuers, ranging from BB+ to B rated, returned to the primary market with issuance as high as 10x oversubscribed. This is evidence that markets have plenty of appetite for Chinese HY bonds barring any short-term volatility due to Sino-US tensions. Nevertheless, in the medium term, the higher level of liquidity will need to find more stable risk assets with higher yield, at the same time and which are more insulated from Covid-19 and trade conflicts.

Maintain overweight rating on EM HY and neutral rating on EM IG

We are maintaining our overweight stance on EM HY and neutral stance on EM IG. Within the EM corporate bond space, HY has understandably borne the brunt of risk reduction since the impact of Covid-19 began in earnest in January. However, it has started to outperform.

FX & COMMODITIES
Worst is over for oil

The easing of lockdown measures and steep production declines in non-OPEC countries along with OPEC+ gives us hope that the worst is behind us in the oil market. - Vasu Menon

Oil

The collapse in supply and partial demand rebound should be enough to move oil markets back into deficit in 2H2020, providing price support which we expect to continue in the coming months. 12-month Brent crude price forecast is unchanged at US$45/bbl but we have raised the 3-month and 6-month forecast to US$36/bbl (old: US$30) and $US40/bbl (old: US$38) respectively.

The supply side has adjusted fast amid steep production declines in non-OPEC countries along with OPEC. A gradual recovery is underway in oil demand, occurring in stages with China the furthest ahead, and Europe and the US a step behind. Easing restrictions in Europe and the US is likely to lead to only a gradual rebound in transportation-driven oil demand. Jet fuel demand remains subdued and any sizeable recovery will depend on international travel restrictions being lifted.

Gold

The big balance sheet expansion by major central banks, near-zero interest rates in the US and concerns that money printing may eventually result in US Dollar debasement, keeps us positive on gold's medium-term outlook. We see the precious metal trading close to US$1, 800 per ounce in 12 months' time.

Currency Outlook

Markets seem to be ignoring negative headlines and have been broadly risk positive. Unrest in US cities should remain a domestic affair, but if it persists, it could be negative for the US Dollar (USD). The broad USD could be further affected negatively in the near term given that the DXY index has broken key support levels.

Near term, we expect a firmer Euro to be the beneficiary of USD weakness. The increased odds of a coordinated fiscal response from EU members augurs well for the Euro. Cyclical like the Australian Dollar and the New Zealand Dollar may also push higher as shorts entered on Sino-US developments capitulate.

Economic data has been poor, but generally still better than consensus estimates. This has contributed to economic optimism and if it continues, the defensive and long-USD thesis may lose further traction.

For now, we have turned less defensive, but we are still not ready to completely give up on it. Although economic data has beaten expectations, this may be because of over pessimistic estimates. We prefer to wait for stronger evidence of a recovery in data before we give up on our defensive stance.

In Asia, weakness of the Renminbi versus the USD has not translated to materially weaker Asian currencies versus the greenback. This suggests to us that although Sino-US tension has worsened, it has not been a driver in FX markets.

This may remain the case so long as both sides stick to a verbal exchange, and do not take concrete policy action to curtail trade and/or portfolio flows. In the near term, Asian currencies vi's-à-vis the USD should be driven by broad USD dynamics, which at this stage is USD-negative. As for the USD-Singapore Dollar (SGD) pair, there is possibly further downside for the greenback in the short term.

On the domestic front, however any positivity from the end of the circuit breaker period should be short-lived as most of the restrictions remain in place. The domestic economy is still expected to face headwinds, and this should limit excessive SGD strength.

The Long Path to Normal

The global economy is currently facing a major obstacle and is on the brink of the worst recession in the last decade. Strict lockdown measures by developed countries, has pushed global growth into negative territory in the first quarter of 2020. The US economy itself reported a -4.8% GDP growth for Q1 2020. Unemployment rate as of April soared to 14.7%, the highest it's ever been. In Europe, similar conditions are being reported, with GDP growth last quarter at -3.8%. Several countries are now contemplating of reopening their economies, although not fully, but is afraid that it may jumpstart the potential of a "Second Wave" of COVID-19 pushing economies deeper into recession.

Looking east towards Asia, the majority of countries reported contractions as well in regards to Q1 GDP. China reported its largest drop of -6.8% YoY for Q1 2020 GDP. Other countries followed its lead, like Singapore at -2.2%, Hong Kong at -8.9%, and Philippines at -0.2%. Numerous stimulus support, both monetary and fiscal, has been delivered by policymakers to help soften the blow caused by the pandemic. As an example, China's central bank, the PBOC, has lowered its reserve requirements as well as its loan prime rate in order to boost market liquidity, especially for small to medium banks that has been hit hard by the Coronavirus.

Moreover, the rising tension between the United States and China, caused by the accusation by President Trump that COVID-19 had originated from a laboratorium in Wuhan, has introduced a new kind of negative sentiment that has contributed to market volatility. In response, China has agreed to increase its commitment for American products purchases; which is a continuation of the agreed phase 1 trade deal last year. This act by the Chinese government has reduced the increasing tension of the world's two largest economies.

Domestically, the government has been giving their best effort to try and contain the spread of corona virus, by introducing strict social distancing measures; although COVID-19 cases seemed to keep increasing more and more. On the flip side, the recovery numbers seem to also increase in tandem with the new infection numbers. The so called "PSBB" social distancing measure has resulted in a shutdown of the economy, prompting a drawdown of Q1 2020 GDP to 2.97% YoY, which is the lowest level since 2005. Growth slowdown can also be seen from the Manufacturing PMI numbers for April, in which took a huge hit dropping from 43.5 all the way to 27.5. Amongst neighboring countries in Southeast Asia, that particular level is the second lowest after India.

The government has implemented several easings, both monetary and fiscal to support the suffering economy. President Jokowi had introduced a new law which allows the government to increase liquidity in the financial system through government entities in the corporate world, and even through government spending.

Equity

For the whole month of April, the JCI recorded an increase of +3.91%, after experiencing severe punishment in the month before. However, since the start of 2020, the index is still performing at 25.13% lower. The equity market is still burdened by the negative sentiment surrounding COVID-19, both domestically and globally. Moreover, the recent slump in oil prices to its lowest level at USD$-37.63/b had also weighed on risk assets overall. Lastly, the earnings season results that had finally concluded showed significant damages in corporate financials.

The equity market is expected to remain volatile as long as COVID-19 news are still making headlines, which is expected to moderate by the end of May or early June. Hence, the growing infection numbers domestically indicate that the government's effort, in terms of testing capacity, has significantly progressed. The recovery itself, with the help of massive government stimulus', will predictably start in Q3 2020. Nonetheless, the current volatility should be used as a window of opportunity for equity investors, with a focus on big-cap blue chip stocks, particularly in the consumer sector.

Bonds

Likewise the equity market, the bond market also lifted up in the month of April, where the 10-year government bond yield was seen -1.09% lower compared to the beginning of the month, after shooting up 14% in the previous month. On the last week of April, the government auctioned seven new series of government bond in order to reach its target of 2020. The subscription amount for the overall batch was at IDR44.39 trillion, in which the government was only able to absorb IDR16.62 trillion. This proved that investors' appetite of the asset is still high, in the midst of the low interest rate environment. We believe that the bond market still has the potential to rally towards year end, closing the year at the range of 7.2%- 7.3%, with the assumption that economic recovery do really start in the second half this year.

Currency

The Rupiah recorded a huge jump in April, with a whopping 9.53%, closing the fourth month at 14,881/USD. The swap agreement between Bank Indonesia and the Fed amounting to USD60 billion has helped calm the markets. Not only that, the statement made by the governor of Bank Indonesia, Perry Warjiyo at the "Perkembangan Ekonomi Terkini" conference at the end of April, had provided positive market sentiment. He acknowledged that although the domestic economy may contract this year, we are still on the path to our longer-term growth plans. Policy reforms such as the Omnibus Law will start next year. We see that the Rupiah will hover in the range of 14,800 - 15,250 in the short term.

Juky Mariska, Wealth Management Head, OCBC NISP

GLOBAL OUTLOOK

Worst recession in decades

We now anticipate a longer and deeper shock versus a month ago, and have revised down our growth projections for 2020, from 0% to -2.1% for the world economy, compared to the 0.1% contraction in 2009. - Eli Lee

The world economy is facing one of the worst recessions in decades. The global pandemic and measures to try to contain its spread have led to a collapse in economic activity in all major economies.

Much of the developed world is in lockdown, although restrictions are starting to ease in several cases. The normalization process should be broadly underway before the end of the second quarter, but this will not come soon enough to prevent an unprecedented output contraction in 2Q2020.

Sharp economic contraction in China

China reported that 1Q2020 GDP declined 6.8% year-on-year. There had been doubts that the government would permit such a weak number to be reported and it sets a very low base for the year. Even with a reasonably rapid bounce from 2Q2020 (provided there is no renewed outbreak of Covid-19), it is mathematically very difficult for China to achieve a positive figure of 2020. Given its size, this has a big impact on the world growth outlook for the year.

Unimaginable shock to the US labour market

Recent data shows an almost-unimaginable shock to the US labour market, with 30 million people (out of a workforce of 164 million) losing their jobs in the six weeks after the mid-March lockdown. The unemployment rate is set to rise to around 20% by June, compared to the 10% peak during the 2008-09 recession and below 4% for the past two years. This points to an extraordinary economic contraction in 2Q20.

Less dramatic rise in European unemployment

Europe will see a less-dramatic rise in unemployment due to government-funded schemes to provide subsidies in order to protect jobs. However, the initial economic damage will be similar as a large part of the labour force is inactive, whether registered as unemployed or simply furloughed by their employer.

Through of recession may be wider than expected

Lockdowns in developed economies are persisting for longer than expected. Across much of Europe, initial periods of enforced self-isolation failed to bring down infection rates rapidly enough and have been extended or are lifting very gradually. This means that the trough of the recession may be wider than previously expected.

Forecasts revised down sharply

We now anticipate a longer and deeper shock versus a month ago. As a result, we have again revised down growth projections for 2020, from -2.9% to -4.3% in developed markets and from 1.9% to -0.5% in emerging markets (where China has a big impact). This takes the predicted outlook for the world from 0.0% to -2.1%, compared to the 0.1% contraction in 2009. As recently as the start of this year, global growth looked set to be around 3.3%, only moderately slower than the 3.8% average of the previous decade.

Base case - Lockdowns will gradually be lifted

The "base case" assumes that lockdowns will gradually be lifted, and economic activity normalises in parallel. However, if renewed outbreaks require further lockdowns, or if consumers and businesses are unable or unwilling to re-engage, then growth would be worse than expected, putting even greater strain on government finances.

Bear case - Further outbreaks

A "bear case" scenario could see further outbreaks and renewed lockdowns towards the end of this year, in which case developed economies could shrink by close to 10% in 2020 and the world economy by perhaps 5-6%.

Central bank action has helped

The risk of major dislocation in global financial markets has been forestalled by prompt and aggressive action by central banks. Market liquidity has improved, and credit spreads have narrowed.

Immediate pressure on emerging markets has also eased, partly thanks to action by the Fed. Emerging markets typically have younger populations, which should be less vulnerable, but they also have weaker healthcare systems and less room to provide a policy response.

Covid-19 could cause political issues

Amid extreme social and economic stress, perceptions of policy failures could lead to political turmoil. In democracies this can be channelled through the election process, where the focus is on the US elections in November.

Forecast of robust recovery in 2021 is tentative

While we expect a sharp contraction in the global economy this year, the expected bounce in 2021 is commensurately stronger, although in developed economies, it is not enough to recapture the losses of this year. The absence of solid information about the scale of the short-term damage to the economy and lack of clarity over the lifting of containment measures means that any forecasts are tentative.

Past recessions were typically met by policies aimed at providing an immediate boost to demand. However, this approach has little merit when weak demand is due to the medical emergency and related restrictions on activity. As such, beyond providing basic income support, policy measures have been aimed at trying to limit long-term economic damage from unemployment and bankruptcies. This may allow activity to recover relatively rapidly once containment measures are lifted and if a second wave of infections fail to materialise.

Global growth outlook

EQUITIES

Lock in some gains

With the risk-reward now less attractive, we look to take advantage of the near-term rally to reduce our overweight positions in Asia ex-Japan and overall equities to neutral. - Eli Lee

Markets have been on an upward trajectory since bottoming in late March, fuelled by the concoction of largely successful containment measures, sizeable fiscal packages and loose monetary policies. Still, subsequent waves of outbreaks lurk in the background, and normalcy in the absence of a vaccine remains extremely challenging. With the risk-reward now skewed to the downside, we look to take advantage of the near-term rally to reduce our overweight positions in Asia ex-Japan and overall equities to neutral.

Tread carefully

While the timing of the market upturn was warranted, the magnitude of the move deserves scrutiny. The widely held baseline expectation is that the global Covid-19 recession will be short-lived, but we are wary that the bear case of an extended recession longer than a year, could lead to a significant market downside ahead. Earnings estimates have moderated significantly on a YTD basis, but remain too high in our view. Corporate visibility among S&P 500 companies remains low, with many lowering or withdrawing guidance altogether. While we remain positive on selected companies with resilient balance sheets and robust long-term growth prospects, these are slim pickings for now, in our view.

Looking ahead, we are cognisant that the flattening of the virus curves in the G7 economies and the focus of policymakers moving on to exiting containment measures - plus an unprecedented degree of fiscal and monetary stimulus - is potentially a potent setup for market upside ahead.

However, given where equity valuations are and the risks that are in play, we believe that a more balanced stance is optimal at this point. We will be keen to add risk exposure ahead if valuations turn more attractive or if the key risk factors abate meaningfully.

United States

With the effects of Covid-19 deemed to have a one-off effect on the economy, investors have increasingly been willing to anchor expectations to the expected recovery in 2021, while the unprecedented monetary policy response is certainly providing the ballast to risk assets in the near-term.

However, we believe that investors should still exercise caution. Gains in the S&P 500 index have so far been concentrated among the top companies in the index. A more broad-based participation is likely to be required from other companies in the S&P 500 index for it to continue its rise. However, this could be challenging as visibility remains cloudy, given the increasing number of guidance withdrawals among large cap corporates during the first quarter earnings season. Shareholder returns in the form of share buybacks and dividends are also at risk, given the need to conserve cash.

Europe

In Europe, earnings growth forecasts continue to be revised down quite significantly. Although this has been revised down to -19%, we suspect that there is still more downside ahead. At the sector level, we see that the Discretionary, Commodities and Materials sectors are trending down the most in year-on-year terms, with Healthcare names providing the most resilience at this early stage.

As for the 1Q20 earnings season, of the 176 companies that have reported so far on the Stoxx600, 54% have beaten estimates, while 46% have missed, giving a net beat of ~8% of companies. However, do note that consensus expectations have been thoroughly rebased given the incredibly challenging business conditions.

Japan

Japanese equities underperformed global equities in April as the nation declared a state of emergency and boosted its stimulus package to a record US$1.1 trillion to soften the economic damage from the Vovid-19 outbreak.

The Bank of Japan has revised its estimates for Japan's GDP to a potential 3% to 5% contraction in calendar year 2020, following the nearly 7% decline in October-December 2019 GDP due to the consumption tax hike.

As corporate Japan starts a new fiscal year in April, potential Yen strength on reducing risk appetite could act as a headwind for many of Japan's export companies. Market valuations, however are at undemanding levels of about 1x price/book, near the previous trough-multiple of 0.9x over the past decade. With forward earnings growth still looking optimistic at about 8%, earnings revisions and dividend cuts should weigh on the market. Looking ahead, we think the easing of global lockdown measures is one leading indicator of growth recovery.

Asia ex-Japan

The recovery in risk appetite has resulted in the MSCI Asia ex-Japan Index appreciates 8.9% in April. Meanwhile, EPS estimates have been revised down by 9.2% as compared to end-2019, with countries such as Hong Kong, Singapore and Thailand seeing larger downward revisions. Stronger EPS growth expectations are projected in South Korea and India. There could be downside risks to the latter, depending on how the Covid-19 situation pans out. The lockdown in India has been extended by a further two weeks to 18 May, although there was also some easing of restrictions in areas not affected by the virus.

In the banking sector, the large Chinese banks have seen an increase in their non-performing loans formation rate, while there are rising concerns of bad debts at Indian banks.

Most of the S-REITs have also either reported their 1Q20 results or provided some form of business update. Distributions declared were largely down on a year-on-year basis. Although operational metrics were still largely healthy, this is expected to deteriorate in the future. The decline in distribution per unit was also largely driven by retention in taxable income available for distribution, some of which was as large as 70-80%. This is in anticipation of more challenging conditions in 2Q20, especially for the retail REITs, where most of the rental rebates to tenants are set to kick in. Given this current situation, we believe investors would be better positioned with the larger-cap government-linked REITs which have strong balance sheets.

China/Hong Kong

The latest Politburo meeting reiterated a dovish tone on monetary policies without any explicit reference to the growth targets. In our view, we believe there needs to be an easing bias in terms of monetary policy, while fiscal policies are stepped up during this period of economic recovery. It is estimated that fiscal-type policies announced so far were about 1.2% of GDP. We expect more policy support to come, including around 1.5% of GDP in additional fiscal spending, which will bring fiscal spending to around 3% of GDP.

Considering expectations of stronger policy easing, ample liquidity and the recovery in domestic activities, the offshore Chinese equities market has rebounded by 14% since the recent low in mid-March and is trading slightly above historical average level. Investors should consider taking partial profit for companies or sectors that have posted a relief rally, such as the energy sector. Having said that, the downward pressure on earnings and market volatility would offer opportunities for long-term investors to accumulate quality companies during a pullback.

BONDS

Bond market makes a U-Turn

We maintain a slight risk-on tilt in our overall asset allocation strategy, through our overweight positions in emerging market high yield bonds and overall fixed income securities. - Vasu Menon

After its worst month in more than a decade, bond markets rallied in April as the coordinated stimulus from central banks and policymakers globally began to bear fruit. Emerging Market (EM) Corporates rallied 3.3%, with High Yield (HY) up 4.5% and Investment Grade (IG) up 2.6%. In Developed Markets (DM), US IG was up a staggering 5.1% and HY rose 3.6%.

Positive on EM HY bonds

We maintain a slight risk-on tilt in our overall asset allocation strategy, through our overweight positions in EM HY bonds and overall fixed income.

Our long-term view on EM HY bonds, however, remains constructive. While we do expect persistent volatility and higher default rates ahead, we do not believe spreads will widen to the levels seen during the 2008-09 Great Financial Crisis as the composition of the market is far superior today from a credit quality perspective. The carry offered by this asset class also remains attractive given that we expect the hunt for yield would continue to be an important structural market driver against the backdrop of very low interest rates.

Prefer Asia both among HY and IG bonds

Among both HY and IG bonds, we maintain our preference for Asia, which is driven by China. Our constructive China outlook is based on several factors: 1) It is one of the few major EM countries likely to exhibit positive GDP growth in 2020 based on IMF projections; 2) It has demonstrated effective management of Covid-19; and 3) the country has the fiscal and monetary bullets to address economic and social challenges.

Central banks have been supportive

Proving that it will do whatever it takes, the Fed has responded with a "shock and awe" program of stimulus measures. To date these include swelling the balance sheet to close to US$7 trillion, introducing a special purpose vehicle to buy Corporate Bonds, opening up swap lines with various Central banks to increase the supply of US Dollars into the global economy and easing restrictions on banks to free up lending capacity.

On 9 April, the Fed rolled out a US$2.3 trillion program to buy high-yield bond ETFs and lend directly to Main Street businesses. Consequently, we moved our position in DM HY bonds from underweight to neutral on 10 April. Aside from Fed intervention, this upgrade was also due to less demanding pricing after a significant correction year-to-date.

Globally, literally dozens of Central Banks have followed the Fed's lead with proactive interest rate cuts, the most recent being Mexico, Turkey and Russia.

While none of the Fed's actions are specifically targeted at EM bonds, it does indirectly benefit the asset class in that it instils the sense of calm and stability necessary to restore investor confidence toward risk taking.

Several weeks ago, the Fed had also introduced a Special Purpose Vehicle to purchase US IG bonds on the open market, with the intention of unfreezing the credit markets. This is also supportive of our neutral position on DM IG bonds.

Further downside in EM bonds possible but we do not see GFC levels

The ultimate impact, scope and duration of Covid-19 are still largely an unknown. Hence, despite all the money that policymakers throw at the problem, further volatility and downside may persist in the coming weeks and even months.

However, within EM bonds we do not expect spreads to revisit the levels achieved during the Global Financial Crises in 2008/2009, where HY spreads reached over 20% on average.

Maintain overweight on EM HY bonds and neutral IG bonds

We are maintaining our overweight stance on EM HY bonds and neutral stance on EM IG bonds. Within the EM bond space, HY has understandably borne the brunt of risk reduction since the impact of Covid-19 began in earnest in January. However, given our belief that spreads will not revisit 2008/2009 levels, we think that at current levels it makes sense for longer-term investors to start gradually reengaging with the asset class.

FX & COMMODITIES

Gold to range-trade short-term

Concerns of money printing that may result in the US Dollar debasement eventually, keeps us positive on gold's medium-term outlook. However, in the next three to six months, gold is likely to range-trade between US$1,675/ounce and US$1,750/ounce. - Vasu Menon

Oil

WTI May futures contracts turned negative for the first time ever in April, underscoring a situation of too much oil, with nowhere to put them. Oil is a story of low prices now for higher prices later, with a more-painful adjustment in non-OPEC supply as the next most logical event. The most immediate impact will be felt by the sudden fall in drilling activity in the US shale oil basins. This fall in oil production won't solve the storage issues in the short term. Cushing (Oklahoma) storage will be nearly full in the next month or so. Globally, offshore or floating storage is becoming the only viable option. This will keep oil futures volatile, particularly as they near maturity.

A possible reversal of the lockdowns lifting oil demand and US oil production cutback could help tighten the market in the second half of 2020 and beyond. We continue to project Brent crude price to rebound to US$45/barrel in a year's time.

Gold

As a result of a big and sustained balance sheet expansion by major central banks, such as the US Federal Reserve, concerns of money printing that may result in the US Dollar debasement eventually, keeps us positive on gold's medium-term outlook and we see the precious metal trading close to US$1,800 per ounce in 12 months' time.

Short-term, however, over the next three to six months, gold price may range-trade between US$1,675 and US$1,750 an ounce versus US$1,706 per ounce on 4th May. Uncertainty, risk aversion and lower inflation expectations which are usually accompanied by lower interest rates may prove less beneficial for gold going forward. This is because, the lack of willingness or capacity among central banks to cut already very low nominal interest rates, may weigh on gold prices as real rates (nominal interest rates mins inflation) could increase as a result.

Currency Outlook

Going forward, the economic uncertainties should only get more obvious, and we do not rule out further growth downgrades. This is likely to hurt risk appetite. Thus, we prefer to stay defensive and continue to see the US Dollar benefiting from safe-haven flows.

In Asia too, the short-term weakness of the US Dollar against regional currencies seems overdone. In fact, we see no signs of strong portfolio inflows into Asia. Foreign investors are still largely on the side-lines. Thus, we do not see the flow environment as positive for Asian currencies just yet.

We do not see a lot more downside for the US Dollar versus Asia currencies in the near term. We are of the view that the exchange rate between the US Dollar and Asian currencies has not adjusted sufficiently to the expected macro headwinds from the spread of the Covid-19 virus.

We prefer to be structurally long the US Dollar against Asian currencies at this point. As for the US Dollar versus the Singapore Dollar, it too continues to be led lower by the weak US Dollar. We view a lower US Dollar versus the Singapore Dollar as incompatible with Singapore's weak economic fundamentals. Thus, we see limited downside from current levels.

Pandemic-driven recession

The corona virus has definitely stolen the spotlight for all of Q1 2020, with infection numbers escalating rather rigorously. The United States has now taken over China and other European countries to be the country with most Covid-19 cases and fatalities, with New York leading the charge. President Trump's administration has readied more than USD$2 Trillion dollars, the most by any country administration, to fight back the economic shock caused by the novel virus. This has been apparent when we take a look at the number of people claiming for unemployment benefits in the US, which was recorded at roughly 16 million people in just the last 3 weeks, with unemployment soaring from 3.5% to 4.4% for the month of March.

Looking at Europe, we can see that the infection curve flattening, as the spread in Italy, Spain, Germany, and France has started to mitigate. After a tumultuous couple of months, European countries may now have a little breathing room. In Great Britain, Prime Minister Boris Johnson was recently released from the hospital and is currently undergoing self-isolation at his estate, while resuming his role as the country's chief. In regards to the oil price war between Saudi Arabia and Russia, recently OPEC and the group of G20 has finally reached a historic agreement to cut oil production by nearly a 10^th, or 9.7 million barrels a day in order to support and stabilize oil prices that in the past month has recorded one of the most volatile periods in history.

Countries in Asia such as Singapore, Hong Kong, and China are currently experiencing what they call a "Second Wave" of Covid-19 cases which was mainly imported cases and is responded in a swift manner by the affected countries. Overall, Asian countries are still battling with Covid-19 but it is apparent that the U.S and Europe is going through a tougher process. The MSCI Asia Pacific index recorded a 12% drop in the month of March, still lower than the average declines seen in Wall Street. Most of the Asian governments are currently still cooking more fiscal stimulus packages to support its deteriorating economies due to the pandemic.

Domestically, the government is currently solely focused on the containment of Covid-19 which had entered the country in the beginning in March, and has been growing exponentially since the third week. The lack of necessary equipment and accessories have been a hindrance for the doctors in our healthcare system. As Covid-19 pressure builds up, both domestically and globally, our equities market at one point dropped to low levels last seen in 2012; with government bond yields shooting up like shooting stars. However, inflation remains stable, recorded minimal decline from 2.98% to 2.96%, which is still better than expected. But foreign reserves took a hit going down from USD$130.4B to USD$120.97B, which was hugely expected due to the central bank's efforts (triple intervention done in spot market, domestic forward market, and the bond market) to stabilize the exchange rate for the Rupiah against the greenback. In addition to that, the newly minted repo agreement between Bank Indonesia and The Fed amounting to USD$60B has spurred optimism for the currency market. The government had also lowered growth expectations for this year significantly, from 5.3% all the way down to 2.3%. All in all, the month of March has punished our capital markets more than it deserved, but economic indicators show signs of resistance and resiliency.

Equities

In the month of March the JCI officially went bearish, sliding below its short-medium-long term averages to its lowest level since 2012 at 3,937.63. For the first quarter of 2020, the JCI recorded a decline of 28%, in which 16.75% came in March. It is evident that our equities market suffered a devastating blow due to the Covid-19 pandemic, both domestically and globally. As global risk appetite took a huge hit, investors are turning more and more towards safe-haven assets such as Gold and the greenback. Foreign investors recorded outflows from domestic equities market, and the same for domestic investors. As Q1 comes to an end, investors will want to see the impact of the novel virus on corporate earnings, where many would anticipate one of the bleakest earnings season since the Great Financial Crisis of 2008-2009.

With the current environment, although we don't see the JCI to be able to climb back to its glories of above the 6,000-level handle, we also do not see the JCI to dive back below 4,000 as domestic bulls will eventually take advantage of significant declines at this point as valuations become more attractive. Earnings of the current year is estimated to decline by 11%, as the domestic economy needs to recover from this pandemic. Thus, any recovery in the second semester may support JCI to hover in the range of 5,500 to 5,800.

Bonds

Similar to the equities market, the bond market took a beating in March in which the 10-year benchmark yield jumped 14%, to its highest level since the first half of 2019, above 8.0%. The negative performance of the bond market is propelled by the significant depreciation of Rupiah against the US dollar, and therefore upside will remain limited as demand for the greenback is powered by the ongoing concerns relating to the Covid-19 pandemic. The central bank has exercised their "triple intervention" as mentioned earlier and has proven to be quite successful in providing a sense of stability in the bond market. As our credit market is considered a High Yield Emerging Market (HY EM), foreign investors have recorded historic outflows in the month of March, which has presented opportunities for domestic investors. However, as there are numerous ongoing uncertainties, domestic investors are more comfortable with a wait & see stance as Covid-19 cases have started to increase exponentially since the last week of March.

We believe that there is more upside to the bond market right now, with yields at 8.0%. Our year-end estimates remain the same, for the 10-year benchmark yield to be in the range of 7.0% - 7.25% with the assumption that the pandemic would peak in Q2 2020, leaving the second half of 2020 room for revitalization.

Currency

Our domestic currency, the Rupiah, is the worst performing Asian currency since the start of 2020, with a total decline of 17.6%, where 14.3% came in just the third month itself. The volatility seen in the exchange rate is mainly forced by the demand surge for the US dollar, while domestically the country is at an all-out war with the pandemic; weighing on the strength of the Rupiah itself. On the positive side, the central bank has reached an agreement with the US central bank of repurchase agreements (repo) of up to USD$60B to help stabilize the currency market. We see the exchange rate for the Rupiah against the US Dollar to be somewhere in the range of 16,000 - 17,000 by year-end.

Juky Mariska, Wealth Advisory Head, OCBC NISP

GLOBAL OUTLOOK
Pandemic-driven recession

Though the global economy is set to sink into recession, central banks are actively injecting liquidity into financial markets to prevent the Covid-19 economic shock from turning into a financial crisis. And a rebound in activity should come quite quickly once the containment measures start to be lifted. - Eli Lee

Covid-19 has spread much faster and further over just one month. As a result, the world appears set to sink into a recession that is set to be worse than that of 2009, albeit shorter-lived.

From the macroeconomic perspective we need to consider several questions.

How deep and lengthy will be the economic contraction in developed markets due to the coronavirus and associated containment measures?

Economies in Europe and North America will be badly hit. Containment measures represent an enforced demand shock that will send some parts of consumer spending to near zero. Non-discretionary spending (such as food, housing, utilities, telco, medical care) typically represents 60-70% of consumption and this will be stable, or even firmer, but overall spending will fall sharply until the medical emergency abates. Government spending will increase rapidly, but the positive impact is likely to be more than outweighed by a collapse in private sector investment.

Conceptually, a shutdown of less than a month should contain the pandemic, but the experience in Italy and Spain suggests this could be insufficient unless rigorously enforced. However, even after draconian isolation policies are lifted, social distancing will continue to depress many areas of consumer spending, which will limit the pace of the rebound.

The assumption is that developed economies face a month of shutdown followed by a couple more months of restrictive measures before a progressive normalisation. It is impossible to know how far activity will drop, but a month where it is 10-20% below normal does not seem unrealistic and this is already suggested by China's experience. Europe is a few weeks ahead of the US, but this will make little difference in terms of the hit to full-year growth rates.

Tentatively, we have revised the growth forecast in developed economies from 1.6% last month to -2.9%, with all regions contracting sharply. Unavoidably there is a wide margin of error. Emerging markets also face a big hit, with growth forecast at 1.9% compared to 4.1% last month. That leaves global growth at zero, compared to the 3.8% average of the previous decade.

The bear case is that the containment measures are ineffective and need to be extended for several more months. In this case, the trough could extend for much longer and developed economies could see contraction of something approaching 10% for the year as a whole.

This would put a huge strain on government finances and the financial system could buckle under the weight of mass bankruptcies. It is easy to project such economic distress out to more extreme political scenarios.

Will the economic crisis lead to a financial system crisis?

Two broad policy measures give hope that the undoubted economic shock will not lead to financial system crisis.

The first is that central banks are actively injecting liquidity into financial markets wherever they see the risk of dislocation. Previous prudence has been abandoned and rule books are being re-written. This is most clearly illustrated by the Federal Reserve adopting a "whatever it takes" approach, with a rapid expansion of its balance sheet along with participation in corporate debt markets.

Secondly, loan guarantee schemes lift the cost of future non-performing loans off the balance sheets of the banks and put it onto the government. This is particularly important in Europe, where the banks are still relatively fragile, and the system is more dependent on direct lending rather than capital market financing compared to the US.

How rapid and vigorous will the rebound be once the pandemic fades?

A rebound in activity should come quite quickly once the containment measures start to be lifted, if policy action is reasonably successful in preserving jobs and supporting income, as there will be areas of pent-up demand.

However, it still seems likely to be more than two years before output returns to peak levels of 4Q2019. The recovery could be held back if the hit to growth, combined with the drop in oil prices, results in a deflationary shock that impedes the efforts of central banks to loosen monetary policy.

Similarly, if policy cannot prevent wholescale bankruptcies, then the recovery could be much delayed.

Global growth outlook

EQUITIES
Opportunities emerging

While volatility is likely to persist, we believe that attractive long-term value has emerged in the Chinese, Hong Kong and Singapore equity markets, and we are incrementally adding equity exposure in these markets, thereby moving our position in Asia ex-Japan and overall equities from neutral to overweight. - Eli Lee

The global selloff in equity markets has been the swiftest seen in three decades. Indiscriminate selling has also been rampant given investors' rush for liquidity.

In our view, this creates opportunities for investors with ample cash and are underweight equities, as well as those who are looking to rebalance their portfolios, to move into higher quality long-term holdings.

For these investors, we recommend gradually averaging into bargain-priced stocks with resilient balance sheets and long-term growth outlook, as these are likely to emerge unscathed from the virus outlook, and into quality dividend-yielding stocks with healthy cash flows, such as selective Singapore REITs, that would benefit from a "reach for yield" dynamic as rates continue to fall.

United States

The consensus 2020 earnings per share (EPS) estimate for the S&P 500 has been dropping in the last few months, but further downward revisions are highly likely. Companies are now focused on free cash flow generation and preservation, so reduced capex is to be expected. This reduction in investment activity is likely to lower revenue and earnings activity in 2020.

While lower oil prices are traditionally beneficial for consumers, concerns are mounting over the US energy sector, given that the US is now a net oil exporter following the shale revolution.

Our preferred picks in the US continue to have a tilt towards quality technology names that

1. ride on durable secular growth trends
2. possess strong and sustainable business models, and
3. sit on healthy balance sheets.

Europe

The coronavirus outbreak is hitting Europe hard, and the potential impact on earnings is at the top of mind for investors. Europe's worst ever year-on-year EPS decline was -49% during the global financial crisis, while a typical earnings recession sees year-on-year EPS growth fall to -25% at its worst.

So far, from mid-February, we have only seen a ~7% reduction in EPS forecasts for 2020, and consensus is still expecting a 2% growth for EPS this year. This is clearly too high, partly because analysts need time to review their estimates.

We also note that the fall in oil price is an issue for the wider European market, as the Energy sector was supposed to be the largest contributor to 2020 EPS growth, providing over 1/6th of the total market growth. This is now lost, and whilst over the medium-term lower energy costs and lower rates should stimulate consumption, that is not the near-term focus of the market.

Japan

While the Bank of Japan's (BOJ) increase of daily ETF purchases to ~JPY100b (from ~JPY70b) has helped support the equity market near term, likely unrealized losses on its current holdings and the sustainability of this strategy (or the absence of a long-term exit strategy) remain a concern over the longer term.

Market valuations have reached undemanding levels of 0.96x price/book, nearing the previous trough multiple of 0.9 times over the past decade.

Due to the viral outbreak however, lower domestic demand and economic activities disruptions should lead to further earnings cuts in the upcoming results season, while the Olympics has been officially postponed, dampening sentiment further. With forward earnings growth still looking optimistic at ~12%, we expect earnings forecasts to be revised lower and we remain selective.

Asia ex-Japan

The recent focus on Covid-19 has been largely on Europe and the US. However, there are lingering concerns that the worst may not be over for Asia. For example, it is still unclear how quickly India (10% weight in the MSCI Asia ex. Japan Index) would be able to contain the spread of Covid-19 within its borders.

There were also bright spots amid the general economic malaise, as China's official PMI saw a steep rebound from 35.7 in February to 52 in March, beating consensus' expectations (44.8).

There were encouraging signs within the Chinese Property sector, as most developers reported that more than 90% of their sales offices have already re-opened (with the exception of Wuhan), while construction activities have also largely resumed above the 90% level. The major developers we track have mostly guided for positive growth in their contracted sales for 2020 by high single-digit to mid-teen levels.

The MSCI Asia ex. Japan Index is currently trading at a forward P/E ratio of 11.1x, which is 1.1 standard deviation below its 7-year mean.

China/Hong Kong

The pace of activities resumption and stimulus policies will remain as the key focus with some of the high frequency indicators that we have been monitoring picking up steadily, such as daily coal consumption and inter-city traffic congestion indices.

While we expect the government will announce and implement stimulus measures that are required for a prompt and sufficient rebound, a broad-based stimulus that is similar to that in the 2008 Global Financial Crisis is highly unlikely and not necessary, in our view. That said, stronger stimulus would still be required to boost activities significantly to bring it above trend in 2H20.

Looking ahead, it will be important to monitor the above data points that may suggest cyclical policy is stronger or weaker when compared to our expectations.

On a relative basis, we do see favourable factors to support Chinese equities to outperform, namely

1. stabilization in Covid-19 cases and a steady resumption in economic activity;
2. China has the room and ability to ease policy further (both monetary and fiscal policy); and
3. growth recovery.

However, in the event of a prolonged structural downturn or global recession (which is not our base case), China's growth will not be immune. A prolonged period of weaker global growth will hurt Chinese exports.

BONDS
When the levee breaks

Given our belief that spreads will not revisit 2008/2009 levels, we think that it makes sense for longer-term investors to sensibly reengage with the high yield credit space. As such, we are maintaining our overweight stance on emerging market high yield and neutral stance on EM investment grade. - Vasu Menon

Credit markets globally staged a historically epic collapse beginning in late February and extending through the month of March. Over the past month Emerging Market (EM) is down 10.1%, with Investment Grade down 7.1% and High Yield falling 14.9%. March was the worst month for Credit since October 2008, even though in the last week or so the market recouped some of its earlier losses.

High Yield (HY) spreads widened out as much as 500 basis points during March to reach the highest level post the Global Financial Crisis (GFC) before rallying back more than 105 bps at the end of the month. Investment Grade (IG) spreads widened a more modest 180 basis points at the widest during the month before re-tracing 10 bps at the end of the month.

Further downside in EM Credit possible, but we do not foresee 2008/2009 levels

The ultimate impact, scope and duration of Covid-19 is still largely an unknown.

Hence, despite all the money thrown at the problem by global policymakers and governments, further volatility and downside may persist until there is widespread consensus that the virus is a spent force (or a vaccine is developed).

However, within EM credit, we do not expect spreads to revisit the lows achieved during the GFC.

The composition of this market is far superior today from a credit quality perspective. China is the largest component and almost 10% is from the Gulf Cooperation Council countries (Abu Dhabi and Saudi in particular). Many of the largest names from these countries are systemically important, with significant government ownership.

We would expect that these countries will provide these strategically important entities with support during times of severe stress.

Maintain medium-term preference for Asian High Yield

Asian dollar bonds have also suffered during March as a result of the global market volatility but held up relatively well.

Our overweight on Asia high yield bonds, in particular Chinese property, remains current. Two main factors support our view.

Firstly, China experienced the Covid-19 earlier, and it is slowly resuming economic activities. Officially, 90% of businesses have reopened in China. We still expect to see a weaker year-on-year March in the Chinese property sector, but we expect a more significant recovery during April.

Secondly and importantly, while the US Dollar bond market has been closed to Chinese issuers in the second half of March, the onshore bond market is still operating. We have observed many of the developers under our research coverage issued onshore corporate bonds, supporting their liquidity position during 2020.

Maintain neutral duration position

The US Treasury (UST) market has exhibited extreme volatility and even bouts of illiquidity in recent weeks. The 2-10 year UST curve "bull steepened" in the wake of Fed rate cuts (and subsequently flattened 25 basis points) while the 3-month UST bills went negative in the signs of a potential liquidity trap.

In this market environment where significant policy actions are ongoing, we would recommend a neutral portfolio duration position until some measure of stability and continuity returns to the interest rate market.

Maintain overweight rating on High Yield and stay neutral on Investment Grade

We are maintaining our overweight stance on EM HY and neutral stance on EM IG.

Within the EM credit space, HY has understandably borne the brunt of risk reduction.

However, given our belief that spreads will not revisit 2008/2009 levels, we think that at current levels, it makes sense for longer-term investors to start reengaging with the asset class.

FX & COMMODITIES
Gold surges on pandemic fears

We cut the 12-month oil price forecast to USD40/bbl for WTI and USD45/bbl for Brent on the back of downside pressure from the pandemic shock and the Saudi/Russia oil price war. Meanwhile, gold could continue to take a breather over the next few months before continuing its journey higher. - Vasu Menon

Oil

Crude oil has been hit by double whammy from the pandemic and the Saudi/Russia oil war. We cut the 12-month oil price forecast to USD40/bbl for WTI and USD45/bbl for Brent. A fading of the Covid-19 shock to oil demand and US oil supply cutbacks should still allow oil prices to rebound in the medium-term.

Gold

Gold has outperformed during the recent sharp equity market downturn, though it is not exempt from volatility in the rush to liquidate positions for cash amid intensifying US Dollar funding pressure. While US Dollar funding pressure has since eased, gold could continue to take a breather over the next few months before continuing its journey higher. Helicopter money and successful Fed action to boost inflation breakeven and push down real rates should ultimately bolster the bullish gold trade in the medium-term.

Currency Outlook

Compared to March, the broad US Dollar is likely to be more stable heading into April as implied volatility eases across the foreign exchange space.

The series of central bank and government rescue packages have alleviated some immediate financial stress and calmed risk sentiment, indirectly keeping a lid on broad US Dollar strength.

So far, actual macro data concerns have largely been overlooked as the market's focus was set on the financial markets. This may change in April. The pipeline for positive news may be thinning, whereas the potential for negative developments - virus spread, economic concerns, credit issues - may still actualise. Thus, we would not rule out another bout of risk-off moves in the near future. This should re-ignite US Dollar safe haven flows.

Overall, we see some range-bound action in the major pairs early in April, as positive drivers run their course. Heading further into April may see renewed US Dollar strength, as the macroeconomic hit becomes even more apparent.

On a multi-week horizon, we prefer to back the US Dollar against cyclical currencies. Reserve currencies, like the EUR and JPY, may also come under negative pressure against the US Dollar, but are expected to remain more resilient.

In Asia, the pattern of near-term consolidation and US Dollar strength further out is also expected to play out. The ability of the CFETS RMB Index to track broad US Dollar movement in March should provide an anchor of stability to Asian currencies, and ward off outsized moves in the USD-Asia pairs on either side.

Fundamentally, Asian currencies continue to face downside pressure on unprecedented portfolio outflows. South Asian currencies are particularly vulnerable, with heavy outflows both on the bond and equity fronts.

On the growth front, Thailand and Singapore have forecast contraction for their economies. The scale of the growth downgrade is large and will set the tone for the rest of the Asian economies. This should also weigh heavily on Asian currencies in the structural horizon.

With the environment negative for Asian currencies, we expect the USD/SGD to search higher on a multi-week horizon. However, despite the easing actions by the Monetary Authority of Singapore, the message of stable monetary policy also came across strongly. We think this will ward off excessive upside expectations for the USD/SGD for now.