AMID COVID-19: OPPORTUNITIES & CHALLENGES

BY ANDREW LEONG

In the blink of an eye, it seems we’ve made it midway through 2020. Emerging from the gloomy first half of the year, we see some good news as COVID-19 cases have declined largely, and most countries are reopening their economies or have plans to do so soon. New Zealand’s government has already announced to lift all COVID-19 restrictions, except stringent border controls. In New York City, the hardest hit by the global coronavirus outbreak in the United States, has started reopening in early June after about three months of lockdown. Singapore’s Circuit Breaker measures have also been gradually eased from 2 June onwards with the country lifting its restrictions over three phases. So, what are the opportunities and challenges we face this post-COVID-19 era?

The US Dollar (USD) has been resilient, and one of the biggest winners. It strengthened continuously until mid-March – and even during April – where the stock market was witnessing a thirty per cent recovery (indicating a higher appetite for risk), where the USD still held its ground. It wasn’t until mid-May when economies started to show firmer signals of reopening that the USD reversed its trend and started to head south. With the tides changed, the markets are showing increased confidence in the economic growth outlook, and safe-haven USD is losing its favor. We see the same weakness in other safe havens, including JPY and CHF. Gold is also seeing some headwinds; however, it’s also affected by the huge stimulus from central banks; which are triggering general currency debasement, possibly leading to further appreciation of Gold.

Meanwhile, commodity currencies have rebounded following the pickup in manufacturing. China was the first country to have lifted the restrictions, and the resulting growth in manufacturing and service activities have been optimistic. The Caixin China General Manufacturing Purchasing Managers’ Index (PMI), which gives an independent snapshot of the country’s manufacturing sector, rose to 50.7 from 49.4 in April. It’s the highest reading since January, adding to evidence that the country’s manufacturing sector is regaining momentum after the country started returning to work in April. The same outperformance is observed in the service sector, according to Caixin, the service sector activity rebounded sharply to a nearly ten-year high in May as domestic demand recovered. These are likely drivers that play a part in the increased optimism from investors and the resulting new highs we see in the global stock market. Investors are betting on a quick global recovery and expecting other countries to generate the same growth pace, as shown in China’s.

Geopolitical Risks: Opportunities for Singapore

While the investment landscape is generally optimistic, geopolitical risks loom, especially in Hong Kong, which is drawing the attention of investors. China’s newly announced security law has thrown Hong Kong into social unrest, and this time it might lead to tailwinds for the Singapore economy.

Singapore and Hong Kong have long been globally preferred countries for wealthy individuals and companies to park their assets.

Not surprisingly, this has led to a recent record jump in fund inflow into Singapore bank accounts from abroad; this is, of course, supported by her safe-haven appeal — with political stability even during the pandemic.

While Singapore has benefited from the situation and may continue to see an increased benefit in the future, we find that it still has not quite reached the point of replacing Hong Kong. Hong Kong has long been a primary gateway into China’s vast market, aided by its closeness to Beijing under the One Country, Two Systems framework. It has allowed international funds to invest directly in China’s stock and bond markets via Hong Kong, making it a top hub for offshore and onshore renminbi transactions. According to Swift, three-quarters of all overseas renminbi payment flows go through the Territory. In contrast, about a quarter of all foreign exchange transactions in renminbi are executed in Hong Kong. Comparatively, Singapore accounts for just 3.48 per cent and 5.54 per cent of those flows, respectively.

There is also a tremendous difference in the size of capital markets. At $665bn, the equity capitalization of Singapore’s stock market is a lot smaller compared to Hong Kong’s approximate $4tn. Therefore, while Singapore is making cumulative gains from Hong Kong’s woes, we do not see it behaving like a full replacement of the market opportunities that Hong Kong provides.

Opportunities in the FX Markets

Now that we have explored the opportunities and challenges brought about by pandemic, how do we better prepare ourselves for the coming months ahead? It is safe to say that in May, markets were optimistic about the global recovery, as reflected by the strong rally in equities and risk assets, retracing most of the losses earlier this year. Meanwhile, oil has bottomed, USD has peaked, and surveys show consumption sentiment increasingly biased towards looking at the lockdown and ensuing job losses as temporary.

However, we see a divergence between economic data and market performance. One example would be the developments in the US which showed that the pandemic is giving rise to a large number of discouraged workers. The labor force participation rate declined by 2.5 per cent from March to April, which represented the largest monthly drop for this series on record. Beyond the US, the picture in emerging markets remains grim. We have seen successive downward revisions of the 2020 real GDP outlook for emerging market economies, ranging from Brazil (-6%) to India (-3%) to

Indonesia (-1%). Statistics like these, coupled with inconclusive developments with regards to the COVID-19 vaccines make a sustainable recovery to a pre-pandemic level of activity seem exceptionally unlikely — not forgetting the cliché for equities, “Sell in May and go away”. Hence, with the divergence in economic data and a potential second wave of infections, the economic recovery that we are expecting might fall short of market expectations, which could cause risk assets and stocks to pare their recent gains.

As we tread cautiously in an environment which could see risk assets like stocks and commodities correcting lower, we could be seeing an opportunity to buy the GBP/AUD. Brexit negotiators have agreed to extend trade talks through the summer, rather than to call them off. Combined with the British government efforts to close the gap with developed world peers on reopening the economy, this could provide some boost to the Sterling. Meanwhile, if we were to see the second wave of a market correction, it could put high beta currencies such as the AUD under renewed pressure.

On a technical front, price is currency testing our support level at 1.8200, in line with our weekly ascending trend line where we could see a bounce to our intermediate resistance level at 1.8650. A break above this level could provide the bullish acceleration to our next resistance target at 1.9350. For the latest view of the chart, please scan the QR code.

P(For internal use) Link: https://www. tradingview.com/chart/GBPAUD/ieoJgSY4gbpaud/

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