COVID-19 isn't just another economic crash, it is a global pandemic that has taken countless lives and affected billions of people worldwide. The markets reacted accordingly, with one of the worst stock market crashes in March 2021, as major financial indexes such as the S&P 500 plunged a lot more than 30% within weeks.
Singapore's open and trade-centric economy contracted 5.8% in 2021 according to advance estimates shared through the Ministry of Trade and Industry (MTI). This will make it the worst recession in Singapore's history, despite the government delivering unprecedented support packages worth close to S$100 billion over 4 national budgets in 2021.
While things are looking brighter in 2021, we still need to remain vigilant. Government stimulus measures in Singapore and globally have largely prevented economic collapse. However, it has driven interest rates back to near-zero levels.
Singapore and many other countries are starting their vaccination programmes and striving towards reconnecting to the world, once it's safe to do so. Pockets of the economy will also be emerging out of the doldrums, while old and new sectors are riding on digital trends within the new normal. However, perils of sudden rotations – in the sectors or asset classes that outperform – will continue. Through all of this, Asia has been put in the driving seat to influence the global economy out of the current lull.
Broader trends in sustainability and doing good – concentrating on ESG – have also remained sticky, by having an increasing number of investors preferring firms that seek good outcomes for society in general, rather than only maximising profitability.
There are both risks and opportunities for investors because the global economy restarts, resets and reopens. To help us identify some of the investment themes in 2021, we browse the Asia Outlook 2021 report authored by Fidelity International.
# 1 Low interest Will Likely Persist
While interest rates were creeping upwards pre-COVID-19, the pandemic has led many central banks including the Federal Reserve (U.S. Central bank) to cut interest rates to near-zero.
One reason is to encourage businesses and people to borrow to invest or consume, in order to get the economy going again. Another side-effect of this is that it increases the amount of money in circulation.
As stated by Steve Ellis, Global Chief Investment Officer (CIO, Fixed Income) at Fidelity International, in the Asia Outlook 2021 report , money supply (M2) growth is generally at 7% a year. Currently, it's at 23%, a level not seen since the 1960s.
At the chance of oversimplifying this, when money supply increases, it has an inflationary effect on asset prices. As we can observe around us, prices of properties, equities, bonds, gold and even alternative asset classes for example cryptocurrencies are rising. This may also extend to potentially rising consumer prices.
Even with vaccinations available these days, we can expect interest rates to remain lower in the near-term as the U.S Fed has pledged to keep interest rates near-zero until 2023.
In such an environment, located on cash isn't an option as its value gets eroded by inflation. As the valuation or pricing of various asset classes, including equities and bonds have risen, there remain pockets of investment opportunities. ESG (Environmental, Social and Governance) and climate funds have outperformed conventional funds in 2021 and Fidelity's Steve Ellis expects this to continue in 2021. \”Funds like these are able to provide more secure income streams over the long term- quality credit issuers with high ESG ratings can offer a smoother return profile within the coming years than those with weaker ESG credentials.\”
Steve Ellis also noticed that \”central banks must keep refinancing cost low\”. However, this will make \”the financial system more vulnerable to a sudden rise in yields, whether triggered by indications of inflation, better growth prospects or perhaps a policy mistake similar to the decrease in the Fed's balance sheet that triggered a market tantrum towards the end of 2021.\”
#2 Asia Could Be At The Forefront Of The Economic Recovery
When recovering from past recessions, Asian countries usually took the lead from major Western economies. However, in 2021, it isn't really the case.
Many Asian countries seem to have done a generally better job in containing the COVID-19 outbreak. The benefit of this extends to the economy because it allows the country to recover faster.
As mentioned by Paras Anand, CIO (Asset Management) for Asia Pacific at Fidelity International in the Asia Outlook 2021 report, another \”key trend that was already underway due to rising trade tensions is larger intra-regional reliance. The pandemic has only accelerated this phenomenon, significant parts of supply chains being brought nearer to home in Asia, especially in China.\”
In fact, despite to be the first country to report the coronavirus in December 2021, China was one of the only economies in the world having a 2.3% GDP growth in 2021. In particular, Chinese e-commerce companies have done remarkably well in 2021, accelerated by COVID-19. While interest rates in China have been reduced slightly, it's not to the extent of the rate cuts in the U.S, making Chinese bond yields particularly attractive in a weaker dollar and low yield environment.
According to Paras Anand, \”across Asia as a whole, if current trends continue and also the region does not suffer the setbacks of further waves from the virus, then the recovery is likely to broaden out. Countries that have been left behind such as India could get caught up fast in 2021, with more value trades employed in Asia than in Western economies due to the greater strength and more linear shape of the Asian economic recovery.\”
#3 Environmental, Social & Governance Come in Focus
In the past, investors' focus was usually on profitability, business growth along with a strong balance sheet. While they are still essential factors for good companies today, what has become equally important are companies that do well on the ESG front.
The general idea behind ESG is that investors want to invest in companies that not only provide positive monetary returns, but also impact society and the environment positively.
The push to pay attention to ESG in investments can be seen in the Singapore Exchange's (SGX's) announcement in December last year that it would strengthen its resolve for sustainability with a S$20 million plan. Funds will go towards SG-focused products, services and platforms and into capacity building for the financial ecosystem, strengthening internal capabilities and increasing CSR (Corporate Social Responsibility) commitments. SGX also offers its ESG stock rating, where it rates how well listed companies manage ESG problems that are material to their businesses.
Mapping out Asia's devote the world of sustainable investing, Fidelity's Paras Anand believes that Asia is catching up fast on ESG. \”This creates a chance for Asian companies to add value not just in terms of continuing growth trends, because they have focused on in the past, but also in terms of attracting greater levels of investor capital through better sustainability characteristics.\”
#4 Do We Need To Invest Beyond Traditional Asset Classes?
In yesteryear, asset allocation typically comprises two main asset classes – equities and bonds, with a few holding cash as a reserve.
As observed by Henk-Jan Rikkerink, Global Head of Solutions and Multi Asset at Fidelity International, within the Asia Outlook 2021 report, something that happened during the March 2021 crash was what percentage of the safe haven assets failed to provide the protection that investors expected.
\”In the March 2021 crash, most of the traditional safe haven asset classes didn't provide the level of protection that investors expected. US Treasuries and investment grade bonds, for instance, provided less effective risk diversification in portfolios when compared with previous crises.\”
But what should investors consider doing? Henk-Jan Rikkerink suggests some alternatives.
\”Alternatives offer another way of diversification. We continue to find opportunities in areas for example asset leasing, infrastructure and renewables. We have a tendency to look for combinations of alternatives which have low correlations with traditional equity and bond markets. Specifically, 'long volatility' strategies are explicitly made to generate positive performance during periods of heightened market volatility. These kinds of strategies have cost investors in the past years as broad markets benefited from prolonged periods of growth, but performed well in 2021. We believe they have an important long-term role to play in diversified portfolios, and 2021 is likely to throw up plenty of opportunities for them to prove their worth.\”
If we want a resilient portfolio, we must constantly review the correlation of the assets we invest in. In the end, if the point of investing in multiple asset classes would be to enjoy the benefits of diversification over the long-term, we need to ensure that the investments we make aren't highly correlated.
Are Markets Already At Their Peak?
With the pandemic still ravaging many countries, most of us know that the world's economy is way from fully recovered. Simultaneously, equities, bonds and other asset classes are seemingly trading in a high valuation already.
So, what happens next?
Will these assets climb even higher once the global economy recovers from COVID-19? Or is the expected future recovery throughout the economy already priced into current asset valuations?
According to Romain Boscher, Global CIO (Equities) at Fidelity International, chances are \”that asset prices have shot ahead of earning expectations in 2021, thanks largely also to the fiscal and monetary response to the economic damage caused by COVID-19.\”
Romain also mentioned in the Asia Outlook 2021 report that while investors are banking on the best-case V-shaped recovery, for example with expectations the US$600 paid every week to US citizens continues with the new US government, it's possible that a \”K-shaped outcome\” may happen, \”where valuations diverge sharply between those sectors and stocks perceived to be winners and those spurned as losers.\”
We need to stay invested in 2021. However, we cannot ignore the fundamentals of a company we purchase. After all, high valuations in equities need to be matched by earnings and earnings growth. Unless earnings meet current expectations, stocks that are trading at a higher-than-usual valuation is going to be vulnerable.
If you are keen for more information about the various investment themes and what to look out for as an investor in 2021, we encourage you to read the Asia Outlook 2021 report by Fidelity. This will give you a better idea of a few of the macro trends that we discussed in this article and other areas that may also be important.