Head, Treasury Research & Strategy, OCBC Bank
Member of OCBC Wealth Panel
Macro-economic uncertainties such as the Brexit and the slowdown in China may fuel investor worries, but there are still silver linings
RECENT world events have triggered fears among investors that the second half of 2016 (2H2016) will see more risks unfold. But OCBC Bank's head of treasury research and strategy Selena Ling says that there are some bright spots that investors should note.
The United Kingdom's vote to leave the European Union (EU), for instance, serves as a timely reminder that all is not well in developed markets, says Ms Ling, who is also a member of the OCBC Wealth Panel. Financial markets and the British Pound took a beating on news of the Brexit, with major central banks preparing for emergency injections of US dollar liquidity if things take a turn for the worse.
The United States Federal Reserve's plan to raise interest rates by at least 25 basis points this year, as well as the European Central Bank (ECB) and the Bank of Japan (BOJ) potentially resorting to more fiscal measures to support economic growth and stalling concerns of deflation, could compound the uncertainty further. "The pervading gloom in the global economy looks set to stay for a while longer," says Ms Ling.
However, all is not lost. Ms Ling maintains that the global economy is not headed for a global recession similar to the 2008 Global Financial Crisis, despite news of lingering threats. Major economies are still growing, albeit in a muted fashion. "Global growth is still tipped to be close to the 3 per cent year-on-year handle. The US economy is expected to grow around 2 per cent in 2016; not fantastic but not dire either. Europe and Japan may clock in a more tepid 1.6 per cent and 0.5 per cent respectively," says Ms Ling.
Both the ECB and the BOJ may be venturing into unknown territory of negative deposit rates, but both banks have stated that they would remedy the situation. "Japan postponed its planned April 2016 sales tax hike and a supplementary budget is on tap soon," she adds.
Ms Ling notes that the risks of mounting debt and non-performing loans continue to loom over China. While its growth has stabilised in recent quarters, such a trend is due to Chinese policymakers responding to the slowdown with some support measures, in a move that could seem contradictory to medium-term reform efforts to cut its credit risk.
For the medium-term, China needs to focus on reducing the housing inventory and shift from an exports-based economy to a consumption-based one, as outlined in its Five-Year Plan, says Ms Ling. Policymakers may have to bear with the sluggish growth trajectory for now, and be cautious about implementing further stimulus. She feels that a hard landing for China is unlikely, as policymakers have been proactive in trying to prevent a debt crisis.
Fiscal measures to drive growth in Asia
Global inflation remains lacklustre in 2H2016, a reflection of crude oil oversupply and softening global demand, says Ms Ling. With inflation at a standstill, Asian central banks have room to ease monetary policy in the near-term.
Banks such as the Royal Bank of Australia, the Monetary Authority of Singapore (MAS) and Bank Sentral Republik Indonesia have been easing monetary policy opportunistically in light of growth headwinds and fickle US dollar sentiment owing to the Federal Reserve's rate hike plans, as well as the anticipated capital outflows from emerging markets to developed markets that did not fully materialise.
She explains that Indochina economies may expand by 6 to 8 per cent this year, followed by the Philippines at about 6 per cent, Indonesia at 5.1 per cent and Malaysia at 4.4 per cent. While regional trade is also slowing, Asean economies have not been sitting back idly.
Says Ms Ling: "Indonesia has regained some mojo with its recent push to attract more foreign direct investments and a tax amnesty bill is currently underway to help shift much-needed funds back to its infrastructure projects. Global and regional growth prospects may notch a little lower in the wake of the post-Brexit period of protracted uncertainty, but we anticipate that over time, the global search for yield will return."
"Emerging markets, especially Asia, may still benefit from relatively higher yields and more stable macro-economic fundamentals. As for Singapore, full-year growth is likely to be stuck in the lower half of the official 1 to 3 per cent growth forecast, weighed down by falling external demand. OCBC expects gross domestic product growth to hit 1.8 per cent in 2016, down from 2 per cent last year."
Ms Ling projects manufacturing to remain in the doldrums, with construction demand supported by public infrastructure efforts. Financial services and tourism-related services, such as hospitality, should outperform labour-intensive domestic services, such as retail and food & beverage, she adds.
In response to the uncertainties, MAS has already eased its Singapore dollar Nominal Effective Exchange Rate (NEER) policy stance thrice, with the latest being a neutral stance in April. Should growth and inflation expectations deteriorate, MAS may lower the NEER parity, similar to its actions post-Global Financial Crisis. "With the Committee for Future Economy due to release its recommendations at the end of the year, there may be some fiscal initiatives in the pipeline as well, although it could be more a 2017 story with the FY2017 Budget package," says Ms Ling.
She emphasises that while there are still dark clouds on the horizon, global recession fears are overblown. "There are remaining uncertainties over China's ongoing slowdown and even the US presidential elections outcome and its implications for foreign and trade policies," she says.
"Nevertheless, Asia should see growth stabilise in the second half of 2016, and remain a key growth region with interesting prospects for investment and infrastructure spending in the medium-term," she adds. According to Ms Ling, there are still ample investment opportunities despite the volatile environment.
OCBC advises clients to take a diversified and multi-strategy approach as a way to spread out risks in an investment portfolio. The bank recommends that investors look at the BlackRock Global Multi-Asset Income Fund, the JPMorgan Global Macro Opportunities Fund and the Schroder Asian Income Fund.
In a nutshell
- Uncertainty continues to prevail in the macro-economic environment, but the silver lining is that key policymakers are on stand-by;
- A global or US recession is unlikely this year, notwithstanding the plethora of gloomy news headlines;
- China's growth has stabilised in recent quarters, although it remains to be seen if the policy-fuelled momentum can be sustained into the future;
- The main difference between 2H16 and 2H15 is that the Fed is no longer hawkish and global inflation remains lacklustre;
- Singapore's growth may have bottomed in the first half of 2016 and policy settings remain accommodative; and
- There are silver linings within Asia still;
- Dark clouds are still on the horizon, but global recession fears are overblown.
At OCBC Premier Banking, both customers and Premier Banking Relationship Managers have access to rich market information provided by the OCBC Wealth Panel. With over 200 years of collective investment experience, the Panel's insights are available to help guide customers' investment decisions.
Here are the bank's recommendations:
- BlackRock Global Multi Asset Income Fund
- JPMorgan Global Macro Opportunities Fund
- Schroder Asian Income Fund
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