“It [Singapore] particularly benefits from the supply chain reshuffling globally as a service provider, with part of it [the reshuffling] going to Asean, and not even Singapore per se. But Singapore provides all kinds of services supporting this relocation,” says Chen. He was speaking on a Sept 23 webinar titled ‘A new dawn in the US and the world’.
Chen adds that Indonesia, with its natural resources, particularly in strategic metals, could also benefit from the changing geopolitical backdrop.
In 2023, metals were the second most-exported product out of the country, contributing to around US$42.1 billion ($54.0 billion) to its economy, as per data from global trade database the Observatory of Economic Complexity (OEC). S&P Global predicts Indonesia to hold 60% of the world’s mined nickel supply by 2028, of which it is already the leading producer.
“But some of the smaller economies, depending on their geopolitical positioning, could be forced to choose a side, and that may lead them to face more uncertainty from a political perspective,” notes Chen.
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Chen, who is also the head of Asia research at the Swiss bank, estimates that some US$26 trillion of foreign assets are currently invested in the US. For years, the cycle of capital flow he says, has been based on three fundamental conditions that have been irresistible to investors.
He says: “One is that the US economy provides transparency and stability. Second is the US government provides security guarantees to its allies and lastly, US assets do not just provide safe assets or risk-free assets, but also its equity market probably provides the highest returns as well.”
“But we've seen that these three major conditions have actually been eroded to different extents since Trump stepped into the White House the second time,” adds Chen.
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Already, the economist observes that there have been “very clear signs” of diversification away from the US dollar as part of this repatriation, referring to the Euro’s 5.49% rally year-to-date, trading at 1.18 relative to the US dollar as at Sept 23. He also points to gold prices as another indication, which rose to a record-high of US$3791.10 on Sept 23.
Chen says: “That is a clear sign that investors are chasing non-dollar currencies or precious metals, which is a way of expressing their caution against the US dollar. But in other asset classes, such as equities for example, we haven't seen a sustained trend of diversification away from the US.”
Although he thinks that Asean as a whole will be “net-net” in gaining from the changing global order, Europe will be the “biggest beneficiary”.
“The reason is pretty simple: because European assets represent the biggest chunk of the foreign assets residing in United States, if there is real repatriation of assets out of the US, Europe — given what has been happening in the policy front, will better capture that capital repatriation, instead of other regions,” says Chen.
He is referring to Germany’s historic amendment of its ‘debt brake’, a policy introduced in 2009 by then-Chancellor Angela Merkel to curb government debt of the European Union’s largest economy during the global financial crisis. For the past 16 years, Germany’s federal government and its 16 states were largely prohibited from taking on extra loans, with only the former being permitted to take on a maximum debt of 0.35% of the nation’s GDP.
In March this year, Germany’s parliament or the Bundestag altered the rule to announce that defence spending above 1% of GDP would not be subject to any borrowing limit. The amendment frees up an extra fund with a validity period of 12 years of some EUR500 billion for additional infrastructure spending, of which EUR100 billion has been earmarked for climate-rated investment.
Chen, calling the move a “game-changing pivot”, says that the lifting of its previously “very restrictive” fiscal stance will resort to large-scale borrowing and ultimately investments.
“We think this kind of impetus could spill over to the rest of Europe as well and bring a potential structural revival of this continent, in terms of higher growth rate and higher investments and so on,” says the economist.
With this, he sees European equities to be a “potential winner” moving forward, as the asset class is still treated at a "significant discount” of “over 20%” when compared to American equities. Chen says: “We've been advocating and also investing very actively, particularly in the area of [European] real estate. That is a theme that we have identified long-term, and we think there are plenty of opportunities of value creation through private equity, in the real estate sector in Europe.”
