The first panel at the OCBC Securities Investment Forum, titled Investing with greater clarity in a fragmented world, comprised two of the local market’s most respected economists: Selina Ling, chief economist & head, Global Markets Research & Strategy, OCBC, and Manu Bhaskaran, CEO, Centennial Asia Advisors. The third panellist, Tommy Xie, managing director and head of macro research, Global Markets, OCBC, offered interesting new insights into Southeast Asia.
The forum took place against a backdrop of rising US Treasury yields, with the 30-year Treasury yield at its highest level in more than 10 years, and rising policy rates in some developed markets such as Australia and Japan. But local interest rates are at a low.
“We don’t have an interest rate policy. The Monetary Authority of Singapore [MAS] runs an exchange rate policy. In April, they tightened monetary policy by raising the slope of the SGDNEER (nominal effective exchange rate) appreciation band. That means the Singapore dollar is strengthening against a basket of currencies to help curb imported inflation, since Singapore imports almost everything. When you have a stronger Singapore dollar stance, it attracts more capital inflows into Singapore, which in turn depresses local interest rates. You have this irony that the Singapore dollar is getting stronger, but interest rates are very, very low compared to the US interest rates,” Ling explains.
Because of Singapore’s different monetary policy, it has attracted additional wealth and investment flows since the start of the Iran War.
“Basically, it’s all about safe-haven flows now as well. In the past, when you had a war, the dollar would appreciate and bond yields would fall. Today, we see bond yields rising, and even though the dollar has strengthened, it’s not strengthened as much as before. So, there’s a change in how global investors view safe-haven assets. People are looking for safe havens. There are not that many. The Swiss franc and the Singapore dollar have gone up. The danger we face, I think, is that we get too much liquidity into Singapore than we are comfortable with. Then, the MAS may be forced to undertake administrative and other measures,” Bhaskaran elaborates.
Some of those wealth and investment flows have been directed into the local equity market. Unfortunately, wealth flows are likely to inevitably make their way into the local property market.
“Although we see a little bit of caution on the labour market hiring front, if you look at COE prices and the property market, they are actually still doing very well, because liquidity is still very ample. Our households here have very high savings rates, yet remain very opportunistic when it comes to big-ticket purchases. Of course, the external environment does play a part, but Singapore benefits a lot from its AAA-rated safe-haven status. The more uncertain the world is, the higher the trust premium for Singapore,” Bhaskaran recounts.
See also: Investing in a fragmented world
Too much money
The problem arises of too much money chasing too few assets, which is pushing up Singapore’s cost structure. “If you become more and more like Switzerland, you could become very, very expensive. That might be good for the very rich, but it may not be good for the common man. So that creates a whole set of other policy challenges that we’ll have to deal with,” Bhaskaran muses.
US rates are rising because Americans are paying higher pump prices. Inflation is also creeping higher. The Iran War hasn’t just disrupted the flow of oil and gas but also the supply of associated products such as urea, fertiliser, lithium, helium and others.
On the flip side, Singapore equities have benefited. Xie points out the benefits of wealth flows to the banking sector. “The banking sector is usually one of the sectors that can benefit from this flush of liquidity, but of course, there’s also the negativities in terms of NIM [net interest margins] because the interest rates in Singapore have been falling. Overall, I would say it’s still pretty positive if you look at earnings,” Xie says. “When I talk to some of my colleagues from Global Markets, they are struggling to deploy the money, because we have too much money.”
See also: Asia’s gold rush fuelled by wealth flows: OCBC
Often, property measures are introduced to stem the flow of hot money into residential property. “If you look at how Singapore policy makers tackle asset inflation, they do so mainly through macroprudential policies, for instance, just recently, rules for executive condominiums were introduced. The downside for the audience here, obviously, is that Singaporeans are very, very heavily invested in property, so that they would be watching quite closely any of the potential moves by the Singapore authorities in the future,” Ling cautions.
Regions, sectors
Xie expanded on the resilience of the Chinese economy despite challenges in its property sector. The manufacturing sector has been resilient. China’s trade surplus last year was a record US$1.2 trillion ($1.5 trillion). China is a commodity importer. If commodity imports are excluded, China is running an even larger manufacturing surplus of US$2 trillion.
“What does US$1.2 trillion mean? It’s almost 1.8% of your global GDP. This is unprecedented, even during the peak for Japan and Germany. To me, that is how resilient the Chinese economy is. The second point concerns the integration between China and Asean. One data point I’m monitoring is under HS codes 84 and 85 (harmonised system codes that classify traded products). That’s basically your semiconductors, chips, automated machines, etc. China’s trade surplus with the Asean-6 under these two categories last year was US$133 billion, accounting for 12.4% of China’s total trade surplus last year,” Xie elaborates. “I’m still very positive on China’s trade outlook, because this integration, the pace is so fast and we should be positive about this development.”
Bhaskaran pushes back a little on China’s growing trade surplus with the so-called Global South. “If you look at the trends in manufacturing and investment, some people are saying that China’s share of world manufacturing will go from 30+% to maybe as high as 42% in the next few years. That is just politically impossible. There will be a strong reaction to this and even countries that want to be friends with China will have to respond if their local producers go bust and workers lose their jobs. They will react, and I think the next big thing to look out for is this wave of protectionism against China.”
Ling points to China-Asean integration as a double-edged sword. “The greater the integration of the manufacturing supply chain between China and Asean is, the more it actually benefits us as a buffer when the US economy is slowing. It also means that China is now among the top three trading partners of Asean, together with the US. We know that there is US-China contestation, so although Asean and Singapore are neutral, effectively you will be pressured by both sides to choose, and it’s a very, very difficult position because you’re choosing between your top two trading and investment partners. It is a very hard choice.”
She thinks that sectors likely to do well in the current fragmented landscape, globally, are defence. “Secondly, with oil prices being so high, there will be a lot more investments going into the green transition into renewables, and even, like in Singapore’s case, we are looking at small nuclear reactors. Thirdly, with this diversification story, it’s about building just-in-case supply chains, so if the Middle East looks unstable, and the US-American bloc looks like it’s coalescing around US-centric policies, then Asean looks very, very attractive. That’s why you see a lot of investments coming to Asean, but it will also drive up business costs in Asean and in Singapore itself,” Ling explains.
Within Asean, Bhaskaran singles out Singapore, Malaysia, and Vietnam as likely to do very well. Ling agrees, adding that Singapore and Malaysia are capitalising on the AI boom, with data centres being built and significant investments in semiconductors and chips.
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“Indonesia is going through a little bit of a tricky time right now, mainly because of its policies that the rating agencies don’t like. A lot of fiscal spending is going into the free lunch programme. There are questions about the fiscal sustainability of that programme, so you see the Indonesian rupiah losing a lot of ground against the dollar, and its rising yields are important given the interest rate differential between the US 10-year yield and Indonesian rates. There may be a rotation or reversal of capital inflows into Southeast Asia, with funds flowing back into developed markets, such as the US, Europe or Japan. This is typically what causes the volatility and pressures the currency markets, and that’s when people turn a little bit more cautious on emerging markets in Southeast Asia,” Ling warns.
Xie believes that Asean will continue to benefit from flows from China. He goes back into history to make the point.
“Southeast Asia’s first boom was in the 13th–15th centuries because China had a war in Mongolia, blocking its trade route to Central Asia. When our trade route was blocked, people looking for alternatives came to Southeast Asia. The second boom was in the 16th–17th centuries, driven by the rise of the Ottoman Empire and war in the Middle East. Again, the trade route was blocked and people seeking an alternative — the Portuguese, Spanish, Dutch and British — came to Southeast Asia. Every time we have a major trade blockage, Southeast Asia benefits. That’s why I live here,” Xie, who is from Mainland China, concludes.
