Stay focused on your investment goals despite uncertainty and volatility 6 Oct 2020
Global count for coronavirus cases is accelerating, with upwards of 32 million confirmed cases around the world, and more than 1 million deaths since 29 September.1
US remains as the global hotspot for COVID-19 infections with over 7 million confirmed cases1, constituting over 15 million cases with India and Brazil2. A resurgence of the virus has swept across Europe, prompting stricter restrictions and partial lockdowns across France, Germany, Spain’s Madrid and UK’s London. On 18 September, Israel became the first country to implement a second nationwide lockdown.2
Faced with the dire economic consequences of locking down, leaders around the world are sidestepping a second lockdown as best as they can. A second lockdown is likely to impair economic recovery as it shakes consumer confidence, weaken consumption and global demand. We look to the decline in GDP over Q2 2020 for reference, when most countries underwent nationwide lockdowns:
COVID-19 continues to dominate headlines and uncertainty looms over a global economic recovery. Nearly all equity indices registered losses in the month of September, with NASDAQ, gold and Chinese equities, which have been leading market returns, declining over the month. However, NASDAQ, gold, and Chinese equities still remain very much within green territories year-to-date.
As governments cope with the spread of COVID-19, markets will focus on stricter restrictions and lockdown measures imposed by governments, as well as fiscal stimulus and relief amidst an easing monetary policy environment. Globally, attention will be turning towards Brexit talks, the US presidential debate and US-China trade tensions.
United States US markets reacted negatively to news that President Donald Trump has tested positive for COVID-19. NASDAQ futures slid 2.3%, while the Dow and S&P 500 futures were down 1.6% and 1.7% respectively.34 The benchmark 10-year Treasury yield also edged lower to 0.6545%, and US crude futures fell 0.98%.35
August saw a slow recovery in the US jobs market, adding 1.371 million non-farm payrolls36 and lowering unemployment rate to 8.4%, the lowest level recorded since the spike to 14.7% in April.3 The Fed forecasts that US GDP will contract by 3.7%, and that unemployment rate will climb to 7.6% by year-end.4
Fiscal and monetary policies The House Democrats released a US$2.2 trillion stimulus proposal on 29 September 2020, a number far in excess of the White House’s US$1.5 trillion budget, with plans to reach a bipartisan agreement ahead of the US Presidential election.6
The Fed maintained an accommodative stance on monetary policy in its 16 September meeting, holding the federal funds rate steady at 0.25% and pledging to continue its purchases of US treasuries and mortgage-backed securities.4
Strength of greenback While expansionary monetary policies are a boon given the current market weakness, it does have its consequences. The US dollar has depreciated notably over the second half of the year, with the US dollar index falling to a two-year low of 92 at the end of August.5
The recent weakness of the greenback has been largely attributed to the Fed’s accommodative stance on monetary policy for the longer term, which could mean lower inflows into US dollar-denominated investments.5 However, a weaker dollar can drive inflation towards the Fed’s 2% target as it increases the relative cost of imports, especially those relating to commodities and consumer goods, which are major inputs to the US consumption. The weaker dollar will make US exports cheaper and more competitive to the rest of the world but will eat into the profits of these exporters. The US dollar notched 0.3% upwards on news that President Trump had tested positive for COVID-19, as investors showed signs of risk aversion.35
US Presidential Election The US Presidential election will take place on 3 November 2020, and the first of three presidential debates occurred on 29 September 2020. While polls are not a definitive measure of the election outcome, as seen in the 2016 elections, presidential candidate Joe Biden continues to lead the popular vote ahead of incumbent Donald Trump in BBC polls.
A Trump administration is likely to keep 2017 corporate tax cuts in place. While a lack of stricter regulatory oversight and corporate governance can have disastrous consequences, it is advantageous for corporates and markets in the near-term. The administration is also likely to maintain its confrontational stance with China and focus on infrastructure spending. Recent news on Trump’s tax statements and unwillingness to commit to a peaceful transfer of power has put a dent on his candidacy.3
In contrast, Biden’s policies favour higher taxes for corporations and high-income individuals, and focuses on eradicating loopholes that have so far allowed businesses to minimise their tax liability. Besides lobbying for increased regulation on banks, energy and healthcare, a Biden administration is also likely to ease tariffs with US’ trading partners – which is positive for global economic growth.3
Europe New COVID-19 cases climbed vehemently across Europe in recent weeks. Poland, Russia, Netherlands and Czech Republic saw sharp increases in infections, as did the 4 largest economies of Europe – France, Germany, Italy and Spain.7
The European Central Bank (ECB) kept the deposit facility rate unchanged at -0.5% in September and reiterated its commitment to continue its massive bond-buying programmes. While inflation for the eurozone slipped to -0.2% in August, the bank remains sanguine about the zone’s economic outlook, citing a strong rebound in the bloc’s activity. Putting its money where its mouth is, the bank raised its 2021 inflation expectations to 1%, and kept its projection for 2022 unchanged at 1.3%.8
Germany outpaced its European counterparts in recovering its economy. Munich-based Institute for Economic Research expects the country’s GDP to grow 6.9% in the Q3 and 3.8% in Q4 2020.9 The country’s Purchasing Managers’ Index (PMI) for manufacturing, which accounts for about a fifth of the economy, accelerated to 56.4 in September.10
The German government’s prudent financial aid of close to €1 trillion to businesses and citizens is a key factor for its recovery. The country’s lockdown restrictions were also more modest than European counterparts, allowing the country to retain a considerable part of its economic activity and productivity. Although a lack in global demand is weighing on exports, Germany’s production capabilities remain very much active, with a relatively stable workforce supported by the Kurzabeit scheme.11
Spain entered a recession in Q2 2020 when GDP fell 18.5%. After lavishing 20% of this year’s GDP on fiscal measures like its furlough schemes, the Spanish government expects debt-to-GDP ratio to scale as high as 115.5% by year-end, and projects the public debt deficit to hit as high as 10.3%.12 Although Spain’s Purchasing Managers’ Index (PMI) of 50.8 in September denotes economic growth over the month13, the country is now battling a second wave of infection. Commencing October, Madrid’s borders are shut to outsiders, and residents are barred from leaving the city except for essential trips for work, school, non-leisure shopping and medical care.14
United Kingdom The United Kingdom (UK) economy contracted 20.4% and officially entered a recession in Q2 2020, as the coronavirus lockdown took a heavy toll on economic activity in the country.3
The recent rapid rise in COVID-19 infections and a lack of clarity over a Brexit deal pose major threats to the country’s economic recovery. The country saw a new daily COVID-19 infection record on 25 September, registering 6,874 new cases in a day and pushing the total confirmed cases to 423,236.15 This saw London being placed on the nation’s COVID-19 “watch list” the very next day. The recent acceleration on infections have prompted new measures and reignited fears of a potential second lockdown.
Boris Johnson, UK’s Prime Minister, has underscored his commitment to veer away from a second national lockdown but has not ruled the possibility of one. The Prime Minister also admitted that the country’s testing systems are overwhelmed, and promised to increase testing capacity to 500,000 tests a day by end of October.16
Brexit talks Favourable trading arrangements under a Brexit deal is a key factor underpinning UK’s road to economic recovery. The Brexit transition period ends on 31 December 2020, with a tight 15 October 2020 deadline for any Brexit deal to be agreed between UK and the European Union (EU). The Brexit deal is significant for UK, as trades with EU accounted for 43% of the country’s 2019 exports, and 51% of its 2019 imports.17 Negotiations took a backseat as COVID-19 took centerstage but has since resumed on 29 September 2020.
The key hurdles on trade negotiations are those relating to fishing rights, competition regulations, state aids, as well as the governance and enforcement of the eventual agreement. EU expects the UK to comply with EU rules on workers' rights, environmental regulations and state aids to businesses, which the UK rebuts is against the grains of Brexit – to free itself from following common rules.17
Stimulus The government’s furlough scheme, which supported 8.9 million private sector jobs at its peak in May and is estimated to be supporting one-in-eight workers in early September, will cease in October. UK’s Finance minister Rishi Sunak announced the Economic Winter Plan on 24 September, unveiling policies targeted at boosting the economy through jobs support. The new scheme will kick off on 1 November 2020 and will see the UK government directly supporting the wages of people that are working at least a third of their hours instead of none, giving businesses who face depressed demand the option of keeping employees in a job on shorter hours than to make them completely redundant, and essentially weeding out support provided to jobs propped up by the furlough scheme. The Plan also prolonged tax cuts for the suffering hospitality sector, and extended loan tenures for loans undertaken during the crisis.18
Inflation and interest rates In August 2020, inflation - measured by the Consumer Prices Index (CPI) - fell sharply from 1% to 0.2%, well below the UK target of 2%, despite uplift in the retail and gaming sector.19
With unemployment looming, growth slowing and inflation well below target, there is growing pressure on the Bank of England (BoE) to inject further stimulus into the UK economy.22
Minutes from September’s meeting reveals that the use of negative interest rates can stimulate the economy, with Governor Andrew Bailey later clarifying that the exploration of negative interest rates are aimed more at assessing the effects and feasibility of implementation, and that the BoE is not about to implement sub-zero interest rates in the near future.20
China China’s swift recovery has been gaining momentum on tailwinds of domestic consumption, government stimulus and export resilience. Retail sales increased for the first time in 2020, at 3.36 trillion yuan ($495 billion) in August, a 0.5% increase over the previous year.21 Residential property sales were up, while car sales rose nearly 12% year-on-year in August.22 Industrial firm profits grew 19.1% year-on-year in August to 612.81 billion yuan ($89.8 billion), the country’s fourth straight month of industrial profit growth. Boosted by the rebound in the prices of international commodities, raw material manufacturing profits increased by 32.5% year-on-year in August, while profits of the general equipment manufacturing sector increased 37% year-on-year.23 Smaller firms weighed on factory activity as they battle sluggish market demand and capital strains.
To steer the country towards being a self-reliant and domestic-driven economy, authorities have pledged to boost investments in strategic industries including core tech sectors such as 5G, artificial intelligence and semiconductors. Local governments have borrowed a record US$550 billion from the central government to spend on infrastructure, which the central government is hoping will give private spending and investments a boost.24
US-China Trade Tensions Tensions are escalating between Washington and Beijing, with the US increasingly imposing trade restrictions on Chinese goods on grounds of defending national security and foreign policy interests. Citing possible military applications, US had most recently imposed restrictions on US exports to China’s biggest chip maker SMIC. The latest case trails an entity list published by the US in August, a focused list of 24 blacklisted Chinese companies with connections to the construction and military deployment in the South China Sea. Blacklisted companies will have significant difficulties getting US export licenses approved.25
China is also falling back on its purchase commitments guided by the Phase One trade deal. According to the deal, China’s purchases should be US$200 billion above 2017’s levels, which is less than one-third fulfilled to-date. This comes despite significant year-on-year surge in China’s imports of US soybeans (15%), pork (134%) and corn (50%). Recent spikes in monthly purchases suggests China’s commitment to keeping the trade deal alive – corn sales to China soared 513% from June to August, while soybean sales and car sales surged 432% and 97% respectively.26
Japan The equity market of the world’s third largest economy saw green pastures in September, forging through a change in the country’s leadership. Previously the Chief Cabinet Secretary under Abe’s office, Yoshihide Suga succeeded Abe as Japan’s prime minister and took office on 16 September 2020.
The new prime minister indicated a willingness to advance Abenomics and has signalled a desire to shake up cosier industries and untangle red tapes. Abenomics had aimed to drive GDP up via three facets: monetary easing, fiscal stimulus and regulatory reforms. Suga also expressed a desire to fast-track Japan’s digitization, singling out the mobile service industry for charging inflated fees amidst stifled competition.27
Japan’s economy declined an annualised 28.1% in Q2, marking the country’s third straight quarterly contraction.28 Factory output rose in July thanks to rebounding demand for automobiles, but domestic consumption fell 7.6% year-on-year, as real wages declined for the fifth consecutive month.29 COVID-19 hit the economy at a bad time – the economy was already plagued by an ageing population, huge debts and an economic recession, and had freshly unrolled fiscal tightening aimed at downsizing national debt by way of an unpopular consumption tax hike to 10%.30
The government has so far unveiled a US$2 trillion package of stimulus measures, adding to an enhanced easing programme from the Bank of Japan (BOJ). The Central Bank eased monetary policy twice this year, including lending facilities set-up to ensure money flows to cash-strapped small firms, alongside two big government spending packages.29 The government is also increasingly easing border restrictions and has signalled intentions to ramp up efforts to accelerate the process towards international travel to “revitalize” the economy.
Singapore Source: Channel News Asia
While COVID-19 infections within the community remain low, the Singapore government has been careful to ease COVID-19 restrictions, as a second outbreak remains a key risk to economic recovery. Further escalation of US-China trade tensions could also throw a spanner in the works towards global economic recovery, while continued uplift in manufacturing is a boom for economic recovery.31
Business sentiment for the next six months at Singapore's small and medium-sized enterprises (SMEs) plunged over gloomy prospects for global growth and economic activity, with the construction and engineering sectors posting the steepest fall in business sentiment. This was the lowest SBF-Experian SME Index reading recorded since the Index’s inception in 2009.32
Economists and analysts surveyed by the MAS expect a 7.6% contraction in the third quarter, dragged by a bleak outlook towards construction, accommodation and food services, and private consumption.33 Looking ahead, however, economists are projecting for the Singapore economy to grow 5.5% in 2021.31
As volatility returns on fears of a second wave of coronavirus and lockdowns and uncertainties concerning the US presidential election, US-China trade tensions and a Brexit deal, the narrative that Government and Central Bank policies around the world holds key to economic recovery stays the same.
Despite the uncertainties, stay focused on your investment goals and remember to take profits along the way. By taking calculated risks and maintaining a diversified portfolio that is in line with your risk appetite and investment objectives, you will be better positioned to turn this crisis into an opportunity.
Be a disciplined investor and don’t allow your emotions to get the better of you! A simple way to manage your emotions is by investing on a regular interval. dollarDEX allows you to setup Regular Savings Plan (RSP) with a monthly investment to the fund of your choice. Find out more here.
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Sources:
1. https://finance.yahoo.com/news/coronavirus-update-world-nears-1-m-deaths-inovio-delays-latestage-trial-as-vaccine-race-quickens-173116124.html 2. https://www.bbc.com/news/world-54303628 3. https://sports.yahoo.com/markets-economies-finance-brexit-us-presidential-debate-gdp-coronavirus-081649805.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAHNU1YndyywJ6gepjPDBG8VAtz9jKE-T5upxrsvk8IU3L8BPap_uUL10ekziSKGk-OjAE-8pXdesDEUKGGVFJcuPQ_oa3j3apYzVXSc18NRNsXKUobvltRkaH0gTnXrEAfJV7eNWGKBtYCx2itMKhbQnK0heS_DaZwb93krgqvF3 4. https://finance.yahoo.com/news/fed-fomc-monetary-policy-decision-september-2020-135645057.html 5. https://finance.yahoo.com/news/lower-for-longer-rates-from-the-fed-point-to-weaker-for-longer-dollar-204429963.html?guccounter=1 6. https://www.bloomberg.com/news/articles/2020-09-28/house-democrats-release-new-2-2-trillion-u-s-stimulus-proposal 7. https://www.bbc.com/news/world-europe-54309649 8. https://uk.finance.yahoo.com/news/european-central-bank-september-2020-interest-rates-decision-115207439.html 9. https://www.dw.com/en/german-short-time-work-cushions-unemployment-rate/a-54009453 10. https://www.reuters.com/article/germany-economy-pmi/recovery-in-german-manufacturing-picks-up-pace-in-september-pmi-idUSZRN000O0C 11. https://www.dw.com/en/germanys-pandemic-recovery-raises-age-old-questions-about-european-economy/a-55090733 12. https://www.barrons.com/news/spain-s-debt-soars-as-virus-slams-economy-01601463303?tesla=y 13. https://www.reuters.com/article/uk-spain-economy-pmi/spains-factory-activity-picks-up-in-september-after-august-dip-pmi-idUKKBN26M51H 14. https://www.voanews.com/covid-19-pandemic/spain-orders-new-lockdown-measures-madrid-after-covid-19-cases-spike 15. https://www.standard.co.uk/news/uk/uk-coronavirus-new-cases-highest-daily-total-a4556606.html 16. https://www.bbc.com/news/uk-54182368 17. https://www.bbc.com/news/52937766 18. https://www.businesstimes.com.sg/government-economy/uk-finance-minister-unveils-new-job-support-scheme-loan-extensions 19. https://www.bbc.com/news/business-12196322 20. https://www.ft.com/content/ecc4a23d-f175-41e9-8f07-852dbe03d062 21. https://markets.businessinsider.com/news/stocks/china-economy-retail-sales-rise-first-time-industrial-recovery-covid-2020-9-1029588893 22. https://edition.cnn.com/2020/09/15/economy/china-economy-retail-intl-hnk/index.html 23. https://www.reuters.com/article/china-economy-industrial-profits/chinas-industrial-profits-grow-for-fourth-straight-month-idUSKBN26I01X 24. https://www.bloomberg.com/news/articles/2020-09-06/china-returns-to-old-construction-playbook-to-boost-growth 25. https://www.asiatimesfinancial.com/us-tightens-exports-to-chinas-chipmaker-smic-citing-risk-of-military-use 26. https://www.scmp.com/economy/china-economy/article/3103377/us-china-trade-soybeans-corn-and-cars-surge-beijing-still-not 27. https://asia.nikkei.com/Politics/Japan-after-Abe/Suga-vows-to-digitize-government-and-push-down-mobile-fees 28. https://www.nytimes.com/2020/08/16/business/japan-economy-recession.html 29. https://www.channelnewsasia.com/news/business/japan-economy-gdp-q2-shrink-recession-13090596 30. https://www.bbc.com/news/business-49849484#:~:text=Japan%20has%20increased%20its%20consumption,most%20food%20will%20be%20exempt. 31. https://www.channelnewsasia.com/news/singapore/singapore-economy-contraction-covid-19-private-economists-mas-13088052 32. https://www.straitstimes.com/business/economy/spore-sme-business-sentiment-sinks-to-all-time-low 33. https://www.straitstimes.com/business/economy/economy-tipped-to-shrink-6-this-year 34. https://edition.cnn.com/2020/10/02/investing/global-stocks/index.html 35. https://finance.yahoo.com/news/global-markets-u-stock-futures-051751944.html 36. https://sg.news.yahoo.com/august-jobs-report-labor-department-coronavirus-pandemic-unemployment-200735185.html
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