An opportune time to invest in Singapore Bonds

By Manulife Investment Management

2 Feb 2021

Singapore bonds performance in 2020

Amidst a challenging 2020, Singapore bonds turned in a resilient performance.  With the spread of Covid-19 accelerating in the first quarter of 2020 leading to lockdowns across countries globally, the virus roiled economies and financial markets. Singapore’s economy was not spared as well, with the country’s Gross Domestic Product (GDP) contracting by 0.2%¹ year-on-year in the first quarter of 2020 as services sector activities shrank on the back of a sharp decline in tourist arrivals and a fall in domestic consumption relating to Covid-19. The construction sector was also severely impacted by supply chain disruptions and delays in the return of foreign workers.

Central banks around the world turned to monetary and fiscal stimulus to spur economic recovery.  Singapore was no different as the Monetary Authority of Singapore (MAS) took actions to ease monetary policy by cutting the rate of appreciation of the Singapore Dollar Nominal Effective Exchange Rate (S$NEER) to 0%², and the local government pledged fiscal stimulus of more than S$50 billion³ to support the economy. During the first quarter of 2020, investors started seeking safe-haven assets such as Singapore sovereign bonds and hence, the 10-year yield declined from 1.7% in January to less than 1% in early March⁴. In contrast, risk assets corrected globally and Singapore dollar credit spreads widened over the first quarter. Consequently, Singapore bonds gained over the first quarter with Singapore sovereigns outperforming corporate bonds.

Following the volatility in the first quarter, financial markets gradually recovered over successive quarters. Investor sentiments were mixed as there were growing signs of economic recovery, yet at the same time, countries around the world were struggling with new waves of the Covid-19 across the globe. Towards the end of 2020, risk sentiments improved on the back of the Covid-19 vaccine news and improving global economic activities. With this backdrop, the Singapore 10-year sovereign yield eventually ended the year at 0.83%⁵ and credit spreads for Singapore corporate bonds also narrowed.

Overall, Singapore bonds had a relatively strong year and gained 7.86%⁶ in 2020. This was driven primarily by the decline in Singapore government bond yields on the back of accommodative monetary and fiscal policies, and strong demand for safe-haven assets. Singapore dollar corporate bonds also recovered on better investor sentiment to help boost overall returns.     

Why Singapore Bonds is an attractive asset class for investors

1. Stable and high-quality asset class
   Singapore bonds are a relatively stable and high-quality asset class for investors looking to achieve consistent income and capital preservation. The Singapore government has been able to secure and preserve the highly coveted AAA sovereign rating, which is the highest rating available, from major ratings agencies such as Moody’s and Standard and Poor’s. The reason why the Singapore sovereign is so highly rated is because of the country’s strong institutions and governance practices combined with formidable fiscal reserves. Even as the economy faces a cyclical shock from the pandemic and the government’s significant fiscal commitments of approximately 20% of GDP⁷ to fight the downturn, the rating agencies remain comfortable with Singapore’s strong fiscal position and have affirmed the AAA sovereign rating. Similarly, in the Singapore corporate bond space, many of the corporate issuers carry investment grade credit ratings, i.e. rated BBB- and above. Some of these issuers have direct links with the Singapore government and Singapore’s sovereign wealth fund – Temasek. Ultimately, Singapore bonds are among the highest quality issues in the Asia region and offer investors state of mind with respect to reduced credit risks and hence, they can be a very stable source of income for investors.
   
   
2. Positive yields in a negative yielding environment
   After central banks around the world have cut their interest rates and carried out accommodative monetary policies, the amount of negative yielding bonds is currently over USD$17 trillion⁸. This has fuelled yield-seeking activities by global investors who are looking for asset classes with positive yields and strong fundamentals. With this backdrop, there may potentially be a growing demand for Singapore bonds as Singapore is a country with strong economic fundamentals and attractive medium-term growth prospects relative to other developed markets.
   
   

3. Favourable macro landscape for 2021
   The first half of 2021 should see global corporate bond defaults remain relatively contained and idiosyncratic before an improvement to the overall economic outlook in the second half of the year as Covid-19 vaccines are rolled out globally. As economic recovery is likely to be uneven across different sectors, it is important to carry out careful credit selection to avoid exposure to “fallen angels” i.e. bonds at risk of being downgraded to below investment grade. In many ways, 2020 was an unprecedented year and we are unlikely to see a repeat of the aggressive interest rate cuts which served as a tail wind for Singapore bond performance last year. Having said that, we expect accommodative monetary and fiscal policy will be maintained to help support the gradual recover to Singapore’s economy which will be supportive for performance of this asset class in 2021.
   

Manulife Singapore Bond Fund aims to deliver stable returns in unpredictable markets. Here are the key features of the Fund:

Focus on Singapore

• The fund is focused on investing primarily in Singapore issuers, with at least 70% of the portfolio invested in Singapore dollar-denominated bonds.

Focus on high quality bonds

• The fund focuses primarily on high quality investment grade rated bonds (see Chart 1) and has a minimum exposure of 20% to government and government-related issuers. Exposure to high yield bonds is limited to a maximum of 5%. As of 31 December 2020, the fund has an average credit rating of A+.
  

Chart 1

Source: Manulife Investment Management, as of 31 December 2020.

Flexible allocation across different sectors

• The fund is well-diversified across both government and corporate sectors (Chart 2), hence balancing quality of government-related issuers with the opportunity for enhanced yields from exposure to corporate bonds.

Chart 2

Source: Manulife Investment Management, as of 31 December 2020.

Award-winning fund with a track record longer than a decade

• Incepted since September 2009, the fund is actively managed with a proven track record, outperforming the Markit iBoxx ALBI Singapore Index benchmark for most time periods shown in Chart 3. Recently, the fund has been awarded “Outstanding Achiever” for the Top Fund Award (Mutual Funds) at the BENCHMARK Fund of the Year Awards 2020

Chart 3

Source: Manulife Investment Management, Morningstar, as of 31 December 2020. Past performance is not indicative of future results. Investment involves risk. Investors should not only base on this material in isolation to make investment decisions and should read the Fund prospectus for details, including the risk factors, charges and features of the Fund.

Conclusion

Singapore bonds have proven to be a resilient asset class for investors looking for stable income and capital preservation. In the turmoil of financial markets due to the pandemic last year, Singapore bonds managed to outperform many other asset classes as a result of their stand-out quality as a safe haven asset in times of market stress. In a world of negative-yielding assets, coupled with interest rates expected to stay lower for longer, Singapore bonds are a strong choice for investors looking for exposure to highly rated government and corporate bonds should deliver attractive risk-adjusted returns. Manulife Investment Management is a leader in Asian fixed income and has a highly experienced and award-winning investment team which has been successfully managing the Singapore bond strategy for over ten years and is well-positioned to capture opportunities for investors interested in accessing this asset class.

Click here for more information on Manulife Singapore Bond Fund.

Notes

¹ Source: Department of Statistics Singapore, 4 January 2021
² Source: Monetary Authority of Singapore, 30 March 2020

³ Source: Prime Minister’s Office Singapore, 30 June 2020

⁴ Source: Monetary Authority of Singapore, 30 March 2020

⁵ Source: Monetary Authority of Singapore, 31 December 2020

⁶ Source: Bloomberg, 31 December 2020. Singapore bonds returns represented by Markit iBoxx ALBI Singapore Index

⁷ Source: Singapore Budget 2020, 05 June 2020

⁸ Source: Bloomberg, 17 November 2020

Manulife Investment Management's Disclaimer

Important information

Manager of the Manulife Singapore Bond Fund (the “Fund”): Manulife Investment Management (Singapore) Pte. Ltd. (“Manulife”) (Company Registration Number: 200709952G). The information provided herein does not constitute financial advice, an offer or recommendation with respect to the Fund. Opinions, forecasts and estimates on the economy, financial markets or economic trends of the markets mentioned herein are not necessarily indicative of the future or likely performance of the Fund. The Fund may use financial derivative instruments for efficient portfolio management and/or hedging.

Investments in the Fund are not deposits in, guaranteed or insured by the Manager and involve risks. Past performance of the manager or sub-manager is not necessarily indicative of its future performance. The value of units in the Fund and any income accruing to them may fall or rise. Past performance of the Fund is not necessarily indicative of future performance. Investors should read the prospectus, and seek advice from a financial adviser before deciding whether to purchase units in the Fund. A copy of the prospectus and the product highlights sheet can be obtained from Manulife or its distributors. In the event an investor chooses not to seek advice from a financial adviser, he should consider whether the Fund is suitable for him.

This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.

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Information is correct as of 02/02/2021.