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Market euphoria over vaccine optimism

5 Jan 2021

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Positive developments on a vaccine have given markets a boost, despite a blazing COVID-19 situation. While the novel virus remains a lingering threat to a global economic recovery, markets will be keeping tabs on the elusive US stimulus and Brexit trade deal with the EU, as well as rising geopolitical tensions in various parts of the world.

 

Vaccine

The US Food and Drug Administration authorised Pfizer’s COVID-19 vaccine for emergency use on 11 December 2020, becoming the sixth country – after Britain, Bahrain, Canada, Saudi Arabia and Mexico – to clear the vaccine. Other authorisations, including by the European Union, are expected within weeks.2 The World Health Organization (WHO) has warned that the vaccines starting to get approval for public use does not mean that the pandemic will end soon, despite being a “major, major, powerful tool”.1

 

China’s state-backed vaccine, developed by Sinopharm unit China National Biotec Group Co. (CNBG), has also been granted emergency use authorisation in the UAE. The vaccine has been administered to frontline medical workers, government health officials and a number of senior minister in the UAE, and has emergency authorization in China where it has been has been administered to hundreds of thousands of people in recent months.21 The Chinese shot can be transported and stored at normal refrigerated temperatures, easing distribution challenges in countries lacking deep-freeze facilities and trucks required for vaccines from Pfizer and Moderna.3

 

Global Purchasing Manager's Index (PMI)

The global economic recovery hit a speed bump in November - global PMI slipped slightly from 53.3 in October to 53.1 in November - as rising COVID-19 infections led to a renewed slowing of business activity. But the slowdown looks to be temporary, with business sentiment about the year ahead jumping to its highest for over six years, fuelled primarily by expectations of life starting to return to normal in the coming year amid encouraging vaccine news.5

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Both the US and China saw accelerating factory output growth and notable accelerations in service sector growth rates. The Eurozone slipped back into substantial contraction, led by sharply falling business activity in France, Spain and Italy. Germany bucked the Eurozone downturn, thanks to strong manufacturing output growth offsetting a drop in service sector activity, though even in Germany the overall rate of expansion slowed markedly. The UK reported a renewed fall in business activity in November, similarly impacted by the increased lockdown measures.5

 

Encouragingly, manufacturer’s optimism about the year ahead improved in November. Sentiment strengthened in the wake of promising news on COVID-19 vaccine developments, as well as a notable upturn in the US following the presidential elections. Sentiments picked up in the US, Eurozone, the UK, Canada, Russia and Brazil, but lost some ground in China, India and Japan.6

 

Brexit

Talks continue between the UK and EU, but UK prime minister Boris Johnson has given the strongest signal yet that he sees a no-deal situation as the most likely outcome from talks with the EU, exclaiming that they were "not yet there at all" in securing a deal. Weeks of intensive talks between officials have failed to overcome obstacles in key areas, including competition rules and fishing rights.7

 

If a deal can’t be agreed with the EU, then the UK will default to World Trade Organization (WTO) terms from 1 January 2021. Under these terms, tariffs and quotas would be applied to goods coming into UK from EU, and vice versa. That means the UK would be hit by big taxes when it tried to sell products to the EU market.8 UK exporters will face additional checks for safety and security documentation, customs papers and, in some cases, regulatory compliance from the start of 2021.9

 

The EU has since set out contingency measures in the event of a no-deal Brexit, aiming to ensure that UK and EU air and road connections still run post-Brexit, and allowing the possibility of fishing access to each other's waters for up to a year or until an agreement is reached.7

 

Sino-Australian Tensions

Sino-Australian relations have been in a downward spiral since April, when Canberra infuriated Beijing by proposing an independent international inquiry into the origins of the Covid-19 pandemic. Beijing has in recent months slapped several restrictions amounting to billions of dollars of Australian exports, including beef, barley and wine, citing dumping and other trade violations that analysts widely view as pretexts to inflict economic retaliation.

 

Under a newly-passed legislation, Australia's foreign minister will be able to scrap agreements between other nations and sub-national bodies such as state and territory governments, local councils and universities believed to undermine foreign policy. This is likely to further escalate tensions between Australia and China after the latter included it on a list of 14 grievances, which it said were responsible for "poisoning" ties.10

 

With Australia exporting around one-third of its total exports to China, there is a high degree of vulnerability to disruptions in bilateral trade for Australia. A key weakness for Australia is that many of its major exports to China are agricultural and mineral commodities, many of which can be substituted by China for similar imports from other countries. Given the very asymmetric bilateral trade relationship, Australia is unlikely to embark on any kind of tit-for-tat retaliatory trade measures.11

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US-China Trade War

Sino-US trade tensions continue to escalate in December.

 

US passed a bill that would mandate foreign companies listed on US exchanges to comply with the SEC’s (Securities and Exchange Commission) accounting standards or risk delisting. According to a congressional commission on US-China economic relations, there are 217 Chinese companies listed on several US exchanges, with a total market capitalization of $2.2 trillion.12 The US department of defence also designated an additional four Chinese companies as owned or controlled by the Chinese military, taking the total number of such blacklisted firms to 35. US investors will be prevented from buying securities of these blacklisted companies starting late 2021.4

 

Separately, China announced it would revoke visa exemption treatment for US diplomatic passport holders visiting Hong Kong and Macau after the US imposed financial sanctions and a travel ban on 14 Chinese officials over their role in adopting a national security law for Hong Kong and over Beijing’s disqualification of elected opposition legislators in Hong Kong in November.13

 

 

US

The US continues to clamp down on big technology firms. For more than a year, Google, Facebook, Amazon and Apple have faced an array of antitrust probes on both the federal and state levels. The US Federal Trade Commission and a coalition of US states have sued Facebook on grounds that it broke antitrust law and should potentially be broken up. Facebook is the second big tech company to face a major legal antitrust challenge this fall, after the Justice Department filed a complaint against Alphabet’s Google in October.14


No major change of policy is expected from the central bank in the final meeting of the US Federal Reserve. However, there’s some speculation that the Fed could tinker with its asset purchasing program, and perhaps change its guidance to the market on policy and the economy, as signs show the US economy’s recovering is slowing.15


Stimulus negotiations are in disarray as House Democrats, Senate Republicans, and the White House continue to disagree on key issues such as stimulus checks, state aids, and liability provisions for companies. Packages offered by Republicans have become progressively smaller in size as the economy appears to be recovering, even though millions of Americans are being pushed to the financial brink. If no stimulus deal is reached by the end of the year, up to 12 million Americans are expected to lose unemployment benefits coverage. The federal eviction moratorium, paid sick leave, aid to state and local governments, among other relief, will also lapse on 26 December.16

 

 

Eurozone

Business activity in the 19-country eurozone declined significantly in November as a strong second wave of the coronavirus swept across Europe, and many countries were forced to impose tighter restrictions on business and social life.17


ECB president Christine Lagarde expects growth to rebound more slowly next year as the pandemic continues to weigh on output, and remarked that risks to the eurozone economy remained tilted to the downside but had become less pronounced. The ECB rolled out yet more stimulus measures to lift the currency bloc out of a double-dip recession and provide support to the economy – increasing the overall size of its Pandemic Emergency Purchase Programme by 500 billion euros (S$810 euros) to 1.85 trillion euros, extending the scheme to March 2022, and scheduling to hold additional tenders for three-year loans to give banks ample liquidity.18

 

China

China’s economic rebound is gathering pace toward the end of the year, with an official gauge of manufacturing rising faster than expected in November, driven by strong domestic demand as consumer sentiment continues to recover, and an export boost ahead of the Christmas holiday period.


While most central banks around the world remains accommodative and prepared to provide support where needed, China’s central bank is singing a different tune. The Chinese central bank has signalled that the sustained economic recovery will allow it to phase-out easing measures introduced earlier in the year to support businesses. However, the transition is likely to be gradual and it signalled a willingness to ease fears about tighter cash supply by adding liquidity to the banking system.19

 

South Korea

South Korea's early trade data showed exports extending their recovery in November, as tech demand remained resilient amid record COVID-19 cases in major economies. Exports rose 11% in the first 20 days of November year-on-year, while average daily shipments increased 7.6% in the period.

 

South Korean exports are receiving a boost from an improving economy in China, while sales to the US and Europe gained despite the renewed restrictions on activity following the uncontrolled spread of COVID-19. Shipments continue to be supported from the pandemic-driven demand for tech products. Overall semiconductor shipments increased 22% during the period, while sales of wireless communications devices jumped 36%.20

 

 

As we watch keenly to how vaccine developments would ease the pandemic and constitute to a sustained global economic recovery, your portfolio value would likely fluctuate with each positive and negative development in the markets. Don’t forget to stay calm and remain focused on what you wish to achieve with your investments.

It is important to have a diversified portfolio to avoid concentration risk in a particular sector or region. If you are unsure of how to build a diversified portfolio, we have dollarDEX investment portfolios that matches your identified risk profile. You only need to complete a risk questionnaire to determine your risk profile and a matched investment portfolio will be presented. You can decide to invest into he entire investment portfolio or any of the funds with your cash or Supplementary Retirement Scheme (SRS) funds. Login to your account to try it out today! If you do not have an account with us, simply spare 5 minutes to complete the online application.

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Sources:

 

1.   https://www.bbc.com/news/world-51235105
2.   https://www.straitstimes.com/world/united-states/us-fda-authorises-pfizer-covid-19-vaccine-for-emergency-use-new-york-times
3.   https://www.bloomberg.com/news/articles/2020-12-09/uae-says-sinopharm-vaccine-has-86-efficacy-against-covid-19
4.   https://www.scmp.com/business/markets/article/3112509/hong-kong-stocks-decline-after-us-blacklists-four-more-chinese
5.   https://ihsmarkit.com/research-analysis/global-pmi-slips-lower-but-future-expectations-hit-highest-for-over-six-years-Dec20.html
6.   https://ihsmarkit.com/research-analysis/global-factory-growth-close-to-highest-in-a-decade-Dec2020.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+MarkitPMIsAndEconomicData+%28IHS+Markit+PMIs+and+Economic+Data%29
7.   https://www.bbc.com/news/uk-politics-55266678
8.   https://www.theweek.co.uk/fact-check/95547/fact-check-what-a-no-deal-brexit-really-means
9.   https://ihsmarkit.com/research-analysis/the-new-euuk-trading-relationship-could-deliver-more-uk-econom.html
10. https://www.timesnownews.com/international/article/china-australia-tensions-likely-to-escalate-as-canberra-passes-law-to-scrap-agreements-with-foreign-nations/692246
11. https://ihsmarkit.com/research-analysis/assessing-the-economic-impact-escalating-australiachina-trade-frictions-Nov2020.html
12. https://www.dw.com/en/us-passes-bill-that-could-delist-chinese-companies-from-stock-markets/a-55805624
13. https://www.reuters.com/article/us-usa-china-sanctions/china-revokes-visa-exemptions-for-u-s-diplomat-passport-holders-visiting-hong-kong-macau-idUSKBN28K0N4
14. https://www.reuters.com/article/us-tech-antitrust-facebook-factbox-idUSKBN28J2XR
15. https://www.smh.com.au/business/markets/brexit-us-stimulus-and-the-fed-to-keep-market-busy-20201213-p56n00.html
16. https://money.yahoo.com/us-needs-45-trillion-in-stimulus-to-recover-133548317.html
17. https://uk.finance.yahoo.com/news/eurozone-business-activity-plunged-into-severe-decline-in-november-ihsmarkit-pmi-092745168.html
18. https://www.businesstimes.com.sg/government-economy/ecb-gives-eurozone-another-shot-in-the-arm-to-fight-pandemic
19. https://www.bloombergquint.com/china/china-factory-outlook-strengthens-as-recovery-gathers-pace
20. https://www.businesstimes.com.sg/government-economy/south-koreas-exports-extend-recovery-despite-worsening-pandemic
21. https://www.japantimes.co.jp/news/2020/12/09/world/science-health-world/china-coronavirus-vaccine-test/

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All information here is for GENERAL INFORMATION only and does not take into account the specific investment objectives, financial situation or needs of any specific person or groups of persons. Prospective investors are advised to read a fund prospectus carefully before applying for any shares/units in unit trusts. The value of the units and the income from them may fall as well as rise. Unit trusts are subject to investment risks, including the possible loss of the principal amount invested. Investors investing in funds denominated in non-local currencies should be aware of the risk of exchange rate fluctuations that may cause a loss of principal. Past performance is not indicative of future performance. dollarDEX is affiliated with Aviva but dollarDEX does not receive any preferential rates for Aviva products as a result of this relationship. Unit trusts are not bank deposits nor are they guaranteed or insured by dollarDEX. Some unit trusts may not be offered to citizens of certain countries such as United States. Information obtained from third party sources have not been verified and we do not represent or warrant its accuracy, correctness or completeness. We bear no responsibility or liability for any error, omission or inaccuracy or for any loss or damage suffered by you or a third party (including indirect, consequential or incidental damages) arising in any way from relying on this information.

 

This information does not constitute an offer or solicitation of an offer to buy or sell any shares/units.
This article has not been reviewed by the Monetary Authority of Singapore.

 

Information is correct as of 05/01/2021.

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