A Test of Resilience

MONTHLY OUTLOOKApril 2020

02

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IN THIS ISSUE

IN THIS ISSUE

The OCBC Wealth Panel draws on the collective expertise and experience of wealth management experts from the OCBC Group, namely OCBC Bank, OCBC Investment Research, Lion Global Investors and Bank of Singapore. With over 200 years of collective investment experience, the OCBC Wealth Panel is dedicated to provide timely advisory services to grow, manage and protect your wealth.

Pandemic-driven Recession

Opportunities Emerging

Focusing On Activities Resumption

When The Levee Breaks

Gold Could Take A Breather

GLOBAL OUTLOOK

EQUITIES

HONG KONG / CHINA MARKET OUTLOOK

BONDS

FX & COMMODITIES

P 04-05

P 06-07

P 08

P 09

P 10

Hong Kong Labor Market Is Under Pressure

SPECIALS

P 11-12

About the OCBC Wealth Panel

As we move through Q2 2020, the shock from the Covid-19 pandemic continues to dominate the market outlook. The global spread of the virus has ended the longest US economic expansion in history and now looks set to tip the world economy into recession, at least for a few months.

In response, central banks globally have unleashed monetary interventions of unprecedented scale, while governments have also stepped up �scal stimulus e�orts and public healthcare measures, pledging to do whatever it takes to cushion their economies from the worst e�ects of the pandemic.

Following the brutal sell-o� in March, we believe that attractive long-term value has emerged in selected risk assets for non-leveraged investors with comfortable liquidity positions in their portfolios.

We encourage investors to observe the discipline of managing risks through diversi�cation, maintaining su�cient liquidity and building resilient portfolios.

A Test of Resilience

03

ELI LEEHead of Investment Strategy, Bank of Singapore

Pandemic-driven Recession

GLOBAL OUTLOOK

“Though the global economy is set to sink into recession, central banks are actively injecting liquidity into �nancial markets to prevent the Covid-19 economic shock from turning into a full blown �nancial crisis.”

• Covid-19 has spread much faster and further over just one month. As a result, the world appears set to sink into a recession that is set to be worse than that of 2009, albeit shorter- lived.

• From the macroeconomic perspective we need to consider several questions.

How deep and lengthy will be the economic contraction in developed markets due to the coronavirus and associated containment measures?• Economies in Europe and North America

will be badly hit. Containment measures represent an enforced demand shock that will send some parts of consumer spending to near zero. Non-discretionary spending (such as food, housing, utilities, telco, medical care) typically represents 60-70% of consumption and this will be stable, or even �rmer, but overall spending will fall sharply until the medical emergency abates. Government spending will increase rapidly, but the positive impact is likely to be more than outweighed by a collapse in private sector investment.

• Conceptually, a shutdown of one to two months should �atten the pandemic

curve, but the experience in Italy and Spain suggests this could be insu�cient unless rigorously enforced. However, even after draconian isolation policies are lifted, social distancing will continue to depress many areas of consumer spending, which will limit the pace of the rebound.

• The assumption is that developed economies face a month of shutdown followed by a couple more months of restrictive measures before a progressive normalisation. It is impossible to know how far activity will drop, but a month where it is 10-20% below normal does not seem unrealistic and this is already suggested by China’s experience. Europe is a few weeks ahead of the US, but this will make little di�erence in terms of the hit to full-year growth rates.

• Tentatively, we have revised the growth forecast in developed economies from 1.6% last month to -2.9%, with all regions contracting sharply. Unavoidably there is a wide margin of error. Emerging markets also face a big hit, with growth forecast at 1.9% compared to 4.1% last month. That leaves global growth at zero, compared to the 3.8% average of the previous decade.

• The bear case is that the containment measures are ine�ective and need to be extended for several more months. In this case, the trough could extend for much longer and developed economies could see contraction of something approaching 10% for the year as a whole.

• This would put a huge strain on government �nances and the �nancial system could buckle under the weight of mass bankruptcies. It is easy to project such economic distress out to more extreme political scenarios.

Will the economic crisis lead to a �nancial system crisis?• Two broad policy measures give hope

that the undoubted economic shock will not lead to �nancial system crisis.

• The �rst is that central banks are actively injecting liquidity into �nancial markets wherever they see the risk of dislocation. Previous prudence has been abandoned and rule books are being re-written. This is most clearly illustrated by the Federal Reserve adopting a “whatever it takes” approach, with a rapid expansion of its balance sheet along with participation in corporate debt markets.

04 GLOBAL OUTLOOK

• Secondly, loan guarantee schemes lift the cost of future non-performing loans o� the balance sheets of the banks and put it onto the government. This is particularly important in Europe, where the banks are still relatively fragile, and the system is more dependent on direct lending rather than capital market �nancing compared to the US.

How rapid and vigorous will the rebound be once the pandemic fades?• We should begin to see a gradual

recovery in activity once the containment measures start to be lifted, if policy action is reasonably successful in preserving jobs and supporting income, as there will be

areas of pent-up demand. • However, it still seems likely to be

more than two years before output returns to peak levels of 4Q2019. The recovery could be held back if the hit to growth, combined with the drop in oil prices, results in a de�ationary

shock that impedes the e�orts of central banks to loosen monetary policy.

• Similarly, if policy cannot prevent wholescale bankruptcies, then the recovery could be much delayed.

• Covid-19 has spread much faster and further over just one month. As a result, the world appears set to sink into a recession that is set to be worse than that of 2009, albeit shorter- lived.

• From the macroeconomic perspective we need to consider several questions.

How deep and lengthy will be the economic contraction in developed markets due to the coronavirus and associated containment measures?• Economies in Europe and North America

will be badly hit. Containment measures represent an enforced demand shock that will send some parts of consumer spending to near zero. Non-discretionary spending (such as food, housing, utilities, telco, medical care) typically represents 60-70% of consumption and this will be stable, or even �rmer, but overall spending will fall sharply until the medical emergency abates. Government spending will increase rapidly, but the positive impact is likely to be more than outweighed by a collapse in private sector investment.

• Conceptually, a shutdown of one to two months should �atten the pandemic

05GLOBAL OUTLOOK

curve, but the experience in Italy and Spain suggests this could be insu�cient unless rigorously enforced. However, even after draconian isolation policies are lifted, social distancing will continue to depress many areas of consumer spending, which will limit the pace of the rebound.

• The assumption is that developed economies face a month of shutdown followed by a couple more months of restrictive measures before a progressive normalisation. It is impossible to know how far activity will drop, but a month where it is 10-20% below normal does not seem unrealistic and this is already suggested by China’s experience. Europe is a few weeks ahead of the US, but this will make little di�erence in terms of the hit to full-year growth rates.

• Tentatively, we have revised the growth forecast in developed economies from 1.6% last month to -2.9%, with all regions contracting sharply. Unavoidably there is a wide margin of error. Emerging markets also face a big hit, with growth forecast at 1.9% compared to 4.1% last month. That leaves global growth at zero, compared to the 3.8% average of the previous decade.

• The bear case is that the containment measures are ine�ective and need to be extended for several more months. In this case, the trough could extend for much longer and developed economies could see contraction of something approaching 10% for the year as a whole.

• This would put a huge strain on government �nances and the �nancial system could buckle under the weight of mass bankruptcies. It is easy to project such economic distress out to more extreme political scenarios.

Will the economic crisis lead to a �nancial system crisis?• Two broad policy measures give hope

that the undoubted economic shock will not lead to �nancial system crisis.

• The �rst is that central banks are actively injecting liquidity into �nancial markets wherever they see the risk of dislocation. Previous prudence has been abandoned and rule books are being re-written. This is most clearly illustrated by the Federal Reserve adopting a “whatever it takes” approach, with a rapid expansion of its balance sheet along with participation in corporate debt markets.

• Secondly, loan guarantee schemes lift the cost of future non-performing loans o� the balance sheets of the banks and put it onto the government. This is particularly important in Europe, where the banks are still relatively fragile, and the system is more dependent on direct lending rather than capital market �nancing compared to the US.

How rapid and vigorous will the rebound be once the pandemic fades?• We should begin to see a gradual

recovery in activity once the containment measures start to be lifted, if policy action is reasonably successful in preserving jobs and supporting income, as there will be

areas of pent-up demand. • However, it still seems likely to be

more than two years before output returns to peak levels of 4Q2019. The recovery could be held back if the hit to growth, combined with the drop in oil prices, results in a de�ationary

shock that impedes the e�orts of central banks to loosen monetary policy.

• Similarly, if policy cannot prevent wholescale bankruptcies, then the recovery could be much delayed.

% 2019 2020 2021

Developed Markets 1.7 1.6 1.7 US 2.3 1.8 2.0 Eurozone 1.2 1.2 1.2 Japan 0.8 0.5 0.6Emerging Markets 3.6 4.1 4.5 China 6.1 5.2 5.5 Rest of Asia 4.9 5.2 5.9World 2.9 3.1 3.4

Global growth outlook

Source: Bank of Singapore

ELI LEEHead of Investment Strategy, Bank of Singapore

EQUITIES

06 EQUITIES

• The global sello� in equity markets has been the swiftest seen in three decades. Indiscriminate selling has also been rampant given investors’ rush for liquidity.

• In our view, this creates opportunities for investors with ample cash and are underweight equities, as well as those who are looking to rebalance their portfolios, to move into higher quality long-term holdings.

• For these investors, we recommend gradually averaging into bargain-priced stocks with resilient balance sheets and long-term growth outlook, as these are likely to emerge unscathed from the virus outlook, and into quality dividend-yielding stocks with healthy cash �ows, such as selective Singapore REITs, that would bene�t from a “reach for yield” dynamic as rates continue to fall.

United States• The consensus 2020 earnings per

share (EPS) estimate for the S&P 500 has been dropping in the last few months, but further downward revisions are highly likely. Companies are now focused on free cash �ow generation and preservation, so

reduced capex is to be expected. This reduction in investment activity is likely to lower revenue and earnings activity in 2020.

• While lower oil prices are traditionally bene�cial for consumers, concerns are mounting over the US energy sector, given that the US is now a net oil exporter following the shale revolution.

• Our preferred picks in the US continue to have a tilt towards quality technology names that

(a) ride on durable secular growth trends

(b) possess strong and sustainable business models, and

(c) sit on healthy balance sheets. Eurozone• The coronavirus outbreak is hitting

Europe hard, and the potential impact on earnings is at the top of mind for investors. Europe’s worst ever year-on-year EPS decline was -49% during the global �nancial crisis, while a typical earnings recession sees year-on-year EPS growth fall to -25% at its worst.

• So far, from mid-February, we have only seen a ~7% reduction in EPS forecasts for 2020, and consensus is

still expecting a 2% growth for EPS this year. This is clearly too high, partly because analysts need time to review their estimates.

• We also note that the fall in oil price is an issue for the wider European market, as the Energy sector was supposed to be the largest contributor to 2020 EPS growth, providing over 1/6th of the total market growth. This is now lost, and whilst over the medium-term lower energy costs and lower rates should stimulate consumption, that is not the near-term focus of the market.

Japan• While the Bank of Japan’s (BOJ)

increase of daily ETF purchases to ~JPY100b (from ~JPY70b) has helped support the equity market near term, likely unrealized losses on its current holdings and the sustainability of this strategy (or the absence of a long-term exit strategy) remain a concern over the longer term.

• Market valuations have reached undemanding levels of 0.96x price/ book, nearing the previous trough multiple of 0.9 times over the past decade.

Opportunities Emerging

“While volatility is likely to persist, we believe that attractive long-term value has emerged in the Chinese, Hong Kong and Singapore equity markets, and we are incrementally adding equity exposure in these markets, thereby moving our position in Asia ex-Japan and overall equities from neutral to overweight.”

• Due to the viral outbreak however, lower domestic demand and economic activities disruptions should lead to further earnings cuts in the upcoming results season, while the Olympics has been o�cially postponed, dampening sentiment further. With forward earnings growth still looking optimistic at ~12%, we expect earnings forecasts to be revised lower and we remain selective.

Asia ex-Japan• The recent focus on Covid-19 has been

largely on Europe and the US. However, there are lingering concerns that the worst may not be over for Asia. For example, it is still unclear how quickly India (10% weight in the MSCI Asia ex. Japan Index) would be able to contain the spread of Covid-19 within its borders.

• There were also bright spots amid the general economic malaise, as China’s o�cial PMI saw a steep rebound from 35.7 in February to 52 in March, beating consensus’ expectations (44.8).

• There were encouraging signs within the Chinese Property sector, as most developers reported that more than 90% of their sales o�ces have already re-opened (with the exception of Wuhan), while construction activities have also largely resumed above the 90% level. The major developers we

track have mostly guided for positive growth in their contracted sales for 2020 by high single-digit to mid-teen levels.

• The MSCI Asia ex. Japan Index is currently trading at a forward P/E ratio of 11.1x, which is 1.1 standard deviation below its 7-year mean.

China/Hong Kong • The pace of activities resumption and

stimulus policies will remain as the key focus with some of the high frequency indicators that we have been monitoring picking up steadily, such as daily coal consumption and inter-city tra�c congestion indices.

• While we expect the government will announce and implement stimulus measures that are required for a prompt and su�cient rebound, a broad-based stimulus that is similar to that in the 2008 Global Financial Crisis is highly unlikely and not necessary, in our view. That said, stronger stimulus

would still be required to boost activities signi�cantly to bring it above trend in 2H20.

• Looking ahead, it will be important to monitor the above data points that may suggest cyclical policy is stronger or weaker when compared to our expectations.

• On a relative basis, we do see favourable factors to support Chinese equities to outperform, namely

i) stabilization in Covid-19 cases and a steady resumption in economic activity;

ii) China has the room and ability to ease policy further (both monetary and �scal policy); and

iii) growth recovery. • However, in the event of a prolonged

structural downturn or global recession (which is not our base case), China’s growth will not be immune. A prolonged period of weaker global growth will hurt Chinese exports.

07EQUITIES

• The global sello� in equity markets has been the swiftest seen in three decades. Indiscriminate selling has also been rampant given investors’ rush for liquidity.

• In our view, this creates opportunities for investors with ample cash and are underweight equities, as well as those who are looking to rebalance their portfolios, to move into higher quality long-term holdings.

• For these investors, we recommend gradually averaging into bargain-priced stocks with resilient balance sheets and long-term growth outlook, as these are likely to emerge unscathed from the virus outlook, and into quality dividend-yielding stocks with healthy cash �ows, such as selective Singapore REITs, that would bene�t from a “reach for yield” dynamic as rates continue to fall.

United States• The consensus 2020 earnings per

share (EPS) estimate for the S&P 500 has been dropping in the last few months, but further downward revisions are highly likely. Companies are now focused on free cash �ow generation and preservation, so

reduced capex is to be expected. This reduction in investment activity is likely to lower revenue and earnings activity in 2020.

• While lower oil prices are traditionally bene�cial for consumers, concerns are mounting over the US energy sector, given that the US is now a net oil exporter following the shale revolution.

• Our preferred picks in the US continue to have a tilt towards quality technology names that

(a) ride on durable secular growth trends

(b) possess strong and sustainable business models, and

(c) sit on healthy balance sheets. Eurozone• The coronavirus outbreak is hitting

Europe hard, and the potential impact on earnings is at the top of mind for investors. Europe’s worst ever year-on-year EPS decline was -49% during the global �nancial crisis, while a typical earnings recession sees year-on-year EPS growth fall to -25% at its worst.

• So far, from mid-February, we have only seen a ~7% reduction in EPS forecasts for 2020, and consensus is

still expecting a 2% growth for EPS this year. This is clearly too high, partly because analysts need time to review their estimates.

• We also note that the fall in oil price is an issue for the wider European market, as the Energy sector was supposed to be the largest contributor to 2020 EPS growth, providing over 1/6th of the total market growth. This is now lost, and whilst over the medium-term lower energy costs and lower rates should stimulate consumption, that is not the near-term focus of the market.

Japan• While the Bank of Japan’s (BOJ)

increase of daily ETF purchases to ~JPY100b (from ~JPY70b) has helped support the equity market near term, likely unrealized losses on its current holdings and the sustainability of this strategy (or the absence of a long-term exit strategy) remain a concern over the longer term.

• Market valuations have reached undemanding levels of 0.96x price/ book, nearing the previous trough multiple of 0.9 times over the past decade.

• Due to the viral outbreak however, lower domestic demand and economic activities disruptions should lead to further earnings cuts in the upcoming results season, while the Olympics has been o�cially postponed, dampening sentiment further. With forward earnings growth still looking optimistic at ~12%, we expect earnings forecasts to be revised lower and we remain selective.

Asia ex-Japan• The recent focus on Covid-19 has been

largely on Europe and the US. However, there are lingering concerns that the worst may not be over for Asia. For example, it is still unclear how quickly India (10% weight in the MSCI Asia ex. Japan Index) would be able to contain the spread of Covid-19 within its borders.

• There were also bright spots amid the general economic malaise, as China’s o�cial PMI saw a steep rebound from 35.7 in February to 52 in March, beating consensus’ expectations (44.8).

• There were encouraging signs within the Chinese Property sector, as most developers reported that more than 90% of their sales o�ces have already re-opened (with the exception of Wuhan), while construction activities have also largely resumed above the 90% level. The major developers we

track have mostly guided for positive growth in their contracted sales for 2020 by high single-digit to mid-teen levels.

• The MSCI Asia ex. Japan Index is currently trading at a forward P/E ratio of 11.1x, which is 1.1 standard deviation below its 7-year mean.

China/Hong Kong • The pace of activities resumption and

stimulus policies will remain as the key focus with some of the high frequency indicators that we have been monitoring picking up steadily, such as daily coal consumption and inter-city tra�c congestion indices.

• While we expect the government will announce and implement stimulus measures that are required for a prompt and su�cient rebound, a broad-based stimulus that is similar to that in the 2008 Global Financial Crisis is highly unlikely and not necessary, in our view. That said, stronger stimulus

would still be required to boost activities signi�cantly to bring it above trend in 2H20.

• Looking ahead, it will be important to monitor the above data points that may suggest cyclical policy is stronger or weaker when compared to our expectations.

• On a relative basis, we do see favourable factors to support Chinese equities to outperform, namely

i) stabilization in Covid-19 cases and a steady resumption in economic activity;

ii) China has the room and ability to ease policy further (both monetary and �scal policy); and

iii) growth recovery. • However, in the event of a prolonged

structural downturn or global recession (which is not our base case), China’s growth will not be immune. A prolonged period of weaker global growth will hurt Chinese exports.

Total Returns % 12-months YTD March

World -11.8 -21.3 -13.4

US -8.1 -19.6 -12.4

Europe -14.1 -22.5 -14.3

Japan -10.1 -17.3 -7.0

Asia Ex-Japan -14.2 -18.4 -12.1

Source: Bloomberg, MSCI, Bank of Singapore as of 1 April 2020

ELI LEEHead of Investment Strategy, Bank of Singapore

HONG KONG / CHINA MARKET OUTLOOK 08

HONG KONG / CHINA MARKET OUTLOOK

• The pace of activities resumption and stimulus policies will remain as the key focus with some of the high frequency indicators that we have been monitoring picking up steadily, such as daily coal consumption and inter-city tra�c congestion indices.

• While we expect the government will announce and implement stimulus measures that are required for a prompt and su�cient rebound, a broad-based stimulus that is similar to that in the 2008 Global Financial Crisis is highly unlikely and not necessary, in our view. That said, stronger stimulus would still be required to boost activities signi�cantly to bring it above trend in 2H20. We expect accommodative monetary policy with further cuts in the reserve requirement ratio of 50bps or more, and further cuts in policy rates such as the Medium-term Lending Facility and Loan Prime Rate. There have been rising expectations for a cut in the benchmark deposit rate to encourage banks to lend. If it materializes, it would be the �rst time since 2015. On �scal policy, tax cuts and fees reduction to ease cash �ow pressure will also be helpful especially for small- and medium-sized enterprises. We expect the �scal de�cit ratio to increase by 3ppt in 2020, mainly driven by larger special bond issuance and stronger policy bank support. Infrastructure investment has also been used as an e�ective measure for counter-cyclical growth. Looking ahead, it will be important to monitor the above data points that may suggest cyclical policy is stronger or weaker when compared to our expectations.

• On a relative basis, we do see favourable factors to support Chinese equities to outperform, namely i) stabilization in Covid-19 cases and a steady resumption in economic activity; ii) China has the room and ability to ease policy further (both monetary and �scal policy); and iii) growth recovery. However, in the event of a prolonged structural downturn or global recession (which is not our base case), China’s growth will not be immune. A prolonged period of weaker global growth will hurt Chinese exports.

• Our view is that equity market volatility will likely stay elevated, and we believe investors should focus on structural trends irrespective of �uctuations and uncertainty in the macro environment: (1) Rising online engagement - the Covid-19 outbreak has prompted businesses and consumers to engage more online via online meetings and operations as well as online shopping, entertainment and education, so we maintain our preference for the internet sector. (2) Hunting for yield in light of interest rates staying lower for longer for the global economy and China. We think Chinese banks could o�er a defensive play amid rising expectations of a potential benchmark deposit rate cut. HK property developers, which focus on paying absolute dividend amounts also appear attractive at close to 5% yield. (3) Policy bene�ciaries - the expectations of continuous stimulus policies roll out could o�er tactical trading opportunities for sectors like autos and infrastructure but the sustainability of re-rating will hinge on earnings conversion. (4) Ongoing shifts in supply chains across Asia - the spread of Covid-19 beyond mainland China will put more stress on the supply chain and could accelerate ongoing shifts in supply chains across Asia, and we are cautious on IT hardware before we have more clarity on the supply shock. We are also cautious on the energy and insurance sectors.

Focusing On Activities Resumption

“On a relative basis, we do see favourable factors to support Chinese equities to outperform, namely i) stabilization in Covid-19 cases and a steady resumption in economic activity; ii) China has the room and ability to ease policy further (both monetary and �scal policy); and iii) growth recovery.”

VASU MENONExecutive Director, Investment Strategy, Wealth Management Singapore, OCBC Bank

BONDS

09BONDS

When The Levee Breaks

“Given our belief that spreads will not revisit 2008/2009 levels, we think that it makes sense for longer-term investors to sensibly reengage with the high yield credit space. As such, we are maintaining our overweight stance on emerging market high yield and neutral stance on EM investment grade.”

• Credit markets globally staged a historically epic collapse beginning in late February and extending through the month of March. Over the past month Emerging Market (EM) is down 10.1%, with Investment Grade down 7.1% and High Yield falling 14.9%. March was the worst month for Credit since October 2008, even though in the last week or so the market recouped some of its earlier losses.

• High Yield (HY) spreads widened out as much as 500 basis points during March to reach the highest level post the Global Financial Crisis (GFC) before rallying back more than 105 bps at the end of the month. Investment Grade (IG) spreads widened a more modest 180 basis points at the widest during the month before re-tracing 10 bps at the end of the month.

Further downside in EM Credit possible, but we do not foresee 2008/2009 levels• The ultimate impact, scope and

duration of Covid-19 is still largely an unknown.

• Hence, despite all the money thrown at the problem by global policymakers and governments, further volatility and downside may persist until there is widespread consensus that the virus is a spent force (or a vaccine is developed).

• However, within EM credit, we do not expect spreads to revisit the lows achieved during the GFC.

• The composition of this market is far superior today from a credit quality perspective. China is the largest component and almost 10% is from the Gulf Cooperation Council countries (Abu Dhabi and Saudi in particular). Many of the largest names from these countries are systemically important, with signi�cant government ownership.

• We would expect that these countries will provide these strategically important entities with support during times of severe stress.

Maintain medium-term preference for Asian High Yield• Asian dollar bonds have also su�ered

during March as a result of the global market volatility but held up relatively well.

• Our overweight on Asia high yield bonds, in particular Chinese property, remains current. Two main factors support our view.

• Firstly, China experienced the Covid-19 earlier, and it is slowly resuming economic activities. O�cially, 90% of businesses have reopened in China. We still expect to see a weaker year-on-year March in the Chinese property sector, but we expect a more signi�cant recovery during April.

• Secondly and importantly, while the US Dollar bond market has been closed to Chinese issuers in the second half of March, the onshore bond market is still operating. We have

observed many of the developers under our research coverage issued onshore corporate bonds, supporting their liquidity position during 2020.

Maintain neutral duration position• The US Treasury (UST) market has

exhibited extreme volatility and even bouts of illiquidity in recent weeks. The 2-10 year UST curve “bull steepened” in the wake of Fed rate cuts (and subsequently �attened 25 basis points) while the 3-month UST bills went negative in the signs of a potential liquidity trap.

• In this market environment where signi�cant policy actions are ongoing, we would recommend a neutral portfolio duration position until some measure of stability and continuity returns to the interest rate market.

Maintain overweight rating on High Yield and stay neutral on Invest-ment Grade• We are maintaining our overweight

stance on EM HY and neutral stance on EM IG.

• Within the EM credit space, HY has understandably borne the brunt of risk reduction.

• However, given our belief that spreads will not revisit 2008/2009 levels, we think that at current levels, it makes sense for longer-term investors to start reengaging with the asset class.

VASU MENONExecutive Director, Investment Strategy, Wealth Management Singapore, OCBC Bank

FX & COMMODITIES

10 FX & COMMODITIES

Gold Could Take A Breather

“We cut the 12-month oil price forecast to US$40/bbl for WTI and USD45/bbl for brent on the back of downside pressure from the pandemic shock and the Saudi/Russia oil price war. Meanwhile, gold could continue to take a breather over the next few months before continuing its journey higher.”

Oil• Crude oil has been hit by double

whammy from the pandemic and the Saudi/Russia oil war. We cut the 12-month oil price forecast to US$40/bbl for WTI and US$45/bbl for brent. A fading of the Covid-19 shock to oil demand and US oil supply cutbacks should still allow oil prices to rebound in the medium- term.

Currency outlook• Compared to March, the broad US

Dollar is likely to be more stable heading into April as implied volatility eases across the foreign exchange space.

• The series of central bank and government rescue packages have alleviated some immediate �nancial stress and calmed risk sentiment, indirectly keeping a lid on broad US Dollar strength.

• So far, actual macro data concerns have largely been overlooked as the market’s focus was set on the �nancial markets. This may change in April. The pipeline for positive news may be thinning, whereas the potential for negative developments – virus spread, economic concerns, credit issues – may still actualise. Thus, we would not rule out another bout of risk-o� moves in the near future. This should re-ignite US Dollar safe haven �ows.

Gold• Gold has outperformed during the

recent sharp equity market downturn, though it is not exempt from volatility in the rush to liquidate positions for cash amid intensifying US Dollar funding pressure. While US Dollar funding pressure has since eased, gold could continue to take a breather over the next few months before continuing its journey higher.

Helicopter money and successful Fed action to boost in�ation breakeven and push down real rates should ultimately bolster the bullish gold trade in the medium-term.

• Overall, we see some range-bound action in the major pairs early in April, as positive drivers run their course. Heading further into April may see renewed US Dollar strength, as the macroeconomic hit becomes even more apparent.

• On a multi-week horizon, we prefer to back the US Dollar against cyclical currencies. Reserve currencies, like the EUR and JPY, may also come under negative pressure against the US Dollar, but are expected to remain more resilient.

• In Asia, the pattern of near-term consolidation and US Dollar strength further out is also expected to play out. The ability of the CFETS RMB Index to track broad US Dollar movement in March should provide an anchor of stability to Asian currencies, and ward o� outsized moves in the USD-Asia pairs on either side.

• Fundamentally, Asian currencies continue to face downside pressure on unprecedented portfolio out�ows. South Asian currencies are particularly vulnerable, with heavy out�ows both on the bond and equity fronts.

• On the growth front, Thailand and Singapore have forecast contraction for their economies. The scale of the growth downgrade is large and will set the tone for the rest of the Asian economies. This should also weigh heavily on Asian currencies in the structural horizon.

• With the environment negative for Asian currencies, we expect the USD/SGD to search higher on a multi-week horizon. However, despite the easing actions by the Monetary Authority of Singapore, the message of stable monetary policy also came across strongly. We think this will ward o� excessive upside expectations for the USD/SGD for now.

“Due to the Covid-19 outbreak, both the Purchasing Managers’ Index (PMI) and the di�usion index of SMEs’ business situation dropped to record lows in Hong Kong. The worsening business situation has dented hiring sentiments and has weighed heavily on the labour market with the unemployment rate surging to a more than 9-year high of 3.7%. To bu�er the economic impact of coronavirus outbreak, the Hong Kong Monetary Authority and the government have unveiled a slew of measures with the latest focusing mainly on safeguarding jobs. These e�orts may ease the �nancial burden of the hard-hit sectors and buy some time to save jobs but may not be enough to reverse the downturn. Going forward, should the pandemic last longer than expected, some SMEs may go out of business despite the stimulus measures. In this case, those employees currently on no-pay leave may eventually lose their jobs. As such, we expect overall jobless rate to edge higher to 4% or above in the coming months.”

• Due to Covid-19 outbreak, Hong Kong’s PMI fell to a record low of 33.1 in February from 46.8 in January. During the same month, the current di�usion index of Hong Kong SMEs’ business situation dropped to a record low of 20.3. The sub-index for the retail trade, restaurants and logistics also plunged to 16.6, 13.1 and 13.2 respectively. This was worse than the levels seen last August when social unrest escalated. This reinforces our view that economic contraction caused by the Covid-19 epidemic in 1Q 2020 would be much worse than that resulted from the US-China trade war and social unrest in 2H 2019. Worse still, the outlook di�usion index slid to record low of 36.7 as well, despite a raft of

stimulus measures aiming to support SMEs.

• As SMEs created 1.3 million jobs as of September 2019, the worsening business situation has dented hiring sentiments and is weighing heavily on the labour market. During the three months through February, the unemployment rate surged to a more than 9-year high of 3.7%. Zooming in, the jobless rate of retail, accommodation and food services sectors edged up to a nearly 10-year high of 6.1% as the Covid-19 pandemic has brought inbound tourism to a standstill and dented consumer sentiment. Meanwhile, the unemployment rate of the construction sector rose notably from 5.7% to 6.8%, the highest since

2011, as the Covid-19 outbreak has stalled construction activities. Furthermore, the jobless rate of the trade sector increased to the highest since late 2017 at 2.9% as trade activities have been disrupted by the coronavirus outbreak.

• To o�set the economic impact of the coronavirus outbreak, the Hong Kong Monetary Authority (HKMA) and the government have unveiled a slew of measures. Since early March, the HKMA has followed the Fed to cut the base rate by 114 basis points to 0.86% and reduced the countercyclical capital bu�er (CCyB) ratio to 1.0% to release about HK$500b in capital. The Hong Kong Tourism Board launched a HK$400m trade support plan to tide over the tourism sectors

11SPECIALS

SPECIALS

CARIE LIEconomist, Treasury Research, Treasury Division, OCBC Wing Hang

Hong Kong Labor Market Is Under Pressure

while the government unveiled the Retail Sector Subsidy Scheme under the Anti-epidemic Fund to bene�t 70,000 retailers. Furthermore, the Hong Kong Airport Authority launched HK$1b relief measures to support the airport community. Finally, the government rolled out a second round of HK$137.5 billion anti-epidemic fund, mainly focusing on safeguarding jobs. These e�orts

may ease the �nancial burden of hard-hit sectors and buy some time to save jobs but may not be enough to reverse the downturn given the lingering uncertainty about the pandemic.

• Going forward, should the pandemic last longer than expected, some SMEs may go out of business despite the stimulus measures. In this case, those employees currently on

no-pay leave may eventually lose their jobs. Therefore, as a lagging indicator, overall jobless rate is expected to edge higher to 4% or above in the coming months. This could then feed through into local consumption and the housing market, both of which have already been harmed by the negative wealth e�ect from recent stock market rout.

• Due to Covid-19 outbreak, Hong Kong’s PMI fell to a record low of 33.1 in February from 46.8 in January. During the same month, the current di�usion index of Hong Kong SMEs’ business situation dropped to a record low of 20.3. The sub-index for the retail trade, restaurants and logistics also plunged to 16.6, 13.1 and 13.2 respectively. This was worse than the levels seen last August when social unrest escalated. This reinforces our view that economic contraction caused by the Covid-19 epidemic in 1Q 2020 would be much worse than that resulted from the US-China trade war and social unrest in 2H 2019. Worse still, the outlook di�usion index slid to record low of 36.7 as well, despite a raft of

stimulus measures aiming to support SMEs.

• As SMEs created 1.3 million jobs as of September 2019, the worsening business situation has dented hiring sentiments and is weighing heavily on the labour market. During the three months through February, the unemployment rate surged to a more than 9-year high of 3.7%. Zooming in, the jobless rate of retail, accommodation and food services sectors edged up to a nearly 10-year high of 6.1% as the Covid-19 pandemic has brought inbound tourism to a standstill and dented consumer sentiment. Meanwhile, the unemployment rate of the construction sector rose notably from 5.7% to 6.8%, the highest since

2011, as the Covid-19 outbreak has stalled construction activities. Furthermore, the jobless rate of the trade sector increased to the highest since late 2017 at 2.9% as trade activities have been disrupted by the coronavirus outbreak.

• To o�set the economic impact of the coronavirus outbreak, the Hong Kong Monetary Authority (HKMA) and the government have unveiled a slew of measures. Since early March, the HKMA has followed the Fed to cut the base rate by 114 basis points to 0.86% and reduced the countercyclical capital bu�er (CCyB) ratio to 1.0% to release about HK$500b in capital. The Hong Kong Tourism Board launched a HK$400m trade support plan to tide over the tourism sectors

12 SPECIALS

while the government unveiled the Retail Sector Subsidy Scheme under the Anti-epidemic Fund to bene�t 70,000 retailers. Furthermore, the Hong Kong Airport Authority launched HK$1b relief measures to support the airport community. Finally, the government rolled out a second round of HK$137.5 billion anti-epidemic fund, mainly focusing on safeguarding jobs. These e�orts

may ease the �nancial burden of hard-hit sectors and buy some time to save jobs but may not be enough to reverse the downturn given the lingering uncertainty about the pandemic.

• Going forward, should the pandemic last longer than expected, some SMEs may go out of business despite the stimulus measures. In this case, those employees currently on

no-pay leave may eventually lose their jobs. Therefore, as a lagging indicator, overall jobless rate is expected to edge higher to 4% or above in the coming months. This could then feed through into local consumption and the housing market, both of which have already been harmed by the negative wealth e�ect from recent stock market rout.

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