Global growth is likely to accelerate in the coming months, hitting 5.9% this year and 4% in 2022, led by vaccine roll-outs, fiscal stimulus and a broadening services recovery, says Credit Suisse.
Asia’s recovery is set to continue at a solid pace with non-Japan Asia likely to grow 7.5% this year and 5.7% in 2022, says the investment bank in its 2H2021 investment outlook.
See: Post-pandemic, Asean e-commerce growth 'inevitable': Credit Suisse
This is higher than its growth forecast for the US (6.9% in 2021) and the Eurozone (4.2%). Most of the recent data support the assertion that Asia will outgrow most other regions, says Ray Farris, chief investment officer of South Asia at Credit Suisse. “I think it’s important to realise that Asia is still going to be the world’s fastest-growing region.”
South Korea will continue to ride the robust global demand for technology hardware, says John Woods, chief investment officer of Asia Pacific at Credit Suisse. “We believe that the Korean equity market will continue to strongly outperform emerging markets… We feel confident in recommending the Korean market to our clients.”
Within Asia, Credit Suisse prefers South Korean tech companies, which are positioned to benefit from the shortage in microchips and the global reflation that is gathering pace, says Woods.
Thailand, too, is favoured, but for another reason. “Thailand’s valuation is pretty compelling relative to the rest of the emerging market. It’s also about sensitivity to value sectors, including banks, energy — particularly oil — and a belief that once Thailand strongly emerges from the current challenges with Covid-19, its tourism industry will bounce back strongly and provide additional support and earnings to the equity market,” says Woods.
China’s sustainable growth
In a surprise announcement to the UN General Assembly last year, China’s president Xi Jinping committed the world’s largest polluter to tackle its carbon emissions. “We aim to have CO2 emissions peak before 2030 and achieve carbon neutrality before 2060,” said Xi then.
Calling China’s green goals a “multi-decadal Asian super trend”, Woods notes the sustainability efforts’ US$15 trillion ($20.2 trillion) price tag, which “will throw up a whole range of investment opportunities”.
See also: Vaccine roll-out aids recovery; tech stocks' growth intact despite closer scrutiny: Pictet
“Renewables in China now comprise something close to 15% of the total energy mix. That has to expand to a quite extraordinary 90% within the next 40 years,” reasons Woods. “Right now, we are very much focused on solar energy, wind stocks and EV, or electrical vehicle-linked stocks.”
From a broader perspective, China’s growth is working its way down to below-trend rates, a policy objective of its government, says Woods. “It’s because the Chinese government has decided to tighten policy modestly. It’s not that monetary policy and credit policy are outright tight, but there is some degree of slowing in credit growth. All of those point to a softening outlook for the Chinese economy.”
Credit Suisse expects China to grow by 8.2% in 2021 despite a modest slowdown in fiscal and monetary policy support from 2020. “External demand remains a key support for the economy, as it does for the Chinese yuan. A robust trade balance, coupled with the absence of tourism outflows, leads us to remain positive on the yuan, despite concern from the authorities on the pace or allegedly speculative nature of yuan appreciation,” writes Credit Suisse.
See also: Singapore's GDP plunged in 2020, household wealth increased instead, says Credit Suisse
The Covid-19 crisis may have contributed to the recent commodity rally but China’s next steps will soon temper the current euphoria. “The Covid-19 crisis was very much about creating imbalances in supply chains, pushing up commodity prices as a consequence. The chart for commodities has gone pretty much vertical and parabolic in terms of gains but they have started to moderate. We anticipate this will continue into the second half of the year.”
However, China has now announced it is releasing some strategic stockpiles for copper, notes Woods. “This allows the copper price to moderate and it’s our view that as inflation moderates and as the supply chain imbalances are corrected, we should see a moderation in commodity prices.”
Singapore equities’ rally ending
As a whole, Singapore equities have done “very well” and the market is one of the best-performing in Asia, says Suresh Tantia, senior investment strategist at Credit Suisse. Year to date, the Straits Times Index (STI) is up 12.13%. However, Suresh urges investors to remain cautious in 2H2021.
“Going forward, I think we’ll have to be more selective because a large part of the rally is already done. What we are suggesting to clients will be to focus more on the financial services sector, especially banks, because I think banks will benefit in the second half.”
As the US economy recovers, so will local banks, says Suresh. “We see higher bond yields in the US that will support the net interest margins for the Singapore banks. So, that would be a key sector to watch out for in the Singapore market.”
Suresh also notes the potential recovery plays in REITs exposed to the retail and hospitality sectors, as Singapore aims to fully vaccinate three-quarters of residents by August. “REITs stand to gain from a revival of business travel and other services activity in the region.
Singapore’s fast roll-out of vaccinations places it in good stead to benefit from potential travel bubbles,” notes Credit Suisse. “At this juncture though, we expect equities to perform in line with global equities,” reads the outlook.
On currencies, the Singapore dollar might be allowed to appreciate gradually against the US dollar and on a nominal effective exchange rate basis, says Credit Suisse, as the Covid-19 situation here remains largely contained. “The improving global demand alongside a gradual recovery in regional and international travel might lead to discussions of a change in the policy stance,” notes Credit Suisse.
Appreciation took “a bit of a pause” in May, as Singapore entered a period of lockdown, says Julian Wee, investment strategist at Credit Suisse. “As you might know, the government is relaxing restrictions a bit. This may allow the authorities to return to a higher state of confidence and allow the Singapore dollar to appreciate over the next 12 months or so, potentially even earlier.”
“Relative to the dollar, our forecasts are 1.31 in three months and 1.29 in 12 months, pretty much in line with the overall Asian performance. We will see a rise in the Singapore dollar within the policy.”