The past half-decade has seen the rise of geopolitical rivalry and global populism alongside the rapid erosion of free trade, making for a time of great uncertainty. One may thus harbour nostalgia for the relatively stable international environment of the 1990s and 2000s.

However, a return to normalcy is unlikely, given the growing US-China tensions, says Pushan Dutt, professor of Economics at Insead Business School. “I think that going back to the unipolar world that existed is infeasible. We are going to move towards a world that is more multipolar,” says Dutt, who envisions a world operating on a US-China axis. International relations will increasingly be defined by nationalism and protectionism in contrast to open markets and hyper-globalisation previously. Covid-19, as well as other forms of global disruption, he believes, makes a return to the liberal world order all but impossible.

Dutt was speaking at The Edge Singapore’s Year End Investment Forum 2020, “Aftermath of US Election, What does it mean for markets?”, held on Dec 5. Also on the panel were Howie Lee, economist at OCBC Bank and Christopher Brankin, CEO of TD Ameritrade Singapore.

The disruptions described by Dutt are widely attributed to US President Donald Trump, and the incoming Biden administration could see slightly more constructive US-China ties. However, fundamental disagreements on human rights and technology transfers persist. The US is also not likely to accommodate Chinese ambitions in the Asia Pacific or in the field of advanced technology. Sadly, argues Dutt, reconciling on these thorny disagreements is necessary for a harmonious world.

With the Washington foreign policy establishment increasingly hawkish towards China, the US will likely prefer a containment strategy, says Dutt. He sees US-China decoupling as a real possibility. Taiwanese tech giant Foxconn is already shifting supply chains out of the mainland. Gains from trade will increasingly be sacrificed in the name of resilience and geopolitical advantage, as international relations is increasingly seen as a zero-sum game. “We have to recognise that some form of conflict is inevitable, but we should try to carve out some realms for cooperation,” Dutt says.

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Yet China faces challenges of its own. Dutt notes that its era of exponential growth rates and demographic dividend is over. Besides having to rethink its economic strategies for this new era, Beijing is grappling with significant imbalances between manufacturing and investment. This has seen a rapid build-up of foreign exchange reserves parked in US treasuries, introducing significant volatility into financial markets due to the resulting depression in interest rates.

Dutt argues that China should place less emphasis on its flagship Belt and Road Initiative, launched with huge fanfare back in 2013. Instead, it should focus on internal growth drivers — a goal that Beijing has articulated in its “dual circulation” concept and Made in China 2025 plan. He believes that strengthening intellectual property regulations, implementing financial reforms and promoting sustainability will be key to stimulating China’s domestic growth in the longer run.

For now, says Lee of OCBC, China’s economy has recovered sharply from the Covid-19 lows. Crude oil processed and crude steel produced in China reached record highs in July. The Caixin Purchasing Managers’ Index (PMI), which measures manufacturing in China, reached 54.9, the highest on record for the current series beginning in 2018, lending a boost to Asia’s export numbers.

Road to recovery
The global economy’s most immediate challenge is to recover from the deepest recession since the Great Depression. Lee notes that global GDP is expected to contract by 4.4%this year. While growth is seen to rebound sharply in 2021 by 5.2%, this would merely return GDP growth to pre-pandemic levels. Recovery will likely to be less steep from 2021 onwards, and an uneven W-shaped recovery is likely, he says. Singapore’s economy, according to official estimates, will contract 6.1% this year, and rebound by 5% in 2021.

According to Lee, the virus will be the largest risk impeding the recovery, noting that any attempt to do away with safe distancing has seen a surge in cases, creating a non-linear
recovery. Fortunately, the worst is likely now over following a difficult 2Q2020, Lee says, with nearly all countries experiencing a 3Q q-o-q growth rebound. While Asia has done relatively well, Lee warns that the failure of the US and Europe to control the virus will continue to be a drag.

Yet, despite the uncertain economic fundamentals, asset prices are likely to remain lofty, says Lee. In contrast to ordinary inflation, which is typically centred on wages and cost of goods, asset inflation takes place despite no meaningful organic growth in economic output. In 2020, despite a sharp GDP contraction in the US, home prices and equity levels went up 6.3% and 10% respectively, no thanks to market distortions arising from quantitative easing policies by central banks to maintain near-zero interest rates.

Lee does not see this phenomenon translating into stagflation as was seen in the 1980s, where low growth was accompanied by high inflation. Asset inflation, he notes, will largely remain confined to financial markets, with little of this affecting the price of goods and services in the real economy. “Put away all your thoughts of valuations and whether it is overpriced. If people have the notion that asset prices are going to increase next year...they will keep piling funds into assets,” says Lee, who expects higher asset prices in 2021 and beyond.

Macroeconomic pronouncements aside, TD Ameritrade has seen its clients here jumping in actively. “For our customers at TD Ameritrade, especially in Singapore, it’s ‘risk on’,” says Brankin, who notes that this has been the case for the past seven months as US markets reached new highs “again, and again, and again”. But the strength of this US stock rally and the level of investor sentiment will depend on the efficacy of a Covid-19 vaccine and how quickly the doses can be distributed.

The size and timing of the US fiscal stimulus — which Congress is rapidly running out of time to pass — could also be a factor, he cautions. Should the US congress fail to pass the fiscal stimulus by this year, the size of the package will likely depend on two run-off US senate races in Georgia called due to close results in the initial polls in November. While markets are pricing in a Republican senate, which will likely bring a smaller stimulus and lower taxes, victory for the Democrats in both seats would flip the senate and likely bring a larger stimulus with more taxes and regulations, says Brankin. As markets like the status quo and are adverse to uncertainty, they would likely prefer a smaller stimulus if it would mean avoiding wide-ranging tax reforms under a “blue wave”, he adds.

Betting on the future
While most webinar attendees were eager to hear about Singapore stocks, due to homebase bias, Lee pointed out that Singaporean equities had in fact underperformed during the pandemic. The reason for this is because of the dearth of strong technology plays on the Straits Times Index (STI) which is dominated by banks and developers and REITs. Despite a recovery throughout November, Singapore remains one of the worst-performing indices in Asia, down 12.3% year-to-date as of Dec 7, compared to South Korea’s Kospi (up 24.9%) and Japan’s Nikkei (up 12.2%).

“I don’t think [the STI] will be the standout performer in 2021, with emerging market counterparts like those with higher yielding differentials probably boasting better prospects in this region, or hot money increments in Europe and the US,” says Lee. He observes cyclical rotation taking place in the equity space, with the “most beaten-up assets” rising while the top gainers begin to lag.

In the equity space, energy and financial stocks have begun gaining while tech begins to lose steam; within commodities, energy has gained while precious metals become less lucrative. Even in the foreign exchange market, this month’s laggards — the Thai Baht and Indonesian Rupiah — were the top performers in November. But low US bond yields and a weak US dollar will likely prove beneficial for gold into the new year; investors will look to switch out their weaker greenbacks for Asian currencies says Lee.

As for bullish US equities, Brankin sees clients increasingly trading in Big Tech stocks like Facebook, Apple, Amazon and Microsoft, which have been driving US markets higher through the summer. In fact, less than 40% of the stocks on the S&P 500 were up y-o-y two months ago. Fortunately, the US stock rally is now more broad-based, with over 90% of the S&P 500 across all sectors at or above their 200-day moving average in the past two months. Investors are increasingly exploring emerging markets and smallcap stocks using ETFs.

TD Ameritrade clients are also looking into financials, such as JP Morgan Chase & Co, as investors anticipate greater infrastructure spending and economic recovery in 2021. In the energy space, they like Chevron and Exxon Mobil, since both have experienced low prices for most of 2020. Both have also promised to keep dividends steady, which has resulted in attractive dividend yields of around 7% for Exxon Mobil and 4% for Chevron at current prices, with significant upside as recovery takes shape.

Pharmaceuticals have also continued to perform strongly. For the vaccine frontrunners, the announcement of viable Covid-19 vaccines is likely to have a more positive impact on Moderna’s stock price than on Pfizer’s. While Pfizer is a more established industry name with many drugs coming to market, Moderna has never brought a drug fully through production and distribution that has ever been approved.

But with markets — especially tech plays — on the up, have investors missed the boat? Brankin and Lee do not think so. The way Brankin sees it, investors should perhaps factor in “potential” when buying into high-growth plays like tech stocks. Lee, meanwhile, muses that tech stocks, given their unique nature, should perhaps be evaluated on different metrics. “My guess is that you cannot apply the traditional way of looking at bricks-and-mortar stores to the tech space,” he says.