Key themes in 2020
- Asia is about to witness a major turnaround (which likely extends into a rally) in 2020, fuelled by a series of catalysts like the semiconductor cyclical upswing, US-China ‘Phase 1’ trade deal and reduced political uncertainties, re-direction of new orders into Asian economies and swing to positive investor sentiments.
- Asia and EM’s economic momentum expected to swing positively in 2020. We expect a jumpstart in the region-wide export recovery to pass on positive effects to other cyclical sectors.
- We expect a near-term shift in investor’s sentiments towards optimism (after broad pessimism across 2019) for EM and Asian equity markets moving into 2020. This will drive equity flow towards these markets underpinning its equity rally.
- Global semiconductor upswing in 2020. The global semiconductor sales has been on a steady uptrend and we expect double-digits sales growth in early 2020. It is crucial to the Asian economies which are deeply mired in the global electronic supply chain.
- We expect to witness a series of earnings upgrade (or rather a reversal of the drastic earnings downgrades) for EM and Asian equities due to improved economic growth and earnings prospect.
Macro Outlook
- Key existing headwinds, like the US-Sino trade dispute, have eased moving into 2020. However, many major economies are facing headwinds associated to late-cycle economic growth.
- Tailwinds from policy support remained strong, significant trade uncertainty has also been lifted while global macro environment has improved. We see receding possibility of a recession next year.
- Overall, tailwinds are likely to outweigh headwinds in 2020 and global growth is expected to remain resilient with a gentle pick up. Interest rates are likely to stay low to support global growth. We think Asia will be the epicenter of global growth in 2020.
- Favor equities over fixed income on an asset allocation basis. We expect yields to hover near current low levels, due to central banks' dovishness. Simultaneously, the lower interest rates will likely boost corporate profit margins and encourage businesses to take on more expansionary plans.
Equity Outlook and Strategy (Key Markets)
- US (Unattractive) – Economic and corporate fundamentals have weakened while valuation has extended further into the expensive territory. In our view, risk-reward ratio has skewed notably to the downside.
- China (Very Attractive) – Cheap valuations supported by one of the highest earnings growth in Asia. Profit outlook remains bright for Chinese companies. Very attractive upside for A and H-shares.
- Europe (Neutral) – Profitability of companies have declined but the economy has likely just bottomed. Equity market have priced in a potential recovery leaving room for fewer upside.
- Japan (Attractive) – Companies have improved corporate fundamentals, are more profitable and use capital more effectively. Valuations remained cheap. Attractive Upside.
- Asia ex Japan (Very Attractive) – Rebound in Asia’s growth drives earnings upgrade. Cheap valuations supported by high double-digit earnings growth. Very attractive Upside.
- Favour EMs over DMs – Better economic growth prospect and earnings outlook for EMs. EM’s valuation supported by possible earnings upgrade and higher earnings growth.
Fixed Income Outlook and Strategy
- EM Debt (Attractive) – Improved EM macro outlook supports yield and credit outlook. Cheap valuation with spreads above historical average and declining credit risks. Yield expected to hold above 5% in 2020, which is especially appealing in the current low-yield environment.
- Singapore-centric (Attractive) – Combination of decent yield and relative margin of safety, especially for SGD investors. We expect yields to hover around 4% next year.
- Asian High Yield (Attractive) – Growth rebound in Asia in 2020 supportive of yields and credit quality. Outlook for Chinese property developers showing signs of improvement. Cheap valuation with spreads above historical average and declining credit risks. We expect yields expected to remain above 6.5% in 2020.
Currency View
- USD dollar index (Bearish) – Greenback (as measured by DXY Index) remains overvalued and faces potential weakness in 2020. Slated to face multiple headwinds in 2020 amid fewer tailwinds support.
- EM currencies against USD (Bullish) – Most EM currencies are undervalued. Better growth outlook in 2020 and interest differential with US supports EM currencies.
- CNY against USD (Bullish). Potential trade détente in 2020 will relief depreciation pressure. Stability in China’s growth will also be supportive.
| Equity Markets | Index | 2019 YTD Performance (%)* | Earnings Growth 2019F (%) | Earnings Growth 2020F (%) | Earnings Growth 2021F (%) | Current Year PE Ratio (X) | Fair PE (X) | Upside Potential by End-2021 (%) |
2020F Dividends Yield (%) | Excess Yield (%)** |
| MSCI World | MXWO Index | 23% | -2.9% | 11.3% | 10.5% | 16.7 | 15.5 | 13% | 2.5 | 4.1% |
| MSCI Developed Markets | MXWD Index | 22% | -1.9% | 9.8% | 9.3% | 18.3 | 16.5 | 8% | 2.6 | 3.6% |
| MSCI Emerging Markets | MXEF Index | 15% | -11.1% | 16.4% | 15.0% | 14.2 | 13.5 | 26% | 3.1 | 3.9% |
| US | SPX Index | 24% | 0.9% | 10.0% | 10.3% | 19.3 | 17.0 | 7% | 2.0 | 3.3% |
| Europe | SXXP Index | 23% | 0.8% | 8.4% | 8.2% | 16.0 | 15.0 | 11% | 3.6 | 6.5% |
| Japan | NKY Index | 15% | -5.9% | 7.3% | 9.1% | 18.4 | 18.0 | 14% | 2.0 | 5.4% |
| Asia Ex Jap | MXASJ Index | 15% | -11.4% | 15.3% | 14.9% | 15.0 | 15.0 | 30% | 2.7 | 2.7% |
| China A | SHSZ300 Index | 28% | 8.9% | 13.8% | 12.4% | 13.0 | 13.0 | 28% | 2.7 | 4.5% |
| China H | HSML100 Index | 10% | 4.8% | 7.3% | 9.9% | 9.2 | 12.0 | 54% | 3.9 | 7.7% |
| India | SENSEX Index | 15% | 3.4% | 18.4% | 17.0% | 22.6 | 18.0 | 10% | 1.6 | -2.4% |
| Russia | RTSI$ Index | 44% | 3.9% | 6.9% | 6.3% | 7.0 | 7.0 | 15% | 7.6 | 11.4% |
| Brazil | IBOV Index | 29% | 9.9% | 17.7% | 13.2% | 15.4 | 13.0 | 12% | 3.5 | -0.3% |
| Singapore | STI Index | 9% | 0.7% | 4.4% | 4.9% | 13.1 | 15.0 | 26% | 4.2 | 5.9% |
| Hong Kong | HSI Index | 10% | 3.5% | 5.2% | 7.9% | 10.5 | 12.0 | 30% | 4.0 | 8.2% |
| Source: Bloomberg, Consensus estimates, iFAST estimates. Data as of Dec 2019. *Year-to-Date total return performance is measured in individual local currency basis. **Excess Yield is calculated using the difference between index earnings yield and equivalent 10-year government bond yield. | ||||||||||
Key 2020 Themes
1. Asia is about to witness a major turn around
Our team expects a rebound in Asian economic growth (which likely extends into a rally) in 2020, one led by a region-wide export recovery. We see major catalysts driving this recovery:
(i) Cyclical upswing in global semiconductor and electronics industry (as discussed below);
(ii) ‘Phase 1’ trade deal and reduced uncertainty;(iii) Re-direction of new orders into existing production capacity in Asian economies (Ex-China) and;(iv) Swing to positive investors sentiments.
Asian market performances are typically driven by their underlying economic fundamentals. Thus, as these catalysts swing economic momentum positively in Asia and EMs, our team expects a potential market rally to materialise in 2020.
Particularly, we believe these catalysts will uplift exports figures for Asian economies in the coming quarters. The resultant recovery in trade-reliant sectors such as manufacturing and industrial, will trigger a positive spillover effect into other cyclical sectors, such as financials and real estate. Coupled with monetary and fiscal stimulus measures implemented across 2019, our team believe in an Asian economic recovery in the upcoming year.
In the same vein, we expect earnings momentum for Asian equities to swing positively as underpinned by improved economic and corporate fundamentals. All things considered, we remain very positive on Asian equities heading into 2020 and see an upside of 30% by end-2021.
Chart 1: GDP growth in Asia expected to improve in 2020
2. Global semiconductor upswing
Semiconductor stocks have had a stellar performance in 2019. While the trade dispute remains a headwind for semiconductor stocks, several chipmakers (TSMC, NVIDIA and Intel etc.) have reported better financial performance, with some guiding for better revenue numbers ahead and citing lower inventory levels and stronger market demand.
The semiconductor down-cycle started in 1Q19, with sales growth falling by double-digits year-on-year. However, global semiconductor sales has been on a steady uptrend underpinned favourable shifts in supply-demand dynamics– inventory drawdowns and improving demand environment, present in key markets (i.e. Taiwan and S. Korea).
Looking ahead, we expect negative sales growth to recover by double digits in early 2020 as the upcycle goes into full swing. This will be a boon for semiconductor stocks as well as markets like Taiwan and S. Korea. In the longer-term, the rise of new technological advancements like 5G telecommunication and cloud computing will further support a structural uplift in semiconductor demand. Since our call on semiconductor equity at the start of the year and our allocation into it, the VanEck Vectors Semiconductor ETF (SMH) has return more than 60%.
Chart 2: Semiconductor sales growth expected to rebound to double digit in 2020
3. Swing in sentiments for EM and Asian equities
Over 2019, EM and Asian markets have been held back by the US-Sino trade dispute given their reliance on trade, commodities, global growth and sensitive to capital flow. The unceasing trade dispute that weighed significantly on global markets over the past 1.5 years has taken a turn for the better. With the ‘phase 1’ trade deal and the subsequent reduction in tariffs, we will witness a tilt in investor’s sentiments towards optimism for EM and Asian equity markets moving into 2020.
Our team strongly believes that the swing in sentiments will drive equity flow, both foreign and local, towards EM and Asian equity markets. Equity flow towards these regions remain muted at the current juncture. This means we will likely see significant headroom for EM and Asian equities to run.
Furthermore, with a potential Asian economic recovery in 2020, this will propel sentiments further into optimistic territory. Benefits should also go beyond equity markets. Business sentiments are likely to rebound as uncertainty clears, which in turn boost economic activities and supports growth.
Chart 3: EM and Asia ex-Japan has performed poorly in 2019 on the back of weakened sentiments
4. Earnings upgrade for Emerging market equities in 2020
With an impending recovery in Asia’s economic growth, led by an export rebound, our team believes it will drive corporate earnings growth higher in 2020. Earnings for Asian equities are expected to be revised upwards as we believe markets have yet to price in the potential recovery. As such, when economic data improve, particularly export numbers and earnings for Asian equities beat estimates, upwards revision will materialise.
Moreover, Brazil’s passage of pension reformed has secured a sustainable and positive mid to long-term economic growth which will underpin earnings upgrade in 2020. We see potential earnings upgrade for multiple regional EMs which collectively, will contribute to EM’s aggregate earnings upgrade. Underpinned by improving EM economic and corporate fundamentals, we expect EM equities to rise in 2020.
Macro outlook
Compared to 2019, the global macro environment have largely improved. Most economies remain supported by domestic demand despite moderating external sectors (such as trade and manufacturing). Entering 2020, we expect the global demand to continue its slowdown, as many major economies are facing late-cycle headwinds. This means that we do not foresee significant rebound in global growth.
However, tailwinds from fervent policy support across EMs and DMs remain strong as central banks and governments are even more willing to keep the expansion going. Significant trade uncertainty has also been lifted following the ‘phase 1’ trade deal and thus, business activities could rebound in 2020 which supports growth. Coupled with the improved global macro environment, our team sees a receding possibility of a recession in 2020. Overall, with risks are slightly skewed towards the upside as tailwinds should outweigh headwinds moving into 2020, we expect global growth to remain resilient and pick up in 2020, albeit not a significant rebound. Against the backdrop of tepid inflation and growth, interest rates will likely stay low in 2020 which is a boon for risk assets.
Late in the economic cycle, it is hard to see the US maintaining its stellar GDP growth rates seen in prior years, particularly when it was fuelled by the one-off tax-cut in late 2017. Additional growth will have to come from central bank and the fiscal front, which looks limited given current deficit levels. Europe faces muted growth dragged down by geopolitical uncertainties and the trade dispute. Growth in many of its economic powerhouses such as UK and Germany is still poor, despite the believe that the region’s downturn has bottomed. This means 2020 will likely see European economies’ growth on a recovery rather than driving the global growth should trade tension ease.
We are more positive on growth in other emerging market regions such as LATAM and EMEA. Nonetheless, factors such as geopolitical uncertainty, commodity prices and dollar strength dictates the trajectory of its growth in 2020. As such, Asia remains the region with significant growth-boosting catalysts heading into 2020. We believe it will likely be the global growth driver in 2020, powered by a potential export-led recovery.
Chart 4: Growth for Asia Ex-Japan surpassed regional peers and largest economies
Key Equity Market Outlook
United States (‘2.0 Stars’ Not Attractive)
On a macro level, we believe the US consumers, which has yet to show major cracks, coupled with policy support is able to insulate the slowing economy. The fact that it is an election year also means that the likelihood of support from the US government is much elevated so as to avoid an economic slowdown. A US recession is at a low possibility given its current growth and policy outlook. Overall, the US economic growth will slow entering 2020, but growth is unlikely to fall off the cliff.
With US economic growth outlook for 2020 unimpressive, we see lesser support for corporate earnings of US equities. Corporate fundamentals have deteriorated in 2019 as margins declined while earnings estimates were slashed. Without robust fundamentals, current expensive valuation remains unsupported entering 2020. US equities may continue to rise on the back of momentum, but upside potential is limited over the longer term. Thus, the risk-reward for US equities has skewed notably and it remains unattractive with an upside potential of 7% by end-2021.
Key risks to the US equities in 2020 includes re-escalation of trade dispute, election uncertainty, slowing economy and weakening profitability for corporates.
Chart 5: S&P 500 index price and EPS
|
S&P 500 Index |
FY2018 |
FY2019 |
FY2020 |
FY2021 |
|
PE Ratio (X) |
19.3 |
19.3 |
17.6 |
15.9 |
|
Expected Earnings Growth YoY |
23.5% |
0.9% |
10.0% |
10.3% |
|
Earnings Per Share (EPS) |
163 |
164 |
180 |
199 |
|
Projected Fair Price (Based on Fair PE Ratio of 17.0X) |
- |
- |
- |
3,383.86 |
|
Potential Upside from Today |
- |
- |
- |
7% |
China A & H Shares (4.0 Stars/4.5 Stars “Very Attractive”)
Our team expect China’s GDP growth to decelerate gradually, likely falling below 6% in 2020. However, that is also due to the maturing of China’s economy, much like the DMs. We believe external weakness caused by trade dispute will alleviate in 2020 and growth is likely to be cushioned by domestic demand due to China’s rebalancing effort towards consumption-driven growth and its burgeoning middle class. Credit conditions should improve and in turn support growth. We also expect greater countercyclical efforts by policymakers. All in all, China’s economic growth is expected to slow but likely to be gradual and non-threatening to Asia’s economic recovery.
Earnings of China A-share equities are projected to grow by double digit in 2020, one of the highest in Asia. With an improved macro outlook compared to 2019 and a ‘phase 1’ deal, we expect earnings growth estimates to improve for Chinese equities in 2020, particularly if more countercyclical support were implemented. The improved earnings prospect heading into 2020 supports the cheap valuations in both A and H shares. We favour Chinese equities overall with the A and H-shares projected to have an upside potential of 28% and 54% respectively. Investors looking for a greater valuation discount can consider H-shares.
Key risks to the Chinese equities in 2020 includes re-escalation of trade dispute, prolong protest (H-shares) and China’s economy slowing more than expected.
Chart 6: CSI 300 index price and EPS
|
CSI 300 Index (China A) |
FY2018 |
FY2019 |
FY2020 |
FY2021 |
|
PE Ratio |
14.1 |
13.0 |
11.4 |
10.1 |
|
Expected Earnings Growth YoY |
8.0% |
8.9% |
13.8% |
12.4% |
|
Earnings Per Share (EPS) |
281 |
306 |
348 |
391 |
|
Projected Fair Price (Based on Fair PE Ratio of 13.0X) |
- |
- |
- |
5,087 |
|
Potential Upside from Today (%) |
- |
- |
- |
28% |
|
Source: Bloomberg, iFAST estimates. Data as of Dec 2019. |
||||
Chart 7: HSML 100 index price and EPS
|
HSML100 Index |
FY2018 |
FY2019 |
FY2020 |
FY2021 |
|
PE Ratio (X) |
8.8 |
9.2 |
8.5 |
7.8 |
|
Expected Earnings Growth YoY |
7.1% |
4.8% |
7.3% |
9.9% |
|
Earnings Per Share (EPS) |
860 |
901 |
967 |
1063 |
|
Projected Fair Price |
- |
- |
- |
12,752 |
|
Potential Upside (%) from Today |
- |
- |
- |
54% |
Europe (‘2.5 Stars’ Not Attractive)
Europe is prone to trade-related shocks given its exposure to such sectors. Weaknesses in the trade-oriented sectors have weighed on growth for the region, with Germany and UK narrowly avoided recession. However, we believe the economic softness has bottomed as supported by economic indicators, and this means we are unlikely to see severe deterioration in Europe’s growth. With Brexit lilkely to occur early in 2020, we expect uncertainty in the region to clear up as we progress beyond 2Q 2020. The region nonetheless faces headwinds from trade uncertainty (US/EU trade developments) and the automobile sector. Thus, economic momentum is turning positive and we expect growth for Europe to recover marginally in 2020.
Corporate earnings in Europe have declined across past quarters and remain prone to further downgrades. Europe’s equity market has priced in an (i) economic recovery and (ii) ‘phase 1’ trade deal as it climbed to year-to-date peaks, while earnings and economic fundamentals weakened. We believe sets up for a potential correction should equity reprice if (i) is weaker than expected and (ii) suffers hiccups after confirmation. Valuation are also modestly overpriced with earnings growth muted. We remain neutral on European equities and expect an upside potential of 11% by end-2021.
Key risks to the European equities in 2020 includes re-escalation of trade dispute, unfavourable Brexit outcome, regional political uncertainty and China’s economy slowing more than expected.
Japan (‘3.5 Stars’ Attractive)
We see tailwinds from positive catalysts for growth – Asian export recovery, improved electronics demand, ‘phase 1’ trade deal, expansive budget stimulus. However, headwinds from October 2019’s consumption tax and pressure on exports showed no signs of abating and will likely seep into 2020. Current economic growth remains fragile due to Japan’s exposure to trade, but we hold the view that economic growth will hold in 2020.
We favour Japanese equities due to improving corporate fundamentals (margins near cycle high, debt levels sunk, ROE improved and closed the gap with other DMs). Not only are they more profitable but Japanese equities also use capital more effectively. Valuations remained cheap and we see upside potential of 14% by end-2021.
Key risks to the Japanese equities in 2020 includes re-escalation of trade dispute, impact from consumption tax and China’s economy slowing more than expected.
Asia ex Japan (‘4.5 Stars’ Very Attractive)
We believe a rebound in Asian exports is imminent due to 2 catalyst: (i) Cyclical upswing in global semiconductor industry and (ii) Re-direction of new orders into existing production capacity in other Asian economies after the one-off trade war shock. This rebound in exports will led an economic rebound in the region (as highlighted in previous section) and simultaneously drive corporate earnings higher for Asian equities.
Profit outlook for Asian companies are expected to improve. Sales and earnings estimates across FY2020 and 2021 have reversed from their downtrend and revised upwards. Valuations also remains cheap while supported by strong double-digit earnings growth. The upside potentials of Asia ex-Japan by end-2021 remains very attractive at 30%.
Key risks to the Asia ex Japan’s equities in 2020 includes re-escalation of trade dispute, delay in semiconductor upcycle and China’s economy slowing more than expected.
Chart 8: MSCI Asia ex-Japan price and EPS
|
MSCI Asia ex-Japan Index |
FY2018 |
FY2019 |
FY2020 |
FY2021 |
|
Price-Earnings Ratio (X) |
13.5 |
15.2 |
13.2 |
11.5 |
|
Expected Earnings Growth YoY% |
8.4% |
-11.4% |
15.3% |
14.9% |
|
Earnings Per Share (EPS) |
50.0 |
44.3 |
51.1 |
58.7 |
|
Projected Fair Price |
- |
- |
- |
881 |
|
Potential Upside from Today (%) |
- |
- |
- |
30% |
|
Source: Bloomberg, iFAST estimates. |
|
|
|
|
Favour emerging markets over developed markets
Our team see no indications of any major drivers for growth for DMs, nor catalysts for contraction, leaving DM’s growth to remain tepid in 2020. On the flip side, we see several growth drivers for EMs in 2020 and these are China’s policy stimulus, supportive commodity prices and headroom for monetary stimulus for EM central banks. Therefore, we are more positive on the growth outlooks for EMs than DMs moving into 2020.
In the aforementioned macro backdrop for DMs and EMs, we see low likelihood of a re-acceleration in earnings growth for DM to prior years high, but more of a marginal recovery from 2019’s contraction. Earnings growth for EMs are also likely to recover but see a larger re-acceleration in 2020, contributed by Asian EMs. Valuations are also in favour of EMs vis-à-vis DMs.
Upside potential for EMs remains more attractive as we see upside potential of 8% for DMs and 26% for EMs by end-2021.
Fixed Income Outlook
With the global economy cooling amid trade war escalations, bond yields trended downward across 2019, generating substantial capital gains. This is especially as central banks came to the rescue
Following a year of easing monetary policy, we think the major central banks are expected to become more patient in further rate cuts or expanding quantitative easing. Economic and manufacturing data are showing early signs of stabilisation, which enable central banks to take on a “wait-and-see” approach. With interest rates close to zero in developed economies like Europe and UK, the room for further rate cuts is pretty limited.
On a global level, we doubt yields will move much lower, but we are also of the view that the yield environment is unlikely to see a sharp increase, with the expected macro environment in 2020. With our view that global economy should improve gradually in the coming year, yield should also edge up modestly. This would imply capital losses.
Spreads (the yield difference between riskier bonds and government bonds) in most credit segments also narrowed in 2019. Absolute yields thus dropped to very low levels in most segments. As such, we prefer specific credit segments like Asian High yield and EM debts, as the yields are still appealing to compensate for risks associated to late credit cycle.
Chart 9: Credit spreads for major fixed income segments
Emerging Market Debt (EMD)
Our team expect EM’s economic growth to improve in 2020. Asian EMs should benefit from an export driven recovery and expansionary fiscal stimulus. LATAM giant, Brazil’s passage of pension reform secured a more sustainable long-term growth and we anticipate a growth rebound as well. Russia’s stable economy is likely to hold with large fiscal stimulus and stability in oil prices. Overall, this bodes well for EMD as yields should be supported by improved inflation prospects and inflation stability while credit quality remain supported by a better growth outlook and ability of central banks to cut rates.
Overall on a yield basis, improved macro outlook for EMs should keep yields supported and thus, we expect EMD to continue yielding higher than historical spreads. This means valuations will likely remain moderately cheap and investors are well compensated, particularly when credit risks are expected to decline. Given the current low interest rates environment, EMD index’s yields of over 5% remain attractive comparatively. With all things considered, we expect yields of EMD to remain above 5% in 2020.
Chart 10: Yields for EM sovereign
Chart 11: Yields for EM high yield
Singapore-centric bond
Our team sees a potential export-led recovery in Singapore’s economy in 2020 as supported by improvement in key economic data. This rebound in growth will be favourable for Singapore-centric bond funds as the constituent lenders and funds has outsized exposure to the Singapore market. Thus, we expect credit quality for Singapore-centric bond funds to maintain and credit risks remain low. Singapore-centric bond funds also offers lower duration, which minimises duration risk taken by investors. Overall, this segment continues to be a safer choice compared to others moving into 2020.
We also expect this segment to yield above/ around 4% in 2020, which remains decent in the current low-yield environment. The combination of decent yield and margin of safety compels us to favour Singapore – centric bonds moving forward.
High yield (HY)
As global liquidity is lifted, due to the drop in interest rates across markets, risk appetite has once again swelled. Therefore, in such a search-for-yield environment, a higher risk appetite will likely see investors piling into the HY segments. We expect continue inflows into HY given its higher yields and this will boost price return in 2020. The global dovish tilt will also benefit corporates as lower interest rates is supportive of their credit outlook. From a regional perspective, we favour Asian high yield HY over US HY.
We expect a potential growth rebound for Asian economies in 2020 (as discussed in prior section). Improved economic conditions and the willingness for central banks to reduce rates should help improve the credit outlook of companies in the Asian high HY segment, particularly for Chinese corporate and real estate developers. On the other hand, we are less positive on growth for the US (as discussed in prior section). Furthermore, political uncertainty is higher in the US (2020 general election) than in Asia. Considering the different candidates’ stance and willingness to make significant changes to regulation, this means many industries might face headwinds. Therefore, harming credit quality of US corporates.
Looking at yields, we believe Asian HY will continue to yield above 6.5% in 2020. This remains attractive in the current low-interest environment and spreads remain above historical average. Conversely, US HY index’s spread level remain below historical average. There is also a divergent in yields, where US HY’s yield is falling while Asian HY is rising. On a valuation basis, Asian HY is still cheap (at the same time where credit risks are expected to fall) while US HY has turned expensive, thus investors are well compensated. With all things considered, we continue to favour the Asian high yield segment.
Chart 12: Yields for Asian high yield
Chart 13: Yields for US high yield
Key FX Views: USD, CNY, EM currencies
US dollar – Bearish
The USD has strengthened considerably across 2019, amid heightened market volatility. We see the following headwinds for the USD in 2020 (i) high valuation, (ii) sizable and growing current account and fiscal deficits, (iii) moderating economic growth and (iv) tightening USD interest rate differential over other DMmarkets’ currencies.
Conversely, we also see strong tailwinds for USD coming from (i) safe haven currency status and (ii) possibility for US growth to surprise to the upside.
Given the many headwinds for USD and few but strong tailwinds, we believe risks are tilted to the downside. As such, we hold the view that the USD (measured by the DXY index) will likely weaken in 2020.
Chart 14: USD’s valuation is high relative to history
EM Currencies (ex China) – Bullish
EM currencies have been beaten down in 2019 as soured investor sentiments drove the outflow. However, moving into 2020, we expect EM currencies to strengthen against the USD.
We see the following drivers for its strength in 2020 – (i) Valuations hovering near historic lows, (ii) US’ widening trade deficit with EMs may strengthen the local currencies against the greenback and (iii) Improved growth prospects in EMs as well as higher real rates which will drives capital inflow.
Chart 15: EM currencies’ valuation on the other hand remains low
CNY – Bullish
Although the CNY has depreciated against USD in 2019, we do not think the only reason is due to the growth slowdown in China. From movements of the CNY in 2019, we believe the US-Sino trade dispute was a huge influence. As such, with the ‘phase 1’ trade deal and the possible rollback of tariffs, we anticipate a relief on the depreciation pressure for the CNY.
Economic stability in China, albeit growth might marginally weaken, will also help keep sentiments in check and reduce outflows. China’s rebalancing towards a consumption driven economy will likely put negative pressure on the CNY as its current account surplus diminish, however, it would likely be a longer term catalysts. Overall, with the macro outlook of China in 2020 and the ‘phase 1’ trade deal, we remain bullish on the CNY (against the USD) in 2020.
All materials and contents found in this site are strictly for general circulation and informational purposes only and should not be considered as an offer, or solicitation, to deal in any of the funds or products found/identified in this site. While iFAST Financial Pte Ltd ("IFPL") has tried to provide accurate and timely information, there may be inadvertent delays, omissions, technical or factual inaccuracies and typographical errors. Any opinion or estimate contained in this report is made on a general basis and neither IFPL nor any of its servants or agents have given any consideration to nor have they or any of them made any investigation of the investment objective, financial situation or particular need of any user or reader, any specific person or group of persons. You should consider carefully if the products you are going to purchase are suitable for your investment objective, investment experience, risk tolerance and other personal circumstances. If you are uncertain about the suitability of the investment product, please seek advice from a financial adviser, before making a decision to purchase the investment product. Past performance is not indicative of future performance. The value of the investment products and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. In respect of any matters arising from, or in connection with the said research analyses or research reports, recipients of the report are to contact IFPL at 10 Collyer Quay, #26-01 Ocean Financial Centre Building, Singapore 049315, or by telephone at +65 6557 2853. Where the report contains research analyses or research reports from a foreign research house and if the recipient of such research analyses or research reports is not an accredited investor, expert investor, institutional investor or an ex-accredited investor, IFPL accepts legal responsibility for the contents of such analyses or reports to such persons only to the extent as required by law. Please note that only certain security(ies) herein are available to all investors, while the rest are only available for certain persons to invest in, such as Accredited Investors (as defined in the Securities and Futures Act) or one who invests at least S$200,000 (or its equivalent currency) per transaction. To qualify as an Accredited Investor, one needs to submit a declaration form and certain relevant supporting documents, according to iFAST’s prevailing policies and procedures.
Please read our full disclaimers on the website at ( https://secure.fundsupermart.com/fsmone/policies/328125/investment-account-terms-&-conditions).
iFAST Financial Pte Ltd (IFPL) (registered address: 10 Collyer Quay #26-01 Ocean Financial Centre Singapore 049315, Telephone: 6557 2000) holds the Financial Advisers Licence issued by the Monetary Authority of Singapore ('MAS') to conduct regulated activities of advising on securities, marketing of collective investment schemes and arranging of any contract of insurance in respect of life policies, other than a contract of reinsurance and the Capital Markets Services Licence issued by the MAS to conduct regulated activities of dealing in securities and providing custodial services for securities. While IFPL has made every effort to ensure the independence of the report's contents, IFPL's nature of business is such that IFPL and its connected and associated entities together with their respective directors, officers and staff may be involved in providing dealing or investment-related services in the abovementioned securities, and have taken or may take positions in the securities mentioned in this report, and may also act as the principal for any buy or sell trades.