Ali Malik, Senior Investment Advisor of Bank of Singapore, discusses the impacts of COVID-19 on the economic landscape globally, current pace of recovery and what the key investment opportunities are & how different factors can play a vital role towards recovery.
Malik says that the difficulties in controlling the renewed spread of COVID-19 have cast doubts on the pace of economic recovery and emphasizes the need to avoid withdrawing policy support too quickly.
“Worldwide, the pace of economic recovery is set to become more uneven after the initial surge that followed the easing of lockdowns. China now seems likely to record positive GDP growth for the 2020 full year, while Europe is set to contract by 7.9% and the US by 5.1%, both slightly worse than previously expected. As a result, world GDP is set to fall 2.2% in 2020, with the improved outlook for China accounting for an upward revision from last month’s forecast of -2.5% global GDP growth,” says Malik
Due to the resurgence in COVID-19 cases globally, policy makers are reluctant to fully reopen their economies right away. Malik says that, “Mindful of the risks to the nascent global economic recovery, central banks and governments have signaled their determination to provide continued support through ultra-loose monetary policy and further fiscal stimulus. With interest rates likely to remain persistently low, we continue to see opportunities in select risk assets, especially beneficiaries of structural forces set off by the pandemic such as the increase in online consumption and a sharper focus on long term sustainability risks for businesses and society. Amid persistent, ultra-loose monetary policy by the Fed and other major central banks; we see select opportunities in emerging market high yield bonds which provide attractive carry.”
Almost every major crisis and recession in modern history has resulted in lasting implications for the investment landscape. Similarly, the COVID-19 crisis will leave its permanent imprints.
“Across the corporate landscape, companies will shift their focus towards building up resilience in their business strategies and balance sheets, seeking more robust technology platforms for employees to work remotely, less concentration risk in customer and supply chain exposures, and stronger balance sheets with greater liquidity, longer term funding and reduced leverage,” says Malik.
The COVID-19 pandemic sweeping across the world today has exposed the deepening inequality in wealth, living conditions and access to social security, healthcare and daily necessities even in developed economies. For many businesses, the integrity and resilience of their supply chains, and the quality of their employee relations and crisis management have suddenly come into sharp focus like never before.
“We see the crisis accelerating emerging trends in investing based on environmental, social and government (ESG) considerations and we expect the heightened focus on businesses’ environmental and social impact to persist long after the crisis abates. As higher-quality ESG metrics and industry standards are developed and more ESG-focused products are introduced, we see increasingly greater opportunities for investors to align their portfolios more closely with their own sustainability preferences and goals,” says Malik.
The rise in gasoline and distillate inventories, which comes amid the US summer driving season, when demand usually rises sharply and inventories normally fall, also warns that easy gains in oil prices are behind us.
Malik says, “We expect oil demand to continue to grind higher and next year might surprise to the upside if international trade recovers. In addition, OPEC+ compliance is likely to remain strong and support oil prices while radical reductions in drilling across the world should remain in place until oil prices start to rise above USD 50/bbl.”
Discussing other commodities he further states that, “Gold has outshone other reserve currencies such as the USD, JPY, EUR, and CHF this year. Risk of central banks attempting to inflate away a debt overhang in a world of near-zero interest rates and worries of currency debasement should keep gold as a “haven” asset of choice.”
“Gold’s rise is also an indication of currency debasement fears stoked by central bank balance sheets. As for silver, it should continue to play catch-up to gold. Silver should gain from better prospects for silver industrial demand, particularly in solar energy and in consumer electronics that is benefiting from the transition to working from home. A range of higher gold prices of between USD 2000-2200/oz is likely before the market begins to anticipate Fed tightening. Our 12-month forecast for gold stands at USD 2150/oz and our 12-month forecast for silver is USD 28/oz,” says Malik.
The impact on FX because of the pandemic is inevitable, Turkish Lira has been in the news recently, in emerging markets, the Turkish Lira (TRY) has weakened sharply amid growing concerns that monetary policy in Turkey is too loose to be compatible with TRY stability. As Turkey’s FX reserves fell from USD 81 billion at end-2019 to USD 47 billion at the end of July, the drain on FX reserves adds to the sense that attempts to support the TRY are ultimately unsustainable.
Malik says, “We remain cautious on the TRY’s medium-term outlook until there is a clear pivot towards policies that address Turkey’s internal and external imbalances, including reversing the negative real rates that discourage foreign inflows.”
“However, the USD index is still elevated, but it has made a technical downside breakout that increases the odds it declines further. Falling US real yields and risking risk assets is a significant challenge for the USD. The USD should stay under pressure, as the Fed remains fearful about the economy and thus it is likely to ease monetary conditions at its next meeting in September. We expect the Fed to shift to “average inflation targeting”, which means the central bank may not start raising interest rates from their current levels near zero for up to the next five years. This would keep the USD in a downtrend — to the benefit of risk assets.”
He further says, “Lower USD index is not just about falling USD but it is also a story of rising EUR. The European Union deal was a historic achievement for Europe. The EURUSD is set to trend stronger to 1.25 in 12 months’ time. The new European Union Recovery Fund significantly strengthens Europe’s economic outlook by providing for greater fiscal transfers. For the first time since the EUR’s inception in 1999, the EU will have significant resources to counter economic shocks.”
Asia on the other hand has proven to be the most effective region in dealing with the COVID-19 pandemic. With the notable and sad exception of India, new cases in Asia are running at a fraction of daily highs in the Q1 2020.
“Conversely the epicenter of the pandemic has now moved to Latin America, which sports four of the top ten countries in terms of infections. South Africa has unfortunately moved into the top five countries in terms of infections, which portends poorly for the continent. The IMF projects that Brazil, Mexico, and South Africa will be the most adversely impacted amongst major emerging market countries, not even returning to 2019 GDP levels by year-end 2021. Conversely, all of the major Asian countries are expected to exceed 2019 GDP levels by year-end 2021, with Vietnam and China bouncing back the strongest,” says Malik.
