Covid-19 Fallout: When Quality Takes Spotlight
A global concerted monetary and fiscal stimulus has helped to give support to the financial markets. Yet, we are now at an inflection point.
New cases in Europe is starting to see some positive signs of the blunting of the infection curve, but the US has evidently become the epicentre of the COVID-19 pandemic. Leadership in the US has yet to enforce any strong credible actions to contain the viral outbreak, and even restrictions on movement are still being administered on the state or municipal level.
Whilst in Asia, COVID-19 is largely contained and starting to recover, the risk remains for new hotspots to flare up, which could potentially set off new waves of infections. At this juncture, a quicker turnaround should call for a global co-ordinated healthcare response, which has yet to materialise.
Singapore Resilience Budget: A Well-Timed Roll Out
The Singapore government has been quick to roll out support packages to cushion the economic and social impact of the Covid-19 pandemic. The Unity, Resilience and Solidarity Budgets unveiled to-date puts the total figure at a historic $60 billion – representing about 11 percent of Singapore’s Gross Domestic Product (“GDP”).
Complementing the Singapore government’s fiscal injection, the Monetary Authority of Singapore (“MAS”) also eased up on its exchange rate-based monetary policy to return the Singapore dollar’s appreciation to neutral stance.
However, Singapore’s economy cannot fully benefit from the stimulus especially when it is still partially debilitated by the virus, along with the world economy effectively in a lockdown. The crisis is one relating to public health and not a financial one, after all.
Likely, we see growing pressures on local businesses, which cannot function normally. The silver lining here was how quickly the Singapore government stepped in to reduce burden on households and businesses. This would help limit retrenchment in the workforce, which would otherwise, release the tide of mass unemployment.
The question now though is how much of the government’s support will be translated into real spending later on, which ultimately determines how quick recovery sets in once the coronavirus outbreak is contained.
But even with the stimulus, outlook is still getting grim by the day: The MAS lowered its forecasts, expecting that the Covid-19 pandemic would plunge the local economy deeper into a recession of -4% to -1%; further slashing the core inflation and headline forecasts to between -1% to 0%.
Due to its small size and open economy, despite the government’s support, Singapore’s turnaround is hinged on how fast the contagion is controlled in Europe and especially the US in coming weeks.
Deep Value Emerging
It might still be too early to talk about going back into the market. The core issue here may not just be about whether the global healthcare system can contain the current outbreak, but to deal possibly with multiple waves of infection going forward.
But obviously, for market sentiments to recover, the viral containment measures need to start working and show results in the first place. Investors might take indications from the stabilisation of the global infection rate curve as a signal that the current outbreak has peaked. However, to err on the safe side and avoid possible traps that new infections may re-accelerate, risk-averse investors may want to wait out for more convincing signs, i.e. zero new infected cases for about 14 days.
For Singapore equities, one positive impact arising from this crisis is that valuations have become even cheaper and is now significantly below historical means. As a whole, the Straits Times Index (“STI”) is currently trading at about 9.5 times price-to-earnings (“P/E”), under its 10-year mean of about 12 times P/E. The blessing in disguise here, unlike the US counterparts, was that Singapore equities did not experience a significant run-up in 2019 and valuations had not experienced an exuberant run before the plunge.
Staying Defensive With Quality Selections
The quantum of monetary and fiscal policies around the world to deal with the current crisis is unprecedented. Although they could ease the burden on economies, downside potential persists as uncertainties linger on to when the outbreak may peak. Furthermore, a protracted crisis could further elongate the turnaround period for economic recovery.
As diversification is key in the current climate, investors should tilt towards pockets of defensive sectors and focus on the quality of the stocks.
For investors not well-equipped at individual stock-picking, exchange traded funds (“ETF”) provide an inexpensive option to tap the market. The convenience of accessing a diversified portfolio would help investors avoid the potential downfalls of picking the wrong stock.
Compared to market capitalised-based STI ETFs in the market, Phillip SING Income ETF stands out specifically with defensive emphasis in place. Using smart beta strategies, by means of factor-scoring stocks based on their quality of income and their dividend yield, Phillip SING Income ETF is designed to achieve stronger income stability and risk-adjusted returns for investors.
This publication and the information herein is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in the exchange-traded fund (“ETF”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for important information of the ETF and obtain advice from a financial adviser (“FA”) before making a commitment to invest in the ETF. A copy of the Prospectus and PHS for the ETF are available from PCM or any of its Participating Dealers (“PDs”).
Investments are subject to investment risks including the possible loss of the principal amount invested. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved. Any use of financial derivative instruments will be for hedging and/or for efficient portfolio management. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the ETF. The regular dividend distributions, either out of income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the ETF. Upon launch of the ETF, please refer to <www.phillipfunds.com> for more information in relation to the dividend distributions.
An ETF is not like a typical unit trust as the units of the ETF (the “Units”) will be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.
The information herein is not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the ETF or related thereto.
Morningstar® Singapore Yield Focus IndexSM is a service mark of Morningstar Research Pte Ltd and its affiliated companies (collectively, “Morningstar”) and have been licensed for use for certain purposes by PCM. Phillip SING Income ETF is not sponsored, endorsed, sold or promoted by Morningstar, and Morningstar makes no representation regarding the advisability of investing in Phillip SING Income ETF.
This publication has not been reviewed by the Monetary Authority of Singapore.