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Covid-19 Fallout: When Quality Takes Spotlight

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.

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