Heady markets belie lingering uncertainty

Singapore

THE financial markets are likely underestimating tail risks that include elevated political uncertainty, even as the global economy is in a better shape than it has been in a long while, said the managing director of the Monetary Authority of Singapore Ravi Menon.

"A striking feature of the post-crisis landscape is that while investment in the real economy has been sluggish, the appetite for risk-taking in financial assets has been voracious. Investors are extrapolating into the future, current low interest rates and realised asset price volatility, and continuing to reach for yield," said Mr Menon at the DBS institutional investors symposium on Thursday.

"Reduced volatility in the markets should not beguile us into thinking there is less uncertainty out there."

He noted that growth is on a positive momentum and is increasingly broad-based across both advanced and emerging economies, with global trade picking up. Yet, the factors that underpin sustained growth - capital investment and productivity - remain weak in most parts of the world.

Against this backdrop, markets are hoping for some fiscal stimulus in the US in the short term, even though the economy is at full employment. The expectation misses the key question of whether such stimulus can increase the medium-term supply capacity in the economy.

This also comes as markets seem to underestimate the pace of monetary policy normalisation by the US Fed. It reflects expectation of low inflation, which could change if the labour market tightens further.

Even as markets are tracking the quarterly growth rates out of China, the emphasis seems misplaced, too. The question should be whether efforts are being stepped up to achieve sustained growth over the medium term, specifically by reducing vulnerabilities in the system and implementing structural reforms, said Mr Menon.

Meanwhile, while the size and number of revisions to global growth forecasts have fallen, there are risks on the political front, as a disorderly Brexit alone could lead to increased market turmoil and trigger sharp asset price corrections.

"While the risk of increased trade protectionism seems to have abated somewhat, it remains a significant tail risk that could seriously injure global growth," said Mr Menon.

"Against this backdrop, a rising tide of populist backlash against globalisation is a wild card for the medium term."

That being said, Asia remains committed to openness and is positioned for sustained growth, said Mr Menon.

In particular, there are opportunities to invest in Asia through alternative investments such as private equity (PE). "Companies, including those in Asia, are choosing to stay private for longer, and are increasingly comfortable with the PE value proposition," said Mr Menon.

He pointed to the trends emerging from the technology sector, where the average age of US technology companies that went public in 2014 was 11 years, up from four years in 1999.

Likewise in Asia, South-east Asia's most valuable startup Garena only just filed for an IPO after eight years. Gaming firm Razer Inc, which was founded in 2005 by a Singaporean, is still staying private.

Given this trend, Singapore is at work to simplify the regulatory framework for venture capital (VC) managers, and is building the talent pool for both the VC and PE space.

Another emerging form of alternative investment is in Asian infrastructure, with Mr Menon citing a Marsh & McLennan report showing that about 40 per cent of infrastructure projects in emerging Asia are considered bankable.

"Asia remains the biggest growth story in the world. There is still much work ahead in regional economic integration and domestic structural reform. But Asia is moving forward."