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A rocky road to economic recovery

Singapore has started on the path to recovery, but the journey ahead remains fraught with risks.

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"Sectors positioned better are likely to be part of the technology eco-system. Especially those involved in upstream semiconductors, as well as tech solutions for communications and logistics. Also, the biomedical sector may be poised for some degree of sustained out-performance," says Vishnu Varathan, head of economics and strategy at Mizuho Bank.

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"The battle for ideological supremacy between the West and China isn't going to go away. As the risk of escalation increases, Singapore could benefit by flying its neutral flag," says Song Seng Wun, CIMB Private Banking economist.

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"The new normal may drive sunset companies or industries to transform faster or risk extinction earlier. If they cannot adopt new business models ... and reach new or non-traditional markets, they may find the domestic market conditions still challenging," says Selena Ling, head of treasury research and strategy, OCBC Bank.

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"We recommend that investors seek opportunities in technology companies with robust fundamentals, or in sectors such as renewable energy and industrials that continue to benefit from longer-term global megatrends, " says Francis Tan, investment strategist, UOB Private Bank.

ECONOMIES around the world are hoping to recover as quickly as possible from the Covid-19 pandemic, which has paralysed businesses, companies and supply chains for much of 2020. But sustained progress towards a recovery from the crisis is being threatened by trade tensions and other geopolitical risks.

This will likely impact the progress of Singapore's nascent economic resurgence, as the Republic gets back on a more stable footing after a sharp and unprecedented slump in the second quarter of 2020, caused by the global lockdown and the circuit breaker at home. While economic activity has picked up in Q3 from record low levels, they are not back at pre-Covid levels just yet, analysts say.

"The silver lining is that Singapore's economy appears to be on track for a sustained recovery in 2021. The more sobering reality, though, is that this recovery will probably be very gradual, falling short of a full restoration of pre-Covid activity. And the real worry is that the recovery could remain fragile and tentative for a while; being uneven across sectors and subject to the uncertainties of the pandemic aftermath and unabated US-China risks that not only linger, but have turned more assertive," explains Vishnu Varathan, head of economics and strategy at Mizuho Bank.

In particular, the hardest-hit sectors like aviation, hospitality and entertainment continue to face deep challenges as global borders remain largely closed and the domestic tourism market proves too small to make up for any shortfall from international travellers. The construction sector also continues to struggle as uncertainty lingers, although cases of infections at foreign worker dormitories appear to be mostly contained.

On the ground, many companies continue to deal with lacklustre demand, higher costs partly due to increased hygiene and social distancing restrictions, as well as uncertainty about the re-emergence of Covid-19 infections.

"Cashflow remains an issue for many companies, as reflected in the decline in prompt payments, hence the recent announcement of the extension and enhancements of various government schemes, grants and assistance programmes will go some way to helping them ride out this challenging period," says Selena Ling, head of treasury research and strategy, OCBC Bank.

US-CHINA TENSIONS

Singapore's road to recovery will depend to a large extent on the pace of the global economic recovery, how the Covid-19 pandemic evolves, as well as geopolitical risks like persistent US-China tensions across economic, trade, investment and other strategic areas.

Analysts expect the US-China standoff to remain for an extended period of time, and continue to create bouts of market volatility. The conflict has created pressures on the technology sector in particular. For instance, the US announced in August 2020 that it would further tighten restrictions on Huawei Technologies to limit its access to smartphone chips. With disruptions to their supply chains, Chinese and American technology companies have been looking to shift the location of their operations to cushion the impact.

On a positive note, this has helped to boost Singapore's attractiveness as a destination for technology companies from both countries looking for new markets, with the likes of Alibaba, Amazon, Apple, Byte Dance and Tencent setting up their regional headquarters here.

"These foreign investments into Singapore will help boost the country's economy amid muted growth resulting from the pandemic and also trigger other multiplier effects such as bolstering the demand for financial and professional services," says Francis Tan, investment strategist, UOB Private Bank.

Singapore's neutral position is also likely to be a boon amid ongoing tensions between the two superpowers. "The battle for ideological supremacy between the West and China isn't going to go away. As the risk of escalation increases, Singapore could benefit by flying its neutral flag," says CIMB Private Banking economist Song Seng Wun.

Meanwhile, the outcome of the upcoming US presidential election is yet another geopolitical risk to businesses and economies. An increasingly aggressive "America First" approach, coupled with more abrasive China policies under a Trump administration, could spell near-term disruption and a drop in global demand growth due to heightened uncertainty.

"Whether the new US administration is friendly or antagonistic towards globalisation, free trade and even China, could have important implications for regional growth and economic linkages, especially for a small open economy like Singapore," says Ms Ling. Beyond the US elections, when a Covid-19 vaccine becomes available is also important, she adds.

BRIGHT SPOTS EMERGE

The financial services, semiconductor and biomedical manufacturing, infocomms and technology sectors are likely to be at the forefront of the recovery and ride out the volatility of a post-Covid-19 world better.

In particular, the technology sector has benefitted from higher demand for digital tools and solutions amid the pandemic, as more people work remotely or turn to online shopping given movement restrictions and safe distancing measures.

"Sectors positioned better are likely to be part of the technology eco-system. Especially those involved in upstream semiconductors, as well as tech solutions for communications and logistics. Also, the biomedical sector may be poised for some degree of sustained out-performance," says Mr Varathan.

He adds that the outlook for the finance and banking sector may be a mixed bag as it suffers from lower net interest margins, even as demand for working capital and schemes incentivised by expansionary monetary policy could help lift transactions.

In the hard-hit sectors such as travel and tourism, however, the pandemic has forced many businesses to embark on transformation efforts to develop more sustainable business models.

"The silver lining is that the digital adoption has been accelerated, and the speed of change has been pressed home more than years of moral suasion and policy pronouncements have affected. The new normal may drive sunset companies or industries to transform faster or risk extinction earlier. If they cannot adopt new business models, including online platforms, and reach new or non-traditional markets, they may find the domestic market conditions still challenging," argues Ms Ling.

Mr Song notes that Singapore and the global economy are fortunate that this crisis has coincided with the fast-growing trend of digitalisation among businesses. "This has allowed new businesses to be created when the old economy is being disrupted by technology and leading to a sharp pullback in demand. Jobs are still being created in Singapore despite undergoing one of its worst recessions ever."

INVESTMENT OPPORTUNITIES

Amid this crisis, there will be opportunities for savvy investors to profit from the shifting dynamics in the global economy. While technology stocks have been a key beneficiary during this crisis, analysts note that their valuations are currently high.

"As such, we recommend that investors seek opportunities in technology companies with robust fundamentals, or in sectors such as renewable energy and industrials that continue to benefit from longer-term global megatrends such as sustainability or automation," advises Mr Tan.

While Singapore does not have the breadth of large-cap technology companies compared with the US or China, the country's stock market presents investors with great value opportunities, he adds. In particular, investors can consider value stocks in sectors such as real estate and real estate investment trusts, industrials, financial services and consumer goods.

He says: "Specifically, given the impact of the Covid-19 pandemic, value stocks such as those in financial services and consumer goods have been out of favour with investors due to a fall in their stock prices. However, these value stocks are likely to perform when demand and prices for these stocks increase in tandem with the economic recovery. An eventual vaccine for Covid-19 will also spur the broader recovery of the stock market."

 

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