Markets Outlook - Hong Leong Bank

Chief Investment Office

Markets Outlook2021: Year Ahead and Themes

26 November 2020

Jeff NgSenior Treasury Strategist

[email protected]

1

Executive Summary

After challenging years in 2019 and 2020, the world is indire need for a reprieve and a rebound. We certainlyexpect so, with the world economy likely to see a partialcatchup to activity levels before the Covid-19 pandemic.

There is scope for resets in international relations, withincoming US President-elect Joe Biden taking over the reinsfrom incumbent Donald Trump. The freshly mintedRegional Comprehensive Economic Partnership (RCEP) alsorepresents a chance for economies in Asia to collaboratefurther. Still, we see governments continuing to enactexpansionary policies to rectify the current damage doneto domestic economies.

We are cautiously optimistic of a consumer-led recovery,fueled by optimism of a better 2021. Asia will likely be atthe forefront of the recovery.

2021 will likely be when the world looks further into thefuture. Opportunities are abound, after immediatechallenges are being addressed.

We anticipate further inroads made by ESG investments, toprovide for some sustainability against climate changechallenges. In addition, the current pandemic has amplified

the need for long-term food security. We see opportunitiesin real estate, as global activity levels normalizes and thesector restructures to fit in current trends. Technologyadvancements will also drive sectoral growth, such as inhealthcare and in communications.

For 2021, we expect some broad gains in equities, with USand Asia likely to outperform the competition. Industrials,consumers, tech and healthcare sectors are our pick of thebunch, although we see gains in most.

For fixed income, expect gains to be capped by continuallylow interest rates. We are slightly positive on Asia credit.

In an environment of market recovery, we expect the dollarto weaken for a second consecutive year. This will implysome potential gains in most currencies (G10 and Asian).

We wish you a great 2021 ahead!

Best Regards,Jeff

26 November 2020

2

The Year Ahead

Macro Outlook

2021 Themes

1. A Biden Reset

2. Asia Recovery, Growth, and Potential

3. Embracing ESG Investments

4. The Future of Food

5. Restructuring the Real Estate Sector

6. Technology and Linkages

CIO Asset Class Outlook

3

Macro & Market Outlook

4

GDPPartial recovery in DMRebound in Asia/China

TradeRegional FTAs

Issue of free vs. fair trade

InflationMinimal price pressures

Fiscal PolicyExpansionary

Limited scope for more

Central BanksLow impetus for hikesResist negative rates

EquitiesBroad support from earnings

rebound

Fixed IncomeSome positives for Asian

credit

FXDollar weakness benefits

CNY (also MYR, SGD) AUD & NZD

Partial Recovery in DM

It will take some time for the world to be immunized against Covid-19,even as some vaccines are ready to be distributed as we head to2021. In the meantime, we expect developed markets (DM) tocontinue fighting an attritional battle with Covid-19. This may implysome partial business closures at some points in time.

DMs face other organic challenges like lackluster consumer spending,sluggish investment growth and policy uncertainty. We see 2021growth in DMs as being “modest and subdued”, although growthnumbers are likely to be above the 10-year average.

Rebound in China and ASEAN (Theme 2)

We expect elevated growth rates across Asia, although economicactivity levels may still stay below end-2019 levels (pre-Covid-19).

Subdued inflation trends

Subdued global demand also indicates that inflation in mostdeveloped markets stay below 2%. In addition, core inflation may stayaround zero in China, highlighting continued disinflationary pressuresahead. With real interest rates negative in some regions, this meansthat most central banks are in no hurry to increase their policy rates.

2021 Economic Rebound

5Source: IMF, HL Bank

IMF GDP growth forecasts (%)

2020F 2021F

US -4.3 3.1

Eurozone -8.3 5.2

UK -9.8 5.9

Japan -5.3 2.3

China 1.9 8.2

ASEAN-5 -3.4 6.2

Malaysia -6.0 7.8

Singapore -6.0 5.0

Risk Factors

Policy Mistakes

• Managing the Covid-19 pandemic: governments have to balance between economic openness and new infections

• Fiscal policy: An attritional battle with Covid-19 and the subsequent recessionary pressures imply need for more government spending (with differing views on how)

• Rising government debt: see publication

The Future of US-China Relations

• Biden inherits an America filled with anti-China rhetoric

• Strategic competition is likely with competing standards rather than complementary ones

• China has its own foreign relation issues to resolve (e.g. Australia, India)

6

Theme 1: A Biden Reset

Healthcare

Biden’s Covid-19 relief proposals are for removing obstacles in managingcurrent outbreak, vaccine development and support businesses/individuals.

ESG

Biden will likely be more focused on the environment, appointing experienced officials who are climateminded to tackle issues. However, aggressive plans may be difficult to implement.

Asia/China/HK stocks

Particularly in tech and communications, as it may represent a opportunity for a reset, away from aggressive strategic competition.

Industrials

If Biden sets a less confrontationalpolicy with China, improved global trade can benefit industrials.

• Immediate policy implications

• Focus on Covid-19 containment

• Balance between business openness and outbreak

• Moderate fiscal policy support

• Asia: Possible reset in US-China relations

• Possible medium-term directions

• Re-regulation

• More collaborative international policy

• Strategic competition with China

• Asset class implications

• Stocks: Relief/mixed

• Fixed income: Lower for longer US rates

• FX: Dollar weakness

7

Supported Sectors

• Above-trend GDP growth in Asia

• Covid-19 containment

• Export-driven recovery – to China and the US (see Figure)

• Rebound in consumer spending and economic activities

HL Bank’s GDP growth forecasts (%)

• ASEAN benefits from US-China competition and US-China cooperation

• China+1 strategy for operations

• China-ASEAN trade corridor

• Important market, as well as trade and investment partner

Theme 2: Asia Recovery, Growth and Potential

8Note: Asia exports to China exclude intra-China flows. Source: CEIC, HL Bank

-60

-40

-20

0

20

40

60

Jan-14 Jul-16 Jan-19

US EU CN JP

Asia export growth to majors (% YOY)

2020 2021

China 1.7 8.0

Singapore -5.9 6.3

Malaysia -5.3 to -5.8 5+

Theme 3: Embracing ESG Investments

0

100

200

300

2017 2018 2019

ABS Financial corp. Non-financial corp.Development bank Local govt Govt-backed entitySovereign Loan

• Potential in modern renewable energy: Modern renewables make up 11% of total energy consumption vs. fossil fuels’ gigantic 79.9% (Renewables Now)

• Deloitte forecasts 29% CAGR growth in 2020-2030 in electric vehicle sales, to 31.1mn by 2030 – this will constitute 32% of total new car sales

• Singapore will phase out internal combustion energy vehicles by 2040, installing 28,000 charging points for electric cars

• Singapore’s focus on solar: 4,116 solar PV installations (1Q-2020)

9Source: Renewables Now/IEA, Climate Bonds

Sustainable investments – investing in companies that address Environment, Social and Governance (ESG) issues

Estimated Global Growth in Renewable Energy Compared to Total Final Energy Consumption, 2013-2018

• Green Bond issuance rose 51% in 2019, setting a new global record of USD 257.7bn (see above Figure)

• 479 bond issues in 2019, up 25%

• 2020 saw positive momentum with record-high 3Q issuance of USD 69.4bn

• Focus ahead is on transparency, relevancy and comparability: under the Disclosure Regulation (start: March 2021)

• On 24 November 2020, the Monetary Authority of Singapore has launched a grant to support green and sustainability-linked loans

Green Bond Issuance: 2017-2019

Halal Food

• USD 1.3trn industry and forecast to grow 5.7% annually in 2021-2026 (Global Halal Market 2020 Report)

• Growth opportunities: Halal population expected to grow to 2.2bn by 2030 (1.84bn now), with 60% of them in Asia (Superfood Asia)

Plant-based Diets & Food Production

• Changing eating patterns towards more consumption of fruits, vegetables, nuts, seeds, oils, whole grains, etc

Bio-Plastics

• Innovative packing methods (products made of renewable biological sources)

Theme 4: The Future of Food

Impact of Covid-19 Pandemic

• Diversifying food production sources and supply chains

• Alleviating bottle-necks in farm labor, processing, transport, logistics

• Addressing stockpiling issues

Long-term Challenges

• Balancing future demand and supply

• Providing global food access: online distribution channels

• Ensuring stability in food supplies: supply/value chains

• Maintaining biodiversity and ecosystems

• Mitigating the effects of climate change

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Food sustainability – production of healthy products, while maintaining the ecosystem and addressing pollution

Source: FAO

“Two-thirds (65%) of consumers want to have a positive impact on the environment through their everyday actions.” (Source: ADM)

Theme 5: Restructuring the Real Estate Sector

M&A Activity

Restructuring / Rise in Data Center REITs

Rebound from economic recovery

Decentralization & Move to Online Shopping

11Source: CEIC, HL Bank, IDC/Seagate

80

90

100

110

Mar-15 Jun-16 Sep-17 Dec-18 Mar-20

Residential Commercial Retail Industrial

Singapore Property Indices (2015=100)

80

90

100

110

Mar-15 Jun-16 Sep-17 Dec-18 Mar-20

Central Fringe

Average of retail, shop and commercial prices (2015=100)

Some resilience in fringe, compared to central

Singapore Reitsgoing global again

after US$340 billion blow

(Straits Times, 2 Nov. 2020)

CapitaLand Retail China Trust to raise at least S$300m for acquisition

(Business Times, 17 Nov. 2020)

MapletreeLogistics Trust in

$1.09 billion property buying

spree

(Straits Times 20 Oct. 2020)

33

175

0

50

100

150

200

2018 2025

Total data produced in zettabytes (projections by IDC’s Data Age 2025 study)

More data created equates to rising need for data storage

Theme 6: Technology & Linkages

5G infrastructure & connectivity

Estimated worth of USD 2.5trn value chain by 2035 (Intel)

eHealth

Telehealth

Telemedicine

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Technologies in the 2020s – 5G & 6G, space industry, virtual reality, A.I., and more

Technology & Healthcare Technology & Communications

Race in space satellites

Moon & Mars missions

Vaccines

Cures for chronic diseases

Summary of Key Asset Class Views

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Outlook List

US & Asia equitiesCyclical (industrials), all-weather (consumers), & long-term thematic (tech & healthcare) sectorsAsia creditCNY & AUD/NZD/CAD

Sovereign bondsInvestment grade and high yield credit

USD and GBP

? Energy & financial services sectorsEUR

Asset Class Dashboard

Note: level as of 25 November close. Source: Bloomberg, HL Bank

Level MTD (%) YTD (%)

Equities

MSCI World 2,590 12.9 9.8

S&P 500 3,630 11.0 12.3

Euro Stoxx 50 3,512 18.7 -6.2

China "A" 4,911 4.5 19.7

China "H" 10,558 8.6 -5.1

Hang Seng Index 26,670 10.6 -5.4

Straits Times Index 2,870 17.7 -11.5

Fixed Income

US 3M LIBOR (%)* 0.23 0.017 -1.676

US 10 Year (%)* 0.88 0.008 -1.036

SG 3M SIBOR (%)* 0.41 0.000 -1.369

US Investment Grade 0.7 5.1

US High Yield 2.8 -1.9

Asia Credit 2.0 5.2

FX

DXY 91.99 -2.2 -4.6

EUR/USD 1.19 2.4 6.3

GBP/USD 1.34 3.4 1.0

USD/JPY 104.46 0.3 4.1

AUD/USD 0.74 4.8 4.9

USD/MYR 4.09 1.8 0.2

USD/SGD 1.34 2.1 0.5

Commodities

WTI ($/bbl) 45.71 28.6 -24.6

Brent ($/bbl) 48.61 30.9 -25.7

Gold 1,807.56 -3.6 19.4

* Change in bps instead of %

Global equities: We broadly see positive returns

for equities in 2021, buoyed by a world better

adapted to manage the Covid-19 pandemic

Asia equities: Positive fundamentals in Asia (both

China and ASEAN) indicate opportunities for

cyclical buys.

Markets Outlook – Equities

14Source: Bloomberg, HL Bank

STI and Hang Seng still below January levelsEquities – Positive Outlook

20,000

25,000

30,000

2000

2500

3000

3500

4000

02-Jan 27-Mar 20-Jun 13-Sep

S&P 500 STI Hang Seng (RHS)

Cyclical sectors (industrials – with bias on ESG related areas, consumer discretionary)

All-weather sectors (consumer staples, real estate)

Long-term thematic sectors (communications, healthcare, tech)

?Energy: A recovery should be favorable, but sector is weighed down by restructuring towards alternative energy, alongside supply factors)

?Financial services: Opportunities from volatility and wealth management clouded with possibility of defaults and low interest rates environment

Markets Outlook – Sectors

15Note: level as of 25 November close. Source: Bloomberg, HL Bank

MSCI World movements, by sector (%)Sectors – Mostly Positive During Recovery

9.8

11.0

17.0

3.3

29.5-32.9

-7.5

7.0

8.7

-8.4

33.0

2.1

9.7

-40 -20 0 20 40

MSCI World

Materials

Communications

Consumer Staples

Cr Discretionary

Energy

Financial Services

Healthcare

Industrials

Real estate

Technology

Utilities

Metals & Mining

YTD MTD

Underperformers

Outperformers

Sovereigns: Low interest rates to stay

(3m LIBOR forecast of 0.25% end-2020 and end-

2021; 3m SIBOR forecast of 0.4% end-2020 and

end-2021)

Asia credit: Some modest opportunities with

equity recovery (see below chart)

Investment grade: Expect range movements. Still,

an important part of any diversified portfolio

High yield: Selective opportunities available when

risk appetites improves

Markets Outlook – Fixed income

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Fixed Income – Focus on Asia

Q4-20 Q1-21 Q2-21 Q3-21 Q4-21

Fed 0.25-0.50 0.25-0.50 0.25-0.50 0.25-0.50 0.25-0.50

BOC 0.25 0.25 0.25 0.25 0.25

ECB -0.50 -0.50 -0.50 -0.50 -0.50

BOE 0.10 0.10 0.10 0.10 0.10

SNB -0.75 -0.75 -0.75 -0.75 -0.75

RBA 0.10 0.10 0.10 0.10 0.10

RBNZ 0.25 0.25 0.25 0.25 0.25

BOJ -0.10 -0.10 -0.10 -0.10 -0.10

BNM 1.75 1.75 1.75 1.75 1.75

MAS Hold - Hold - Hold

PBOC Hold Hold Hold Hold Hold

Central Bank Forecasts (%)

Source: Bloomberg, HL Bank

Asia credit vs. S&P 500 (in 2020)

220

240

260

2000

3000

4000

Jan Mar May Jul Sep Nov

S&P500 (LHS) JP Morgan Asia Credit Core (RHS)

CNY (CNH): China outperformance in economic recovery; PBOC allowing stronger yuan; reset in US-China relations (this may also benefit Asia FXlike SGD and MYR to some extent)

AUD/NZD/CAD: Can benefit when markets stay buoyant, alongside resilient fundamentals; contingent on RBA/RNBZ/BOC resisting negative rates

USD: Global stock rally, sustained low real US yields (below chart) and Asia-led recovery

Markets Outlook – FX

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Bloomberg Dollar index vs. real US 10 year yields

FX Forecasts

Q4-20 Q1-21 Q2-21 Q3-21 Q4-21

DXY 91.50 90.00 91.00 90.50 89.00

USD/CAD 1.305 1.28 1.30 1.29 1.27

EUR/USD 1.20 1.22 1.205 1.21 1.23

GBP/USD 1.31 1.33 1.315 1.32 1.34

USD/CHF 0.91 0.925 0.908 0.905 0.90

AUD/USD 0.74 0.755 0.745 0.75 0.76

NZD/USD 0.690 0.705 0.695 0.70 0.71

USD/JPY 103.0 102.5 103.5 103.0 102.0

USD/MYR 4.08 4.05 4.06 4.03 4.00

USD/SGD 1.34 1.32 1.33 1.325 1.31

USD/CNY 6.55 6.40 6.50 6.45 6.30

Source: Bloomberg, HL Bank

-2.00

-1.00

0.00

1.00

2.00

900

1100

1300

Jan-14 Jan-16 Jan-18 Jan-20

Bloomberg DXY Real US 10 yr yield (16m lead)

FX – Expect Another Year of USD Weakness

Strategist’s Declaration

The strategist, analyst or economist (together “Strategist”) who prepared this report certifies that the opinions contained in this report accurately and exclusively reflect his or her views about the securities of the listed entity or the currency involved, and that he or she has taken reasonable care to maintain independence and objectivity in respect of the opinions in this report.

The Strategist who wrote this report does not hold any financial interests in the listed entity or the currencies referred to. The Strategist’s connected persons, (as defined in the Securities and Futures Act (Chapter 289) of Singapore, do not hold any financial interests in the listed entity or the currencies referred to.

The Strategist does not receive compensation directly or indirectly related to the specific recommendations or views expressed by that Strategist in this research report. The reporting line of the Strategist is separate from and independent of the business solicitation or marketing departments of HL Bank, Hong Leong Bank Berhad or Hong Leong Group Malaysia.

The Strategist confirms that he or she, and the Strategist’s connected persons (as defined in the Securities and Futures Act (Chapter 289) of Singapore, does/do not serve as directors or officers of the listed entity, and the listed entity or other third parties have not provided or agreed to provide any compensation or other benefits to the Strategist and the Strategist’s connected persons, (as defined in the Securities and Futures Act (Chapter 289) of Singapore, in connection with this report.

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This report was prepared by Jeff Ng, Senior Treasury Strategist, with the help of William Yeoh, Graduate Trainee.

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