Lim Yuin is our Chief Investment Strategist at Lion Global Investors with 17 years of financial industry experience specialising in asset management and securities. He was previously the Fund Manager of the LionGlobal Disruptive Innovation Fund and a Japan Equities Analyst at the firm before moving into his current role.
Dawn Leong: As your quarterly outlook is appropriately titled – A Game of Tug-of-War, central banks on both sides of the Atlantic have been facing the tall order of balancing inflation versus growth – i.e. how to bring down sticky inflation by raising interest rates, with as little economic pain as possible. To add fire to the fuel, in March, market was thrown in further turbulence on the back of the collapse of Silicon Valley Bank and Signature Bank, which was shortly followed by further troubles in Europe. That said, markets seemed to have pretty much shrug it off.. with US equities recovering and finishing the month and quarter higher. So what is our view on the banking failures on the markets and do we think that recession probabilities have been heightened?
Lim Yuin: Yes, we are lucky that financial regulators in the US and Europe have acted swiftly and decisively to prevent further deterioration in confidence. As such, the risk of a systemic banking crisis is low. However, there is still a longer-term impact on the real economy. Funding costs for banks in the developed markets are likely to be higher than before the financial turmoil which would lead to tighter lending standards at the banks. This would have a delayed impact on investments at businesses and private consumption. As such, we expect economic growth at the developed economies to slow even further. We see higher risks of recessions in the US and Europe end of this year or early next year and as such, we are negative on the developed equities markets.
Dawn Leong: On the back of the banking sector troubles, I wanted to delve deeper into this – what is the impact on Asia and the financial sector in the region? What are some of the warning signs that we should observe?
Lim Yuin: We should look at this issue from two angles. First, whether Asia banks faces the same challenges as the US banks, and second, on the impact on Asia’s economic growth. i) Asia’s inflation has been less severe as the US and central banks in Asia did not hike interest rates as much as the US. So the stress on Asia banks are generally less severe. ii) a slower economic growth in the US and Europe would likely weigh on economic growth in Asia. But central banks in the US and Europe would likely turn dovish and loosen if economic growth slows excessively. That would lessen the negative impact of weaker US and European economic growth.
We would look out for any signs that financial conditions are affected which would be reflected in a significant slowdown in corporate and consumer spending. We would also monitor the export numbers for signs of excessive slowdown. We will also look for policy response from the Asian central banks.
Dawn Leong: As we turn more cautious on developed market equities, is the Fed becoming more dovish and what are the implications?
Lim Yuin: The Federal Reserve (Fed) and European Central Banks (ECB) continued to raise rates by 25 basis points and 50 basis points respectively in March. The Fed’s projections for the federal funds rate implied a 25 basis points hike for the rest of 2023 and keeping rates constant for the rest of the year. Central banks are still focused on controlling inflation and we don’t see monetary policies supporting a reaccelerating growth in developed markets.
Dawn Leong: We highlighted that China seems decoupled from the troubles in the US. We have been positive on China equities for a while now, and the takeaways from the China National People’s Congress have reinforced our optimism on the market. How is China’s growth coming along? What are some of the sectors that we believe will benefit?
Lim Yuin: There are early signs of recovery in the Chinese economy, and we expect to China’s GDP to grow at 5% this year. Recent data suggests that things are starting to turn around in the all-important property and consumption sectors. Property sales by volume in February recovered above pre-Covid levels in 2019, while property completions turned positive year-on-year in January and February from a contraction in December. February retail sales also saw positive year-on-year growth as compared to a decline in 4Q2022 and in January 2023.
The recovery in China would be led by a rebound in private demand with a recovery in the domestic economy. Also, regulatory tightening is easing for sectors like internet and property. We expect companies benefiting from rebounding domestic demand and policy tailwinds to benefit. Historically, a rebound in domestic demand is also linked to greater demand for commodities and the rise in commodity prices. So, positive on beneficiaries of higher commodity prices too.
Dawn Leong: How is China’s recovery and growth going to benefit the rest of Asia?
Lim Yuin: It will benefit through a recovery in goods demand in China, though to a lesser extent as compared to previous cycles as the Chinese government is unlikely to provide very strong stimulus. As such, our preference is for quality markets like the Singapore equities market that is supported by attractive dividends.
Footnote: All data are sourced from Bloomberg and Lion Global Investors as at 31 March 2023 unless otherwise stated.
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