SINGAPORE – Asia will outperform the rest of the world as economies in the region appear to recover from the coronavirus-induced slump in 2021, said the chief economist of Singapore’s largest bank.
Few Asian countries will continue to receive major fiscal aid next year, but that’s “OK” as the region is in “a much better state” in conditions for managing the pandemic and growth recovery compared to the West, said Taimur Baig of DBS Group Research.
DBS Group Holdings in Singapore’s central business district.
Nicky Loh | Bloomberg | Getty Images
“I think it’s a fairly easy set of arguments to believe that given the favorable growth differential, given the attractive valuation, Asian economies and markets will attract investor interest – they will do better,” he told CNBC’s Wednesday. Street Signs Asia.
“That’s why we’re actually making a pretty strong outperformance call for Asian asset classes and Asian economies in 2021 compared to the rest of the world,” he added.
In a report last week, Baig and other DBS strategists outlined 12 trading ideas and strategies for 2021 in rates, currencies and credit.
Interest rate trading is macroeconomic and mostly revolves around government bonds and interest rate derivatives. The DBS report stated six trade themes for tariffs:
- Rising US Treasury yield curve, with ten-year yield likely to reach 1.3% in the second half of 2021 – an increase from current levels of about 0.9%.
- Betting on the Singapore dollar exchange rate that outperforms the US dollar.
- Expects Indonesian government bonds to appreciate as they are now relatively cheap; DBS analysts see 6.5% as a “decent entry point” in the short term for the 10-year bond.
- Flattening of the Indian government bond curve, with the interest rate spread between the three-month and five-year segments creeping to 150 basis points by the end of 2021.
- Prefer Chinese government bonds that can pick up in the short term as it fuels the strength of the yuan, with a preference for five and seven year maturities.
- Widening 10-year interest rate spreads between Korean government bonds and Thai government bonds to as much as 70-80 basis points given the potentially increased bond supply in South Korea.
The US dollar has become “less overvalued,” meaning it could depreciate more gradually in 2021, DBS said. The bank has three ideas for trading currencies next year:
- Expect a basket of high yield Asian currencies – the Indonesian rupiah, the Philippine peso and the Indian rupee – to strengthen against the dollar.
- Seeing value in the Philippine peso against the Swiss franc and Japanese yen. This strategy has generated stable spot returns of up to 2% and still appears to offer “value”, the analysts said.
- Forecasting the British pound could weaken against the New Zealand dollar given the different fundamentals between the two economies.
When it comes to investing in debt securities, the DBS analysts preferred Asian credits in US dollars. They have three preferred sectors:
- Indonesian investment grade bonds;
- “Quality” Indian bank credit;
- Chinese Real Estate and Consumer Discretionary Credit.
DBS said China – where the coronavirus was first discovered – will lead the global recovery in 2021. But investors should be careful of Chinese companies with higher leverage and poor profitability, the bank warned.
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