Pressure on dollar to drive investor capital into Asian markets

Standard Chartered Bank global head of research and chief strategist Eric Robertson

PETALING JAYA: As the greenback remains pressured on the back of major economic deficits in the United States deteriorating further, Asian markets, particularly emerging markets like Malaysia, are likely to see a return of investor capital.

Between January and October last year, the Asian equity markets have lost nearly US$80bil of investor capital and since then, only US$20bil to US$25bil have returned to the region.

While many were of the view that emerging markets have seen a record amount of inflows, Standard Chartered Bank global head of research and chief strategist Eric Robertson begged to differ.

Even with the good amount of return of capital in November and December, he said it paled in comparison to what was lost.

Robertson said there was still nearly US$50bil that has the potential to make a comeback and this ignored the structural stories over the last 10 years where money has piled in the US equity and credit markets.

On a whole, he believed that it will be a negative story for the US dollar in 2021 but a positive one for the current and equity markets of Asia and commodities.

“The budget deficit (in the US) is getting worse due to the fiscal stimulus, that’s pretty similar to all economies, the current account deficit is deteriorating and the third factor perhaps, is the US trade deficit is actually at 15-year lows and that’s even with Trump’s four-year campaign to eliminate the US trade deficit.

“So with all the deficits moving in the wrong direction, we expect pressure on the dollar.

“From a market point of view, we will see a return of investor capital to emerging markets across asset classes, but especially ini currencies, equities and to a lesser degree but still positive, local currency bond markets,” he told a virtual press conference on Standard Chartered’s 2021 global outlook yesterday.

Robertson described the economic outlook as extremely constructive for Asia, especially emerging markets because a lot of the economic recovery that was seen was due to trade between emerging markets.

He also pointed out that the amount of capital sitting on the sidelines was another aspect to the emerging market recovery.

“If we look at flows in 2020, most of it in the past 12 months went into US money market funds and into US and developed markets’ fixed income securities.

“A lot of these were at the expense of emerging market assets, both local currency debts and local currency equities.

“We believe that in a world of 1% treasury yields and 18 trillion dollars of negative yielding debt, investor capital has to go in search of the highest return and we believe that will be in emerging markets,” Robertson said.

He added that a weaker greenback was a net positive for the global economy and global markets as it will ease the financial conditions for countries and companies that have dollar denominated debts.

This will be a double positive for them due to the low interest rate environment.

As for commodities, Robertson believed that it would be one of the best value plays in global markets as prices remain severely depressed relative to the last 20 to 30 years.

“Governments, central banks and the private sector will all be intimately intertwined in driving a recovery.

“That’s going to mean infrastructure spending and the rebuilding of healthcare infrastructure and a variety of other infrastructure measures, which is very good from the commodity context.

“It is a net positive for basic materials and chemicals and that’s very good for a number of economies in Asia, with Malaysia being a key in that narrative and Australia as well in the G10 space,” he said, adding that the demand for energy, base metals and precious metals will be a structural story for at least the next three to five years.

He also said that a significant pent up demand from consumers, business and government will be unlike anything that was seen post World War II.

On a more local context, Standard Chartered’s Chief Economist of Asean and South Asia Edward Lee said the reimposition of the movement control order (MCO) in Malaysia and new measures in other parts of the world will unlikely result in destructive impact on growth like what happened in the second quarter last year.

This was due to targeted restrictions, better online logistics for employees to work from home and no synchronised lockdowns globally.

“The Covid-19 resurgence makes recovery a bit bumpier but it delays it rather than deter the growth we are expecting in 2021.

“We are also expecting Bank Negara to stay on hold for now. It is a bit too early to try to cut rates and boost something when the overall environment is not allowed to take advantage of the low interest rates,” he said.

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