From the latest official figures published recently, Singapore’s economic growth in 2Q19 was weaker than expected. Given the gloomy climate, some are now wondering if the Singapore government would call for an early election.
Adopting the UK-style Westminster parliamentary system, each parliament in Singapore has a maximum five-year term but may be dissolved at any time to call for elections before the term ends. The ruling People’s Action Party (PAP) had held several early elections which saw them winning much more votes, inferring the importance of timing.
Unlike Singapore, the US government cannot bring forward their presidential elections. As a result, the incumbent must do his best to lift the US economy during his term before the next election begins.
Comparatively, Singapore is notably different. In the past few elections, the PAP tended to hold elections whenever the economy was in a downturn. People are speculating that PAP will stick to its playbook by using the country’s economic challenges as a rallying call in the upcoming election.
In his congressional testimony on 10 July 2019, the US Federal Reserve Chairman Jerome Powell gave clear indication that the central bank would cut interest rates at the end of the month. This would effectively end the interest rate hike cycle that started since December 2015.
It seems that the US interest rate policy follows a certain pattern. After hiking interest rates for three years from December 2015 to December 2018, would the Fed ease monetary policy for the next three years till the end of Trump’s second term?
For the first time, the bellwether Dow Jones Industrial Average finally rose above 27,000 points, after failing to rally above 26,900 points three times in the last two years. The credit goes to none other than Powell, for reigniting animal spirits in the US.
Right now, market participants are speculating that the Fed would cut interest rate cut by 25-50 basis points. Regardless, any interest rate cut would have already been good news for the stock market. Nonetheless, this validated my repeated conjecture that it is the Fed’s “tradition” to cut interest in the third year of a new president’s term.
Now, all Trump has to do is to ensure that the US economy remains robust. Perhaps, add a little frothiness in the stock market and Trump would raise his chances of being re-elected in the US Presidential Election 2020.
That said, one major campaign promise has yet been fulfilled. Eager for a US-China trade deal, Trump initiated to restart negotiations by calling on his Chinese counterpart Xi Jinping for a private meeting at the G20 summit.
Despite agreeing to restart trade talks, the Chinese side seems to be dragging its heels. Right now, China has not committed to restarting importation of US agricultural products nor were there any further talks held with the US .
With the trade uncertainty still hanging on the horizon, there are still significant risks for companies with large overseas exposure. These include US tech companies like Qualcomm, Boeing, as well as American companies with manufacturing bases in China such as Apple and Nike.
Learning a thing or two from Trump, Japanese Prime Minister Shinzo Abe began to suppress competition by directly targeting the supply chains of South Korea’s tech industry. Over the last decade, South Korea’s mobile phone and chip industry have made tremendous strides to overtake Japan. However, it still relies heavily on the latter for core technology and components.
Undoing the effects of globalisation that have shrunk the length of supply chains, Abe is fighting a tech war with South Korea to stymie its lead over Japan. Whilst this would weigh on South Korea’s high tech industry, Japanese component suppliers are bound to be hurt. In the long haul, this will drive South Korean tech companies to follow on Huawei’s path towards self-reliance. Nonetheless, the end of a globalised supply chain would have profound impacts on Singapore’s electronics sector and hence its economic development.
In his latest sign to ease up on Huawei, the US government has allowed the Chinese telecom equipment giant to purchase components from US companies, under the circumstance that such components can also be found elsewhere. Knowing that a complete trade ban on Huawei would be detrimental to numerous US corporations, Trump has eased on Huawei by allowing US companies to deliver non-exclusive products that compete with Japan, South Korea and Taiwan.
Regardless, having been dealt a consequential blow, Huawei and the Chinese telecom industry will inevitably work towards reducing their dependence on overseas supplies. This would create long term concerns for US and Japan tech companies.
Last year July, the US fired its first shot when it officially imposed tariffs on Chinese goods. Despite that, based on trade data from China’s General Administration of Customs, Chinese export value rose 6.1 percent to Rmb7.95 trillion in the first six months of 2019. Meanwhile, Chinese imports also increased 1.4 percent to Rmb6.72 trillion, leading to its current account surplus to swell 41.6 percent during the same period.
It is no wonder why Xi was indifferent to Trump, only agreeing to meet the latter right before the G20 summit commenced. China’s trade data further reflected that it would not be crippled by the trade war. Although exports to the US fell 9 percent, other regions more than made up for the shortfall. As a result, China would pay less emphasis on the US market and would harden its stance in trade talks going forward.
When the US-China trade war first broke out, many Chinese manufacturers were debilitated as they concentrated sales of goods solely on the US market. Consequently, it also forced them to expand channels into other markets.
The effort saw positive results as following the release of its trade data, China announced that its gross domestic product (GDP) grew a commendable 6.2 percent in spite of the trade war. Together with the growth of 6.4 percent in the first quarter, the economy effectively grew 6.3 percent in 1H19.
One of the contributing factors to its healthy export growth was the depreciation of the Chinese Renminbi. That said, local investors need to be wary of the effects that weakness in the Chinese currency have on Chinese companies listed here, whereby results are converted into Singapore Dollar.
Looking from another angle, it seems that not only does Trump want lower interest rates, he also desires a weaker US Dollar. China, which has previously depreciated its currency to match US tariffs, would inherently see the Renminbi strengthen against the US Dollar.
Potentially, the ongoing trade war could spillover to the currency front, creating yet another uncertainty for global markets. As a result, gold prices have risen significantly over the past month, reflecting higher level of hedging activities.
During the announcement of its 2Q19 GDP figures, I observed that the Chinese media specifically emphasized that the Chinese economy could well maintain its current growth rate of 6.3 percent without any major stimulus. In my opinion, this was to lower expectations for the Chinese government to open the “floodgates” to bolster the economy.
Last December, when Xi introduced the “six stabilising principles” during the Central Economic Work Conference, investors were reminded of the Rmb4 trillion infrastructure package and of the consumption rebate programs aimed at rural areas during the last financial crisis. However, till today, the expectations failed to materialise, sending prices of auto, infrastructure and consumer appliance stocks tumbling .
Notwithstanding that, China’s GDP growth will no longer be export-driven in the long term. Since the dawn of reform, urban migration has helped to support real estate prices, despite countless suppressive measures. This year, property prices in China’s tier one and two cities continue to rise unabated.