SGX Market Strategist, Equity & Fixed Income, Singapore Exchange Ltd (SGX)

Geoff Howie

SGX Market Strategist, Equity & Fixed Income

Asia’s leading multi-asset exchange

Singapore Exchange Ltd (SGX)

Singapore Exchange is Asia’s leading and trusted market infrastructure, facilitating the exchange of capital and ideas to create value for people, businesses and economies. As a multi-asset exchange operating equity, fixed income and derivatives markets to the highest regulatory standards, SGX is a vertically integrated business that provides listing, trading, clearing, settlement, depository and data services.

With about 40% of listed companies and over 80% of listed bonds originating outside of Singapore as well as established linkages across the region and in Europe, SGX is Asia’s most international and connected exchange. Offering a full suite of derivatives products across Asian equity indices, commodities and currencies, SGX is the world’s most liquid international market for the benchmark equity indices of China, India, Japan and ASEAN.

As Asia’s pioneering central counterparty, SGX is globally recognised for its risk management and clearing capabilities, and was one of the first globally to adopt the Principles for Financial Market Infrastructure.

Headquartered in AAA-rated Singapore, SGX has over 800 employees including offices in Beijing, Chicago, Hong Kong, London, New York, Mumbai, San Francisco, Shanghai and Tokyo.

Equity Bottom-Up

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<ul>
<li>
The Lion-OCBC Securities Hang Seng TECH ETF will commence trading on SGX on 10 December 2020, offering investors low cost and direct access to 30 of the world’s largest Chinese technology companies. 
	 </li>
	<li>
The ETF tracks the Hang Seng TECH Index, which comprises leading technology-themed companies across the information technology, industrials, healthcare, consumer and financials sectors, including Xiaomi, Meituan Dianping, Tencent and JD.com. 
	 </li>
	<li>The Hang Seng TECH Index has outperformed major global indices amidst the global pandemic, with Chinese technology giants enjoying a growth surge during the coronavirus pandemic in areas from healthcare to cloud computing.</li>
</ul>
 

The Lion-OCBC Securities Hang Seng TECH ETF, jointly established by Lion Global Investors and OCBC Securities, will list on Thursday, 10 December 2020, kicking off with US$64 million in assets under management. It is also Singapore’s first tech-focused ETF listed on SGX. 
The ETF seeks to replicate the performance of the Hang Seng TECH Index (HSTECH), which represents the 30 largest Chinese technology companies that have high exposure to themes such as cloud, digital, e-commerce, fintech or Internet, and are considered innovative by operating a technology-enabled business, with strong Research &amp; Development investment, or exhibit robust revenue growth. 
The Index is free-float, market capitalisation-weighted, with 8% cap on individual constituent weighting and rebalances quarterly. HSTECH Index Top 10 Constituents

<table class="table table-striped"><tbody>
<tr>
<td>
			Company Names
			</td>
			<td>
			Industry Classification
			</td>
			<td>
			Weighting (%)
			</td>
		</tr>
<tr>
<td>
			Tencent Holdings Ltd
			</td>
			<td>
			Information Technology
			</td>
			<td>
			8.92
			</td>
		</tr>
<tr>
<td>
			Meituan-Dianping
			</td>
			<td>
			Information Technology
			</td>
			<td>
			8.86
			</td>
		</tr>
<tr>
<td>
			Sunny Optical Technology Ltd
			</td>
			<td>
			Industrials
			</td>
			<td>
			8.77
			</td>
		</tr>
<tr>
<td>
			Alibaba Group Holdings Ltd
			</td>
			<td>
			Information Technology
			</td>
			<td>
			8.43
			</td>
		</tr>
<tr>
<td>
			Alibaba Health Information Technology Ltd
			</td>
			<td>
			Healthcare
			</td>
			<td>
			3.60
			</td>
		</tr>
<tr>
<td>
			Semiconductor Manufacturing International Corp
			</td>
			<td>
			Information Technology
			</td>
			<td>
			7.55
			</td>
		</tr>
<tr>
<td>
			Xiaomi Corporation
			</td>
			<td>
			Information Technology
			</td>
			<td>
			7.40
			</td>
		</tr>
<tr>
<td>
			JD.com
			</td>
			<td>
			Information Technology
			</td>
			<td>
			6.99
			</td>
		</tr>
<tr>
<td>
			Kingdee International Software Group Limited
			</td>
			<td>
			Information Technology
			</td>
			<td>
			5.69
			</td>
		</tr>
<tr>
<td>
			Lenovo Group Ltd.
			</td>
			<td>
			Information Technology
			</td>
			<td>
			4.23
			</td>
		</tr>
</tbody></table>
 Source: Hang Seng Indexes, October 2020

 

Industry Weightings in HSTECH Index

<table class="table table-striped"><tbody>
<tr>
<td>
			Industry
			</td>
			<td>
			No. of Constituents
			</td>
			<td>
			Weighting (%)
			</td>
		</tr>
<tr>
<td>
			Information Technology
			</td>
			<td>
			18
			</td>
			<td>
			69.12
			</td>
		</tr>
<tr>
<td>
			Industrials
			</td>
			<td>
			3
			</td>
			<td>
			11.76
			</td>
		</tr>
<tr>
<td>
			Healthcare
			</td>
			<td>
			2
			</td>
			<td>
			10.62
			</td>
		</tr>
<tr>
<td>
			Consumer Discretionary
			</td>
			<td>
			5
			</td>
			<td>
			6.87
			</td>
		</tr>
<tr>
<td>
			Financials
			</td>
			<td>
			2
			</td>
			<td>
			1.63
			</td>
		</tr>
<tr>
<td>
			Overall
			</td>
			<td>
			30
			</td>
			<td>
			100
			</td>
		</tr>
</tbody></table>
 Source: Hang Seng Indexes, October 2020

 

Hang Seng TECH Index Outperformed Major Global Indices 
Hang Seng TECH Index has outperformed major global indices in 2020 amidst the global pandemic, with Chinese technology giants enjoying a growth surge during the coronavirus pandemic, in areas ranging from healthcare to cloud computing. The two largest Chinese tech companies, Alibaba and Tencent, have seen their share prices rally by 26% and 58% respectively in the 2020 year-to-date. 
As China and US bilateral tensions continue to simmer, an increasing number of Chinese tech companies listed in the US are returning home to list in China's mainland market or Hong Kong. The Hang Seng TECH Index has an IPO fast-entry mechanism to prepare for the homecoming of foreign-listed Chinese companies and the new listing of Chinese “unicorns” in Hong Kong. The rule enables sizable newly listed technology companies to be included in the index in a timely manner without the need to wait until the quarterly review.
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<figure>
 <img src='https://api2.sgx.com/sites/default/files/2020-12/Capture_5.PNG' alt='Performance of Hang Seng Tech Index against major stock indices' />
 </figure>
 <div class='content-caption'>Performance of Hang Seng Tech Index against major stock indices</div>
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<table class="table table-striped"><tbody>
<tr>
<td>
			Index – Total Return
			</td>
			<td>
			1-Mth
			</td>
			<td>
			3-Mth
			</td>
			<td>
			6-Mth
			</td>
			<td>
			1-Yr
			</td>
			<td>
			YTD
			</td>
		</tr>
<tr>
<td>
			Hang Seng TECH Index
			</td>
			<td>
			3%
			</td>
			<td>
			5%
			</td>
			<td>
			141%
			</td>
			<td>
			90%
			</td>
			<td>
			70%
			</td>
		</tr>
<tr>
<td>
			NASDAQ 100 Index
			</td>
			<td>
			7%
			</td>
			<td>
			8%
			</td>
			<td>
			131%
			</td>
			<td>
			52%
			</td>
			<td>
			45%
			</td>
		</tr>
<tr>
<td>
			CSI 300 Index Index
			</td>
			<td>
			7%
			</td>
			<td>
			11%
			</td>
			<td>
			141%
			</td>
			<td>
			45%
			</td>
			<td>
			35%
			</td>
		</tr>
<tr>
<td>
			S&amp;P 500 Index
			</td>
			<td>
			8%
			</td>
			<td>
			8%
			</td>
			<td>
			120%
			</td>
			<td>
			21%
			</td>
			<td>
			16%
			</td>
		</tr>
<tr>
<td>
			Nikkei 225 Index
			</td>
			<td>
			13%
			</td>
			<td>
			18%
			</td>
			<td>
			124%
			</td>
			<td>
			23%
			</td>
			<td>
			22%
			</td>
		</tr>
</tbody></table>
 Source: Bloomberg, based on index total return as of 4-Dec-20

Note: Past returns performance is not indicative of future results.

 

China’s Growth Outlook 
China continued its economic recovery from COVID-19 in the third quarter of 2020, registering year-on-year growth of 4.9%. Although this headline number fell short of economists’ expectations, the broadening of growth on both the demand and supply sides appears to bode well for the rest of the year. Investment and net exports led China’s recovery in demand but, as noted by economists, increasing migrant worker employment numbers and household income suggest that consumption will gain strength in the last quarter of the year. The consensus forecast for China’s growth this year is now 2.2%, and the country remains the only major economy expected to post positive GDP growth in 2020. 
 

Fund Details

<table class="table table-striped"><tbody>
<tr>
<td>
			Listing Date
			</td>
			<td>
			10 December 2020
			</td>
		</tr>
<tr>
<td>
			Fund Manager
			</td>
			<td>
			Lion Global Investors Limited
			</td>
		</tr>
<tr>
<td>
			Index
			</td>
			<td>
			<a href="https://www.hsi.com.hk/eng/indexes/all-indexes/hstech">Hang Seng TECH Index</a>

			 

			Index RIC: .HSTECH / Bloomberg code: HSTECH
			</td>
		</tr>
<tr>
<td>
			Base Currency
			</td>
			<td>
			HKD
			</td>
		</tr>
<tr>
<td>
			ISIN
			</td>
			<td>
			SGXC56627679
			</td>
		</tr>
<tr>
<td>
			Total Expense ratio (TER)
			</td>
			<td>
			68 bps
			</td>
		</tr>
<tr>
<td>
			Replication
			</td>
			<td>
			Physical
			</td>
		</tr>
</tbody></table>
 

<h4>Key Trading Specifications</h4>

<table class="table table-striped"><tbody>
<tr>
<td> </td>
			<td>
			SGD counter
			</td>
			<td>
			USD counter
			</td>
		</tr>
<tr>
<td>
			SGX Trading Name
			</td>
			<td>
			Lion-OCBC Sec HSTECH S$
			</td>
			<td>
			Lion-OCBC Sec HSTECH US$
			</td>
		</tr>
<tr>
<td>
			SGX Stock Code
			</td>
			<td>
			HST
			</td>
			<td>
			HSS
			</td>
		</tr>
<tr>
<td>
			BBG ticker
			</td>
			<td>
			HST SP Equity
			</td>
			<td>
			HSS SP Equity
			</td>
		</tr>
<tr>
<td>
			Trading Lot Size
			</td>
			<td>
			10 shares ( ~S$1.34/share)
			</td>
			<td>
			10 shares ( ~US$1/share)
			</td>
		</tr>
<tr>
<td>
			Tick Size
			</td>
			<td>
			S$0.001
			</td>
			<td>
			US$0.001
			</td>
		</tr>
</tbody></table>
 

<h4>
The product is classified as Excluded Investment Product (EIP) as defined in the Notice on the Sale of Investment Products issued by the Authority. SGX investor classification: Investors who invest in this product expect low to moderate likelihood of loss of principal investment amount, with generally smaller potential returns. Investors who invest in this product have a basic understanding of financial instruments with standardized terms and no unusual or complicated features. 
 </h4>

Investing in ETFs

ETFs are investment funds listed and traded intraday on a stock exchange. The majority aim to track the performance of an index and provide access to a wide variety of markets and asset classes, including local stocks, international securities, bonds, commodities or money markets. 
Each ETF gives investors access to the performance of the asset that comprises the underlying index. Investing in the ETF is also less costly if one was to build a similar portfolio by buying the individual stocks. It also provides exposure to international markets and asset classes that may be inaccessible to individual investors. 
To find out more about ETFs, click <a href="https://www.sgxacademy.com/home/infographics/what-you-need-to-know-about-investing-in-etfs/?utm_source=Research&amp;utm_medium=MU&amp;utm_campaign=ETFs&amp;utm_term=%2708062020&amp;utm_content=Market%20Update">here</a>. 
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The Lion-OCBC Securities Hang Seng TECH ETF will commence trading on SGX on 10 December 2020, offering investors low cost and direct access to 30 of the world’s largest Chinese technology companies.  
	 
	
The ETF tracks the Hang Seng TECH Index, which comprises leading technology-themed companies across the information technology, industrials, healthcare, consumer and financials sectors, including Xiaomi, Meituan Dianping, Tencent and JD.com. 
	 
	The Hang Seng TECH Index has outperformed major global indices amidst the global pandemic, with Chinese technology giants enjoying a growth surge during the coronavirus pandemic in areas from healthcare to cloud computing.

 

The Lion-OCBC Securities Hang Seng TECH ETF, jointly established by Lion Global Investors and OCBC Securities, will list on Thursday, 10 December 2020, kicking off with US$64 million in assets under management. It is also Singapore’s first tech-focused ETF listed on SGX.  
The ETF seeks to replicate the performance of the Hang Seng TECH Index (HSTECH), which represents the 30 largest Chinese technology companies that have high exposure to themes such as cloud, digital, e-commerce, fintech or Internet, and are considered innovative by operating a technology-enabled business, with strong Research &amp; Development investment, or exhibit robust revenue growth.  
The Index is free-float, market capitalisation-weighted, with 8% cap on individual constituent weighting and rebalances quarterly.  HSTECH Index Top 10 Constituents




			Company Names
			
			
			Industry Classification
			
			
			Weighting (%)
			
		


			Tencent Holdings Ltd
			
			
			Information Technology
			
			
			8.92
			
		


			Meituan-Dianping
			
			
			Information Technology
			
			
			8.86
			
		


			Sunny Optical Technology Ltd
			
			
			Industrials
			
			
			8.77
			
		


			Alibaba Group Holdings Ltd
			
			
			Information Technology
			
			
			8.43
			
		


			Alibaba Health Information Technology Ltd
			
			
			Healthcare
			
			
			3.60
			
		


			Semiconductor Manufacturing International Corp
			
			
			Information Technology
			
			
			7.55
			
		


			Xiaomi Corporation
			
			
			Information Technology
			
			
			7.40
			
		


			JD.com
			
			
			Information Technology
			
			
			6.99
			
		


			Kingdee International Software Group Limited
			
			
			Information Technology
			
			
			5.69
			
		


			Lenovo Group Ltd.
			
			
			Information Technology
			
			
			4.23
			
		

 Source: Hang Seng Indexes, October 2020

 

Industry Weightings in HSTECH Index




			Industry
			
			
			No. of Constituents
			
			
			Weighting (%)
			
		


			Information Technology
			
			
			18
			
			
			69.12
			
		


			Industrials
			
			
			3
			
			
			11.76
			
		


			Healthcare
			
			
			2
			
			
			10.62
			
		


			Consumer Discretionary
			
			
			5
			
			
			6.87
			
		


			Financials
			
			
			2
			
			
			1.63
			
		


			Overall
			
			
			30
			
			
			100
			
		

 Source: Hang Seng Indexes, October 2020

 

Hang Seng TECH Index Outperformed Major Global Indices   
Hang Seng TECH Index has outperformed major global indices in 2020 amidst the global pandemic, with Chinese technology giants enjoying a growth surge during the coronavirus pandemic, in areas ranging from healthcare to cloud computing. The two largest Chinese tech companies, Alibaba and Tencent, have seen their share prices rally by 26% and 58% respectively in the 2020 year-to-date.  
As China and US bilateral tensions continue to simmer, an increasing number of Chinese tech companies listed in the US are returning home to list in China's mainland market or Hong Kong. The Hang Seng TECH Index has an IPO fast-entry mechanism to prepare for the homecoming of foreign-listed Chinese companies and the new listing of Chinese “unicorns” in Hong Kong. The rule enables sizable newly listed technology companies to be included in the index in a timely manner without the need to wait until the quarterly review.



      
    
    Performance of Hang Seng Tech Index against major stock indices





			Index – Total Return
			
			
			1-Mth
			
			
			3-Mth
			
			
			6-Mth
			
			
			1-Yr
			
			
			YTD
			
		


			Hang Seng TECH Index
			
			
			3%
			
			
			5%
			
			
			141%
			
			
			90%
			
			
			70%
			
		


			NASDAQ 100 Index
			
			
			7%
			
			
			8%
			
			
			131%
			
			
			52%
			
			
			45%
			
		


			CSI 300 Index Index
			
			
			7%
			
			
			11%
			
			
			141%
			
			
			45%
			
			
			35%
			
		


			S&amp;P 500 Index
			
			
			8%
			
			
			8%
			
			
			120%
			
			
			21%
			
			
			16%
			
		


			Nikkei 225 Index
			
			
			13%
			
			
			18%
			
			
			124%
			
			
			23%
			
			
			22%
			
		

 Source: Bloomberg, based on index total return as of 4-Dec-20

Note: Past returns performance is not indicative of future results.

 

China’s Growth Outlook   
China continued its economic recovery from COVID-19 in the third quarter of 2020, registering year-on-year growth of 4.9%. Although this headline number fell short of economists’ expectations, the broadening of growth on both the demand and supply sides appears to bode well for the rest of the year. Investment and net exports led China’s recovery in demand but, as noted by economists, increasing migrant worker employment numbers and household income suggest that consumption will gain strength in the last quarter of the year. The consensus forecast for China’s growth this year is now 2.2%, and the country remains the only major economy expected to post positive GDP growth in 2020. 
 

Fund Details




			Listing Date
			
			
			10 December 2020
			
		


			Fund Manager
			
			
			Lion Global Investors Limited
			
		


			Index
			
			
			Hang Seng TECH Index

			 

			Index RIC: .HSTECH / Bloomberg code: HSTECH
			
		


			Base Currency
			
			
			HKD
			
		


			ISIN
			
			
			SGXC56627679
			
		


			Total Expense ratio (TER)
			
			
			68 bps
			
		


			Replication
			
			
			Physical
			
		

 

Key Trading Specifications



 
			
			SGD counter
			
			
			USD counter
			
		


			SGX Trading Name
			
			
			Lion-OCBC Sec HSTECH S$
			
			
			Lion-OCBC Sec HSTECH US$
			
		


			SGX Stock Code
			
			
			HST
			
			
			HSS
			
		


			BBG ticker
			
			
			HST SP Equity
			
			
			HSS SP Equity
			
		


			Trading Lot Size
			
			
			10 shares ( ~S$1.34/share)
			
			
			10 shares ( ~US$1/share)
			
		


			Tick Size
			
			
			S$0.001
			
			
			US$0.001
			
		

 


The product is classified as Excluded Investment Product (EIP) as defined in the Notice on the Sale of Investment Products issued by the Authority.  SGX investor classification: Investors who invest in this product expect low to moderate likelihood of loss of principal investment amount, with generally smaller potential returns. Investors who invest in this product have a basic understanding of financial instruments with standardized terms and no unusual or complicated features. 
 

Investing in ETFs

ETFs are investment funds listed and traded intraday on a stock exchange. The majority aim to track the performance of an index and provide access to a wide variety of markets and asset classes, including local stocks, international securities, bonds, commodities or money markets.  
Each ETF gives investors access to the performance of the asset that comprises the underlying index. Investing in the ETF is also less costly if one was to build a similar portfolio by buying the individual stocks. It also provides exposure to international markets and asset classes that may be inaccessible to individual investors.  
To find out more about ETFs, click here. 



Ride on the Growth of China’s Largest Tech Companies

Semiconductor Manufacturing International Corp (SMIC) / Equity Bottom-Up

Semiconductor Manufacturing International Corp (SMIC)

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SGX Asia FX Insights

By Macro Hive

<ul>
<li>Yield support to boost CNH through Q4</li>
	<li>Equity outflows bring recent rupee appreciation to an end</li>
	<li>NEER back within band allows scope for further TWD strength</li>
	<li>September’s KRW strength to continue with improving macro  </li>
	<li>MAS October policy review in focus for S$NEER</li>
</ul>
Spotlight View #1: A Strong Quarter for CNH

The CNH got another medium-term support with confirmation that Chinese government bonds will be included in the FTSE Russell World Government Bond Index. The late September announcement that Chinese bonds will be added as of next year will mean around $140bn during the first 12 months of the inclusion, according to some estimates. It should also secure a structural shift towards foreign participation in the country’s debt market. China’s debt market has already seen inflows this year, but, with foreign holdings at just 9% of the total, there is significant scope to expand. That China’s yield spread over 10-year US Treasuries is currently the highest in more than a decade should attract further inflows (Chart 1).  

Capital inflows combined with a widening C/A surplus, the result of strong exports and a drop back in tourism outflows, point to further CNH appreciation. China’s basic balance (CA plus net FDI and net portfolio flows) climbed to 1.6% of GDP in Q2 from just 0.8% in Q1. We expect this moved higher again in Q3 given that CNH strengthened nearly 4% through the quarter. This also marked the currency’s strongest quarter for more than a decade and placed it second only to the Chilean peso in EM.

Despite the positive news from the FTSE Russell announcement, USD/CNH has strengthened from the mid-September low of 6.74. The currency pair is now trading back above 6.80 as a bout of dollar strength and a US equity correction have left EM currencies weaker across the board. But worries over ongoing US-China frictions may also be playing a role in the recent yuan weakening. Friday’s announcement that China’s leading chipmaker, SMIC, will now face export restrictions comes on top of the increased Huawei restrictions now in place. This could leave the country’s semiconductor industry struggling to source important technology and components. 

Restricted access to US tech could, if prolonged, dent what has otherwise been an ongoing economic recovery. Industrial profits were up 19% YoY in August, the third consecutive double-digit gain, reflecting the continued improvement in exports and IP (Chart 2). September PMI data showed China’s manufacturing and services sectors remaining in expansionary territory, albeit with the pace of expansion now slowing after what has been a sharp rebound.

Retail sales have been a weak spot in the recovery, leaving China’s Golden Week holiday, beginning 1 October, as an important test of any sustained consumption revival. Domestic travel is expected to be high with <a href="https://www.ft.com/content/0c9472e7-ad98-4b94-bd44-2037b338665f">600mn trips</a> projected over the eight-day holiday leaving the tourism sector, and services more generally, poised to benefit. It will also be a key test of COVID prevention given the scale of movement expected through the week.

With just a month left before the US election, we do not rule out further US-China tensions over the coming weeks. We continue to see mostly rhetoric rather than any concrete policy action not least due to timing, with polls pointing to a win for Democratic presidential nominee Joe Biden. Trade policy is one of the most important aspects for Asia in the US election. And while a Biden win will not reset US-China trade relations to their earlier state, it should mean a more predictable and rules-based trade policy for the region.    

Despite USD/CNH now back above 6.80, we continue to see a move towards 6.70 by year end. Yield support is one factor, with the PBoC leaving the loan prime rates unchanged at the recent policy meeting. A more flexible approach to reducing interest rates set out in the recent quarterly monetary policy review also suggests any further easing will not come via lower benchmark rates. Favourable fundamentals and a competitive valuation also point to further CNH appreciation.
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<figure>
 <img src='https://api2.sgx.com/sites/default/files/2020-10/202010_1E.PNG' alt='Image cannot be loaded.' />
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 <div class='content-caption'>202010_1E</div>
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Spotlight View #2: INR Weakens as Equity Flows Reverse 

After rallying sharply through August, the rupee sold off in September with the 0.2% drop in INR against USD contrasting with monthly gains in KRW, TWD and CNH. Nothing material has changed in India’s macro outlook during recent weeks, and latest data continue to point to an uneven, yet ongoing, economic recovery despite the relentless rise in new COVID cases (India has now reached 6mn cases). INR weakness instead reflects a consolidation after the 1.6% rally (vs USD) in August combined with a drop back in risk sentiment. USD/INR nevertheless remains below 74 (or SGX INR/USD futures above 134), its lowest level since March but one big figure higher than the early September low of below 73 (or SGX INR/USD high of 137).  

The RBI stepped up dollar purchases sharply in July, with FX intervention at an all-time high of $15.9bn. FX reserves have increased by another $10bn since then (data through 14 September), which looks to be the RBI slowing the pace of August appreciation, particularly as India recorded a huge $6.1bn in equity inflows through the month (Chart 4). By contrast, September has seen around $660mn in outflows. While this is in line with the rest of the region, it starkly contrasts the earlier high inflows. Given the reserves accumulation during recent months, the RBI can step in to offset rupee weakness should it choose to do so.

As things stand, the combination of above-target inflation (6.7% YoY), an exceptionally weak growth outlook and increasingly large government financing needs leave a difficult balancing act for the RBI. To manage the competing objectives, the bank has stepped up liquidity provision to prevent yields from moving higher (Chart 3), continued with operation twist to actively push longer-term yields down and paused with cuts to the policy rate. The RBI was expected to leave rates on hold again at 4% at the scheduled 1 October meeting, but the meeting has been postponed due to the government’s failure to appoint three new external MPC members. Inflation concerns will likely dominate for now, and we do not expect the RBI to allow any significant currency weakness.  

Given INR’s high-yielder status and significant bond supply likely over the coming few months, we remain constructive on INR on potential carry gains.    
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Spotlight View #3: TWD Strength Continues

The relentless appreciation of the Taiwanese dollar continued through September. SGX TWD/USD futures reached a high of almost 0.35 in September. It gave back some of those gains, but it since strengthened again. TWD remains the region’s second-best performer this year (after PHP), with a gain of over 3% versus USD and 1.8% in Q3 (Chart 6). Alongside China, Taiwan has the strongest fundamentals, although the milder COVID outbreak in Taiwan and the absence of a very steep contraction complicate comparisons for this year. Further appreciation will remain a function of central bank intervention, but, with the US Treasury’s FX manipulation report due in the coming weeks, we expect the CBC to allow further strengthening against the USD.   

Another reason why the CBC may be comfortable with TWD strength is the easing back in the NEER appreciation seen through H1. TWD weakness against the EUR has allowed the trade-weighted exchange rate to drop back from earlier highs and, crucially, back within the CBC’s preferred +/-5pp band for the past two months. Assuming further broad dollar weakness, the NEER should remain within the CBC comfort levels.    

Taiwan’s economy can withstand a stronger currency. August export orders hit 13.6% YoY in August, the highest in more than two years; IP growth is robust; and unemployment has declined for the past three months and, at 3.8%, is barely higher than a year ago. Importantly, recent releases have tended to be better than expected, and expectations for economic growth have generally been marked upwards. CPI is also inching out of deflationary territory (the -0.3% YoY reading in August was the highest since March), which should also limit concerns over any further currency appreciation. 

We expect the CBC will continue to limit the pace of TWD strength, but not the trend, and retain our view of TWD moving higher.
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Rest of Asia FX

KRW – September’s Best Performer 

The Korean won was Asia’s best-performing currency in September, with KRW up by almost 1.6% versus USD. A brief flirt with 1160 was the strongest level since January, but the currency has since pulled back close to 1170. The won has largely followed gains in the stock market, with the KOSPI rising through mid-September until the correction in US stocks, and renewed dollar strength dampened risk appetite. Bond market inflows have been another support for the currency, with the $6.9bn inflows through September more than double that recorded in July.

Korea’s recovery also looks to be gathering steam. The early reading on September exports (based on the first 20 days of the month) showed a 3.6% YoY, the first positive reading since March and a sharp improvement from the -7.5% YoY in July. A favourable working-day effect was partly behind the improvement, but strong gains in exports to China and in semiconductors were important positives. 

The won’s low-yielder status will limit further appreciation. But with an improving BoP position, albeit partly on the back of weak exports, we remain constructive and see scope for a moderate strengthening.

SGD – Following Global Risk Sentiment 

MAS’s October biannual monetary policy review will determine the S$NEER outlook. If, as expected, policy is left accommodative with no change to the midpoint of the band and the NEER slope left at zero, USD/SGD will continue to trade with global risk sentiment. Five months of deflation and a long recovery ahead, despite the recent rebound in IP (13.7% YoY) and non-oil domestic exports (7.7% YoY), suggest no need to adjust policy right now. Significant fiscal loosening will continue to provide the main policy support, with MAS instead focusing on maintaining price stability.

MAS and other central banks in Asia will closely watch the upcoming <a href="https://macrohive.com/hive-exclusives/taiwan-thailand-and-vietnam-all-risk-currency-manipulator-label/?add-to-cart=6305">US Treasury FX manipulation report</a>. We expect Singapore to remain on the watchlist, but, as it does not meet the criteria of a bilateral trade surplus with the US of at least $20bn, there is a low risk of any currency manipulation label. Nevertheless, MAS’s April disclosure of $29.9bn in net FX purchases through H2 2019 likely caught the attention of the Treasury, and, with H1 2020 data due for release in October, MAS FX intervention will be in the spotlight.  
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<html><body>(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs. This content has been produced by Macro Hive Limited. While SGX has participated as a sponsor, SGX  has not had any input into the content and neither SGX nor its affiliates shall be responsible or liable for the same.)</body></html>



SGX Asia FX Insights

By Macro Hive


Yield support to boost CNH through Q4
	Equity outflows bring recent rupee appreciation to an end
	NEER back within band allows scope for further TWD strength
	September’s KRW strength to continue with improving macro  
	MAS October policy review in focus for S$NEER

Spotlight View #1: A Strong Quarter for CNH

The CNH got another medium-term support with confirmation that Chinese government bonds will be included in the FTSE Russell World Government Bond Index. The late September announcement that Chinese bonds will be added as of next year will mean around $140bn during the first 12 months of the inclusion, according to some estimates. It should also secure a structural shift towards foreign participation in the country’s debt market. China’s debt market has already seen inflows this year, but, with foreign holdings at just 9% of the total, there is significant scope to expand. That China’s yield spread over 10-year US Treasuries is currently the highest in more than a decade should attract further inflows (Chart 1).  

Capital inflows combined with a widening C/A surplus, the result of strong exports and a drop back in tourism outflows, point to further CNH appreciation. China’s basic balance (CA plus net FDI and net portfolio flows) climbed to 1.6% of GDP in Q2 from just 0.8% in Q1. We expect this moved higher again in Q3 given that CNH strengthened nearly 4% through the quarter. This also marked the currency’s strongest quarter for more than a decade and placed it second only to the Chilean peso in EM.

Despite the positive news from the FTSE Russell announcement, USD/CNH has strengthened from the mid-September low of 6.74. The currency pair is now trading back above 6.80 as a bout of dollar strength and a US equity correction have left EM currencies weaker across the board. But worries over ongoing US-China frictions may also be playing a role in the recent yuan weakening. Friday’s announcement that China’s leading chipmaker, SMIC, will now face export restrictions comes on top of the increased Huawei restrictions now in place. This could leave the country’s semiconductor industry struggling to source important technology and components. 

Restricted access to US tech could, if prolonged, dent what has otherwise been an ongoing economic recovery. Industrial profits were up 19% YoY in August, the third consecutive double-digit gain, reflecting the continued improvement in exports and IP (Chart 2). September PMI data showed China’s manufacturing and services sectors remaining in expansionary territory, albeit with the pace of expansion now slowing after what has been a sharp rebound.

Retail sales have been a weak spot in the recovery, leaving China’s Golden Week holiday, beginning 1 October, as an important test of any sustained consumption revival. Domestic travel is expected to be high with 600mn trips projected over the eight-day holiday leaving the tourism sector, and services more generally, poised to benefit. It will also be a key test of COVID prevention given the scale of movement expected through the week.

With just a month left before the US election, we do not rule out further US-China tensions over the coming weeks. We continue to see mostly rhetoric rather than any concrete policy action not least due to timing, with polls pointing to a win for Democratic presidential nominee Joe Biden. Trade policy is one of the most important aspects for Asia in the US election. And while a Biden win will not reset US-China trade relations to their earlier state, it should mean a more predictable and rules-based trade policy for the region.    

Despite USD/CNH now back above 6.80, we continue to see a move towards 6.70 by year end. Yield support is one factor, with the PBoC leaving the loan prime rates unchanged at the recent policy meeting. A more flexible approach to reducing interest rates set out in the recent quarterly monetary policy review also suggests any further easing will not come via lower benchmark rates. Favourable fundamentals and a competitive valuation also point to further CNH appreciation.



      
    
    202010_1E


Spotlight View #2: INR Weakens as Equity Flows Reverse 

After rallying sharply through August, the rupee sold off in September with the 0.2% drop in INR against USD contrasting with monthly gains in KRW, TWD and CNH. Nothing material has changed in India’s macro outlook during recent weeks, and latest data continue to point to an uneven, yet ongoing, economic recovery despite the relentless rise in new COVID cases (India has now reached 6mn cases). INR weakness instead reflects a consolidation after the 1.6% rally (vs USD) in August combined with a drop back in risk sentiment. USD/INR nevertheless remains below 74 (or SGX INR/USD futures above 134), its lowest level since March but one big figure higher than the early September low of below 73 (or SGX INR/USD high of 137).  

The RBI stepped up dollar purchases sharply in July, with FX intervention at an all-time high of $15.9bn. FX reserves have increased by another $10bn since then (data through 14 September), which looks to be the RBI slowing the pace of August appreciation, particularly as India recorded a huge $6.1bn in equity inflows through the month (Chart 4). By contrast, September has seen around $660mn in outflows. While this is in line with the rest of the region, it starkly contrasts the earlier high inflows. Given the reserves accumulation during recent months, the RBI can step in to offset rupee weakness should it choose to do so.

As things stand, the combination of above-target inflation (6.7% YoY), an exceptionally weak growth outlook and increasingly large government financing needs leave a difficult balancing act for the RBI. To manage the competing objectives, the bank has stepped up liquidity provision to prevent yields from moving higher (Chart 3), continued with operation twist to actively push longer-term yields down and paused with cuts to the policy rate. The RBI was expected to leave rates on hold again at 4% at the scheduled 1 October meeting, but the meeting has been postponed due to the government’s failure to appoint three new external MPC members. Inflation concerns will likely dominate for now, and we do not expect the RBI to allow any significant currency weakness.  

Given INR’s high-yielder status and significant bond supply likely over the coming few months, we remain constructive on INR on potential carry gains.    



      
    
    202010_2E


Spotlight View #3: TWD Strength Continues

The relentless appreciation of the Taiwanese dollar continued through September. SGX TWD/USD futures reached a high of almost 0.35 in September. It gave back some of those gains, but it since strengthened again. TWD remains the region’s second-best performer this year (after PHP), with a gain of over 3% versus USD and 1.8% in Q3 (Chart 6). Alongside China, Taiwan has the strongest fundamentals, although the milder COVID outbreak in Taiwan and the absence of a very steep contraction complicate comparisons for this year. Further appreciation will remain a function of central bank intervention, but, with the US Treasury’s FX manipulation report due in the coming weeks, we expect the CBC to allow further strengthening against the USD.   

Another reason why the CBC may be comfortable with TWD strength is the easing back in the NEER appreciation seen through H1. TWD weakness against the EUR has allowed the trade-weighted exchange rate to drop back from earlier highs and, crucially, back within the CBC’s preferred +/-5pp band for the past two months. Assuming further broad dollar weakness, the NEER should remain within the CBC comfort levels.    

Taiwan’s economy can withstand a stronger currency. August export orders hit 13.6% YoY in August, the highest in more than two years; IP growth is robust; and unemployment has declined for the past three months and, at 3.8%, is barely higher than a year ago. Importantly, recent releases have tended to be better than expected, and expectations for economic growth have generally been marked upwards. CPI is also inching out of deflationary territory (the -0.3% YoY reading in August was the highest since March), which should also limit concerns over any further currency appreciation. 

We expect the CBC will continue to limit the pace of TWD strength, but not the trend, and retain our view of TWD moving higher.



      
    
    202010_3E


Rest of Asia FX

KRW – September’s Best Performer 

The Korean won was Asia’s best-performing currency in September, with KRW up by almost 1.6% versus USD. A brief flirt with 1160 was the strongest level since January, but the currency has since pulled back close to 1170. The won has largely followed gains in the stock market, with the KOSPI rising through mid-September until the correction in US stocks, and renewed dollar strength dampened risk appetite. Bond market inflows have been another support for the currency, with the $6.9bn inflows through September more than double that recorded in July.

Korea’s recovery also looks to be gathering steam. The early reading on September exports (based on the first 20 days of the month) showed a 3.6% YoY, the first positive reading since March and a sharp improvement from the -7.5% YoY in July. A favourable working-day effect was partly behind the improvement, but strong gains in exports to China and in semiconductors were important positives. 

The won’s low-yielder status will limit further appreciation. But with an improving BoP position, albeit partly on the back of weak exports, we remain constructive and see scope for a moderate strengthening.

SGD – Following Global Risk Sentiment 

MAS’s October biannual monetary policy review will determine the S$NEER outlook. If, as expected, policy is left accommodative with no change to the midpoint of the band and the NEER slope left at zero, USD/SGD will continue to trade with global risk sentiment. Five months of deflation and a long recovery ahead, despite the recent rebound in IP (13.7% YoY) and non-oil domestic exports (7.7% YoY), suggest no need to adjust policy right now. Significant fiscal loosening will continue to provide the main policy support, with MAS instead focusing on maintaining price stability.

MAS and other central banks in Asia will closely watch the upcoming US Treasury FX manipulation report. We expect Singapore to remain on the watchlist, but, as it does not meet the criteria of a bilateral trade surplus with the US of at least $20bn, there is a low risk of any currency manipulation label. Nevertheless, MAS’s April disclosure of $29.9bn in net FX purchases through H2 2019 likely caught the attention of the Treasury, and, with H1 2020 data due for release in October, MAS FX intervention will be in the spotlight.  



      
    
    202010_4E

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs. This content has been produced by Macro Hive Limited. While SGX has participated as a sponsor, SGX  has not had any input into the content and neither SGX nor its affiliates shall be responsible or liable for the same.)


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