City-state's appeal as a safe haven rises
SINGAPORE: Singapore's safe-haven appeal is rising as investors seek respite from the volatility unleashed by US President Donald Trump's tariff flip-flops and potential tax cuts.
Singapore equities have delivered a total return of 13% since the start of this year – more than double the MSCI All Country World Index's 6% gain.
The gains come as investors move funds into safer and more stable stocks here, noted Morgan Stanley analysts on May 22.
One of the causes of market volatility is the so-called 'Taco' trade, a term coined by Financial Times columnist Robert Armstrong referring to 'Trump always chickens out' when it comes to imposing tariffs.
Each time Trump backs down, stocks stage a rally.
The first notable Taco trade came on April 9, when Trump paused the supersized tariffs he had proposed on April 2 after global stock markets plunged and longer-term US Treasury yields spiked.
Soon after, Trump hinted at possibly removing Jerome Powell as chairman of the US Federal Reserve, only to retreat once markets reacted sharply.
Other examples include an agreement to roll back US tariffs of 145% to 30% on most goods imported from China, and a similar pullback by China on US goods.
The United States and China announced on May 12, after talks in Geneva, that there would be a further 90 days to negotiate and agree on tariffs. On cue, markets recovered.
The latest Taco trade was on May 26 and 27, when markets rallied after Trump announced a delay to 50% tariffs on goods from Europe.
US stocks remained strong on May 29, after a ruling by the US Court of International Trade stated that Trump had overstepped his authority by imposing across-the-board duties on imports from other nations.
But Wall Street is increasingly brushing off tariff threats from Trump: A recent analysis quoted by Bloomberg said the S&P 500 Index's sensitivity to tariff-related headlines has dropped sharply since April.
Data showed that just over a third of the S&P 500's daily movements are now driven by tariff news compared with early April, when tariffs accounted for as much as 80% of daily market moves, Bloomberg noted.
Morgan Stanley analysts believe the safe haven provided by Singapore stocks will continue to perform well amid these market swings.
Ratings agency Moody's downgraded the US government's credit rating by one notch on May 16, from AAA to Aa1, due to concerns about the nation's growing budget deficit and debt.
It was the third of three major rating agencies to do so amid stock market swings.
By comparison, Singapore holds an AAA rating, the highest possible, from all three major agencies.
Stocks and Treasuries are not the only US assets facing greater volatility; the US dollar has been battered, too.
Some investors have sought refuge from the greenback's weakness in the Singapore dollar, which has risen by 5.5% against the US dollar since the start of this year.
Bank of Singapore economist Mansoor Mohi-uddin noted on May 2 that the Singapore dollar is a proven long-term store of value, backed by the Monetary Authority of Singapore's (MAS) policy of allowing the currency's trading band to appreciate over time, as well as 'huge foreign reserves'.
The Singapore dollar was trading at 1.287 to a US dollar at 9pm local time last Thursday, almost unchanged from the day before, despite some volatility earlier in the day, and not far from its 10-year high of 1.2807 last September.
Michael Wan, a foreign exchange analyst at MUFG Bank, noted that the Trump administration has filed a notice of appeal with the US Court of International Trade against its ruling.
Wan said he expects that Trump's tariffs will likely remain in effect throughout the appeals process, as the administration is expected to pursue the case all the way to the Supreme Court, implying a prolonged period of legal uncertainty.
He added that the initial strengthening of the US dollar against most Asian currencies when the ruling was announced on May 29 will not last, given that 'tariffs on Asia are likely to stay amid the legal battle, coupled with the legal uncertainty also potentially crimping US growth and investment plans further'.
Demand for Singapore assets from investors seeking a safe place to park their funds may continue over the longer term.
Bank of Singapore's Mohi-uddin noted on May 22 that US Treasuries, the S&P 500 and the US dollar have fallen together on just 10% of all trading days since 1971.
'This year so far, there will already be 10 such days. We expect President Trump's erratic policymaking is set to increase the number of days, keeping us cautious on long-term Treasuries and the US dollar.'
Still, MAS managing director Chia Der Jiun noted recently that there are cyclical and structural factors determining the pricing and confidence in the US currency and US dollar assets.
'On the cyclical side, markets are pricing in slower growth, the prospect of higher inflation and questions over the fiscal trajectory in the United States, as well as rotation into other regions and hedging of overweight exposures,' he said at a forum on May 20.
'On the structural side, the US Treasury market is fundamental and systemic to the global financial system, and there is no alternative at this point.' — The Straits Times/ANN
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