Business

The only certainty is 
increased unpredictability

A big part of investing is managing risks and a big part of managing risks is taking measures to reduce uncertainty. This is why investors pay top dollar for the best forecasters and research. However, this can only help up to a point - sometimes, markets encounter situations where no amount of analysis or insight can reduce the uncertainty.

As things stand today, present circumstances represent one such instance, where the only certainty is heightened uncertainty ­- brought on by the entry of Donald Trump into the White House.

Rabobank last week perhaps summed up the present state of elevated unpredictability when it revived memories of a 1960s TV show that opened with the line "anything can happen in the next half hour!'' - an apt description of how the present White House is issuing disruptive executive orders.

To borrow a phrase from another Donald, namely former Defence Secretary Rumsfeld, one known unknown is that Mr Trump's "America First'' policy involves trade protectionism.

This much was made clear by an announcement to slap a 20 per cent tariff on Mexican imports.

However, some experts are still banking on the chance that trade protectionism will not feature as prominently as feared. For example, Bank of America-Merrill Lynch in its Feb 2 Liquid Insight Playing with fire: the FX implications of US trade protection, said its view is that the market is still pricing a benign scenario, in which the new US administration delivers fiscal stimulus and deregulation, but does not go ahead with trade protection.

"The market remains long the USD, despite the recent adjustment. The VIX index is at historically low levels, despite its latest increase'' said BoA-ML. "Global equities remain at historical highs, even after its correction (last) week. EM FX has been somewhat volatile, but without a clear trend this year.''

The biggest fear for the local economy is a full-fledged trade war between the US and China. In his Feb 3 Asia Economics - "America First" Trade Strategy report, Maybank Kim Eng economist Chua Hak Bin said North-east Asia trade is more vulnerable if a US-China trade war unfolds, because of larger China trade shares and supply chain linkages.

"Asean (ex-Singapore and Malaysia) trades more with the US than China, but are not direct targets so far, being smaller and not seen as direct competitors. Trade and demand diversion may cushion the impact on Asean."

Still, the implication is that Singapore will be negatively affected if the two superpowers decide on trade confrontation.

Meanwhile, Wall Street punters have been banking on the new president pump-priming the economy - Friday's bounce was because of hopes that he will dismantle bank regulations - with tax cuts and big government-funded projects.

Yet Natixis Asset Management in its latest Allocation Perspectives by multi-asset strategist Raphael Gallardo said Mr Trump's economic policy, which involves implementing Keynesian stimulus measures and protectionist policies to an economy that is already running on full employment, will only have a moderate impact on growth but will push up interest rates and the dollar.

"This surge in the dollar will be disastrous for Trump's popularity with disaffected voters in the deindustrialised rust belt states of the Mid-West," said Mr Gallardo.

"The temptation could then be to accentuate America's protectionist stance, which would only further increase the risk of a world recession on growth, but will also serve to push up interest rates and the dollar...

"We were sceptical on the legitimacy of the Trump rally on the equity markets. We have gradually taken profits on our exposure to US equities by shifting our overweight stance onto equities in the Eurozone, Japan, Canada, Taiwan and Australia."

This article appears in The Business Times today. For full listings of SGX prices, go to http://btd.sg/BTmkts

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