On world financial markets, 2020 has begun the same way 2019 ended. Its waters remain a wild place, one where its waves can capsize the unaware at a moment’s notice. Question now is: how will Singapore dollar perform in 2020?
For starters, a no-deal Brexit remains a frightening possibility. The Trump presidency continues to surprise, to say nothing of the prospect of a Sanders administration. Hong Kong continues to fall from grace, as Beijing tightens the chain around its throat.
Suffice to say, investors are fervently searching for a safe harbour. For many, the Singapore dollar (SGD) is the sturdy port they’ve been searching for. A politically stable crossroads of regional trade, Singapore has long been a favourite of those looking for security. In light of recent events, this city-state has never looked quite so attractive.
Is Singapore dollar a viable play? And if so, how can the resourceful investor play the Singapore dollar to their advantage? That’s the question we’ll explore in today’s blog.
The Singapore dollar: A Financial Lifeboat On The High Seas Of Finance?
The financial community had so much faith in BoJo. Get elected, even if that means making grandiose promises (e.g., Brexit means Brexit). But after the counters record the last ballot, default to reason. After all, there’s no way Boris thinks he can negotiate trade deals in a year, right?
Well, it appears Prime Minister Johnson wasn’t bluffing. Brexit does mean Brexit, regardless of whether the UK, the EU, or financial markets are ready for it. Slowly but surely, smart investors are slowly backing toward the exit, terrified of starting a stampede.
In the two weeks following the UK election, GBP/SGD slid 3.6% from 1.82195 on 13 December to 1.75573 on Christmas Eve.
The Euro isn’t faring much better. The bloc, which faces potential no-deal chaos and less favourable UK trade deals in its future, has slid against the Singapore dollar (SGD). In August 2019, when BoJo optimism was at its height, the EUR/SGD rate was 1.56661. Today, it sits at 1.49790 – almost 4.4% lower.
Regionally, tensions in Hong Kong have pushed affluent residents to find a safer haven for their capital. Compared to September (when things were looking up), the HKD has lost almost 3% against the Singapore dollar (SGD).
And, what about the mighty USD? After hitting September highs of 1.39162, Forex traders have watched USD/SGD slip to 1.34462 – a loss of nearly 3.4%. While the consumer sector of the economy continues to grow, businesses have cut back, giving many investors pause.
Is The Rally Real?
In all these cases, a clear trend is emerging. Since the middle of 2019, the Singapore dollar (SGD) has been increasing in value against a slew of major currencies. However, a thorny question persists: Is the rally based on anything concrete? Or are institutional investors just searching for a haven?
To find the answer, let’s take a broader look at Singapore’s economy. At first glance, it seems like a stable place to invest. It’s the third least corrupt country on Earth, has low taxes, and is very business-friendly.
Over the decades, these qualities have helped Singapore build a world-class finance sector. Trade, oil & gas, and biotech are also leading industries.
So, bombs away? Hold the phone – once you take a closer look, things aren’t as rosy as they appear. In 2019, Singapore struggled, managing only to eke out growth of 0.7%. Local economists blame blowback from the China-US trade war for the stifled pace. While Singapore manufacturing is in recession, it’s worth noting that service industries (like finance) posted respectable growth numbers.
The verdict? Despite struggles in specific sectors, the fundamentals of the Singapore economy are quite solid.
How To Play The SGD’s Strength To Your Advantage
So, we’ve established that the SGD rally has substance. As investors, how can we take advantage of this situation? Let’s review a few scenarios.
To be honest, most of them revolve around the GBP and the EUR’s impending date with disaster. For starters, merely buying & holding will work. Once the world realises BoJo actually plans to drive off the Brexit cliff, panic will ensue.
Remember, the smartest money has already left the party (i.e., 2019 and before.) When the masses finally see the writing on the wall, they’ll stampede for the exit. Projected losses of 10% against benchmark currencies (USD, SGD, etc.) are conservative estimates. It’s not too late – by moving significant capital into the SGD, you’ll preserve its value as the GBP or EUR tanks.
A second advantage comes from deploying your SGD after the Brexit dust has settled. According to expert analysis, the value of British real estate may tank. KPMG, an internationally-acclaimed accounting firm, has set a conservative estimate of 6%-7.5%. They have, however, not ruled out a plunge between 10%-20%. And then, there’s the Bank of England. In December 2018, they warned that an apocalyptic drop of 30% wasn’t out of the question.
As of January 2020, the average asking price for British homes sat around 306,000 GBP nationwide. A 10% drop would shave 30,000 GBP off asking. And if the worst-case scenario hits? Over 90,000 GBP. Once things settle down, you can then swoop in and snap up intrinsically valuable properties.
The same principle applies if you run a business. The United Kingdom makes some excellent value-added products. Mechanical and electronic machinery rank first and third, respectively, in export value.
Once the no-deal Brexit plunge in the GBP hits, all these products go on sale. And if some manufacturers go belly-up? The strength of your SGD and fire-sale auction prices will constitute a once-in-a-lifetime opportunity.
Get The Best Price Possible On Your SGD Trade
Investors who hold safe-haven currencies will be best equipped to move forward in 2020 and beyond. Unfortunately, you can inadvertently erode this advantage by moving your money inefficiently.
Put simply – if you use your bank to move cash, you’re getting hosed. They offer rates far removed from the interbank, or REAL rate of exchange. To add insult to injury, they also charge fees for the “privilege” of moving your money.
Thankfully, the internet revolution has given rise to alternatives. Transferwise, WorldFirst, XE (xe.com) – all offer superior rates, products, and customer service. To illustrate what we mean, let’s see what the Royal Bank of Scotland will give you on an SGD trade. According to their latest figures, their GBP/SGD rate is 1.6600. That’s a far cry from the interbank rate (1.75573) mentioned earlier.
Of course, you can’t trade at the interbank rate – but you can get close. Transferwise technically trades at the interbank rate, choosing to make money by charging a nominal fee. For large amounts, it’s often 0.426% or less.
If you moved 100,000 GBP to SGD with RBS, you’d end up with about 166,000 SGD on the other end. That sounds fine – until you realise you’d get 175,365 SGD if you went with Transferwise. Despite their cost, trust us – 10,000 SGD will buy you more Singapore Slings than you can handle.
Forward Contracts – Your Best Defence Against Currency Fluctuations
Before we leave you to the business of securing your capital, a word. We don’t need to tell you that economic waters have been choppy lately. Anything that comes out of Trump’s or BoJo’s mouth can send currencies gyrating up or down.
The point we’re trying to make is this: Unpredictable geopolitics shouldn’t cost you your hard-earned money. Let’s say a Brexit development sends GBP/SGD 1.5% lower. If we’re using the example in the section above, that could cost you THOUSANDS of SGD.
There is a way to avoid such a tragic loss of capital – forward contracts. Put simply, it is a mutually agreed-upon price at which you’ll execute a trade in the future. That way, if the GBP/SGD moves against you, you’re protected.
It’s true – you won’t get the best possible price at the moment. But, forwards provide a measure of security in an insecure world. In our view, that’s worth trading a bit of equity for.
The Singapore Dollar: A Safe Port From The Coming Economic Storm
Brexit is closer than ever to finally happening. When it hits, it likely won’t be a soft landing. And the American trade war? While deals are being signed, bones of contention remain between the US and China.
Setting aside some capital in a safe haven isn’t paranoid – it’s common sense. And, as safe ports go, the SGD is a solid one.