Pivot to Asia II: Singapore Family Office Seminar

On the 07^th March 2023 and 13^th March 2023, Equinox GEMTZ held two virtual seminars for select audiences from all over the world. 

Equinox GEMTZ is a strategic consultancy set up to offer strategic advice in the spheres of finance, wealth management, public relations, political positioning, and security.  We help high net-worth individuals with financial engineering, utilising family offices and trusts structures to secure their assets and mitigate their risks.  We have more than a century of corporate, wealth management, and risk management experience. 

A family office is a company or trust, set up as a private wealth management advisory entity that serves high net-worth individuals, or families.  A family office differs from traditional wealth management companies because they offer a total solution to managing financial, investment, taxation and insurance needs.  They provide a broad spectrum of private wealth management services. 

Aside from traditional financial services, family offices are vehicles for various other activities, such as charity endowments, change of tax residence, business networking, entering new markets, and application for residency or citizenship.  Family offices, with trust structures, are used to conserve wealth across generations, bypass probate, minimise estate tax, and even educate the next generation.  There are two kinds of family offices.  A single-family office serves an individual and his family.  A multi-family office serves the one family of more than one individual. 

With political upheaval and economic instability around the world, we need a place where our wealth can grow.  We need a place that is politically stable and financially connected.  The key considerations include fund quantum, taxation and control of wealth.  Post-Covid-19, Singapore is the preferred destination for the wealthy.

Singapore has strong governance, political and economic stability, tax incentives, the presence of variable capital companies, strong regional and international connectivity, and the presence of the Singapore International Arbitration Centre.  Singapore had around 40 family offices several years ago.  As of end 2022, we have 700 family offices, and the number is growing. 

Singapore family offices provide a good foundation to apply for permanent residency, under specific schemes.  A Singapore passport carries a lot of benefits, especially ease of international movement, and elevated access to credit. 

Singapore intends to implement changes to the Permanent Residence qualification from 15^th March 2023.  The Monetary Authority of Singapore will announce further changes to the financial reporting of family offices from 01^st April 2023.  This is to cope with the influx of new family offices into Singapore. 

These are key takeaways for corporate taxation in Singapore.  Singapore’s standard corporate tax rate is 17%.  There is a partial tax exemption eligible for the first S$300,000 of chargeable income.  Under this condition, 75% of the first S$10,000 of chargeable income is tax exempt and 50% of the next S$290,000 of chargeable income is tax exempt.  With all available tax credits and reliefs, the average corporate tax paid varies from 10% to 14%.  Singapore has tax relief for charitable contributions and donations.  Singapore does not have a capital gains tax, or an estate tax.  This is an attractive reason for investors to set up a family office in Singapore. 

You could begin with a holding company or a trust.  Equinox GEMTZ proposes bespoke solutions specific to your needs.  You decide the financial engineering required, based on your budget and your needs. 

Phases of Setting Up a Family Office

Phase 1: Fact Find & Analysis

Phase 2: Design & Proposal

Phase 3: Set Up & Implementation

Phase 4: Management & Reporting

Key Investment Views for 2023

The following are some key investment views for 2023.  2022 was a year most asset allocations lost value.  Diversification was muted since most major asset classes were down for the year.  On the macro front, I expect US growth to stall, corporate profits to decline and associated cost cutting will result in higher unemployment rates.  All this could lead to a recession near the middle of the year.  Inflation is expected to gradually drop to saner levels, which means the Federal Reserve will pivot away from higher interest rates to a holistic monetary policy to either stave off or mitigate the projected recession.  Against this backdrop of deteriorating growth profile and higher unemployment, the Federal Reserve is expected to be less hawkish, and put downward pressure on interest rate.  This will result in a a re-steepening of the yield curve. 

Considering this, there will be plenty of opportunities for asset classes to make a strong turnaround. This will begin with rated sovereign bonds, particularly, US Treasury bonds.  This will eventually include global and Asian equities and high yield credit.  This recovery will be staggered across regions and asset classes, and this will be challenging to predict.  In 2022, Market reaction was driven by inflation.  2023 will probably be influenced by the same factors for the first half of the year only.  In 2022, the yield curve moved higher and inverted.  Equities de-rated via contracting valuations caused by higher discount rates.  In 2023, I would expect that the central banks will be less concerned with inflation, and focus on growth to prevent a stalled economy.  Sectors and industries that are more resilient, such as defensive and non-cyclicals, are expected to outperform in the first half.  In contrast, cyclicals and growth companies should lead a strong recovery towards the latter half. 

In the larger asset allocation picture, it is advised to maintain an underweight stance to equities for the short term.  Even as economies transition from inflation concerns to growth concerns, this does not change equity thesis.  Sovereign bonds are another matter altogether.  From a tactical perspective, it is advised to increase the duration exposure to take advantage of expected declining yields. 

In 2022, inflation made cash and money market attractive.  Most money market funds yielded above 4%.  From a strategic asset allocation perspective, it makes sense to maintain some cash in the portfolio because of the positive yields and almost no downside risk.  Sovereign bonds, particularly US Long Treasuries, look attractive after briefly exceeding above 4% in October 2022.  That is a level unseen since the global financial crisis of 2007/2008.  I expect 2023 to be disinflationary.  As such, the US yield curve will naturally re-steepen.  Yields will fall across the curve, the front-end falling more to reflect a dovish shift in the Federal Reserve’s sentiment. 

Because of this macroeconomic situation, I expect equities to underperform, especially during the first half of the year.  This will eventually rise towards the middle of the year.  Forward price equity-ratios are relatively high.  Real rates are expected to stay above 1% for most of 2023.  Valuations are likely to compress further from here.  Equity capitulation are almost always found in the middle of the recession, as peak bearishness entrenches in the markets.  Equities usually rebound once investors start to look at long-term prospects. 

I have a preference for Asian equities over developing market equities, but that is a personal bia, because I am bullish on East and Southeast Asia over an extended investment horizon.  China’s reopening is well underway.  Relaxation in other policy areas are explicitly stated.  Because of this, Chinese equities will continue to rise.  Valuation is currently around 12x, below 5-year average of 13.5x, which is far from being demanding.  The negative earnings revisions have bottomed out, for both earning per share and revision breadth.  They have started to trend upward from trough.  This uptrend will be boosted by an ongoing macroeconomic rebound.

Observations of the Chinese Economy 2023

China had an eventful 2022.  The two notable events were the end of the zero-tolerance Covid policy, and the 20^th National Congress of the Chinese Communist Party.  The latter was seismic.  The pivot away from the zero-tolerance policy for Covid -19 is a welcome development, while the developments from the national congress give us an insight on what to expect in terms of long-term growth prospects, well beyond 2023. 

China officially announced the end of its zero-tolerance Covid policy on the 07^th December 2022.  Since then, quarantine and local lockdown measures have been rolled back.  Domestic and international borders have been gradually reopened.  The unexpected end to the zero-tolerance Covid policy triggered a large-scale outbreak of Omicron variants across cities and urban areas. Those infection rate have peaked in large cities.  Lower-tier cities and the rural area will likely experience peak infection with a slight delay.  This will drag out the recovery.  Because the equity market priced ahead, the MSCI China index has rebounded strongly by 30%+ from the low in October to year-end.  The index still closed 20% lower for 2022 as a whole. 

Pent-up demand is expected to drive domestic consumption recovery in 2023.  This will offset much of the slowdown in export manufacturing activity caused by weaker developed markets demand.  Beijing has signalled relaxation on other policy fronts to spur growth.  These include regulations on internet platform companies and the property market.  The government has announced a new credit policy to promote housing sales.  Banks are now allowed to lower mortgage rates for first time home buyers in cities where home prices have dropped for at least three consecutive months.  State media has reported the government may roll back or delay the deadline of the “three red lines” policy, designed to discourage property developer’s leverage.  This is cosmetic.  The central government is obviously trying to address the key issue in the current economy down cycle, lack of credit demand, as opposed to lack of credit supply.  This is holding back economic momentum. 

The fiscal and monetary policy will remain supportive, at least, for the first half of 2023.  Liu Kun, the current Minister of Finance, has stated the Ministry will step up proactive fiscal policy this year by expanding fiscal expenditure, promoting special bond investment, and more transfer payments from the central to local governments.  This is necessary to stave off municipal bankruptcies in 2^nd tier cities.  The People’s Bank of China has reiterated their intention to use various monetary policy tools to maintain reasonably ample liquidity in 2023.  The central bank will take greater measures to lower financing costs.  This has raised market expectations on more interest rate and required reserve ratio cuts.  The 1-year loan prime rate and required reserve ratio are at 3.65% and 11.0% respectively, at the moment. 

The medium-to-long term view of the Chinese economy is more balanced, erring on the side of caution.  The 20^th Party Congress was, on the surface, a venue to announce the appointment of the seven top leaders to the Politburo Standing Committee.  Specific economic and social policies will only be announced in the subsequent National People’s Congress, which convened on the 05^th March 2023.  Under the new Politburo leadership, it is expected that several major themes set during the 14^th Five Year Plan, 2021-25, will likely continue their course longer.  The two major themes to focus on are “Common Prosperity” and “China Modernisation”.  National security and social stability, including supply chain security, are paramount, following the 20^th Party Congress. 

Another overarching is “Housing is for living, not for speculation”.  This summarises the government’s approach to reshape the property market.  High property prices incentivise households to save more to meet the cost of accommodation.  They prevent young adults and migrants from buying homes.  This conflicts with Beijing’s strategic objective of transitioning to a consumption-led, less unequal economy, the “Common Prosperity”.  Policymakers have been aggressively trying to alter expectations and revert the financialisation of property.  This is defined as buying one or more properties purely for capital increase instead of rental income generation.  This was a common practice in China, and a major driver of higher property prices.  The speed in which these policies were rolled out in 2021, and the restrictive nature of zero-covid policy, pushed the economy into severe downturn in 2022.  This was preferable to long-term social instability which would threaten the Party’s grip on power.  There is a financing issue local government.  This is one part of the wider problem of Chinese leverage, and potential for cascading corporate debt.  Recent easing back on some of these measures are meant to arrest the ongoing downturn in the property market, amid the still subdued housing demand. 

Deleveraging of housing market will resume once market sentiment is stabilised.  The current situation is unsustainable.  State-owned enterprise developers are the likely agents of change.  The government is likely to replicate, to an extent, the structure of more advanced economies such as Singapore.  Priority is likely to be given to improving housing quality and affordability, establishing a proper rental market, and further disincentives to the financialisation of property.  Once the market stabilises, the property tax is expected to rise. 

China’s long-term growth is expected to trend lower because of their aging population.  The intent to reducing dependence on real estate is meant to allow a more efficient allocation of resources, elevate consumption as the main engine of growth, and transitioning to higher value-added industries and renewable energies.  This should help boost total factor productivity, and support GDP growth in the long run.  To fund this, it is expected that state capital involvement will increase in key strategic industries.  In summary, we can expect growth, but the economy will slow down in the long term due to the ageing population and maturing economy.  The financial markets will mature and become deeper as more sophisticated financial engineering is employed.

Observations of the ASEAN Economy 2023

ASEAN has been resilient in 2022.  The majority of the countries in the region have enjoyed notable rebound in economic activity after reopening since Covid-19 pandemic.  Higher commodity prices increased export revenue in the first half of 2022 for commodities exporters such as Thailand, Malaysia and Indonesia. 

Inflation has risen during 2022, but local central banks reacted in a timely fashion to rein it in through multiple rate hikes.  Furthermore, subsidies have mitigated the impact of higher inflation on domestic consumption.  Local equities in the ASEAN region have been resilient compared to the global market, even though performance has been eroded by a stronger US dollar.  The strengthening of the US dollar against local currencies is expected to continue well into 2023. 

The 2023 outlook for the region is neutral for the region as whole.  However, China’s reopening will help with risk sentiment.  Thailand and Singapore  will benefit the most from the expected rebound of Chinese outbound tourism.  While we do expect China’s economy to rebound close to pre-Covid-19 levels, this will probably be delayed to the 2^nd half 2023 because of China’s slow opening. 

If, as expected, the US economy goes into recession, the slowdown in domestic demand and global trade will outweigh the rebound in China’s import demand.  This will negatively impact ASEAN economies.  The reopening momentum will slow in 2023.  A few local central banks are still on hiking cycles.  The consensus’ expectation for a pause only in 2^nd and 3^rd quarters.  The impact of higher cost of funding will be seen in the 2^nd half of 2023.  This will damp investment and consumption.

Observations of the Global Economy 2023

The following are some observations of the global economy, and the perceived outlook for the year.  We have observed that higher inflation became more entrenched in the economy due to global supply chain disruptions.  This was exacerbated by higher levels of demand and energy uncertainties.  In reaction to this, the Federal Reserve tapered from its asset purchase programme, and aggressively tightened monetary policy.  Inflation hit a 30-year high.  These cooling measures were necessary, but lagged. 

The Federal Reserve began raising interest rates in March 2022 by 25 basis points, and then a further 50 bps in May.  Despite this, inflation continued to escalate.  This forced the Federal Reserve into further aggressive tightening of monetary policy.  Interest rates were raised a further 75 basis points over the next four FOMC meetings, to around 3.75% within 8 months.  That was unprecedented.  Because of this, risk sentiment improved in late 2022.  Data indicated inflation likely peaked.  While inflation may have softened, it is still likely to remain above what we have experienced in the past decade. 

In its final FOMC meeting for 2022, the Federal Reserve moved rates by a widely anticipated 50 basis points to around 4.25% as inflation peaked.  However, they remain hawkish.  It is anticipated that continued rate increases will be continue in 2023 before it tapers off at its terminal rate at around 5.1%.  Any lowering of rates will only occur in 2024. 

Major central banks have followed the Federal Reserve.  The exceptions have been the Bank of Japan and the People’s Bank of China.  Because of this global tightening of credit, volatility has spiked.  Both fixed income and equity have dropped in value.  This runs against conventional wisdom and correlation theory.  As of end Dec 2022, the MSCI World index lost 18.1%, and Barclays Bloomberg Global Aggregate Corporate Total Return index lost 16.7%. 

In 2023, the effects of major central banks’ tightened monetary policy tightening continue to persist.  Policies will remain restrictive to tame inflation, which is still a concern.  It is likely that US growth will stall, corporate profits will decline and the associated cost cutting measures will lead to higher unemployment.  There is a higher probability of a recession sometime near the middle of the year.  Equity valuation will likely drop before recovering in the latter half of 2023. 

The last three years have been rough.  The economic shutdown caused by the global pandemic created a huge gap between demand and supply, exacerbated by the prolonged disruptions in global supply chains.  The resulting inflation took central bankers off-guard because it is unprecedented.  This forced them to make a reverse the ultra-loose monetary policy.  In fact, as of the beginning of March 2022, the Federal Reserve was still injecting cash in the economy. 

To tame inflation, interest rates need to be maintained above the neutral policy rate.  This neutral rate reflects the potential rate of economic growth and long-term inflation expectations.  Pertaining to the case of the US, potential growth stands around 1.7% per annum.  The best market approximation of long-term inflation expectations, the 30-year inflation swap, has hovered around 2.5% at the end of 2022.  As such, the assumed US neutral policy rate lies somewhere around 4.2%.  The Federal Reserve raised rates above these levels only in December, to 4.25% to 4.50%.  As such, much more needs to be done to effectively tame domestic demand.  As mentioned, the Federal Reserve has signalled its preference for another cumulative 75 basis point rate hike, to the 5.00% to 5.25% range.  This could be achieved in the next two to three meetings.  Rates are expect to remain unchanged until the end of 2023. 

There is a correlation to the evolution of inflation and employment.  The Federal Reserve remain cautious on inflation.  The concern is that higher wages could keep inflation above the Federal Reserve’s target for an extended period.  It is implicitly assumed unemployment will remain low, because the Federal Reserve is projecting unemployment at 4.6% at the end of 2023 and 2024.  However, the rate of layoffs in the technology sector threaten that.  If unemployment spikes, particularly as a precursor to a possible recessions, the policy resolve of the Federal Reserve would be tested.  Over the last few months, US inflation has been increasingly driven by lagging items, particularly housing, which has a weightage of 33% of the CPI basket.  This could bring inflation back to a 3.0% to 4.0% range and unemployment rising to a 5.5%-6.0% range.  That is very concerning. 

Based on the above, even if a rate cut does not occur before 2024, the forward looking nature of markets will consider any change in policy bias.  The market will start betting on a policy easing in 2024, or even as early as the second half of 2023.  That anticipated market sentiment would benefit growth assets, even for an economy in recession.  Historically, equities reach their trough before the end of the recession, provided that monetary and fiscal policies are more supportive of an economic recovery.  Assuming inflation eases off, current bond yields will become attractive for long term investors.  The key market risks are inflation and the impact of monetary policy.