MUMBAI • Go long on the Indian rupee while shorting the Singapore dollar. This is emerging as one of the favourite trades for next year, as strategists make a play on the diverging outlook for the two nations.
Lower reliance on exports and one of the world's fastest economic growth rates are seen insulating India from any potential US protectionist policies set forth by the Trump administration. In contrast, trade-dependent Singapore - already under pressure from the lower energy prices hurting the oil and gas services sector - may feel more pain.
Morgan Stanley, Societe Generale and Skandinaviska Enskilda Banken are global banks favouring the rupee against the Singdollar. An attractive carry, a strong external balance and falling inflation in Asia's third-largest economy are reasons Goldman Sachs Group and Nomura Holdings say the rupee will outperform regional peers.
"The Singapore dollar faces a number of exogenous risks as a highly open economy," said Mr Dushyant Padmanabhan, a Singapore-based foreign exchange strategist at Nomura. "Domestic macro conditions also remain weak."
India's high currency reserves and potential central bank intervention to limit volatility make the rupee less vulnerable on external shocks, of which there are potentially several in 2017.
DUSHYANT PADMANABHAN, a Singapore-based foreign exchange strategist at Nomura Holdings.
On the other hand, "India's high currency reserves and potential central bank intervention to limit volatility make the rupee less vulnerable on external shocks, of which there are potentially several in 2017".
The rupee will earn 5.9 per cent, including interest, by the end of next year - the highest total return in Asia, according to Bloomberg surveys of strategists. The Singapore dollar is seen handing investors a 0.8 per cent return in the period.
Three-month implied volatility in the rupee, a gauge of expected swings used to price options, has fallen for a third year, slipping 73 basis points to 6.02 per cent. A similar measure for Singapore's currency has jumped 52 basis points to 7.32 per cent, climbing for a fourth year.
While Indian Prime Minister Narendra Modi's shock November move to ban high-value currency notes is seen to be denting consumer demand and weighing on India's economic growth, analysts expect the impact to be transient. Morgan Stanley predicts expansion of 7.6 per cent next year, up from an estimated 7.4 per cent in 2016.
"The rupee is a 'good carry' story with attractive fundamentals," said Dr Kamakshya Trivedi of Goldman Sachs in London. "The nation will have the prospect of improving growth beyond the hit from the note ban."
Asian markets are pressured also by the US Federal Reserve's forecast for a steeper path for borrowing costs next year. The Singapore Government lowered the top end of its growth forecast to 1.5 per cent from 2 per cent last month, while saying the economy will probably avoid a recession.