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Economics Markets Strategy - the DBS Vickers Securities Equities ...

Economics Markets Strategy - the DBS Vickers Securities Equities ... Economics Markets Strategy - the DBS Vickers Securities Equities ...

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29.10.2014 Views

Asian Equity Strategy Economics – Markets – Strategy cycle comes to an end followed by rapid tightening to normalize interest rates. Fig. 19: Singapore GDP growth and inflation 20 % % 10 We summarise the top and bottom three sectors 15 GDP growth (L) 8 Fig. 18: Singapore sector indices’ sensitivity to oil price, bond yields and US$ strength 10 6 Top 3 sectors Positively correlated Oil Bond yields US$ strength Top 3 sectors Negatively correlated Oil Bond yields US$ strength 5 0 4 2 Oil/Eq Svs/Dst Eqt Ivst Ins Mining Persona l Goods Eqt Ivst Ins Aero/D efence Mining Fd & Drug Rt l Ind. Met & Mines Inds Eng M edia Lif e Insuran ce Mobile T/Cm H/C Eq & Svs Inds Eng Mining Oil/Eq Svs/Dst Con & Mat 0.2 0.26 0.10 -0.05 0.00 -0.26 0.14 0.21 0.04 -0.04 0.06 -0.18 0.11 0.21 0.04 -0.03 0.07 -0.16 Source: Datastream, DBS calculations in Singapore where performances are highly or least correlated to (i) rising oil prices, (ii) bond yields, and (iii) stronger USD. The conviction calls are to raise weighting for offshore marine sector, and reduce for Telcos. Selective investment trusts in USD earnings should benefit from the dollar strength. We favor the property sector as an inflation hedge. While we believe physical property prices has room to fall 20% on average due to the spike last year, property stocks are trading at 30% discount to their RNAVs, which imply property prices could drop 50%. However, we believe this is unlikely, and would happen only during an economic downturn. Real interest rates in Singapore remain in negative territory, and economic growth is still expected to stay healthy with a relatively tight employment -5 -10 90 92 94 96 98 00 02 04 06 08 Source: CEIC Fig. 20: Singapore real rates vs property prices Index 200 Inflation rate (R) Source: CEIC. Real rates using 3-month SIBOR minus CPI inflation Fig. 21 : Singapore unemployment rate vs wage growth 16 12 180 160 140 120 100 8 80 60 40 20 0 -6 90 92 94 96 98 00 02 04 06 08 % Property Price Index (L) % Real rates (R) 0 -2 8 6 4 2 0 -2 -4 4 0 -4 -8 96 97 98 99 00 01 02 03 04 05 06 07 Unemployment rate Source: CEIC Wage growth 64

Economics – Markets – Strategy Asian Equity Strategy Fig. 22: Singapore property / banks relative performance vs inflation rate Index % 160 8 140 120 100 80 60 40 20 0 90 92 94 96 98 00 02 04 06 08 Property / Banks relative performance (L) Inflation (R) Source: DBS, Datastream, Bloomberg market at 1.8% unemployment rate. Reflation should still be on track if economic growth remains strong and under a negative interest rate environment. Korea: Upgrade to Neutral from Underweight Korea is raised to Neutral following our expectations for a weaker won and forecast for cuts in Korean policy rates. Moreover, with the weaker-than-expected 1Q GDP growth, growth fears has intensified among policy makers. And the new government could be rolling out fiscal stimulus, including rate cuts to bolster domestic demand. We still think the "747" economic pledge is ambitious, but the Korean government did lower growth potential to 6% from 7%. The new government should be working towards achieving this goal while continuing policy efforts to boost growth. Emphasis will be placed on revitalizing investments and domestic consumption, reinforcing competitiveness, and discovering new growth engines. Tax cuts and expansion of tax deductions, regulatory reforms and innovation of public companies, stabilising interest rates and exchange rates and support to boost exporters' competitiveness and stabilise current account balances are in the action plan for 2008. 7 6 5 4 3 2 1 - (1) (2) Fig. 23: Singapore / Hong Kong financials relative performance vs Fed funds rate % % 80 6 60 40 20 0 -20 -40 0 01 02 03 04 05 06 07 08 Singapore / Hong Kong Financial sector relative performance yoy% Fed funds rate (RHS) Source: DBS, Datastream, Bloomberg Fig. 24: Singapore vs Hong Kong residential property price index Index 450 400 350 300 250 200 150 100 50 90 92 94 96 98 00 02 04 06 08 Singapore Hong Kong Source: DBS, Datastream, Bloomberg 5 4 3 2 1 Hong Kong: Downgrade to Benchmark-weight from Overweight We have less preference for Hong Kong now because of its sensitivity to US interest rates, which are expected to rise from 4Q08 onwards. Since the Fed started to cut rates in August 2007, Hong Kong financials 65

Asian Equity <strong>Strategy</strong><br />

<strong>Economics</strong> – <strong>Markets</strong> – <strong>Strategy</strong><br />

cycle comes to an end followed by rapid tightening<br />

to normalize interest rates.<br />

Fig. 19: Singapore GDP growth and inflation<br />

20 %<br />

%<br />

10<br />

We summarise <strong>the</strong> top and bottom three sectors<br />

15<br />

GDP growth (L)<br />

8<br />

Fig. 18: Singapore sector indices’ sensitivity to oil price,<br />

bond yields and US$ strength<br />

10<br />

6<br />

Top 3 sectors<br />

Positively correlated<br />

Oil Bond<br />

yields<br />

US$<br />

strength<br />

Top 3 sectors<br />

Negatively correlated<br />

Oil Bond<br />

yields<br />

US$<br />

strength<br />

5<br />

0<br />

4<br />

2<br />

Oil/Eq<br />

Svs/Dst<br />

Eqt Ivst<br />

Ins<br />

Mining<br />

Persona<br />

l Goods Eqt Ivst Ins<br />

Aero/D<br />

efence<br />

Mining<br />

Fd & Drug<br />

Rt l<br />

Ind. Met &<br />

Mines<br />

Inds<br />

Eng<br />

M edia<br />

Lif e<br />

Insuran<br />

ce<br />

Mobile<br />

T/Cm<br />

H/C Eq<br />

& Svs<br />

Inds<br />

Eng<br />

Mining<br />

Oil/Eq<br />

Svs/Dst<br />

Con & Mat<br />

0.2 0.26 0.10 -0.05 0.00 -0.26<br />

0.14 0.21 0.04 -0.04 0.06 -0.18<br />

0.11 0.21 0.04 -0.03 0.07 -0.16<br />

Source: Datastream, <strong>DBS</strong> calculations<br />

in Singapore where performances are highly or<br />

least correlated to (i) rising oil prices, (ii) bond<br />

yields, and (iii) stronger USD.<br />

The conviction calls are to raise weighting for offshore<br />

marine sector, and reduce for Telcos. Selective investment<br />

trusts in USD earnings should benefit from <strong>the</strong><br />

dollar strength.<br />

We favor <strong>the</strong> property sector as an inflation hedge.<br />

While we believe physical property prices has room<br />

to fall 20% on average due to <strong>the</strong> spike last year,<br />

property stocks are trading at 30% discount to<br />

<strong>the</strong>ir RNAVs, which imply property prices could<br />

drop 50%. However, we believe this is unlikely,<br />

and would happen only during an economic downturn.<br />

Real interest rates in Singapore remain in negative<br />

territory, and economic growth is still expected<br />

to stay healthy with a relatively tight employment<br />

-5<br />

-10<br />

90 92 94 96 98 00 02 04 06 08<br />

Source: CEIC<br />

Fig. 20: Singapore real rates vs property prices<br />

Index<br />

200<br />

Inflation rate (R)<br />

Source: CEIC. Real rates using 3-month SIBOR minus CPI<br />

inflation<br />

Fig. 21 : Singapore unemployment rate vs wage growth<br />

16<br />

12<br />

180<br />

160<br />

140<br />

120<br />

100<br />

8<br />

80<br />

60<br />

40<br />

20<br />

0<br />

-6<br />

90 92 94 96 98 00 02 04 06 08<br />

%<br />

Property Price Index (L)<br />

%<br />

Real rates (R)<br />

0<br />

-2<br />

8<br />

6<br />

4<br />

2<br />

0<br />

-2<br />

-4<br />

4<br />

0<br />

-4<br />

-8<br />

96 97 98 99 00 01 02 03 04 05 06 07<br />

Unemployment rate<br />

Source: CEIC<br />

Wage growth<br />

64

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