Post on 08-Jun-2015
description
QE3 will end in October
2014….but markets are
still rising....!!!!???
Kevin Scully, 23 August 2014
www.nracapital.com
Disclaimer
This material is for educational purposes only & does not constitute
financial product advice. Netresearch-asia / NRA Capital does not
represent or warrant that the material is complete or accurate. You
should consider obtaining independent advice before making any
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for any loss arising in any way (including by way of negligence) from
anyone acting or refraining from acting as a result of this material is
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presenter/and staff of NRA Capital Pte Ltd.
What is QE or Quantitative
easing ?
Its an unconventional form of monetary
policy used only when short term interest
rates are near zero ?
Government purchases of non
government securities at the long end of
the yield curve in the hope of reviving
borrowing and consumption.
We have had four rounds of QE
type activities since 2008
QE1 – Nov 2008 to June 2010 US$600bn
QE2 – Nov 2010 to June 2011 US$600bn
Operation twist – Sept 2010 to Sept 2011
US$400bn
QE3 – Sept 2012 to ??? US$85bn per
month – todate about US$1.8trillion
Estimated total QE since 2008 – US$3.2
trillion…..
Fed fund rates collapsed to almost
zero in 2008 which prompted QE
Effects of the ending of QE1 and
QE2 give prelude to end of QE3
QE1
start
QE1
ends
QE2
starts
QE2
ends
OT
starts
OT ends
QE3 starts
Tapering
But QE seems to have failed….
The post QE impact…is coming
What should we look for ?
US unemployment rate below 6.5% - done
US inflation rate above to 2% - holding
10 year Treasury yields above 3% -
waiting
A rise in the Fed funds rate - waiting
US unemployment rate was
6.1% in July 2014
US CPI was 2.1% for July 2014
US 10 Year Treasury Yields up
from low and likely to rise further
Janet Yellen’s latest comments
last night at Jackson Hole
….the economy was improving but the
Fed was waiting for more evidence about
the health of the labour markets before
deciding when to start raising interest
rates….
Stock markets are already into
the 5th plus year of a Bull run….
Healthy correction of 20% due
and likely to be triggered by end
of QE3 and a hike in Fed Fund
Rate early 2015…???
Dow Jones 2000-2014
Bull cycle (4-5
years) Dow up
14% per annum
Bear cycle (2-
3 years) Dow
down 32%
per annum
Bull cycle (5
years…?)
Dow up 20.1%
per annum
FSSTI Index 2000-2014
Bull cycle (4-5
years) FSSTI up
26.9% per annum
Bear cycle –(2-3
years) FSSTI
down 38% per
annum
Bull cycle (5
years…?) FSSTI
up 17.6%
Hang Seng Index 2000-2014
Bull cycle (4-5
years) HSI up
30.3% per annum
Bear cycle (2-3
years) HSI down
41% per annum
Bull cycle (5 years
?) HSI up 14.4% per
annum
Long term interest rates return to
normal – for 10 year treasuries 4 to 5%
10 year US
Treasury yields
back to 4 to 5%
Expect mutual fund money to flow into
US equities out of emerging markets
Record US$40-45bn flowed into US equities in
Jan/Feb 2014
Bond funds continued to see outflow
Emerging market ETFs still seeing outflows with
some mutual funds seeing outflows for the first
time
Dow BULL market looks set to continue for
another 12 to 24 months
Asset class performance between
May and August 2013May to Aug
2013
S&P 500 0.01%
FTSE -2.94%
Bond Index -3.44%
Gold -3.64%
Hang Seng -7.70%
Shanghai -8.06%
Nikkei 225 -8.69%
STI Index -11.50%
Jakarta -18.64%
Asset class performance between
May and Oct 2013May to Oct
2013
S&P 500 6.16%
Nikkei 225 -0.21%
Hang Seng -0.33%
FTSE -0.72%
Shanghai -2.14%
Bond Index -2.52%
STI Index -6.96%
Jakarta -10.39%
Gold -10.55%
Asset class performance between
Jan to Apr 2014Jan to Aug
2014
Jakarta 21.6%
HSI 7.7%
S&P 500 7.6%
Shanghai 5.9%
Gold 5.8%
FSSTI 4.9%
Bond Index 4.8%
FTSE 0.4%
Nikkei -4.6%
There was a trend reversal in February
to less risky assets and opportunistic
flows into emerging markets Ukraine crisis led to some funds flow into less
risky assets
But Ukraine economy is only two thirds the
size of Singapore – so no impact as
confirmed by the Vix Index staying below the
20 level
Some opportunistic value flows into emerging
markets like Indonesia, Hong Kong and
Shanghai
Singapore outlook
Singapore property
prices finally starting
to turn down
Singapore property – likely to under
perform because of Govt measures
The latest measure on debt servicing (TDSR) is likely to be the final nail
National Development Minister Khaw Boon Wan recently said that he wanted to bring affordability of HDB flats from 5.5 times annual income to 4 times – with incomes unchanged this points to a 30% decline in prices. DBS Bank CEO talked about property price declines of 15%.
URA data shows that property prices have declined in the last three quarters, rentals are also falling
Property prices and rentals in
Singapore set to fall further
Residential Property Act – look
for the next SC Global Under the Residential Property Act, housing developers whose
shareholders and directors are not all Singaporeans have to get a
Qualifying Certificate (QC) to buy residential property.
'QC holders are given permission to purchase residential land and property
solely for development and sale of the units, and not for investment
purposes. These conditions are imposed to control foreign ownership of
land in Singapore,' the Singapore Land Authority said.
This requires them to sell all units within two years of obtaining the
temporary occupation permit (TOP). They are not allowed to rent out unsold
units.
Extension beyond the two years incurs a cost of 8 per cent, 16 per cent and
24 per cent of the property purchase price for the first, second and third
extra years, respectively. The amount is pro-rated based on the proportion
of unsold units.
Big cap property stocks
Price Fair value Price to
Property stock S$ S$ Recommendation accumulate
City Dev 10.25 10.00 SELL Below $8.80
Capitaland 3.37 3.60 HOLD Below S$3.00
Keppel Land 3.49 3.94 BUY/Accumulate Below S$3.00
Singapore banks – Neutral
Singapore bank loan deposit ratio
more than 100% since 2013
SIBOR has ticked up – get
ready for higher interest rates
Three month
Have you noticed the latest
DBS and OCBC adverts
If Singapore interest rates rise
Three local banks should see better net
interest margins….but
NPLs will start to rise
DBS has the lowest general provisioning
coverage, also its aggressive expansion
into SME loan market exposes it to more
bad loans
Singapore banks – UOB and
OCBC slightly undervalued
Price
Fair
value Price to
Bank stocks S$ S$ Recommendation accumulate
DBS 17.93 15.90 SELL
Below
$14.50
OCBC 10.41 11.20
HOLD/BUY on
weakness
Below
S$9.00
UOB 22.87 25.00
HOLD/BUY on
weakness
Below
S$20.00
UOB has strongest balance sheet
Balance Sheet
Strength
As at 31March 2014 UOB OCBC DBS
CET1 (Final-%) 12.5% 11.0% 11.7%
Tier 1 CAR (%) 14.0% 14.4% 13.1%
Total CAR (%) 17.7% 15.6% 15.3%
Note: Basel recommended CET1 is 4.5%
Telcos – traditionally yield plays SingTel, Starhub and M1 are yield plays offering
dividend yields of between 4-5%
The expected rise in risk free / interest rates suggest that
we could see some downside risks in their stock prices
Probably worth accumulating 10% below their current
stock price levels.
Current Price to Dividend
Stocks Price S$ Accumulate Yield
S$ S$ (%)
M1 3.76 3.0 3.7%
Sing Tel 3.86 3.50 4.4%
Starhub 4.13 3.50 4.8%
REITs more weakness ahead but a
buying opportunity is around the corner
90% of REITs have negative
returns in 2013 on “Tapering”
Only 2 of the 29 Reits have positive returns between Dec 2012 and August 2013 (SPHREIT and PLife REIT)
Likely to see more weakness once ‘tapering actually starts and funds move out of fixed income plays
Wait to accumulate when the yields pass 6-7% and gearing remains below 40% - pick defensive REITs
Watchout for possible devaluation of capital values when interest rates rise (ie capitalisation rates which are used to value the REIT assets will also rise) – which is why you should look at lower levels of gearing
Oil & Gas sector - overweight
Fundamentals of oil & gas sector
Global oil reserves about 1637 billion barrels of
oil
Current annual consumption – 27 billion barrels
– reserves can last 60+ years
Need to expand oil exploration activity in deeper
waters
Only wild card is shale oil/gas whose current
reserves are estimated at more than 5 trillion
barrels of oil equivalent
Rig market profile favours good
demand for deep water rigs
More than 70% of the world’s rigs are more than 30 years old
Most of these rigs do not meet new environmental and safety standards and are being phased out
Old rigs cannot drill in deep waters
Rig builders and OSVs charters favoured
0
10
20
30
40
50
60
70
80
90
2004 2005 2006 2007 2008 2009 2010 2011 2012
DRILLSHIP JACKUP SEMISUBMERSIBLE
Source: IHS Petrodata
Rig orders remain robust….but
Increased competition from China
will pressure margins
China plans to increase its global market share in rig building from 8% in 2011 to 20-30% by 2014/2015 with new entrants in Cosco and Yangzijiang but there is still enough to go around
Customer risks have increased as they now have less access to European bank financing
More speculative building
Thank You