Economics Markets Strategy - DBS · 2018. 4. 14. · Hong Kong Treasury & Markets - Management...

EconomicsMarketsStrategy3Q 2013DBS Group Research13 June 2013

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June 13, 2013Economics–Markets–Strategy

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The information herein is published by DBS Bank Ltd (the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The infor-mation herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.

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ContentsIntroduction 4

Economics How high the moon? 6

Currencies Looking past volatility 22

Yield Transitioning to higher interest rates 36

Offshore CNH Becoming a global player 52

Asia Equity Wary but hopeful 56

Greater China, Korea

China A paradigm shift in macro management 68

Hong Kong More inflation 72

Taiwan Recovery is delayed 78

Korea Not too weak 84

Southeast Asia, India

India Stuck in negative loop 88

Indonesia Commodity headwinds 94

Malaysia Expectation lowered 98

Thailand Infrastructure push 104

Singapore Not as bad 108

Philippines Fastest 114

Vietnam Turning dicey again 118

G3

United States comme ci, comme ca 122

Japan Is the party over? 126

Eurozone No easy way out 132

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Economics–Markets–StrategyJune 13, 2013

Economic forecasts

Policy and exchange rate forecasts

Policy interest rates, eop Exchange rates, eop

current 3Q13 4Q13 1Q14 2Q14 current 3Q13 4Q13 1Q14 2Q14

US 0.25 0.25 0.25 0.25 0.25 … … … … …Japan 0.10 0.10 0.10 0.10 0.10 94.7 100 102 104 105Eurozone 0.50 0.50 0.50 0.50 0.50 1.336 1.31 1.32 1.34 1.35

Indonesia 5.75 5.75 5.75 6.00 6.25 9,893 9,850 9,800 9,750 9,700Malaysia 3.00 3.00 3.00 3.00 3.00 3.15 3.02 2.99 2.96 2.94Philippines 3.50 3.50 3.50 3.75 4.00 43.1 41.5 41.0 40.5 40.0Singapore n.a. n.a. n.a. n.a. n.a. 1.26 1.24 1.23 1.21 1.19Thailand 2.50 2.50 2.50 2.50 2.75 31.0 29.9 29.8 29.7 29.6Vietnam^ 7.00 7.00 7.00 7.00 7.00 21,031 21,100 21,200 21,300 21,400

China* 6.00 6.00 6.25 6.25 6.50 6.14 6.09 6.06 6.03 6.00Hong Kong n.a. n.a. n.a. n.a. n.a. 7.77 7.77 7.78 7.79 7.80Taiwan 1.88 1.88 1.88 2.00 2.13 29.9 29.6 29.4 29.2 28.9Korea 2.50 2.50 2.50 2.75 2.75 1135 1100 1080 1060 1040

India 7.25 7.00 7.00 7.00 7.00 58.2 56.2 56.6 57.0 57.4

^ prime rate; * 1-yr lending rate

Source: Bloomberg and DBS Group Research

GDP growth, % YoY CPI inflation, % YoY

2010 2011 2012 2013f 2014f 2010 2011 2012 2013f 2014f

US 3.0 1.8 2.2 1.6 2.2 1.6 3.1 2.1 1.6 2.0Japan 4.5 -0.6 2.0 1.8 0.9 -0.7 -0.3 0.0 0.0 2.0Eurozone 1.9 1.6 -0.5 -0.6 0.1 1.6 2.7 2.5 1.5 1.9

Indonesia 6.1 6.5 6.2 6.3 6.5 5.1 5.4 4.3 5.3 5.4Malaysia 7.2 5.1 5.6 5.0 5.5 1.7 3.2 1.7 2.0 2.4Philippines 7.3 3.6 6.8 6.4 6.0 3.8 4.8 3.1 3.1 4.0Singapore 14.8 5.2 1.3 2.5 4.0 2.8 5.2 4.6 2.8 3.6Thailand 7.8 0.1 6.4 5.0 5.0 3.3 3.8 3.0 2.9 3.7Vietnam 6.8 5.9 5.0 5.3 5.7 9.2 18.6 9.3 6.7 6.8

China 10.3 9.3 7.8 8.0 8.5 3.3 5.4 2.6 3.5 3.5Hong Kong 7.0 4.9 1.5 4.0 4.0 2.4 5.3 4.1 4.5 3.5Taiwan 10.7 4.1 1.3 2.6 4.2 1.0 1.4 1.9 1.0 1.3Korea 6.2 3.6 2.0 2.8 4.0 2.9 4.0 2.2 1.5 2.9

India* 8.4 6.5 5.0 5.7 6.1 9.6 8.9 7.4 6.7 7.0

* India data & forecasts refer to fiscal years beginning April; inflation is WPI

Source: CEIC and DBS Research

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Interest Rate Forecasts%, eop, govt bond yield for 2Y and 10Y, spread in bps

Source: Bloomberg and DBS Group Research

12-Jun-13 3Q13 4Q13 1Q14 2Q14US 3m Libor 0.27 0.30 0.30 0.30 0.30

2Y 0.33 0.78 0.78 1.17 1.1710Y 2.23 2.75 3.00 3.25 3.5010Y-2Y 190 197 222 208 233

Japan 3m Tibor 0.23 0.25 0.25 0.25 0.25

Eurozone 3m Euribor 0.21 0.19 0.19 0.19 0.19

Indonesia 3m Jibor 5.16 5.50 5.75 6.00 6.252Y 5.78 5.50 6.00 6.50 6.7510Y 6.51 7.00 7.50 8.00 8.2510Y-2Y 74 150 150 150 150

Malaysia 3m Klibor 3.21 3.25 3.25 3.25 3.253Y 3.15 3.20 3.20 3.20 3.2010Y 3.46 3.60 3.60 3.60 3.6010Y-3Y 31 40 40 40 40

Philippines 3m PHP ref rate 1.55 1.50 2.00 2.75 3.002Y 2.72 2.75 3.00 3.25 3.5010Y 3.54 4.25 4.50 4.75 5.0010Y-2Y 82 150 150 150 150

Singapore 3m Sibor 0.37 0.35 0.35 0.35 0.352Y 0.28 0.40 0.40 0.46 0.4610Y 2.19 2.10 2.25 2.35 2.5010Y-2Y 191 170 185 189 204

Thailand 3m Bibor 2.60 2.60 2.60 2.60 2.852Y 2.83 2.70 3.00 3.00 3.2510Y 3.97 3.80 4.25 4.25 4.5010Y-2Y 114 110 125 125 125

China 1 yr Lending rate 6.00 6.00 6.25 6.25 6.502Y 3.09 3.25 3.50 3.75 3.7510Y 3.46 3.75 4.00 4.25 4.2510Y-2Y 37 50 50 50 50

Hong Kong 3m Hibor 0.38 0.40 0.40 0.40 0.402Y 0.25 0.83 0.93 1.32 1.3210Y 1.62 2.10 2.60 2.85 3.1010Y-2Y 137 127 167 153 178

Taiwan 3M CP 0.88 0.80 0.80 0.88 1.002Y 0.61 0.80 0.90 0.90 0.9010Y 1.34 1.60 1.70 1.70 1.7010Y-2Y 73 80 80 80 80

Korea 3m CD 2.69 2.70 2.75 3.05 3.053Y 2.88 2.85 3.00 3.25 3.5010Y 3.31 3.50 3.75 4.00 4.2510Y-3Y 43 65 75 75 75

India 3m Mibor 8.46 8.00 8.00 8.00 8.002Y 7.41 7.00 7.00 7.00 7.0010Y 7.30 7.50 7.50 7.50 7.5010Y-2Y -11 50 50 50 50

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Economics–Markets–StrategyIntroduction

Global growth remains in the doldrums. US growth has averaged but 1.4% annualized for the past two quarters, considerably less than the 2.2% averaged in the two quarters before that. We expect further slowing to 1.2% in 2Q13, thanks mainly to the $85bn of sequester cuts that take effect in the six months between April and September.

What’s $85bn over six months? A lot. Here’s one way to see it. Start with the $16trn economy. That’s an annualized number, which means output is $4trn per quarter. Next, pretend growth runs at a 2% rate – what it’s done for the past two years. Add in another 2% for inflation and nominal GDP growth comes to 4%. Again, though, that’s an annualized 4 percent. So you’re looking at 2% actual growth over six months’ time. Two percent of $4trn comes to $80bn, a tad less than the $85bn of sequester cuts.

In other words, the $85bn of sequester cuts more than wipe out all the growth one might have expected / enjoyed had the economy continued to chug along at the 2% real rate that it has for the past two years. That is what $85bn in six months is. And what it means is that growth over the next two quarters isn’t going to look much better than it has for the past two. Expect about 1.4% – less than half the long-run average.

Europe of course is faring more poorly than the US. Growth there isn’t running at 50% to 60% of long-run average. The economy there has been shrinking for the past six quarters. Granted, it shrank at only a 1% annualized rate in the first quarter, much better than 2.4% contraction in 4Q12. But few are convinced the ‘improvement’ is anything but volatility. The PMIs remain well below 50 (chart below). The unemployment rate marches relentlessly northward. It’s now at 12.2% for the Eurozone overall. In France, unemployment has breached 11%; in Italy, 12%. In Spain it is only two ticks shy of 27%, about where Greece is, of all places. The pain has become so acute that national authorities are now, with official blessing from the EU and the IMF, backing away from the austerity plans

David Carbon • (65) 6878-9548 • [email protected]

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IntroductionEconomics–Markets–Strategy

agreed to in 2011 and 2012. The ECB’s OMT program has done a marvelous job of keeping speculators off the back of the euro and sovereign bonds but, as the recent rate shows, it has done nothing to help the real economy. Short-term threats to the euro are low; longer-term risks emanating from the real economy remain essentially unchanged.

In Asia, China is key. The new leadership has made it abundantly clear it is in no hurry pick up the growth pace. Longer-term structural changes and reforms are the priority for now – not lifting the short-term cyclical growth rate with government sponsored fixed asset investment.

That’s fine, even good, if it lessens the risk of a cyclical blowout somewhere down the line. Steady growth is, or should be, the preference for investors of all stripes. More predictability, less risk, a better night’s sleep. There’s plenty of investment coming down the pipe, what with plans for increased urbanization on the drawing board and the pressing need to bring development inland and away from the coast.

We had been anticipating a bit more gas from China once the new leadership took over at the start of the year. With no urgency being displayed there, we have downgraded our growth forecast to 8% from 9% and, if Beijing remains as nonchalant as it has been so far this year, that could fall further.

China, the US and Europe. Three speeds. Three attitudes. Europe is shrinking and authorities are anxiously loosening fiscal policy. The US is plodding along at a sub-2% pace and the Fed is debating whether to begin trimming QE3. China is running much faster than anywhere else in the world but much slower than recent norms and the authorities appear pleased as punch.

A slowboat to everywhere. When the global financial crisis erupted in earnest back in 2008, isn’t this precisely where everyone said we would be five years hence? When you think about it, things could be a lot worse.

David Carbon, for

DBS Group Research

June 13, 2013

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Economics–Markets–StrategyEconomics

Global central banks continue their drive to push interest rates lower. US short-term rates have been zero for four years and while markets fret the eventual tapering of QE3, for now the Fed continues to buy $85bn of Treasury and mortgage bonds every month. The ECB cut rates to 0.5% in May and its balance sheet now stands at 30% of GDP, 10 percentage points higher than the Fed’s. Enter Japan! The central bank there has announced it will double the size of the monetary base in the next two years.

Money, money, money. A lot of it’s being printed and a lot of it doesn’t stay put – it flows to Asia, where growth and returns are higher. Interest rates fall, asset prices rise – especially property, the most interest rate-sensitive asset of all. Since March 2009, when the global financial crisis ended in Asia, residential property prices have

David Carbon • (65) 6878-9548 • [email protected]

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Asia property: how high the moon?

• Asia’s property prices march relentlessly northward

• Relative to incomes, however, prices are falling steadily in most Asian countries. Housing is becoming more affordable, not more expensive

• Hong Kong is the key exception to this rule. Property prices relative to income have risen by nearly 80% since 2000. This raises a red flag

• Housing debt remains very low in Asia compared to the US

• But when interest rates go up, risks go up. Monthly housing payments in many Asian countries will rise by 15%-25% when rates return to precrisis norms. Some families will find themselves over-extended

• Indonesia and the Philippines are the most vulnerable to higher interest rates. China, India and Thailand are the least vulnerable

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Economics Economics–Markets–Strategy

more than doubled in Hong Kong. They’re up by 55% in Singapore, 50% in China and Taiwan and by 40% in Malaysia (chart below).

For foreign investors lucky enough to have bought back in 2009, returns have been 20-50 percentage points higher in USD terms, thanks to inflows pushing currencies north in tandem with property. Unable to control these inflows and local interest rates as a result, authorities throughout Asia have resorted to direct / administrative controls on property to keep prices in check. And still they rise. Compared to March 2000, prices in Asia now are as high as they were in the US just before the eruption of the subprime crisis that threw the entire global economy into the biggest recession since 1929 (chart bottom of previous page).

How high the moon?

How much higher can Asia’s property prices go? Have they risen ‘too far’ already? If so, can GDP/income growth restore a proper balance? Or has a bubble formed that only a blowout can now ‘fix’?

Let’s answer the last question first, or, rather, ‘address’ it. Because nobody we know of has ever come up with a way to identify a bubble until after it’s blown. If

Capital inflow turned briefly to outflow in late-2011. Inflows are the rule again

Hong Kong’s property prices have risen the most since 2009. Singapore’s next

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From an invest-ment perspective, property prices do not appear out of line with equities in Hong Kong

monetary authorities could do it, bubbles wouldn’t exist. If private investors could do it, they wouldn’t be sitting in your office professing such skill, they’d be sitting on the beach or advising kings and presidents. The best one can do is to look hard at the data and make inferences about what comes next. Let’s try that.

Housing as an investment

While most people buy homes to live in, many in Asia buy them as investments. Often, they are blamed for driving house prices higher than they ‘should’ be. Singapore and Hong Kong are home to Asia’s wealthiest investors and highest home prices. Is there a connection? More generally, from an investment return perspective, how have home prices compared to, say, equities?

In Hong Kong (chart above), equities and property have offered similar returns over the long haul. Since 1985, equities have risen by 10.6% per year, a tad more than the 9.8% return delivered by property. Rental payments and equity dividends are missing from this picture but assuming they are broadly similar then the conclusion wouldn’t change: from an investment point of view, property does not appear overvalued relative to equities.

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A small (100 sq meter) home would cost US$1.4mn in Hong Kong and US$870k in Singa-pore

Ditto for Singapore (chart at bottom of previous page). In USD terms, (to make returns comparable with Hong Kong), both property and equities have returned 8.1% per year since 1985. Assuming again that rental payments and equity dividends are similar, then like Hong Kong, Singapore property prices do not appear overvalued relative to equities.

As long as we have these long-run pictures in front of us, it’s worth making a couple of additional points. The first regards Hong Kong, and the fact property prices there have climbed so much more in recent years than in other countries. It seems reasonable to view much of Hong Kong’s rise as a rebound from the SARS epidemic that peaked in mid-03. Yes, prices have soared by 4x since then but compared to 1997, they are up by only 40%. Moreover, from a purely technical / price perspective, 1997 does not appear overvalued looking back over the data today.

Similarly for Singapore. It is often exclaimed that property prices (and rents) have soared of late. And they are, in fact, up by 55% since mid-09. But that puts them only 18% higher than 1996 levels. Of course one could argue that Singapore’s prices were ‘too high’ in 1996. To some extent we’d agree. But deflate the 1996 levels to something ‘more reasonable’ and today’s prices still don’t seem out of line with what prevailed 17 years ago.

How much is that house in the window?

Price changes are one thing. What about prices themselves – the levels? How much does a house cost in Chinese yuan, or Indonesian rupiah or Sing dollars? And can anyone afford to buy one anymore?

Asia’s houses aren’t cheap, that’s for sure. The average 100 sq meter (1055 sq ft) home in Hong Kong would run you US$1.4 million today. And that’s not a big house, either, even by Asian standards. But it’s already so expensive that the average family in Hong Kong lives in a 60 sq meter house instead. That’s barely one-quarter the average US home size (208 sq m / 2200 sq ft).

Prices are lower in Singapore but the average 100 sq meter home will still run you US$870k. In Taipei, 100 sq meters costs half a million USD and in Bangkok, $180k.

Average home sizessq m sq ft

Thailand (Bkok) 50 528Hong Kong 60 633Singapore 100 1,055Taiwan (Taipei) 105 1,108China 120 1,266Malaysia 130 1,372Japan 130 1,372US 208 2,194

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In spite of all the hoopla, China is still cheap. A 100 sq m home costs less than $100k. A bargain at twice the price? Perhaps. But much of the apparent economy owes to the China figure being a national average. A home in Beijing or Shanghai would cost 3 times more. That’s still cheap compared to Taipei, HK or Singapore and only 30% more expensive than Bangkok. By this gauge, China doesn’t appear overpriced at all. Homes are still cheapest in Malaysia ($42k per 100 sq m) and the US ($85k), where land is abundant. Again, though, these are national prices; houses in Kuala Lumpur or New York City would cost 2.5x-4x more.

How many years to buy a house?

Numbers are just numbers until you put them next to something, like wages or income. How many years do you have to spend behind a desk in Singapore or Bangkok before you can buy one of these houses? That’s the ‘real’ price of a home (and one measure of the ‘real’ wage).

We’ve already seen that Hong Kong’s houses are by far the most expensive in Asia in nominal dollar terms. But the gap is even wider in real terms. In Hong Kong, it takes almost 40 years for the average person to buy the average 100 sq m house. That’s 2.5x longer than it takes in China. And here, measures are not being distorted by national averages. Prices in Shanghai may be three times the national average but so are wages. Hong Kongers really do have to work 2.5x longer than they do in China before they can buy that 100 sq m home.

This puts a whole new spin on ‘real’ income. Hong Kong is purported to be far richer than China, and most other places in the world. But in terms of houses/housing, Hong Kong’s ‘real’ wages are 2.5x lower than China’s!

Elsewhere in Asia, ‘real’ wages in housing terms are comparable to China’s. It takes the same number of years (15) for the average Singaporean to buy a 100 sq m home. Ditto for Thailand. Prices are cheaper (real incomes are higher) in Taiwan, where it takes only 9 years to buy a home. Incomes are higher yet in Malaysia (4 years to buy a home) and the US (1.7 years).

Housing compression

It comes as no surprise that where housing is expensive, people live in smaller houses, and vice-versa. In Hong Kong, where it takes 40 years to buy a 100 sq m home, people live in 60 sq m homes instead. In Singapore and Taipei, the norm is in fact 100 sq m. In Malaysia, where houses are cheaper, people opt for 130 sq m homes. And in the US, where housing is the cheapest of all, 208 sq m is the norm.

It takes 39 years for the aver-age Hong Kong resident to earn enough to buy a 100 sq meter home

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When you recalculate how many years of work it takes to buy what people actually buy, the expenditure range gets compressed. At the high end, Hong Kong’s number shrinks to 23 years from 39; at the bottom end, the US number stretches to 3.5 years from 1.7. But it’s still a wide range and it begs an immediate question.

Real home prices as a bubble gauge

If Hong Kong’s house prices are so high, and US prices are so low, why did the biggest housing collapse in 100 years occur in the US and not in Hong Kong? Plainly, something’s missing – housing prices alone, either in nominal or ‘real’ terms, tell us nothing about what’s about to blow. That hurts. If you can’t compare Hong Kong or Singapore to Thailand or the US, how do you get a feel for risk?

You do the only thing left: compare Singapore today with Singapore yesterday, Thailand today with Thailand yesterday, and so on. Let’s start with Asia overall. We began this report by showing a chart of Asian property prices – reproduced below left for convenience – rising to US crisis levels and asked if Asia might be headed for a crash too. Deflating prices by incomes – chart below right – the answer would seem to be ‘no’. Asia’s home prices have risen rapidly since 2000 but incomes have risen even faster [1]. Today, home prices are 22% lower, relative to incomes, than

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If takes 39 years to buy a 100 sq meter home in Hong Kong and only 1.7 years in the US ....

... then why did the US blow and not HK?

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they were they were back in 2000. By this gauge, Asia has little to fear on the property front – homes are becoming more affordable, not more expensive.

Importantly, this is true for most individual countries, not just for the average. In China, where so much attention has been paid to the property sector, incomes have risen almost twice as fast as prices since 2000. Homes are 40% cheaper, relative to incomes, than 13 years ago. Even in more recent years, China’s price:income ratio has run sideways, not upward.

In Singapore, price:income ratios have drifted upward a little bit since 2006 or 2009 but not by very much. Prices are 10% higher than they were in 2006, but they are 15% lower than they were in 2000. In the 5 years since 2007, prices have essentially run parallel to incomes.

The same is true for Korea, Thailand and Malaysia. In Korea and Thailand, prices (relative to income) have drifted south steadily over the past decade. In Malaysia, they are lower than they were back in 2000, and essentially unchanged from 2007 or 2009 levels.

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1.40

1.60

1.80

00 02 04 06 08 10 12 14

HK – house price to income ratio


USA

HongKong

0.60

0.80

1.00

1.20

1.40

1.60

00 02 04 06 08 10 12 14

Taiwan – house price to income ratio


USA

Taiwan

Asia’s exceptions are Taiwan and Hong Kong. Taiwan’s prices (relative to income) have risen by 20% since 2000. That’s not insignificant. But it’s still far less than the jump in the US just before the subprime crisis there. US prices rose by 50%, relative to incomes, in the six short years between 2000 and mid-2006.

The situation is more serious in Hong Kong. There, prices are up by 78%, relative to incomes, compared to 2000 levels. When affordability drops so far so fast, something needs to be looked at.

The first thing to check is whether 2000 is a good base year for comparison. If one takes a longer-term view, for example, does the picture change?

The answer is, yes to some degree. Prices (relative to incomes) today are no higher than they were in 1997 and not much higher than what prevailed for the six years between 1991-1997. One could argue that the Asian financial crisis of 1997 brought prices down to where they “ought to be”. But that’s too simplistic. The Asian financial crisis was not about Hong Kong (or Singapore). It was about Thailand, in the first instance, and then Malaysia, Indonesia and Korea. The drop in currencies values and asset prices in Singapore, Hong Kong and Taiwan was collateral damage – spillover from the “Crisis-4” countries. Hong Kong, Singapore and Taiwan weren’t the center of anybody’s attention.

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

2.20

85 87 89 91 93 95 97 99 01 03 05 07 09 11 13

Hong Kong and Singapore – house price to income ratio

1985=1.00, price to per cap GDP ratio, annual avg data

Hong Kong

Singapore

HK prices relative to income are up by nearly 80% since 2000. That raises concerns

14


The question remains: were prices in Hong Kong too high in 1997 (on the cusp of the Asian financial crisis) or too low in 2003 (at the peak of the SARS epidemic)? Mostly the latter, we think, but housing there is still among the most expensive in the world, in absolute terms and relative to income. Home ownership rates for residents are only 52% compared to Singapore’s 90%, a fact that is surely related to affordability and probably to a less equal income distribution as well. Thus, while from a financial market perspective, Hong Kong’s housing situation is probably not best described as a bubble, social tension related to housing affordability appears to be on the rise.

Leverage

Housing risk isn’t necessarily about prices per se. In the US, the bigger problem was the underlying build up of leverage and debt, which ultimately could not be sustained. How does Asia look from a debt perspective? How burdensome are housing payments today and how burdensome might they become once interest rates start to rise? Who in Asia is most vulnerable to a potential ‘interest rate shock’?

Asia’s housing debt as a percentage of income has risen steadily over the years. For the most part, that’s normal. Housing is a ‘superior’ good. As incomes go up, housing expenditures tend to go up even more. The fact that housing debt, even as a percentage of income, is rising across the region is not, by itself, cause for alarm. As always, it’s a question of ‘how far how fast’ and whether the debt can be serviced in bad times as well as good.

In Singapore and Hong Kong, Asia’s richest countries, housing loans have grown to about 45% of GDP (chart below left). Singapore’s debt has clearly grown faster than Hong Kong’s but Singapore’s per capita income has grown faster too. Back in 1967, both countries had a per capita income of US$5200 (at today’s prices and exchange rates). Today, Singapore’s GDP per capita is US$57k, 50% higher than Hong Kong’s US$38k.

Debt has risen steadily in China and Korea too (chart below right; same X and Y scale as for SG and HK on the left), though it’s much lower than in the wealthier economies. China’s debt load is about half as large as Korea’s; Korea’s is two-thirds as large as Singapore’s and Hong Kong’s.

Debt loads and per-capita incomes of other countries are shown in the chart at the top of the next page. Beyond illustrating the ‘superior good’ aspect of housing across countries, the key message of this chart is that US housing debt, even 5 years after the crisis, still stands at 85% of GDP – nearly twice as high Singapore, Hong

Leverage and debt are what did the US in, not prices per se

0

10

20

30

40

50

60

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Singapore

Financial sector housing loans as % of GDP

SG & HK – housing debt as % of GDP

Hong Kong

0

10

20

30

40

50

60

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

CH & KR – housing debt as % of GDP

Financial sector housing loans as % of GDP

China

Korea

Data unavailable, scaling with chartat left maintained

15


Kong and Taiwan, and 3x to 5x higher than other Asian countries.

High debt / leverage is what caused the US bubble and its collapse. When interest rates rose – Fed funds rose by 425 basis points between mid-04 and mid-06 – borrowers found it increasingly difficult to service their debts. By mid-06, the jig was up. Home prices began to fall. Banks would not / could not extend refinancing. The value of mortgage backed securities plummeted. Companies that couldn’t possibly insure against such losses but did anyway went broke. The rest is (not yet) history.

For Asia, the good news part of the story above is that regional debt loads remain far lower than they were in the US. It is not unreasonable to conclude that risks in Asia are lower accordingly.

Debt burdens and interest rates

Debt loads aren’t a big problem when interest rates are zero. (“Roll it over Joe, and call me next year.”) It’s when you can’t make the payments that trouble begins and what used to be a hidden bubble isn’t so hidden anymore. How burdensome are Asia’s housing payments today and who will be in trouble when today’s rock-bottom rates start to go up?

0.3 0.3

0.7

1.4 1.51.8

2.3 2.52.7 2.8

2.9

5.4

0

1

2

3

4

5

6

PH ID IN CH JP TH KR MY SG HK TW US

Housing debt payments as % of GDP

interest + principal payments as a % of GDP, 20Y payback assumed

Asia’s debt loads are very low com-pared to the US. That’s a relief

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

0

10

20

30

40

50

60

70

80

90

PH ID IN CH TH MY KR HK SG TW US

Housing loans as % ofGDP (LHS)

Per-capita income in2012 USD (RHS)

Housing debt and income level

percent US dollars per person

16


To answer the first question, we calculate the annual payment required to retire the stock of outstanding housing loans in each country, at the prevailing interest rate [2] and subject to the condition that principal and interest are re-paid in full over the next 20 years.

Who’s got Asia’s biggest payments? By this gauge, it turns out to be Taiwan, where 2.9% of GDP goes to pay housing principal and interest (chart at bottom of previous page). But Hong Kong and Singapore are almost identical, paying 2.8% and 2.7% of GDP to service housing debt each year. Malaysia’s and Korea’s burdens are in the low 2 percent range. Thailand’s burden is an even lower 1.8% of GDP.

Where does China fall on this ladder? Near the bottom with annual housing payments of only 1.4% of GDP.

Worry? It wouldn’t seem so. Especially when one compares Asia’s debt burdens with the US. There, payments are running at 5.4% of GDP, nearly 6x higher than in China, and 2x higher than in Hong Kong, Singapore and Taiwan.

Again, this has to be good news for Asia. The US seems to have blown for a reason and, for the same reason, Asia seems unlikely to.

When rates go up

Risks remain. Interest rates have been on the floor for 5 years. What’s going to happen when they go back up? Who’s vulnerable in Asia?

The simplest way to answer this question is to re-calculate the housing payments made above under the new assumption that interest rates have returned to their pre-crisis level. Who suffers most will depend partly on debt loads and partly on whose interest rates fell the most and will now rise the most.

The key variables behind these calculations are shown in the table below. It comes as no surprise that interest rates in Singapore and Hong Kong have fallen comparatively the most in Asia – by a factor of 2x to 2.1x (col 5). Singapore and Hong Kong run currency pegs, which means their interest rates track US rates (in the case of HK) or a basket of US, EU and JP rates (in the case of Singapore). In all instances, these rates are near zero.

Who's vulnerable to higher interest rates?

(1) (2) (3) (4) (5) (6) (7) (8) (9)=(4)/(3) =(7)/(6)

Housing Housing Mtge Mtge Annual Annualloans loans rate rate amortiz'n amortiz'n

to GDP current pre-crisis* Ratio current hypo** Ratio GDPUSD bn % % % x USD bn USD bn x USD bn

China 1,404 16 5.8 5.3 0.9 120 115 0.96 8,632

HK 120 45 2.2 4.6 2.1 7.5 9 1.25 266Spore 129 46 1.6 3.2 2.0 7.6 8.9 1.16 283

Korea 368 31 4.1 6.5 1.6 27 33 1.23 1,187Taiwan 230 48 2.0 3.5 1.8 14 16 1.15 482

Malay 98 32 4.6 4.4 1.0 7.6 7.4 0.98 309Thai 78 20 6.2 5.3 0.8 6.9 6.4 0.93 388

Indon 22 2.6 10.0 14.6 1.5 2.6 3.5 1.33 864Phils 6.8 2.6 7.6 12.5 1.7 0.67 0.93 1.40 264

India 137 7.3 8.1 6.8 0.8 14 13 0.91 1,875

US 13,137 83 2.6 5.1 1.9 851 1,061 1.25 15,810Japan 1,194 23 2.6 3.0 1.1 77 80 1.04 5,152

* 8Y average from 2000-2007.** based on LR interest rate in Col 4

When interest rates go back up, risks will too

17


The situation is different in Malaysia. There, rates are not much different from pre-crisis levels and the risk of interest rate shock seems low. In China, interest rates are higher today than they were on average before the crisis. Theoretically, a return to precrisis rates would be a pleasure, not a pain.

A doubling of interest rates of course does not imply a doubling of one’s monthly payment because most of what is being repaid is principal, not interest. Therefore, while Singapore and Hong Kong interest rates might rise comparatively the most in Asia, it does not follow that the risk to their economies is greatest.

In fact, by our gauge, Indonesia and the Philippines will experience Asia’s largest jump in housing payments when interest rates return to precrisis norms. This follows partly from a large interest rate differential (1.5x to 1.7x) and partly from the fact that interest rates there are so much higher than in other countries in absolute terms. A 50% increase in Indonesian interest rates, for example, implies a 460 basis point rise. That’s a serious move.

A return to precrisis mortgage rates would raise annual housing payments in the Philippines by about 40% (column 8 in the table on the previous page) and raise Indonesia’s by about one-third. That might not be a crushing blow but a 30%-40% increase in monthly housing payments would not come easily to most households.

Payments in Singapore and Hong Kong would be relatively easier to manage. Nevertheless, a rise in mortgage rates to precrisis averages (a doubling in these two cases) would, by our measure, bring a 25% increase in monthly payments in Hong Kong and a 16% monthly increase in Singapore. As in the Philippines and Indonesia, these increases could probably be absorbed in most cases. But it seems equally likely that some families would find themselves over-extended.

The vulnerability of other countries to higher interest rates is shown in the chart below. Most countries in Asia will, by our measure, face increases of 15% to 25% in housing payments when interest rates return to precrisis norms. China, Malaysia, Thailand and India are the clear exceptions. These countries have not experienced large falls in interest rates and presumably would not suffer (direct) shocks when global interest rates return to precrisis norms.

The US remains an interesting case. Mortgage rates there have fallen to 2.6%, about half their precrisis norms, thanks to QE3 / Fed purchases of mortgage bonds, which continue to run at a pace of $40bn per month. In recent weeks, markets have come to believe the Fed will need to taper back these purchases in the near future.

40

33

25 2523

16 15

4

-2-4

-7-10

0

10

20

30

40

50

PH ID US HK KR SG TW JP MY CH TH IN

Who's vulnerable to higher interest rates?

% increase in housing payments if interest rates return to precrisis avg

more vulnerable

less vulnerable

Monthly housing payments in many countries will rise by 15%-25%. Some families will find themselves over-extended

Indonesia and the Philippines are the most vulnerable to higher interest rates. China, India and Thailand are least vulnerable

18


But if the result is that average monthly mortgage payments go up by 25%, as our calculations suggest, the improvement seen in the housing sector over the past year could come to an abrupt halt. The Fed could find itself back at Square One, faced with what might have been an obvious fact all along: that if you truly are driving the economy, as many believe, you can’t simply stop. Time will tell but the numbers here suggest the US is every bit as vulnerable to higher interest rates as Asia is.

In sum

When economies get over-extended, property is almost always at the center of the trouble. Property brought down Asia in 1997. Property brought down the US – and the rest of the world – in 2007/08. Recovery is not complete. Risks remain. Interest rates are still near zero in the G3 and parts of Asia. Low rates and capital flows are pumping up property sectors in Asia and the eventual return of interest rates to normal levels could reveal some households and countries as having become over-extended.

To summarize what we’ve shown above:

1) Returns on property have been nearly identical to equity market returns over the long-haul in Singapore and Hong Kong. From an investment perspective, property does not appear over-valued compared to the key alternative;

2) Although prices have more than doubled in Hong Kong since 2009 and are up by 55% in Singapore, they are up by only 40% and 18% compared to 1997 levels. Moreover, 1997 prices do not appear overvalued by much, if at all;

3) Asia’s houses are expensive. A 100 sq meter home costs US$1.4mn in Hong Kong and US$870k in Singapore. Houses are cheap in China ($97k / 100 sqm), the US ($85k) and Malaysia ($42k);

4) It takes the average Hong Kong resident 39 years to earn enough to buy a 100 sq meter home. In China, Singapore and Thailand, it takes 13-15 years. In the US, it takes 1.7 years;

5) US houses are extremely cheap compared to Asia. Yet it was a US bubble that led to the biggest global recession in 100 years. Conclusion? Prices per se tell us nothing about risk;

6) Although Asia’s home prices are high, they have fallen steadily relative to incomes in most countries since 2000. Housing is becoming more affordable, not more expensive. Risks fall accordingly;

7) Hong Kong is the key exception to this rule. There, home prices relative to income have risen by 78% since 2000. This is cause for concern;

8) Debt and leverage are important when it comes to assessing risk. Housing debt as a percentage of income is rising across Asia. Most of this is normal. Housing is a ‘superior good’, people spend proportionately more on it as incomes rise;

9) Asia’s housing debt as a percentage of income remains very low compared to the US, where it stands at 5.5% of GDP. Debt to GDP is about 3% in Singapore, Hong Kong and Taiwan. In China, housing debt is a very low 1.4% of GDP;

10) When interest rates go up, risks go up. As mortgage rates return to precrisis averages, monthly housing payments in most Asian countries will rise by 15%-25%. Some families will likely find themselves over-extended.

11) Housing payments are unlikely to rise by much in China, Malaysia, Thailand or India, as interest rates there did not fall by much during the global financial crisis;

12) Indonesia and the Philippines appear most vulnerable to higher interest rates;

The US is as vul-nerable to higher interest rates as Asia. This could delay the removal of QE3 far longer than most antici-pate

19


13) The US appears every bit as vulnerable to higher interest rates as Asia. This could delay the removal of QE far longer than most currently anticipate.

Finally, we note that to the extent Asia’s rising home prices follow from capital inflows, this is not likely to end when global interest rates go up. Quantitative easing in the G3 and low global rates are only part of Asia’s inflow story. The much larger, and longer-term driver of capital inflows into the region is the fact Asia now generate’s the lion’s share of the world’s incremental growth. Put simply, businesses want to be where the growth is. This means investment and capital inflows into Asia are likely to continue long after monetary policy in the G3 has returned to normal.

Property prices will likely continue northward as well.

Loose monetary policy in the G3 isn’t the main driver of capi-tal inflows into Asia. The biggest driver is the fact that Asia now generates the lion’s share of the world’s incremen-

Notes:

[1] Per capita GDP is used as the measure of income.

[2] The following interest rates are used to proxy mortgage rates.

China 5YR PBOC less 10% discountHong Kong since Jan 2007: 3m Hibor+1.75%

pre-Jan 2007: prime rate less 2.00%Korea Avg CB housing loan rateTaiwan Avg home loan rate, top 5 banksSingapore 12m Sibor + 1.25%Malaysia BLR - 2.00%Thailand MLR - 1.00%Indonesia BLR - 1.50%Philippines Avg MM rate all instr + 3.50%India 3m Mibor + 2.25%US Adj rate mortgage rateJapan Priv dwelling housing loan rate

Sources:

Except where noted, data for all charts and tables are from CEIC Data, Bloomberg and DBS Group Research (forecasts and transformations).

20


Appendix I: residential house price indices

75100125150175200225250275300325350375400425

00 02 04 06 08 10 12 14

USD terms

local ccy terms

China – residential property pricesMar00=100, nsa

50

75

100

125

150

175

200

225

250

00 02 04 06 08 10 12 14

USD terms

local ccy terms

Hong Kong – residential property pricesMar00=100, nsa

75

100

125

150

175

200

00 02 04 06 08 10 12 14

USD terms

local ccy terms

Taiwan – residential property pricesMar00=100, nsa

75

100

125

150

175

200

00 02 04 06 08 10 12 14

USD terms

local ccy terms

Korea – residential property pricesMar00=100, nsa

75

100

125

150

175

200

225

00 02 04 06 08 10 12 14

USD terms

local ccy terms

Singapore – residential property pricesMar00=100, nsa

75

100

125

150

175

200

225

00 02 04 06 08 10 12 14

USD terms

local ccy terms

Malaysia – residential property pricesMar00=100, nsa

21


75

100

125

150

175

00 02 04 06 08 10 12 14

USD terms

local ccy terms

Indonesia – residential property pricesMar00=100, nsa

75

100

125

150

175

200

00 02 04 06 08 10 12 14

USD terms

local ccy terms

Thailand – residential property pricesMar00=100, nsa

Appendix I: residential house price indices (con’t)

22

Economics–Markets–StrategyCurrencies

Philip Wee • (65) 6878 4033 • [email protected]

CU

RR

ENC

IES

FX: Looking past volatilityAsia: Market volatility extended into 2Q13; Fed tapering fears

displaced yen weakness as main worry

Fears of withdrawal of Fed stimulus overdone

Look for sentiment to improve, albeit cautiously, with global recovery prospects in 2H13

CNY: Volatility-free steady appreciation

HKD: No speculation on peg

TWD: Keeping stable between 29 and 30

KRW: Looking up on exports

SGD: Appreciation slows with growth/inflation

MYR: Pendulum

THB: Re-aligned to Asian peers

IDR: Targeting stability

PHP: Favoring more modest appreciation

INR: On negative watch

VND: Ready to depreciate again

USD: Upside exhausted

JPY: Excessively weak?

EUR: Underpinned by Germany

AUD: Oversold

NZD: Resisting lower AUD/NZD

DXYEURCHFCADGBPNZDAUDJPYCNYINRBRLRUBZARHKDVNDTHBIDRMYRSGD

1.5 1.1

-0.5

-2.8-3.5 -3.6

-8.8-9.6

1.6

-4.8 -5.0 -5.2

-16.1

-0.2-0.9 -1.2

-2.3 -2.3 -2.8 -2.8

-4.6-5.7

-18

-16

-14

-12

-10

-8

-6

-4

-2

0

2

4

DX

Y

EUR

CH

F

CA

D

GBP

NZD

AU

D

JPY

CN

Y

INR

BRL

RU

B

ZAR

HK

D

VN

D

THB

IDR

MY

R

SGD

TWD

PHP

KR

W

USD, EUR and CNY weathered volatility in the first half of the year

% change vs USD, 12 Jun 2013 vs 31 Dec 2012* USD is performance of DXY index

MAJOR CURRENCIES EMERGING ASIAN CURRENCIESB R I C S

23

CurrenciesEconomics–Markets–Strategy

Currency forecasts

12-Jun 3Q13 4Q13 1Q14 2Q14

EUR/usd 1.3336 1.31 1.32 1.34 1.35Previous 1.35 1.36 1.37 1.38

Consensus 1.28 1.26 1.26 1.26

usd/JPY 96.00 100 102 104 105Previous 100 102 104 105

Consensus 103 105 106 107

usd/CNY 6.1335 6.09 6.06 6.03 6.00Previous 6.11 6.07 6.05 6.00

Consensus 6.12 6.10 6.08 6.05

usd/HKD 7.7643 7.77 7.78 7.79 7.80Previous 7.79 7.80 7.80 7.79

Consensus 7.76 7.76 7.77 7.76

usd/KRW 1128 1100 1080 1060 1040Previous 1040 1030 1020 1017

Consensus 1108 1100 1086 1080

usd/TWD 29.875 29.6 29.4 29.2 28.9Previous 28.8 28.6 28.4 28.3

Consensus 29.9 29.6 29.4 29.0

usd/SGD 1.2557 1.24 1.23 1.21 1.19Previous 1.20 1.19 1.18 1.18

Consensus 1.25 1.25 1.24 1.22

usd/MYR 3.1300 3.02 2.99 2.96 2.94Previous 3.04 3.00 2.96 2.95

Consensus 3.05 3.02 3.00 3.04

usd/THB 30.950 29.9 29.8 29.7 29.6Previous 29.5 29.4 29.3 29.0

Consensus 29.8 29.5 29.4 30.2

usd/IDR 9855 9850 9800 9750 9700Previous 9550 9500 9450 9420

Consensus 9825 9850 9810 9815

usd/PHP 43.000 41.5 41.0 40.5 40.0Previous 39.7 39.3 39.0 38.8

Consensus 41.4 40.8 40.6 40.7

usd/INR 57.790 56.2 56.6 57.0 57.4Previous 53.5 53.0 52.5 52.3

Consensus 54.5 54.1 53.5 53.0

usd/VND 21000 21100 21200 21300 21400Previous 20750 20750 20750 20750

Consensus 21000 21000 21000 21000

AUD/usd 0.9480 0.98 1.00 1.02 1.04Previous 1.06 1.08 1.10 1.10

Consensus 0.97 0.97 0.96 0.96

NZD/usd 0.7986 0.80 0.82 0.84 0.86Previous 0.85 0.86 0.87 0.87

Consensus 0.81 0.80 0.80 0.82

DBS forecasts in red. Consensus are median forecasts collated by Bloomberg as at June 12, 2013

24


Global volatility and the weak yen and Fed

Global currency markets were volatile in the first half of 2013. Two broad themes underpinned the US dollar – a weak Japanese yen and fears that the US Federal Reserve may taper asset purchases. In turn, this ended the half-year recovery (in 2H12) of Asia ex Japan currencies from the Eurozone crisis. With most of their economies disappointing in 1Q13, markets in emerging Asia remained under pressure in 2Q13.

By late May, signs emerged that the yen/Fed themes may be running into headwinds themselves. Hence, it is too early to conclude that the volatility in the first half will extend into the rest of 2013.

Many things have changed in Japan to suggest that the yen is no longer as excessively strong as it was in November. On a relative basis, the Nikkei 225 index closed its gap with the Dow Jones Industrial Average. Real GDP growth was stronger than the US in 1Q13, at least in year-on-year terms. Current account deficits reversed into surpluses even whilst trade deficits persisted. Consensus turned more confident that Japan would achieve its 2% inflation target in 2014 by the time the Bank of Japan (BOJ) moved aggressively on quantitative easing measures in April.

Against this constructive backdrop, 10Y Japanese government bond (JGB) yields spiked in late May when USD/JPY rose above 100 to a high of almost 104. In turn, this triggered a more-than 20% correction in the Nikkei in May/June after it peaked at just below its multi-decade trendline resistance.

These price actions reminded us of comments made by PM Abe’s economic adviser Koichi Hamada in January regarding the yen’s level. Hamada considered USD/JPY around 95-100 as nothing to worry about. He reckoned that concerns would start to arise above 100, with levels above 110 considered as problematic. Coincidentally, according to Reuters Corporate Survey conducted in May, most Japanese corporates also viewed the same 95-100 range as their comfort zone for USD/JPY. Hence, USD/JPY may consolidate in a wide 95-105 range over next 12 months.

Despite USD/JPY’s fall below 100, there was no let up in the speculation that the Fed would taper asset purchases by end-2013 or early 2014. This was reflected by the rise in the 10Y treasury yield to 2.21% on June 10, its highest level since April 2012, from a low of 1.63% on May 2. There was confidence that, five years after the 2008 global financial crisis, the US economy had turned the corner and was ready to exit QE3. The reasons often cited were record high US equities and the recoveries in the US housing and jobs markets. In particular, the unemployment rate was expected to fall to the Fed’s 6.5% target in the second half of 2014.

3-Jan-114-Jan-115-Jan-116-Jan-117-Jan-11

10-Jan-1111-Jan-1112-Jan-1113-Jan-1114-Jan-1117-Jan-1118-Jan-1119-Jan-1120-Jan-1121-Jan-1124-Jan-1125-Jan-1126-Jan-1127-Jan-11

65

70

75

80

85

90

95

100

105

0.40

0.60

0.80

1.00

1.20

1.40

1.60

Jul-12 Oct-12 Jan-13 Apr-13

JGB turned volatile when USD/JPY > 100

USD/JPY

10Y JGB(% pa, left)

4-Jan-895-Jan-896-Jan-899-Jan-89

10-Jan-8911-Jan-8912-Jan-8913-Jan-8917-Jan-8918-Jan-8919-Jan-8920-Jan-8923-Jan-8924-Jan-8925-Jan-8926-Jan-8927-Jan-8930-Jan-8931-Jan-89

5000

10000

15000

20000

25000

94 96 98 00 02 04 06 08 10 12 14

Nikkei 225 retreats from multi-decade resistance

25


In our view, there are more reasons for the Federal Reserve to sit tight than to taper asset purchases. Given the volatility in global bond markets in May/June, and its negative spillover into currency markets, the the FOMC meeting on June 18-19 will be important to watch for the Fed’s guidance and intentions on asset purchases. Fed Chairman Ben Bernanke is also scheduled to hold a press conference after the meeting.

The Fed has set two criteria to exit QE3 and move away from ultra-low US interest rates. First, the US unemployment rate should first fall below 6.5%. Second, inflation should rise above 2.0% with the pain threshold seen at 2.5%.

On the first criteria, the market has set a straight-line projection for the US jobless rate to fall to 6.5% in 2014. Unfortunately, things are never that simple. The ISM manufacturing PMI fell to 49.0 in May, its lowest level since June 2009. Similarly, the employment sub-indices for both the ISM manufacturing and services also fell steadily to near breakeven levels of 50.1 in the same month. These weaknesses, if they persist, have been known to moderate the pace, or even reverse, the fall in the jobless rate.

On the second criteria, the Fed highlighted that US inflation was falling “well below” its 2% target before it inserted a new line, “to increase or reduce the pace of its asset purchases” into its FOMC statement on May 1. Why the sudden interest in disinflation? The answer probably lies in the relationship between the US housing market and real long-term US bond yields.

According to the NAHB housing market index, the US property sector merely stabilized during QE1 and QE2. The housing recovery took off only after real long bond yields turned negative during Operation Twist. Bond yields fell swiftly because investors sought safety from the Eurozone crisis. Inflation took a longer time to follow yields lower because of the rise in commodity prices that accompanied the recovery from the 2008 crisis. Conversely, the NAHB index appeared to have lost some momentum in recent months when the same real long rates turned positive. Only this time, rising 10Y US bond yield and falling US inflation were headed in opposite directions of the Fed’s 2% inflation target.

Apart from jobs and inflation, the Fed will probably remain mindful that the White House and the Republicans are far from finding common ground on a medium-term plan for fiscal consolidation. The Congressional Budget Office (CBO) estimates that US lawmakers have until October or November to lift the federal debt ceiling. By then, the US Treasury Department would have exhausted extraordinary measures to keep paying government bills including bond payments. Failure here would risk undermining America’s credit standing. Perhaps that’s why Fed officials pushing for tapering asset purchases are focused on mortgage-backed securities and not treasuries.

Jan-98Feb-98Mar-98Apr-98

May-98Jun-98Jul-98

Aug-98Sep-98Oct-98Nov-98Dec-98Jan-99Feb-99Mar-99Apr-99

May-99Jun-99Jul-99

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ISM signals caution against US jobs optimism

US unemployment rate(% sa, right)

Employment sub-indices ISM manufacturingISM non-manufacturing

Fed's 6.5% jobless target

6-May-087-May-088-May-089-May-08

12-May-0813-May-0814-May-0815-May-0816-May-0819-May-0820-May-0821-May-0822-May-0823-May-0827-May-0828-May-0829-May-0830-May-08

2-Jun-083-Jun-08

-50

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2008 2009 2010 2011 2012 2013

US housing recovery and real LT interest rates

QE1 QE2 QE3

10Y UST(% pa)

US CPI(% YoY)

NAHB housing market index (right)

Op Twist

26


Negative spillover into emerging Asian currencies

The sell-off in emerging Asian currencies in May/June was different from the one in January-March in two regards. First, it was not due to a stronger US dollar. USD/JPY fell back into its 95-100 range and dragged the DXY index down. The sell-off in Asia ex Japan currencies was part of an unwinding of risk assets globally from fears that the Federal Reserve may wind down its stimulus. The hard hit currencies were those (AUD, KRW, INR and THB) that cut rates to address their disappointing economies. The currencies that had been appreciating for most of this year (INR, THB and NZD) gave up their gains and ended up weaker for the year. The depreciation in the fundamentally stronger THB and NZD were more of conscious choices by their governments to realign them with their weaker counterparts. The INR tumbled to a new life-time low on renewed fears that it may lose one of its investment grade debt rating due to India’s weak growth momentum and twin deficits. Conversely, the Philippines was upgraded to investment grade but this did not stop the PHP from becoming the worst performing currency in Southeast Asia during this period. Ironically, the IDR turned out to be one of the least volatile Asian currencies because of its steady depreciation. The sell-off in export-led Asian currencies (SGD, TWD and KRW) about the same as the January-March with SGD and TWD continue to track each other closely in weakness.

3-Dec-124-Dec-125-Dec-126-Dec-127-Dec-12

10-Dec-1211-Dec-1212-Dec-1213-Dec-1214-Dec-1217-Dec-1218-Dec-1219-Dec-1220-Dec-1221-Dec-1224-Dec-1225-Dec-1226-Dec-1227-Dec-12

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Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13

VND

IDR

INR

Deficit-led Asian currencies

% YTD change vs USD3-Dec-124-Dec-125-Dec-126-Dec-127-Dec-12


-20

-15

-10

-5

0

5

10


EUR

NZD

AUD

JPY

Major & antipodean currencies

% YTD change vs USD

3-Dec-124-Dec-125-Dec-126-Dec-127-Dec-12


-8

-6

-4

-2

0

2

4

6

8


CNY

TWD

SGD

KRW

Export-led Asian currencies

% YTD change vs USD3-Dec-124-Dec-125-Dec-126-Dec-127-Dec-12


-8

-6

-4

-2

0

2

4

6

8


THB

MYR

IDR

PHP

Domestic-led Southeast Asian currencies

% YTD change vs USD

27


From market volatility in 1H13 to global recovery in 2H13

Sentiment is likely to improve in the second half of the year. Optimism is, however, likely to remain cautious after the market volatility in May/June.

The main event in 3Q13 is the G20 Leaders’ Summit in Moscow on September 5-6. Over the past twelve months, the G20 has moved from defusing tail risks in the Eurozone crisis in 2H12, to countering yen-led currency war worries in 1H13. Topping the agenda at this upcoming meeting will be the challenge of withdrawing US stimulus without hijacking the global recovery.

America will make its case that the global recovery cannot be led by the US alone. China and Germany, the largest surplus-led economies in their respective regions, will be encouraged to lead growth with more domestic demand. Japan will want to be heard that it is also contributing here via Abenomics.

Despite the volatility in global currency markets, China been guiding the yuan steadily stronger and stepping up efforts to promote the yuan as an international payments currency. China’s new leaders, President Xi Jinping and Premier Li Keqiang, would probably present their agenda to deepen and accelerate economic and financial reforms to move the Chinese economy more towards consumer spending and services.

German Chancellor Angela Merkel announced that a strong euro will be part of her party’s platform at the federal elections in September. She views the 1.30-1.40 range as a historical norm for the euro. Merkel elaborated that Germany has a duty to boost domestic demand to support the eurozone economy. Germany has returned to balanced budget with a solid current account surplus of more than 4% of GDP.

The above scorecard sees China, Germany and Japan leaning towards boosting domestic demand. US President Barack Obama has been actively pushing to forge more trade deals with Europe and Asian countries, which has become a priority in his second-term agenda to boost growth and create jobs in the US.

Put together, it does not look like America is in a hurry to return to a Strong USD policy. When this policy started in 1995, the US unemployment rate had already fallen below the Fed’s 6.5% target with inflation also above the 2% target. Back then, Japan had also entered into a full-blown banking and property crisis, and asked the G7 for help to stop the yen’s appreciation. Japan was the main player in the global rebalancing story back then. Today, it is China.

Here’s the bottomline. The surprise in the second half of the year could well be the return of a weaker US dollar on the back of more global cooperation and coordination to return to the world economy to a more balanced and sustainable growth path.

Jan-80Feb-80Mar-80Apr-80May-80Jun-80Jul-80

Aug-80Sep-80Oct-80Nov-80Dec-80Jan-81Feb-81Mar-81Apr-81May-81Jun-81Jul-81

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Reagan ReaganTerm II

Is US ready to return to a Strong USD policy? Think again

Obama Term II

Obama Term I

US CPI inflation( % YoY)

US unemployment rate, % sa(When the jobs market was this bad)

Fed's 6.5% jobless target

Fed's 2% inflation target

Strong USDpolicy

Bigbudgetdeficits

Fiscalconsolid-

ation

Fiscalconsolid-

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Weak USDSep 85 to

Dec 87

28


US dollar

DXY upside exhausted by doubts over weak yen and Fed’s intentions on asset purchases

The strong US dollar in the first five months of this year had been mostly about a weak Japanese yen and worries that the Fed may start to exit QE3 sooner than later. Both these factors may fall short in 3Q13. The yen is likely to consolidate after the yen-Nikkei-JGB volatility in late May. Focus has potential to shift from the Fed towards the US budget impasse again. The US Treasury Department estimated that it has, until the September 2 Labor Day holidays, to exhaust its extraordinary measures to keep paying all of the government’s bills including bond payments. Failure by the White House and Republicans to reach a compromise would probably lead to stop-gap funding measures on October 1, the start of the new fiscal year, and a showdown on the federal debt limit in November. With inflation well below the Fed’s 2% target amidst weaker inflation expectations, it will be hard to see the Fed tapering bond purchases this year without risking America’s credit standing. Lest we forget, the Fed has, in its FOMC statement on May 1, also opened the door to increase asset purchases as well. Note that ISM manufacturing PMI fell below 50 to 49 in May, its lowest reading since June 2009.

Euro

EUR/USD has scope to return to its 1.30-1.40 historical norm

The euro was remarkably resilient in 2Q13 after the Cyprus crisis in late March. EUR/USD consolidated mostly between 1.28 and 1.32, in spite of a surprise rate cut by the European Central Bank (ECB) on May 2. While Eurozone continues to struggle with negative growth and high joblessness, sentiment has, nevertheless, improved from a year ago. Two factors signaled that the worst was probably over for the sovereign debt crisis. First, government bond yields of struggling EU nations fell back to pre-crisis lows. Second, Portugal successfully returned to the bond market for the first time since its bailout. Spain and Italy also attracted strong demand for their bond issues. More importantly, the friendlier market environment opened the door for the Eurozone to balance austerity with growth. Looking ahead, September will be an important month to watch. Germany will be urged at the G20 Summit to stimulate domestic demand and help Eurozone return to growth. German Chancellor Angela Merkel announced that a strong euro will be part of her CDU’s party campaign for the September federal election. FYI, Merkel said in February that a euro rate of 1.30-1.40 was in line with historical norm.


DXY 12-Jun 3Q13 4Q13 1Q14 2Q14Revised 80.947 82.8 82.6 81.9 81.6Previous 80.4 80.0 79.6 79.2Consensus 84.4 85.6 85.9 85.8

Policy, % 12-Jun 3Q13 4Q13 1Q14 2Q14Revised 0.25 0.25 0.25 0.25 0.25Previous 0.25 0.25 0.25 0.25Consensus 0.25 0.25 0.25 0.25

72

74

76

78

80

82

84

86

88

90

72

74

76

78

80

82

84

86

88

90

2010 2011 2012 2013 2014

DXY index – upside exhausted

72

74

76

78

80

82

84

86

88

90

72

74

76

78

80

82

84

86

88

90

2010 2011 2012 2013 2014

DXY index – upside exhausted


EUR /usd 12-Jun 3Q13 4Q13 1Q14 2Q14Revised 1.3336 1.31 1.32 1.34 1.35Previous 1.35 1.36 1.37 1.38Consensus 1.28 1.26 1.26 1.26


1.15

1.20

1.25

1.30

1.35

1.40

1.45

1.50

1.55

1.15

1.20

1.25

1.30

1.35

1.40

1.45

1.50

1.55

2010 2011 2012 2013 2014

EUR/USD – historical norm is 1.30-1.40

29


Chinese yuan

CNY appreciation trend intact; USD/CNY on track to 6.00 by mid-2014

China consistently set the official central parity for USD/CNY to new record lows so far this year. As at June 7, the yuan was fixed 2.0% stronger from end-2012 levels. Interestingly, the appreciation was slower in the onshore CNY (1.6%) and the offshore CNH (1.4%) in Hong Kong. Why the differences? On the policy front, we believe that China is moving as fast as it could to make the yuan “basically convertible” by 2015. According to SWIFT, the yuan has emerged as the 13th most used currency for international payments in March. This was a dramatic climb from its 20th position only 15 months ago in January 2012. Markets, meanwhile, struggled to reconcile the strong yuan with slower growth in China, and a strong US dollar from a weak yen and Fed tapering fears in 1H13. Looking ahead, China is expected to further liberalize interest rates, advance the yuan’s internationalization by increasing capital account convertibility and move towards a more flexible and market-determined yuan exchange rate. There is expectation that the official USD/CNY trading band may be widened to ±2% from the present ±1% around the central parity as early as the US-China Strategic Economic Dialogue in July.

Japanese yen

From correcting excessive yen strength to worrying about excessive yen weakness

For the six months between mid-November and late May, Abenomics worked well as a “weak yen, strong equity” story. That is until the Japanese bond market turned volatile in late May and brought the Nikkei down 20%. What went wrong? Nothing really. People simply started to believe that Abenomics may succeed in reinvigorating the stagnant Japanese economy. By April 4, the day the Bank of Japan delivered aggressive QE, there was consensus that Japan would succeed in achieving its 2% inflation target in 2014. Lest we forget, the weak yen story that started last November was about beating deflation by correcting the yen’s excessive strength. The JPY-Nikkei-JGB volatility also affirmed that government’s less vocal worries about excessive yen weakness. Back in January, economic adviser Hamada said that 95-100 was “nothing to worry” about for the yen, and that the dollar’s rise to 110 or more would become a problem. Interestingly, Japanese corporates also favored the 95-100 range, according to a Reuters poll. Hence, USD/JPY may start to consolidate as it lets fundamentals play catch up to the euphoria discounted in the Japanese markets.


usd/ JPY 12-Jun 3Q13 4Q13 1Q14 2Q14Revised 96.00 100 102 104 105Previous – 100 102 104 105Consensus – 103 105 106 107

Policy, % 12-Jun 3Q13 4Q13 1Q14 2Q14Revised 0.10 0.10 0.10 0.10 0.10Previous – 0.10 0.10 0.10 0.10Consensus – 0.10 0.10 0.10 0.10

75

80

85

90

95

100

105

110

75

80

85

90

95

100

105

110

2009 2010 2011 2012 2013 2014

USD/JPY – six month rally gives way to consolidation


usd/ CNY 12-Jun 3Q13 4Q13 1Q14 2Q14Revised 6.1335 6.09 6.06 6.03 6.00Previous 6.11 6.07 6.05 6.00Consensus 6.12 6.10 6.08 6.05


5.80

6.00

6.20

6.40

6.60

6.80

7.00

7.20

7.40

5.80

6.00

6.20

6.40

6.60

6.80

7.00

7.20

7.40

2008 2009 2010 2011 2012 2013 2014

USD/CNY – volatile-free yuan appreciation

30


Hong Kong dollar

Lessons from 1H13 and 4Q12 – weak USD, not just strong CNY, needed to fuel HKD peg speculation

Despite the steady appreciation of the Chinese yuan, and more talk of increasing capital account convertibility in China, there was little or no mention that Hong Kong may abandon its HKD peg to the US dollar in 2Q13. This was a sharp contrast to 4Q12 when the Hong Kong Monetary Authority (HKMA) intervened many times to defend the HKD peg against speculation that it may abandon the greenback in favor of the yuan. The reason was simple. The greenback was weak in 4Q12 from the start of the Fed’s QE3 last September. That changed in mid-January when the weak Japanese yen and Fed tapering fears underpinned the US dollar against other Asian currencies including the HK dollar. It also did not help that the HKMA was warning of overheating risks in the HK economy, citing the sharp narrowing in the current account surplus to 1.3% of GDP in 2012 from its peak of 15% in 2008, amidst an increase in total household debt to a record 61% of GDP. While the stronger yuan was the primary reason for the recovery in yuan deposits in the territory, the weaker HK dollar did, nonetheless, preside over their rise to new record highs starting from February.

Taiwan dollar

Nearing the top of its 29-30 range, USD/TWD faces more downside than upside risks

USD/TWD has been trapped mostly between 29 and 30 since early 2012. The move from the floor to the ceiling of this range in 1H13 was predicated on external and domestic factors. Globally, currency markets were volatile from a weak yen and Fed tapering fears underpinning the US dollar. Domestically, fundamentals failed to live up to optimism set at the start of the year. On May 24, the Taiwan government downgraded its 2013 official growth and inflation forecasts to 2.40% and 1.23% respectively. This was a sharp contrast from February 22, when the official estimates for growth was upgraded to 3.59% from 3.53%, and inflation to 1.37% from 1.31%. Sentiment was dampened after real GDP growth retreated to 1.8% YoY in 1Q13 after a better-than-expected 3.9% in 4Q12. Assuming no more downside surprises in the outlook, Taiwan is still on track for growth to re-accelerate in 2H13 into 2014. This “optimism” is reflected by our expectation for USD/TWD to fall modestly below 29 by mid-2014. To move the target towards the 2011 low of 28.50, exports must rise to record highs alongside foreign reserves.


usd/ HKD 12-Jun 3Q13 4Q13 1Q14 2Q14Revised 7.7643 7.77 7.78 7.79 7.80Previous 7.79 7.80 7.80 7.79Consensus 7.76 7.76 7.77 7.76


7.74

7.75

7.76

7.77

7.78

7.79

7.80

7.81

7.82

7.74

7.75

7.76

7.77

7.78

7.79

7.80

7.81

7.82

2010 2011 2012 2013 2014

USD/HKD – off the lows of convertibility band


usd/ TWD 12-Jun 3Q13 4Q13 1Q14 2Q14Revised 29.875 29.6 29.4 29.2 28.9Previous 28.8 28.6 28.4 28.3Consensus 29.9 29.6 29.4 29.0


28.0

28.5

29.0

29.5

30.0

30.5

31.0

28.0

28.5

29.0

29.5

30.0

30.5

31.0

2011 2012 2013 2014

USD/TWD – keeping to a tight 29-30 range

31


Singapore dollar

SGD to maintain its appreciation vs USD in 2H13 albeit in a weaker path

With real GDP growth and CPI inflation coming in lower-than-expected in Singapore, USD/SGD has moved into the upper half of its descending price channel. We now expect the SGD’s appreciation to track this weaker path for the rest of the year. This is in line with the downgrades in our growth and inflation outlook for 2013. Real GDP growth is now expected to be 2.5% this year instead of 3.2%, while inflation is likely to average 2.8% vs 4.0% previously. CPI inflation fell dramatically to 1.5% YoY in April, thanks to macroprudential measures to curb credit for house and car purchases. Not only was April the lowest inflation since February 2010, it was also well below the official 3-4% inflation target. Despite this, the central bank (MAS) is not letting its guard down on core inflation. Labor conditions are expected to remain tight from restructuring efforts to reduce the country’s dependence on cheap foreign labor and move its economy towards productivity-driven growth. Hence, the MAS will probably maintain the status quo of a modest and gradual appreciation exchange rate policy at the next policy review in October.

Korean won

USD/KRW to revisit its 2011 low when the external recovery improves next year

The won was the only export-led Asian currency that was close to fully recouping its losses incurred during the Eurozone crisis. The attempt was hijacked in mid-January when the weak Japanese yen and Fed tapering talks underpinned the US dollar into May. Korea also sought to partially counter Japan’s aggressive monetary policies with a 25 bps rate cut to 2.75% on May 9. On a positive note, these lower rates, coupled with the KRW5.3 trillion supplementary budget, should help the Korean economy to perform better in 2H13. Despite its volatility, the won is well supported by its improving international liquidity position. This was best reflected by record high foreign reserves (April: $329 bn) vs falling short-term external debt (1Q13: $122 bn). The current account surplus exceeded 4% of GDP in 2012 for the first time since 2009. The trade surplus totaled USD14.1 bn in the first five months in 2013, with the full-year surplus likely to exceed the USD28.3bn posted in 2012. Export growth turned positive year-on-year in 1Q13 after three straight quarters of declines. This time next year, the won will probably be close to its 2011 high again.


usd/ KRW 12-Jun 3Q13 4Q13 1Q14 2Q14Revised 1127.8 1100 1080 1060 1040Previous 1040 1030 1020 1017Consensus 1108 1100 1086 1080


900

1000

1100

1200

1300

900

1000

1100

1200

1300

2010 2011 2012 2013 2014

USD/KRW – trending lower in upper channel


usd/ SGD 12-Jun 3Q13 4Q13 1Q14 2Q14Revised 1.2557 1.24 1.23 1.21 1.19Previous 1.20 1.19 1.18 1.18Consensus 1.25 1.25 1.24 1.22


1.15

1.20

1.25

1.30

1.35

1.15

1.20

1.25

1.30

1.35

2011 2012 2013 2014

USD/SGD – shifting downtrend to upper channel

32


Malaysian ringgit

USD/MYR continues be volatile in a lower but wide 2.95-3.10 range

The ringgit staged a brief relief rally after the ruling Barisan Nasional coalition secured a simple majority in parliament at the closely-fought general elections on May 5. USD/MYR fell to a low of 2.9745 on May 9 before it spiked to almost 3.10 on June 4 on external and domestic factors. The ringgit was pressured alongside other Asian currencies after the Japanese yen depreciated past 100 on May 9. Less than a week later, on May 15, Malaysia’s economy disappointed with growth slipping to 4.1% YoY growth in 1Q13 from a 2.5-year high of 6.5% in 4Q12. It was also the first time since 2Q11 that real GDP growth slipped below 5%. The sub-par performance was blamed on exports which contracted for the third straight quarter in 1Q13. Conversely, imports picked up to 5.5% YoY in 1Q13 from 1.2% in the previous quarter. This coupled a rise in inflation to 1.5% YoY from 1.3% during the same underscored the dependence of the economy on domestic demand. The trade surplus narrowed to MYR11.2 bn in the March quarter after 34 quarters of surpluses in excess of MYR20 bn. The above factors signal that USD/MYR will be patient in revisiting its 2011 low below 2.95.

Thai baht

Policy resistance against appreciation to keep the baht near the 30 level

The baht was one the most volatile Asia ex Japan (AXJ) currencies in the first half of this year. By April 19, the baht appreciated almost 7% year-to-date to its strongest level since July 1997. Over the next seven weeks, its fortunes were reversed. By early June, the currency returned more than 90% of the gains accummulated in the first 3.5 months. These large swings were in line with the fluctuations in its economy. Real GDP growth surged to a record high of 19.4% YoY in 4Q12, only to slip to 5.4% in 1Q13. The Bank of Thailand responded, on May 29, with a rate cut of 25 bps to 2.50%. Many believed that the cut was also aimed at discouraging baht appreciation. This should not come as a surprise. As at June 3, the baht and the Chinese yuan were the only two AXJ currencies that posted gains in 2013. PM Yingluk Shinawatra and her government have urged the central bank to impose more measures to keep the baht stable and competitive for exporters. Like GDP, export growth slowed to 4.5% YoY in 1Q13 from 18.2% in the previous quarter. The finance ministry reckoned that baht strength beyond 30 would be hard for the Thai economy.


usd/ MYR 12-Jun 3Q13 4Q13 1Q14 2Q14Revised 3.1300 3.02 2.99 2.96 2.94Previous 3.04 3.00 2.96 2.95Consensus 3.05 3.02 3.00 3.04


2.85

2.90

2.95

3.00

3.05

3.10

3.15

3.20

3.25

2.85

2.90

2.95

3.00

3.05

3.10

3.15

3.20

3.25

2011 2012 2013 2014

USD/MYR – a pendulum around mid-channel


usd/ THB 12-Jun 3Q13 4Q13 1Q14 2Q14Revised 30.950 29.9 29.8 29.7 29.6Previous 29.5 29.4 29.3 29.0Consensus 29.8 29.5 29.4 30.2


28

29

30

31

32

33

28

29

30

31

32

33

2010 2011 2012 2013 2014

USD/THB – correcting excessively strong baht

33


Philippine peso

The peso is likely to consolidate after its sharp correction in 1H13

Philippines’ favorable fundamentals were reflected in its stock market and not its exchange rate in 1H13. The benchmark Phisix stock index hit an all-time high in mid-May on the back of two investment grade debt ratings awarded by Fitch on March 27 and Standard & Poor’s on May 2. The Philippines overtook China as the fastest growing Asian country in the first quarter. Real GDP growth was 7.8% YoY in 1Q13 vs 7.7% in China. As for the peso exchange rate, it was vola

Economics Markets Strategy - DBS · 2018. 4. 14. · Hong Kong Treasury & Markets - Management...

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