Fixed Income Overview · 2013. 1. 4. · Fixed Income Overview Fixed income asset allocation 1q13...

Fixed Income Overview

Fixed income

asset allocation 1q13Policy

uObam weight (%)

benchmark weight (%)

change from 4q 2012

developed Underweight 30.0 70.0 =

Government Underweight 40.0 71.0 =

High Grade Overweight 55.0 21.0 =

High yield Underweight 5.0 8.0 =

emerging Overweight 70.0 30.0 =

asia Overweight 32.0 30.0 =

latin america Neutral 33.0 33.0 =

cIs/ee** Underweight 24.0 27.0 =

middle east/africa Overweight 11.0 10.0 =

**CIS–CommonwealthofIndependentStates,EE–EasternEurope

Wereduceourfixedincomepositiontoanunderweight.Therecordlowyieldsandimprovedriskappetiteindicatethatthemulti-yearfixedincomerallymaybeslowing.

In the developed markets, we remain underweight inGovernment debts specifically in the Eurozone area. Wemaintain overweight in investment grade corporate creditson the back of positive corporate fundamentals whileunderweighting high yield corporate credits due to credit

deterioration. Duration will be kept neutral/short to thebenchmark.

In emerging markets, wemaintain theoveralloverweightrelativetotheDevelopedRegions.WeareoverweightinAsiaandCIS, neutral in Latin America,Middle East and Africa;andunderweightinEasternEurope.WearecautiousonHighYieldEMcreditsduetocreditdeterioration.

29QUARTERLY INVESTMENT STRATEGYFirst Quarter 2013

Please refer to the last page for the important notice & disclaimer. UOB Asset Management

Ranked by Singapore dollar adjusted returns

Source:YieldBook,asof30November2012

Bond Market Returns

Local currency returnsSingapore dollar adjusted returns

-20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%

Japan

United States

Denmark

Switzerland

Germany

Sweden

Spain

Netherlands

Canada

Finland

UK

Australia

France

Austria

Belgium

Italy

Ireland

Portugal

G7

-10.3%

-3.6%

-3.5%

-3.0%

-2.2%

-1.6%

-1.5%

-1.2%

-1.0%

0.1%

0.2%

1.2%

3.0%

3.8%

8.6%

13.3%

21.8% 41.5%

-4.2%

2.1%

2.4%

2.7%

2.1%

3.7%

1.6%

4.7%

4.5%

2.7%

6.1%

3.3%

5.7%

9.2%

10.1%

15.2%

20.2%

29.1%

50.1%

4.1%

TheG7governmentbond indexreturned-4.2%inSingaporedollarterms,primarilyduetoastrongerSingaporedollar(SGD)againstmostlocalcurrencies.Inlocalcurrencyterms,allbondmarketshaveperformedwellin2012asconcernstowardstheEuropean crisiswere eased aftermarkets sawpolicymakers’responses in the right direction. Hence, Eurozone countrieswerethebestperformersin2012asofearlyDecember.Risingconcernstowardsthefiscalcliff inthethirdquarterhavekeptUnited States (US) Treasury yields low, which have returned2.4%in2012inUSdollarterms.

GLOBaL FIXeD INCOMe

30 QUARTERLY INVESTMENT STRATEGYFirst Quarter 2013

Please refer to the last page for the important notice & disclaimer.

uSUSdata continued to surprise on the upside. The pickup inconsumerspending,withhousingtakingaleadingrole,providedthemuch needed growth in theGDP.However, deceleratingexportsduetoglobalslowdownandsharpslowdownincapitalspending growth by businesses have kept the overall paceof growthbelowpar. Theuncertainty around the fiscal cliff isalsodelayingbusinessesinvestmentdecisionstillthereismoreclarityaroundtaxstructuresgoingforward.Onthepositiveside,privatesectorhiringhaskeptthelabourmarketimprovinginthefourth quarter of 2012. The unemployment rate has fallen to7.7%inNovember2012,butwagegainshavebeensoftandproductivitygrowthmuted.Inspiteofthis,spendingiskeepingpaceduetorealincomegainsthroughrisinghousepricesanddeclining debt burdens. Inflation also remained tame, whichalongwithhighunemploymentandlingeringriskstogrowth,willkeeptheUSFederalReserve(Fed)inaccommodativemode.

InSeptember,theFedintroducedanopen-endedquantitativeeasing(QE),andindicatedthatitwouldkeepthisinplacelongaftertherecoverystrengthens.Inotherwords,theFederalOpenMarket Committee (FOMC) does not expect an increase in funds rateuntilat leastmid-2015.Thishasessentiallykeptacap on the short-term rates andwill likely continue for quitesometime.Inthefirstquarterof2013,weexpecttheratestokeep lowand continuebe range-boundwith a bias towardssteepening.Wethinkthatthe10-yearratescouldgouphigherandtradebetweenthe1.7%and2.2%rangeoncethemarketsreceive someclarity on the fiscal cliff debate.Weexpect the cliff to shrink aggregate spendingof aboutUS$300billion oraround1.8%ofGDP.Currently,themarketsarealsopricinginasimilarimpact,henceoncetheuncertaintyisoutofway,thecurveshouldbearsteepenfromthecurrentlevel.Hence,wearebothneutralinourUSallocationanddurationwhileoverweightintheUSdollar.

euThe third quarter of 2012 has seen policy responses to thesovereigndebtcrisiswhichsignificantlyimprovedtheperipheraloutlookfor2013.Thefiscalconsolidationburdenislowerin2013comparedwith2012,producinglesseconomicdrag.AlsotheEuropeanCentralBank(ECB)’sOutrightMonetaryTransactions(OMT)willimplicitlycapperipheralyieldsandpartiallyreversethecapitalflight, improvinglong-rundebtdynamics.Thepotentialdirect European Stability Mechanism (ESM) bank recap andliquidity support (EFSF/ESM/SMP/OMT) to reduce relianceonbanks’purchasesarealsostepsintherightdirection.ThebankingsectoraidwouldsignificantlyeasethesovereigndebtburdeninSpain,IrelandandCyprus,butaswearestillalongwayfromformationoftheBankingSupervisorybody,thetruecircuit-breakerstillfacesimplementationrisks.

Source:Bloomberg,30November2012

US Treasury 10-Year

1.30

1.50

1.70

1.90

2.10

2.30

2.50

12/1

/201

1

1/1/

2012

2/1/

2012

3/1/

2012

4/1/

2012

5/1/

2012

6/1/

2012

7/1/

2012

8/1/

2012

9/1/

2012

10/1

/201

2

11/1

/201

2

US Treasury 10-yr


UOB Asset Management

Currently,theEurozoneisinthemidstofamildrecession,giventhestructuralweaknessesintheperipheralsanditsspill-overtocorecountries.AlthoughGermanyhasshownweaknessinitsrecentgrowthandmanufacturing/industrialproductionnumbersasaresultofthelowerglobaldemand,westillexpectitsgrowthto bottom out in the first quarter of 2013, led by improvingexports as well as domestic demand. Germany will retainits competitivenesson theglobalmap,maintaininga resilientlabourmarketandbusinessconditions.

Also, we expect limited progress on EU structural reforms(common budget, banking union, etc.) given the upcomingGerman elections. The elections will prompt risk-aversepolicymakingandmarketstabilisationwilltaketoppriority.WeexpectBundyieldstostaylowwithaslightbiastowardsbearsteepeningasperipheralsstabiliseanddemandforsafehavendiminishes.HencewemaintainourunderweightinBunds,shortposition on duration and underweight in the Euro. We alsomaintainourunderweighttowardsFrancewithshortondurationasthecurrent levels lookexpensivegivenFrance’sdebt load,budget and structural growth challenges. The fundamentalmissessuchas itsanti-businessplatform (top tax rate75%),25% youth unemployment, together with its budget deficittargetof5.6%for2012,thatisunlikelytobemet,reflectthatthebondmarketsaretoocomplacentwithFrance.


German & French yields

-

0.50

1/2/

2012

2/2/

2012

3/2/

2012

4/2/

2012

5/2/

2012

6/2/

2012

7/2/

2012

8/2/

2012

9/2/

2012

10/2

/201

2

11/2

/201

2

1.00

1.50

2.00

2.50

3.00

3.50

4.00 Germany 10-yrFrance 10-yr


Italian & Spanish yields

4.00

1/2/

2012

2/2/

2012

3/2/

2012

4/2/

2012

5/2/

2012

6/2/

2012

7/2/

2012

8/2/

2012

9/2/

2012

10/2

/201

2

11/2

/201

2

4.50

5.00

5.50

6.00

6.50

7.00

7.50

8.00Italian Bonds 10-yrSpanish Bonds 10-yr

WehaveseenasignificantstabilisationinSpanishyieldsposttheannouncementoftheOMTbytheECBinSeptember2012.However, the fundamental risks still remain for Spain. Theseinclude1) execution risk around fiscal consolidationplans, 2)fundingrisksgivenhighborrowingneeds,3)riskofdowngradetobelowinvestmentgrade,and4)riskthatcapitalneedsoftheSpanishbankingsectorwillbehigherthantherecentstresstest.

Giventheserisks,weexpectSpaintorequestanESMcreditline in the firstquarterof2013activating theOMT,drivenbypoliticalpressureand/orhigheryields.Spainhas€115billionofgrossbondsupply,andasdomesticbanksarelikelysaturatedwith government bonds, international investors will demanda higher yield. Italy, on the other hand, faces a politically uncertainscenarioasMarioMontiwillstepdownasthePrimeMinisterdue toSilvioBerlusconi’sparty’swithdrawal fromhistechnocraticgovernment.Monti’scredibilityhasearnedmarketconfidence as he moved towards resolving Italy’s structuralweaknesses through various reforms. Any reversal in thisdirection,withananti-austerityleadershipinthecountry,couldswiftlychangetheyield’sdirection,shifting themarket’s focusbacktoItaly.WemaintainourneutralcallonItalianbondsanddurationwhilekeepingacloseeyeonitspoliticaldevelopments.



Source:OECD,30November2012

*Measurestheproceduresandcostsinvolvedindismissingindividualsorgroupsofworkersandtheproceduresinvolvedinhiringworkersonfixed-termortemporaryworkagencycontracts.Asof2008;dataarefor2009forFranceandPortugal

The Irish Labour Market is a model of flexibility

3

Amongst thebest in class

Poor students

2

U.S.

CANA

DA

IREL

AND

JAPA

N

SWIT

ZERL

AND

DENM

ARK

SWED

EN

NETH

ERLA

NDS

FINL

AND

AUST

RIA

BELG

IUM

ITAL

Y

GERM

ANY

NORW

AY

PORT

UGAL

GREE

CE

FRAN

CE

SPAI

N

1

OECD Labour Market Rigidity Index

After a weak year, we expect a gradual recovery in the UK economy, ledbyapredominantly improvingglobalbackdrop.As with other small open economies, the UK’s economicperformanceisverymuchafunctionoftheglobalenvironment.We expect private sector demand to pick up globally, ascorporates remain healthy, US spending improves and theEurozone exits recession. As inflation is likely to remain wellabovethe2%target,wethinkthattheBankofEngland(BoE)will put a hold on itsQE program,while retaining its currentmonetarypolicy.However, ifeconomicconditionsdeteriorate,thepossibilityofasmall-scaleextensionofQE isnotunlikely.MarkCarney,BankofCanadagovernor,whohadmaintainedsuccessful dovish policies in Canada, was named BoE’sgovernor commencing June 2013. We expect the yield toremainrangeboundbetween1.70%and1.90%level.WeareneutralontheGBPasweexpectittobenefitfromendQE.

Greece, inourview,willcontinuetobeapartofEurozone inthenearterm,andwillmuddlethroughin2013.Greekofficialshaveenactedalargeamountoffiscaltighteningmeasures,butwith little success in changing the debt/GDP ratio dynamic, even after the debt restructuring. Most recently, there havebeenstepsfromEurozoneofficialstowardsdebtsustainabilityreducinganestimated144%debttoGDPto124%by2020though lowering the loan rateby100basispoints,extendingmaturityby15yearsand foregoingprofitsonGreekdebtbyECB. Greece has also launched its debt buy back scheme,offering a swap to Greek bonds for price between 32.2%-40.1% of face value (depending onmaturity) with sixmonthEFSFnotes.Postthedeal,Greecewillreceiveitsnexttrancheofbailout funds,whichhavebeendue sinceJune2012.Ontheotherhand,Irelandmaintaineditssuccessstoryduringthe fourth quarter of 2012. Ireland’s competitive tax system andflexible labour market helped provide Ireland with its exportboom(withdownwardreductioninwagesandprices)offsetting much of its fiscal drag. We expect Ireland to regain marketaccessin2013withtheECB’sOMT.Portugalmayrequireatop-upbailoutpackage,butshouldregainpartialmarketaccess.



Given the challenges we have outlined and potential policychanges, we are underweight Japanese government bondsandyen.

australiaAustralia’stermsoftradehavedeclinedfromthepeakreachedin2011.Theweakerconditionsintheminingindustryandrisingcostpressurehavepromptedreassessmentof investmentsinminingprojectsand resourcesectorphysical investmentswillprobably decline from 2013. Capacity built over the last fewyearsiscontributingtosupply.Thereispriceuncertaintyastowhen the capacity will come onstream as resource demandstillhingesonthepaceoftheglobaleconomicrecovery.Withthe developed economies’ growth expected to be modest,emerging economies are now relying on more domesticallydriven growth, thereby dampening demand for commodities.Hitoncorporateprofitsfromlowertermsoftradeinturnlowersbudgetforcapitalexpenditureandlabour.

Whilethehousingsectorhasbeenweak,itcouldbeapotentialcontributortogrowthgoingforward.Thelevelofinterestratesissupportive,higherrentalyieldsandrisingbuildingapprovalsprovidetentativesignsofrecoveryinconstructionactivities.

ThepublicsectorisnotexpectedtobeameaningfulcontributortoGDPgrowthasthegovernmentseeksfiscalprudence.Theofficial forecast for GDP growth was lowered reflecting thechangetotheprofileformininginvestments.Thesofteroutlookis expected to be reflected in the labourmarket and benignunderlyinginflation.

Despitedeclining termsof tradeandeasingmonetarypolicy,theAustraliandollarhadbeenholdingupbetterthanexpectedagainst theUSdollar. Thecurrencyhas thesupportof flowsfromforeignreservediversificationsandin lateNovember,theIMFmentionedaboutexpandingtheofficialreservecurrenciesfrom thecurrent five to includealso theAustraliandollar andCanadiandollar from2013.This is a statistical recognitionofthereality.

JapanThethirdquarter2012GDPforJapanwasweakandreflectedthe softness of external demand and the tensions withChina.Quarter-on-quarter,GDP contracted 0.9% in the thirdquarterandonanannualisedbasis, theeconomycontracted3.5%. Exports, private investments and consumption were weaker.Publicinvestmentsaddedtogrowthspurredbypost-earthquakereconstructiondemand.Thenear-termoutlookforthe economy does not look optimistic. Latest survey resultspointtodeclinesinbothmanufacturingandnon-manufacturingsentiment. The exports sector continues to suffer from a sluggish global economy, a strong yen, the China-Japanterritorial dispute and slipping competitiveness. Having saidthat,whileexportshavealargeimpactontheoveralleconomy,it may be increasingly inappropriate to measure Japan’s external incomebasedonexports.LocalsalesintheUSandChina have been rising versus direct exports from Japan.Japancouldbelookingatincreasingforeigndirectinvestmentstoboostnational income,consideringthechallengesfacedathomesuchasageingpopulationandenergyconstraints.

In March and April 2013, the term of the current Bank of Japan (BoJ) deputy governors and governor end and theappointment of new board members could shift BoJ policydepending onwhethermore dovishmembers are appointed bythenewgovernment.

The Prime Minister Yoshihiko Noda decided to dissolve theLowerHouseon16November2012andtoholdanelectioninmid-December. The oppositionmightwin, considering thehigherapprovalratecomparedtothatoftherulingpartyDPJ.LDPleaderShinzoAbe,whowasprimeministerin2006-2007,is vocal about a number of policy changes on top of moreaggressivefiscal stimulus.These includean inflation targetof2%to3%fromthecurrentgoalof1%andpushingBoJtoamoreaggressivemonetarypolicytospurtheeconomyshouldhewintheelection.TheintendedpolicyactionsarenegativefortheJapaneseyen.Yenweaknesswillbegetfurtherweaknessifthemarketviewontheyensteeredtowardsweakeningdrivesunwindingofexistingcurrencyhedgesonforeigninvestments.



The Reserve Bank of Australia cut policy rate by 25 basispointsto3%intheDecember2012meeting,takingtheviewthateasingwasappropriategiventhatthefulleffectsofearliermeasuresareyettobeobserved.Thecentralbankmentionedthattherearesignsofeasiermonetarypolicystartingtohavesome of the expected effects, though the exchange rate remainshigherthanexpectedgivendeclineinexportpricesandweakerglobaloutlook.

In view of the above discussed, we are underweight on theAustraliangovernmentbondsandAustraliandollar.

CanadaThe breakdown of Canada’s export destinations shows that themajorityofitsexportsistoslow-growingeconomies.Inthenearterm,obstaclestoCanada’sgrowthfromexternaldemandincludetheimpactofHurricaneSandyandthefiscalclifftotheUS-animportantexportmarketforCanada.

Domestically,capacityutilisationhasheldupandtheCanadianeconomyoperateswithasmallamountofexcesssupply.Thereis the prospect for investment spending and based on the BankofCanadaBusinessOutlooksurvey,thenetpercentageof firmsplanning to raise investmentover thenext12monthremainsinpositiveterritory.

Thecentralbankhasbeenmaintainingitspolicyrateandthere is little impetus to start the hiking cycle now. The strong demand for Canadian housing underpinned by low interest ratesandastable jobmarkethavebeenmetwithmeasuresfromthegovernmenttotightenlendingrequirements,includinglowering loan-to-value ratios and loan tenor. The global anddomestic economic backdrop does not warrant tighteningmonetary policy to slow the housing market. Administrativemeasurestakensofartoaddressthehighhouseholddebttoincomes arising largely from housing is having an impact ondampeninghouseprices.

We are underweight on Canadian government bonds andneutralonCanadiandollar.



eMeRGING MaRkeT FIXeD INCOMe

EmergingMarket (EM)bondsareheaded fora recordyearofinflowsandhighsingledigitreturns(inSGD)for2012.Inaworldoftepidgrowth,subduedinflationandexcessliquidity,EMbondshavebeenanetbenefactor.Developedmarkets(DM) have contributed indirectly to this. As they slowly de-lever and grapplewith new austeritymeasures, excessliquidityhasfoundanewhomeinEMbonds.AslewofcreditratingdowngradesinEurope–France,Spain,Italy,Portugal,Ireland–havevalidated thismove. Italy, IrelandandSpain,onceAAAratedcountries,arenowinthesamecreditratingcategory as EM countries such as Russia, Mexico, Brazil,PeruandIndonesia.Certainly,thegrowthoutlookandhealthof the balance sheets of these EM countries are certainlybetterthanthatoftheirDMcounterparts.

Source:JPMorganEMOS,November2012

Number of upgrades and downgrades

2007 2008 2009 2010 2011 2012

60

50

40

30

20

10

0

Emerging UpDeveloped Up Developed Down

Emerging Down

Asweenter2013,weseemoreofacontinuationofthisstory,atleastinthefirsthalfoftheyear.WebelievethetheoryofEMasthenew‘safehaven’isintactatthispoint.However,thisisnotaone-waystreet;carefulcountryandcreditselectionwillbekey.Thereareafewpotholesalongtheway.However,wethinkthatthenumberofcreditratingupgradeswilloutweighthoseofthecreditratingdowngrades.

In termsof growth,webelieve that EMgrowthwill remaintepid.TheEurozoneeconomiesarelikelytocontractfurther in2013andwillcontinuetobeadragtoglobalgrowth.TheUSeconomyseemstobeshowingsignsoflife,inparticularthehousingsector;Chinaontheotherhand,canbeexpectedtogrowataslowerpace.EMexportshaveslowedandwethink some recoverycanbeexpected.However,withoutasharprecovery inDMmarkets,wedonot foreseeastrongrecoveryforEMexports.Infact,thismaybegoodforbonds.Asubduedinflationaryenvironmentisalsopositive.

Bond yields arenowat historical lows.Withglobal growthrecovering slowly, we think bond yields are still somewayofffromrising,whilebondspreadsshouldcontinuetogrindtighter.EMbondsarestillapproximately75basispoints(bp)wideofhistoricaltightsforsovereignbondsand175bpswideofhistorical tights forcorporatebonds.Hence, there isstillsomeupside in termsofperformance thatwecanexpect.Theriskhere isadramaticrecovery inglobalgrowth,suchthatbondyieldssuddenlyrise,andquickly.Butthisisnotourbasecase.



Source:JPMorganEMOS,November2012

EM Bonds Yield and Spread14

12

10

8

6

4

2

0

Aug

-06

Dec

-06

Ap

r-07

Aug

-07

Dec

-07

Ap

r-08

Aug

-08

Dec

-08

Ap

r-09

Aug

-09

Dec

-09

Ap

r-10

Aug

-10

Dec

-10

Ap

r-11

Aug

-11

Dec

-11

Ap

r-12

Aug

-12

With global liquidity still plenty, money will want to find ahome.WethinkfundflowswillstillfavourEMbonds,butmaystartmovingdownthecreditspectrum–tocorporatebonds,highyieldsbondsandalsolocalcurrencybonds.

We are currently neutral high yield (versus an underweightpreviously) against high grade bonds. In terms of countryselection, we continue to favour Mexico, Colombia, Peru,Brazil, Russia, Turkey, Peru andChina and are overweightcorporatebondsinthesecountries.WearealsooverweightVenezuela and Dubai. We are underweight in Argentina,Belarus,SouthAfrica,Ukraine,Hungary,andEasternEuropeingeneral.Wehavebeenfairlyneutraloncurrenciesbutthinkthatwemayseeoutperformanceoflocalcurrencybondsin2013.WehaveaddedMexicanPesoandChineseReminbiexposuretopositionforthisview.

Sovereign SpreadCorporate Spread

Sovereign YieldCorporate Yield

asset class (30 november 2012) yield (%)

USHYCorp JPMHY 7.10

EMLocalSov GBI-EMGlobalDiv 5.52

EMCorps CEMBIBroad 4.78

EMSov EMBIG 4.57

USIGCorp JULI 3.45

EMCurrencies GELMI+ 2.60

EurozoneIG EMU IG 2.59

EuroCredit Maggie 2.43

US Equities S&P500 2.02

EM Equities EM Free 1.95

DM Treas GBIGlobal 1.72

US Treas USTreasury 1.53

Source:JPMorgan,EMBIMonitorDec2012



aSIa FIXeD INCOMe

The confluence of strong action from all themajor centralbanks led to strong performance in risk assets. The USFederal Reserve’s commitment to quantitative easing, theECB’sOMT and the BoJ’s announcement of further assetpurchasesaremajorshorttermboostersofliquidityandriskassets.Formuchof2012,investorshavefrettedoverthreequestions:1) WilltheEurozonebreakup?Ifso,when?2) WillChinaexperienceahardlanding?3) Canpolicymakerspreventtheimpending“fiscalcliff”from

derailingtheeconomicrecoveryintheUS?

PolicymakersinEuropehavemadesubstantialstepstowardspreventing(oratleastdelaying)abreak-up.Recenteconomicdata fromChinapoint towardsabottomingof theChineseeconomy.Assuch, thefirst two risksdelineatedabovearenowlow.

TheUSfiscalcliff,ontheotherhand,hasyettoberesolved.

President Obama’s re-election resulted in a short sell-off in risky assets as investors fretted about impendingtax increases and a continuation of ineffective economicpolicies.Given that bothPresidential candidates had beenreticentabouttheirplansfortheeconomy,businessleadershad been holding back from July 2012 (see chart below).However,capitalexpenditurecannotbeindefinitelydeferred–themostrecentdatareleaseinNovember2012showsasmallresurgenceincapitalexpenditure.

While it is difficult to predict whether policy mistakes willnot bemade, commentsmade by theRepublican leadersshortlyaftertheelectionssuggestedagreaterwillingnesstocompromise. However, recent statements have been lesspositive,with someDemocrats suggesting that temporarilygoing over the fiscal cliff may not be too detrimental. Thepolitical calculus behind these statements are particularlyinsightful on how dysfunctional things are – polls suggest that the public will blame Republicans if a compromise cannotbereached.

Furthermore, the hurdle towards a “successful” resolutionis not low–policymakershave to raise revenuesandcutexpendituresinawaythat1) doesnotderailtheeconomicrecovery2) assures investors thatasustainabledebt trajectorycan

bereached.

If a successful resolution is attained, a strong rally in riskyassetscanbeexpected.Thereasonsareasfollows:1) There is now a significant amount of deferred capital

expenditurebyUScorporations.Thiscannotbeindefinitelydeferred. When this backlog of investment is deployed,therewillasignificantboosttotheGDP.

2) Valuationsdonotappearstretchedforequities.3) Housing,aheadwindoverthepastthreetofouryears,is

nowbecomingatailwind.4) CheapenergyduetotheshalegasrevolutionintheUShas

thepotentialtoreversethehollowingoutofmanufacturingintheUS.

Capital goods new orders nondefense ex aircraft & parts SA

Source:Bloomberg,November2012

Capital Goods New Orders Nondefense Ex Aircraft & Parts SA

S&P 500

0

200

400

600

800

1000

1200

1400

1600

1800

40,000

45,000

50,000

55,000

60,000

65,000

70,000

75,000

Jan-

08

Ap

r-08

Jul-

08

Oct

-08

Jan-

09

Ap

r-09

Jul-

09

Oct

-09

Jan-

10

Ap

r-10

Jul-

10

Oct

-10

Jan-

11

Ap

r-11

Jul-

11

Oct

-11

Jan-

12

Ap

r-12

Jul-

12

Oct

-12

US

Dur

able

Go

od

New

Ord

ers

ex D

efen

se S

A (M

illio

ns)



30

35

40

45

50

55

60

65

Dec

-07

Mar

-08

Jun-

08

Sep

-08

Dec

-08

Mar

-09

Jun-

09

Sep

-09

Dec

-09

Mar

-10

Jun-

10

Sep

-10

Dec

-10

Mar

-11

Jun-

11

Sep

-11

Dec

-11

Mar

-12

Jun-

12

Sep

-12

Ind

ex

Exp

ansi

ona

ry

Co

ntra

ctio

nary

Purchasing Managers’ Index (PMI) numbers in the twolargest economies, US and China, improved in November2012whilethedataemergingfromtheEurozonecontinuestobedismal.Wedonotthinkthelatterwillbeasignificantdragoninvestorsentimentasthesehavebeenfactoredintoassetprices.Rather,policymistakeswillbethekeythreattostabilityinthefinancialmarkets.

Basel III standards are set to kick in in 2013 and this willresult in a furtherwithdrawal ofEuropeanbanks fromAsiaas they try to shore up their balance sheets. Asian bankswill not be able to meet the excess credit demand. As aconsequence,disintermediationwillcontinueandAsianbondmarkets should continue to see increasing issuer diversity.A diversified bond universe in Asiamakes the asset classattractive to investors. On the other hand, supply will bea drag on returns if the bondmarkets cannot absorb thesupply.Astrongreboundinrisksentimentwillgraduallybringinvestorsbackintoequities,thuscannibalisingfundflowsintofixed incomeassets.Weexpect flows into fixed income toremainfairlyhealthy,althoughtheyareunlikelytobeasrobustastheyhadbeenafterthepastyear.

Major regions’ manufacturing PMIs


United States EurozoneUnited Kingdom China

Overall, we expect risky assets to performwell in the firstquarterof2013astailriskshavebeenreduced.

InHigh Grade,weareoverweightingchina, Hong kong, singapore and australia High Grade corporates. these credits include china national Petroleum corporation, sinopec, Indonesia government, PccW, china Overseas land, swire properties, sun Hung kai Properties, beijing enterprise, china national Petroleum, andnational Wealth management, Henderson land and kerry Properties. These companies offer decent yieldpick-up over similarly rated credits and duration without acompromiseincreditquality.

InHigh yield,wecontinuetoprefergoodqualitycorporatebonds like mIe Holdings, country Gardens, kWG properties, Guangzhou r&F, shanshui and Gemdale thathavestrongbalancesheetsandsolidbusinessmodels.We also thinkbumi andberau bonds have an attractive risk-rewardtrade-offdespitehigherheadlinerisk.



SINGaPORe FIXeD INCOMe

Fourth Quarter 2012 Review

MaCRO RevIewThe third quarter 2012 real GDP growth was revised to0.3%year-on-year(y-o-y),asignificantmoderationfromthesecondquartergrowthof2.5%y-o-y.Itwasalsolowerthanadvancedestimatesofa1.3%y-o-ygrowth.Onaquarter-on-quarter seasonally adjusted annualised basis, the thirdquartersawa5.9%contraction.

Thispointstowardsachancethatatechnicalrecessionwilloccur inthefourthquarterof2012.Withweakereconomicgrowthand theSGDNEER tradingabout2.6%above themid-band,theSGDlooksexpensive.


Please refer to the last page for the important notice & disclaimer. UOB Asset Management

Fixed Income Overview · 2013. 1. 4. · Fixed Income Overview Fixed income asset allocation 1q13...

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