Rising market pressures may trigger third wave of credit crisis

Business Times – 11 Mar 2008

Nervous investors hanging on to pronouncements of central bankers

(LONDON) Tight money markets and tumbling stocks and the US dollar are expected to increase worries for investors this week as pressure mounts on central banks facing what looks like the third wave of a global credit crisis.

Last week, money markets tightened to levels not seen since December, when year-end funding problems pushed lending costs higher across the board.

In response, the Federal Reserve unveiled new measures to ease liquidity strains on Friday – injecting US$200 billion into the banking system – and said that it was in close consultation with central bank counterparts.

However, the Fed failed to lift the mood much. Investors, keen to see if any further plan is in the works to prevent a financial market seizure, will scrutinise words from key central bankers including Fed officials this week.

‘It’s another round of the credit crisis. Some markets are getting worse than January this time,’ said Jesper Fischer-Nielsen, interest rate strategist at Danske Bank in Copenhagen. ‘There is fear that something dramatic will happen and that fear is feeding itself. Central banks have shown great resolve to try to solve the problems (on money markets) and I’m sure they will do again.’

Philipp Hildebrand, vice-chairman of the Swiss National Bank, warned last week that the world might be in a new, more dangerous phase of the crisis.

If that is the case, the latest wave is the third one.

The first round began in August when interbank lending dried up as banks realised they did not know which was dangerously exposed to the meltdown in the US sub-prime mortgage market.

Then, late last year, pressure intensified again in the money markets – after some of the world’s biggest banks began writing off colossal sums of money – prompting top central banks to inject billions of dollars into the system.

Renewed problems in the credit market – including fears that US mortgage lender Thornburg might go bankrupt and acute cash flow problems at a Dutch fund – and concerns over slowing world growth led to a sell-off in stocks last week.

World stocks, as measured by MSCI, fell more than 3 per cent on the week while the dollar lost more than one per cent to hit record lows against a basket of six major currencies at one point last week.

Also reflecting investor jitters, two-year US Treasury yields hit a four-year low below 1.5 per cent as investors flocked to government bonds.

The cost of corporate bond insurance hit record high levels on Friday and parts of the debt market are also getting hit.

‘A funding freeze by lenders, that appears already in progress, could cause first-round casualties in Spain, Italy, Ireland, Portugal, Greece and Austria, countries collectively identified as the euro zone liability group,’ a UBS note said.

The G-10 policymakers came up with a cash injection plan late last year, with the top five central banks injecting liquidity into banks.

However, after weeks of calm, stress is building up again in money markets.

‘The level of financial stress is . . . likely to continue to fuel speculation of more immediate central bank action either in the form of increased liquidity injections or an early rate cut,’ Goldman Sachs said in a note to clients\. \– Reuters

TAKING STOCK: Inflation worries hammer STI and regional bourses

NO SOONER does the market show some spark than another bout of bad news clobbers it back down again.

Yesterday, it was inflation concerns after oil rose above the US$100 a barrel mark.

Red ink flowed from the word go. The Straits Times Index (STI) opened lower and kept spiralling downwards, losing more than 78 points by the early afternoon.

Asian markets were also in a similar state of distress. Hong Kong’s Hang Seng was 2.2 per cent down, while Japan’s Nikkei and broader Topix indexes sank more than 3 per cent each. Markets in South Korea, Taiwan, Australia and China were also bruised.

The STI eventually closed down 71.23 points, or 2.3 per cent, at 3,026.83 – an unwelcome gloomy ending after five positive finishes in six trading days.

Volume was low – just 1.59 billion shares worth $1.88 billion changed hands.

‘Investors were discouraged by the early fall and wanted to play safe and stand by the sidelines to watch the show,’ said a dealer.

Telco SingTel led the market’s plunge, falling 14 cents to $3.78 and bringing the index down by a whopping 13.3 points in the process.

Morgan Stanley caused the sell-off, after it downgraded the stock from ‘overweight’ to ‘equal weight’, saying that strong competition from other mobile and broadband operators, as well as government initiatives to open up the broadband industry, pose long-term risk to earnings.

Banking stocks also weighed down the STI, dogged by news of Credit Suisse’s unexpected US$2.8 billion (S$4 billion) in sub-prime write-downs.

DBS Group Holdings was the worst hit, probably also due to profit-taking after six days of gains. It fell 46 cents to $17.90, United Overseas Bank lost 28 cents to $18, while OCBC Bank slipped seven cents to $7.45.

Among the few bright spots were oil-related plays, including Singapore Petroleum Co, up 26 cents to $6.65.

‘With the oil prices back to record highs, we could see a continued rally in offshore and marine stocks,’ a UOB Kay Hian report said yesterday, favouring Keppel Corp, ASL Marine, AusGroup, SembCorp Marine and Cosco Corp.

Source: The Straits Times 21 Feb 08

US-linked worries drag Asian markets down

Delayed reaction due to holiday break as recession fears dog investors

ASIAN stock markets were battered yesterday, after a four-day break for the new lunar year failed to dispel the same old fears that have been unnerving investors.

Steep falls on Wall Street last week had a delayed reaction here as markets waited to re-open after the holiday, with a rush for the exits once the opening bells rang.

Singapore’s Straits Times Index (STI) tumbled 63.68 points, or 2.17 per cent – to 2,868.29, its lowest close since Jan 22.

But volumes were relatively low with just 1.08 billion shares worth $1.64 billion traded, suggesting that most investors are seeking safety on the sidelines.

But the STI’s drop was nothing compared to the selldown in India, where the Sensex Index plunged 4.78 per cent, after a much-awaited stock listing made its debut more than 17 per cent below its issue price.

India was joined on a southward spiral by Hong Kong’s Hang Seng Index, which slumped 3.64 per cent, and South Korea’s Kospi Index, down 3.29 per cent.

Markets in Indonesia, the Philippines, Malaysia and Australia were also belted.

JP Morgan Private Bank’s senior portfolio manager, Mr Elan Cohen, said: ‘The weight of negative news in the US last week and the 4 to 5 per cent fall in stocks there factored heavily in Asian markets today.’

Wall Street, racked by recession fears and more subprime red ink, dived 4.4 per cent last week to close at 12,182.13 – down more than 8 per cent for the year.

The already jittery Asian market sentiment was exacerbated by comments from the Group of Seven policymakers who said yesterday that the global economy faces growing threats from a United States housing slump and credit crunch.

The wave of pessimism sent the STI down from the opening bell, with many blue chips taking a hit. Weaker US futures during Asian trading hours pushed the STI further south in the afternoon.

The banks were thumped. United Overseas Bank dropped 58 cents to $17, the day’s fifth-largest loser. DBS Group Holdings lost 36 cents to $16.66, while OCBC shed 16 cents to $7.14.

Property plays were also down. City Developments shed 40 cents to $11.06, Keppel Land lost nine cents to $5.74 and CapitaLand fell 23 cents to $5.45.

Other bruised blue chips included Singapore Exchange, off 47 cents to $8.79, and Singapore Airlines, which retreated 28 cents to $15.18.

The FTSE ST Mid Cap Index lost 1.7 per cent to 752.55, while the China Index plunged 3.1 per cent to 524.54.

But SingTel had a better day, adding a cent to $3.72 due to bullish analyst reports, while Neptune Orient Lines was up 10 cents at $3.20 ahead of its full-year results today.

Analysts warn of more volatility to come but note that the worst may soon be over.

DMG & Partners Securities senior dealing director Gabriel Yap said: ‘The downside could last another one to three months more. We’re already quite close to the bottom.’

 

Source: The Straits Times 12 Feb 08

NEWS ANALYSIS: Panic and fear, not fundamentals, driving sharp market selldown

Widespread selling creating financial violence people hope to avoid, analysts say

NEW YORK – THE fear is spreading.

For months now, investors have been lured to overseas markets with the promise that surging growth and solid economic fundamentals in Asia and the Middle East would insulate them from the credit squeeze plaguing the United States market.

But the broad international sell-off yesterday and Monday has raised fresh concerns that a looming recession and the fallout from sub-prime mortgages could have global repercussions.

Some analysts saw the sell-off, with leading stock market indexes off 4 per cent to 8 per cent worldwide, as being driven by fear more than by fact.

‘I don’t think it’s warranted by the fundamentals,’ said Mr Edward Yardeni, an independent strategist. ‘The global economy’s resilience in the face of a credit crunch has been impressive.’

Mr Yardeni warned, however, that in a time of panic and fear, less attention is paid to fundamentals, like a fairly tight US job market and strong growth and the extraordinary build-up of foreign exchange reserves in emerging markets. The result is panic selling and the prospect of a global recession.

‘People are creating the financial violence that they hoped to avoid,’ he said.

Other analysts point out that the overseas uncertainty reflects the unpleasant, if not devastating, reality that the excesses of the long-running credit boom will not go away soon.

What makes this correction more dangerous, they say, is that the selling is not being driven by panicky retail investors, as it was in the collapse of the technology bubble, but by hedge funds and investment banks that find themselves saddled with illiquid securities backed by an array of valueless assets.

‘What you see is not a panic of the public. This is a panic of the sophisticated,’ said Mr James Sinclair, a wellknown gold trader who oversees a financial website and who has warned investors for years about the dangers of derivatives.

‘But this will have a tremendous impact on the public. It’s very serious, and drastic emergency economic action is needed.’

Most retail investors have not invested directly in the complex securities that have ruined the reputations of some of Wall Street’s most-respected minds.

Their exposure, however, to plummeting companies like Citigroup and Merrill Lynch, and now a broader basket of stocks affected by the market malaise, will add to the sense of wealth erosion that many are already feeling from the declining values of their houses.

On his blog, JSMineSet, Mr Sinclair has told his readers that as much as US$450 trillion (S$649 trillion) worth of derivatives could disintegrate, leading to a far greater and, in some ways, unpredictable calamity.

He argued that compared with the savings and loan crisis in the late 1980s, when the formation of a trust company for beaten-down institutions established a floor for sinking assets, the inability of the government to form a similar entity for suffering securities had heightened investors’ unease.

While the views of Mr Sinclair, who expects the price of gold to go to US$1,650, up from about US$870 now, might be taken with a grain of salt, other experts have also begun to warn of the dire consequences of the credit market collapse.

Mr Christopher Wood, a strategist based in Asia who publishes a widely read newsletter called Greed & Fear, pointed out in a note published this weekend that the potential insolvency of bond insurers like Ambac, MBIA and ACA Capital signals a larger market correction that has not yet been grasped by policymakers.

‘Greed & Fear’s view is that with the bond insurance business model fast unwinding, a full-scale crisis could be coming,’ he wrote.

The international selling has also stoked a long-held fear that flush Asian and Middle Eastern central banks and governmentbacked

investment funds will cut back on their US dollar-based investments – like Treasury bills and stakes in troubled investment banks – in the face of another round of interest rate cuts and continued weakness in the dollar.

These flows have been a crucial source of liquidity for an economy that produces little of its own domestic savings, and they have been lifelines for capital-starved banks. But no money manager, regardless of how long the timeframe, likes to invest in a falling market, and analysts fear that a spate of additional write-downs and market turmoil will signal to foreigners that the markets in Asia have not yet found their bottom.

One large investor, who asked not to be identified because he did not want to tip his hand, said the sell-off on Monday was a direct response to the stimulus package proposed by the Bush administration – not so much a judgment that the proposal was inadequate as a reflection of the weakness and drift of the world’s largest economy.

‘It is one thing to see the market go from 14,000 to 12,000,’ he said. ‘But when the president of the United States says we are sick, you can’t ignore that.’

 

Source: NEW YORK TIMES (The Straits Times 23 Jan 08)

Asian markets crash while US totters

Recession fears hit home in plunges reminiscent of post-9/11 debacle

(SINGAPORE) It was blood on the floor across Asian bourses yesterday as investors dumped stocks amid intensifying fears of a US economic meltdown.

This, despite President George W Bush last week announcing a massive US$145 billion stimulative tax relief plan and Federal Reserve boss Ben Bernanke stating that more interest rate cuts were in the works.

But all this fell on deaf ears of panic-stricken investors.

The result: a series of institutional programme selling and waves of margin calls which resulted in the most intense one-day rout across Asian bourses in recent memory.

Singapore’s recently revamped Straits Times Index (STI) plunged a massive 6.03 per cent to end at its lowest levels since March 2007 at 2,917.15 points as bellwether stocks and blue chips took a beating. It was its steepest singleday fall since the September 2001 New York bombings, when it had fallen 7.47 per cent.

In Hong Kong, the Hang Seng also posted its worst one-day fall since the same tragedy, as it plunged 5.49 per cent to 23,818.86 – its lowest close since last September. And in Tokyo, the Nikkei 225 sank 3.86 per cent to 13,325.94, while Mumbai’s BSE Sensex 30 plunged 7.41 per cent to 17,605.35 points.

The same depressing scenario was played out in Seoul, Kuala Lumpur, Jakarta, Sydney and elsewhere.

And as Asian investors licked their wounds after a massive beating, European bourses started the day in similar vein in negative territory.

Analysts attributed the selldown to intensifying fears of a US economic recession, brought about by knock-on factors from the widening sub-prime crisis.

That had prompted President Bush to unveil his US$145 billion tax plan over the weekend – which many had hoped would help calm nerves and stabilise markets.

‘Letting Americans keep more of their money should increase consumer spending,’ he declared.

But many in the market now say the plan was too little, too late.

‘We are just seeing the beginnings of what could be a downward spiral which could take months to flatten out,’ said a European fund manager who spoke anonymously on account of the bank’s internal compliance requirements.

‘The real crunch-time could come some time during the middle of this year, when the US adjustable rate mortgages come up for review. That could hit the wider US housing market, especially if banks start tightening up.’

Others noted that this was a long overdue correction, with the markets having largely recovered in November and December, after being hit last July and August.

And even while the US economy comes into focus, new fears are emerging about a massive economic slowdown in the euro- zone, no thanks to a sharp appreciation in the euro which is already hurting exports.

Meanwhile in China, there are fears that Chinese banks which have until now remained largely silent about their sub-prime exposure could now start unveiling losses. Some market insiders reckon large players like Bank of China have substantial exposure, which could come to light in the coming weeks.

Meanwhile, the flight to cash has already started across Asian markets and looks likely to continue for the foreseeable future.

 

Source: Business Times 22 Jan 08

Markets brace for news of big losses by banks

Citigroup could write off US$24b, lay off 20,000 staff

(LONDON) Major American banks are expected to unveil substantial losses and secure more cash from abroad in what is shaping up to be a pivotal week for the global credit crisis.

Citigroup could write off as much as US$24 billion and lay off 20,000 workers in a drive to cut costs and boost capital, CNBC said on its website in a report dated Sunday.

CNBC said the plans will be unveiled today when Citi, the largest US bank by assets, reports its fourth-quarter results.

Investment bank Merrill Lynch is just as troubled.

The Financial Times said yesterday that Merrill was seeking about US$4 billion in a second capital raising, and the Kuwait Investment Authority was expected to be a significant investor. A deal could be announced as soon as midweek, the newspaper said, citing people familiar with the matter.

The New York Times on Friday said that Merrill was expected to suffer US$15 billion in losses stemming from bad mortgage investments, almost twice the company’s original estimate, when it releases its results later this week.

FT also reported on Saturday that Citigroup was putting the final touches to its second big fund-raising, seeking up to US$14 billion from Chinese, Kuwaiti and other investors.

The US$200 billion Kuwait Investment Authority had no immediate comment yesterday on the reports that it may buy into the two damaged American banks.

Banks, wrestling with huge losses stemming from mortgages lent to people ill-equipped to repay them, have been seeking cash from sovereign wealth funds.

In December, Merrill secured as much as US$7.5 billion by selling a stake to Temasek Holdings and New York based money manager Davis Selected Advisors.

The month before, Citi agreed to sell up to a 4.9 per cent stake to Abu Dhabi for the same amount.

As well as Merrill and Citi, other big names such as State Street and JP Morgan report results this week.

Wall Street analysts have turned increasingly wary over US financial results for the fourth quarter as well as the first two quarters of 2008, according to a weekly survey by Reuters Estimates yesterday.

The survey showed that analysts expect S&P 500 companies’ fourth-quarter earnings to fall 9.1 per cent from a year earlier.

That was gloomier than the 8.4 per cent decline forecast a week earlier, and the 11.5 per cent growth forecast in an Oct 1 survey.

The Federal Reserve was to auction US$30 billion later yesterday and the European Central Bank and Swiss National Bank will continue their unprecedented US dollar lending to banks as part of coordinated central bank efforts to help calm credit market tensions. The Bank of England will also weigh in.

Results of the latest ‘term auctions’, a plan agreed in December and one which has helped money market rates ease, will come today.

One to three-month Euribor interbank interest rates fell yesterday amid central banks’ moves to inject liquidity into markets.

Most analysts say the threat of further losses at major banks from investments tied to US sub-prime mortgages means the crisis is far from over as crucial lending between commercial banks remains patchy at best.

The Fed is forecast to use its other policy lever – interest rates – before the month is out. It is seen slashing rates by a half-point at its two-day meeting ending on Jan 30 after Fed chairman Ben Bernanke gave a downbeat assessment of the US economy last week and said the central bank was ready to take ’substantive additional action’.

Swiss banking giant UBS appealed to shareholders last week to back a capital injection by Singapore’s Temasek and a Middle East investor and warned it still could not predict how the sub-prime crisis would play out.

And shares in Northern Rock fell as much as 7 per cent early yesterday on fresh concerns that the bank is facing imminent nationalisation. Northern Rock is Britain’s biggest casualty of the credit crunch and has borrowed around 26 billion pounds (S$72.8 billion) from the Bank of England since it requested emergency funds in September.

 

Source: Reuters (Business Times 15 Jan 08)

Big China firms’ bonds better: ING

(HONG KONG) Investors in Chinese property bonds should adjust their portfolios in favour of larger, diversified firms and cut their exposure to smaller developers which are focused on fewer cities, ING Bank said in a report yesterday.

The bank advised bond investors to remain invested in bigger firms like Shimao Property Holdings, Agile Property Holdings and Hopson Development Holdings, and said it expected less bond issuance from large developers this year.

It also recommended that investors pare positions in bonds issued by Greentown China Holdings and Shanghai Real Estate due in 2013.

Tightening credit conditions in China, growing risk aversion in global markets, a property-sector slowdown in some Chinese cities and concerns about fresh bond supplies have caused a widening of credit spreads in the Chinese property sector recently, the report said.

‘Despite our long term positive outlook on the sector, spreads are likely to stay wide in the near term due to soft market sentiment,’ it said.

‘However, we do not see any immediate credit-specific problems, especially for large developers.’

Bonds issued by firms with higher ratings, large land banks and diversified geographic exposure were worth buying because of their strong sales and resilience to property-sector downturns in selected cities, it said.

ING analyst Steve Chow said that spreads on Shimao’s bonds maturing in 2016 and on Lai Fung Holdings’s bonds maturing in 2014 had widened less than the spreads on other Chinese property bonds due to their respective credit strengths.

He expects more bond offerings from Chinese property companies this year, with small and medium developers bearing a low BB and B credit rating seen as the primary source.

Firms that had initial public offers last year are also potential bond issuers in 2008, he said.

Large firms, with the exception of Country Garden Holdings Co and Agile Property, are likely to make few issuances in 2008 because they are either highly geared or have prudent expansion strategies, he said.

 

Source: Reuters (Business Times 15 Jan 08)

TAKING STOCK: Asian markets poised for further losses

Current decline in S’pore presents buying opportunity, say some brokers

ASIAN stock markets look set to run into more turbulence this week after Wall Street’s sharp plunge last Friday.

The Dow Jones Industrial Average’s 246-point dive – on fears that American consumers are tightening their belts – is likely to result in a regional knee-jerk selldown today.

The benchmark United States index slipped 1.5 per cent last week to close at 12,606.3 points after falling 4.2 per cent the week before.

Singapore’s Straits Times Index (STI) ended 150.45 points, or 4.4 per cent, lower at 3,287.34 for the week.

Average daily volume grew to 1.88 billion shares worth $2.12 billion last week, from 1.46 billion shares valued at $1.61 billion the week before.

Dealers say the local bourse has been suffering from a lack of fresh direction. This is set to continue.

‘There will be no focus and direction until the end of the month, when more corporate results are available.

The lack of direction is expected to persist until the next US Federal Reserve meeting,’ DMG & Partners Securities senior dealing director Gabriel Yap said.

The market is widely expecting the Fed to cut interest rates but no earlier than the end of the month.

Another direction-setter – Hong Kong – is expected to remain choppy. Analysts tip the Hang Seng Index to trade between 25,800 and 27,800 points this week. Last week, the index fell 2.4 per cent to 26,867.01.

The STI, meanwhile, is seen diving to as low as 3,000 points in the coming months.

A UOB Kay Hian technical report, however, said the ‘present decline is a buying opportunity’.

‘The STI has corrected marginally below 3,300; yet there is no major sign of panic. Even if the index breaks below 3,300, we think there will be secondary supports.’

A recent Merrill Lynch report is also upbeat over Singapore. The investment firm says it continues to favour Asean markets over those of South Korea and Taiwan.

‘Singapore’s ability to adapt to a changing economic environment has driven rapid output growth,’ it said.

‘The government has focused on three key themes: raising competitiveness, expanding the population and wealth management. This will support economic growth in the long term.’

Key US data to watch out this week will include December retail sales and reports on inflation and industrial production.

On the US corporate front, all eyes will be on the earnings of finance heavyweights such as Citigroup, JPMorgan Chase and Merrill Lynch. Much attention will be on the extent of their sub-prime losses.

Back home, the reporting season will move into full swing, with the likes of Singapore Press Holdings releasing its first-quarter results today and the Singapore Exchange its interim report tomorrow.

 

Source: The Sunday Times 13 Jan 08

TAKING STOCK: Asian markets slide on Wall Street’s poor showing

Blue chips lead the drop as ST Index closes 2.5% lower on worries over American economy

TRADERS knew it was coming after the Friday night fright on Wall Street, but it did not make yesterday’s bloodletting any less painful.

The Dow Jones Industrial Average’s 256-point retreat, sparked by worrying jobs figures, suggested that the theoretical United States recession was looking more realistic by the day.

After stewing over it during the weekend, regional traders rushed for the exits from the opening bell yesterday, with bourses from Singapore to Australia and Taiwan bleeding red.

Australian shares dipped 2.3 per cent, Japan’s Nikkei 225 plunged 1.3 per cent and Taiwan’s market fell 4.1 per cent.

The Straits Times Index (STI) dived 84.73 points, or 2.5 per cent, to 3,353.06 but was spared a worse fate by Hong Kong’s post-lunch recovery and bright stock futures in the US.

Hong Kong’s Hang Seng Index lost more than 800 points in early trading before staging a property-led recovery to close at 27,179.49, down a relatively light 1.2 per cent, or 340.2 points.

Yesterday’s sharp reversal still means that the STI, while spared further misery, has so far slid 3.7 per cent since the start of the year. It was also the index’s lowest close since Nov 23 last year.

‘It was mainly a knee-jerk reaction to Wall Street’s plunge,’ DMG & Partners Securities head of research (retail) Terence Wong said. ‘The fall here was not surprising, given renewed fears over the US sub-prime issue and consumer confidence.’

SingTel shares fell 14 cents to $3.76, accounting for a 14.6-point fall in the index on their own.

Bank stocks fared no better. United Overseas Bank plunged 58 cents to $19.08, the day’s second-top loser in absolute terms. DBS Group Holdings dropped 24 cents to $20.24, while OCBC Bank shed 12 cents to $8.19.

Property plays also tumbled. City Developments retreated 54 cents to $13 to be among the day’s top losers, while Keppel Land dropped 13 cents to $7.05.

Citigroup analyst Wendy Koh said the main risk facing the property market is ‘a severe deterioration in the sub-prime fallout’.

Citigroup kept its positive stance on the local residential property market, expecting rental rates to continue to rise rapidly at 20 per cent to 25 per cent. However, it is less optimistic on the office sector.

Other blue chips that took a hit included Singapore Exchange, off 48 cents at $12.30, and Singapore Airlines, down 44 cents to $16.52.

Commodity and property investment company Straits Trading lifted its trading halt around 4.15pm and saw its shares shoot up by 68 cents, or 13.7 per cent, to $5.64 in quick time.

This was a response to an announcement by investment firm Tecity group – founded by the late Dr Tan Chin Tuan – of an offer to buy Straits Trading for $5.70 a share.

There was also joy for palm oil plays due to a bullish outlook for the sector and high commodity prices.

Indonesian palm oil producer First Resources rose 10 cents to $1.60, while Golden Agri-Resources was up three cents at $2.37.

Penny stocks emerged relatively unscathed compared to counters on the main index.

The UOB Catalist Index, which tracks such stocks, lost just 1.86 points, or 0.9 per cent, to 208.60.

The falls in global markets could be a blessing in disguise for investors. Experts say these may trigger a 50-basis point interest rate cut by the US Federal Reserve later this month in order to avert a US recession.

That should give a substantial lift to markets so investors can capitalise on the recent falls to pick up bargains.

Meanwhile, analysts warn of continued volatility on the STI.

DBS Group Research sees the STI heading down to 3,000 points by the end of the first quarter.

It noted recently: ‘Stay cautious and be very selective in the near-term. In general, we recommend a sell into bounce and will adopt a trading stance on selective thematic play.’

But not all shared the sentiment.

AmFraser Securities senior vice-president of research Najeeb Jarhom said: ‘The STI is unlikely to plunge all the way to 3,000 points even if it breaks the key 3,300 psychological support level.

‘It should repeat its quick recovery in the event of another plunge below 3,300 as seen in mid-August last year.’

 

Source: The Straits Times 8 Jan 08

Inflation fears drag global stock markets down

LONDON – ASIAN and European stocks tumbled yesterday as last week’s strong United States inflation data reduced expectations that the US Federal Reserve would deliver further interest rate cuts soon.

Also, in a sign that rising food and agricultural prices may push inflation up globally, US wheat futures surged more than 3 per cent and surpassed US$10 a bushel for the first time.

Investors took their cue from Wall Street’s sell-off last Friday in the wake of unexpectedly strong inflation figures.

US consumer prices jumped 0.8 per cent last month. On a 12- month basis, inflation hit 4.3 per cent, the fastest since June last year. New York’s Dow Jones Industrial Average tumbled 1.32 per cent last Friday in a volatile session as the price data raised fears of stagflation – a combination of slower growth and stubborn inflation pressures.

Inflation concerns generally weigh on equities as they erode corporate profits.

They are also nagging the world’s central banks as they wrestle with persistent tensions in money markets, which are showing only modest signs of easing after policymakers announced a plan last week to inject liquidity. The plan started yesterday.

Markets are now pricing in around a 78 per cent chance of a January Fed cut in benchmark interest rates to 4 per cent, which will follow three easing moves since the credit crisis broke in August.

Earlier this month, markets fully priced in a cut.

Developments in money markets are key in a week when investors will receive more evidence of how the financial sector is coping with the US sub-prime mortgage fallout as major US banks release quarterly earnings.

In morning trade, London’s FTSE 100 index of leading shares dropped 1.44 per cent, while Frankfurt’s DAX 30 slid 1.2 per cent, and Paris’ CAC 40 shed 1.88 per cent.

Earlier in Asia, Tokyo closed down 1.7 per cent, Hong Kong slumped 3.51 per cent, Seoul shed 2.9 per cent, Shanghai gave up 2.6 per cent, and Mumbai lost 3.8 per cent.

 

Source: REUTERS, AGENCE FRANCE-PRESSE (The Straits Times 18 Dec 07)

Consumers in HK, S’pore ‘less upbeat over stock markets’

They are more bullish over jobs and the overall economy: MasterCard survey

A NEW survey has found that Singapore consumers are highly optimistic about the economy but slightly less upbeat about the stock market.

Their counterparts in Hong Kong are also bullish about the economy, but confidence in the stock market has fallen even more sharply there.

The latest MasterCard Worldwide Index of Consumer Confidence survey found that, in the two economies, sentiment towards the stock market had dipped amid caution over wild swings in share prices.

Overall, the index was up: For Singapore, it rose to 83.6 from 83.3 six months ago; for Hong Kong, it rose to 85.9 from 84.7.

Published twice a year, the index is calculated based on percentage response figures, with zero denoting the most pessimistic view and 100 the most optimistic, while 50 would be neutral.

In terms of the stock market, sentiment in Singapore slipped slightly, to 75.4 from 76.6 a year ago. In Hong Kong, it fell more sharply, to 69.3 from 76.7 a year ago.

Five economic factors were measured in the survey: employment, the economy, regular income, the stock market and quality of life.

Conducted in October across 13 Asia-Pacific markets, including China, Indonesia and Vietnam, the survey polled more than 5,000 people in the middle- and upper-income groups.

It found that Singaporeans remained bullish about employment and the economy, but were less sanguine about regular income and the quality of life, due to rising living costs.

People were worried about the goods and services tax, higher food costs and oil prices, said CIMB-GK research head Song Seng Wun. ‘If they took the survey today, the index levels might fall further. People react depending on how full or empty their pockets are.’

Vietnam continued to top the region’s markets in terms of consumer sentiment. It had the most buoyant view for the six-month period ahead. Next came Hong Kong, China and Singapore.

Participants from South Korea showed the sharpest increases in optimism. The country’s score increased by a whopping 15.6 points to 64.1. At the opposite end of the spectrum was Taiwan, which registered the lowest score at a very gloomy 29.7.

Dr Yuwa Hedrick-Wong, MasterCard’s economic adviser, noted that while the overall outlook for consumer confidence had improved in most countries, this merely reflected current economic conditions on the ground.

‘If you have bonuses doubling, do you think you’d be pessimistic?’ he asked.

There could be greater uncertainty going into the year ahead if there are more fund failures, asset downgrades and bank write-offs, leading to a slowdown in consumer spending. If Asia begins to see the cancellation of export orders, this could hurt its corporate earnings, Dr Hedrick- Wong noted.

‘For 2008, the critical uncertainty is therefore China, which has become an increasingly important market for exports from the rest of Asia,’ he added.

 

Source: The Straits Times 14 Dec 07

TAKING STOCK: Regional markets make hasty retreat as Fed cut disappoints

REGIONAL investors were as disappointed yesterday as their United States counterparts over the size of the latest US interest rate cut.

Bourses in Asia fell across the board following an overnight tumble on Wall Street, where key benchmarks fell over 2 per cent.

Investors were unhappy that the Federal Reserve trimmed interest rates only by a quarter point. Some were pinning their hopes on a bolder half-point cut.

This, coupled with a lack of direction from the Fed’s statement, failed to inspire much confidence in Asian markets. Fears of a possible US recession left investors with little reason to cheer.

Taking their cue from Wall Street, most Asian bourses sank into the red and never saw the light of day. Hong Kong’s Hang Seng Index led the region’s fall with a 2.41 per cent decline. Only South Korea’s Kospi Index closed in positive territory.

Joining the sea of red was the local benchmark, the Straits Times Index (STI). Panic sparked a sell-off right after the opening bell, wiping all of Tuesday gains.

The index slumped 79.3 points within a minute, in what a dealer described as ‘an overreaction and irrational move’.

‘It’s still better to have somewhat of a cut than none at all,’ said the dealer. ‘The Fed made a mistake by not sending out any signals if it was open to more rate cuts, so now the market’s fumbling to find its feet.’

Bargain-hunting in the afternoon saw the STI recover slightly before some profit-taking towards the end of the trading day. It closed 1.11 per cent lower at 3,549.25.

Westcomb Securities head of research Goh Mou Lih said: ‘The sell-off was more of an immediate reaction to Wall Street and within expectations.’

The magnitude of the sell-off could have been much larger if the local market had priced in expectations of a bigger cut to the extent that Wall Street did, he added.

Banking stocks, touted to be the main beneficiaries of a US rate cut, took a beating.

DBS Group Holdings lost 30 cents to $21.40, while United Overseas Bank fell 40 cents to $20.10.

Electronics maker Venture Corp slipped on concerns of a slumping US economy. Singapore Airlines also fell after crude oil prices climbed, while SingTel and SembCorp Industries remained unscathed.

Short-term overhang pressure among second-liners and small caps could also manifest in the coming one to two sessions, according to a DBS Vickers report.

Assuming there will be no major bombshells, Mr Goh expects the market to recover.

‘There shouldn’t be any more substantial drops in the stock market,’ he said, adding that he expected a fourth straight rate cut at the Fed’s meeting next month.

Expect volatility to linger on, however, especially with the low trading volume, say analysts. Overall turnover remained a thin 1.45 billion units worth $1.73 billion.

 

Source: The Straits Times 13 Dec 07

Bull market in Asia in mature stage

Value investing advisable

THE bull market in Asia ex-Japan equities is in the mature stage, says Markus Rosgen of Citi Investment Research, and he advises investors to switch from momentum investing towards value.

In the value space, Mr Rosgen, Citi’s chief Asian strategist, favours large cap stocks which he says have only just begun to outperform. The sectors with more value support are semiconductor, banks and utilities. Those with the least value are software, healthcare, industrials and the consumer space.

Up till now, the playground for momentum plays has been the mid-cap space, he says in a Nov 19 report. ‘The alpha trade has been to go long mid/small caps and short the index against it as a hedge, effectively shorting large caps. This has stopped working and given them higher ROE, higher margins and the fact that large caps are free cash flow-to-sales positive … will serve them well in this time of increased economic uncertainty’.

In his report, Mr Rosgen debunks the notion that in the Asia ex-Japan equities space, it’s different this time. Asia, he says, is now trading at valuation premiums to the MSCI World index. The last time this occurred was in 1988.

In terms of price-to-book value, Asia last traded at a premium from 1993 to 1995 when Asian ROEs were superior to the developed markets. This time, valuations in Asia are superior but ROEs are inferior.

The decoupling theme, he says, has become a global consensus ‘among a large enough pool of investors to frighten me’. ‘The more recent the investor is to Asia, the stronger the view is held. The longer an investor has been involved with Asia, the higher the degree of scepticism.’

Trade linkages, he says, are stronger after 2000 than at any time over the last 20 years. ‘This makes decoupling hard… Far from rising, consumption share in GDP has fallen as export and investment shares have risen. Nor, regrettably, has the Asian consumer ever behaved counter cyclically. Finally, stock markets themselves are the most correlated they have been over the last 30 years.’

Reviewing the changes in the sectoral composition of Asia ex-Japan markets, he finds that while the weights have changed significantly, the difference in PEs between 1975 and today is just 0.9 multiple points. Over the period, the difference averages just 0.3 PE points.

While investors may believe that valuations have changed dramatically over time, the statistical tests on Asian multiples show that valuations are mean reverting. In addition, buying high PE stocks since 2000 has not led to outperformance. On a 12-month basis, buying stocks with PEs of over 30 times results in negative returns.

‘The bottom line is that we do not deny that things change over time as far as market composition and perception of actual or implied risk; they clearly do. What one finds is that investors have a tendency to over-emphasise or extrapolate changes and thus overpay for the perceived change.’ He adds: ‘… excessive growth expectations are now in the price of Asian equities with 44 per cent implied earnings growth for the region and in excess of 60 per cent for China and India’.

China’s market cap to GDP ratio stands at 123 per cent today. The ratio for Japan in 1990 was 150 per cent, and that of the US in 2000 was 131 per cent. But GDP per capita in Japan in 1990 was 10 times larger than China currently; and in 2000, the US’ ratio was 14 times larger. ‘If China continues to grow nominal GDP at 12 per cent per annum, it would take 20 years to reach the Japanese GDP per capita set in 1990 when valuations were comparable. It would take 23 years to reach the same level of GDP per capita as the US in 2000 when market cap to GDP was similar.’

 

Source: Business Times 28 Nov 07

HK billionaire on the hunt for bargains

Now is the time to get back into stocks: Lee Shau Kee

(HONG KONG) Billionaire investor Lee Shau Kee, sometimes nicknamed Hong Kong’s Warren Buffett, said that he spent more than HK$1 billion (S$185 million) in the stock market on Thursday as the first salvo in a HK$10 billion bargain hunt.

‘Now is the right time to get back to the stock market and start buying,’ Mr Lee told a news conference.

The HK$10 billion that Mr Lee is poised to pump into stocks will most likely target his favoured portfolio of 11 companies.

The initial HK$1 billion went into China Life Insurance Co, China Merchants Bank, oil firm CNOOC Ltd, coal producer Shenhua Energy and stockmarket operator Hong Kong Exchanges and Clearing Ltd.

But Mr Lee warned investors that although he was being open about his plans, he was not expecting anyone to follow him and he was not promising speculators would profit by doing so.

‘Gamblers like to complain if they lose their money,’ he said, according to Bonnie Ngan, spokeswoman for his firm Henderson Land.

Mr Lee said Hong Kong’s stock market had fully priced in negative news, such as the fallout from the US subprime crisis, and it was time for investors to hunt for bargains.

He forecast that the benchmark Hang Seng Index, which closed 2.3 per cent down at 26,004.92 on Thursday, would hit 30,000 later this year before climbing to reach 33,000 by Chinese new year, during the first quarter of 2008.

The index hit a high of 31,958.41 at the end of last month, but has fallen steadily since.

 

Source: Reuters (Business Times 24 Nov 07)

TAKING STOCK – Bourses buckle across Asia on US, oil worries

ST Index falls 91 points, marking its fourth slump in five sessions

REGIONAL bourses including Singapore suffered a rout yesterday in the face of fresh worries about a slowdown in the United States and record crude oil prices.

The Straits Times Index (STI) plunged 91.07 points, or 2.65 per cent, to end at 3,347.20 – its fourth slide in five sessions.

About 1.83 billion shares worth $2.18 billion were traded, with gainers trailing way behind losers by 176 to 677.

Said CIMB-GK research head Song Seng Wun: ‘It doesn’t take much to knock the wind out of the market’s sails at the moment.

‘Today, it was a continuation of US recession worries, sub-prime fears and high oil prices.’

Earlier, the Federal Reserve slashed its US growth forecast for next year to between 1.8 per cent and 2.5 per cent, down from the 2.5 per cent to 2.75 per cent range forecast in June.

More bad news battered the markets as crude oil continued its charge towards the psychologically significant US$100 mark, hitting a peak of US$99.29 during intra-day trade due to a weakening greenback.

Market players also pointed to Japan’s Nikkei index, saying its early dive had set the scene for a bearish regional trading session.

Said a Singapore dealer: ‘The Nikkei slid quite heavily in late morning trading, which affected regional sentiment.

‘Here, we saw the herd mentality at work, which sparked a selldown.’

The Nikkei dipped 2.46 per cent to 14,387.66 points, while bloodletting on Hong Kong’s Hang Seng Index sent it down by 1,153.02 points or 4.15 per cent to 26,618.19.

Here in Singapore, traders’ fears that Tuesday’s modest recovery was just a ‘dead cat bounce’ – a mild recovery before another fall – were realised.

Singapore Exchange shares led the STI’s decline, as they dived 70 cents to $12.40. That alone accounted for a 10.8-point fall in the index. Dealers said hedge funds were largely responsible for this selldown.

SingTel shares continued their southward spiral as they fell another six cents to $3.72. Investors are concerned about the fallout from an unfavourable ruling by Indonesia’s competition watchdog, but some analysts feel such fears might be overdone.

A Credit Suisse report noted: ‘Concerns over the political and regulatory risk are unlikely to affect short-term or possibly even long-term forecasts. Thus, a further correction could signal a buying opportunity.’

Bank stocks also took a hit, with United Overseas Bank dropping 60 cents to $19. DBS Group Holdings fell 40 cents to $19.20, while OCBC Bank slipped 15 cents to $8.25.

There was no bright debut for Z-Obee Holdings, which managed only 28.5 cents – below its issue price of 34 cents.

Given the volatile times and cautious mood, market experts urge investors to switch from speculative stocks to those with a proven track record and a low price-earnings ratio.

Mr Song added: ‘There are still buying opportunities, despite the uncertain environment. Blue chips, defensive stocks and resource sector counters still continue to be attractive.’

 

Source: The Straits Times 22 Nov 07

TAKING STOCK – STI falls on US problems, weak yen; China New Town sinks

SHARE prices tumbled across Asia, as deepening credit woes in the United States and renewed weakness of the greenback against the yen prompted traders to liquidate positions before the weekend.

Yet, for all the regional bloodletting, local investors took some solace that the fallout in Singapore was not as severe as in other markets.

The Straits Times Index (STI) fell 36.63 points, or 1.05 per cent, to 3,440.96, after plunging by as much as 71 points at one stage.

Other markets did not get off as easily, though. Hong Kong’s Hang Seng Index was down 3.95 per cent, hurt by concerns that China might again raise interest rates, while Tokyo’s Nikkei 225 Index lost 1.6 per cent due to fears a US slowdown might hurt the Japanese economy.

The key concern here was the striking drop in investor interest in equities as prices swung down. Overall, market volume fell to just 1.82 billion shares worth $2.11 billion.

‘Investors are moving to the sidelines and taking a wait-and-see attitude, given the uncertainties caused by the mortgage crisis in the United States,’ said a dealer.

While that was the big picture, there was an equally compelling drama going on among China plays.

Jittery traders dumped recently-listed China New Town Development on concerns its project in China probably did not receive the authorities’ blessing.

China New Town shed 12.1 per cent to 69 cents on a hefty volume of 79.6 million shares. It has now lost 16.8 per cent since it listed on Wednesday.

A China New Town spokesman said it was not the company’s policy ‘to comment on specific share price performance and market speculations’.

One dealer said investor confidence was shaken by a belated realisation that a risk factor disclosed in China New Town’s prospectus might cast a serious pall on its business prospects.

By listing here, China New Town is now regarded on the mainland as a foreign firm. This means it must get the approval of China’s Commerce Ministry for any investment that exceeds US$100 million (S$144.8 million) – a rule that applies to a 1.17 billion yuan (S$228 million) project mentioned in its prospectus.

The firm had been caught in limbo, as the Shanghai branch of the Commerce Ministry did not send its proposal to Beijing after approving it.

‘As the transfer is an internal government procedure, we are not in a position to seek clarification or confirmation,’ it said.

The plunge in China New Town rippled across other China plays, with recent losers continuing their declines.

 

Source: The Straits Times 17 Nov 07

Japanese banks hit by fresh sub-prime woes

More sub-prime losses ahead for Japan’s banks, say analysts

(TOKYO) Japanese financial firms were hit by fresh sub-prime woes yesterday as several banks posted profit slumps and two securities firms delayed a planned merger due to recent market turmoil.

Japanese banks are also finding conditions increasingly tough at home as hopes of the central bank raising its rock-bottom interest rates fade amid growing uncertainty about the outlook for the global economy.

Mizuho Financial, Japan’s second-largest bank, reported a 16.6 per cent drop in first-half net profits to 327.06 billion yen (S$4.24 billion) as it booked losses of almost 70 billion yen related to the US subprime loan crisis.

Mizuho also slashed its full-year net profit forecast to 650 billion yen from 750 billion, although that would be 4.6 per cent higher than the previous year.

Many major banks have been burnt by rising defaults by American homebuyers on sub-prime mortgages that were often repackaged and sold on financial markets.

Japanese banks have been among those hit by the turmoil although they are believed to be less exposed than many of their foreign rivals. Analysts said there could be more sub-prime losses ahead for Japan’s banks.

‘There’s a bit more to come out of the woodwork yet I suspect,’ said Jason Rogers, a credit analyst at Barclays Capital.

‘If you have exposure it’s very hard to draw a line under the losses. But it is containable and manageable and they (the Japanese banks) are in a far better situation than many of their international peers,’ he added.

Shinsei Bank yesterday reported a 40.3 per cent drop in first-half net profits to 23.19 billion yen amid swelling losses from the sub-prime crisis, roughly in line with a reduced forecast released a day earlier.

Another Japanese mid-size player, Aozora Bank, said its net profit for the fiscal first half to September fell 20 per cent to 42.75 billion yen, hit by losses arising from its investments in mortgage backed securities.

‘Given the sharp declines in markets since mid-October, it may take some time before the sub-prime mortgage lending troubles settle down,’ chairman Kimikazu Noumi told reporters.

Japan’s biggest bank Mitsubishi UFJ Financial Group (MUFG) last month warned it expects a 31.9 per cent drop in net profits to 600 billion yen this year due to weak income, losses on sub-prime loans and problems at its credit card subsidiary. The industry leader is expected to report its interim results next week.

Mizuho Securities and Shinko Securities meanwhile announced a four-month delay to their planned merger until May next year as financial market volatility complicates negotiations on the terms of the deal.

‘The financial market turmoil triggered by the US sub-prime mortgage problem is still showing no sign of resolving, and the situation remains uncertain,’ they said in a statement.

 

Source: AFP (Business Times 15 Nov 07)

Tactical asset allocation models cut risks

ARJUNA MAHENDRAN examines the use of total return strategies as a way of riding out turbulent stock markets

THE stock market boom that started back in 2003 is expected to continue in the medium term. However, an analysis of longer-term market cycles shows that equity investors must brace themselves for more volatility in the short term.

Historically, bull markets have been spread over several decades. Examples of this are the sustained boom that followed the US Civil War and lasted until the beginning of the 20th century, the period after World War II to the end of the 1960s, as well as the phase from the beginning of the 1980s until the Internet bubble burst in 2000. These boom phases were all driven by fundamental innovations such as the railway, electricity, automobiles, aviation, and modern telecommunications.

By contrast, bear markets – when equity prices tumble as they did in 2000-2003 – tend to last two to three years, and result in cumulative losses of between 40 per cent and 80 per cent. They historically turn into a new bull phase with relatively small and mild corrections in the first four to six years, the most recent of these periods probably being from 2003 to mid-2007. The second phase of a longlasting bull market usually sees a correction of 15-20 per cent before the boom continues.

The current economic and societal changes clearly indicate the continuation of the bull market. New technologies (digital communication, nanotechnology), the rapid industrialisation of emerging markets such as China, and demographic changes (urbanisation in Asia, ageing populations in many industrialised countries) provide favourable conditions for growth. However, concerns about dwindling energy resources, geopolitical tensions and environmental problems mean that it will not all be smooth sailing.

Investment strategies must, therefore, also factor in potential crises. In the current environment, the question is whether investors should adopt a passive strategy. Too much short-term switching in a portfolio will eat into returns, but a purely passive strategy when prices are falling could also lead to (book) losses of between 40 per cent and 80 per cent over several years.

Between 1926 and 2006, it sometimes took more than 20 years to earn a higher annualised return on Swiss equities than on Swiss bonds. The figures for the US tell a similar story. In the long run, equity investors are the most successful, but at the same time are exposed to considerable fluctuations in value. Investors with a strong stomach and the courage to buy in weak market phases can achieve handsome returns.

But the loss risk that comes from buying near the end of a boom phase should not be underestimated. The markets are prone to exaggeration: One of the best-known examples is the equity and property bubble in Japan at the end of the 1980s when the Imperial Palace in Tokyo was estimated to be worth as much as the whole of California. Or the technology and Internet bubble in 2000 which saw breathtaking leaps in the market capitalisation of companies that often did not turn a profit and in some cases did not even report any turnover.

Our analyses show that simple indicators such as seasonality (sell in May and go away), momentum, central bank monetary policy, and interest-rate structures on the capital markets can be a useful source of investment tips. A combination of these factors has led to higher returns with a lower downside risk.

These results suggest that sophisticated tactical asset allocation models can offer attractive returns while at the same time substantially reducing the loss risk, otherwise known as total return strategies.

Total return, or absolute return, strategies have two objectives: to achieve a minimum return, often equal to the money market return plus 2-3 per cent; and at the same time to minimise the loss risk. Most of these strategies aim to generate a positive return over a 12-month period.

Total return strategies draw on a dynamic investment approach and diversification to reach their objectives. Demand for these strategies tends to increase when the markets become volatile. Relative return strategies, by contrast, track their performance against a benchmark. This approach means that fund managers can beat the benchmark despite making net losses for their clients, for example, if the fund loses 12 per cent but the benchmark index falls 20 per cent.

The situation is reversed if the total return strategy achieves 10 per cent while the equity market gains 20 per cent in a given year. Investors must be aware that it is not only the returns that vary; the risks are also different.

In practice, total return and relative return strategies are not mutually exclusive. Many clients want active risk monitoring for part of their investments, but at the same time are mindful of the returns achieved in relation to traditional investment forms such as equities and bonds.

Arjuna Mahendran is chief economist and strategist, Asia-Pacific, Credit Suisse Private Banking

 

Source: Business Times 14 Nov 07

Putting Asian markets in perspective

While valuations are no longer cheap, it is not difficult to find stable growth companies with good cash flows and yields, says TAN LYNN DAH

THIS has been a bountiful year for Asian equity markets, with Asian bourses scaling new peaks and regional economies enjoying prodigious growth.

As one of the fastest growing regions in the world, Asia’s growth is underpinned by a confluence of supportive factors such as favourable demographics, structural reforms and moderate inflation. The region is stronger fundamentally and is more resilient, with most Asian countries having less foreign debt and vast current account surpluses to cushion against market turmoil.

The impact of the sub-prime mortgage woes has been limited in Asia because of ample cash in the regions’ banking systems.

As we enter the last lap of the year, the million dollar question on investors’ minds will be: Are there any more investment opportunities for investors in Asia, especially the Greater China region, where China and Hong Kong indices have rocketed?

With long-term fundamentals firmly in place, we believe that the Asia miracle will continue into 2008, offering more investment opportunities. Several drivers such as strengthening Asian currencies, earnings upgrades, increasing flow of private equity into the region and infrastructure investments are impetus for another year of robust growth and are expected to buoy the sustainable performance of Asian markets in 2008. Exceptional performance in the twin engines of China and India is also propelling growth in the region.

Though Asian valuations are no longer cheap, we feel that it is not too difficult to find stable growth companies with good cash flows and yields. In view of current market volatility, we are more focused than ever on companies with strong operating cash flows that are well positioned for less-thanfavourable economic conditions. We like defensive growth stocks with very predictable cash flows.

Within the Greater China region, we have been adding to Chunghwa Telecom (Taiwan), whose yield including specials is nearly 10 per cent, and 13 per cent of its balance sheet is in net cash. Another stock which we have been adding to is Singapore Telecommunications, which has 50 per cent of earnings from emerging markets and 50 per cent from Singapore and Australia, generating 10 per cent sustainable growth in earnings-per-share. The free cash flow yield is 5-6 per cent . These stocks provide both sustainable growth as well as steady dividend streams.

For the past few months, we have seen the negative effects of the sub-prime mortgage woes on established financial institutions like Northern Rock, Merrill Lynch, UBS and Citigroup. We feel that banks with global exposures are most vulnerable in a downturn and we have trimmed our holdings in financial stocks such as Standard Chartered and HSBC.

We think that asset plays will perform better than banks in Asia. Though property prices have run up quite a lot, we remain sanguine on asset reflation in Asia. We think that Asian asset prices will remain on an uptrend in the medium to long term and this is stimulative for Asian property prices.

In the Greater China region, property transactions have picked up considerably in Hong Kong, where real interest are on the decline (in tandem with US interest rates due to the HK dollar currency peg) as inflation increases. This is very positive for Hong Kong property prices. In view of this, we have added to stocks like Cheung Kong Holdings.

Another stock that we like is Jardine Matheson. The company has controlling stakes in a number of businesses, the largest of which is Hong Kong Land, which owns commercial real estate. The company trades at an attractive discount to its assets and has recently embarked on share buybacks.

We have also added to Singapore property plays like Fraser & Neave and CapitaCommercial Trust. The outlook for Asian demand looks promising, and we believe that domestic consumption should remain resilient. China is likely to be a main driver of growth in Asia, with its voracious consumption appetite. Increasingly, we are seeing intra-country travels by the Chinese to Hong Kong and Taiwan, and bourgeois Chinese have been very generous with their spending during such trips.

This synergy between the Greater China region spells investment opportunities. In view of this, we are positive on consumer stocks like Li & Fung (HK), Shinsegae (South Korea) and President Chain Store (Taiwan) for their track record and defensive growth nature.

Being industry leaders with strong management, these Asian consumer companies have the potential for further growth in 2008. For example, Shinsegae, a South Korean department store, has created a successful private label that is allowing it to enjoy attractive profit margins as one of the earliest operators of the discount store concept in Korea. The company has also ventured into the Chinese market successfully, tapping on Chinese consumption demand.

Taiwan has been a laggard this year compared to its thriving neighbours of China and Hong Kong.

Going into 2008, we believe that Taiwan’s economy will pick up after the presidential election in March. Both candidates, Frank Hsieh from the Democratic Progressive Party and Ma Ying-jeou from the Kuomintang, emphasise reconciliation and peaceful co-existence with China, which bodes well for Taiwan.

With the election as a backdrop, we believe that Taiwanese stocks will perform well in 2008. Attractive valuations have led us to buy some technology stocks like TSMC, given its stable growth and very strong cash generation ability. It also has a yield of 5 per cent . As the largest silicon foundry in the world, we believe that TSMC holds significant price potential and is undervalued vis-à-vis its Western peers. Also, TSMC stands to gain from burgeoning IT demand from emerging economies like China and India.

Infrastructure investment is likely to be a key driver of growth in Asia. With infrastructure development in the blueprint of most Asian governments, key beneficiaries are likely to be the engineering, construction and utilities sectors.

The Chinese make up 21 per cent of the world’s population, consume 46 per cent of the world’s iron ore and 25 per cent of the world’s aluminium. These figures are expected to grow exponentially with rapid expansion of China’s economy in the next decade, making China the main driver of the resources and energy sector.

With this in mind, we are invested in Hopewell Highway Infrastructure, where yield is 5 per cent and growth will remain in the low teens while the currency is appreciating. Listed in Hong Kong with strategic operations in China, Hopewell builds and operates strategic expressway infrastructure in the Guangdong Province. The company is also developing a new expressway, tunnel and bridge infrastructure projects, particularly in the thriving economy of the Pearl River Delta region.

Another company that is benefiting from increased infrastructure spending is China Resources Power, also incorporated in Hong Kong. Capacity growth is very strong as the company engages in the investment, development, operation, and management of power plants in China.

Though the Asia of today is more resilient and the region’s economy somewhat decoupled from the US, a faltering US economy could still adversely impact Asia’s growth. With such euphoric sentiment and bullish market run-up in 2007, it is inevitable that Asian markets get jittery on negative news. We view such short term pull-backs as healthy.

With strong liquidity conditions and positive market sentiment in Asia, we believe the region still has potential upside and is better placed to cope with adverse external developments.

Tan Lynn Dah is First State Investments’s marketing research manager

Credit squeeze won’t hit emerging markets

ALLAN CONWAY and NICHOLAS FIELD explain why emerging markets would be able to withstand any global contagion from the US housing market collapse

THERE are now growing fears of global contagion from the US housing market collapse. Will emerging markets be able to withstand this threat? We think they can, and here’s why.

First, a recap on the sub-prime crisis. Low quality US mortgage debt has been repackaged and sold on but as defaults grow in this sector, the re-packaged debt loses value. Now, banks and funds around the world are forced to re-price the debt, and realise large losses.

How this affects the real economy is through the re-pricing of debt. As US banks tighten lending requirements, debt becomes more expensive for the borrower, and harder to obtain. If this problem worsens, it could severely impact consumer confidence and curtail spending.

So far, there is no evidence that emerging market financial institutions have any meaningful exposure to debt. These repackaged sub-prime debt has only appeared in Germany, Australia and the UK. The world of proprietary trading desks, and in-house hedge funds is largely alien to emerging banking.

Direct economic contagion is also limited. The first obvious point is that emerging markets do not themselves have a sub-prime debt market, since personal finance is under-developed in these markets. Average leverage levels are very low. Many countries are now only developing mortgage markets, and have only begun lending at the higher quality end of the market.

Emerging markets also continue to improve their resilience to external shocks. On almost all measures – external and domestic balances, external debt levels, local interest rates – emerging markets have markedly improved over the last five years.

Emerging markets now have considerable firepower to stabilise their economies in the face of external shocks. Last year was another very good year for emerging markets – and for the first time in history we can say we have seen four consecutive years of positive returns.

In our view, it is high time investors realised that they shouldn’t take their cue on emerging markets from the US. Those who still see the region as the riskiest place to be in times of a US slowdown seriously need to re-examine where economic growth in the world is now coming from.

America has always been seen as the engine of global growth, but emerging markets are now running on their own engine, no longer primarily dependent on exports to developed economies to achieve their growth. Particularly so as China and India have arrived on the global economic scene.

It is estimated that growth in emerging markets as a whole accounts for some two thirds of global growth. The BRIC (Brazil, Russia, India, China) economies by themselves account for around a third of global growth.

So, instead of being dependent on the global economy for their own growth, emerging markets are actually key drivers of the global economy.

Several economies in Asia are strong enough on their own to generate their growth, as well as to drive it elsewhere. In China, India and Malaysia, the contribution to GDP growth in the last year has been almost entirely from increasing domestic demand, rather than exports – whether to the rest of Asia or to the likes of the US and Europe.

Other countries, like the Philippines, Taiwan and Thailand, are still dependent on exports. However, they are significantly less dependent on the US as they benefit from strong trade with nearer neighbours. Emerging Asian countries’ exports to China now exceed those to the US.

Importantly, China’s self-sustained growth story is admittedly one driven primarily by investment spending, and not yet by the China consumer. There has been concern about whether China is actually over-spending on its own growth. We disagree. China’s capital investment spending as a percentage of GDP is running at just over 40 per cent – in line with Japan in the late 1950s and 1960s, and in line with Korea and Taiwan in periods of strong growth. The level of investment spending in China is commensurate with this stage in its economic cycle.

The ability of emerging markets to sustain their own growth is down to massive structural improvement in these economies. In the past, you knew you were investing in more volatile, weaker economies, characterised by hyper-inflation, debt crises and currency crises. That’s no longer the case.

Inflation is down to single digits across the world’s emerging markets, and Latin America’s days of hyper-inflation are well and truly over. Most countries have seen a massive reduction in debt. The total level of government debt as a percentage of GDP (at 38 per cent) is at less than half the level of developed economies (at 89 per cent).

Overall, there are no direct financial or economic linkages from US credit problems to emerging markets. What we are left with are sentiment effects and a global increase in risk aversion – in other words, some increase in the cost of capital. No doubt there will be further headline-grabbing stories of funds realising large losses, and increased volatility in global equity markets over the next few months. Emerging markets will be buffeted by this, but they should still see strong economic growth.

And with their relatively limited exposure to global credit, they should be able to avoid any drastic outcome.

Despite the strong fundamental economic case for emerging markets, there is a note of caution when it comes to equities. Share prices have risen sharply in recent weeks and valuations are beginning to look stretched, particularly in China and India. While we remain positive on the medium to longer-term prospects for emerging markets, in the near term we expect markets to be volatile and they could be vulnerable to a setback.

Allan Conway is head of emerging markets equities, and Nicholas Field, economist & strategist emerging markets, Schroders

 

Source: Business Times 14 Nov 07