Worst may be over for equities

Three of four fund managers and analysts polled also paint bullish picture for Asia and emerging markets, reports GENEVIEVE CUA

WILL it be a severe recession for the US or a relatively mild one? To what extent would Asia and the emerging markets suffer? Views gathered by Executive Money from fund managers and analysts reflect optimism for the medium term for Asia and the emerging markets. Valuations, they say, are looking attractive, and equity markets could resume their bullish trend before the end of the year.

As for the current market gyrations, three out of the four polled believe that the worst may be over for equity markets, even if volatility remains fairly high. Markets, after all, are a discounting mechanism and historically in past crises have recovered well ahead of an economic upturn.

If you are sitting on cash, price weakness is an opportunity to buy. Jim McCaughan of Principal Global, in particular, gives insights on some assets that offer value and attractive yields to boot.

Mark Mobius, executive chairman of Templeton Asset Management

The worst is over for credit and equity markets, say the man who oversees some US$47 billion in funds. 'The credit crisis is over,' he declares in a recent visit to Singapore. 'Markets - stocks, bonds and money markets - are leading indicators. Now, the rebuilding is taking place.

'Yes, you'll still hear of bad news, but in essence, the crisis is over. The worst of the market drop has happened.'

He said that emerging markets are looking attractive on a number of metrics, including price to book value, price earnings and PE to growth ratios. These include China, Thailand, Taiwan and even India, which until the recent correction, was seen to be overvalued.

'The support for emerging markets is based on fundamental factors. The most important is economic growth. Growth in these markets will be about 7 per cent compared to 2 per cent for developed countries. That will feed into earnings. We're expecting reasonably good earnings.'

Based on the Templeton Emerging Markets Fund end-February fact sheet, the flagship fund with US$1.54 billion in assets is 19 per cent invested in Brazil; 16 per cent in China and 13 per cent in Russia. In terms of industry exposure, it is 25 per cent invested in energy and 21 per cent in materials.

Yet, the fund has underperformed the MSCI Emerging Markets Index by a wide margin. Over one year, the fund returned 20.7 per cent, against the index's 33.6 per cent. Over three years, the fund returned 75.8 per cent, against the index's 114.9 per cent.

Mr Mobius says: 'We invest with a long-term framework. We can't change the portfolio so often . . . If you want to track the index, you can buy a tracker. Our purpose is to find good, safe stocks we can hold and that tends to deliver better results.'

Inflation, he says, is a concern for emerging markets. 'Inflation with strong emerging market currencies is something to watch carefully. If inflation expectations move up, it will be an incentive for central banks to raise rates. That's not good unless rates are lower than inflation, and real rates are negative . . . But we don't see this happening anytime soon.'

He says that one way to hedge the inflation risk is to buy consumer-oriented stocks which are able to pass on costs through higher prices.

Jim McCaughan, chief executive of Principal Global

He believes that yield-hungry investors will find lots of value in three types of assets that have suffered greatly in the current credit crunch. These are global real estate investment trusts; preferred securities - usually issued by financial and insurance firms; and commercial mortgage-backed securities (CMBS).

The other asset that he is positive about is emerging market equities, which until the recent bear market, have enjoyed a bull run for the last four years or so.

On global real estate, he says that the credit crunch has caused financing facilities to be withdrawn from the real estate market. 'Less finance being available means less development, and oversupply can't emerge. That's good for existing investors. I see quite a good medium-term strategic outlook for commercial real estate. It's not over-built in the US.'

In the fixed income market, de-leveraging by major institutions and funds have thrown up value in a number of segments. One of these is preferred securities, which are a fixed income type of asset, subordinated to other senior debt a company may issue.

Mr McCaughan says that a portfolio of preferred securities could yield 7.5 per cent, at a time when 10-year Treasuries are yielding 3.5 per cent. 'We think that (spread) overstates the risk. There is risk, but in a diversified well-researched portfolio, we think the yield more than compensates for the risk.'

Yet another depressed segment is CMBS, where spreads have widened significantly. 'The mortgages underlying CMBS have virtually no defaults. Higher quality CMBS have a loan to value ratio of 65 per cent and 150 per cent interest cover. Corporate America has to stop paying rent for a problem to develop . . . Those are high quality yields of 7-9 per cent. Investors can lock in the yield and get a good performance in the next two to three years.'

Mr McCaughan believes that the worst may be over for equity markets. He reckons that a US recession would be relatively mild, even if the credit crisis is as bad as any previous financial crisis. 'I doubt that the credit crisis translates into a severe economic recession. The developed economies are too diversified and competitive to see that happen . . . Productivity remains a strong underpinning.'

Christophe Caspar, Russell Investments chief investment officer (Asia-Pacific)

Markets could still retest recent lows, and that warrants some caution, he says. 'The reason I'm cautious is that when you look at the spread of Libor against the Fed rate, we're at 25 basis points. Banks are still not comfortable lending to each other.

'It may be true that the worst of the sub-prime news is behind us, but bad news may still shake markets. If banks were more confident to lend to each other, that would give confidence that there are no more hidden issues.'

He believes, however, in a V-shaped economic recovery for the US. This would be very positive for Asian markets, which could resume its bullish uptrend. The reason for his optimism is that the Federal Reserve is expected to cut interest rates further; the financial effects of tax rebates are still to take effect; and the weak US dollar is a boon to exports.

On a price-earnings basis, he says that Asia is now more attractive, although it now fetches a premium compared with developed markets. The PE has fallen from about 19 times six months ago to 12-13 times. The latter represents a premium of about 4 per cent over developed markets. 'Usually, Asia trades at a discount of about 20 per cent, so it doesn't look cheap.'

He adds: 'Asian markets are on a structural uptrend. Companies are better managed than they used to be. We're not having an Asian crisis but a global crisis, putting a temporary brake on Asia. I think people shouldn't give up on Asia. When the market rebounds, it's always difficult to know when to get back in, and you end up not getting back in.'

Paul Nesbitt, Fortis Private Bank technical analysis director

He looks for patterns in the market for an indication of the likely or most probable forward path of markets. Drawing on a number of approaches - Fibonacci series, the Dow four-year patterns, the 'decennial' pattern, among others - he believes that equity markets may have hit their 'corrective lows'.

'All the evidence suggests we've seen the corrective low and markets will rally from here and make new highs. On balance, the trend for next year should be up.

'It may not feel like that in the next month or two. But once we get into the third quarter, a lot of confidence will come back - unless there is a totally new problem. We'll still get bad news and downgrades.'

The exception to his reading is Japan.

Technical analysis examines the historical path of markets. The Fibonacci approach, for example, looks into the magnitude of market rises and falls to discern probable outcomes. Academics, however, say that there is little evidence that this approach to investing delivers outperformance.

For example, the Dow Jones four-year cycle approach posits that the index forms a low every four years, roughly in the second year of one cycle. In Mr Nesbitt's reading, the current cycle began around 2007, following an extended bull cycle between 2002 and 2006. 'In the first year of the cycle, if there are problems to be sorted out, tough decisions are made. That causes a dip in the second year . . . Sometime between now and 2010, we'll get a bull run and make new highs. Once the cycle low happens, the following year in every occasion is up.'

At the moment, he isn't making an outright call yet to buy the market. 'It's too early to be 100 per cent confident,' he says. 'You can pick up your favourite stocks on the bad days of the market. I don't think it's a buy-and-hold market yet. But ultimately, the stocks that will perform best will be the dogs. The financials have to perform if the market is to take a bullish outlook.'

Straits Times April 23, 2008

Deferred payment scheme: Up to 4,200 homes may be dumped

No URA figure on units sold but experts say 30% could be offloaded

By Jessica Cheam

THE hugely popular deferred payment scheme (DPS) - scrapped last year - may now be a thing of the past, but what sort of shadow will it cast on the Singapore property market going forward?

This has been the question on market watchers' lips since the Urban Redevelopment Authority (URA) revealed last week that as many as 29,250 homes offered under the DPS, including 5,760 unsold units as at the end of last month, will be completed from this year to 2013.

The concern is that speculators who bought homes under the DPS could dump their units at below-market prices, and this could drastically drag down overall sentiment.

But just how many units are at risk of being sold, and how big will the impact be?

The URA said while it has the number of units approved under DPS, it does not have data on how many units were actually sold under the scheme.

But four property experts The Straits Times spoke to estimated that up to 30 per cent of homes sold under the scheme last year could be held by speculators who may offload homes as the completion date nears. This translates to roughly 4,200 homes, going by a back-of-the-envelope calculation.

That is because out of the 23,490 units approved under the DPS and sold, only about 50 to 60 per cent - or roughly 14,000 - are likely to have been sold under the DPS, say property consultants and agency bosses from Knight Frank, Savills Singapore, HSR Property Group and PropNex.

The remaining 40 to 50 per cent were not bought under the DPS. Either developers did not eventually offer it, or buyers chose to pay via progressive payments, because buying a home with DPS usually means a further 2 to 3 per cent added to the price.

Next, property experts estimated that of the 14,000 or so homes sold under the DPS, about 20 to 30 per cent were probably sold to short-term investors or speculators.

This means that as a group, speculators could be holding on to as many as 4,200 units.

Why are speculators prone to selling their units as they near completion?

The DPS allowed buyers to pay just 10 or 20 per cent of the sale price upon purchase, with the rest due only when the unit received its temporary occupation permit (TOP) on completion.

Speculators would, therefore, typically opt for the DPS and hope to sell their units for a profit before the TOP. Any later and they would have to pay up for their homes by arranging for bank loans or other means of financing.

Industry experts were, however, divided on the impact these 4,200 homes would have on the market.

Some maintained that panic selling is not likely, given Singapore's strong economic outlook, which is backed by upcoming mega projects such as the integrated resorts and the 2010 Youth Olympics.

Mr Eric Cheng, HSR's executive director, noted that homes set to be completed this year and next are less likely to be sold indiscriminately, since their owners are probably sitting on healthy gains.

But those who bought at the peak of last year's buying frenzy, from April till October, are most likely to be at risk. These homes are likely to be completed after 2010.

Mr Ku Swee Yong, Savills' director of business development and marketing, said the sell-off will likely be staggered, because investors have different levels of holding power.

Also, investors have bigger coffers compared to the last property peak in 1996, he added.

But he warned that if too many units in a single large project get dumped at below-

market prices, overall market sentiment may be hit.

Mr Colin Tan, Chesterton International's head (research and consultancy), thinks that the potential risk created by the DPS is relatively high.

He added that data on homes sold under the DPS should be collected and made public, so investors know 'what they're getting themselves into'.