Tuesday, June 29, 2010

Fear and caution as investors take stock

Bourse's second-half outlook tinged with anxiety, although property market offers solace

INVESTORS hoping that the second half will turn out a bit better than England's on Sunday might find themselves out of luck, with more volatility warming up on the touchline.

Sure, market experts do not expect the disappointing performance to continue, but they fear the problems that have cropped up over the past six months may still flare up from time to time.

These could possibly come in the form of more panic over Europe's debts, a crash in China's over- heated economy, or the troubled United States economy slipping again into recession.

If there is a bright spot for investors here, it is the red-hot property market, where the huge gains made by HDB upgraders from selling their flats, combined with low mortgage rates, have helped to underpin the private residential market.

If the market's report card was written now, it would show that the bulls and bears appear to have fought each other to a standstill, with the benchmark Straits Times Index (STI) registering an almost negligible 1 per cent loss since January.

But that does not do justice to the days of high drama and near panic that have occurred, starting with the STI gaining 4.2 per cent to hit a two-year high of 3,019.74 in April on the back of dazzling economic data from outperforming Asian economies such as China and Singapore.

The bourse then suffered a hangover, falling by up to 12.2 per cent at one point last month from its April high as investors succumbed to fears over Europe's debt crisis.

Many investors fear that new problems will flare up in the second half while existing ones remain unresolved.

New complications on the horizon include the increasingly protectionist US Congress, which faces elections in November, and a faltering economy that has left millions of Americans jobless.

These new factors come on top of problems in the first half that refuse to go away - like questions over the ability of heavily indebted European countries such as Spain to service their debts.

Even China's move last week towards a more flexible yuan exchange rate offered little more than temporary solace.

Investors fast turned cagey after the US Federal Reserve noted that financial conditions had become 'less supportive of economic growth'.

Citigroup economists Kit Wei Zheng and Johanna Chua noted last week that investors' confidence stayed spooked, even though the sovereign debt crisis in Europe seemed to have subsided.

'Euro zone retail sales unexpectedly fell in April and in the United States, private employment and housing data disappointed in May,' they said.

Even in Asia, which has provided a steady stream of positive economic data to cheer investors, the magnitude of positive surprises has been declining, they noted.

South Korea, Taiwan, China, Thailand and Singapore have all reported May trade data and most have surprised on the upside, with accelerating momentum.

But apart from Singapore and India, industrial production has eased for most Asian economies.

Not surprisingly, Asian fund managers have adopted a wait-and-see attitude, shifting more assets into cash, even as stock prices advance on thin volumes during the World Cup.

Citigroup's fund-flow report yesterday said that net selling by Asian funds has continued since April.

'Unlike two months ago, when sales were concentrated in Singapore and Malaysia, the selling in May took place mainly in markets that have been overweight by Asian funds like Hong Kong,' it added.

But while fund managers stay on the sidelines, analysts expect HDB resale prices to stay firm, given the mismatch between demand and supply.

Citigroup said in its property report: 'With capital gains from existing HDB flats at a seven-year high, coupled with low mortgage rates, we believe new sales are likely to remain strong in the mass market.'

While investors can fund property purchases with cheap loans, as mortgage rates sink to less than 2 per cent, they can get rental yields of around 4.25 per cent.


'With capital gains from existing HDB flats at a seven-year high, coupled with low mortgage rates, we believe new sales are likely to remain strong in the mass market.'

Citigroup's property report

Source: Straits Times, 29 Jun 2010

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