Business Times: Fund houses show their hand – and it’s thumbs-up

October 18, 2007
Fund houses show their hand – and it’s thumbs-up
BT survey reveals they are mildly bullish, still hot on China but worried about US slowdown
By TEH HOOI LING

(SINGAPORE) In a unique exercise to determine exactly what the smart money is thinking, BT has polled top fund houses and found that they are moderately bullish about the equities market over the next six months. The 10 fund houses who shared their views have combined assets of US$1.39 trillion under management.

The average outlook of fund managers is +2, on a scale of -10 (being ultra bearish) to +10 (being super bullish). Their ratings are weighted by their fund size.

The most bullish rating is +8 and the most bearish -3. Meanwhile, cash level stands at about 5 per cent.

BT intends to conduct a similar poll every month and this will form the basis of a fund managers’ sentiment index – a gauge of how they see things unfolding. The results of the poll will be published in Pulses, the Singapore Exchange monthly financial magazine from next year onwards. SGX has outsourced the production of the magazine to BT starting from January 2008.

The latest snapshot, based on the first poll, shows that geographically, Hong Kong and China still feature among the top
picks of fund managers despite the incredible run that the two markets have had in 2007. For the year to date, the CSI 300 – an index that tracks the daily price performance of the 300 most representative A-share stocks listed on the Shanghai or Shenzhen Stock Exchanges – has surged a jaw-dropping 185 per cent.

China is the best performing market in the world for the year to date. Meanwhile, Hong Kong’s Hang Seng Index has risen 47 per cent during the same period.

Singapore also appears as the top pick among a number of fund managers. Malaysia, Indonesia, Taiwan, South Korea and Thailand showed up on the lists of more than one fund manager.

Said Geoffrey Wong, UBS Global Asset Management’s head of global emerging markets: ‘Within Asia, we are currently finding a lot of value in Indonesia, Thailand and India.’

Thailand and Indonesia are favoured for their cost competitiveness. In addition, companies within these markets generate relatively higher return on equity and earnings growth compared with their regional peers, he said.

Schroders, meanwhile, maintains a moderate overweight in the US market for its defensive qualities. ‘The Fed has plenty of policy scope to cut rates while earnings growth and valuation remains attractive,’ it said.

It also likes European equities for their strong earnings per share growth and valuation – ‘the most compelling compared to its own history and other regions’. Schroders is also positive on Asia as the region continues to show signs of decoupling from the US economy, with China providing the key support.

Sector-wise, fund managers see upside in property, industrial, construction, energy, and consumer sector and technology.

Said UBS’ Mr Wong: ‘In Asia, we like the consumer sector due to strong structural drivers such as a big reserve of young and under-leveraged individuals with rising disposable incomes.’ UBS is also positive on the industrial sector as it relates to the infrastructure theme. ‘Spending on infrastructure,’ said Mr Wong, ‘is expected to triple over the next ten years.’

Meanwhile Schroders prefers large over small cap stocks, and growth over value. As for Roger Groebli, head of equity research, Asia at ABN Amro PrivateBanking, his three sector picks are energy, commodities and technology.

When it comes to concerns, the biggest worries for fund managers include a slowdown in the US economy, over-valuation of equities, sharp appreciation of Asian currencies and volatility in the US dollar.

One risk, noted UBS, is that ‘higher interest rates and oil prices may result in an outflow of funds from emerging market assets.’

There are a couple of bears amidst the majority of bulls. One particularly bearish fund holds the view that there are a number of imbalances now in the market that will cause a significant market decline at some point in the next few years. ‘The most tenuous characteristics is record high profit margins across the board, particularly in lower quality companies,’ said the fund manager.

As such it recommended risk reduction and capital preservation to its clients. ‘We are not averse to advising our clients to invest a chunk of their portfolio in cash at the moment…In the case where clients have to or want to take on some equity risk, we recommend high quality and large cap equities, particularly in the US.’

A total of ten fund houses responded to BT’s poll. The aim of constructing the index is to let the market have a snapshot of the collective outlook of the smart money. No firms will be highlighted without consent. The index is only as good as the number of fund managers who respond to the survey – and hopefully more will start to share their sentiment.

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Business Times: Analysts play catch-up as economy stays hot

October 11, 2007
Analysts play catch-up as economy stays hot
They bump up forecasts following Q3 flash estimates of 9.4% growth
By CHEN HUIFEN

(SINGAPORE) The Singapore economy continued to power ahead in the third quarter, prompting several research houses to raise their growth forecasts for the whole year.

Flash estimates released by the Ministry of Trade and Industry (MTI) showed that the economy grew a sterling 9.4 per cent year-on-year last quarter, based on data from July and August. This is higher than the median forecast of 7.8 per cent among private sector economists polled by the Monetary Authority of Singapore recently.

The performance was fuelled by broad-based expansion across various sectors. The construction industry moderated to a growth of 15.5 per cent in Q3, from 18.8 per cent in Q2. And despite a lacklustre performance from the electronics cluster, the manufacturing industry managed 12.3 per cent growth, picking up momentum from the 8.3 per cent year-on-year gain in Q2. This was underpinned by the strong biomedical and transport engineering clusters.

The services sector eased to a 8.1 per cent gain, from 8.4 per cent in Q2. ‘Our sense is that financial services, information and communications as well as hotels and restaurants outperformed during the quarter,’ said Citigroup economist Chua Hak Bin. ‘Some modest slowdown was detected for wholesale and retail trade and sea transport activities.’

On a quarter-on-quarter, seasonally adjusted annualised basis, real GDP growth decelerated to 6.4 per cent from 14.4 per cent in Q2.

The headline figure takes the growth rate for the first nine months to 8.2 per cent, exceeding the official forecast of 7-8 per cent for the full year. Several economists that BT spoke to said that they were revising their full-year growth estimates, with one going as high as 8.7 per cent.

‘Although the advance estimates are below our expectations, we believe once the full set of data is in, 3Q ‘07 GDP could be revised up to the 10 per cent level, as year-to-date growth is already 8.2 per cent,’ CIMB-GK research head Song Seng Wun wrote in a report yesterday. ‘Hence, we are actually raising our full-year growth estimate from 7.5 per cent to 8.7 per cent.’

The team at Citigroup has upgraded its 2007 growth forecast to 8 per cent, from 7.2 per cent previously. Similarly, Standard Chartered Bank economist Alvin Liew is raising his forecast to 8 per cent, from 7.6 per cent, while UOB is looking at 8.4 per cent growth for the full year.

‘The preliminary estimate for manufacturing growth of 12.3 per cent year on year in 3Q factors in a modest 2 per cent year-on-year growth in the industrial output for the month of September after 18.1 per cent year-on-year expansion in July-August,’ said a UOB report. ‘This suggests that actual GDP growth for the quarter could potentially surprise on the upside should the biomedical sector continue its robust expansion in September.’

While many are keeping an eye on rising prices, some said that the risks of the economy overheating are low – at least for the time being.

‘If you look at asset prices, inflation, wage increases in the last two quarters, there does seem to be some risks of overheating,’ said Stanchart’s Mr Liew. ‘But I don’t foresee an overheating situation, at least for the next three quarters until mid-2008.

‘For one, we can see that there’s a lot of domestic driven activities. And even though we had achieved fairly high growth, the manufacturing sector isn’t the one that’s pushing it. So it’s not an export-oriented kind of growth story this time round.’
UOB economist Ho Woei Chen said that the risks of overheating could be tempered by the slowdown in the US economy. ‘We are not so concerned about overheating because there’s some downside risks to the global growth outlook going forward,’ she said. Besides, the steeper appreciation of the S$NEER slope, announced by the MAS yesterday, could help cap imported inflation to a certain extent, she added.

HSBC, which last week cautioned against an overheating Singapore economy, is maintaining a growth estimate of 8.5 per cent. In a report titled Easy, tiger, it argued that the economy is showing signs of overheating, with wages rising at a seven-year high of 8.5 per cent, office rents jumping 50 per cent, and the consumer price index hitting a 12-year high.

Citigroup’s Dr Chua also suggested overheating pressures were looming. ‘Tightness is apparent in labour and property markets, with wage costs, office rents and residential rents all rising strongly,’ he wrote in a report on Monday.

The market probably reacted on fears that there may be more tightening measures ahead, following an adjustment to the S$NEER slope yesterday. The Straits Times Index shed more than 50 points to end the day’s trading at 3,814.45.

‘The market has also run up quite considerably,’ said Dr Chua. ‘I suppose there may be some concerns as well that a stronger Singapore dollar could probably hurt exports. So it’s a combination of factors.’

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Business Times: MAS ups pace of Sing $ appreciation, citing price pressures

October 11, 2007
MAS ups pace of Sing $ appreciation, citing price pressures
Currency hits 10-year-high against US$ as news of new stance trickles in By LARRY WEE

(SINGAPORE) The Monetary Authority of Singapore (MAS) surprised currency markets with a decision to ‘increase slightly’ the pace of annual appreciation for the trade-weighted Singapore dollar in its semi-annual Monetary Policy Statement yesterday – while keeping unchanged its overall stance of a modest and gradual appreciation.

Explaining the decision, MAS in a statement said: ‘Domestic price pressures are expected to persist due to heightened supply constraints, while externally, oil, food and other commodity prices will remain firm into next year.’

A stronger currency would help contain price increases by lowering the cost of imports.

Traders reported that the US dollar slid to a fresh 10-year low of S$1.4620 when the news of MAS’ stance hit the market at the start of currency trading yesterday morning, but it was able to make a slight comeback thereafter to end the day at S$1.4645 – possibly aided by some intervention, traders speculated.

That said, the news also prompted currency strategists to lower their end-2007 and 2008 forecasts for the US dollar yesterday.

In its latest statement yesterday, MAS raised its inflation forecast for 2008 to 2-3 per cent, with the recent Goods and Services Tax (GST) hike expected to raise headline consumer price inflation (CPI) to 3.5 per cent in the first half of 2008. This is up from the 1.5-2 per cent inflation pace that MAS now expects for the local economy in 2007 as a whole – which in turn was raised from the more modest 0.5-1.5 per cent rise in prices predicted in its April 2007 statement.

For overall GDP growth, the republic is also expected to out-do April’s 4.5-6.5 per cent forecast, to grow at the upper end of a revised 7-8 per cent pace this year.

In announcing its decision yesterday, MAS revealed that besides upping its appreciation pace slightly, there would be no re-centring of its policy band, or its width – both of which are undisclosed by the local central bank.

Since the early 1980s, the local central bank has fine-tuned the value of the S$NEER as the main tool of its monetary policy, given the very open nature of the local economy.

Private sector models have estimated that since MAS first implemented its current stance for a modest and gradual appreciation of the S$NEER in April 2004, this has translated into an annual appreciation pace of something like 1.5-2.5 per cent per annum, within plus/minus bands of up to 2.5 per cent around its changing central value.

With MAS’ decision to ‘increase slightly the slope of the S$NEER policy band’ announced yesterday, that annual appreciation pace of 1.5-2.5 per cent could now have been raised to something like 2-3 per cent, suggest MAS watchers here.

Jimmy Koh, head of economic and treasury research at UOB, suggests an appreciation pace of 2.5 per cent into 2008, while JPMorgan’s head of Asia forex research Claudio Piron estimates the pace has risen now from 2.25 to 2.75 per cent per annum.

And, suggested OCBC currency strategist Emmanuel Ng yesterday: ‘Our initial take is that the slope steepening, as opposed to the other alternative of re-centring the band higher at pre-announcement levels, represents a more hawkish policy signal. Over the medium term, this suggests greater latitude for S$NEER appreciation if the need so arises compared to a band re-centring.’

Mr Koh explained his upward-revised 2.5 per cent appreciation pace for the S$NEER based on MAS’ higher inflation forecast: ‘If inflation is now expected to rise 2-3 per cent in 2008, this would seem to suggest that the S$NEER appreciation path will also increase from the previous estimate of 2 per cent to 2.5 per cent or so.’

He has accordingly revised his year-end targets for the US dollar lower this year and next – to S$1.47 and S$1.44 respectively, compared to S$1.48 and S$1.46 before MAS announcement yesterday.

He explained: ‘It appears to us that China may have also upped its appreciation pace for the yuan more recently, to something like 5-7 per cent per annum, and we expect Asian units to become more willing to take over the bigger share of appreciation versus the US dollar in 2008 – taking over from 2007’s top gainers like the euro, Australian dollar and Canadian dollar.’

Mr Piron, who estimates a slightly faster pace of 2.75 per cent, now expects the US currency to finish the year at S$1.46, down from S$1.48 before the MAS decision.

But, he cautioned that this may not have any large impact in the short-term: ‘Note that an additional half-a-per-cent increase in the slope translates into an additional 0.13 basis points per day on a 360 day count basis.

‘Indeed, the MAS is suspected by some participants to have slowed Sing appreciation this morning near the USD/SGD 1.4640-50 level, which according to our MAS S$NEER reading at the time was 130 basis points on the strong side of the policy band and close to (our estimated) 150 basis point upper limit.’

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Business Times: HK cutting taxes to shore up financial centre status

October 11, 2007
HK cutting taxes to shore up financial centre status
Income tax dips to 15%, corporate tax, 16.5%; gap with S’pore rates widens

(HONG KONG) Hong Kong’s government will cut income and corporate taxes by one percentage point to help protect the city’s position as an Asian financial centre in its high-stakes race with Singapore.

Salaries tax will be cut to 15 per cent and profits tax to 16.5 per cent in 2008-2009, chief executive Donald Tsang said in his annual policy address yesterday, his first since being elected to a five-year term in March.

The reduction will widen the gap with Singapore, which in February announced a cut in its corporate tax rate to 18 per cent from 20 per cent to lure more financial-services and technology companies. Singapore’s top income tax rate is currently 20 per cent.

Mr Tsang had pledged in his election campaign to cut the standard rate of salaries tax and profit tax to 15 per cent within five years.

‘We will consider further profits tax relief if our economy remains robust and our public finances stay sound,’ Mr Tsang said yesterday.

Hong Kong’s corporate tax rate is currently 17.5 per cent, while its salaries tax is 16 per cent. The city’s economy in the three months ended June 30 climbed 6.9 per cent from a year earlier after gaining a revised 5.7 per cent in the previous quarter.

Mr Tsang, who has said that his long-term goal is to preserve Hong Kong’s status as Asia’s top financial centre, also said that the government plans 10 major infrastructure projects in the next five years that will create 250,000 jobs and add HK$100 billion (S$18.9 billion) to the economy annually.

The plans include building an expressway linking Hong Kong with the southern Chinese cities of Guangzhou and Shenzhen, Mr Tsang said. Financing arrangements for a bridge linking Zhuhai city with Hong Kong and Macau are also being finalised, he added.

The city will also spend HK$20 billion to complete a direct road link between Shenzhen and Hong Kong’s airport.

Traffic growth at Hong Kong’s port, the world’s second busiest container port last year, has slowed because of competition from mainland ports.

The Hong Kong government also plans to build a new rail line in southern Hong Kong Island. The line, which will cost more than HK$7 billion, is scheduled to begin operations before 2015.

Mr Tsang said that the city may also start building a line linking Shatin in the New Territories to Central, the downtown business district, in 2010.

In addition, Mr Tsang said that rates for property owners totalling some HK$2.6 billion would be waived for the final quarter of the fiscal year.

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