30 AUGUST 2013
Dr Chan’s Take On The Global Economies
By Nicholas Tan
With all eyes fixated on the upcoming Federal Reserve meeting in September, the investment community is eagerly watching in anticipation of signs that would hint of the beginning of the stimulus tapering, marking the end of easy money that has become a norm in recent years. How will the imminent end of quantitative easing change the world? Shares Investment finds out what is Dr Chan Yan Chong’s take on this as well as his views on the developments evolving in the global economies in an exclusive phone interview.
Shares Investment: Financial markets have scrutinised the FOMC’s July meeting minutes and now expects to see a cut back in bond purchases at the next September meeting. How much do you expect the Fed to rein-in? Do you foresee the anticipated tapering derailing the US recovery in 2014?
Dr Chan Yan Chong: The amount of cut back on bond purchases will not be large and the likely impact on financial markets will be minimal. Since the beginning of August financial markets have started to correct and factor-in this imminent event.
The Dow Jones Industrial Average has fallen about 600 points or 4 percent from its high on 2 August while the 10-year US Treasury yield rose to a two-year high at 2.93 percent on 22 August.
I do not think the tapering event will derail the US economy in 2014 as recent economic data have been positive and the recovery process is on-track, hence it is the right time to pull-back on monetary stimulus policy.
SI: Interestingly, Bernanke’s second term as Fed chief ends in 31 January 2014, can we infer that the Fed’s choice of pulling back on monetary stimulus will be partially influenced by this event?
Dr Chan: Quantitative easing was invented by Bernanke, so it is only right that he starts to rein-in on it before his term as Fed chief ends. However, whether it will occur during the September meeting remains a mystery, but I am certain that it will be before the end of his second term.
SI: If the Fed indeed starts to “pull the plug” on easy money in the coming quarter, do you see the US dollar appreciating? Hence what does this spell on the outlook for emerging markets in 2014?
Dr Chan: Theoretically, the US dollar will appreciate in an event that the Fed applies the brakes, but so far for the month of August, the US dollar has not appreciated against either the euro or yen, in fact, it has depreciated against them. However, the US dollar has appreciated against the emerging market currencies but this was due to the slowdown in these emerging market economies and not attributed to the strength of the US dollar.
Developed nations’ economies are less susceptible to a slowdown in the Chinese economy as they are more domestic-driven and do not rely on exporting natural resources as a driver for growth. Contrastingly, emerging markets are more export-oriented and a slowdown in the Chinese economy will have spill-over effects on emerging market economies leading investors to prefer the developed world.
SI: Recently, the Eurozone edged out of recession to expand 0.3 percent for the first time in six consecutive quarters. Is this a sign that the problems in the 17-nation bloc has bottomed-out? And taking a chapter off the Fed’s book, when can we expect the European Central Bank (ECB) to start tightening monetary policies?
Dr Chan: The Eurozone has bottomed-out and is expanding though relatively slower compared to the US. During the Global Financial Crisis, the US bottomed-out and started to print money in 2009 to revive its economy, so it has been on a four-year recovery track.
Comparatively, the Eurozone only started printing money in 2012, hence there is still a long way to go. Unemployment rate in parts of southern Europe is still high and the area remains mired in a slump, therefore in the near-term it is unlikely that the ECB will tighten monetary policies.
SI: August’s Flash PMI figure of 50.1 shows that China’s manufacturing expanded from July’s 47.7 final figure, leading economists to predict that the Chinese economy is stabilising and will reach its upper band growth target of 7.5 percent for 2013. What are your views on this?
Dr Chan: In my opinion, the prediction that China’s economy has stabilised is premature. Since 2009, China’s gross domestic product has fallen from double-digit growth and it is likely to fall further as it adjusts to a more sustainable growth pace. However, if the growth rate falls below the 7 percent lower band target pronounced by the Chinese administration, it is likely that they will implement some sort of monetary or fiscal stimulus measure to achieve their goal.
SI: What do you see as the biggest challenges that will plague the Xi and Li administration as China transits into a new phase of normalised economic growth?
Dr Chan: The biggest challenge for China is to maintain its comparative advantage while keeping its economy growing at the targeted 7 percent level in the wake of higher labour costs. Things have changed from the 90s, when many companies came to China to set up factories to take advantage of the relatively cheap manpower. Labour costs have inevitably risen considerably as China progressed along the economic path. As such, these same companies have since started to move out to other new emerging markets like Bangladesh, Indonesia and the Middle East, where wage rate is lower than China’s, leading to a decrease in foreign investment into the country.
SI: Under Japan’s new leadership, Shinzo Abe has carried out his version of economic stimulus dubbed “Abenomics”, what are your views on it?
Dr Chan: Since the re-election of Shinzo Abe for the second time as Japan’s Prime Minister on 26 September 2012, the Japanese stock market has been on a bull run, increasing almost two folds and hit a high of 15,627 points on 22 May 2013. At the beginning of the year, I said that I am positive on the Japanese stock market, however it has increased over 50 percent, hence it is not the right time to enter now.
I feel that Shinzo Abe has the support of the Japanese people and “Abenomics” is the correct method to stimulate the lacklustre economy, however this will affect other competitor markets like South Korea and China as they all vie for the same pie. A weaker yen means that Japanese goods are relatively cheaper and consumers will likely to prefer buying Japanese goods at the expense of South Korean or Chinese goods.
SI: Since its peak in May, the STI has taken a relatively heavy beating, down some 300 odd points or 10 percent plus compared to other regional bourses. Do you see this as a temporary correction and a good entry point for investors?
Dr Chan: I do not think it is a good entry point for investors at this moment as the correction is only a mere 10 percent and the US central bank has not taken any concrete actions to scale back on bond purchases. I feel that global markets need a catalyst event such as the actual implementation of monetary tightening policy by the Fed.
The US will not pull out of quantitative easing if the economy is still anemic, they will only do so if they are reasonably confident that the economy will not slip back into a recessionary phase. So in an event that the Fed pulls back on printing money and the stock market is not badly affected, investors will see this as a positive event and it will be an opportune time to enter the market.
SI: As Singapore implement new policies to build an “inclusive” society and prepare itself for a new phase of lower economic growth, what sectors of the local economy do you favour?
Dr Chan: There are two sectors of the local economy that I favour – construction and healthcare. Construction because the Singapore government has promised to build more public housing to meet the increasing demand so that every citizen will have a roof to stay under. As Singapore’s population ages, the government has also pledged to do more to reduce medical costs so that the lower income bracket will not be burdened with high medical expenses.
Publish date: 30/08/13