Thursday, January 9, 2014

Key themes for 2014 -Theme 1: Fed tapering (MKE)

Three issues stand out. 2013 has passed and there are signs that 2014 could turn out to be a much better year, given that the global economy is in a recovery mode. In this report, we explore three important themes that we believe will pan out throughout the course of 2014 and examine their implications for the equity market.

1. A year of Fed tapering. The first cut will commence this month when the Federal Reserve reduces its asset purchases by USD10b to USD75b per month. This comes five years after the start of a series of quantitative easing (QE) exercises that has spawned a prolonged period of low interest rates globally, providing a substantial boost to asset prices. Now that the taper is upon us, the asset inflation cycle could reverse, which would have an impact on the equity market.


2. Government’s stance on immigration policies. Singapore is a small and well-managed economy and any action taken by the government will have a far-reaching effect. With immigration policies likely to remain tight in 2014, the economy will have to adapt to a correspondingly tight labour market even as it strives to achieve higher productivity. Is this potentially negative?

3. Measures on the property sector. Since 2009, a slew of anti-speculation measures have been introduced to curb the exuberance in the residential property market. Now that the market has cooled off and is likely to face an influx of home completions starting from this year, would there be some relaxation in terms of measures? What would this mean for the property market?


Theme #1: Fed tapering
Interest rates are set to rise. When the wall of liquidity that has driven down global interest rates is gradually being removed from the system, the way is paved for interest rates to rise. Long-term rates will increase first, followed by short-term rates as the taper gains momentum. Based on the Fed’s guidance and projections, we believe the US central bank may complete QE tapering by end-2014 or early 2015. This means the Fed funds rate – the US benchmark interest rate – may start to rise in mid-2015. In view of the extremely tight historical correlation (93.9%) between the Fed funds rate and Singapore dollar SIBOR (Figure 1), we expect the latter to rise in tandem.

In this section, we take a closer look at sectors that stand to gain or lose in a rising interest rate environment.

A. Key beneficiaries of rising interest rates
Banks stand to gain the most. In our view, Singapore banks are the largest beneficiaries of a higher interest rate environment by virtue of their liquid balance sheets and strong deposit franchises. The earnings upswing can be powerful after years of persistent net interest margin (NIM) decline, assuming asset quality stays strong. While Singapore dollar SIBOR is only expected to rise starting from 2Q15, we expect the banks to show positive response from as early as 2H14 as the market tends to look forward.

Credit cost to remain well-behaved. In our view, system credit charge should be well-contained even as rates rise because:
Household balance sheet will remain strong (Figure 2) amid a tight job market and an improving economy. We expect Singapore’s real GDP growth to strengthen to 4.0% in 2014E from 3.6% in 2013E.

The corporate sector’s median interest coverage is still in line with the 10-year average of 7x (Figure 3), although corporate leverage (measured as median total debt-to-equity) has risen to its highest since Dec 2004. Taken on its own merits, a 7x interest coverage ratio is a good number.

Strong loan growth in the past few years (+17.4% CAGR since Sep 2010) was driven by the traditionally-safer housing loans (+15.7% CAGR sine Sep 2009), and short-term US dollar trade loans (+31% CAGR since Sep 2009). US dollar loans made up 26% of our universe’s aggregated loans at end-Sep 2013 – a sharp increase from 16.6% at end-Sep 2009 (Figures 4 and 5).

The rise in interest rates is expected to be modest and well-paced, allowing the economy ample time to adjust to the change. We project 3M Singapore dollar SIBOR to increase to 1.0% by end-2015 and to 2.0% by end-2016 (currently 0.4%).

DBS stands to gain the most. This is because among the three Singapore banks, DBS has:
The most favourable Singapore dollar deposit franchise with current and savings account (CASA) of 58% (Figure 6).

The most liquid Singapore dollar balance sheet with 73% loan-to-deposit ratio (LDR), implying a massive SGD37b net deposit surplus.

What about cash-rich companies? Cash-rich companies such as Cordlife Group, Genting Singapore, OSIM International, Q&M Dental Group, SATS, Singapore Airlines, SIA Engineering, ST Engineering and Venture Corp will also benefit from higher interest rates. However, the earnings impact is likely to be negligible.

B. Key losers of rising interest rates
Property sector to take a hit. In our view, the property sector – comprising property developers and property REITs – stands to lose the most. The broad property sector has benefited significantly from a low interest rate environment as evidenced by soaring real estate prices in Singapore (Figure 8). As the cost of borrowing is set to rise amid tighter lending rules, we expect real estate prices to correct in the years ahead, boding ill for property counters.

Loser #1: Property developers to see slower new home sales and physical property price correction. Our property developer analyst Wilson Liew believes that physical property prices will come down by 10% in 2014 due to record numbers of physical completions (Figure 9) coinciding with slower population growth. This situation will be compounded by higher mortgage rates and tighter lending rules. The signs are already there: HDB resale flat prices have softened, reducing the motivation for HDB owners to upgrade to mass market private properties. Under this environment, stock valuation is likely to stay compressed. That said, we think the share prices within our coverage universe would see limited downside, given the already cheap valuations, and there is room for some of the property measures to be unwound in the event that physical property prices correct significantly.

Based on our estimates, our universe is trading at an average 40% discount to our RNAV estimates. The key risk to our sector view is the fact that property players have de-geared their balance sheets since the 2008-2009 global financial crisis, bringing the industry median gearing ratio down to near its 10-year lows (Figure 10). This is not surprising as property developers were quick to turn around their landbank. This means they need not be compelled to slash selling prices in order to move units. At the worst, there may be selective occurrences. An industry-wide phenomenon appears remote at this juncture, in our view.

Loser #2: Property REITs face NAV depreciation risk. Rising interest rates have two effects:
Triggering a recalibration of overheated property prices, especially industrial property prices, and dampening net asset value (NAV). This will lift S-REITs’ gearing ratios (total debts/total assets), which are capped at 60% under the law, affecting the ones with high gearing ratios (Figure 11).

Raising the average borrowing cost which has been kept low in recent years. Our property REITs analyst Ong Kian Lin sees little refinancing risk with the debt profile well spread out (Figure 12).

Yield-accretive acquisitions may be hard to come by. Adding to the woes is the currently inflated asset valuation, which makes undertaking long-term yield-accretive acquisitions difficult. Limited rental upside makes it even more challenging for our coverage universe to deliver meaningful DPU growth. We estimate that share prices of property REITs need to correct by at least 8% before DPU yield reverts to the historical average of 7%. In our view, industrial property prices have the

Raising the average borrowing cost which has been kept low in recent years. Our property REITs analyst Ong Kian Lin sees little refinancing risk with the debt profile well spread out (Figure 12).

Yield-accretive acquisitions may be hard to come by. Adding to the woes is the currently inflated asset valuation, which makes undertaking long-term yield-accretive acquisitions difficult. Limited rental upside makes it even more challenging for our coverage universe to deliver meaningful DPU growth. We estimate that share prices of property REITs need to correct by at least 8% before DPU yield reverts to the historical average of 7%. In our view, industrial property prices have the most room to fall, considering how they have escalated by a whopping 115% over the past four years.

Bottomline: The key messages are:
Positive on banks sector. Banks benefit significantly when interest rates rise. DBS is the largest beneficiary.

Stay selective on property sector. Rising mortgage rates and tighter lending rules will dampen property sales. This, coupled with an influx of new home completions, could cause physical property prices to correct by up to 10% in 2014. Nevertheless, property counters would continue to trade at a significant discount to our RNAV estimates, cheap valuations notwithstanding. For exposure, our top sector pick is CapitaMalls Asia (CMA), which has negligible presence in the residential sector (less than 2% of its NAV) given its focus on retail malls. We also like it for its success in mixed-development projects in China.

Avoid S-REITs. We think it is too early to re-enter this sector. We would wait for a minimum 8% price correction before venturing in. For exposure, we recommend Suntec REIT.




Source/Extract/Excerpts/来源/转贴/摘录: MKE-Research,
Publish date: 06/01/14

No comments:

Post a Comment

Warren E. Buffett(沃伦•巴菲特)
Be fearful when others are greedy, and be greedy when others are fearful
别人贪婪时我恐惧, 别人恐惧时我贪婪
投资只需学好两门课: 一,是如何给企业估值,二,是如何看待股市波动
吉姆·罗杰斯(Jim Rogers)
“错过时机”胜于“搞错对象”:不会全军覆没!”
做自己熟悉的事,等到发现大好机会才投钱下去

乔治·索罗斯(George Soros)

“犯错误并没有什么好羞耻的,只有知错不改才是耻辱。”

如果操作过量,即使对市场判断正确,仍会一败涂地。

李驰(中国巴菲特)
高估期间, 卖对, 不卖也对, 买是错的。
低估期间, 买对, 不买也是对, 卖是错的。

Tan Teng Boo


There’s no such thing as defensive stocks.Every stock can be defensive depending on what price you pay for it and what value you get,
冷眼(冯时能)投资概念
“买股票就是买公司的股份,买股份就是与陌生人合股做生意”。
合股做生意,则公司股份的业绩高于一切,而股票的价值决定于盈利。
价值是本,价格是末,故公司比股市重要百倍。
曹仁超-香港股神/港股明灯
1.有智慧,不如趁势
2.止损不止盈
成功者所以成功,是因为不怕失败!失败者所以失败,是失败后不再尝试!
曾淵滄-散户明灯
每逢灾难就是机会,而是在灾难发生时贱价买股票,然后放在一边,耐性地等灾难结束
  • Selected Indexes 52 week range

  • Margin of Safety

    Investment Clock

    World's First Interactive Investment Clock