How will markets and economy fare in second half?

How will markets and economy fare in second half?
PHOTO: How will markets and economy fare in second half?

The global economy and financial markets stand at a crucial crossroad, and look set for further turbulence in the next six months.

The world economy is somewhat on the mend since the global financial crisis but recovery is still patchy and sluggish.

Meanwhile, financial markets are on tenterhooks over concerns that the huge amounts of easy money pumped in by central banks, which have fuelled the recent market rally, may be gradually withdrawn in the coming months.

How things will pan out in the near term will be determined by one event - the slowing down of the United States Federal Reserve's massive money-printing measures.

"All eyes will be centred on when the Fed will start to scale down its asset purchases, as this will have a major impact on how the markets move," said Mr Kelvin Tay, regional chief investment officer for Southern Asia Pacific at UBS wealth management.

Last week, Fed chairman Ben Bernanke hinted that the central bank will not rush to raise interest rates, triggering a market rally across the globe.

His comments were seen as a reversal of his position in late May when he said the Fed would soon cut back its massive stimulus - which sparked market mayhem.

The Sunday Times speaks to analysts and experts on how the financial and property markets as well as the economy will fare in the second half of the year.

1. Rocky road ahead for stocks

As an asset class, most wealth experts are still upbeat on equities relative to bonds or gold. Stock movements are expected to move in accordance with any Fed announcement or utterance by Mr Bernanke. Hence, stocks will remain volatile in the coming months.

Weaning stocks off easy money flows arising from the Fed's massive stimulus measures will be like getting an addict off drugs, UBS global chief investment officer Alexander Friedman told this newspaper last month. It will cause considerable short-term pain before long-term gain, he explained.

As CIMB research head Kenneth Ng noted: "Markets worry about the end of cheap money." UBS' Mr Tay expects the Fed tapering to start in December this year or January 2014, with quantitative easing eventually ending next July.

Analysts tip the Straits Times Index (STI) to trade within a narrow range till the end of the year. CIMB's Mr Ng has a year-end target of 3,400 points for the STI, and advises investors to bottom-pick if the index dives below 3,000.

OCBC Investment Research head Carmen Lee said: "We expect the Singapore market to be volatile, especially in view of the looming Fed tapering and worries over the withdrawal of funds and a higher interest rate environment."

She added that the above factors should limit price gains, but believes the local market should receive good support due to its "undemanding" valuation.

UBS' Mr Tay said Singapore stocks enjoy "safe haven" status relative to other Asian equities on any market volatility triggered by Fed tapering or financial risk in China.

That's because the local market has been less vulnerable to fickle external capital flows than some of its Asean neighbours, and is also less exposed to China than its peers such as Hong Kong and South Korea.

2. Caution takes centrestage for local property market

Caution will be the buzzword for the Singapore residential property market for the rest of the year, say experts.

Overall private residential home prices are tipped to remain flat with a possible slight dip nearer the end of the year, predicted Colliers International research director Chia Siew Chuin. Developers who have bought land at high prices may face some pressure to adjust prices due to lower profit margins, she said.

They could also become more aggressive in timing and use of buyer incentives for project launches, as it would be more advantageous for them to launch sooner rather than later given the latest changes in rules on home loans, Ms Chia added.

Last month, a new framework was introduced to rein in mortgage lending. Banks will not be able to approve a loan if the monthly repayments of a buyer's total debt obligations exceed 60 per cent of his gross monthly income.

"A combination of high inventory, high completions, buyer and seller stamp duties and low loan-to-value caps should keep price growth in check," said Ms Regina Lim, director and head of Asean Property Research at Standard Chartered Bank.

Over the longer term, analysts such as Daiwa's Mr David Lum warn of the rising risks of a major correction.

Mr Lum expects home prices to slump by 18 to 20 per cent from the end of last year to the end of 2015, mainly due to rising levels of unsold inventory if demand suddenly slows and a record pipeline of new homes comes on the market.

3. Sluggish and uneven recovery for the global economy

The world economy is tipped to remain on the recovery road but it will be a bumpy and uneven ride. StanChart economist Edward Lee said: "The global economy is expected to put on a better show in the second half, although still subdued on an overall basis."

CIMB regional economist Song Seng Wun said: "Global recovery is still on course, though the pace differs among the advanced and emerging economies."

While the US economy is showing healthy signs of a decisive turnaround, the picture is less rosy elsewhere.

As OCBC economist Selena Ling said: "The euro zone is still stuck in recession, and China is still facing a slowdown in momentum."

Last week, the International Monetary Fund shaved its 2013 global growth forecast from 3.3 per cent to 3.1 per cent, due to a more protracted recession in Europe and a slowdown in key developing countries such as China and Brazil.

DBS chief economist David Carbon said: "Europe remains a drag... it continues to shrink and unemployment there continues to rise."

As for China, Mr Carbon noted that its focus seems likely to remain "firmly fixed on long-term reform rather than short-term speed".

"That's great for the long run, less great for the second half of this year," he added.

4. Singapore economy to get lift from external factors but risks remain

Economists are generally predicting a prettier picture for the local economy for the rest of the year, as Singapore looks set to benefit from the quicker pace of world economic recovery.

Most economists are tipping a full-year growth figure of 2 per cent and above, well into the upper band of the Government's 1 per cent to 3 per cent forecast.

StanChart's Mr Lee said: "Singapore remains a very open economy and will be able to exploit any improvement in the global economy."

Much will depend on whether the US, the world's largest economy, continues to rebound.

Ms Joyce Lim, head of research and advisory at Citibank Singapore, said: "The key driver supporting the positive economic outlook is the expected pick-up in US economic growth."

But she also cautioned that a slowdown in China could affect Singapore's growth in terms of trade, tourism and property transactions.

Other risk factors include the current economic restructuring process, such as the tightening inflow of foreign workers, warned DBS economist Irvin Seah.

5. US dollar to gain ground

The Singapore dollar looks set to concede more ground to the US dollar in the coming months, as the Fed seems likely to cut back on its money-printing programme soon.

Last Friday, the Singdollar was trading at about 1.26 against the greenback.

It could weaken to 1.30 in the third quarter ahead of the expected start of the Fed tapering, before rallying to 1.27 in the final three months, said StanChart's Mr Lee.

"The 1.27 to 1.28 region looks like a conservative assumption for the next six to 12 months," said OCBC's Ms Ling.

CIMB's Mr Song said: "Our forex strategists believe the US dollar's strength is here to stay." Inflation is projected to rise in the coming months from April's 1.5 per cent as COE premiums head up after bottoming in May.

Citi's Ms Lim said: "Inflation is expected to creep up to 2 to 2.5 per cent for the rest of the year, with 2013 inflation forecast to remain at 2.5 per cent."

The local labour market will remain tight, with the unemployment rate likely to stay low around the 2 per cent mark for the rest of 2013.

alfoo@sph.com.sg


Get a copy of The Straits Times or go to straitstimes.com for more stories.

This website is best viewed using the latest versions of web browsers.