QE3 will end in October

2014….but markets are

still rising....!!!!???

Kevin Scully, 23 August 2014

www.nracapital.com

Disclaimer

This material is for educational purposes only & does not constitute

financial product advice. Netresearch-asia / NRA Capital does not

represent or warrant that the material is complete or accurate. You

should consider obtaining independent advice before making any

financial decisions. To the extent permitted by Law, no responsibility

for any loss arising in any way (including by way of negligence) from

anyone acting or refraining from acting as a result of this material is

accepted by Netresearch-asia / NRA Capital.

This disclaimer extends to any private discussions with the

presenter/and staff of NRA Capital Pte Ltd.

What is QE or Quantitative

easing ?

Its an unconventional form of monetary

policy used only when short term interest

rates are near zero ?

Government purchases of non

government securities at the long end of

the yield curve in the hope of reviving

borrowing and consumption.

We have had four rounds of QE

type activities since 2008

QE1 – Nov 2008 to June 2010 US$600bn

QE2 – Nov 2010 to June 2011 US$600bn

Operation twist – Sept 2010 to Sept 2011

US$400bn

QE3 – Sept 2012 to ??? US$85bn per

month – todate about US$1.8trillion

Estimated total QE since 2008 – US$3.2

trillion…..

Fed fund rates collapsed to almost

zero in 2008 which prompted QE

Effects of the ending of QE1 and

QE2 give prelude to end of QE3

QE1

start

QE1

ends

QE2

starts

QE2

ends

OT

starts

OT ends

QE3 starts

Tapering

But QE seems to have failed….

The post QE impact…is coming

What should we look for ?

US unemployment rate below 6.5% - done

US inflation rate above to 2% - holding

10 year Treasury yields above 3% -

waiting

A rise in the Fed funds rate - waiting

US unemployment rate was

6.1% in July 2014

US CPI was 2.1% for July 2014

US 10 Year Treasury Yields up

from low and likely to rise further

Janet Yellen’s latest comments

last night at Jackson Hole

….the economy was improving but the

Fed was waiting for more evidence about

the health of the labour markets before

deciding when to start raising interest

rates….

Stock markets are already into

the 5th plus year of a Bull run….

Healthy correction of 20% due

and likely to be triggered by end

of QE3 and a hike in Fed Fund

Rate early 2015…???

Dow Jones 2000-2014

Bull cycle (4-5

years) Dow up

14% per annum

Bear cycle (2-

3 years) Dow

down 32%

per annum

Bull cycle (5

years…?)

Dow up 20.1%

per annum

FSSTI Index 2000-2014

Bull cycle (4-5

years) FSSTI up

26.9% per annum

Bear cycle –(2-3

years) FSSTI

down 38% per

annum

Bull cycle (5

years…?) FSSTI

up 17.6%

Hang Seng Index 2000-2014

Bull cycle (4-5

years) HSI up

30.3% per annum

Bear cycle (2-3

years) HSI down

41% per annum

Bull cycle (5 years

?) HSI up 14.4% per

annum

Long term interest rates return to

normal – for 10 year treasuries 4 to 5%

10 year US

Treasury yields

back to 4 to 5%

Expect mutual fund money to flow into

US equities out of emerging markets

Record US$40-45bn flowed into US equities in

Jan/Feb 2014

Bond funds continued to see outflow

Emerging market ETFs still seeing outflows with

some mutual funds seeing outflows for the first

time

Dow BULL market looks set to continue for

another 12 to 24 months

Asset class performance between

May and August 2013May to Aug

2013

S&P 500 0.01%

FTSE -2.94%

Bond Index -3.44%

Gold -3.64%

Hang Seng -7.70%

Shanghai -8.06%

Nikkei 225 -8.69%

STI Index -11.50%

Jakarta -18.64%

Asset class performance between

May and Oct 2013May to Oct

2013

S&P 500 6.16%

Nikkei 225 -0.21%

Hang Seng -0.33%

FTSE -0.72%

Shanghai -2.14%

Bond Index -2.52%

STI Index -6.96%

Jakarta -10.39%

Gold -10.55%

Asset class performance between

Jan to Apr 2014Jan to Aug

2014

Jakarta 21.6%

HSI 7.7%

S&P 500 7.6%

Shanghai 5.9%

Gold 5.8%

FSSTI 4.9%

Bond Index 4.8%

FTSE 0.4%

Nikkei -4.6%

There was a trend reversal in February

to less risky assets and opportunistic

flows into emerging markets Ukraine crisis led to some funds flow into less

risky assets

But Ukraine economy is only two thirds the

size of Singapore – so no impact as

confirmed by the Vix Index staying below the

20 level

Some opportunistic value flows into emerging

markets like Indonesia, Hong Kong and

Shanghai

Singapore outlook

Singapore property

prices finally starting

to turn down

Singapore property – likely to under

perform because of Govt measures

The latest measure on debt servicing (TDSR) is likely to be the final nail

National Development Minister Khaw Boon Wan recently said that he wanted to bring affordability of HDB flats from 5.5 times annual income to 4 times – with incomes unchanged this points to a 30% decline in prices. DBS Bank CEO talked about property price declines of 15%.

URA data shows that property prices have declined in the last three quarters, rentals are also falling

Property prices and rentals in

Singapore set to fall further

Residential Property Act – look

for the next SC Global Under the Residential Property Act, housing developers whose

shareholders and directors are not all Singaporeans have to get a

Qualifying Certificate (QC) to buy residential property.

'QC holders are given permission to purchase residential land and property

solely for development and sale of the units, and not for investment

purposes. These conditions are imposed to control foreign ownership of

land in Singapore,' the Singapore Land Authority said.

This requires them to sell all units within two years of obtaining the

temporary occupation permit (TOP). They are not allowed to rent out unsold

units.

Extension beyond the two years incurs a cost of 8 per cent, 16 per cent and

24 per cent of the property purchase price for the first, second and third

extra years, respectively. The amount is pro-rated based on the proportion

of unsold units.

Big cap property stocks

Price Fair value Price to

Property stock S$ S$ Recommendation accumulate

City Dev 10.25 10.00 SELL Below $8.80

Capitaland 3.37 3.60 HOLD Below S$3.00

Keppel Land 3.49 3.94 BUY/Accumulate Below S$3.00

Singapore banks – Neutral

Singapore bank loan deposit ratio

more than 100% since 2013

SIBOR has ticked up – get

ready for higher interest rates

Three month

Have you noticed the latest

DBS and OCBC adverts

If Singapore interest rates rise

Three local banks should see better net

interest margins….but

NPLs will start to rise

DBS has the lowest general provisioning

coverage, also its aggressive expansion

into SME loan market exposes it to more

bad loans

Singapore banks – UOB and

OCBC slightly undervalued

Price

Fair

value Price to

Bank stocks S$ S$ Recommendation accumulate

DBS 17.93 15.90 SELL

Below

$14.50

OCBC 10.41 11.20

HOLD/BUY on

weakness

Below

S$9.00

UOB 22.87 25.00

HOLD/BUY on

weakness

Below

S$20.00

UOB has strongest balance sheet

Balance Sheet

Strength

As at 31March 2014 UOB OCBC DBS

CET1 (Final-%) 12.5% 11.0% 11.7%

Tier 1 CAR (%) 14.0% 14.4% 13.1%

Total CAR (%) 17.7% 15.6% 15.3%

Note: Basel recommended CET1 is 4.5%

Telcos – traditionally yield plays SingTel, Starhub and M1 are yield plays offering

dividend yields of between 4-5%

The expected rise in risk free / interest rates suggest that

we could see some downside risks in their stock prices

Probably worth accumulating 10% below their current

stock price levels.

Current Price to Dividend

Stocks Price S$ Accumulate Yield

S$ S$ (%)

M1 3.76 3.0 3.7%

Sing Tel 3.86 3.50 4.4%

Starhub 4.13 3.50 4.8%

REITs more weakness ahead but a

buying opportunity is around the corner

90% of REITs have negative

returns in 2013 on “Tapering”

Only 2 of the 29 Reits have positive returns between Dec 2012 and August 2013 (SPHREIT and PLife REIT)

Likely to see more weakness once ‘tapering actually starts and funds move out of fixed income plays

Wait to accumulate when the yields pass 6-7% and gearing remains below 40% - pick defensive REITs

Watchout for possible devaluation of capital values when interest rates rise (ie capitalisation rates which are used to value the REIT assets will also rise) – which is why you should look at lower levels of gearing

Oil & Gas sector - overweight

Fundamentals of oil & gas sector

Global oil reserves about 1637 billion barrels of

oil

Current annual consumption – 27 billion barrels

– reserves can last 60+ years

Need to expand oil exploration activity in deeper

waters

Only wild card is shale oil/gas whose current

reserves are estimated at more than 5 trillion

barrels of oil equivalent

Rig market profile favours good

demand for deep water rigs

More than 70% of the world’s rigs are more than 30 years old

Most of these rigs do not meet new environmental and safety standards and are being phased out

Old rigs cannot drill in deep waters

Rig builders and OSVs charters favoured

0

10

20

30

40

50

60

70

80

90

2004 2005 2006 2007 2008 2009 2010 2011 2012

DRILLSHIP JACKUP SEMISUBMERSIBLE

Source: IHS Petrodata

Rig orders remain robust….but

Increased competition from China

will pressure margins

China plans to increase its global market share in rig building from 8% in 2011 to 20-30% by 2014/2015 with new entrants in Cosco and Yangzijiang but there is still enough to go around

Customer risks have increased as they now have less access to European bank financing

More speculative building

Thank You