Cautious In The Short-term Markets Vulnerable To Near-term Disappointment MONTHLY OUTLOOK May 2019
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Cautious In The Short-term Markets Vulnerable To Near-term Disappointment
MONTHLY OUTLOOKMay 2019
02
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IN THIS ISSUE
IN THIS ISSUE
The OCBC Wealth Panel draws on the collective expertise and experience of wealth management experts from the OCBC Group, namely OCBC Bank, OCBC Investment Research, Lion Global Investors and Bank of Singapore. With over 200 years of collective investment experience, the OCBC Wealth Panel is dedicated to provide timely advisory services to grow, manage and protect your wealth.
Recession Fears Fade
Markets Vulnerable
Cyclical trough
Less sanguine on EM High Yielders
Oil prices may see a pullback
GLOBAL OUTLOOK
EQUITIES
HONG KONG / CHINA MARKET OUTLOOK
BONDS
FX & COMMODITIES
P 04-05
P 06-07
P 08
P 09
P 10
Hong Kong Property Market continue to gain momentum
SPECIALS
P 11
About the OCBC Wealth Panel
“We are circumspect about the market outlook over the short-run, considering the sharp rally in the �rst four months of this year, and would not be surprised if near-term volatility picks up further given the latest uncertainty regarding to the US-China trade situation.
We believe it may now be prudent to pare back risk exposure given the less favourable backdrop at this point.”
Cautious In The Short-term
Markets Vulnerable To Near-term Disappointment
03
MARC VAN DE WALLEHead, Group Wealth Management, OCBC Bank
Recession Fears Fade
GLOBAL OUTLOOK
“Early concern in the US over the economic outlook has faded as data �rst stabilised, and then recently started to rebound. Recession looks even less likely than it did three months ago.”
• Recession fears may have faded, but growth has certainly slowed as anticipated. Production capacity is tight and productivity gains are hard to �nd. However, in�ation is still subdued. This means central banks can remain accommodative and not raise interest rates in a hurry.
• The main threat is a burst of in�ation, but this fear has been there for the past couple of years and has yet to materialise.
• Of course, there are other risks, but these do not seem any more pronounced than usual.
• Trade friction is probably the most serious concern, with a US-China deal still pending, as well as the threat of automobile tari�s triggering a transatlantic bust up.
United States• Despite the weak start to the year,
amid the government shutdown, 1Q2019 GDP growth managed to hit a 3.2% annualised pace in the US. The labour market has been telling a similar story of slower, but still respectable, growth with 205,000 new jobs created each month so far in 2019, compared to 22,000 last year.
RICHARD JERRAMChief Economist, Bank of Singapore
• Despite resilient growth, in�ation pressures have eased slightly. However, much of this seems to be due to temporary or one-o� factors.
• In this environment, the Federal Reserve is unlikely to be in a hurry to change policy. The April jobs report showed the US economy remains in a sweet spot that supports the Federal Reserve’s “patient” approach to policy. After adding 263,000 jobs in April, the average for the year is running at 205,000; this is only slightly slower than the 223,000 of 2018. The unemployment rate fell to 3.6%, which is the lowest in half a century. It is hard to see why the Federal Reserve would want to cut interest rates when the economy is in such good shape.
Europe• The rebound in European activity has
been relatively disappointing in the past few months, especially in the case of Germany. The service sector remains solid, with weakness concentrated in manufacturing and an unusual degree of divergence between these two sides of the economy.
• Concerns over growth and core in�ation stuck at around 1% means that the prospect of the European Central Bank (ECB) tightening remains distant. However, the outlook would need to deteriorate signi�cantly – which we do not expect – for the ECB to resume quantitative easing. The probability of a more hawkish replacement to ECB President Mario Draghi in October further reduces the chance of a policy reversal.
• The UK remains mired in Brexit uncertainty. Unlike elsewhere, the service sector is showing signs of stress which apparently re�ects the chaotic Brexit discussions. With the Brexit deadline pushed out until October, there is little hope of an early resolution.
Japan• Exports have been hit by the weakness
in world trade and the technology cycle, and the weakness has �owed through to the manufacturing sector. However, the domestic economy still seems solid and labour markets are exceptionally tight, which is helping to drive investment.
04 GLOBAL OUTLOOK
• Policy makers are again showing signs of concern as the next round of sales tax increase from 8% to 10% approaches in October. Even though it is a relatively small change, and count-er-measures have already been taken to protect consumers’ spending power, pressure for a further delay is growing. Demographic strains mean that the need for an eventual shift to greater dependence on indirect taxation is unavoidable, but short-term circumstances can make that di�cult. The Bank of Japan is similarly under pressure to o�er the possibility of further policy easing, but this does not look credible.
China• China has unveiled a sequence of
policy stimulus measures over the past year to o�set the damage from US tari�s. However, they have been wary of repeating the excessive boost of a decade ago, with one eye on the credit bubble. Until recently, the impact had been relatively subtle but there are increasing signs of policy traction in both the credit and economic activity data.
• From here, much will depend on whether the long-awaited trade deal with the US can be �nalised. If so, with the manufacturing Purchasing Managers' Index (PMI) already back above 50, we can expect to see policy stimulus being wound back. In fact, there are already some signs of backtracking on the credit loosening seen in the past year.
Emerging markets• Risks in emerging markets continue to
look idiosyncratic rather than systemic. Slower growth in developed economies presents a challenge, but to some degree is o�set by the more dovish monetary policy stance. Many emerging markets – especially in Asia – retain signi�cant policy �exibility to respond to di�culties if necessary. Fiscal positions are mostly solid, and we can expect to see some of last year’s interest rate increases in Asean
reversing as the year progresses.
• More generally, most emerging markets are not showing the sort of imbalances – external de�cits, budgetary problems, over-valued exchange rates, severe in�ation – that produce vulnerability to external events.
• Localised problems will always occur, but systemic risk looks low.
• Recession fears may have faded, but growth has certainly slowed as anticipated. Production capacity is tight and productivity gains are hard to �nd. However, in�ation is still subdued. This means central banks can remain accommodative and not raise interest rates in a hurry.
• The main threat is a burst of in�ation, but this fear has been there for the past couple of years and has yet to materialise.
• Of course, there are other risks, but these do not seem any more pronounced than usual.
• Trade friction is probably the most serious concern, with a US-China deal still pending, as well as the threat of automobile tari�s triggering a transatlantic bust up.
United States• Despite the weak start to the year,
amid the government shutdown, 1Q2019 GDP growth managed to hit a 3.2% annualised pace in the US. The labour market has been telling a similar story of slower, but still respectable, growth with 205,000 new jobs created each month so far in 2019, compared to 22,000 last year.
05GLOBAL OUTLOOK
• Despite resilient growth, in�ation pressures have eased slightly. However, much of this seems to be due to temporary or one-o� factors.
• In this environment, the Federal Reserve is unlikely to be in a hurry to change policy. The April jobs report showed the US economy remains in a sweet spot that supports the Federal Reserve’s “patient” approach to policy. After adding 263,000 jobs in April, the average for the year is running at 205,000; this is only slightly slower than the 223,000 of 2018. The unemployment rate fell to 3.6%, which is the lowest in half a century. It is hard to see why the Federal Reserve would want to cut interest rates when the economy is in such good shape.
Europe• The rebound in European activity has
been relatively disappointing in the past few months, especially in the case of Germany. The service sector remains solid, with weakness concentrated in manufacturing and an unusual degree of divergence between these two sides of the economy.
• Concerns over growth and core in�ation stuck at around 1% means that the prospect of the European Central Bank (ECB) tightening remains distant. However, the outlook would need to deteriorate signi�cantly – which we do not expect – for the ECB to resume quantitative easing. The probability of a more hawkish replacement to ECB President Mario Draghi in October further reduces the chance of a policy reversal.
• The UK remains mired in Brexit uncertainty. Unlike elsewhere, the service sector is showing signs of stress which apparently re�ects the chaotic Brexit discussions. With the Brexit deadline pushed out until October, there is little hope of an early resolution.
Japan• Exports have been hit by the weakness
in world trade and the technology cycle, and the weakness has �owed through to the manufacturing sector. However, the domestic economy still seems solid and labour markets are exceptionally tight, which is helping to drive investment.
• Policy makers are again showing signs of concern as the next round of sales tax increase from 8% to 10% approaches in October. Even though it is a relatively small change, and count-er-measures have already been taken to protect consumers’ spending power, pressure for a further delay is growing. Demographic strains mean that the need for an eventual shift to greater dependence on indirect taxation is unavoidable, but short-term circumstances can make that di�cult. The Bank of Japan is similarly under pressure to o�er the possibility of further policy easing, but this does not look credible.
China• China has unveiled a sequence of
policy stimulus measures over the past year to o�set the damage from US tari�s. However, they have been wary of repeating the excessive boost of a decade ago, with one eye on the credit bubble. Until recently, the impact had been relatively subtle but there are increasing signs of policy traction in both the credit and economic activity data.
• From here, much will depend on whether the long-awaited trade deal with the US can be �nalised. If so, with the manufacturing Purchasing Managers' Index (PMI) already back above 50, we can expect to see policy stimulus being wound back. In fact, there are already some signs of backtracking on the credit loosening seen in the past year.
Emerging markets• Risks in emerging markets continue to
look idiosyncratic rather than systemic. Slower growth in developed economies presents a challenge, but to some degree is o�set by the more dovish monetary policy stance. Many emerging markets – especially in Asia – retain signi�cant policy �exibility to respond to di�culties if necessary. Fiscal positions are mostly solid, and we can expect to see some of last year’s interest rate increases in Asean
reversing as the year progresses.
• More generally, most emerging markets are not showing the sort of imbalances – external de�cits, budgetary problems, over-valued exchange rates, severe in�ation – that produce vulnerability to external events.
• Localised problems will always occur, but systemic risk looks low.
% 2018 2019 2020
Developed Markets 2.2 1.9 1.9 US 2.9 2.3 2.0 Eurozone 1.8 1.1 1.4 Japan 0.8 0.9 0.8Emerging Markets 4.5 4.3 4.7 China 6.6 6.2 6.0 Rest of Asia 6.3 6.4 6.5World 3.6 3.3 3.6
Global growth outlook
Moderate global slowdown
Source: Bank of Singapore
Source: IMF, Bank of Singapore
Emerging economies
Developed economies
World
(%)987654321
0-1-2-3
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
• In equities, we downgrade our overall mildly overweight position to overall neutral. This is achieved by downgrading our overweight positions in Europe and Japan to neutral.
• We prefer an entry point with better risk-reward and after greater clarity on US-China trade relations.
• A key factor behind the rally in the �rst quarter of this year had been increasing market optimism over a US-China trade deal which now looks less certain, given recent renewed trade tensions between the two economic superpowers.
• The stabilisation in their economy this year has given Chinese policy makers more leverage at the negotiating table and it is possible they are attempting to renegotiate aspects of the agreement thought to be closed or pushing back harder against US demands for substantial structural reforms.
• Aside from this, President Trump is expected to decide by 18 May whether to impose tari�s of up to 25% across the board on any imports to the US of vehicles, auto parts and related
technologies. The tari�s would likely prompt immediate retaliation from its major trading partners and the resulting exchange of blows could prove damaging for market sentiment.
United States• The strong start to the latest earnings
season, especially given beaten down expectations, boosted performance of US equities in April. The stabilising of the IHS Markit �ash manufacturing Purchasing Managers’ Index (PMI) at 52.4 in April supported the view that the US economy is not deteriorating as sharply as feared. Cyclical sectors, led by Financials, rallied.
• Looking ahead, corporate earnings announcements and trade deals remain near-term catalysts.
Eurozone• Given gloomy expectations, European
equities outperformed as a pick-up in business cycle indicators boosted investor con�dence. The manufacturing PMI recovered marginally from March’s 47.5, to 47.8 in April led by Technology and Financial stocks. We expect the catch up to continue, given low expectations and less demanding valuations.
• US auto tari�s and European parlia-mentary elections remain ongoing risks.
Japan• Japan continued to lag in April. This
month will be a relatively short trading month, given the 10-day golden week holiday to celebrate the start of a new imperial era. Year-to-date gains have been driven by strong double-digit rebound in the Technology and Communication Services sectors. Given their relatively more extended valuations, we would prefer to switch into Financials and Consumer Discretionary sectors. The longer-term growth backdrop for Japan also remains a concern given capacity issues and increasingly limited policy options.
Asia ex-Japan• Asia ex-Japan underperformed in April
as improving macroeconomic indicators in China triggered concerns that Chinese policy makers would start to slow down their stimulus e�orts. The o�cial manufacturing PMI, however, retreated slightly to 50.1 in April, from 50.5 in March. Given the sharp 20% year-to-date return for Chinese
equities up until April, it looks the bulk of the recovery has already been priced in. Singapore and Taiwan led the region while Malaysia and Korea led the underperformers. Overall, following the rebound, valuations are no longer as supportive - the valuation gap between Asia ex-Japan equities and their global peers has narrowed. As such, we do not expect meaningful outperformance and maintain a neutral stance for the region.
Singapore• Based on the MSCI Singapore Index,
the Singapore market is up 12.3% year-to-date and 6.5% for the month (both data as at end April 2019). Given these strong gains, with the bulk of the gains being recorded in April, valuations are no longer as cheap as a month ago.
• The S-REIT sector saw share prices rallying strongly and based on the REIT Index, the sector is up 11.3% year-to-date.
• Valuation-wise, Singapore equities are not expensive medium-term. The MSCI Singapore index is trading at 13.2 times FY2019 earnings and 12.4 times FY2020 earnings, with price-to-book of 1.2 times and dividend yield of 4.3%.
• As a comparison, the 10-year forward price earnings ratio (PER) is at an average of 13.4 times.
• We had re-iterated our strong buy call for the Singapore banking sector in late March, and the sector had enjoyed strong price appreciation until the trade war escalated in early May. With the correction, re-entry price levels could prove attractive.
China• At 12.4 times forward PER, MSCI China is
trading above its historical average level. We believe market consolidation will continue and further re-rating will hinge on upside surprises in earnings growth.
• From a sector perspective, we prefer laggards with relatively stable earnings growth, such as Banks and Real Estate.
• Chinese banks’ 1Q2019 results indicated a re-acceleration in overall revenue growth, supported by strong non- interest income and steady net interest margin growth. In the near-term, the equities market will focus on the implementation of Phase 1 MSCI A-share inclusion factor uplift.
Markets Vulnerable
EQUITIES
“Global equities trended higher in April, bene�ting from an uptick in select business cycle indicators and a positive start to the earnings season. Following the year-to-date rally, overall valuations are no longer as supportive as they were a few months ago.”
SEAN QUEKHead of Equity Research, Bank of Singapore
06 EQUITIES
• In equities, we downgrade our overall mildly overweight position to overall neutral. This is achieved by downgrading our overweight positions in Europe and Japan to neutral.
• We prefer an entry point with better risk-reward and after greater clarity on US-China trade relations.
• A key factor behind the rally in the �rst quarter of this year had been increasing market optimism over a US-China trade deal which now looks less certain, given recent renewed trade tensions between the two economic superpowers.
• The stabilisation in their economy this year has given Chinese policy makers more leverage at the negotiating table and it is possible they are attempting to renegotiate aspects of the agreement thought to be closed or pushing back harder against US demands for substantial structural reforms.
• Aside from this, President Trump is expected to decide by 18 May whether to impose tari�s of up to 25% across the board on any imports to the US of vehicles, auto parts and related
technologies. The tari�s would likely prompt immediate retaliation from its major trading partners and the resulting exchange of blows could prove damaging for market sentiment.
United States• The strong start to the latest earnings
season, especially given beaten down expectations, boosted performance of US equities in April. The stabilising of the IHS Markit �ash manufacturing Purchasing Managers’ Index (PMI) at 52.4 in April supported the view that the US economy is not deteriorating as sharply as feared. Cyclical sectors, led by Financials, rallied.
• Looking ahead, corporate earnings announcements and trade deals remain near-term catalysts.
Eurozone• Given gloomy expectations, European
equities outperformed as a pick-up in business cycle indicators boosted investor con�dence. The manufacturing PMI recovered marginally from March’s 47.5, to 47.8 in April led by Technology and Financial stocks. We expect the catch up to continue, given low expectations and less demanding valuations.
• US auto tari�s and European parlia-mentary elections remain ongoing risks.
Japan• Japan continued to lag in April. This
month will be a relatively short trading month, given the 10-day golden week holiday to celebrate the start of a new imperial era. Year-to-date gains have been driven by strong double-digit rebound in the Technology and Communication Services sectors. Given their relatively more extended valuations, we would prefer to switch into Financials and Consumer Discretionary sectors. The longer-term growth backdrop for Japan also remains a concern given capacity issues and increasingly limited policy options.
Asia ex-Japan• Asia ex-Japan underperformed in April
as improving macroeconomic indicators in China triggered concerns that Chinese policy makers would start to slow down their stimulus e�orts. The o�cial manufacturing PMI, however, retreated slightly to 50.1 in April, from 50.5 in March. Given the sharp 20% year-to-date return for Chinese
equities up until April, it looks the bulk of the recovery has already been priced in. Singapore and Taiwan led the region while Malaysia and Korea led the underperformers. Overall, following the rebound, valuations are no longer as supportive - the valuation gap between Asia ex-Japan equities and their global peers has narrowed. As such, we do not expect meaningful outperformance and maintain a neutral stance for the region.
Singapore• Based on the MSCI Singapore Index,
the Singapore market is up 12.3% year-to-date and 6.5% for the month (both data as at end April 2019). Given these strong gains, with the bulk of the gains being recorded in April, valuations are no longer as cheap as a month ago.
• The S-REIT sector saw share prices rallying strongly and based on the REIT Index, the sector is up 11.3% year-to-date.
• Valuation-wise, Singapore equities are not expensive medium-term. The MSCI Singapore index is trading at 13.2 times FY2019 earnings and 12.4 times FY2020 earnings, with price-to-book of 1.2 times and dividend yield of 4.3%.
• As a comparison, the 10-year forward price earnings ratio (PER) is at an average of 13.4 times.
• We had re-iterated our strong buy call for the Singapore banking sector in late March, and the sector had enjoyed strong price appreciation until the trade war escalated in early May. With the correction, re-entry price levels could prove attractive.
China• At 12.4 times forward PER, MSCI China is
trading above its historical average level. We believe market consolidation will continue and further re-rating will hinge on upside surprises in earnings growth.
• From a sector perspective, we prefer laggards with relatively stable earnings growth, such as Banks and Real Estate.
• Chinese banks’ 1Q2019 results indicated a re-acceleration in overall revenue growth, supported by strong non- interest income and steady net interest margin growth. In the near-term, the equities market will focus on the implementation of Phase 1 MSCI A-share inclusion factor uplift.
07EQUITIES
Total Returns % 12-months YTD AprilWorld 6.5 16.5 3.5US 12.7 18.3 4.0Europe -3.0 14.8 3.6Japan -7.2 8.1 1.4Asia Ex-Japan -4.1 13.6 1.9
Source: Bank of Singapore
SEAN QUEKHead of Equity Research, Bank of Singapore
HONG KONG / CHINA MARKET OUTLOOK 08
HONG KONG / CHINA MARKET OUTLOOK
Cyclical Trough
“Going into 2Q, we believe it will be an observation period to gauge the sustainability of the recovery and the translation of a rebound in economic activities into corporate earnings.”
• Consolidation in the equities markets continued with MSCI China, CSI300 (a proxy to domestic A-share market) and MSCI HK generating more moderate returns of 2.1%, 1.1% and 1.0%, respectively, in April. Meanwhile, US-China trade negotiations remain unresolved and highly uncertain given President Trump’s tari� threats.
• Economic activities continue to recover. Re�ecting improvements in both industrial activities and prices, industrial pro�t rebounded strongly by 13.9% YoY in March, versus a decline of 14% YoY in Jan-Feb. Hence, the overall 1Q19 industrial pro�t decline of 3.3% YoY probably marked the cyclical bottom.
• Going into 2Q, we believe it will be an observation period to gauge the sustainability of the recovery and the translation of a rebound in economic activities into corporate earnings. We expect implementation of �scal measures like fees and tax cuts to continue and monetary policy to be neutral. Di�erentiated housing policies and city-speci�c measures will probably remain in place.
• At 12.4x forward Price-to-Earnings ratio, MSCI China is trading above its historical average level. We believe market consolidation will continue and further re-rating will hinge on upside surprises in earnings growth. From a sector perspective, we prefer laggards with relatively stable earnings growth, such as Banks and Real Estate.
• Chinese banks have just released their 1Q19 results with overall revenue growth re-accelerated and supported by strong non-interest income and steady net interest margin growth. In the near-term, the equities market will focus on the implementation of Phase 1 MSCI A-share inclusion factor uplift.
BONDS
RAJEEV DE MELLOChief Investment O�cer, Bank of Singapore
09BONDS
Less Sanguine On EM High Yielders
“We reduce our overweight position in Emerging Market High Yield bonds given the current backdrop and increase our position in Developed Market Investment Grade bonds but it still remains underweight versus the benchmark.”
• In �xed income, we reduce our overweight position in Emerging Market (EM) High Yield (HY) bonds. While valuations appear relatively less attractive against the current backdrop, fundamentals are still sound, and we now hold a smaller overweight position.
• EM HY stands to bene�t more from the Federal Reserve’s more dovish policy. Recent earnings announce-ments point to ongoing improvement in credit fundamentals. Default rates are at multi-year lows and distressed ratios do not suggest a rampant spike soon.
• We are neutral on EM investment grade (IG) bonds and increase our position in Developed Market (DM) IG but it remains underweight versus the benchmark.
• We remain underweight in DM IG bonds as there is limited room for already-low yields to fall further.
Best start to year for credit since Global Financial Crises • Global Credit markets enjoyed their
best start collectively since the end of the Global Financial Crises a decade ago. EM Credit is up 5.9%, the best year-to-date start since 2012 with High Yield up 7.1% and Investment Grade up 5.2%. Away from EM, US High Yield is o� to its best start since 2009, up 8.5% while US Investment Grade is up 5.5%, the best start in two decades.
Still broadly constructive on emerging market debt • A benign interest rate outlook and
ongoing dovish Federal Reserve policy stance continues to provide a supportive backdrop for EM credit. However, after the robust start to the year, more challenging valuations, coupled with decelerating global growth and a plethora of potential idiosyncratic roadblocks, the market will be hard pressed to sustain this performance over the remainder of the year.
EM high yielders more attractive than investment grade bonds• The JP Morgan CEMBI high yield bond
index is currently trading at a yield that is 489 basis points higher than US Treasury yields. The 489 points spread is still 140 basis points wider than the lowest spread of 354 basis points achieved in February 2018. This means that there is room for spreads to narrow further, as bond prices rise. With bonds, valuations are deemed as more attractive when spreads are wider. In this respect, the JP Morgan CEMBI high grade bond index is trading at a corresponding 196 basis points spread to US Treasuries, which is lower than the 489 basis points spread for high yield bonds. Also 196 basis points is only 40 basis points wider than the lowest spread for investment grade bonds achieved in February 2018, which leaves little room for spread compression. So, in a nutshell, emerging market high yield bonds are more attractive than emerging market investment grade bonds.
VASU MENONSenior Investment Strategist, Wealth Management Singapore, OCBC Bank
FX & COMMODITIES
10 FX & COMMODITIES
Oil Prices May See A Pullback
“Oil has been enjoying one of its periodic rallies in response to concerns over supply. Over time, we see prices pulling back and remaining in the recent range. As a result, we maintain our 12-month target of US$60 per barrel for WTI and US$65 per barrel for Brent.”
Oil• Oil has been enjoying one of its period-
ic rallies in response to concerns over supply. Concerns over the impact of intensi�ed US sanctions on Iran, together with renewed instability in Libya and Venezuela have contributed to supply concerns as well. However, there is enough supply �exibility among other OPEC producers, as well as price-sensitive US shale investors, that may cap any short-term rally. OPEC has shown an impressive
Currency outlook• Contrary to market expectations for a
rate cut later this year, the Federal Reserve said at its most recent policy meeting that its monetary stance is appropriate right now and it does not see a strong case for cutting or raising rates (that is, the Federal Reserve is adopting a neutral path)
• With the Federal Reserve’s neutral stance, we expect the US Dollar to retain some measure of resilience in the short term. Yield advantage, relative macroeconomic outperformance of the US economy and the Federal Reserve being less dovish than expected, combined should augur well for the greenback.
• Beyond the short term however, note
discipline in controlling output, which has contributed to a period of relative price stability.
• Over time we see oil prices pulling back and remaining in the recent range. As a result, we maintain our 12-month target of US$60 per barrel for WTI and US$65 per barrel for Brent.
Gold• Global growth recovery and an
improvement in risk sentiment have held back gold prices. However, with a
sustained acceleration in the core in�ation rate back to the Federal Reserve’s 2% target still elusive despite US growth rebounding since the start of the year, the Federal Reserve is unlikely to change its dovish tack anytime soon. This is likely to limit gold’s downside risk, resulting in further consolidation of gold prices over the next few months, before rallying further by late 2019.
that rate di�erential dynamics have been moving against the US Dollar in recent weeks and it remains to be seen if the latest Federal Open Market Committee (FOMC) policy stance can alter the tilt.
• More speci�cally, if other major central banks also steer away from being excessively dovish in the coming weeks, the US Dollar could lose some of its shine eventually.
• Apart from the structurally vulnerable Euro and Pound, the US Dollar may also retain positive traction against the cyclical currencies like the Australian Dollar, the Canadian Dollar and the New Zealand Dollar in the short term, as investors assess the veracity of any green shoots narratives.
• The US Dollar’s resilience following the latest FOMC policy meeting may also weigh on Asian currencies in the short term. Beyond the short term however, we expect Asian central banks to be emboldened by the Federal Reserve’s latest attempt at neutrality. Asian central banks have been reluctant to turn outrightly dovish partly because of stubborn regional core in�ation rates. Except for the Indian Rupee and the Philippines peso, expect Asian currencies (including the Singapore Dollar) to be a�ected by the potential resilience of the US Dollar in the coming weeks.
“Hong Kong’s housing market continued to gain momentum in March owing to three factors. These include easing concerns about higher borrowing costs, positive wealth e�ect from the stock market rally and renewed fret about decreased home a�ordability. These favourable factors are expected to support the housing market into the coming months. Still, we believe that the upside for the housing market will be capped in the near term due to cautious sentiments on the back of global headwinds, increasing short-term supply, limited downside for mortgage rates and the risk of the government launching new cooling measures. As such, we revise our forecast for housing price growth from -6.5% YoY to 8% YoY for 2019. Nevertheless, in the long run, the property market may not have much room for correction due to the expected low supply.”
• Hong Kong’s housing transaction volume saw year-on-year (YoY) growth for the �rst time in seven months. At 5231 deals, March’s transaction volume was up 22.7% YoY. This is also the highest level since July 2018. Hong Kong’s property price index exhibited month-on-month (MoM) growth for the third consecutive month and grew by 2.9% in March.
• Three favourable factors helped to release pent-up demand, hence boosting the housing market. First, the Fed’s updated dot plot shows that the US central bank expects no interest rate hikes in 2019, as compared to expectations of two increases just last December. This further eased market concern about higher borrowing costs in Hong Kong where monetary policy mirrors the US’s.
• Second, owing to major central banks’ dovish tone, supposed progress in US-China trade talks and China’s stimulus measures, risk appetite has remained upbeat across the globe. The resultant rally in stock markets (Hang Seng Index rose by 16% year-to-date) in turn increased Hong Kong
households’ wealth e�ect.
• Third, to take advantage of the upbeat sentiment, property developers gradually lifted selling prices. This sparked renewed worries about decreased home a�ordability. Looking forward, we expect these favourable factors to keep supporting the housing market in the coming months.
• Still, we believe that the upside for housing market will be capped in the near term due to several reasons. First, investor sentiment may be cautious amid the global economic slowdown and other external uncertainties such as renewed US-China trade tensions.
• Second, there will be around 5000 units of public housing available in mid-2019 while property developers may bring forward the launch of new projects to avoid the upcoming vacancy tax. This suggests that short-term supply would increase.
• Third, even though the chance of prime rate hike is slim this year, the downside for mortgage rates seems limited due to the decrease in aggregate
balance. One-month HIBOR has stayed above 1.5% since mid-March.
• Fourth, if the property market reaches new highs in the coming months, the possibility of regulators unveiling new cooling measures cannot be ruled out. Taken together, we revise our forecast for housing price growth from -6.5% YoY to 8% YoY for 2019.
• Nevertheless, in the long term, the property market may not have much room for correction due to the expected low supply coming onstream. On the one hand, the government has promised to adjust the public to private housing supply ratio from 6:4 to 7:3. This raises concerns that long-term supply of private housing will decrease accordingly. On the other hand, the vacancy tax may impede property developers from aggressively developing new homes. Indeed, housing completion and housing starts dropped by 17% YoY and 58.9% YoY in 1Q 2019. The government also expects that only 13,700 units of private housing (-5% YoY) will be available in the coming year.
11SPECIALS
SPECIALS
CARIE LIEconomist, Treasury Research, Treasury Division, OCBC Wing Hang
Hong Kong Property Market Continue To Gain Momentum
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