Investment Strategies in a period of Funny Money

Transcription

1 Investment Strategies in a period of Funny Money Kevin Scully, 20 October 2012

2 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.

3 There are no handouts but copies of the slides can be downloaded from this logo at

4 I would like to thank Shareinvestor for inviting me to give this talk

5 World economic growth declines in 2012 with dismal outlook till middle of this decade!!

6 World economic growth falls in 2012 and is expected to be anemic in 2013/ F Country % % % % % World GDP 4.1% 2.7% 2.5% 3.0% 3.3% EU 1.8% 1.6% -0.3% 7.0% 1.4% US 3.0% 1.7% 2.1% 2.4% 2.8% Latest revision 1.9% 2.1% China 10.4% 9.2% 8.2% 8.6% 8.4% Latest revision 7.9% World Trade 13.0% 6.1% 5.3% 7.0% 7.7% Non-oil commodity prices 22.5% 20.7% -8.5% -2.2% -3.1% Source: World Bank Report - June 2012

7 EU GDP growth likely to be muted for next one to two decades! Country % % % % World GDP 3.6% 3.5% 3.6% 2.7% EU 2.3% 0.8% 1.5% 1.7% US 3.3% 0.9% 2.3% 2.3% China 8.1% 10.9% 6.9% 3.5% World Trade 13.0% 6.1% 5.3% 7.0% Source: Conference Board

8 World GDP growth by region 2011 and 2025 Distribution of World GDP 2011 Distribution of World GDP 2025 Rest of the world 41% US 19% Rest of the world 39% US 18% EU 18% EU 16% Japan 6% China 16% Japan 5% China 22%

9 Notwithstanding the poor economic outlook stock markets have rallied in 2012

10 2012 was a good year for stocks but 2011 YTD 2012 Jan Dec-11 % change 18-Oct-12 % change Dow Jones % % Hang Seng Index % % Shanghai Composite % % STI % %

11 Dow from Jan 2011 to Oct 2012 S&P downgrades US Credit rating First Greek election

12 Dow almost back to pre-crisis levels

13 STI from Jan 2011 to Oct 2012 First Greek election Bernanke announces QE3

14 STI about 10% away from pre-crisis levels

15 Liquidity, credit easing in China and hopes of a successful EU solution supporting markets this year 17 June 2012 second Greek election brings in right wing averting a possible Greek default after May 2012 elections were inconclusive 12 September 2012 Bernanke launches QE3 which is open ended..flooding the system with money China starting to ease its credit controls in the wake of slowing GDP

16 Risks of EU collapse or failure still remains

17 High unemployment and fiscal cuts will keep EU GDP subdued for many years Greek unemployment rate 25.1% while unemployment among youth is 54% Spanish unemployment rate 24.6% while youth unemployment is 53% Italian unemployment rate 10.7% while youth unemployment is 36% Any EU government that pushes for austerity measures faces being deposed from power.

18 Public sector spending 40-50% of most EU economies Public sector spending in countries such as Greece, Spain and Italy are between 40-50% of GDP while tax revenues are less than 40%. Any attempts to reduce public debt through spending cuts will aggravate the already weak GDP growth and increase unemployment

19 Top 20 Public debtor nationals in 2010 from CIA World Fact Book Public debt 2010 Country Public Debt US$bn % of GDP Per capita Debt Public debt US$bn in 2008 % change 2008 USA $9,133 62% $29,158 $5, % Japan $8, % $67,303 $7, % Germany $2,446 83% $30,024 $1, % Italy $2, % $34,627 $1, % India $2,107 52% $1,772 $1, % China $1,907 19% $1,427 $1, % France $1,767 82% $27,062 $1, % UK $1,654 76% $26,375 $1, % Brazil $1,281 59% $6,299 $ % Canada $1,117 84% $32,829 $ % Spain $823 60% $17,598 $ % Mexico $577 37% $5,071 $ % Greece $ % $42,216 $ % Netherlands $424 63% $25,152 $ % Turkey $411 43% $5,218 $ % Egypt $398 80% $4,846 $ % Belgium $ % $38,139 $ % Poland $381 53% $9,907 $ % South Korea $331 23% $6,793 $ % Singapore $ % $65,144 not available Taiwan $279 34% $12,075 not available

20 I don t know what the solutions for the EU s problems are but my guess is that the EU cannot be saved and will break-up in two years time

21 US and EU Governments are like this bird..they only have one leg

22 Credit isn t the issue.markets are already flushed with money The only way for both the EU and US to get out of their declining GDP growth is through fiscal expansion! BUT they cant do this because of their huge deficits.!!! Monetary easing is therefore their only instrument but it won t work..because credit isn t the issue interest rates are already near zero

23 That s why we now have QE3. but remember QE1 and QE2 didn t work..so why should QE3

24 So expect a very slow recovery from the US and EU economies. But has all the bad news been discounted???? what happens if Obama loses?

25 then President Romney (who is quite hawkish) might declare war on Iran!!??... that could send oil prices spiraling and force Central Banks to raise interest rates prematurely to check oil push inflation.

26 Let s assume Obama wins then we have to contend with a slow steady recovery and massive liquidity. funny money..

27 So where has the funny money gone??? it s flowed into US Treasuries and also flowing to Asia, in particular property forcing Governments to impose fiscal curbs to avert an asset bubble

28 Singapore

29 STI index up 15.3% in Rise in STI Index inline with other global stock markets in 2012 F&N saga contributed about 3% of this rise alone Index led by banks up 23-29%, oil and gas and yield plays Worst performers were commodities

30 Component stock contributions to STI Index in 2012

31 But Singapore s economic outlook is deteriorating GDP growth slowing and Government forecasts for 2012 lowered Trade growth was negative in last few months Inflation continues to be high boosted by property and transportation Domestic interest rates remain low

32 Singapore GDP growth slows because of its dependence on global economy

33 Trade growth also declining inline with slowing global economy

34 Inflation remains sticky because of property and transport

35 Investment strategy for 2012/13

36 Despite recent rally stocks still look cheap provided that earnings don t disappoint Index PE range Prosp PE Dow 12 to Nikkei to Hang Seng 7 to Shanghai Comp 12.9 to STI Index 10 to

37 Global cyclicals like shipping, commodities, electronics likely to disappoint this reporting season.. current earnings season likely to be disappointing triggering correction

38 If you cannot stomach the volatility.. Stick with defensive yield plays

39 Yield stocks which I recommended in May 2012.no change except for Cerebos & Straco Current Dividen d 18-May- 12 Name Price S$ Yield PE P/B Price S$ % chng Remarks Singapore Telecom % $ % SPH % $ % Cerebos % $ % Privatised Sabana % na 0.89 $ % CapitalMallTrust % na na $ % M % $ % Straco Corporation % na na OCBC 5.1% NCPS % na na $ % UOB 5.05% NCPS % na na $ % Genting Bond 5.125% % na na $ % HPH Trust (US) % na na $ % Current price: Oct 19, 2012

40 short term gains difficult given low volumes and volatile outlook.. wait for correction before starting to accumulate blue chips and selected undervalued mid-caps

41 Earnings disappointment & EU problems to trigger correction providing buying opportunity Start with blue chips first using the levels they fell when the EU and US credit rating crisis started as a reference point to start accumulating. Other major source of capital gains has been,, voluntary delistings or privatisation of electronics and property stocks such as Allgreen, China Healthcare, Beyonics, China Animal, Juken, Cerebos..other tech stocks are trading at 0.3 to 0.4 times price to book and with strong balance sheets are potential targets OSV and rig building market seeing upturn China fiscal spending exposure could see rebound after Central Committee elections in November

42 What blue chips and what price levels should we be looking at?

43 My blue chip stock picks Singapore Telecom accumulate at $3.00 ($3.19) SPH accumulate at $3.60 ($4.07) OCBC accumulate at $8.00 ($9.23) UOB accumulate $16.00 ($18.55) SGX accumulate at $6.00 ($6.80) Keppel Corp accumulate at $7.50 ($11.29) ST Engineering accumulate at $2.60 ($3.51)

44 Summary Global GDP growth slows sharply in EU and China subdued growth expected for EU and US for next decade according to World Bank US and EU policy makers constrained by huge national deficits which prevents them from using much needed fiscal policy for growth High unemployment in EU and huge dependency on public sector for GDP limits ability of EU members to adopt austerity measures for ECB financing US unleashes open-ended QE3 which means that QE1 and QE2 didn t work.in face of weak GDP data Markets likely to remain volatile into the first half of 2013 as stock market volumes are low. Many investors still risk averse and overweight bonds and under-weight equities.

45 Summary cont d If you cannot stomach the volatility, invest in defensive yield plays. Check my dividend yield stock recommendations STI Index facing resistance at 3100 level - disappointing earnings season could trigger correction Stocks remain the cheapest asset class today with most stock markets trading at the low end of their year PE range if earnings aren t downgraded OSV and oil rig builders still seeing upturn China could start fiscal expansion program after its Central Committee elections in November 2012 More privatisations or delistings of stocks trading below NAV in electronics, property..etc

46 Thank You