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Showing posts with label Fed. Show all posts
Showing posts with label Fed. Show all posts

Sunday 3 October 2021

Should we be worried about debt?

 According to Bank Negara’s Financial Stability Review report for the first half of 2021, Malaysia’s household debt to GDP has declined to 89.6% from 93.2% as at end of last year. Although a small achievement,the household debt level remains elevated.

With a current debt-to-gdp of about 125%, the US is not the only country with a huge mountain of debts.

IN recent weeks, global markets were roiled by the mere mention of a four-letter word, debt. From China’s Evergrande Group’s near collapse, as it sat on a mountain of liabilities, to the United States government’s need to raise its debt ceiling.

In Malaysia’s case, we too have not much choice either but to raise our debt ceiling as we look at ways to re-generate the economy with a higher debt room of 65% of gross domestic product (GDP) from 60% currently.

It seems like debt has become one dirty word for investors for the time being, as we all know there is a price to pay when it comes to debt as there is no such thing as a free lunch.

For the US, there is no doubt that they have constantly raised their debt ceiling over the years to ensure they do not default on their obligations.

According to the US Treasury website, since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the nation’s debt limit.

Currently suspended, the US debt ceiling was reset on Aug 1, 2021, to US$28.4 trillion (RM118.9 trillion). For the US, failure is not an option as it will lead to a catastrophic chain reaction to not only the financial market but to the economy as a whole.

According to Treasury Secretary and the former Federal Reserve (Fed) chairperson, Janet Yellen, (pic) the US has never defaulted on its debt before and she was “confident” that the issue would be addressed, despite warning the Congress that the deadline for the debt ceiling is “around Oct 18”.According to Treasury Secretary and the former Federal Reserve (Fed) chairperson, Janet Yellen, (pic) the US has never defaulted on its debt before and she was “confident” that the issue would be addressed, despite warning the Congress that the deadline for the debt ceiling is “around Oct 18”.

According to Treasury Secretary and the former Federal Reserve (Fed) chairperson, Janet Yellen, the US has never defaulted on its debt before and she was “confident” that the issue would be addressed, despite warning the Congress that the deadline for the debt ceiling is “around Oct 18”.

For now, while a nine-week stopgap funding bill has been endorsed by the President on Thursday, which in all likelihood will avoid a government shutdown at least up to Dec 3, 2021, the threat of a US defaulting on its debts remains.

While the US is able to continue to print money by simply passing the law to keep borrowing, the US, just like any other country, cannot go on borrowing forever. With a greater supply of money, sooner or later, interest rates will have to rise as the increase in money supply will likely fuel inflation.

After all, the Fed too expects rates to start rising in 2022 and much more in 2023 onwards.

In the last Federal Open Market Committee just over a week ago, the 10-year and 30-year US benchmark rates have already moved 17 basis points (bps) and 21 bps to 1.50% and 2.06% respectively – as the market begins to price in expectations of the Fed’s tapering move as well as worries if there is going to be lengthy impasse between the Democrats and the Republican or grand old party (GOP) to raise the debt ceiling.

Having said that, as the US has been running budget deficits for the longest time, it would not be too far-fetched to assume that given time, the US will need to raise the debt ceiling yet again in the future.

Hence it was also of no surprise when Yellen commented on Thursday that the debt ceiling ought to be permanently abolished.

In any government’s financial management, it’s either shortfall or revenue, mainly due to inadequate tax collections or excessive spending, which are also a function of debt service charges, and to a certain extent, over-priced development spending or operating expenditures.

With a current debt-to-gdp of about 125%, the US is not the only country with a huge mountain of debts.

So is the rest of the world. In fact, according to the Institute of International Finance (IIF) in its Global Debt Monitor report published on Sept 14, 2021, global debt, which includes government, household and corporate, and bank debt increased by US$4.8 trillion (RM20 trillion) to reach a new alltime high of US$296 trillion (RM1.24 quadrillion).

In essence, over the past six quarters, as the pandemic has caused significant damage to the global economy and unprecedented response from governments, total global debt has expanded by US$36 trillion (RM150.7 trillion) or 13.6% from just about US$260 trillion (RM1.09 quadrillion) as at end of 2019.

Money has to go somewhere

When a debt is raised, be it by the government, a company, or a household, it has to go somewhere. For most governments, debts are mainly raised for development expenditure, and if it is allowed by the constitution, on operating expenditure too.

Debts raised due to the pandemic perhaps has become the norm globally as well, as the government has no choice but to raise the required funding to support the economy.

In the US, the Fed also buys US treasuries and agency mortgage-backed securities and this effectively makes its way into the financial markets.

So while the Fed has expanded its balance sheet by more than 100% since the pandemic, the liquidity it has provided has caused significant gain not only in traditional asset classes but into everything else. Home prices are rising, commodities have boomed and markets are buoyant and cryptos have soared.

In the case of Evergrande Group, many are left wondering if it was a case of a “too-big-to-fail” company. Evergrande became a property developer largely by borrowing.

As a group, they also ventured into other businesses, which among others include electric vehicles, Internet and media production, theme park, football club, and even into mineral water and food production.

Evergrande’s massive business empire, grown out of debt means, while it has substantial assets, it also had huge liabilities. As Beijing has been strong in putting its house in order in the form of new regulations and guidelines for many industries, Evergrande too was not spared.

As early as August last year, the Chinese government had introduced a “three red lines” test for developers to meet if they wanted to borrow more.

This was firstly, liability to asset ratio of not more than 70%; secondly, net debt to equity ratio of not more than 100%; and thirdly cash to short-term debt ratio of more than 1.0.

Hence, the writings were already on the wall on Chinese developers more than a year ago that the regulators were serious in addressing debt-driven growth pursued by these companies. In Evergrande’s case, the debt hit the ceiling.

Why do we go into debt?

Debts taken by individuals are rather straightforward. Of course, there are good debts and bad debts. For most of us, it is for the purchase of big-ticket items like a roof over the head, and for mobility purposes, where most of us own a car.

Of course, we also indulge ourselves with material stuff, either from our savings or credit cards that we will pay off when the time comes. Some of us, due to lack of income or due to financial mismanagement, take on bad debts and that’s where the trouble starts as we are unaware of the consequences of rising personal debts and high-interest cost.

Stories of debts owed to money lenders are common within our society while Bank Negara statistics also show that one of the fastest-growing debt profiles among individuals is personal loans.

This has remained relatively high and has increased by 87.4% over the last five years alone to about Rm73.7bil as at end of August 2021, while its share of the banking system loans outstanding has increased from 2.7% to as much as 4.0% now. 
 
According to Bank Negara’s Financial Stability Review report for the first half of 2021, Malaysia’s household debt to GDP has declined to 89.6% from 93.2% as at end of last year. Although a small achievement, the household debt level remains elevated. For a company, debts should be part of capital management as companies need to not only sustain their business operations but look at opportunities to grow and expand their market share, either via acquisition or via borrowings. However, similar to what we have seen in Evergrande’s case, companies too must observe their own “three-red-lines” to ensure they have the right mix and remain vigilant of its exposure.

Does Malaysia have the room to borrow more?

For Malaysia, with a higher debt ceiling of 65%, the government is effectively allowing itself to have some headway to borrow an additional Rm75bil to support the recovery momentum that most economists now expect will be much stronger in this fourth quarter period and 2022 and as we prepare ourselves for the post-pandemic period.

While we have created this room to enable us to borrow more, we must be mindful to borrow responsibly as debts that are taken today will be borne by future generations.

We also need to chart our way out of this debt-dependency black hole that we have been in since the Asian Financial Crisis of 1998 and get out of this conundrum.

While debt-to-gdp is just a denominator that is divided by a numerator that is steadily growing, we must find ways to manage our overall federal government debt and plan to reduce them post-pandemic.

That is a whole new topic altogether, and next week, this column will explore strategies that Malaysia can deploy to reduce its debt dependency.

  PANKAJ C. KUMAR Pankaj C Kumar is a long-time investment analyst. The views expressed here are his own.   Source link
 

 US federal debt crisis uglier than Evergrande trouble

 
 
 There is much buzz amongst global investors recently about two possible debt defaults, though they are of different proportions in their would-be impact on global equity markets. One is the US federal government's rivers of borrowed money running dry and in urgent need of replenishing. The other is a major Chinese property developer which has run into financial trouble, because the company veered off the road by squandering too much on making electric cars and sponsoring a football club.

As US federal debt default looms, US Treasury Secretary Janet Yellen is facing her biggest test in her eight-month tenure to convince reluctant Republican lawmakers to agree to raise the US' national debt limit, which is currently set at $28.5 trillion. The stakes are high, because if Yellen's effort fails, the US financial system will collapse.

Yellen has called Republican leaders to convey the economic danger which lays ahead, bluntly warning that the Treasury Department's ability to stave off default is limited, and the failure to lift the debt cap by late October would be "catastrophic" for the country and the world.

Six former US treasury secretaries last week sent a letter to top US lawmakers, warning them a default would roil financial markets and blunt economic growth. According to US media reports, Yellen last week also warned the nation's largest banks and financial institutions about the very real risk of a default. She has spoken to chief executives of JPMorgan Chase, Bank of America, BlackRock and Goldman Sachs, briefing them the likely disastrous impact a federal default will produce.

To make things worse, both Democrats and Republicans in the US are at each other's throats now over US President Joe Biden's new $3.5 trillion spending bill, which proposes heavy tax raises on rich families and corporations, and has met fierce opposition from Republican lawmakers. Whether they will compromise on the debt limit, by making a last-minute deal with the White House to reduce Biden's giant spending plan remains to be seen.

Market analysts say if the US government defaults on its colossal debt, a financial system crisis of a magnitude larger than the 2008-09 debacle could occur, which is estimated to lead to an evaporation of $15 trillion in wealth and loss of 6 million jobs in the US. The capital market is now on tenterhooks facing a potential financial time bomb.

Last week, the US' major media outlets also focused their reportage on a possible default of a leading real estate developer in South China, but by all metrics, it is a risk of much smaller scale. The case is being closely watched by China's financial authorities and will never be allowed to develop into a systemic risk.

With regard to the privately-run property developer Evergrande, many fear the knock-on effects of the company's imminent difficulty to pay back principals and interests of borrowed money, including corporate bonds and bank loans. But, even if the city of Shenzhen with its deep pockets, where the company is headquartered, refuses to bail out Evergrande, one bankrupt company can hardly impact the stability of China's financial system, and the risks linked to this possibility have been widely overblown by a hyperventilating media.

Executives at Evergrande are launching a last-ditch rescue effort, trying to sell the company's electric car subsidiary and other assets in China and abroad, including the Guangzhou Evergrande Football Club. It is also selling its housing projects scattered in dozens of Chinese cities at a discount to speed up its cash flow. Whether the company is able to stave off a debt default remains unknown.

Evergrande said on Wednesday that it would make an interest payment on an onshore bonds due Thursday, but the company didn't say whether it had plans to make a $83 million coupon payment due on its US dollar bonds within a month.

The city government of Shenzhen, or the central government in Beijing, has not rushed to bail out Evergande most likely in the belief that the company itself is to blame for the predicament - too much leverage and squandering of borrowed funds ploughed into auto making and other fringe businesses and budgeting largesse. Authorities probably want the case to serve notice to investors at home and abroad, that they need to do their due diligence and enforce accountability on debtors.

However, the central government is almost certain not to tolerate a possible bankruptcy of Evergrande to spill over to draw down the broader Chinese economy, as the central bank has done numerous pressure tests since the 2008 global financial crisis, which was caused by the sub-prime housing debts in the US. Last year, the central bank required property developers to bring down their debt levels below certain thresholds before they are able to borrow more money from financial institutions. And, many Chinese commercial banks have ascertained their exposure to Evergrande is restricted.

So, debt-beleaguered Evergrande is unlikely to produce a firestorm and disrupt China's financial system. In addition, both the government and the central bank have plenty of policy tools, including easing overall monetary policy, to tide over Evergande if it goes under. But of course, the last resort is to bail it out and restructure the company, as China has done with other troubled corporations like HNA, Huarong and Baoshang Bank.

The author is an editor with the Global Times. 
 
 
 
Related:
 
 

 

 Government to table motion on raising statutory debt limit to 65% of GDP 

 https://www.thestar.com.my/business/business-news/2021/09/30/government-to-table-motion-on-raising-statutory-debt-limit-to-65-of-gdp

 

Saturday 6 March 2021

The future of money is digital, but is it bitcoin?

 

Don’t be surprised if by the end of the current decade, the e-wallet on your smartphone resembles a multicurrency account. But instead of dealing with commercial banks, you may be a customer of central banks. Several of them, in fact

 

THE idea that much of today’s cash use will shift to digital tokens is neither faddish nor outlandish, as long as you don’t start equating the future of money with bitcoin.

Sure, governments will borrow some elements of the distributed ledger technology behind private cryptocurrencies, but they will very much want to retain control of what circulates as money in their economies. Some will succeed.

Don’t be surprised if by the end of the current decade, the e-wallet on your smartphone resembles a multicurrency account. But instead of dealing with commercial banks, you may be a customer of central banks. Several of them, in fact.

Sound far-fetched? Apart from the Bahamian Sand Dollar, there’s no official online currency in mass circulation yet.

Still, digital yuan pilots are gathering pace as Beijing aims for a possible rollout coinciding with the 2022 Winter Olympics.

Sweden may be the next major nation to follow suit. The Bank of Japan has no immediate plans, but it acknowledges the possibility “of a surge in public demand” for official digital cash going forward.

Even in the US, which is only toying with the concept, digital payment vehicles that don’t rely on traditional bank accounts can increase financial inclusion among cash users, according to a September 2020 paper by Federal Reserve Bank of Atlanta president Raphael Bostic and others. Treasury Secretary Janet Yellen says a digital dollar is “absolutely worth looking at”.

Once China and the US are both in the fray, virtual money is bound to become a tool for wielding global influence by carving up the world into new currency blocs. That’s because any token will have dual uses outsidethe issuing nation’s borders.

The dollar or yuan that pops up in a phone wallet in Indonesia or India – backed by a solemn promise of taxpayers in the US or China – could be used for buying goods, services or assets internationally.

Just as easily, this new money can end up replacing domestic currency in people’s daily lives. Although this is no different from traditional dollarisation that occurs in countries plagued by inflation and exchange rate volatility, the convenience and accessibility of central bank-issued digital cash could enable “substitution at a faster pace and larger scale,” according to Tao Zhang, a deputy managing director at the International Monetary Fund (IMF). To stay in control of monetary policy, authorities in smaller economies will need their tokens to be attractive in domestic situations.

The goal for bigger nations may be different: China and the US may want to offer add-ons that make the E-CNY or the Fedcoin the preferred choice for foreigners in settling international claims.

An efficient future will be one in which all central banks’ digital currencies are interoperable. In other words, they’ll interact with one another – and with private-sector alternatives including bitcoin, says Sky Guo, the chief executive of Cypherium.

The US enterprise blockchain startup is a member of the Fed’s Faster Payments Council and of the digital monetary institute of the Official Monetary and Financial Institutions Forum, or OMFIF, a central banking think tank.

Guo is working on the challenges that will arise when sovereign money gets digitised:

How to process high volumes of transactions quickly, cheaply, and with a strong consensus among registries updated automatically across a network? How to give people a sense of privacy in everyday payments, even after the anonymity of cash is lost?

Central banks will have to make choices. Not all smartphones can run advanced virtual machines, effortlessly executing the software code for automated contracts.

Choose the wrong technology, and the unbanked population might once again get excluded. Ditto for overseas remittances, a US$124 trillion-a-year opportunity for tokens to replace an expensive network of correspondent banks moving money by exchanging SWIFT messages.

But it won’t work for small transfers if the computing power to verify transactions in a decentralised network costs too much. The ideal technology doesn’t necessarily have to be a blockchain, but it should be something “lightweight, flexible and capable of working with legacy systems,” Guo says. Above all, the distributed ledger must be transparent.

There will be other obstacles. “A driving force for lobbying against central bank digital currencies has been established among payment processing giants like Paypal, Venmo and Stripe,” Guo tells me. “Fedcoin won’t need these intermediaries to send funds.

As these companies fall victim to innovation, it’ll be interesting to see how they try to protect themselves from disruption.”

Paypal Holdings Inc, which owns the person-to-person service Venmo, contests Guo’s assertion as false. Supporting and distributing central bank digital currencies is part of Paypal’s vision of an inclusive future, CEO Dan Schulman told investors last month.

Former Bank of England governor Mike Carney, who has proposed an alternative to the dollar through a network of central bank digital currencies, recently joined the board of Stripe Inc.

One way to resolve the tension may be to co-opt the private sector. As IMF economists Tobias Adrian and Tommaso ManciniGriffoli have argued, an official virtual currency could be like Apple’s IOS operating system, with commercial banks and e-money providers running apps on top of it.

The Apple Health app may be fine for a lay user; an athlete will want something more sophisticated. Money could go the same way.

Countries will also have to cooperate with one another. Take M-CBDC Bridge. The project for 24/7 cross-border remittances using central bank digital currencies was begun by the Hong Kong Monetary Authority and the Bank of Thailand, but has now been joined by the central bank of the United Arab Emirates and the People’s Bank of China. ─ Bloomberg

Source link


Deccan Herald
.
The future of money is digital but is it Bitcoin?

https://www.deccanherald.com/business/business-news/the-future-of-money-is-digital-but-is-it-bitcoin-958338.html 


The future of money is digital, but is it bitcoin?

 

 

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Blockchain: Internet of Value/ Currency of Trust; Private cryptocurrency a misallocation among blockchain technology, say research & economist

 

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Blockchain technology allowed 17 million people to travel between China’s Guangdong province and Macau amid the 

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Thursday 26 November 2015

If China killed commodities super cycle, Fed is about to bury it


Preview of the share image

Has the Commodities Supercycle Run Its Course?

bloomberg.com
Gordon Johnson, Axiom Capital Management analyst, discusses the outlook for commodities and the prospects for SolarCity with Bloomberg's Carol Massar on "Bloomberg Markets." (Source: Bloomberg)


For commodities, it’s like the 21st century never happened.

The last time the Bloomberg Commodity Index of investor returns was this low, Apple Inc.’s best-selling product was a desktop computer, and you could pay for it with francs and deutsche marks.

The gauge tracking the performance of 22 natural resources has plunged two-thirds from its peak, to the lowest level since 1999.

That shows it’s back to square one for the so-called commodity super cycle, a hunger for coal, oil and metals from Chinese manufacturers that powered a bull market for about a decade until 2011.

“In China, you had 1.3 billion people industrializing -- something on that scale has never been seen before,” said Andrew Lapping, deputy chief investment officer at Allan Gray Ltd., a manager of $33 billion of assets in Cape Town. “But there’s just no way that can continue indefinitely. You can only consume so much.”


If slowing Chinese growth, now headed for its weakest pace in 25 years, put the first nail in the coffin of the super cycle, the Federal Reserve is about to hammer in the last.

The first U.S. interest rate increase since 2006 is expected next month by a majority of investors, helping push the dollar up by about 9 percent against a basket of 10 major currencies this year.

That only adds to the woes of commodities, mostly priced in dollars, by cutting the spending power of global raw-materials buyers and making other assets that generate yields such as bonds and equities more attractive for investors.


The Bloomberg Commodity Index takes into account roll costs and gains in investing in futures markets to reflect actual returns. By comparison, a spot index that tracks raw materials prices fell to a more than six-year low Friday, and a gauge of industry shares to the weakest since 2008 on Sept. 29.

The biggest decliners in the mining index, which is down 31 percent this year, are copper producers First Quantum Minerals Ltd., Glencore Plc and Freeport-McMoran Inc.

With record demand through the 2000s, commodity producers such as Total SA, Rio Tinto Group and Anglo American Plc invested billions in long-term capital projects that have left the world awash with oil, natural gas, iron ore and copper just as Chinese growth wanes.

"Without fail, every single industrial commodity company allocated capital horrendously over the last 10 years,” Lapping said.

Drowning in Oil

Oil is among the most oversupplied. Even as prices sank 60 percent from June 2014, stockpiles have swollen to an all-time high of almost 3 billion barrels, according to the International Energy Agency.

That’s due to record output in the U.S. and a decision by the Organization of Petroleum Exporting Countries to keep pumping above its target of 30 million barrels a day to maintain market share and squeeze out higher-cost producers.

A Fed move on rates and accompanying gains in the dollar will make it harder to mop up excesses in raw-materials supply.

Mining and drilling costs often paid in other currencies will shrink relative to the dollars earned from selling oil and metals in global markets as the U.S. exchange rate appreciates.

Russia’s ruble is down more than 30 percent against the dollar in the past year, helping to maintain the profitability of the country’s steel and nickel producers and allowing them to maintain output levels.

"The problem with lower currencies is operations that were under water a year ago are all of a sudden profitable on a cash basis," said Charl Malan, who helps manage $31 billion at Van Eck Global in New York. "Why would you shut them?"

While some world-class operators such as Glencore plan to cut copper and zinc output, others like iron-ore producers BHP Billiton Ltd., Vale SA and Rio Tinto are locked in a "rush to the bottom" as they seek to drive out competitors by maintaining supply even as prices slump, according to David Wilson, director of metals research at Citigroup Inc.

“With the momentum on the downside, it’s very difficult to say that we’re reaching a bottom,” Wilson said.

Source: Bloomberg

Related post:


Sunday 30 September 2012

QE3: Get ready for influx of cash!

QE3 set to boost confidence but experts warn against simply loading up on equities.

A RIVER of cash is likely to wash over the global financial system soon, thanks to decisions by major central banks to unleash their monetary “bazookas” on the faltering global economy.

The money-printing ball started rolling last month when the European Central Bank (ECB) said it would make “unlimited” purchases of bonds from countries such as Italy and Spain.

The US Federal Reserve was next, announcing that a third round of asset purchases, known as quantitative easing (QE3), would start at the rate of US$40bil (RM122.5bil) a month until the job market recovers “significantly”.

It was soon followed by the Bank of Japan, which said it would extend its asset-purchasing scheme by 10 trillion yen.

A big chunk of that excess liquidity will likely flow into Asian financial markets as investors search for better returns, given the low interest rates in most countries.

It is tempting to think investors can simply load up on equities and ride a rally like previous rounds of quantitative easing but this is not so, say experts.

They believe that while QE3 will boost confidence and support markets, the euphoria will be checked by the reality that the real economy is in the doldrums.

The list of worries is long: China is decelerating fast, Europe remains mired in recession, and many US consumers are still looking for jobs.

With countervailing forces at work, wealth managers and analysts have plenty of ideas on what to buy and what to avoid.

Buy
> US, Asian equities 

Analysts believe the flood of money will do much to support markets, but not all will do equally well.

UBS Wealth Management regional chief investment officer Kelvin Tay believes defensive bourses such as Singapore and Malaysia will do less well than markets such as Taiwan, Hong Kong and China.

He added that what is also likely to boost shares in Asia, outside of Japan, is simply that some stock markets look cheap, based on a metric known as price-to-earnings ratio. Shares could rise 12% from current levels, he said.

DBS regional equity strategist Joanne Goh said the bank recently recommended an “overweight” for Chinese and Hong Kong stock markets, indicating that investors should buy into these markets. These markets are likely to do well because they are large, open and undervalued, she added.

Analysts’ views were slightly more mixed about US equities, with some believing they will get a boost from QE3, while others warned that the impact would be limited.

Matthew Rubin, Neuberger Berman’s director of investment strategy, said American shares do look relatively cheap compared with investment-grade bonds.

“The additional liquidity should further support a rise in prices,” said Rubin, who helps set strategy at the fund, which manages assets of US$194bil (RM593.9bil).

But Sean Quek, Bank of Singapore’s head of equity research, said past experience shows that US equities benefit less from quantitative easing.

“Also, current valuations are less attractive versus previous QE periods as well as global peers,” he said, adding that he has a neutral rating on American shares.

> Gold

Most analysts believe stocking up on gold and gold-related assets is a good move.

First, with the amount of cash expanding in the system, there could be the risk of higher inflation. And with the value of the currency likely to fall due to the huge amounts of cash flowing about, investors will want “real assets” to protect themselves.

Rubin noted: “Real assets such as precious metals will act as inflation hedges and are per­ceived as diversifiers to holding fiat currency.”

Chew Soon Gek, head of strategy and economic research for the Asia-Pacific at Credit Suisse Private Banking, believes precious metals will outperform other commodities.

“They are the most sensitive to monetary easing, inflation expectations and real interest rates,” she said.

She tips gold to hit US$1,850 (RM5,663.80) per ounce in a year, from the US$1,760 (RM5,388.40) now.

> High-yield securities

With interest rates likely to stay near zero for the next two years, analysts believe that the demand for high-yielding securities will remain strong.

In particular, companies that pay a good dividend and have strong balance sheets are likely to attract investors, say analysts.

“With the QE expected to suppress yields and the Fed’s commitment to keep interest rates low until mid-2015, dividends will remain an important driver of total returns,” said Quek.

He noted that firms giving investors good payouts have generally performed better in the past two years when rates have fallen.

Rubin also believes that high-yield corporate bonds as well as real estate investment trusts are good places to park money.

“The search for yield in a low interest rate environment will continue,” he said.

Avoid
> US dollar 

If there is one asset class that most analysts believe is to be avoided, it is the greenback.

The flood of US dollars into the system through QE3 will lead to what analysts term a “debasement” of the currency – essentially a depreciation. In fact, Rubin believes that cash, and not just the greenback, should be avoided.

“QE3 increases potential for inflation and depreciation of the dollar,” he said.

This may also affect Singapore investors who have taken positions in US equities, as the currency may erode gains or increase losses due to the exchange rate. Likewise, investors might want to avoid the euro.

The poor economic outlook and flood of cash into the market will likely send it down against Asian currencies such as the Singdollar.

Uncertain
> European equities

For investors who take a riskier approach to investing, European stock markets do offer an option. After all, some of the best bargains are made when everyone else is deserting them, said Henderson Global Investors.

The asset management firm said that even though the outlook is gloomy, many firms remain healthy, with global operations.

But Quek is cautious on the region, simply because many question marks over the overall health of the economy remain.

A recent run-up in share prices there, as a result of the ECB’s unlimited bond purchase decision, has also made European stocks more expensive and less attractive, he noted. “As such, we are maintaining a negative stance on Europe.”

> Property 

While previous rounds of quantitative easing may have been one of the causes of property price inflation, this may not be repeated with this latest round.

Singapore has introduced the additional buyer’s stamp duty of 10% that foreigners incur when buying homes. Tay thinks that while QE3 may keep property resilient, price rises will be capped.

But QE3 could still end up boosting the appeal of US property, says Dr Lee Boon Keng, head of the investment solutions group for Singapore at Bank Julius Baer, noting that the housing conditions were improving and rebounding from historical lows.

“The US economy continues a moderate recovery, aided by rising property prices which should have a multiplier effect on consumption and investment,” he said. — The Sunday Times/Asia News Network

By AARON LOW

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