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31-03-14, 18:53
http://www.straitstimes.com/archive/sunday/premium/invest/story/how-stay-ahead-era-ultra-low-interest-rates-fades-20140330
How to stay ahead as era of ultra-low interest rates fades
Experts recommend buying developed market equities and short-term bonds
Published on Mar 30, 2014
By Yasmine Yahya Finance Correspondent
Emerging markets set to be ‘hardest hit’
A passing comment was all it took to spark uncertainty and volatility in global markets last week.
But given that the unplanned comment came from Federal Reserve chair Janet Yellen and concerned a possibly sooner-than-expected increase in interest rates, it is no surprise that investors around the world took notice.
Based on Dr Yellen's remark that the Fed may raise short-term interest rates as soon as six months after it ends its bond-buying programme, analysts say this could mean interest rates could be hiked as early as April next year.
Citibank Singapore's head of research and advisory, Ms Joyce Lim, notes this immediately caused volatility to rise in the markets.
"Following this statement, equities and bonds reacted. Most major bourses traded lower during their sessions and bonds across tenures generally sold lower in anticipation of higher interest rates in the horizon," she says.
"The seemingly firmer commitment from the Federal Reserve to normalise monetary policy in a stipulated time frame drove bids for the US dollar, and this weighed down on gold and silver."
UBS Wealth Management's chief investment officer for Southern Asia-Pacific, Mr Kelvin Tay, notes that Dr Yellen has not been the only central banker making such surprising statements lately.
"The European Central Bank has also recently been more hawkish than expected, while the Bank of Japan has disappointed expectations of further easing measures to counter the likely dampener on consumer spending caused by an increase in the consumption tax to 8 per cent in April."
In sum, the era of cheap stimulus money that has supported global asset prices over the past five years is fading.
So what should investors do to stay ahead of the market uncertainties that may follow?
Experts believe investors should not jump and make hasty changes to their portfolios simply because the markets have jumped.
Mr Abel Lim, head of investment sales and advisory for personal financial services at United Overseas Bank, says: "As always, investors should evaluate their portfolios with a long-term view and understand their risk appetite and investment goals instead of just reacting to market sentiment."
But strategists do agree that as the world anticipates the inevitable rise in interest rates, it would be wise for investors to review their portfolios and assess whether they are well positioned for the market trends that likely lie ahead.
Stocks
What all the investment strategists who spoke to The Sunday Times can agree on is that now is a good time for investors to go heavier on stocks than on bonds.
But which stock markets to invest in, and which particular stocks in those markets, is a tad trickier.
Market chatter about a future increase in interest rates has been swirling for the past few months and has already weighed on stock prices in Singapore, says OCBC investment research head Carmen Lee.
This has been particularly pronounced among real estate investment trusts (Reits) and property stocks, which are sensitive to interest rate movements, she says.
The FTSE Straits Times Reit index has been sliding since the Fed began hinting at tapering its bond-buying stimulus programme in May last year, shedding almost 23 per cent over the following three months. It has regained only some 3 per cent since.
"Residential property cooling measures and future rate hikes will not help the situation," Ms Lee says.
"We believe that higher rates will be a dampener to these sectors as they could result in slower demand for property purchases."
Companies that have high debt levels will likely be shunned too as interest rates rise, as that would add to the costs of paying off their loans.
However, Ms Lee says, now that the world is aware that higher rates are on the horizon, most companies should already be looking at refinancing most of their borrowings with some form of fixed-rate structure.
UBS' Mr Tay largely agrees, saying that any investments in Reits will "need to focus intensively on asset quality".
Banking counters, however, might benefit as a rise in interest rates is likely to improve their net interest margins, he notes.
Those margins are basically the profits that banks make on lending money.
For investors looking at stocks beyond Singapore, DBS Private Bank investment strategist Dylan Cheang advises favouring developed market stocks, especially those from the US and Europe.
"We would expect renewed downside risks for emerging markets after the recent reprieve, especially given mounting Chinese shadow banking concerns and prevailing uncertainties over the Black Sea," he says.
"The impact on developed markets will, however, be neutral as policy tightening on the back of a strengthening US economy ultimately augurs well for the outlook of US corporate earnings."
Japanese stocks, however, look vulnerable amid mounting concerns over the impact of a sales tax hike as well as growing impatience over the lack of structural reform, he says.
But Societe Generale Private Bank economist and strategist Xavier Denis disagrees: "On average, valuations in the US equity market look fair to rich. Any downward revision of profits or a sequence of profit warnings could trigger a market correction.
"We have reduced our exposure to US equities, as we prefer euro zone and Japanese equities, where valuations are more attractive."
Bonds
The rising interest rate environment will have a mixed impact on the different types of bonds, says UOB's Mr Lim.
"Generally, fixed coupon bond prices will fall as investors find such bonds less attractive. Floating rate notes, or bonds on a floating rate structure, are expected to move together with the market."
Nikko Asset Management Asia's head of fixed income, Mr Koh Liang Choon, says that in such an environment, bond investors should invest in shorter-maturity bond products.
Bonds with shorter tenures are not affected by rising interest rates as much as longer maturity bonds.
Investors who are open to investing in corporate bonds could consider high-yield ones, Mr Koh adds.
"High-yield bonds provide higher spreads than government bonds and can offset the impact of increasing rates. At the same time, if increasing rates are due to a better economic outlook, the outlook for high-yield bond issuers would be better, improving the performance of their bonds."
Citibank's Ms Lim agrees.
"In this climate, we believe that opportunities in the fixed income space can be offered by... keeping duration short, while searching for higher-yielding bonds that may offset the potential capital losses."
DBS' Mr Cheang adds that negative news surrounding the deceleration in China's economic growth and concerns about its shadow banking sector are likely to make Chinese bonds more unpopular.
Developed versus emerging markets
Looking ahead, strategists are largely more optimistic on developed markets.
Ahead of the Fed rate hike, investors should expect further capital outflows from emerging markets, notes SocGen's Mr Denis.
The euro zone, now quite firmly on a path to economic recovery, is of particular interest, says JP Morgan Private Bank's chief investment strategist, Mr Fan Jiang.
"Spain and Italy in particular, although Germany too has some interesting opportunities."
UOB's Mr Lim agrees, saying that Asian and emerging market stocks in particular are likely to be most affected by rising rates.
Funds which came into the region since the US adopted a near-zero interest rate policy in 2008 are expected to return to the US and developed markets as investors see better investment opportunities and better yields there, he says.
But while that may be the case, quality investments in Asia and other emerging markets might become more attractive in terms of valuation, especially to investors with a long-term view, he notes.
UBS' Mr Tay also believes that some of the growth in the West will rub off on Asia, especially the export-oriented economies of North Asia.
"The strong growth momentum in the US and economic recovery in the euro zone will benefit Asian economies with a high degree of export orientation."
Taiwan, South Korea and China are his top picks, while domes-tically driven markets and markets dependent on favourable global liquidity conditions are likely to underperform. These include Malaysia, Thailand and Singapore.
Most importantly though, strategists advise keeping a diversified portfolio and doing thorough checks before investing in a particular company or asset.
"An evaluation of a company's profitability profile, competitiveness, incumbent management's capability and business strategy is far more crucial in the long run than the ability to predict interest rate directions," notes Nikko's Asian equity head Peter Sartori.
"Investors need to look beyond short-term volatility, minimise unnecessary transaction costs and focus on putting together a diversified portfolio that will deliver more stable longer-term performance."
[email protected]
How to stay ahead as era of ultra-low interest rates fades
Experts recommend buying developed market equities and short-term bonds
Published on Mar 30, 2014
By Yasmine Yahya Finance Correspondent
Emerging markets set to be ‘hardest hit’
A passing comment was all it took to spark uncertainty and volatility in global markets last week.
But given that the unplanned comment came from Federal Reserve chair Janet Yellen and concerned a possibly sooner-than-expected increase in interest rates, it is no surprise that investors around the world took notice.
Based on Dr Yellen's remark that the Fed may raise short-term interest rates as soon as six months after it ends its bond-buying programme, analysts say this could mean interest rates could be hiked as early as April next year.
Citibank Singapore's head of research and advisory, Ms Joyce Lim, notes this immediately caused volatility to rise in the markets.
"Following this statement, equities and bonds reacted. Most major bourses traded lower during their sessions and bonds across tenures generally sold lower in anticipation of higher interest rates in the horizon," she says.
"The seemingly firmer commitment from the Federal Reserve to normalise monetary policy in a stipulated time frame drove bids for the US dollar, and this weighed down on gold and silver."
UBS Wealth Management's chief investment officer for Southern Asia-Pacific, Mr Kelvin Tay, notes that Dr Yellen has not been the only central banker making such surprising statements lately.
"The European Central Bank has also recently been more hawkish than expected, while the Bank of Japan has disappointed expectations of further easing measures to counter the likely dampener on consumer spending caused by an increase in the consumption tax to 8 per cent in April."
In sum, the era of cheap stimulus money that has supported global asset prices over the past five years is fading.
So what should investors do to stay ahead of the market uncertainties that may follow?
Experts believe investors should not jump and make hasty changes to their portfolios simply because the markets have jumped.
Mr Abel Lim, head of investment sales and advisory for personal financial services at United Overseas Bank, says: "As always, investors should evaluate their portfolios with a long-term view and understand their risk appetite and investment goals instead of just reacting to market sentiment."
But strategists do agree that as the world anticipates the inevitable rise in interest rates, it would be wise for investors to review their portfolios and assess whether they are well positioned for the market trends that likely lie ahead.
Stocks
What all the investment strategists who spoke to The Sunday Times can agree on is that now is a good time for investors to go heavier on stocks than on bonds.
But which stock markets to invest in, and which particular stocks in those markets, is a tad trickier.
Market chatter about a future increase in interest rates has been swirling for the past few months and has already weighed on stock prices in Singapore, says OCBC investment research head Carmen Lee.
This has been particularly pronounced among real estate investment trusts (Reits) and property stocks, which are sensitive to interest rate movements, she says.
The FTSE Straits Times Reit index has been sliding since the Fed began hinting at tapering its bond-buying stimulus programme in May last year, shedding almost 23 per cent over the following three months. It has regained only some 3 per cent since.
"Residential property cooling measures and future rate hikes will not help the situation," Ms Lee says.
"We believe that higher rates will be a dampener to these sectors as they could result in slower demand for property purchases."
Companies that have high debt levels will likely be shunned too as interest rates rise, as that would add to the costs of paying off their loans.
However, Ms Lee says, now that the world is aware that higher rates are on the horizon, most companies should already be looking at refinancing most of their borrowings with some form of fixed-rate structure.
UBS' Mr Tay largely agrees, saying that any investments in Reits will "need to focus intensively on asset quality".
Banking counters, however, might benefit as a rise in interest rates is likely to improve their net interest margins, he notes.
Those margins are basically the profits that banks make on lending money.
For investors looking at stocks beyond Singapore, DBS Private Bank investment strategist Dylan Cheang advises favouring developed market stocks, especially those from the US and Europe.
"We would expect renewed downside risks for emerging markets after the recent reprieve, especially given mounting Chinese shadow banking concerns and prevailing uncertainties over the Black Sea," he says.
"The impact on developed markets will, however, be neutral as policy tightening on the back of a strengthening US economy ultimately augurs well for the outlook of US corporate earnings."
Japanese stocks, however, look vulnerable amid mounting concerns over the impact of a sales tax hike as well as growing impatience over the lack of structural reform, he says.
But Societe Generale Private Bank economist and strategist Xavier Denis disagrees: "On average, valuations in the US equity market look fair to rich. Any downward revision of profits or a sequence of profit warnings could trigger a market correction.
"We have reduced our exposure to US equities, as we prefer euro zone and Japanese equities, where valuations are more attractive."
Bonds
The rising interest rate environment will have a mixed impact on the different types of bonds, says UOB's Mr Lim.
"Generally, fixed coupon bond prices will fall as investors find such bonds less attractive. Floating rate notes, or bonds on a floating rate structure, are expected to move together with the market."
Nikko Asset Management Asia's head of fixed income, Mr Koh Liang Choon, says that in such an environment, bond investors should invest in shorter-maturity bond products.
Bonds with shorter tenures are not affected by rising interest rates as much as longer maturity bonds.
Investors who are open to investing in corporate bonds could consider high-yield ones, Mr Koh adds.
"High-yield bonds provide higher spreads than government bonds and can offset the impact of increasing rates. At the same time, if increasing rates are due to a better economic outlook, the outlook for high-yield bond issuers would be better, improving the performance of their bonds."
Citibank's Ms Lim agrees.
"In this climate, we believe that opportunities in the fixed income space can be offered by... keeping duration short, while searching for higher-yielding bonds that may offset the potential capital losses."
DBS' Mr Cheang adds that negative news surrounding the deceleration in China's economic growth and concerns about its shadow banking sector are likely to make Chinese bonds more unpopular.
Developed versus emerging markets
Looking ahead, strategists are largely more optimistic on developed markets.
Ahead of the Fed rate hike, investors should expect further capital outflows from emerging markets, notes SocGen's Mr Denis.
The euro zone, now quite firmly on a path to economic recovery, is of particular interest, says JP Morgan Private Bank's chief investment strategist, Mr Fan Jiang.
"Spain and Italy in particular, although Germany too has some interesting opportunities."
UOB's Mr Lim agrees, saying that Asian and emerging market stocks in particular are likely to be most affected by rising rates.
Funds which came into the region since the US adopted a near-zero interest rate policy in 2008 are expected to return to the US and developed markets as investors see better investment opportunities and better yields there, he says.
But while that may be the case, quality investments in Asia and other emerging markets might become more attractive in terms of valuation, especially to investors with a long-term view, he notes.
UBS' Mr Tay also believes that some of the growth in the West will rub off on Asia, especially the export-oriented economies of North Asia.
"The strong growth momentum in the US and economic recovery in the euro zone will benefit Asian economies with a high degree of export orientation."
Taiwan, South Korea and China are his top picks, while domes-tically driven markets and markets dependent on favourable global liquidity conditions are likely to underperform. These include Malaysia, Thailand and Singapore.
Most importantly though, strategists advise keeping a diversified portfolio and doing thorough checks before investing in a particular company or asset.
"An evaluation of a company's profitability profile, competitiveness, incumbent management's capability and business strategy is far more crucial in the long run than the ability to predict interest rate directions," notes Nikko's Asian equity head Peter Sartori.
"Investors need to look beyond short-term volatility, minimise unnecessary transaction costs and focus on putting together a diversified portfolio that will deliver more stable longer-term performance."
[email protected]