Irrational exuberance?

Published July 16, 2007

THIS WEEK'S TOPIC

Irrational exuberance?

Will the financial and property markets continue to boom, or do investors need to be more cautious? When, if at all, should the authorities step in?

Sanjay Prabhakaran
Director, South-east Asia
Baxter Healthcare (Asia) Pte Ltd

I BELIEVE the current financial and property boom will be sustained for a few more years at least. However, the factors that will determine the growth potential of the financial and property sectors will differ.

Singapore has successfully expanded and diversified its financial markets over the past several years. Whether or not the ongoing bull run will continue depends partly on the government's ability to adjust national policies in response to (or in anticipation of) developments elsewhere. Such tweaks could, for example, be designed to reduce the dependence on the US economy, or to increase our trade surpluses and foreign exchange reserves.

In addition, the current financial boom differs from earlier bull runs in that there is a greater spread of wealth within the investment community. In other words, there are more investors keen on gaining exposure in the markets of their choice. The financial services providers should continue to lower the barriers to investment and make new asset classes available to retail investors, to facilitate the goal of wealth creation.

On the property front, the government has been successful in attracting high-net-worth individuals to Singapore, as well as developing new growth engines - such as biotechnology and healthcare - for the local economy. These should ensure that the residential and rental markets for mid- to high-end properties stay robust. Then again, the government should never allow the market to overheat or the high-net-worth individuals could relocate elsewhere.

What's fuelling the markets

Charles Reed
CEO
interTouch

THE boom in the property market is about the same as it was just before the Asian financial crisis almost a decade ago. But the recent Reuters Real Estate Summit in Singapore highlighted that with rentals peaking, investors are not yet done with the lucrative property market, which still holds huge potential. Investors, and now more speculators, are certainly not yet done, but is there still huge potential?

With booming Asian economies, property investment in the region is escalating and with more developers trying to get a piece of the pie, funding in this sector shows no sign of slowing down.

There is demand among the growing middle classes in China, India and in other Asian cities, to invest in their own property markets, thus fuelling the industry further. I find it hard to believe that the growing middle classes in China or India can afford the current runaway prices!

What is fuelling the Singapore property sector and the stock market at the moment is the excessive liquidity in the market from the newly-minted millionaires created by the collective sales fever. Overnight, thousands of people suddenly find themselves with millions of dollars of cash to play with.

Needless to say, the authorities need to observe developments quite closely as policy and regulations are invaluable. However, there is no need to step in as yet as competition is important for the industry to fully reach its potential. The way forward is greater liberalisation and openness from industry regulators to attract healthier competition.

Derek Goh
Executive Chairman/Group CEO
Serial System Ltd

ECONOMIC cycles are part and parcel of the system that the world economies operate in. These are economic forces (micro and macro) that influence the daily lives of every individual.

The financial and property markets are booming because of the bigger appetite of fast growing economies like China, India and Japan. Though each economic cycle lasts an average of 10 to 12 years, the asset bubble is not going to burst just yet.

Government intervention in the markets is unnecessary as the Asian economies are now more resilient and able to withstand bigger swings.

Businesses are not expecting any downturn in the next 12-18 months as major events on the horizon are stabilisers for the global economy, namely, the Beijing Olympics in August 2008 and the US presidential election in December 2008.

Beyond 2008, there is less certainty, as the US economy is losing momentum and China's trade surplus would be too huge for the US balance of trade. Potential trade wars may be triggered by an aggressive new US president then.

For 2007 and 2008 overall, the Singapore economy will not be greatly shaken by any financial or property tsunami.

Tan Kok Leong
Principal
TKL Consulting

THE current property and financial market boom should probably be viewed as the upswing of a business cycle, in the wake of globalisation and technological changes. It is a feature of capitalism at work. The outlook for the introduction and spread of technologies remains favourable while relatively low interest rates favour investment, purchase of homes and consumer durables.

The financial crisis 10 years ago was probably caused by volatile short-term capital flows which attacked weaknesses in foreign reserves, the international exchange rate system and capital markets simultaneously. Future problems, perhaps, are likely to be caused more by disorderly unwinding of global imbalances.

A word of caution

Alfred Wong
Managing Director/Architect
WongPartnership

THERE is definitely a feeling of euphoria in Singapore.

The rate at which residential property prices are rising does not reflect the increase in the earning power of Singaporeans. This is, of course, with the exception of those in the finance and real estate sectors. However, judging by car sales at the car show on July 8 when $31 million worth of cars were sold, it would appear that the average Singaporean is riding on a wave of positive expectations from the integrated resorts and the projected population growth.

I think that many investors do not remember the lessons of the last Asian crisis. I also expect the authorities to step in if the situation approaches a critical point.

Sam Yap S G
Executive Chairman
Cherie Hearts Group

THE property market is currently overheating from speculative pressure, with prices soaring to levels not backed by economic fundamentals. This is sustained by easy credit from banks to speculators and property developers. Once the bubble bursts, a potentially destructive impact could be unleashed on our economy, with home buyers, property developers and banks being the likely victims.

The steps taken by the government to ease the pressure, while encouraging, are insufficient. More proactive measures, such as releasing more land for residential and commercial development and stricter guidelines on bank lending may be needed. Urgent action is required for a soft landing.

Annie Yap
CEO
The GMP Group

COMPARED with a decade ago, we can confidently say that in terms of business or leisure, Singapore can appeal to almost anyone today. Financially speaking, with greater collaboration with China, India and the Middle East, Singapore's financial environment is more diversified than ever. Having our eggs in more baskets means we are more resilient and stable. With upcoming developments in the works, we will see Singapore attract interest from an increased breadth and depth of investors.

But we cannot let lofty enthusiasm become dangerous. Over-speculation can jeopardise Singapore's plans for growth. Therefore, regulatory bodies should take up the role of observers, engaging in soft policing to calm over-excitement before sectors overheat. That way, markets operate smarter without compromising their autonomy. For example, the use of media in encouraging balanced discussions about the property market has helped in making the sector and the general public pause to take stock.

Lars Ronning
President, North & South-east Asia, India, Australia & New Zealand
Tandberg

AS financial and property markets continue to boom, caution should be exercised to establish that the current situation is a true reflection of economic growth and not just a result of speculative buying by over-zealous investors.

Amid the air of optimism and euphoria, the authorities need to prevent such inflationary pressures from increasing the cost of doing business here and eroding Singapore's attractiveness as a business hub to foreign and local investors.

Tan Ser Giam
Chairman
Eastern Navigation Pte Ltd

SINGAPORE'S financial market is flush with funds and this will continue to push the stock market higher, barring unforeseen events. The property market will likewise be strong, although the risk of the government stepping in to cool the market remains high. There are rumblings from businesses about rising rentals adding to the cost of doing business. One of the things to watch is the US economy. If it goes into recession, all bets on the stock and property markets are off.

Joel G. Momberger
Managing Director
Informatica SEA Pte Ltd

AS a small open economy, Singapore is extremely vulnerable to external developments, especially in the surrounding region. While it has withstood the Asian financial crisis 10 years ago and even maintained a relatively favourable economic performance, its close links with the regional economies suggest it will not get away completely unscathed should anything untoward happen.

However, Singapore's track record of prudent fiscal and monetary policies has been a great asset and this will help reassure investors of its commitment to consolidate its position as a financial centre for the region.

On government intervention

Lim Soon Hock
Managing Director
Plan-B ICAG Pte Ltd

WHAT goes up must come down, and this applies to both the financial and property markets, as has been proven in the past. Astute investors will watch the cycle very carefully to look for early signals of correction and downturn.

The wild card amid the optimism and euphoria is the US dollar. Should the US dollar depreciate sharply, there will be shock waves throughout the global economic system. While countries in Europe and Asia may benefit from the weakening of the US dollar, it will only be temporary; the US being the economic engine and technology innovator of the world will import less, because it will cost more. This will have adverse repercussions on the economies of these countries, and as a consequence, on the financial and property markets.

Our authorities should only step in where necessary to prevent a crisis. For example, to prevent an over-strengthening of the Singapore dollar, or property prices escalating beyond the means of the man in the street. I am confident the government will do everything possible to ensure that the gap between the rich and the poor will not be left to widen without timely intervention.

Wee Piew
CEO
HG Metal Manufacturing Ltd

THERE are a lot of positives going for the Singapore economy, which has been posting strong growth in the last couple of years. In the coming years, we are likely to see continued growth in the services sector - like financial services and tourism - with the opening of the integrated resorts.

Hence, the current boom in property and financial services is not without fundamentals. There is definitely more capital flowing into Singapore to take advantage of its growth in the coming years. As such, I do not see an asset bubble at this point in time. After all, the property market has only just been on an uptrend in the past year or so while a property boom typically lasts for a few years.

However, if the recent sharp rise continues next year - especially if it spreads to mass market residential property and the HDB market - then I think the authorities should consider taking some steps to ensure more supply of land for developers. On the other hand, I think stricter measures like those imposed in 1996 should be avoided as it is better left to the market to find a price equilibrium.

Eric Hoh
Vice-President, Asia South Region
Symantec

IT is heartening to see how Singapore has accelerated in terms of economic growth which comes amid a thriving stock market, a strong economy and a property boom. Singapore is likely to continue on its economic upswing with the much anticipated launch of the integrated resorts and hosting of the Formula 1 Grand Prix race.

As many continue to leverage on the increasing attractiveness of Singapore as a global city, I feel that the property and financial boom will continue in the short to medium term. For now, I agree with Senior Minister Goh Chok Tong that we should not be overly concerned and let the market find its own level.

Ng Kong Yeam
Group Executive Chairman
Sino-America Tours Corporation Pte Ltd

BOOMS and busts will always occur, if one reads economic and financial history. In 1985, property prices in Singapore were very low, nothwithstanding efforts by developers to promote sales. Ten years later, in 1995, prices shot up. Then in 1997, the property and stock markets fell due to the Asian financial crisis.

Supply and demand dictate the rise and fall of prices of stocks and properties. Expensive goods are sold based on wants rather than needs. In my view, the boom in Singapore will last two more years, and then a bust will begin to take place. In the US, the housing bust has already started. Investors should figure out for themselves when they should be cautious. Authorities cannot possibly regulate the rise and fall of prices.

Wong Teek Son
Executive Chairman and CEO
Riverstone Holdings Ltd

THERE is a tripartite relationship between businesses, authorities and investors for the market to continue to boom.

Businesses need to build credible operating models to withstand the economic fluctuations. Riverstone, for example, builds its foundations on value propositions by customising products to fit every customer's needs, leading to long-term relationships.

Investors need to examine their options carefully when making their investment decision. Singapore has a good corporate governance structure and investors have data available for them to make educated decisions. The authorities need to continuously work with the market to ensure that information is transparent, adequate and responsibly reported, and leave the decision making to the open market.