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Yield Remains In Equities
Perspective | 30 July 2013
By: Kelly Teoh
Articles (1) Profile

The question of when the Fed will taper is often followed by how Asian equities will fare – we aim to initiate discussion among the readers in this column.

It is clear upon looking at the M2 chart, that when Quantitative Easing (QE) started after the financial crisis, the rise of the equity markets, both in the US and Asia, are correlated; signalling the flow of hot money into emerging Asian equity markets in the global search for yield. It would be inaccurate to look purely at stimulus when the cause was also the accelerated growth of the Chinese economy; kick-starting the commodity super cycle.

Asian countries, which are top trading partners of China, benefited from the strong Chinese demand, prompting countries like the Philippines, Thailand and Singapore to experience phenomenal returns in the equity markets.

Today, we are at the tail end of QE, with half of the economists surveyed by Bloomberg expecting tapering starting September. Regardless of when we think tapering will occur, the market has priced in this expectation and we have seen US equities continue to rally, with EM Asian equities lagging behind.

The reasons for this laggard can be explained by the poor outlook in the Southeast Asian region due to the slowdown in China and Europe. We don’t expect this headwind to ease anytime soon, given the PMI numbers coming out of China continuously showed contraction. Despite the country’s efforts in support and stimulus, and their effort to keep the economy moving and not keeping their stock market buoyant, we expect this to be sector specific. So, although China and Hong Kong stocks had a strong recovery last week with a 3 percent return, we expect this to be short lived.

The pace of China’s economic growth has spurred debates amongst economists, with some lowering their forecasts to as low as 6 percent, the majority at the official 7 percent to 7.5 percent. The bottom line is, slowing growth in China is imminent; the question is how slow and how much of an implication does it have on us living in this region?

Investors should remain vigilant to weather through this period of uncertainty; we still hold the view that yields remains attractive in equities.

We hold the view that Singapore’s efforts in diversifying its growth from exports to services will be its advantage during the period of uncertainty. Although the Q2 earnings have been lacklustre, with companies unable to produce optimistic outlook, this is unsurprising given the headwinds in global growth. Technically, we see the STI trading in a channel, with support at 3,200, a convincing move to the upside will be if it breaks the 3,260 price level with a price target of 3,310.

Kelly Teoh is a Market Strategist at IG Singapore. She provides daily analysis on financial markets to IG’s client base.

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