Welcome ‘09, year of bubbles and bonds

Welcome ‘09, year of bubbles and bonds

Many analysts are bracing for a sombre year but some predict a rebound

By TEH HOOI LING

(SINGAPORE) An enormous amount of evidence suggests that humans simply can’t forecast. Perhaps the indisputable evidence is right in front of us. What happened in 2008 was beyond the wildest expectations of most of the market participants.

Grim picture: The bubbles in US Treasuries and the US dollar could burst this year, marking the start of a long cyclical trend of rising interest rates — AP
Still, investors like to know what the future will look like. So just as a pure intellectual exercise, we polled a few market watchers who are still brave enough to share their views on how 2009 will turn out. The predictions, we tell our respondents, can be serious or fun ones.

As it turned out, not many are in the mood for fun. Most opted to present a very grim picture of the year ahead.

Pradeep Verma, who has 25 years of investment experience and has worked with major financial institutions in London, Dubai, Bahrain and Luxembourg, said as a result of the very loose monetary and fiscal policies and poor regulatory policies of the US government since the 1990s, five big bubbles were created: in housing, credit, equity, US Treasury and the US dollar.

‘In 2008, we saw the bursting of the first three bubbles. We will see the bursting of the remaining two bubbles in 2009. That would rock the markets, in my view,’ said Mr Verma. Hence high volatility is likely to persist and markets could test new lows, he said. Mr Verma moved from London to Singapore in September 2008 to set up his investment advisory company, Quant Invest.

‘Money printing is the only thing the government can do to keep the system going, and this will only result in inflation. I would never have believed that the world’s largest creditor would have been able to get 30-year credit at below 3 per cent.’

- Pradeep Verma,
who has 25 years of investment experience and has worked with major financial institutions in London, Dubai, Bahrain and Luxembourg

The coming inflation is inevitable, he added. ‘Money printing is the only thing the government can do to keep the system going, and this will only result in inflation. I would never have believed that the world’s largest creditor would have been able to get 30-year credit at below 3 per cent.’

This, he said, just confirms that the US is monetising its debts as US Federal Reserve chairman Ben Bernanke said he would. ‘These rates will not last and their reversal will mark the beginning of a long lasting cyclical trend of rising interest rates. As the decline of the US dollar accelerates, yields will increase very quickly as the reality bites all those investors sitting in low yields.’

Citi Global Wealth Management & Global Consumer Group’s Haren Shah said the US bank expects global economic growth to contract in 2009.

‘Although the severity of the contraction will likely ease in the second half of the year, there is nonetheless a risk that the recession could be more protracted than anticipated and a meaningful recovery will not take place until 2010 as consumers and corporates take a longer-than-expected period to ‘de-leverage’ their respective balance sheets,’ he said.

As for CIMB-GK economist Song Seng Wun, he said ‘the only prediction which has some certainty of playing out is the worst contraction in Singapore since independence’.

‘There may be one final ra ra when Barack Obama implements his stimulus package before the market goes back to reality,’ he said.

Given the severity of the situation, Mr Song said there is a chance the Singapore government may give a tax holiday to taxpayers.

This year (2009) will be a perfect time to do that, given the significant surpluses built up by the government in the last few years. ‘The government goodies of no tax will allow businesses to hang on to people,’ he said.

A tax holiday will also be a relief for individuals, said Stephanie Wong, head of research at Kim Eng Securities. Due to the huge bonuses in early 2008, many especially those in the financial sector will be slapped with a huge tax bill in 2009. This comes at a time when a number have been retrenched and others have had their pay docked.

‘So some could find themselves in a negative cash flow situation, in that their income tax payment exceeds their income,’ she said.

Added Mr Song, after the tax holiday, the Singapore government may take the opportunity to move to a Pay As You Earn tax system - that is you pay your taxes at the same time as you are paid your salaries. Malaysia gave a tax holiday and moved to the PAYE tax system during the Asian financial crisis, he noted.

Markedly more bullish is Kim Eng’s Ms Wong. ‘We see the Singapore economy technically coming out of recession by the second quarter of this year (2009),’ she said, adding that the stock market is not expected to breach its last October low and the Straits Times Index could end 2009 some 15 per cent higher than 2008.

But most agree that the first half of the year will remain volatile. So what should investors do?

‘Under these difficult market conditions, diversification, dollar-cost-averaging and portfolio rebalancing remain good advice for anyone investing for the long haul,’ said Mr Verma. ‘By systematically rebalancing, one is forcing himself to buy low and dollar- cost-averaging really pays off as it forces investors away from trying to time the market, which is a losing game.’

For 2009, Mr Verma recommends the following investment strategies, in order of priority:

Bonds: Sell US Treasury and buy investment grade bonds.

Currencies: Sell US dollar and buy a basket of currencies like the euro, Swiss franc, Australian and Singapore dollars.

Commodities: Buy gold, energy and agriculture.

Equities: Sell S&P 500 Index and buy sectors like alternative energy, infrastructure and bio-tech.

Real estate: Avoid.

Hedge funds and private equities: Avoid

The only person to have the mood to comtemplate the lighter side of things is Carmen Lee, head of research at OCBC Investment Research. ‘As Asia moves into the Year of the Ox in 2009, which is the distant cousin of the American bull, this will hopefully put Asia in a more favourable place than the US.

‘Another key event to watch is the possible offspring of the prized China pandas, Tuan Tuan and Yuan Yuan, currently residing in Taiwan. An auspicious name has already been picked and he is likely to be called He Ping.

‘At home, and with Singapore’s famed chicken rice selling for as much as $50 per plate in Russia, chicken rice sellers may venture out beyond Singapore’s shores for higher margin opportunities. There will be more sales to beat the annual Great Singapore Sale, but the illusive Hermes Birkin bag is likely to continue to stay out of the reach of most Singaporeans,’ she said.

Source : Business Times - 01 Jan 2009

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