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[SINGAPORE] Almost seven months after speculation of the move first roiled Asian markets, the US Federal Reserve finally made a widely watched decision to reduce next month an unprecedented, massive, open-ended and disruptive bond-buying stimulus programme.
At the same time, the Fed assuaged market fears of tightened monetary conditions by indicating that short-term interest rates will be near-zero for longer. Low interest rates boost stock and property prices and ensure that businesses who want to invest amid a global economic recovery can do so with minimal borrowing costs.
The fine balance struck between what would seem a tightening stance and assurances that loose monetary conditions would remain for a while more caused US stock markets to surge to all-time highs and stock markets in Asia to stay relatively calm. Markets in Japan, Taiwan, Australia and Indonesia rose, while Malaysia and Korea were flat. Stocks in China, Hong Kong, India, Thailand and the Philippines fell. Meanwhile, European equities rallied.
The Singapore market was up slightly, closing at 3,070.23 points, up 0.28 per cent or 8.45 points. Observers pointed out that Singapore's safe haven characteristics should withstand taper-inspired capital outflows.
But Joanne Goh, regional equity strategist at DBS Bank, noted that low interest rates and strong inflows had driven up Singapore's currency and property market, leading to higher risks of liquidity outflows upon tapering. This is mitigated somewhat by its exposure to global growth. "Singapore stocks are likely to be trapped in a range going forward until we have more growth confirmation," she said.
Interest rate-sensitive companies include real estate developers with debt burdens, real estate investment trusts (Reits) and banks. Asked about the impact of tapering, Jason Ho, head of asset liability management at OCBC Bank, said the bank does not anticipate interest rates rising in the near term, but "will look to manage its assets and liabilities portfolios given the longer-term outlook on interest rates".
A City Developments spokesperson told The Business Times that the property and hotel player "does not expect any significant impact in the short term" from tapering. Other factors like property cooling measures and general economic and geopolitical developments will also affect the company and industry, she said.
On the whole, Asian equities are not expected to do too well, with fundamentals a concern. Andrew Swan, head of Asian equities at asset manager BlackRock, said volatility will increase for countries more dependent on foreign financing as tapering continues throughout 2014.
However, the bigger picture is that after taking tapering into account, most fund houses remain positive on equities as an asset class. Stocks are looking pricey in the US, but there are opportunities in Europe, where companies still trade at below-average valuations. After recent sell-offs, emerging markets are trading at an increasingly wider discount to developed markets.
How well companies perform next year will also be more important in determining equity performance, compared with the past few years when easy liquidity buoyed all companies. "Following two years of strong performance, equities are entering the mature stage of a bull market, with returns likely to be limited to single digits in 2014," said HSBC Global Research. "The next leg-up has to come from earnings growth."
The US began its third round of quantitative easing last September, purchasing US$85 billion of bonds a month in a move known as QE3. It was also dubbed QE Infinity as the Fed did not have a fixed deadline to end its purchases. The move came as short-term interest rates, near zero since the financial crisis struck in 2008-9, could not be lowered directly by the Fed any more. Purchasing longer-dated bonds to push down interest rates to stimulate the economy was an experiment in monetary policy.
But it was far from clear if the move had a direct impact on the US recovery. Financial institutions that sold long-term debt to the Fed did not lend out the money they got, but deposited it back at the Fed. Criticism also mounted on the potential consequences of adding US$1 trillion to the Fed's balance sheet in the past year, and asset bubbles appeared around the world.
Markets were distorted in other ways. They started hanging on the Fed's every word, trading based on whether it signalled liquidity injections would continue. Paradoxically, markets traded up on bad economic news as they assumed easy money would continue.
Then came May, when Fed chairman Ben Bernanke said the Fed could "in the next few meetings" slow down asset purchases if the US economy improves. It was a relatively measured remark, but markets took fright. Asset prices in emerging markets took a hit amid a currency selldown. India and Indonesia, with large current account deficits, were identified as among the most vulnerable. In Singapore, the Straits Times Index had never recovered from its tumble from a high of 3,454.37 points on May 22. It is still 11 per cent off its May peak. Reits were especially hard hit.
By September, a recovering US economy had caused tapering expectations to build up. Defying consensus, the Fed decided not to slow down its asset purchases. Asian markets recovered - before improving US data in the past two months caused selldowns again.
Yesterday, the Fed was at pains to stress that tapering will be gradual, does not mean monetary tightening and interest rates will remain low.
In his final scheduled press conference before his term expires next month, Mr Bernanke emphasised that even though the Fed is reducing its monthly purchases of US$45 billion of longer-term Treasuries and US$40 billion of mortgage-backed securities by US$5 billion each, it is "not doing less" and "certainly not giving up" on attempts to stimulate the economy.
"Asset purchases are a supplementary tool. Our main tool is interest-rate policy . . . I do want to reiterate that this is not intended to be a tightening," he said.
Significantly, he added that interest rates will be kept near-zero "well past" the 6.5 per cent unemployment rate, especially if inflation continues to remain below 2 per cent. This was a marked departure from a year ago, when the Fed first introduced the 6.5 per cent target as one above which rates would remain exceptionally low.
Mr Bernanke also said that, despite the taper, the Fed still holds a substantial amount of assets and is still adding on to them, thus supporting mortgage markets and keeping long-term interest rates low. Moreover, nothing is cast in stone. Tapering will stop if the economy disappoints, or pick up in pace if the economy grows stronger, he added.
Fed members also projected low interest rates in the years to come, with median interest rates staying near-zero through next year, rising to 0.75 per cent at end-2015 and 1.75 per cent at end-2016, down by 0.25 percentage point from September.
Citi's currency analyst Steven Englander was quoted by Business Insider calling the Fed's move "very dovish". "This is as gentle a tapering as anyone could have expected," he said.