Stock markets not bubbling over: Bank of S'pore

DESPITE stock indices such as the S&P 500 and the DAX reaching historic highs, stock markets worldwide do not appear to be in a bubble, said Hou Wey Fook, chief investment officer of Bank of Singapore yesterday.

Briefing the media on the economic and investment outlook for the second half of 2014, Mr Hou said that the bank is confident that stocks will reach higher levels in the next six to 12 months.

"It looks like this bull market can continue," he said, but cautioned that being in the sixth year of a bull market, the ride will be "bumpier" compared to the previous years.

Mr Hou noted that just four industries are showing signs of being "bubbly" - with price to earnings ratio greater than 30 - compared with the 2000 dot com bubble, where 14 sectors, representing some 70 per cent of the market capitalisation in the US displayed such signs.

The four sectors - healthcare technology, real estate investment trusts (Reits), construction materials, and Internet and catalogue retail - account for just 5 per cent of market cap in the US.

"On this basis, we do not think it is a bubble," he said. "There are pockets of bubbles, but its not a system-wide bubble in the US."

He added that the bank still prefers equities to credits and expects the improving growth outlook to spur companies into increasing their capital expenditure and mergers and acquisitions activity.

In Singapore, the bank does not see a new bull market unfolding, with property cooling measures affecting developers and banks.

"We are monitoring closely for the timing of the cooling of these cooling measures," Mr Hou said.

Bank of Singapore expects developed economies to grow at 2.3 per cent in 2014, up from 1.3 per cent last year. However, its growth forecast for emerging economies stands at 4.6 per cent this year, down from 4.7 per cent a year ago.

Richard Jerram, chief economist of Bank of Singapore, said: "This year, global growth is going to be the best since 2011. Next year is going to be fairly similar - it's not going to be wildly rapid, but it's going to be solid and healthy."

The bank expects the US Fed to hike interest rates in 2Q 2015, earlier than previous estimates for the second half of next year.

China would be an area of concern moving forward, Mr Jerram said. "There's a huge credit bubble, you've got credit expansion of 70 per cent of GDP (gross domestic product) in the space of five years," he said, noting that it is higher than the International Monetary Fund's benchmarks in a typical banking crisis.

"There should be a better than even probability that they are going to have a banking crisis, because this credit has been funding inefficient investment, and inefficient investment is not going to service the debt," Mr Jerram said.