UBS has called an underweight on Singapore equities, which are seen to be weighed down by concerns over a weak property sector and a tight labour market.
Tan Min Lan, UBS head of Asia-Pacific investment office, said that the property market is likely to endure a "multi-year period of decline".
She spoke to reporters yesterday prior to the UBS Wealth Management Chief Investment Office APAC Forum. The forum was attended by about 700 participants.
"We continue to think clients who are over-invested in real estate have to think about what they want to do in the coming three years. The big question is when the government will ease (the cooling measures). It will not ease the measures until it sees price declines."
So far, however, prices remain above 2008 levels. On Monday, the Ministry of National Development said that it was too early to lift the property cooling measures. While home sales have fallen, prices have remained stable, it said. Property developer Kwek Leng Beng had earlier called for a review of the measures which he said could impact Singapore's reputation as a global city.
Ms Tan said that the potential supply of around 55,000 new home units between 2014 and 2016 will weigh on prices and rentals. The current vacancy rate of 6.6 per cent is the highest since 2006, and this could rise to 8 to 9 per cent. "It would not be inconceivable for rents to fall by 20 to 25 per cent over this period," she said. The correlation between property and equities is one reason she is "unenthusiastic" about the Singapore stock market. Another reason is the ongoing economic restructuring, from one that is fuelled by labour towards one driven by productivity. This is likely to continue to dampen earnings growth.
She is, however, positive on the prime office market through Reits. Investors, however, should be mindful of interest rates. "One needs to be very selective on Reits. The 10-year yield (on Singapore government bonds) is around 2.3 to 2.4 per cent. By the end of the year it could go to 2.8 per cent. That puts pressure on Reits. But in segments where rents will rise we think this will more than compensate (for rates)."
The UBS Chief Investment Office's report on Singapore equities tells investors to favour exporters over domestic-centric businesses; avoid labour intensive businesses; favour consumer staples over discretionary; and to position for rising interest rates. Higher rates are positive for banks but are generally negative for bonds and income assets such as Reits.
Meanwhile, Mark Haefele, UBS Wealth Management global chief investment officer, says that the bank has not changed its call for clients to maintain a long position on risk assets.
He reckons global equities could generate returns of 8 to 9 per cent over a 12-month period. "We're not looking for a lot of multiple expansion . . . Investors have to lower their expectations after last year."
He continues to favour developed markets over Asia.
He added: "Clients haven't really bought back into the market as much as we would like after the crisis."
Clients' cash allocation remains high at about 25 per cent, against the bank's recommendation of just 5 per cent. Still, there is a silver lining as clients have begun to overcome their home bias to some degree.
"One of the things we have seen as Asia has slowed is an increasing interest in investing outside the region which is an opportunity for us . . . We think on a risk-adjusted basis our clients can do better if they follow our portfolio recommendations."
He has an overweight call on US and eurozone equities. "We are underweight high-grade bonds, although that didn't work out in the first half. We think rates are likely to rise in developed markets . . . As long as it happens gradually equity markets can stay on track.
"For many who have invested in bonds very successfully, they should lighten on the bonds side."
He remains positive, however, on US high yield bonds. "We don't think the market is overdone. We see default rates remaining extremely low. You can get 3 to 4 per cent in high yield over six months. It has performed phenomenally."
US interest rates, he said, could begin to rise in the middle of next year - "hopefully because of a strong US recovery". "We don't think that will impact equity markets that much . . . When the Fed does start to increase rates, that is the time equity and high yield can do pretty well."
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