SHOW ME THE MONEY
Markets down, opportunities up
Real estate is beginning to offer attractive value for investors looking to buy, according to Citi
By TEH HOOI LING
SENIOR CORRESPONDENT
EXCESS liquidity, once so ample, has now decelerated to a point that we are witnessing a slight contraction, according to Citi's equity strategists Markus Rosgen and Elaine Chu in their recent corporate securities strategy report.
Stock prices tend to rise or fall in tandem with liquidity in the system.
According to Citi, there remains a risk that we have not seen the end of the excess liquidity contraction. But markets have had a tendency to respond ahead of a resumption of excess liquidity growth. As soon as it is no longer getting worse, i.e. the rate of liquidity contraction slows, markets will respond positively.
Purely on the basis of extrapolating the data, Mr Rosgen and Ms Chu reckon that this should be occurring late summer or early in the fourth quarter.
Periods of liquidity contraction are usually followed by expansion. And typically, contraction periods are shorter than expansionary periods. On average, liquidity contractions have lasted for 6.3 months. The longest cycle was 13 months in late 1994/95. The shortest was two months, in May and June 1989. March this year was the first month when a negative liquidity growth was registered.
I tried to look at the data slightly differently for the Singapore market. I compared the latest month's M2 money supply to the average M2 levels of the three months prior.
M2 includes currency in active circulation, demand deposits, fixed deposits, negotiable certificate of deposits, savings and other deposits.
The change in M2 relative to the average of the prior three months is also a good indicator of the market.
From the chart, you can see that indeed such a measurement of money supply does provide a good indication of where the market is heading. In the last 18 years, the biggest spike in M2 relative to its levels in the prior three months took place in November 1998. The stock market bottomed in August that year. Still, had one gone into the market in December, one would still be able to make 56 per cent return in the following six months.
Back in 1998, M2 had continued to surge in the following two months, in December 1998 and January 1999.
During the months when M2 contracted, the stock market too retreated. Unfortunately, from the chart, it appears that the change in M2 relative to its three months average generally is more a coincident indicator rather than a leading indicator.
In any case, the interesting thing to note is that in Singapore, the M2 has not seen a drop relative to its prior three months' average since February 2006.
This is an indication of sustained inflow of funds into the Singapore economy. It suggests that people are parking their funds here, getting ready to invest, either in Singapore or elsewhere in the region given the relatively stronger economic prospects. It is also a sign that the market is confident of the strength of the Singapore dollar.
Even in the last few months, when global markets are gripped by jitters, money continued to flow into the Singapore banking system. M2 grew by 9.8 per cent, 8.8 per cent, and 9.0 per cent from a year ago in February, March and April. The May numbers are not out yet.
But admittedly, the expansion rate has slowed slightly compared with the 10 and 11 per cent range chalked up in November 2009 to January 2010.
Still, the growth over the previous three months' average of 2.2 per cent, 0.9 per cent, 1.9 per cent, and 1.2 per cent in the first four months of this year remain decent.
What is it is that, when markets go down, opportunities go up. 'It is easier for realistically priced markets to rise than the other way round,' said Mr Rosgen and Ms Chu.
'Over the last few months, many things have begun to fall in place. Valuations have retreated from above average to below average, expectations from excessive towards the much more realistic. The US dollar, from being viewed as passe, to being now actually stronger. And liquidity, once so ample, has now actually contracted.'
Asian markets, excluding Japan, are now trading at 1.8 times book value, down from 2.2 times. As a region, valuations have moved from above average to just below average. And they are now where they should be at this stage of recovery, instead of being well ahead prior to the recent correction.
In terms of price-earnings ratio, the region is trading at 17.4 times on a trailing basis. This corresponds with valuations in between year one and year two of previous market recoveries.
Meanwhile, given the strong run-up in the US dollar, its further ascent will be more moderate. In this case, the deflationary pressure in the region will be lessened. This bodes well for the markets, according to Citi.
So what should investors buy?
Real estate either on a price-to-book value or enterprise value/sales bases is beginning to offer attractive value, said Mr Rosgen and Ms Chu. According to them, on both metrics, the sector has only been cheaper three times previously: in the early 1990s, the Asian crisis, and then in 2001. On an EV/sales basis, the sector has gone from expensive to cheap. 'Yes, it has been cheaper, but the risk/reward suggests that one should be slowly adding to this sector.'
Citi's credit research has this to say about China's real estate sector: 'We argue that Chinese property developers faced more challenges back then in October 2008 than what they are facing now, in terms of GDP growth trend, balance sheet liquidity, refinancing pressure, and access to capital markets, albeit policy is probably harsher now.'
In terms of ownership, the real estate has gone from being hot favourite on the back of further US dollar and reflation to now being a consensus underweight. 'The combination of being an underweight and having value makes the idea of beginning to dip one's feet in the water all the more alluring.'
But there remains risks: further tightening beyond the forecasts set by Citi's China team, further downward revisions to earnings and for the real estate sector, the net asset value. Lastly, valuations for China's stock markets, although more attractive now, have not triggered a buy yet.
· The writer is a CFA charterholder
Copyright © 2010 Singapore Press Holdings Ltd. All rights reserved.
UNDERWEIGHT SECTOR
Citi argues that Chinese property developers faced more challenges back in October 2008 than what they are facing now
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