ST : Watch out for asset bubbles amid rebound, warns OCBC

Dec 5, 2009

Watch out for asset bubbles amid rebound, warns OCBC

By Dickson Li

WARNINGS abound that asset bubbles may be forming amid the rapid rebound - especially on the stock market, for example, and, recently, in the property sector.

But OCBC's head of treasury research and strategy Selena Ling says policymakers have a powerful tool to stave this off this time around: the benefit of hindsight.

She was taking part in a presentation at OCBC Centre given this week by the bank's in-house experts on the outlook for the Singapore economy for next year.

'These days, policymakers are more forward-looking. Even though they don't think the world economy is (fully recovered) yet, they are already worrying about potential asset bubbles brewing.'

Central bankers are expected to remove the punch bowl as the party gets going, she said, using a heady alcoholic drink to represent cheap credit.

Ms Ling lamented that former Federal Reserve chairman Alan Greenspan had made the error of 'supplying the champagne until the party burst'.

Things could be different this time. Ms Ling cited an unprecedented move by the Reserve Bank of Australia to lift the cash rate three times in three months, most recently this week. The Reserve Bank of India has also raised rates.

She emphasised that this was despite G-20 leaders agreeing not to prematurely withdraw stimulus measures.

Ms Carmen Lee, head of research at OCBC Investment Research, is slightly more wary, saying that the recovery has been 'too fast, too rapid'.

She was concerned that asset prices had risen 'too sharply', and expressed doubts that corporate earnings could match that rate of increase.

As at Nov 24, the Straits Times Index's (STI) price-earnings ratio stands at slightly under 18 - one of the lowest in the region, behind the Hang Seng and the S&P500. The lower that ratio, the better value the shares are. She said a valuation of 18 times is the STI's historic average.

She recommends buying telcos, commodity firms and infrastructure stocks.

OCBC rates the telcos, offshore support firm Ezra Holdings, shipbuilder SembCorp Marine, commodities firms Noble Group and Olam International, manufacturer Midas Holdings, oil and gas engineering firm Rotary Engineering and crane giant Tat Hong as 'buy' stocks.

OCBC is neutral on the banking sector. With the recent rally in banking stocks, it says both DBS Group Holdings and United Overseas Bank are fully valued.

As for property stocks: 'While the residential property market is positive...do keep in mind that the office sector is still weak,' she warned.

OCBC expects the main growth engines here in the year ahead to be manufacturing, financial services and tourism.