The following post by Kevin Scully, chairman of NRA Capital, was posted on www.nracapital.com last week, and is republished here with permission.
IN A TV interview this morning, I was asked about the problems in the US and EU with regard to their national deficits.
I think there is nothing new. The last sharp decline in global stock markets started in August 2011 with the credit rating downgrade of the US. This was due mainly to the indecision of the Republicans and Democrats to effect the necessary policies to improve the deficit issue. So the failure of the "Super Committee" to offer a solution is the same problem we had in August 2011.
In fact, by doing nothing and with the lapse of the some of tax cuts/benefits implemented by the Bush administration, the US deficit will naturally contract by US$6-7trillion after the end of 2012.
I believe that the recent decline in the US market is part of the recent volatility where markets can gyrate +/-2% every other day on specific news. The second is that the decline is a recognition that the October stock market rally was premature. Changing some governments in Italy, Greece and even Spain - helps toward finding a deficit solution but does not solve the problem itself.
In fact 10 year Sovereign bond yields for Greece are now 29% - much higher than before the new Government took over when they were 25%. The yields on Italian and Spanish 10 year debt is now about 7% and in my opinion are likely to continue rising. Hungary which asked for IMF help overnight sees its 10 year sovereign bond yields at almost 9%.
The next wild card is France - whose 10 year bond yields are 3.6% - its facing a credit downgrade and hence its sovereign 10 year yields are higher than Germany's 1.9%. So the problems in the EU are far from over and will continue to fuel market volatility for the next few months.
What about Singapore?
The STI Index has breached the 2700 yesterday and is now likely with the neutral to negative news flow to retest support at the 2500 level. No change in my view that our STI index will be range bound between 2500-2900 but if 2500 breaches than technically the next major support is at 2200.
Singapore banks - our recommendation?
We are in a global financial crisis so banking and finance stocks are likely to under perform in this environment. The three Singapore banks are however financially strong. Our banking analyst puts their Tier 1 ratio at between 16-19% in ascending order of DBS, OCBC and UOB. She prefers UOB (read her recent banking report for details.
Capitaland, Keppel Land and Yanlord - in the face of a declining property market in China?
All three shares have been in a price decline since September 2010, ie they have partially discounted a price decline in China/Singapore in my opinion of up to 20%......but if the price decline in China is more than this say 20-30% or 30-40% than these three counters potentially face more downside risks. The good news is that borrowing rates in Asia remain low - but if they start to rise.....property counters are likely to come under more selling pressure.
Singapore telcos a safe place to be now!
The three Singapore telcos are likely to be defensive and less affected by the global economic downturn in the US and EU. They also offer excellent dividend yields ranging from 5-7% - which can at least beat if not match domestic inflation rates and are much better than deposit rates. They offer a good place to hide for those who want to be in Singapore equities.
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