Dec 16, 2013

    Remove uncertainty with tapering

    STOCK markets abhor uncertainties.

    Thus, when the United States November jobs data turned out better than expected and fuelled fears that the US central bank might start scaling back its massive money-printing as early as this week, stock prices reacted by tumbling globally.

    Yet, US Federal Reserve chief Ben Bernanke would really be doing his successor Janet Yellen and stock markets across the globe a big favour by taking a bold step and starting to taper the US$85-billion (S$107-billion) monthly bond-buying programme when he chairs his final interest-rate-fixing meeting this week.

    For one thing, he would be removing one big uncertainty which has been plaguing global stock markets ever since he first flagged the possibility of tapering in May. Otherwise, the same "tapering" question will crop up before every US rate-fixing meeting and unsettle traders.

    As it is, tapering fears caused the Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite on Wall Street to fall by about 1.5 per cent each last week.

    Tapering fears have not been kind to regional markets either. Hong Kong's Hang Seng fell 2.1 per cent last week, while China's Shanghai Composite lost 1.8 per cent. In Singapore, the Straits Times Index was down 1.5 per cent.

    For the past five years - after the US Fed rescued the global banking system following the collapse of US investment bank Lehman Brothers by allowing its money-printing machine to run wild - the direction of stock prices has been largely determined by action taken by the central banks.

    This year, as tapering fears struck fear into investors' hearts, they pulled money out of bond funds and channelled it into US equity markets.

    That spurred the Dow to gain 20 per cent and the S&P 500 to jump about 25 per cent, as huge sums were poured into exchange-traded funds which tracked the two widely watched indexes.

    Tapering fears also sucked the life out of regional markets, as fund managers liquidated their positions on fears that the greenback may strengthen as the US Fed reins in its printing presses. That would make it dearer for them to borrow in US dollars to make big bets on emerging-market equities.

    The latest fund-flow report by Citi Investment Research shows that about US$1.9 billion was pulled out of emerging-market funds last week. The only bright spot was China funds, which saw an inflow of US$270 million, as fund managers' appetites were whetted by hopes of further investment opportunities after China's new leadership launched a new blueprint last month to further develop its economy.

    As is customary around this time of the year, there are plenty of reports offering a flavour of what lies ahead.

    UBS Securities, in its outlook report for next year, believes banks will continue to do well in an environment where the short-term Singdollar interest rate is expected to stay low.

    Like many other houses, it has turned hot on the China theme, liking stocks "with exposure to secular growth in consumption and potential upside from policy reform".

    However, Citi Investment Research prefers stocks "exposed to external drivers". Those include Keppel Corp, where it believes the rig cycle stays intact despite volatile crude-oil prices, and two firms with big China exposure - Wilmar International and CapitaMalls Asia.

    With the likelihood of the US dollar strengthening, it is also advising investors to focus on "industrial dollar earners" such as ST Engineering and Venture Corp.