Published in straits times Jan 2015

The price of oil this week plunged more than 55 per cent to under US$50 a barrel since June last year. This is the lowest price since the depths of the 2009 recession, and some analysts are saying the  rout could continue to US$35 a barrel in the near term.The Arabic phrase for “oil below US$50” is now a trending hashtag in the Middle East.

Here are some stories from The Straits Times archives which explain the oil price crash and its implications for the economy, key industries and consumers.

Singapore will benefit from cheaper oil: Analysts

This article was first published on Jan 13, 2015

Singapore will be a big winner from cheaper oil although the central bank may have to let the currency weaken if inflation sinks too low, analysts said yesterday.

Oxford Economics said in a recent report that the economy here would likely grow at a slightly faster pace while the trade balance would improve significantly if crude oil falls to US$40 (S$53) a barrel.

The Philippines and Taiwan would also be likely beneficiaries of such a drop, it added.

The British-based group forecast that Singapore’s gross domestic product (GDP) would grow around 3.7 per cent this year and next year if oil prices drop to US$40 a barrel.

That prediction is 0.4 percentage point higher than the 3.3 per cent GDP growth the analysts expect in the baseline scenario, which is if oil prices were to average US$84 per barrel this year, then gradually climb to US$109 per barrel in 2019.

The local economy grew 2.8 per cent last year and the Government expects it to grow 2 per cent to 4 per cent this year.

Oxford Economics tips that Singapore’s current account would also improve markedly in the wake of cheaper crude.

A nation’s current account, a gauge of its trade, is its exports of goods, services and transfers, minus its imports of them. A current account surplus is usually better than a deficit.

If oil prices fall to US$40, the current account here could grow from the baseline scenario’s 18 per cent to as large as 22.8 per cent of GDP, the analysts noted.

That would be the largest projected percentage across the 45 major economies the analysts looked at.

Apart from Singapore, the Philippines and Taiwan would also be among the biggest winners in the region.

The Philippines would likely become the fastest-growing major economy in the world if oil prices were to slide further, the analysts said, predicting that the country’s GDP could expand 7.6 per cent on average over this and next year.

It would outshine even China, for which the analysts predicted 7.1 per cent GDP growth from 2015 to 2016 should oil prices hit US$40 a barrel.

Taiwan would also benefit from a bigger current account surplus, said Oxford Economics, an independent advisory firm that has academic links with Oxford University.

However, other analysts said that the weakening regional currencies and prospect of disinflation in Asia could lead the Monetary Authority of Singapore (MAS) to let the Singdollar weaken.

Credit Suisse economist Michael Wan said in a report yesterday that the MAS might ease monetary policy due to a “weaker outlook for headline inflation, which could have made the central bank more concerned”.

A smoother ride on growth path

The latest dramatic plunge in oil prices to below US$49 a barrel, with no apparent bottom in sight, has come as a shock to investors and analysts, given the relatively stable state of the global economy.

But the fall is also an unexpected bonanza for consumers, and should act as an international stimulus for growth and, in turn, Singapore’s economy.

Oil prices have slumped more than 50 per cent since last June, the most since the 2008 global financial crisis, amid a supply glut. Part of the reason is that the Organisation of Petroleum Exporting Countries is refusing to reduce output for fear of losing market share to competitors, such as shale oil producers in the United States.

Analysts are tipping that prices of benchmark Brent crude could fall to as low as US$40 a barrel.

The scale of the global effect is significant. Think-tank Oxford Economics has estimated that every US$20 fall in the oil price raises global growth by 0.4 per cent within two to three years.

Net oil importers such as China, India, Singapore and the US are likely to benefit from this growth windfall.

For Singapore, economists expect growth of 3.2 per cent this year, an improvement from last year’s estimated 2.8 per cent. This is largely on the assumption that cheaper oil will fuel US economic strength, which will in turn power demand for exports, making up for softer growth in Singapore’s other key trading partners China, the euro zone and Japan.

Barclays Capital economist Leong Wai Ho sees Singapore exports to the US and industrial production picking up by the middle of this year as lower petrol prices stimulate more US consumer and business spending and, in turn, orders and, thus, Singapore exports.

Beneficiaries and losers

BUT not all sectors of Singapore’s economy will gain equally from lower oil prices. A closer look reveals the beneficiaries and losers of cheaper oil.

Petroleum refining, which accounts for 0.4 per cent of Singapore’s GDP, should benefit as feedstock prices drop.

Other beneficiaries include petrochemicals and utilities companies, where petroleum accounts for between 15 and 33 per cent of input costs, and industrial users of electricity such as semiconductor plants.

But a number of industries that are part of the oil supply chain could be hurt by weaker oil demand – like marine and offshore engineering, which accounts for more than 10 per cent of Singapore’s industrial production.

Companies such as Keppel Corp and Sembcorp Marine are likely to be affected, said Citi economist Kit Wei Zheng.

He noted that the surge in these companies’ rig order backlog since 2012 has already peaked, “and lower oil prices may reduce oil- and gas-related capital expenditure, further accelerating the decline in the order backlog”.

Meanwhile, companies for which oil makes up a large part of costs will benefit.

These include transportation companies such as SMRT and ComfortDelGro, logistics firms like SingPost, airlines and shipping firms. Transport and storage accounts for 6.5 per cent of Singapore’s GDP.

But CIMB Research economist Song Seng Wun warned that this benefit could be offset by modest growth in freight volumes as global expansion moderates, and by high wages and rentals, which constitute a bigger chunk of these companies’ operating costs than fuel costs.

Like motorists the world over, Singaporeans are enjoying lower pump prices, with the commonly used 95-octane grade falling further to $1.79 per litre as of Friday, down 35 cents from last October. Also, businesses and households could soon enjoy lower electricity tariffs.

This could make consumers feel richer, which may in turn spur them to spend more, giving retailers a boost. But any benefit to retailers could be dampened by a slowing property market, which lowers consumer confidence, Mr Leong warned.

Lower oil prices could hit alternative-energy projects, which gained momentum in recent years on the back of high oil prices.

But the extent of this effect would depend on how much further crude prices decline and how long they stay at such levels, Mr Song said.

“Singapore’s push towards a green economy isn’t likely to change… but lower oil prices may slow investments in alternative energy because it may not make as much economic sense now.”

Deflation not a threat

ECONOMIC growth aside, plunging oil prices have given rise to a relatively rare and often worrying economic phenomenon: Negative inflation, which hit Singapore last November – for the first time in five years.

Consumer prices fell 0.3 per cent that month, from November 2013, mainly due to fluctuations in Certificate of Entitlement premiums and cheaper oil.

Given tumbling oil costs, analysts expect Singapore to see more frequent headline deflation readings. In the worst-case scenario, a deflationary spiral can occur if consumers and businesses cut spending in anticipation of further price falls. That slashes businesses’ sales and earnings, triggering wage cuts and unemployment, and more dips in demand and prices.

But in Singapore’s case, economists are not unduly concerned as long as core inflation, which excludes private road transport and accommodation costs and is seen as a better gauge of everyday expenses, stays in positive territory.

While the Government tips overall inflation of just 0.5 to 1.5 per cent this year but “firm” core inflation of 2 to 3 per cent, it has cautioned that these could come in slightly lower, “should global oil prices be sustained at current low levels”.

“If core inflation is still positive, that means the economy is still growing and there’s no undue weakness in demand,” Mr Leong said. “Plus we are at full employment and there are foreign worker curbs in place, and modest growth is expected. So we’re unlikely to go into deflation.”

If history is anything to go by, cheaper oil is much more likely to be a boon than a bane for Singapore’s economy.

In 2008, weakness in oil demand stemming from the global financial crisis led to oil prices plunging from US$133 to US$40 a barrel, which helped resuscitate the global economy and trigger a sharp rebound in growth in 2010.

So, while the domestic economy will still face its fair share of challenges this year, including restrained growth in most major economies and productivity struggles at home, lower oil prices should at least give it a slightly smoother ride.

 

Pump prices slide again, hitting six-year lows

Pump prices

Pump prices have fallen again, bringing a litre of petrol back to what it cost in 2009 – the last time crude oil was near the current level of less than US$50 a barrel.

The latest round of price reductions started last Thursday, at Singapore Petroleum Co (SPC) and Caltex. By last Friday, Shell and Esso had followed suit.

Petrol prices were reduced by four cents a litre, while the price of diesel was cut by three cents.

The most popular grade of petrol, 95-octane, is now $1.79 a litre, while the cheapest grade, 92-octane, is $1.75. Prices for 98-octane fuel range from SPC’s $1.91 to Shell V-Power’s $2.24. Diesel costs $1.29 a litre.

All the prices are before discount, and hark back to levels seen in early 2009 – when oil prices were beginning to recover from the slump of the 2008 global financial crisis.

Brent crude sank to its lowest in the last 10 years in late 2008, when it hit US$47 per barrel – from a record of just over US$140 earlier in the same year. The commodity is now close to that 10-

year low, as a supply glut sends prices diving from a high of US$110 in the middle of last year to fresh 51/2-year lows of under US$49 per barrel yesterday.

Crude has fallen by 55 per cent since last year, but the drop in pump prices is lagging behind. For instance, 95-octane petrol fell a total of 21 per cent from its record-high of $2.28 last June.

Industry watchers attribute this to factors such as profit margin, distribution cost and petrol duties, which tend to mask the full impact of price changes. Oil industry consultant Ong Eng Tong said: “All these things are fixed, and can’t be discounted. But if you could exclude them, you’ll find that pump prices have fallen in tandem with oil prices.”

For instance, if Singapore’s petrol duty of 41 cents a litre was excluded, the drop in the price of 95-octane petrol from last June would work out to 26 per cent – five percentage points more than the actual 21 per cent drop.

As for where oil prices are heading, Mr Ong, who has more than 40 years of experience in the industry, said the price drop is not over, but “it should stabilise around US$40”.

He said the current slump has more to do with lower demand from big consumers such as China, rather than competition between Saudi oil producers and American shale oil producers.

“It’s been cited that shale is unviable when oil gets to US$60,” he said. “But technology moves so fast, what’s to say that shale oil can’t be produced at US$30?”

 

Stressful year for oil and gas sector

Petrochemical industry

Oil and gas producers and the firms that service the energy industry are in for a tough year as slumping oil prices hit new lows, said Moody’s Investors Service yesterday.

The warning came as crude slid below US$50 a barrel yesterday for the first time in nearly six years.

“If oil prices remain at around US$55 a barrel through 2015, most of the lost revenue will hit the exploration and production companies’ bottom line, which will reduce cash flow available for re-investment,” said Mr Steven Wood, Moody’s managing director of corporate finance.

“As spending in the sector diminishes, oilfield services companies and midstream operators will begin to feel the stress.”

The Organisation of Petroleum Exporting Countries (Opec) has resisted calls to cut output amid a battle with United States shale producers for market share.

Brent crude fell as low as US$51.23 a barrel on Tuesday, its lowest level since May 2009 following moves by key Opec producer Saudi Arabia to cut prices for European buyers heightened worries about oversupply.

This added to bearish data showing that Russia’s oil output last year hit a post-Soviet-era high while exports from Iraq, another major producer, were the highest since 1980.

The slump in crude prices has accelerated as the United States dollar gained against the euro amid investor concern that Greece might leave the currency union.

Cheaper oil has raised the prospect of more mergers and acquisitions as asset valuations decline, particularly in the offshore support vessel segment, where a number of companies have been trading at significant discounts to book value in recent weeks.

“When oil prices were above US$100, it was rare to find an oil and gas company trading below book value. But now, it’s quite common,” remisier Alvin Yong said.

“Offshore support vessel companies, due either to a squeeze on margins because of rig owners cutting back on spending or construction contracts getting fewer, may have to merge to strengthen their market position.”

Ezra Holdings is trading at 50 per cent discount to book value, given its closing price of 53 cents yesterday. It could be a prime target for takeover if valuations continue to remain depressed, said Mr Yong.

The FTSE ST Oil & Gas Index was the worst-performing sector on the Singapore Exchange yesterday, falling 3.37 per cent.

Keppel Corp slipped 4.26 per cent, or 37 cents, to $8.32 while Sembcorp Industries dropped 2.55 per cent, or 11 cents, to $4.21. Sembcorp Marine was down 3.7 per cent, or 12 cents, to $3.13.

Tumbling oil prices coming amid a surplus of new rig deliveries may spell difficult times ahead for offshore drilling companies, Moody’s added.

Low oil prices will put intense pressure on day rates, or the amount a drilling contractor gets paid by the oil company for a day of operating a drilling rig this year.

But 2016 could prove even more painful for the many companies that will have to renew contracts on existing rigs at significantly lower rates, Moody’s said.

Oil majors will fare better, it added.

“Integrated oil companies have been more measured in their response to falling oil prices, typically making investment decisions assuming prices of no more than US$50 to US$60 a barrel, since projects can take years to complete.

“Still, some companies – ExxonMobil, Royal Dutch Shell and Total – have announced spending reductions for 2015, while cuts at others, including Chevron and BP, look likely.”

 

Some airlines cut fuel levy

Airline and shipping companies

Air travellers may be close to reaping the savings from lower crude prices that motorists have been enjoying at the pump.

Some global carriers are starting to cut fuel surcharges, and therefore fares, but so far, Singapore Airlines

The two local carriers complied with an order last week by the Philippine authorities to remove fuel surcharges for tickets sold from Jan 8 onwards, but have not extended similar cuts to other flights.

One reason some airlines have not budged is that they use hedging to lock in a guaranteed amount of fuel at a fixed price, so they may not benefit fully from cheaper oil for some time.

For instance, SIA has said it has hedged 65.3 per cent of its fuel needs at US$116 a barrel for the six months to March. Fuel costs account for up to 40 per cent of its operational costs, analysts say.

If airlines have locked in at higher fuel prices, they may be reluctant to lower fares. Benchmark Brent crude closed at US$46.59 a barrel yesterday and is tipped to fall to as low as US$40 a barrel.

In response to queries, an SIA spokesman said: “It should be noted that while fuel prices have come down in recent months, the fuel surcharge continues to provide only partial relief against high operating costs from the price of jet fuel.”

Philippine regulator Civil Aeronautics Board ordered 27 foreign airlines operating in the country to scrap their fuel surcharges effective from Jan 8.

Aside from that, airlines that are reducing fuel surcharges include Qatar Airways, Japan Airlines (JAL), Cathay Pacific Airways, Virgin Atlantic and some China carriers, including Shandong Airlines and Xiamen Airlines.

But many other airlines have not followed suit. The International Air Transport Association (Iata), representing about 250 airlines, last month forecast that falling fuel prices and global economic growth meant the industry will post a collective global net profit of US$25 billion (S$33.4 billion) this year and report its strongest profit margin in more than five years. Iata has also predicted a 5.1 per cent fall in airfares from 2014 levels this year.

In Singapore, Mr Seah Seng Choon, executive director of the Consumers Association of Singapore, said there are no regulations requiring airlines to align fuel surcharges with oil prices.

But he “strongly urged” airlines to pass on the savings to consumers, and if not, to “step forward and justify why fuel surcharges are still kept at the present level”. He said the rationale for fuel surcharges, when oil prices exceeded US$100, is no longer valid. “Airlines have a moral obligation to review the need for such fuel surcharges, or at least reduce the amount,” he said.

Mr Mark Clarkson, a Singapore-based business development director at OAG Aviation, said: “It’s also a question of competitive pressure and who blinks first. Depending on which markets airlines are operating in, and what level of competition they face, their strategies will be influenced on a case-by-case basis.”

Asked how long it would take, he said: “There is no standard for this – some may adjust it immediately to gain competitive advantage and forcen others to follow, while some may be forced to hold for as long as possible, given high hedging. Public pressure certainly has some influence.”

Cathay Pacific, which reduced fuel surcharges for fares from Jan 1, said: “Additional fuel surcharges over time were only able to offset about half of the incremental fuel costs. That means we continue to absorb part of the additional fuel costs.”

JAL is cutting fuel surcharges on all international fares from Feb 1. Qatar Airways last week said it will cut surcharges, but did not say by how much and when, Reuters reported.

(SIA) and SilkAir are not among them.

 

The ringgit rout: Good or bad for Singapore?

Exchange rates

The Malaysian ringgit, Asia’s worst-performing currency in 2014, fell to fresh historic lows at the start of the new year on news that crude oil prices had broken below the psychologically significant US$50 threshold.

Even in the depths of the Asian financial crisis, the lowest the ringgit ever sank to was RM2.45 to one Singapore dollar in June 1998.

On Wednesday (Jan 7), one Singapore dollar could buy RM2.68, after the ringgit fell another 0.7 per cent.

This is the weakest the ringgit has been against the Sing dollar since at least 1981, according to figures from Bloomberg that only go back that far.

Here are three reasons why the ringgit is plunging:

1. Oil prices are crashing

Malaysia, a net oil and gas exporter, is the sole loser among emerging Asian economies from the drop in crude prices as 30 per cent of state revenues are oil-related, say Bank of America Merrill Lynch economists. They estimate that every 10 per cent drop in the price of oil takes away 0.2 per cent from Malaysia’s gross domestic product.

2. The US dollar is strengthening

Asian currencies, including the ringgit, have weakened considerably against the US dollar as investors sell their emerging market assets priced in local currencies and buy dollar-denominated assers instead. The dollar is rallying in anticipation of the Federal Reserve raising US interest and because of the robustness of the US econommic recovery. Global funds reduced holdings of Malaysian debt by 5.8 per cent, the most since September 2011, to RM236.5 billion in November, Malaysian central bank data show.

3. Palm oil prices and exports are falling

Palm oil is another commodity on which the Malaysian economy is heavily dependent. Their prices fell 15 per cent last year, dropping in September to the lowest since 2009, as commodities across the board slumped because of the stronger US dollar and the fears of falling global demand.

To make things worse, Malaysia’s most devastating floods in decades in December will see palm oil output slump by 20 per cent compared to November.

Here are three ways a plunging ringgit will impact Singapore’s economy:

1. It’s a windfall for Singapore shoppers and importers

“The weaker ringgit is good for Singaporeans who shop and eat in Malaysia,” said OCBC economist Selena Ling. Lower prices there will also boost tourism to the country, she added.

Manufacturers and other businesses that import raw materials from Malaysia to Singapore will also pay less in Singdollar terms, Ms Ling said. Imports from Malaysia to Singapore were worth about $51.1 billion in 2013, according to official data.

2. Softer ringgit signals weakening Malaysian economy

On the flip side, a weaker ringgit reflects slower growth in Malaysia’s economy, which is closely linked to Singapore’s, said Bank of America Merrill Lynch economist Chua Hak Bin.

Barclays has cut its economic growth forecast for Malaysia to 4.5 per cent from 5.5 per cent, citing the drop in commodity prices and rising market volatility.

Malaysia is Singapore’s biggest export destination, accounting for $66.8 billion or 12.2 per cent of our shipments in 2013.

3. Singapore businesses and investors in Malaysia may be hurt

The close Malaysia-Singapore economic ties mean that a weaker Malaysian economy could affect Singapore businesses with operations there, Ms Ling said.

“What people like is predictability. The sudden plunge will throw businesses’ forecasting into disarray,” she said.

Dr Chua said Singaporeans with property in Malaysia will see the value of their properties fall.

The Singdollar may also weaken as the ringgit is one of the major currencies that the Singdollar is influenced by, he said.

 

 

Singapore gets its first taste of deflation in five years

The relatively rare phenomenon of negative inflation hit Singapore last month – its first appearance in five years.

The effect – also known as deflation – occurs when prices in one month decline over the same period a year earlier.

In this case, consumer prices fell 0.3 per cent last month over November 2013, mainly due to fluctuations in certificate of entitlement (COE) premiums and cheaper crude oil.

The last negative inflation recording was in December 2009 amid the global financial crisis. Plunging oil prices may make headline inflation more common.

Benchmark Brent crude has dropped from about US$70 a barrel at the end of last month to US$60 now, so even deeper deflation may occur this month.

Deflation has become a grave concern for economies around the world. Apart from higher supply, the drop in crude oil prices is a also the product of slowing growth.

The gloomy outlook could translate to even less economic momentum as consumers and businesses grow more cautious.

While deflation points to deeper structural issues for economies like Japan and Europe, economists say that Singapore has less to worry about as its economy is not suffering from a chronic lack of demand.

Singapore’s deflationary reading last month was driven by fluctuating COE prices and falling accommodation costs, in addition to cheaper crude.

“Lower prices were a result of administrative measures designed to curb excess consumer leverage in the purchase of houses and cars, and not due to a lack of demand,” said UOB economist Francis Tan.

Private road transport costs fell 7 per cent in November over the same month last year, while accommodation costs declined 1.2 per cent amid a softening rental market.

However, food inflation jumped 2.9 per cent, driven by price increases in non-cooked items and prepared meals.

Domestic food inflation could remain elevated in the near term, said the Monetary Authority of Singapore (MAS) and Ministry of Trade and Industry (MTI) in a joint statement yesterday.

They reiterated that firms, particularly those in the service sector, are likely to continue passing on high wage costs to consumers amid the tight labour market.

This was borne out in last month’s core inflation figure – seen as a better measure of everyday out-of-pocket costs – which came in at 1.5 per cent.

The measure, which excludes the costs of accommodation and private road transport, is expected to average 2 per cent to 2.5 per cent this year. This is higher than the 1 per cent to 1.5 per cent forecast for headline inflation.

Dr Tan Khay Boon, senior lecturer at SIM Global Education, said car owners who enjoy a lower petrol bill “are the only beneficiaries of lower oil prices”.

“In the midst of high labour costs as well as high industrial and commercial rental costs, any cost savings from lower oil prices will likely be used to defray the high unit labour cost and other operating costs, instead of being translated into lower prices for consumer goods and services.”

The MAS and MTI reiterated their forecasts for headline inflation as coming in at between 0.5 per cent and 1.5 per cent next year, but cautioned yesterday that the reading could come in slightly lower “should global oil prices be sustained at current low levels”.

Core inflation is likely to “stay firm” and average 2 per cent to 3 per cent next year, according to official forecasts.

 

When falling oil prices weaken property demand

Just by comparing the charts tracking the movement of crude oil prices and the local real estate prices, there would appear to be some correlation between the two asset classes.

What the charts show is that in the past 20 years, whenever oil prices are on the upswing, Singapore property prices climb as well. But when oil prices tumble, property prices soften too.

Does this mean that since oil prices have slumped by 50 per cent to about US$50 a barrel in the past six months, the real estate market may take a similar beating too?

Property consultants have been quick to point out that any correlation may be spurious.

Take the 1997-1998 Asian financial crisis, when crude oil prices more than halved from US$23 a barrel to US$10, and home prices – as measured by the URA Property Price Index – fell by up to 44 per cent at the same time.

Knight Frank chairman Tan Tiong Cheng recalled that the crisis had caused oil prices to fall because of a big drop in demand from major economies as consumption slumped. It also triggered a massive regional economic slowdown which affected Singapore’s prospects and the employment market.

That, in turn, caused property prices to plunge, as home buyers became less confident of their job prospects.

Today, there is no financial crisis of similar magnitude in sight. The consensus among economists is for regional economies to expand, even though doubts have been expressed over a possible slowing down in China’s growth.

Instead, the recent plunge in oil prices has been portrayed as a price war waged by Saudi Arabia, the world’s largest oil producer, on US shale producers to try to put them out of business by keeping its production at existing levels, rather than cut output to boost prices.

On the demand side, China’s thirst for oil has slackened due to a slowdown in its economic growth.

In Singapore, property prices had been going downhill even before oil prices crashed, due to other factors such as the Government’s moves to cool the property market in recent years.

Mr Tan noted that one dampening factor is the total debt servicing ratio (TDSR), which caps the sum which a property buyer can borrow by ensuring that his monthly repayments, combined with all his other debt obligations, do not exceed 60 per cent of his gross monthly income. “TDSR effectively caused a significant reduction in transactions through crimping financing,” he said.

So far, the focus of debate has been about the huge supply of homes to be completed in the next few years and the impact this would have on housing prices.

But the weakening demand deserves attention too. While developers were still able to move around 7,300 to 7,500 units in new sales last year, only an estimated 4,701 units changed hands in the resale market. This is down from the 6,678 units in 2013 and 13,214 units in 2012.

With more than 40,000 new condos likely to be completed in the next two years, the likelihood is that sentiment in the resale market will weaken further if large numbers of these units are put up for sale.

Some developers are hoping that foreigners will pick up some of the slack. As part of the Government’s property cooling measures, an additional buyer’s stamp duty (ABSD) is levied on foreigners and permanent residents buying residential properties as well as on Singaporeans who already own one residential property.

For foreigners, the ABSD is a hefty 15 per cent. That means if a foreigner buys a $1 million home, he will have to pay almost $180,000 in stamp duties.

In 2012 – the first full year to feel the impact of the ABSD – the number of private residences bought by foreigners fell by 62 per cent to 2,053 units from 5,480 units in 2011.

But falling oil prices have begun to cast a pall over luxury home sales in global cities such as London and New York, as interest from well-heeled investors from the Middle East and Russia dries up.

This raises a question as to whether developers can successfully lure foreigners to buy top-end condos, even if they can persuade the Government to tweak the ABSD rule.

A potential home buyer may do well to sit tight.

 

Oil woes ‘unlikely to rein in stocks’

This article was first published on Jan 7, 2015

Trouble in Europe and a plunge in crude oil prices are unlikely to halt the climb in global stocks this year, said DBS Bank.

Its chief investment officer of group wealth management and private banking, Mr Lim Say Boon, said at a briefing yesterday that “the stock market started the year with a new wall of worries”.

Concerns about declines in sharply falling oil prices and the potential Greek exit from the euro zone, dubbed the “Grexit”, have caused tumbling stock markets this week.

But “these issues will pass”, said Mr Lim, who expects crude oil prices to rebound above the technical support level of US$58 a barrel by year’s end.

A United States benchmark for crude oil, West Texas Intermediate, fell below US$50 a barrel on Monday to US$49.95.

Brent crude, used primarily in Europe and other parts of the world, dropped to US$51.23 a barrel.

Lower crude oil prices will have an immediate effect on energy-related stocks, though Mr Lim said the upside would be stronger consumer spending.

Higher spending, however, takes time to flow through to better corporate earnings and consequently improved stock prices.

The woes in Greece will also not derail global stock prices, he said.

The reasons that Mr Lim is not unduly worried? The Greek economy is relatively small and the amount of outstanding Greek debt can be absorbed by the markets, if not already written off.

He also expects that any exit would be made so punitive by European officials that no other nation would dare to not comply with reforms, thus likely preventing a contagion effect.

DBS has a “neutral” call on European equities in the short-term three-month window, however, as corporate earnings have not been supportive of growth.

Speculation that the European Central Bank could launch its own version of quantitative easing should lift stocks, with the bank giving European equities an “overweight” call over 12 months.

“European equities’ out-performance will have to wait until monetary conditions in the US start tightening.”

Even though the US Federal Reserve’s quantitative easing has ended and the central bank will likely hike rates this year, Mr Lim has stayed most bullish on US markets.

He has given it an “overweight” call over the three-month and 12-month periods.

“US rates will rise in 2015, but when they do rise, they will rise only very gradually.

“Eventually they will likely exit the rate-hiking cycle at a much lower level than the historical average since World War II, which is about 5 per cent.”

The Fed’s median forecasts are for its rates to come in at 1.13 per cent by the end of this year and 2.5 per cent by the end of next year.

Japanese stocks are also favoured by DBS, given the Bank of Japan’s quantitative easing, which has weakened the yen, in turn, boosting Japanese products and corporate earnings.

Hong Kong and mainland China stocks are also in play for the bank this year.

Singapore stocks will likely trade higher this year but may not be a good buy, said Mr Lim.

“If you look at the Singapore market, yes, it runs a current account surplus, it is less vulnerable to a stronger US dollar, it doesn’t require external financing of its dollar requirements, but does it offer deep value? I don’t think it offers deep value.”

Bonds, however, may have run their course and Mr Lim is underweight on the asset class.

“The bull market for bonds has gone on for a very long time, this is a very late stage, valuations are very high.”