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Prices holding steady but don’t pop the bubbly yet: Economists

ECONOMISTS rubbed their eyes in disbelief yesterday as official data showed that for the third month in a row, inflation held firmly at 7.5 per cent last month instead of climbing.

Does this spell a plateau in consumer prices, which are currently at a 26-year high? Maybe not, said some pundits, as June enjoyed some once-off relief and certain wildcards - oil and food - remain.

According to the Department of Statistics, the consumer price index (CPI) last month rose 7.5 per cent from a year ago, exactly the same as it has since April and slower than market expectations of 8 per cent.

“I had to double check to make sure my eyes not were lying when I saw the headline number,” said CIMB-GK economist Song Seng Wun.

Cheaper cars helped offset higher prices for food and electricity. But there were other exceptionalfactors: A one-time rebate for service and conservancy charges and the Great Singapore Sale.

As a result, June’s CPI - which measures price changes in a basket of goods and services commonly used by households - fell 0.3 per cent from May.

Data for the following months are likely to look similarly heartening - largely due to a technicalfactor related to the Goods and Services Tax (GST).

When the GST went up by 2 percentage points from July 2007, prices were logically higher compared to the previous year when there was no such hike. This month, however, the so-called GST effect will wear off and possibly push down CPI by 1 to 1.5 percentage points, estimated HSBC economist Robert Prior-Wandesforde.

Further dampening the inflation rate for the month would be the recent drop in pump prices. Over the past fortnight, petrol stations have cut prices three times in line with falls in crude oil prices. If such cuts continue, consumers will have reason to cheer.

Inflation for the first half of this year is 7.1 per cent, which the Government expects to ease in coming months to reach a full-year figure of between5 and 6 per cent.

But private-sector economists are less optimistic, cautioning instead, of persistent risks.

“We see elevated food and energy prices keeping CPI inflation at 26-year highs,” said Mr Song, who predicts full-year CPI to reach 6 per cent. Crude oil prices are known to be volatile, while global food supplies are at the mercy of the weather.

Singapore buys two-thirds of its food imports from Malaysia, whose recent fuel price hike of as much as 40 per cent will indirectly raise food prices.

Also, consumers are likely to pay more for transport, said United Overseas Bank economist Ng Shing Yi, as more Electronic Road Pricing gantries become operational, and with taxi, bus and train operators set to raise fares.

Which means that even though July’s inflation rate is expected to slow, due partly to the fading of the GST effect, don’t be too hasty to conclude that the downtrend will continue.

In fact, “what the average man on the street wants to see is prices coming down. That means the inflation figure has to be negative”, said National University of Singapore’s Associate Professor of Economics Tilak Abeysinghe.

Source : Today - 24 Jul 2008

Equities’ valuations seen as attractive now after H1 fall

FEARS of stagflation - a period of high inflation and slow economic growth - may have been overdone.

Citibank said this yesterday in a report on the investment outlook for the second half of this year.

Equity markets ended the first half on a dismal note as ever-rising oil prices and stagflation fears took centre-stage, said Citi analysts. This year, the MSCI AC World Index was down 12 per cent as at June 27. But the global economy is unlikely to return to the stagflationary environment of the 1970s, Citi analysts believe.

‘Slower economic growth is likely to dampen the rapid rise in commodity prices (including oil), which could help ease inflationary pressures over the coming quarters,’ the Citi outlook report said.

In fact, because of the substantial decline in equity markets to date this year, Citibank Singapore’s head of wealth management Salman Haider said that Citi analysts continue to favour equities over bonds.

‘Downside risk is limited and valuations are now attractive,’ Mr Haider said in a presentation. He added that emerging markets and European equities were especially attractive.

Inflation should be under control since ‘wage inflation has not taken effect fully’, said Mr Haider.

However, ‘uncertainties over inflation outlook remain considerable’, so investors should look to combat inflation by investing in the causes of inflation. These include soft commodities in agriculture as high food prices are unlikely to let up in the short term.

Mr Haider also stressed diversification in commodities by investing in hard commodities. Aluminium and copper prices may prove profitable due to higher labour costs and stronger demand. Gold is also a good inflation hedge, with long term gold prices to double or triple in the ‘very long run’ and to reach US$950 per ounce in 2009.

With oil prices likely to remain high, Citi’s tip is to ride on these prevailing winds in the energy sector. Oil field equipment and services companies should profit from greater exploration activity and investors may benefit as oil majors may pay out higher dividends to shareholders.

To counter ‘unforeseen changes in the economic landscape’, good defensive sectors in industries with inelastic demand should also be considered, such as technology, oil and gas as well as healthcare as good sectors.

Because strong demand in food and energy from emerging economies have contributed to higher prices for both goods, emerging markets are also good buys. Their growth should remain markedly higher than that of developed economies. Citi’s GDP growth forecasts put 2008 growth of emerging markets at over 6 per cent as compared with about one per cent for developed countries.

Mr Haider said that Citi analysts also favour frontier economies in the Middle East and North Africa.

As for emerging markets, oil importers with large current account deficits, such as Jordan and Hungary, ‘pose significant risks’ while oil exporters in Latin America and Eastern Europe are good buys.

In Asia, investors should look to North Asia rather than South-east Asia despite the former being net importers of oil. ‘Implications of rising inflation appear more severe for Asean nations than North Asia because of a higher percentage of household expenditure on food and energy, and they have a higher ratio of exports to GDP so they are more vulnerable to the global economic slow down,’ said Mr Haider.

Within Singapore, Citibank overweights the marine and offshore sector in Singapore and certain property developers whose ‘valuations are good’. Mr Haider added that some shine has gone out of telcos and real estate investment trusts (Reits).

Turning to address bonds, Mr Haider said that emerging market debt and Asian bond funds may enhance returns as the greenback declines, with the Australian dollar as Citi’s favoured currency.

His parting shot to investors is to take a long-term view of investments despite market volatility that may present disappointing earnings: ‘It’s about seeking a balanced and diversified portfolio and a comfortable risk level. Pockets of opportunity within asset classes may exist for the investor with a holistic view of his or her portfolio.’

Source : Business Times - 23 Jul 2008

ADB urges central banks to act, says hikes won’t affect just food and fuel

A SECOND round of inflation may be on the cards for Singapore and the rest of East Asia - and this time it won’t be just food and fuel prices going through the roof.

These economies are already experiencing a ‘nagging rise’ in core inflation, which measures price rises beyond oil and food costs, said the Asian Development Bank (ADB) yesterday.

Part of this is due to higher food and energy prices flowing through to the rest of the economy, making other products and services more expensive. Another reason is the recent huge inflow of money from foreign investors coming to Asia and pushing up asset prices.

If governments do not act quickly to keep this second round of inflation in check, it could lead to a new set of broad-based price hikes, ADB warned an audience of 45 central bankers and academics as it launched its semi-annual Asia Economic Monitor report at the National University of Singapore’s Lee Kuan Yew School of Public Policy.

This could in turn trigger a dangerous upward spiral of wages and prices, where employers raise wages to offset inflation but pass on the higher labour costs by upping prices, the report added.

So far, central banks have moved too slowly in tackling inflation - which has reached 30-year highs in some economies - and they need to take more ‘decisive’ action, said Mr Jong-Wha Lee, head of the ADB’s Office of Regional Economic Integration.

In its report, the Manila-based bank cut its forecasts for economic growth across East Asia for this year and next, citing a global economic slowdown and record oil and food prices that show little sign of easing.

‘The unyielding demand for fuel and consistent worries over its supply conditions are expected to continue this year and may worsen next year,’ said Mr Lee. ‘We think the United States economy is likely to avoid a recession this year, but the outlook for a quick recovery is thin.’

ADB expects Singapore’s economy to grow 4.9 per cent this year, down from 7.7 per cent last year, with expansion tipped at 5.8 per cent next year.

It recommended some measures for East Asia’s central banks to combat inflation: tighten monetary conditions, allow currencies to rise faster and use fiscal measures like tax breaks and handouts selectively to help the poor.

Dr Khor Hoe Ee, the Monetary Authority of Singapore’s assistant managing director, responded to the ADB comments on Asia’s central banks being slow to react to inflation by stating that any response to rising inflation depends on its cause.

‘This sudden burst of inflation caught everyone by surprise,’ he said at a panel discussion at the launch. ‘At the moment, most of the inflation we have seen is confined to high oil prices and food.’ If that continues, tightening monetary policy will only exacerbate a downturn, he said.

But if there are other underlying reasons for inflation that spark a second round of price rises, this would be ‘more worrying’ and might warrant more central bank action, he added.

Source : Straits Times - 23 Jul 2008

The global economy is not headed for a period of stagflation, according to US financial giant Citibank. The comment came in its latest investment outlook for the second half of this year.

Citibank said it favours equities over bonds due to high debt valuations, and it also sees potential in emerging markets.

With rising prices and slowing economic growth, some economists have been talking about stagflation.

But Citibank is taking a more positive stand, arguing that slower economic growth may in fact help to combat inflation and therefore reduce the risk of stagflation.

It also sees modest wage growth in both developed and emerging economies.

For investors looking at hedging their portfolio against inflation, Citibank said REITs is one asset class to include.

Salman Haider, Head of Wealth Management, Citibank Singapore, said: “On the REIT side, it’s one of the inflation-combating strategy that we are advising clients on… (for) their portfolio.

“The region we like is continental Europe, excluding UK, and the other region we like is Japan. We think the property prices in these regions would rise with increasing inflation, so that seems to be a good strategy to adopt.

“We are selective when it comes to Singapore, we are selective in terms of where you get exposure, (it) would depend on the specific REIT and what position they have within this market. But globally, we would avoid the US at this stage.”

Citibank said combating inflation is one of the key trends for the second half of this year.

Another sector that it said investors should keep an eye on is global infrastructure. It expects spending in that sector to hit US$2 trillion globally over the next ten years.

In terms of markets, Citibank said emerging markets in Asia and Latin America will be less vulnerable to earnings disappointment. And while it is important to keep a balanced portfolio, it favours equities to bonds for now.

The bank added that it expects Asian currencies to continue on an uptrend for the second half of 2008, albeit at a slower pace.
 
Source : Channel NewsAsia - 22 Jul 2008

Poll shows more firms with higher sales but also higher costs, lower profits

(WASHINGTON) The US economy may have avoided a recession but will grow below trend for some time as firms face higher prices for a range of goods that will cut into profits, according to a panel of economists surveyed.

Economists in the quarterly National Association for Business Economics (NABE) survey were less pessimistic about the economy’s outlook in the June 19 through July 10 survey than they were in April, but said that price pressures would weigh on growth.

‘More firms reported higher sales, but also higher material costs and lower profits, in the second quarter than in the first quarter,’ said Ken Simonson, chief economist at the Associated General Contractors of America.

A record 75 per cent of the economists polled, representing a wide range of industries, said that their firms paid more for materials in the second quarter and expect to see higher prices now as well.

The 101 NABE members surveyed come from all sectors, ranging from manufacturing to financial services. NABE has been conducting this quarterly survey since 1982.

According to the latest survey, more firms are planning increases in capital spending, but continued slowing in the housing and tighter credit have had an impact.

‘More respondents than in the past two surveys said tighter credit market conditions have affected their business negatively for the most part,’ Mr Simonson said.

Still, 44 per cent of the respondents said that they expect inflation-adjusted gross domestic product (GDP) to grow at an annual rate above one per cent in the second half of this year.

But 45 per cent expect growth to be below one per cent and 10 per cent expect a decline.

Demand for goods and services increased at 44 per cent of the respondents’ firms and fell at 19 per cent, a rebound from the dramatically low levels seen in the first quarter.

But weakening US market conditions and soaring commodity prices are squeezing profit margins. For the second quarter in a row, reports of falling profit margins outnumbered those of rising margins.

Among the panelists, 30 per cent reported falling profits while 17 per cent reported rising margins.

And amid wide-ranging cost increases for commodities and goods, 35 per cent of the respondents said that their firms raised prices in the latest quarter, the highest since April 2007.

‘Tighter credit market conditions appear to continue to be having an impact on the economy,’ the NABE survey stated.

Among those surveyed, 41 per cent stated that tighter conditions have affected business, an increase from 39 per cent in the April survey, and 26 per cent in the January survey.

But the share of respondents that expect a further substantial slowdown in the housing market over the next six months dropped to 29 per cent from 45 per cent.

Even with slow growth to continue, employment levels are holding up, particularly in the services sector, the survey showed.

In the second quarter, 27 per cent of all respondents reported rising employment at their firms, while just 12 per cent reported job cuts.

But hiring plans for the next six months will involve caution, the survey showed.

‘Respondents to the July NABE Industry Survey were more varied than in the decidedly downbeat April survey about recent results and the next few quarters, but they were far from ebullient,’ said Mr Simonson. — Reuters

Source : Business Times - 22 Jul 2008