OCBC Wealth Management Market Views
- March 2008

Investment Overview

Stock markets are likely to remain choppy given continued concerns about the U.S. economy and sub-prime mortgages. However there are still pockets of medium-term opportunities despite the turmoil in international financial markets.

While bourses in Asia and emerging markets have gone through a correction in recent months, they remain attractive from a medium-term perspective. But in the short-term, they are likely to stay volatile and may even correct further.  

For those with a strong risk appetite, and with limited exposure to equities in Asia and emerging markets, any sharp corrections in these bourse presents opportunities to accumulate on dips. 

We are also positive on soft commodities and precious metals like gold, which stand to benefit from supply shortfalls and healthy demand.

Infrastructure is another area with a good medium-term growth story as substantial amounts of investments will be needed over the next few years to facilitate Asia’s buoyant growth prospects and to replace ageing facilities in developed markets.

Despite the opportunities highlighted above, investor should be careful not to over-invest in them. If they intend to make any fresh investments, they should spread them out over the next few months. 

There is a risk that markets may correct further if the sub-prime woes worsen, or if global economic growth slows down more sharply than expected. 

FIXED INCOME

In the bond universe, local currency denominated Asian bonds stand out from the pack. However, Asian bonds are likely to be caught between accelerating inflation concerns amid a less sanguine external growth outlook.  China for instance, saw its inflation rate accelerate to 7.1 per cent in January 2008, which was the fastest pace in more than 11 years. This took place on the back of bad snowstorms which disrupted food supplies and aggravated food inflation, putting pressure on the Chinese central bank to continue tightening monetary policy.  In Singapore too, the government has upgraded its consumer price inflation forecast from 3.5-4.5 per cent to 4.5-5.5 per cent. The threat of monetary policy tightening in view of accelerating inflationary pressures, may limit gains for Asian bonds in the near-term.

COMMODITIES

Oil
Crude oil has surpassed the US$100 per barrel mark on the back of a weaker U.S dollar and speculation that production disruptions will keep supplies tight and help push prices higher. However going forward, oil prices may pull back due to slower global economic growth and the warmer weather. 

Base metals
Copper prices have risen on the back of lower stockpiles and China’s strong appetite for copper and copper products. These factors should continue to underpin copper prices. 

Aluminum prices also looks set to stay firm as supply remains tight. Aluminum stocks could diminish further to a record low level, which would push prices higher.

Global consumption of zinc, used to galvanize steel, continues to grow, resulting in a sustained increased in the price of the base metal. 

Precious metals  
Precious metals stand to benefit from supply shortfalls and healthy demand.  Precious metals are also benefiting from the weaker U.S. dollar and strong demand from retail and institutional investors who see metals such gold as a good hedge against inflation and the global uncertainties. 

Demand for gold rose to a record high of US$79.2 billion in 2007 – its fourth annual record in a row. India, China and other rapidly growing economies have seen rising consumer affluence reflected in higher demand for gold jewellery, adding to pressure from investors and speculators seeking a safe haven in times of economic and political uncertainty.

Gold prices were in the limelight recently when they breached US$900 an ounce in the wake of reports that demand was exceeding supply.  

Constraints on gold supply have been brought about by higher production cost. Gold mining is more expensive as input costs have soared across the sector, and miners have to dig deeper and in less politically stable areas. Lack of investments and falling ore grades in South Africa, which is the world's largest gold producer, are also hurting supply.

Soft commodities  
Soaring food prices are becoming a major policy issue in many parts of the world, especially Asia, as it is fuelling inflationary pressures. According to the United National (U.N.) Food and Agriculture Organisation, food prices globally soared nearly 40 per cent in 2007.

The phenomenal growth in emerging markets like China and India has driven up demand for soft commodities like wheat, corn and soybean. At the same time, droughts, floods, and the conversion of farmland into residential property because of soaring land values, have all combined to crimp the supply of these commodities from farmers.

Historically, supply and demand has fluctuated wildly at times. But there’s been one constant, which is that people always have to eat. If nothing else, this one fact helps to make soft commodities a relatively safe long-term bet. In fact, the U.N. has projected that the world population will rise to 9.2 billion by 2050 from 6.5 billion in 2005, which will increase pressure on global food supplies.

Increases in grain production brought about by irrigation and synthetic fertilizer-pesticide inputs have peaked and begun declining. As consumption surpasses production, the world's stocks of stored grain have been falling relative to each year's use.

Climate change has also been a key driver of higher prices for soft commodities, as it has led to greater demand for environmentally-friendly biofuels. The drive to cut greenhouse gas emissions from conventional fuels to curb global warming has driven demand for biofuels. The high cost of crude oil, which hit record levels in January, has made the production of biofuels more commercially viable. Farmers are switching from growing crops such as corn or jatropha, a weed to feed the biofuel industry, rather than crops destined for the dinner table. Figures from the U.N. Food and Agriculture Organisation show that the amount of US maize used for biofuel has doubled since 2003. It also predicted that the European wheat use for ethanol could rise 12-fold by 2016.  

For more on the outlook for interest rates, currencies and equities, please go to: www.ocbc.com/wealth