2018 Global Outlook What Goes Up Will Always Come Down? Francis Tan - - PowerPoint PPT Presentation

Disclaimer: This material that follows is a presentation of general background information about the Bank’s activities current at the date of the presentation. It is information given in summary form and does not purport to be complete. It is not to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation or needs of any particular investor. This material should be considered with professional advice when deciding if an investment is

• appropriate. UOB Bank accepts no liability whatsoever with respect to the use of this document or its content.

Francis Tan UOB Global Economics & Markets Research

25th January 2018

Private & Confidential

2018 Global Outlook

What Goes Up Will Always Come Down?

UOB Global Economics & Markets Research

Some Stuff To Ponder, And Puzzles To Solve

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Will Stock Markets Continue to “Cheong”?

Is the US Economy Really Better?

If So, Why Aren’t Prices Higher? Why Aren’t Workers Paid More? Where Are We On The Business Cycle? Why Were Asian Currencies So Strong In 2017? How About 2018? Where’s the SGD going?

Will There Be More En-Blocs Millionaires This Year?

UOB Global Economics & Markets Research

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History Does Not Repeat Itself…

But It Rhymes

Mark Twain

UOB Global Economics & Markets Research

The Business Cycle Always Rhymes

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EARLY MID LATE RECESSION Trough Peak

EARLY MID LATE RECESSION

Fiscal/Monetary stimulus Fiscal/Monetary stimulus slows Fiscal/Monetary tightening Fiscal/Monetary stimulus Economic growth starts increasing Economic growth slows, still positive Economic growth peaks, stagnates, slows Economic growth & mfg contracts, retail drops Employment picks up, confidence improves Stronger employment growth, confidence continues to grow Unemployment at lowest levels, wages increasing, tight lab mkt Unemployment shoots up, wages contract, confidence declines Corporate profits increases strongly Margins peaking, management buys back shares to boost profits Earnings disappoints though expectations remain high Earnings contract, Bank lending drops

UOB Global Economics & Markets Research

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UOB Global Economics & Markets Research

Lots of Exuberance In Markets. As Much As It Looks Like There’s Only One Direction…

Selected MSCI Equity Indices (Dec 2010 = 1000)

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+30%

UOB Global Economics & Markets Research

Markets Do Move In Cycles…It’s All About Sentiments & Psychology… Or, “Animal Spirits”

Selected MSCI Equity Indices (Dec 2010 = 1000)

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UOB Global Economics & Markets Research

Domestic Interest Rates Are Rising  Fast/Slow?

United States & Singapore Interest Rates

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08’ GFC 01’ IT 03’ SARS 98’ AFC

425bps 175bps 300bps 125bps

UOB Global Economics & Markets Research

Domestic Interest Rates Are Rising  Fast/Slow?

United States & Singapore Interest Rates

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UOB Global Economics & Markets Research

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DM & EM Mfg PMI DM & EM Svc PMI

Improvement in PMIs in Developed Markets Faster Than Emerging Markets, But Could be Peaking

DM mfg peaking?

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US: As The Cycle Matures Further

Are Things Looking Better?

UOB Global Economics & Markets Research

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US Real GDP US Output Gap

Improvement In US GDP Since 2H 2016 & Positive Output Gap Will Heighten Fed’s Hawkish Senses in 2018

The “Lost” Decade US$21.52t US$17.62t

UOB Global Economics & Markets Research

US Payrolls Continues To Gain Strongly During This Cycle

Recovery Trend Of US Non-Farm Payrolls During Previous Recessions

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UOB Global Economics & Markets Research

Labour Market Vibrancy Indicators Pointing To Reduced Slack

US Labour Market Conditions

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UOB Global Economics & Markets Research

US Consumer Confidence & Unemployment Rate (12m Lead)

And The US Consumer Is A lot More Confident While The Labour Market Gets Tighter

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UOB Global Economics & Markets Research

Wage Growth Has Not Been Up to Expectations, Even Though Labour Market Is Deemed To Be “Tight”.

US Average Hourly Earnings % y/y

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UOB Global Economics & Markets Research

Improving Unemployment Rates Has Not Translated Into Higher Wages

Us Phillips Curve

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UOB Global Economics & Markets Research

If Fed Really Follows The Taylor Rule, FFTR Would Be Much Higher (Luckily Janet’s Surname Is Not Taylor!)

US Fed Funds Target Rate and Taylor Rule Estimates

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𝒋𝒖 = 𝝆𝒖 + 𝒔∗ + 𝒃𝝆 𝝆𝒖 − 𝝆∗ + 𝒃𝒛(𝒛𝒖 − 𝒛 𝒖) 𝜤(𝑽∗ − 𝑽𝒖)

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US: How About Wage Inflation?

Hiring is Up, Labour Market is Tight, Why Aren’t Wages Rising Faster?

UOB Global Economics & Markets Research

It’s Simple Labour Productivity Growth Is Low! As Employment Share In Low Productivity Sectors Grew

US Labour Productivity Growth

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UOB Global Economics & Markets Research

Moreover, Increased Incidence of Jobs Mismatches After GFC Why? It’s All About The Skills Set

The US Beveridge Curve

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45 deg

High UnN Low Vacancies Low UnN High Vacancies

1 2 3

UOB Global Economics & Markets Research

US Households & Non-profits Balance Sheet

US Households Are Healthier In Terms of Financials

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UOB Global Economics & Markets Research

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US Home Price Indices US New Home Sales

In Part Due To Higher Home Prices, But…

Source: Bloomberg, (Monthly Data)

UOB Global Economics & Markets Research

…Wages Growing Slower; Cost of Funds Rising Faster  Homes Get Increasingly Unaffordable

US Home Affordability

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UOB Global Economics & Markets Research

S&P 500 Corporate Profits, Dividends, and Valuations

American Corporates Still At Healthy Levels, But No Doubt, Valuations Are Rising By The Day

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UOB Global Economics & Markets Research

Fed Rate Hike & Weaker Asian Manufacturing Will Boost DXY

DXY and UOB DXY Interest Rate Spread

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UOB Global Economics & Markets Research

Market Pricing-In Stronger SGD Before Apr 18, And Likely Will Ease After MAS Meeting

UOB SGD NEER

27 119 121 123 125 127 129 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 SGD NEER Upper-end: 2% Mid-Point of Estimated Policy Band Lower-end: 2% MAS shifted SGD NEER slope from 2% to 1% in an off-cycle decision MAS shifted SGD NEER slope from 1% to 0.5% MAS shifted SGD NEER slope to Neutral MAS kept neutral stance unchanged in Oct 16, Apr 17 and Oct 17 meetings Easing Round 1 Easing Round 2 Easing Round 3 SGD NEER was trading above midpoint 98% of the time since Jan 2017

Source: Bloomberg (Daily Data)

UOB Global Economics & Markets Research

USDSGD  Have Faith!

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Economic Conditions in SG

UOB Global Economics & Markets Research

Slower Growth During This Recovery Cycle

Singapore’s Real GDP

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UOB Global Economics & Markets Research

External Sectors Are Picking Up Very Strongly

Singapore’s Real GDP (Production)

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UOB Global Economics & Markets Research

Recent Pickup in External Sectors Spilling Over to Domestic Sectors

Singapore's Real GDP (External vs Domestic Sectors)

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87’ Crash 97’ Crash 07/08’ Crash 01’ IT

UOB Global Economics & Markets Research

Resurgence in Domestic Consumption, But Investments Still Sluggish

Singapore’s Real GDP (Expenditure)

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UOB Global Economics & Markets Research

China’s Mfg As A Mildly Positive Leading Indicator For SG NODX

China Satellite Manufacturing Index & Singapore Non-Oil Domestic Exports

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UOB Global Economics & Markets Research

Slower Growth For Semiconductor Output Expected In 2018

Asia Pacific Semiconductor Sales vs Singapore Semiconductor IP

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UOB Global Economics & Markets Research

1,880 1,170 1,000 2,000 3,000 4,000 5,000 6,000 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Persons PMET CSSW PTOCL

Prof, Managers, Executives & Technicians Clerical, Sales & Service Workers Prod,Transport Operators,Cleaners & Labourers

Recessions Recessions Recessions

Falling Retrenchment Numbers Amongst PMETs Is A Good Sign

Number of Retrenched Workers by Profession

Source: CEIC, UOB Global Economics & Markets Research (Quarterly Data)

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GFC: 13,130 (PMET) 2012 to date: 43,000 (PMET)

UOB Global Economics & Markets Research

1.80 3.00 2.40 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Persons PMET CSSW PTOCL

Prof, Managers, Executives & Technicians Clerical, Sales & Service Workers Prod,Transport Operators,Cleaners & Labourers

Recessions Recessions Recessions

While Employers Are Holding On To Staff, They Are Hesitant In Hiring More

Job Recruitment Rate

Source: CEIC, UOB Global Economics & Markets Research (Quarterly Data)

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UOB Global Economics & Markets Research

0.35 1.30 0.21 1.42 0.37 1.42 0.85 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Ratio

SG Recessions Job Vacancy to Unemployed Person Ratio: sa

10q 6q 6q

Slight Improvement In Labour Market Tightness, But It’s Basically Still An Employers’ Market

Job Vacancy-to-Unemployed Ratio

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Source: CEIC (Quarterly Data)

Employees’ Market Employers’ Market

23 qtrs

UOB Global Economics & Markets Research

1.10 1.00 1.00 1.20 2.50 2.30 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Persons PMET CSSW PTOCL

Prof, Managers, Executives & Technicians Clerical, Sales & Service Workers Prod,Transport Operators,Cleaners & Labourers

Recessions Recessions Recessions

And Employees Are Hanging On To Their Jobs Dearly, Esp. PMETs

Resignation Rate

Source: CEIC, UOB Global Economics & Markets Research (Quarterly Data)

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UOB Global Economics & Markets Research

What is This?

????

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UOB Global Economics & Markets Research

On Average, Every 10 New Couples Have 12 Children

Singapore’s Total Fertility Rate

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UOB Global Economics & Markets Research

Longer Term Challenges

Singapore’s <15yo and >65yo as % of Total Resident Population

Source: CEIC

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13.0% 27.0% 15.0% 10.8% 0% 5% 10% 15% 20% 25% 30% 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 % of total residents

%>65yo %<15yo 2018

UOB's forecast

12 More Years! SG 65

Faster ageing will necessitate policy changes, including tax

UOB Global Economics & Markets Research

Strong Demographics Is On ASEAN’s Side, But Not For Some

% of Population >65yo and <15yo (2016)

Source: Bloomberg, UN Census Bureau (Annual Data)

44 4.0 4.5 4.7 5.1 5.2 5.5 5.8 6.1 6.9 10.1 11.0 13.0 13.2 13.4 15.0 15.3 15.8 26.6 27.0 33.3 34.9 32.0 28.9 27.7 27.4 28.2 24.6 23.1 17.7 17.7 15.0 13.3 13.7 19.8 18.9 11.2 12.9 10.8 5 10 15 20 25 30 35 40 % of Population

>65yo <15yo

UOB Global Economics & Markets Research

Demographics Dividends or Costs?

Selected Demographics Indicators in Asia

10 20 30 40 50 60 70 80 90

• 1

1 2 3 4 5 6 7 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100 Years TFR, Pop Growth Total Fertility Rate Population Growth Life Expectancy (RHS)

Source: UN Population Prospects (Annual Data)

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SG 100

UOB Global Economics & Markets Research

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UOB Global Economics & Markets Research

Who Says GDP Is NOT Important? High Income Growth = High Property Price Growth

Real GDP and URA Property Price Index

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UOB Global Economics & Markets Research

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4 Factors Supporting SG Property Prices

UOB Global Economics & Markets Research

1: Relative “Value” of Singapore’s Private Property

Selected Property Prices (2011 = 100)

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SG

UOB Global Economics & Markets Research

2: Singapore Has One Of The Highest Savings Rate

Selected Gross Domestic Savings As % of GDP

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SG

UOB Global Economics & Markets Research

3: And One Of The Lowest Unemployment Rates

Selected Unemployment Rates

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SG

UOB Global Economics & Markets Research

4: Though Interest Rate Climbing, Not Like The Previous Tightening Cycle

3m SIBOR and US FFTR

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UOB Global Economics & Markets Research 10 20 30 40 50 60 70 80 90 100 200 400 600 800 1,000 1,200 1,400 SG median px /sqft (S$, rhs) SG HK More Affordable

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Assumptions Unit Size: 1,450 sq ft Price: $929 psf Unit Cost: $1,347,050 (CPF:20%, cash:20%) Interest Rate: 4.60 Household Income: $9,050/month Period: 25 years repayment Debt Servicing: 52.0% Assumptions Unit Size: 1,200 sq ft Price: $1,041 psf1 Unit Cost: $1,249,740 (CPF:20%, cash:10%) Interest Rate: 1.9% Household Income: $16,900/month Period: 25 years repayment Debt Servicing: 21.6% Less Affordable

Low Mortgage Debt Service Ratio due to Low Interest Rates, High Income Growth and Smaller Units

Debt Servicing Ratio Between SG and HK

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Note: SG calculation based on median condo prices for 110 sqm, 70% LTV and loan tenor of 25 yrs, median resident household income living in private properties . HK calculation based on 45 sqm area, 70% LTV and loan tenor of 20 yrs, median household income Source: URA, CEIC, HK SAR Finance Secretary’s Office, Singapore Statistics, UOB Global Economics & Markets Research Estimates

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When interest rate = 5%

UOB Global Economics & Markets Research

Affordability Comparison (2016)

Rule-of-Thumb for affordability in global city-states is 4x for overall system, and 7-8x for private residential 57

Description Singapore HDB BTO (Non-Mature Town) Singapore HDB Resale Singapore Condominium Hong Kong Class B** Malaysia KL (Avg House price) Price per sqm S$2,867 S$5,031 S$11,228 HK$123.659 RM6,244 Average House Size (sqm) 90* 90* 110 56 120 Assumed House Cost S$258,000 S$452,826 S$1,235,117 HK$6,924,923 RM749,305 Average Monthly Household Income S$8,846*** S$11,589*** S$16,900*** HK$35,000 RM6,500 House Price vs Income Ratio 2.4 3.3 6.1 16.4 9.6 Description China National China Beijing China Tianjin China Shanghai Taiwan Taipei City Price per sqm RMB7,475 RMB27,497 RMB12,830 RMB24,747 NT$218,547 Average House Size (sqm) 90 90 90 90 90 Assumed House Cost RMB672,750 RMB2,474,730 RMB1,154,700 RMB2,227,230 NT$19,669,230 Average Monthly Household Income RMB3,970 RMB8,755 RMB5,679 RMB9,050 NT$97,600 House Price vs Income Ratio 14.1 23.6 16.9 20.5 16.8 Source: Singapore DOS, UOB Global Economics & Markets Research Assume 2 working adults in a household where household income data is not available. *Ave 4-room HDB China: 2016 average monthly household income refers to disposable income; property prices from Ministry of Commerce **Ave private residences in HK, Kowloon and New Territories ***Singapore -- Based on national median income, average national income and median resident employed household income for those living in condos and pte flats respectively

UOB Global Economics & Markets Research

$- $100 $200 $300 $400 $500 $600 $700 $800 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 NASDAQ Composite Gold US Home Nikkei 225

Bubble?

Selected Assets Prices

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Source: Bloomberg, UOB Global Economics & Markets Research Est

Mar 2000 Sep 2011 Jan 1990 Jun 2007

UOB Global Economics & Markets Research

$- $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 $1,800 $2,000 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Bitcoin NASDAQ Composite Gold US Home Nikkei 225

• 45%

What Bubble?

Selected Assets Prices

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Source: Bloomberg, UOB Global Economics & Markets Research Est

18 Dec 2017

UOB Global Economics & Markets Research

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UOB Global Economics & Markets Research

Latest ICO in TOWN!!

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UOB Global Economics & Markets Research

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US

• Better payroll numbers did not translate into higher wage gains as

productivity growth remains low, skills mismatches worsened post- GFC, and the pass-through to consumer prices (if any) were negated by the still-low commodities prices, falling services prices, and labour-saving technology adoption.

• US is at the late stage of the business cycle. Will lower corporate

taxes extend the business cycle?

ASIA

• Manufacturing cycle turning down. Will impact current account
• balance. Policymakers need to be more accommodative. Asian

currencies will trend lower into 2018. We are bearish on the ADXY.

SG

• We are getting older, faster than ever. Govt expenditure will rise.

Need to seek higher revenue (higher taxes or more immigrants?), or reduce cost further.

UOB Global Economics & Markets Research

Question & Answer Session

63 About The Speaker Francis is an economist with the United Overseas Bank’s Global Economics & Markets Research team. His interest is in the field of development and financial economics, where he is passionate about the future development and economic

• pportunities for ASEAN nations via financial innovation. While going about his daily research work running economic

models and crafting reports, he also provides regular economics commentaries in both English and Mandarin on TV and Radio and is frequently quoted in the print media. Before joining UOB in 2012, Francis was an investment strategist at Phillip Capital where he used macroeconomics, business cycle theories, market timing and technical analyses to develop a systematic top-down investment approach for discretionary portfolios. Prior to that, Francis served as an Investment Manager in the wealth management arm of the Royal Bank of Scotland. His career also included stints as an economist at the Ministry of Trade and Industry and the Singapore Tourism Board, where he specialised in Tourism Economics. Francis obtained the Bachelor of Social Science (Honours) in Economics in 2002 and the Master of Social Science in Applied Economics in 2003 from the National University of Singapore. Continuing his academic interests in the field of applied economics, Francis had also contributed a chapter titled "Tourism Demand in Singapore: Estimating Neighbourhood Effects" in the Handbook of Tourism Economics published in 2013, and had published a paper titled “Growth and Environmental Quality in Singapore: Is There Any Trade-off?” in the “Ecological Indicators” journal in 2014.

Contact Details Francis Tan UOB Global Economics & Markets Research francis.tantt@uobgroup.com

Thank You