quarterly investment strategy · webcast – asset allocation strategy for q1 2014 in our quarterly...

Asset AllocAtion Overweight Equities, Neutral on Commodities and Underweight Fixed Income

equityAcceleration in global growth should help global equities perform well

Fixed incomeStructural issues warrant a cautious stance in emerging markets

commoditiesDifferentiation in the outlook for various commodities

FIRST QuaRTeR

2014

QUARTERLY

INVESTMENT STRATEGY

developedeconomiesto lead growth

As one of the thought leaders in asset management, UOBAM regularly produces topical investment research articles and publications to help our clients stay on top of financial market developments.

Webcast – Asset Allocation strategy for q1 2014

In our quarterly webcast, Mr Tony Raza, Head of Multi Asset Strategy Unit, will share our asset allocation strategy, as well as discuss key issues driving developments in global markets.

View the webcast on the homepage of our website at uobam.com.sg.

contents

2 CIO MESSAGE

4 GLOBAL ASSET ALLOCATION

5 SUMMARY

6 FIRST QUARTER INVESTMENT THEMES

12 GLOBAL EQUITY STRATEGY

13 Equities Overview

14 • US

16 • Europe

18 • Asia ex-Japan

20 • Japan

22 • Canada

23 • Australia

24 • Latin America

25 SPECIALIST EQUITY STRATEGY

26 • China

28 • ASEAN

29 • Singapore

30 GLOBAL FIXED INCOME STRATEGY

31 Fixed Income Overview

32 • Developed Markets

37 • Emerging Markets

39 • Asia

40 • Singapore

41 CURRENCIES

44 COMMODITIES

01QUARTERLY INVESTMENT STRATEGYFirst Quarter 2014

UOB Asset Management

CIO MESSAGE

It was an eventful quarter during which risk assets mostly moved higher. Markets were buoyed by the fact that US policy makers managed to restart the government and dodge default, as well as by the US Federal Reserve’s continued asset purchases. Data suggests that there was limited disruption caused by the temporary US government shutdown. Meanwhile, developing economies are showing signs of stabilising after a sharp slowdown into mid-2013.

The September World Economic Outlook from the IMF made the following observations: “While advanced economies are growing again, policy makers must continue financial sector repair, pursue fiscal consolidation, and spur job growth. Emerging market economies face the dual challenges of slowing growth and tighter global financial conditions.” These observations are consistent with our own, namely that things have improved but that major issues remain for both advanced and emerging economies.

The outlook for advanced economies has improved slightly, with expectations of modest growth in 2014. US data continues to suggest that the recovery is broadening and becoming more robust. While the rise in government bond yields and mortgage rates appears to have impacted the pace of housing recovery, employment and wage trends continue to track favourably. The cyclical indicators in Europe have rebounded and the Eurozone should recover to record modest growth in 2014. Japan, however, is clearly at risk of slipping back into stagnation. Weakened external competitiveness may limit Japan’s ability to see through its reforms. Higher taxes may also dampen the recovery in domestic demand.

The recovery of emerging market economies is expected to lag behind that of advanced economies. The abundance of global liquidity that had driven investments and output has also created challenges for emerging markets. Public subsidies, higher wages and poor credit allocation pose risks that necessitate timely and somewhat painful reforms. Be it interest rate reform and re-allocating capital from

the state to the private sector in China, removing fuel and food subsidies in India and Indonesia, or dealing with wage inflation more broadly, the emerging market economies are facing new headwinds that may be exacerbated by shifts in capital and foreign direct investment flows.

While the long-term outlook for emerging market economies remains positive, and is supported by favourable demographic trends, improving education levels and rising productivity, recent developments only underscore the fact that the transition from developing to advanced economic status is rarely a straight line. We have temporarily reduced our exposure to emerging markets, due mainly to uncertainties on how the global shift in liquidity conditions will impact these dynamic regions. We expect that as the transition happens opportunities will emerge. In the following sections, we delve into more detail on several of these investment themes. We hope that our clients can benefit from our insights. Successful investing requires careful analysis and patience, and these are the core values that we at UOB Asset Management subscribe to.

John DoyleChief Investment Officer, Equities

Chong Jiun YehChief Investment Officer, Fixed Income & Structured Investments

02 QUARTERLY INVESTMENT STRATEGYFirst Quarter 2014

Please refer to the last page for the important notice & disclaimer.

Global asset allocation*– n +

equities

Fixed income

commodities

cash

* 3-6 month horizonNotes: + denotes maximum overweight, N denotes neutral, - denotes maximum underweight

equities – overweightWe are expecting an acceleration in global growth, particularly in the US, and this should help global equities to perform well. In addition, the list of tail risk events that may jeopardise the equity market rally is certainly shorter now compared with previous years, and therefore, the risk-reward proposition looks more attractive now. We see current valuations at fair levels and believe that earnings momentum could improve.

Fixed income – underweightA rising global interest rate environment presents duration risks. Therefore, fixed income markets that offer mid-single digit returns may struggle to perform in this environment. We are cautious on emerging markets fixed income due to some of the structural issues these markets have to grapple with.

commodities – neutralWhile the macro backdrop has improved, there is a differentiation in the outlook for various commodities. Furthermore, China’s rebalancing of its economy presents challenges in certain industrial metals and energy complexes. For this reason and despite the difficult first half of the year, we stay neutral.



SUMMARY

Changing Tides

developed world takes the lead. Unlike in previous years, the fear of double-dipping is largely over and the US housing market is showing more signs of life than before. In Europe, the consensus has now shifted to an expectation of an end to the recession by mid-2014, which is supported by a rise in retail sales and consumer confidence and the trend of some purchasing managers’ indices breaking above 50. We think that the developed world in 2014 will likely be more of a growth driver than it has been in the past couple of years, while the emerging markets will benefit from the uplift later on in the cycle.

earnings should improve. Our constructive view of global growth and developed markets’ growth suggest that the earnings growth outlook remains positive. We are seeing a number of earnings estimates being revised upwards to reflect the improved fundamentals seen across sectors. In the US, consensus earnings for 2013 have been revised up to US$105 per share from US$103 earlier. Closer to home, Asia has witnessed a turnaround in investor sentiment as China’s growth outlook stabilised. Within Southeast Asia, Singapore looks well placed to benefit from the G3 recovery.

Policy direction bears close watch. Looking ahead, the US Federal Reserve (Fed)’s tapering schedule remain a key event, even though the central bank has officially kicked off the process. In our view, the subsequent pace of adjustment will depend on data changes in either direction and therefore, it is something that deserves attention. In any case, the Fed has reassured investors that monetary policy would stay accommodative even after the unemployment rate falls below 6.5 per cent. This lowers the risk of an interest rate shock to the economy.

stocks, relative to bonds, are not overvalued. In this environment, we see the 10-year rate trading below 3.3 per cent in 2014. The call on the 10-year rate has implications

for the US equity market valuation, which appears stretched by some measures. However, the extraordinarily low risk- free rate at this point suggests that such a valuation may be supported since the alternative – bonds in this case – offers even less upside.

overall, we turn more positive towards developed world equities. Against this backdrop, we recommend an overweight call on equities and underweighton fixed income in general. In terms of regional exposure, we have a preference for developed market equities over emerging market equities.



FIRST QUARTERINVESTMENT THEMES

Last quarter, we wrote about the possibility of the US tapering its quantitative easing (QE) even though the economic recovery remained fragile. Since then, there has been confirmation of the US Federal Reserve (Fed)’s intent to scale back its QE programme. However, what took the markets by surprise was the sharp and broad-based sell-down across the emerging markets. These markets – both weak and sound – witnessed sudden outflows that led to their currencies declining against the greenback.

In the following sections, we will highlight some of the key issues that will likely sway equity and fixed income markets in either direction.



1. Global growth holding upWith growth momentum stuck in a see-saw manner over the past three years, it is easier to get bearish as current economic statistics appear to roll over. However, the fact remains that the recovery of the developed markets is certainly more entrenched than in previous years.

Unlike in previous years, the fear of double-dipping is largely over and the US housing market is showing more signs of life than before. While it is still weak, we have seen hiring activity pick up in the US as the jobless claims continued to slide broadly. The US unemployment rate is still on the downward path, even though that is partly due to the low labour force participation rate.

In Europe, the consensus has now shifted to expectations of an end to the recession by mid 2014, which is supported by a rise in retail sales and confidence and the trend of some purchasing managers’ indices (PMI) breaking above 50. Although there are still some structural problems to be resolved, things are at least looking much better, helped by supportive monetary policy.

In Japan, Abenomics— a package of stimulative fiscal and monetary policies—is having the desired effect of boosting gross domestic product (GDP) growth and lifting consumer price index (CPI) inflation. With a year-on-year CPI inflation rate of 0.9 percent in August, the Bank of Japan is roughly halfway to its stated target of 2.0 percent. While we expect Abenomics to continue to work in the near term, lasting improvement in growth will require structural reforms that would open the door to both trade opportunities as well as measures to offset a shrinking workforce.

Furthermore, North Asia (ex Japan) is picking up on the improvement seen in the Group of 3 (G3) (US, Germany and Japan) and China achieving a measure of growth stability even as it is set to unveil a raft of major reforms for the next 10 years.

What this means for global GDP growth in 2014 and 2015 is that the developed world will likely be more of a growth driver than it has been in the past couple of years. The other notable development will be an eventual normalisation of central bank policy rates. Ultra-low short-term lending rates have been the norm for the past four years or so, but many central banks will likely increase policy rates in 2015.

Current PMI is implying growth of 2.6% - up from 2.21%

Source: Bloomberg, 5 Nov 2013

World GDP (%,lhs) JP Morgan Global Manufacturing PMI

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35

40

45

50

55

60

-6

-4

-2

0

2

4

6

Current PMI is implying growth of 2.6% - up from 2.21%

Ap

r-98

Jan-

99

Oct

-99

Jul-

00

Ap

r-01

Jan-

02

Oct

-02

Jul-

03

Ap

r-04

Jan-

05

Oct

-05

Jul-

06

Ap

r-07

Jan-

08

Oct

-08

Jul-

09

Ap

r-10

Jan-

11

Oct

-11

Jul-

12

Ap

r-13



2. Global earnings outlookOur constructive view of global growth and developed markets’ growth suggest that the earnings growth outlook remains positive. Already, we are seeing a number of earnings estimates being revised upwards to reflect the improved fundamentals seen across sectors.

In the US, consensus earnings for 2013 have been revised up to US$105 per share from US$103 earlier, while the earnings revision ratio (number of upgrades versus downgrades) is still on the upward trend. In Europe, which is projected to emerge from a recession in 2014, we have seen inflows heading back in the same way as they did to the US earlier. In fact, some of the peripheral European countries such as Greece have started to bounce back from the trough.

Closer to home, Asia has witnessed a turnaround in investor sentiment as China’s growth outlook has stabilised. However, the improvement tends to be concentrated in North Asia, which has historically been more plugged into the global electronics cycle. For example, Korea has seen a pick-up in exports growth, while the PMI across the region are broadly moving up. The leading indicators are now suggesting that the growth of Asian (ex Japan) exports should pick up in about a quarter or so, and we should see sentiment improve then.

In addition, the stock market valuation for Korea is still depressed relative to the rest of Asia-ex Japan,which makes a case for investing in Korean equities. Not surprisingly, the earnings revision ratio and sentiment have started to turn around.

In Southeast Asia, equity markets have broadly sold off, but the earnings outlook remains challenging. Economically, there is a need for structural reforms in India and Indonesia, while Thailand needs to address its high level of domestic debt. In these markets, we believe that the weaker sentiment and reforms will weigh on final demand and earnings outlook. With the region, Singapore probably will benefit the most from the G3’s recovery and therefore, looks best in terms of earnings outlook.

PMI

Source: CEIC, Bloomberg, 28 Oct 2013

US ISM Asian exports (yoy,%,3 mma)

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35

40

45

50

55

60

65

-0.5

0

0.5

Jan-

93

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-93

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-94

Oct

-95

Sep

-96

Aug

-97

Jul-

98

Jun-

99

May

-00

Ap

r-01

Mar

-02

Feb

-03

Jan-

04

Dec

04

Nov

-05

Oct

-06

Sep

-07

Aug

-08

Jul-

09

Jun-

10

May

-11

Ap

r-12

Mar

-13



3. uS’ long-end marches to 3 per centIn September 2013, Fed chairman Bernanke stunned the market by announcing non-tapering against the almost unanimous view that the liquidity pumping would slow in that month.

Although the development would surely count as one of the fastest about-turns in Fed policy, we have identified the US political showdown as a key reason for the Fed putting off the tapering until now.

Indeed, the fact that the US came this close to defaulting on its Treasuries – seen as a safe asset until quite recently – suggests to us that keeping the liquidity stimulus at the same pace is warranted, if only to keep the US economy gliding along the “thin economic ice”.

The Fed was and continues to be concerned about the low labour force participation rate – a sign that claims and unemployment have fallen mainly because a number of workers are leaving the workforce.

Into 2014, we believe that the tapering will remain gradual, with the Fed likely to err on the side of caution.

On the fiscal issue, the Republican Party clearly had its support dented, after its Tea Party group forced the government to shut down in order to push its own agenda. The polls have since shown that public disapproval of its tactics has risen significantly, with most Americans pointing the finger at the Republican Party rather than at Democrat president Barack Obama. Even the business groups, which have traditionally supported the pro-tax cuts Republican camp, also voiced their concerns over the Tea Party’s dominance and disregard for the country’s economy.

Such public pressure has caused the Republican Party to back down from its earlier hard-line stance – a development

which should keep them on their toes once talks on the budget resolution are in full swing. Therefore, our view is that the upcoming budget debate may be less hostile and negative for the economy.

The improvements in the US fiscal positionh have given room for optimism on growth. Between 2007 and 2009, the fiscal deficit of the US government, including state and local, jumped from 2.7 per cent to 12.9 per cent of GDP as a result of the financial crisis. However, the latest International Monetary Fund (IMF) forecast is for the deficit to narrow to 3.9 per cent for 2015. As the fiscal drag slows, growth should pick up.

In terms of monetary policy, the market consensus is that the incoming Fed chairman Janet Yellen is a “dove” and therefore, policy easing is likely to stay in place for a very long time. While we do not doubt that the Fed funds target rate will stay low for some time, we think that the market has overestimated Yellen’s dovishness. If anything, Yellen’s views are very much driven by data and decisions on issues such as tapering, the pace of tapering or rate tightening wil likely be more dependent on the health of the US economy than her personality.

A look at her track record bears that out. As president of San Francisco Fed in 2004, Yellen flagged out the risk of housing bubble internally and urged corrective actions. When the economy appeared to be on the brink of deflation in 2011, she was among those in support of extraordinary stimulus measures. Therefore, it is actually more appropriate to classify Yellen as an activist policy maker who makes decisions based on data, rather than a consistent dove in good or bad times.

Given the popular view that Yellen is dovish, we think that she may be keen to establish her own policy agenda when she comes into office – mostly likely to lay out the roadmap for interest rate normalisation.



4. Long term rates and market valuations In our last strategy, we had estimated the fair value of the 10-year US treasury yield at about 2.8 per cent for 2013 and that it would drift up to 3.3 per cent once the QE has ended. The 10-year rate did breach our target shortly after our report, but it has sunk to a low of 2.54 per cent after the non-tapering decision and the US government shutdown.

In our view, these developments are short term in nature and can delay but will not prevent the 10-year rate from converging to its fundamental value. If our base case assumption of a March tapering holds (and the economic data support such a decision), then we should not be surprised that the long end of the US yield curve pushes towards 3 per cent.

The fundamental factors certainly support such a view. For a start, the overall tone of US data has improved even though there has been some slight weakness from the government shutdown. The US ISM – a barometer of manufacturing health, continues to push higher, while the jobless claims continue to slide. Furthermore, CPI inflation is holding up at above 1 per cent and we are optimistic that it will slowly adjust upwards. To the extent that the 10-year rate reflects the growth trajectory, we should expect the yield curve to steepen from here.

What has kept the 10-year rate from pushing higher, however, is an eventful period of political and policy events that we think will pass after the first half of 2014. Therefore, it is our view that duration risk remains a concern for portfolio positioning.

Given the delayed tapering and the prospects of warring political camps restarting talks on the US fiscal issue, we see the 10-year rate trading in a range between 2.5 and 2.8 per cent, with a bias towards the upper end of range. For 2014, we retain our call of 3 to 3.5 per cent range for the 10-year rate. The call on the 10-year rate has implications for the US

equity market valuation, which appears stretched by some measures. For example, the market cap to nominal GDP ratio for the US market is already at the level seen in July 2007. However, the extraordinarily low risk free rate at this point suggests that such a valuation may be supported since the alternative – bonds in this case – offers even less upside. This is clear from the high equity risk premium in the market right now. The risk premium is elevated not because equity yield is high but rather that the bond yield is extremely low. In this case, the adjustment process is more likely to be driven by the selling off of government bonds rather than US stocks getting de-rated.



assessmentIn summary, we are getting incrementally more positive on global economic growth as the US is still on the recovery cycle while Europe is expected to emerge from its recession by mid-2014. The combination of these two developments, together with improved economic conditions in Japan, builds a case for a gradual global growth uptrend led by the G3 markets.

In the emerging markets, there have been some positive developments as well, most notably China’s stabilising growth outlook for 2013. This is important since the country is now a major trading partner and export market for commodity producers like Brazil, Indonesia and Australia. A stable Chinese economy will also provide confidence to investors that the emerging markets’ economic slowdown may not be as sharp or protracted as feared previously.

In Asia ex Japan, India and Indonesia have taken steps to address their currency woes, even though it is still too early to tell if those measures are sufficient once the Fed’s tapering is in full swing. Our base case assumption is that we are still early in the interest rate normalisation process and the subsequent rounds of tapering will depend on the economic outlook.

We believe that the 10-year US bond yield will slowly drift up to 3.3 per cent by end 2014. Our work suggests that the fair value of the 10-year rate is at 2.8 per cent for 2013 and therefore, long duration risk remains a key concern.

However, we are sanguine of the equity market performance (especially the US market) because of the projected improved earnings profile and the fact that equities are trading cheap relative to bonds. If we accept that developed markets are now ahead in the growth cycle, then an outperformance in the developed equity markets can be expected.



GLOBALEQUITYSTRATEGY

There is now a dichotomy between the economic cycles in developed markets and emerging markets. While the outlook for developed markets has brightened, the outlook for emerging markets has taken a darker shade. Overall, this makes regional and country selection calls more critical than before. In this regard, we prefer developed markets over emerging ones as the investment case is a lot stronger for the former.

The US economy is showing signs of improvement. This is especially the case for household consumption and investments. The US housing market is clearly improving, as seen from the builders’ confidence surveys. In terms of household balance sheets, the US enjoys lower household debt relative to its peers and the shale gas discovery is a structurally positive development for the country.

In Europe, the situation has improved even though recovery remains fragile. Furthermore, credit recovery remains lacklustre, and private debt to gross domestic product (GDP) ratio is still high by historical standards. However, we recognise the clear economic improvement and we upgrade Europe to a neutral call.

In Japan, it is not clear if the Abe administration has the political will to push through all three “arrows” of his stimulus programme. There is also uncertainty over the effectiveness of the programme. However, we acknowledge the improvement in Japan’s economic data in recent quarters.

We are underweight in Asia ex Japan, as the region is clearly slowing down with countries such as Indonesia and India facing structural challenges in their current accounts, debt levels and withdrawal of capital. Some of these concerns will continue to weigh on equity markets and the region may fail to deliver.

We are underweight Latin America due to the structural challenges that some of these countries (e.g., Brazil) face. In our view, Mexico is the only market that looks more positive as it is more leveraged on US growth. Given that we are positive on the US, we lean more towards Mexico than Brazil.

overweight position in equities equities asset allocation

– n +

DevelopeD

us

europe

Japan

canada

Åustralia

eMeRGING

Asia (ex. Japan)

lAtAm

emeA

* 3-6 month horizon



We take a positive view on the fundamentals of the US market as the improvement in economic activity continues to broaden out. Other than supportive consumer-related activities such as credit lending, automobile sales, residential construction and consequently employment, business related indicators such as durable goods orders and ISM data have registered strong readings in the last few months. Capital spending plans, while more moderate, are up year-on-year, and we view these to be lagging indicators.

Meanwhile, we continue to believe business activity data should maintain this recent positive momentum as lending standards continue to ease. Historical evidence suggests that the “Banks Tightening C&I Loans” index has a high correlation to various economic indicators including the Non-Residential Fixed Investments (commonly known as capex), non-farm employment and the US ISM, with the lending index leading by nine months. We have already seen the non-farm employment and the US ISM closing the gap with the lending data, and expect the capex data to follow suit and firm up in 2014 (see chart).

usSector allocation

– n +

consumer discretionary

consumer staples

energy

Financials

Healthcare

industrials

materials

technology

telecommunications

utilities

Bank Lending Standard vs Capex

Bank tightening C&I Loan to Large firm (%) (left) Private Nonresidential Fixed Investment (Capex) YoY

Recession

Corporate earnings, on the other hand, have had a flat and uneventful year. Both the S&P 500 revenues and earnings (excluding financials) have hovered narrowly between -3 per cent and 3 per cent in all of the last six quarters but the last, when the S&P earnings rose a firmer than expected 4.7 per cent.

Looking ahead, we expect the S&P 500 earnings per share (EPS) to reach USD107 in 2013, representing 4 per cent growth over 2012. Profit growth in 2014 looks more attractive

-20

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-91

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-00

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/Y)

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given the earnings estimates of USD116 and growth rate of 8 per cent. These estimates reflect the fairly stable 2013 and 2014 GDP growth forecasts of between 2.5 and 3.0 per cent, continued favourable cyclical tailwinds from consumption and a firmer capital spending outlook, which are helping to offset headwinds, especially those from the weaker the emerging markets. In terms of valuation forecast for 2014, we expect the market to price in a lower equity risk premium, higher risk-free interest rates and arrive at a target of 1920.

In addition, by 2014, we expect to have a better read on the rate of US Federal Reserve (Fed) tapering and its impact on the economy. With this backdrop, we can benefit from the US market performance in various ways.

One way is to invest in companies with a singular focus on shareholder yield or shareholder return. S&P 500 companies are now sitting on about USD1.2 trillion in cash and continue to generate strong cash flows. Cash as a percentage of total assets are at an all-time high of 11.7 per cent, as measured

by FactSet. As the non-US growth environment slows and as companies find it hard to source for more attractive ways to invest, one of the key goals of these companies is to return capital to shareholders.

This can be done through two common ways: in the form of dividends and share repurchases. The proportion of S&P 500 companies that pays a dividend has risen from a low of approximately 71 per cent in 2002 and 2009 to a level in excess of 80 per cent in 2013. Companies that practise share repurchasing are also important contributors to shareholder returns. In 2011, total shareholder payments reached USD935 billion, of which dividends made up USD256 billion, while net share repurchases contributed an even larger USD352 billion. In percentage terms, dividends and buybacks would have represented closed to 90 per cent of S&P earnings.



We are still underweight in European equities, but we have reduced this underweight position as we expect the US recovery to have a positive impact on European growth, based on internal analysis and studies done by the International Monetary Fund (IMF).

As of end November 2013, European stocks have posted a strong performance on re-rating in stock multiple, as Europe’s economy looks set to expand in 2014. However, the actual earnings performance has remained poor, as shown by the disappointing 2013 third quarter reporting season and current expectations of negative earnings growth for 2014.

As previously noted, investors are also expecting the European Union (EU) and the European Central Bank (ECB) to continue with their policy support for the economy. The EU’s recent actions have amounted to a continued relaxation of various austerity targets, thereby preventing further countries from entering official stability programmes. The ECB’s importance has centred on providing stimulus to the European economy and overseeing the integration of the Eurozone

banking system.

Since becoming ECB President in June 2011, Mario Draghi has cut the ECB’s main refinancing rate five times to the current 0.25 per cent level and has hinted at more unconventional measures to address the deflationary pressures that are still threatening a number of European economies. For example, recent press reports have suggested an additional Long Term Refinancing Operation (LTRO) tied to specific loan targets for participating banks. While ECB activism is a current positive, it does carry the potential risk of a clash with the German Constitutional Court.

Expectations that Europe’s economy will return to positive growth is largely hinged on Germany’s economic growth exceeding 1.5 per cent in 2014. This compares to consensus expectations of 1.0 per cent GDP growth for the Eurozone as a whole. This suggests that many of the peripheral Eurozone economies may continue to struggle. Such a scenario is supported by the current Purchasing Managers’ Index (PMI) manufacturing and services data, which shows Germany

europeSector allocation

– n +


consumer staples

energy

Financials

Healthcare

industrials

materials

technology

telecommunications

utilities



continuing to outperform its Eurozone peers. We think that important structural reforms are still required in Italy and France to help boost economic activity. However, progress in legislation to support such reform remains disappointing.

While aggregate Eurozone economic indicators appear to have bottomed and have returned to positive territory, the danger is that the important Eurozone countries will continue to see disappointing GDP growth, rising national debt-to-GDP levels and high unemployment. Increased fiscal and banking integration is vital to stabilise the European economy, but may become more difficult to achieve with uneven economic growth rates across the region. We have kept a generally defensive investment approach that is focused on value companies with high return on equity (ROE) and consistent growth, companies with a high, sustainable dividend yield and companies with a diversified revenue base. However, we have raised our exposure to cyclical sectors, particularly those companies with exposure to the UK and stronger North European economies, and companies that are expected to benefit from an improving US economy.

In terms of sector allocation, we are overweight in the consumer discretionary, consumer staples, healthcare, industrials and technology sectors relative to the benchmark. We are underweight in the basic materials, energy, financials, telecommunications and utilities sectors.

Our main overweight is the consumer discretionary sector.

Companies in this sector have benefited from sales to the US and developing markets and should benefit from the potential rebound in European domestic markets. We remain overweight in the consumer staples sector, where companies have been able to maintain operating margins and can support sustainable dividend growth. We remain overweight in the healthcare sector, particularly pharmaceutical companies with visible new product pipelines, companies that will benefit from an aging European population and these which are least affected by uncertainties related to Obama care. Within the technology sector, we expect software companies to benefit from the pick-up in US and Japanese demand. We continue to favour companies with global leadership positions within the industrials sector.

We remain underweight in the two commodity-related sectors – basic materials and energy. Geopolitical tttrisks appear to have reduced in recent months, which may see an upturn in previously affected countries such as Iran and Libya. Although commodity companies have now made sizeable reductions to capital expenditure budgets, markets still face oversupply concerns from recently completed projects that are now coming on-stream. We remain underweight in the financials sector, ahead of possible negative headlines relating to the upcoming European bank stress tests. We are underweight in telecommunications, as competitive pressures continue to squeeze operating margins, and as data revenue growth struggles to offset falling voice revenue.



The growth outlook for Asia ex Japan seems to have stabilised, thanks to a broadening out of the G2 economic recovery, which should bode well for Asian exports. However, the US Fed’s eventual tapering of its asset purchase programme could keep markets volatile in the near term. In particular, some Southeast Asian economies and India are more vulnerable to capital outflows and currency depreciation, which in turn have placed upward pressure on local interest rates.

In China, we see signs of growth stability and this is another bright spot for the region. During the Third Plenary session in November 2013, China’s senior leadership announced its aim to achieve wide ranging economic and social reforms by 2020. The key focus includes fiscal reform, factor price and market reforms, as well as social safety net and government administration reforms. Although these proposed reforms will take time to play out fundamentally and the implementation progress will be gradual, a positive reform momentum should

boost market confidence and sentiment. The challenges presented by a rebalancing of China’s economy remain. However, the market looks to have largely discounted this and there is room for the valuation gap to narrow on the prospect of reforms and improving economic efficiency.

AsiA ex-JAPAnSector allocation

– n +


consumer staples

energy

Financials

Healthcare

industrials

materials

Real estate

technology

telecommunications

utilities



The long-term growth opportunities in Asia remain underpinned by favourable demographic trends and rising incomes. Our strategy is to remain focused on these structural opportunities by investing in companies that have sound business models, are positioned in segments offering attractive growth and have demonstrated operational and financial discipline.

We see investment opportunities in selected beneficiaries of China’s reform. These include companies in the areas of clean energy and urbanisation, but we remain cautious on deep cyclical sectors with excess capacity. We continue to favour consumer companies that benefit from the rise of the middle income population. In particular, we expect e-commerce to see explosive growth in coming years as the penetration rate of the Internet and smartphones rises in Asia, especially in China. China’s dairy industry is another high growth sector as the currently low per capita milk consumption in China and the demand-supply gap will likely keep milk prices buoyant over the

next few years. The recovery in the global developed markets present opportunities for selective US dollar earners such as certain pharmaceutical companies and Asian exporters including technology companies that form part of the supply chain of global brand names. While the impending tapering of quantitative easing by the Fed poses near term headwinds to domestic demand in Southeast Asia, the long term structural fundamentals for these economies remain robust.



Although the Japan market has posted a strong rally in 2013, we expect further gains in 2014, albeit at a more muted pace. Firstly, the global macro backdrop now appears more favourable given the signs of a globally synchronised acceleration in economic growth. As Japan is historically highly leveraged to the global cycle, we see it as a beneficiary of this trend.

On the domestic front, consumption in Japan will inevitably slow down with the implementation of the consumption tax increase. However, we think the risk of Japan entering into a recession appears to be small, as the Abe government intends to soften the blow to the economy by implementing a supplementary budget (funded by tax overshoots and reserves), as well as corporate tax breaks or tax cuts.

However, we believe that the Bank of Japan will likely embark on additional monetary easing around the time of the tax increase to weaken the Japanese yen and support asset prices in order to avert the downside risks. Easing measures

may take the form of purchases of Japan government bonds (JGB) which are of longer duration and exchange traded funds (ETF). Coupled with increased expectations of the US Federal Reserve (Fed) tapering quantitative easing (QE), interest rate differentials may widen, resulting in a weaker JPY/USD rate. A weaker yen is positive for Japan equities given the boost to corporate earnings.

JAPAnSector allocation

– n +


consumer staples

energy

Financials

Healthcare

industrials

materials

Real estate

technology

telecommunications

utilities



The measures to increase equity ownership in Japan are another potential positive catalyst for the market. Starting from 2014, Japan will roll out a tax exempt individual savings account NISA (Nippon Individual Savings Account). Japan’s government pension investment fund has also announced plans to rebalance its portfolio, increasing allocation to domestic equities and other risky assets while reducing allocation to domestic bonds.

The implementation of structural reforms by the Abe government will be closely scrutinised. While progress may be slow and results evident only in the longer term, we expect positive developments in the near future in several areas, including the Transpacific Partnership (TPP), energy and agricultural reforms, corporate tax cuts and tax breaks for capital expenditure and corporate governance.

The risks to our optimistic scenario include a weaker-than-expected macro backdrop in 2014, currency volatility and poor execution of structural reforms by the Abe government. Japan’s fiscal and demographic challenges will need to be addressed too.

Valuations of Japanese equities remain undemanding despite the market’s strong performance in 2013. The price-to-book (P/B) ratio of 1.27x is lower than the 5-year historical average of 1.35x. Prospective price-to-earnings (P/E) of 15.3x for financial year 2013 are also lower than the historical average of 16.2x.

We are currently overweight consumer discretionary, consumer staples and financials, neutral industrials, telecommunications and technology and underweight materials, utilities, real estate and energy. Our preference includes beneficiaries of a weak yen, domestic infrastructure/ capital expenditure related companies, and high ROE stocks.



We remain underweight on Canada, as earnings growth has slipped below historical average, and the market is not expected to outperform the US stock market. Part of the reason behind the disappointment is that Canada is losing its US export market share to Mexico even though it will still benefit from some positive spill-over effects from the US recovery. This, we believe, will be an on-going concern.

Although the 2014 financial year GDP forecast for the Canadian economy is expected to be slightly above 2 per cent, this is still below the consensus GDP forecast for the US economy. Furthermore, the US is expected to post lower inflation numbers and a faster decline in unemployment rate. This can be seen from the current positive trend in general US housing-related activities such as housing sales and construction. Meanwhile, housing starts have been at a run rate below the historical 200,000 monthly average, based on year-to-date data (as of December 2013). In contrast, Canadian housing prices are at all-time highs, as represented by Canada’s New Housing Price Index, and may well roll over.

Canadian resource companies can eventually be expected to benefit from stronger growth in both the US and Chinese

economies. However, while global monetary conditions remain supportive, it is still uncertain if QE has produced sustainable growth in the world’s two largest economies. Commodity prices remain range-bound, with investors watching for signals of economic strength.

Overall, our key overweight calls are in the consumer discretionary and staples sectors and key underweights are the energy and materials sectors. We are slightly overweight in the industrials and healthcare sectors. Within the commodities sector, we expect the gold mining stocks prices to be range-bound even though they are an important part of the Canadian materials sector. The call stems from the upward pressure on global interest rates and volatile commodity prices.

cAnAdASector allocation

– n +


consumer staples

energy

Financials

Healthcare

industrials

materials

technology

telecommunications

utilities



In Australia, we expect the economic growth to be sluggish in 2014. Although there are areas of sustained activity, especially related to housing turnover and starts, this is offset by decelerating retail sales and tepid hiring and credit growth. In addition, investments have turned negative as growth over the past year shifted away from mining investment and engineering construction.

Given the likely contraction in fiscal policy, a continued accommodative monetary policy will be needed to support economic growth over 2014. The Reserve Bank of Australia is now staying pat on its cash rates of 2.5 per cent, after lowering it eight times over the past two years, while waiting for the effects of these lower rates to be felt.

The silver lining is that much of the bad news has already been priced into the Australian dollar (AUD), which broke the parity against the US dollar in May 2013. The benefit of a lower AUD should help exports activity, reduce the pace of downgrades and help overall economic recovery. The

Australia equity market benefits from liquidity support as the index comprises mainly high-return and high-yielding large corporates in a high-interest rate currency. Valuations for the Australian market are reasonable, with forward P/E trading slightly below the historical average of about 16x.

Overall, our key overweight is the consumer sector and key underweight is the materials sector. We are slightly overweight the consumer staples, telecommunications, industrials and healthcare sectors, with the latter two sectors being more geographically diversified.

AustRAliASector allocation

– n +


consumer staples

energy

Financials

Healthcare

industrials

materials

telecommunications

utilities



Due to the near macroeconomic headwinds, we are underweight the Latin America (Latam) markets even though we still subscribe to a long term secular growth story in the region. Therefore, our strategy is to adopt a defensive positioning within domestic plays.

On the issue of macroeconomic outlook, consensus estimates for GDP growth in 2014 are about 3.2 per cent, driven largely by the peripheral countries such as Mexico, Chile and Peru. Inflationary pressures are moderating across most of the Latam markets. Employment continues to be very strong with low unemployment rates and the increasing working population giving rise to strong real wage and income growth in the region. This bodes well for the domestic consumption story.

The fiscal balance of Latam remains strong and the central bank interest rates for most countries are now back to neutral rate. This provides the central banks with monetary policies to use as tools to stimulate the economy in the event of a global slowdown.

Latam equities are currently fairly valued in our view, with the market trading at 12.6x consensus forward P/E, a 21 per cent

premium against the historical average of 10.4x. While earnings have declined in recent months, we continue to see downside risks to the earnings and hence our underweight call on the region. Macro conditions remain critical to the overall growth expectations.

The key risks are capital outflows, current account deficits, inflation and political/ fiscal stability. Recent data have shown inflationary pressures easing in Brazil due to the recent rate hikes, but inflation in the services sector remains sticky. We think that further rate hikes by the central bank could stifle growth in country but will help to anchor inflation expectations. We believe the rate hike in Brazil which started in the early part of 2013 is coming to an end with a final hike in the first quarter of 2014.

We view that the long term structural growth story of the Latam economies remains intact, underpinned by the strong domestic demand and underleveraged population. Our strategy is to add to our positions on market declines with a preference for domestic cyclical sectors. We are overweight the financials, industrials and consumer sectors and underweight the telecommunications, energy and materials sectors.

lAtin AmeRicASector allocation

– n +


consumer staples

energy

Financials

Healthcare

industrials

materials

Real estate

technology

telecommunications

utilities



SpECIALISTEQUITYSTRATEGY

While most of Asia and the emerging markets took a hit on deteriorating current account deficits, capital outflows and currency depreciation, the Chinese economy stood out for its healthy external surplus and a strong Renminbi. Its growth also looks to have stabilised as we saw improved readings in the PMI and recent activity indicators. For example, both the official and HSBC PMI have held up above 50, and October’s economic data continued its improving trend since July with decent expansion in industrial production (+10.3 per cent), steady investments (+19.4 per cent) and retail sales (+13.3 per cent).

China’s structural problems have been well-documented. The credit overhang that resulted from the policy stimulus post-2008 global financial crisis has persisted. Today, debt levels in China have escalated to over 220 per cent from below 150 per cent of GDP before the global financial crisis. This is certainly high by emerging market standards and it was worsened by the escalation in local government debt and shadow banking practices. Despite such large increases in debt ratios, growth has slowed significantly from pre-2008 levels. The credit bubble looks to have spilled over mainly into the property market instead of the economy, with property prices especially in tier 1 cities at

record levels. Overcapacity is still a major problem in the steel and cement industries, as well as the large supply of commercial space coming up all over the country. These issues among others are the reasons why China is trading at such a large discount relative to historical levels and the rest of Asia.

We have maintained for some time now that the key to a re-rating in China’s equities is an economic reform that improves the structure and competitiveness of the economy and the corporate sector, and strengthens the social fabric. To this end, China did not disappoint when the government unveiled a package of wide-ranging and comprehensive reforms at the Third Plenum in November. These reforms, tackling economic, structural and social issues, are the most comprehensive since Deng Xiaoping’s time.

While China’s reforms and tighter monetary policy have a dampening impact on growth in the short term, the successful implementation will lead to many benefits in the medium to long run. These include the resolution of structural problems, better economic and corporate efficiency and the lessening of the tail risk of a future hard landing and social unrest. We believe this will

cHinASector allocation

– n +


consumer staples

energy

Financials

Healthcare

industrials

materials

Real estate

technology

telecommunications

utilities



lead to a strong re-rating of the Chinese market.

There are question marks on the implementation and timelines for the reforms. However, taking into account historical records as well as examples from other countries, we still believe there is a good chance of successful execution and market re-rating.

After the Third Plenum in 1978 when peasants were freed from communes and given rights to sell agricultural yields, we saw grain yield growth jump from 0 per cent to 10 per cent in 2 years. In 1984’s Third Plenum, private enterprises were legalised and township enterprises’ contribution to GDP grew from just under 7 per cent to over 20 per cent in the following decade. The 1993 Third Plenum announced major reforms to state-owned enterprises (SOEs) and following that, we saw the government’s finances improve significantly and SOEs’ share of industrial output declined from 50 per cent to 30 per cent in the following decade. The Chinese government’s track record of reform execution is evident when it has both strong policy will and leadership. We believe that President Xi Jinping is in such a position to carry out his reform agenda. His anti-corruption crackdown on many high profile names and the sea change in government behaviour to less conspicuous spending is an early sign of his power and clout. He has made the reforms a key platform of his presidency and successful implementation would cement his legacy. Nonetheless, we do acknowledge that the proposed reforms are far bigger than these previous individual episodes and implementation now would be tougher given the more complex social and economic structure of China presently.

Looking at reforms around the world and their impact on respective stock markets, we see some encouraging precedents. The Thatcher reforms in the early 1980s, Singh reforms in the early 1990s and most recently, Abenomics in Japan, have all resulted in the significant outperformance of their respective markets. We note that there are many differences between each of these events and today, but the common denominator is that their respective markets re-rate sharply well before the full benefits from the reforms are seen.

China’s valuations are attractive, close to one standard deviation below its 10-year mean on P/E basis, and in the case of P/B, close to levels during the 2008 global financial crisis. Within the

Asian markets, China also stands out as one of the cheapest. History shows that if we buy into markets at such valuation levels, we will very likely be rewarded with strong positive returns over the medium to long term. Moreover, we now have tailwinds of positive reform momentum and stabilising internal and external growth.

We remain vigilant in tracking the operating conditions across China given the slowdown in growth and the government’s policy initiatives having uneven impact across industries. We continue to look for opportunities to invest in companies that are benefiting from the rising purchasing power of the region’s consumers. Stock selection is critical, given high competitive pressures.

We continue to be underweight in deep cyclical sectors such as materials in the face of China’s slower growth over the medium term and general over-supply conditions. We are also underweight in the sectors such as banking that are facing structural headwinds. Notwithstanding fiscal reforms that will alleviate the burden of local government debt, Chinese banks face contracting profit and net interest margins with interest rate liberalisation and rising non-performing loans as growth slows. We prefer the non-bank financials such as insurance and brokers which will benefit more from financial and social security reforms. We are also overweight on utilities with a focus on renewables and clean energy - another key focus area of the reforms. Another area we like is technology, especially the Internet and mobile segments, which are facilitating a sea change in consumer spending patterns.

In the long term, the China market continues to be supported by high savings and wage gains, which provide an attractive backdrop for consumption growth. The rising purchasing power of the middle and lower income population is a very supportive backdrop for investors. When China gets through the current necessary painful transition and reforms, and rebalances its economy towards a more sustainable growth path, these positive fundamentals should reassert themselves. The Chinese market should then enjoy a sustained re-rating, with high rewards for long-term investors.



We retain our cautious view on the ASEAN markets, given the near-term macroeconomic headwinds facing Indonesia, the political uncertainty in Thailand and the expected impact on fund flows when the US starts the tapering of its quantitative easing programme in early 2014.

In the near term, we expect Indonesia to continue to face macro headwinds as it attempts to cut its current account deficit. To date, the Indonesian government has made the right moves to raise interest rates and cut fuel subsidies. However, we believe that the economy will have to go through a further period of economic adjustment and this is likely to dampen economic growth and consumption.

In Thailand, the ongoing political uncertainty is a concern in the near term. The Thai market has been sold down since November, and valuations are starting to look appealing. However, we are keeping a prudent stance in this volatile environment and are hence defensively positioned.

Our top pick in the region is Singapore. Singapore’s economy is relatively more resilient than its ASEAN peers given its large current account balances and low corporate leverage. The market index is also the most leveraged to the global cycle as 48 per cent of its index composition is global cyclical and

commodities, as opposed to 3 to 28 per cent for the rest of the region.

Despite enjoying the best economic fundamentals in the region, we keep our neutral call on the Philippines as valuations are high.

Lastly we have reduced our underweight position on Malaysia on the back of improving macro indicators and recent positive government initiatives. These include raising electricity tariffs which should reduce government spending on subsidies as well as the planned introduction of a Goods and Services Tax in 2015.

In summary, while we remain confident of ASEAN’s medium to long-term prospects (favourable demographics, domestic demand etc), macro headwinds in the near term prompt us to take a more prudent stance in our investment positioning.

AseAnSector allocation

– n +


consumer staples

energy

Financials

Healthcare

industrials

materials

Real estate

telecommunications

utilities



Heading into the first quarter of 2014, we believe that the Singapore market is likely to be range-bound, ahead of the expected US Fed tapering. Investors are likely to remain concerned over the risk of contagion amid capital outflows from neighboring markets of Indonesia, Thailand and the Philippines. Singapore, as the biggest market in ASEAN, may be affected by short-term capital outflows from the region.

Nevertheless, we expect the Singapore economy to be more resilient than its ASEAN peers given its large current account balances and low corporate leverage. The market index is also the most leveraged to the global cycle as 48 per cent of its index composition is global cyclical and commodities, as opposed to 3 to 28 per cent for the region. Our investment themes continue to be centred on companies that thrive on external growth.

sinGAPoReSector allocation

– n +


consumer staples

energy

Financials

industrials

Real estate

telecommunications



GLOBALFIXED INCOMESTRATEGY

In the developed markets, we remain underweight in government bonds. We also maintain the slight underweight in investment grade corporate credits due to the potential steepening of the US treasury yield curve while keeping the portfolio duration short relative to the benchmark. Generally, we prefer high yield credits as we expect credit spreads to stay stable or tighten slightly.

In the emerging markets (EM), we reduce the overall overweight to neutral and remain positive on corporate credits relative to sovereign credits. We are neutral across EM regions as we would prefer to focus on the analysis of specific countries. We continue to favour the US dollar over local currency EM credits over the next three to six months.

underweight position in Fixed incomeFixed Income asset allocation

– n +

Fixed income

DevelopeD

dm Govt

dm credit

eMeRGING

em Govt

em corp

em local currency

duration^

yield curve*

Asia

latin America

cis/ee

middle east/Africa

Notes:^ + denotes long duration and - denotes short duration* + denotes Steepener and - denotes Flattener

31QUARTERLY INVESTMENT STRATEGYFourth Quarter 2013

Please refer to the last page for the important notice & disclaimer. UOB Asset Management

Source: The Yield Book, as of 30 November 2013

-10.9%

-5.1%

-2.9%

0.4%

0.8%

4.8%

6.4%

13.7%

-0.6%

-1.6%

2.8%

-1.7%

-2.9%

-2.9%

-1.8%

-1.1%

0.4%

7.3%

0.9%

0.6%

-15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0%

Japan

Canada

Singapore

UK

United States

Germany

France

Italy

World

G7

Local currency returns

Singapore dollar adjusted returns

The G7 fixed income index returned -1.6 per cent year to date in Singapore dollar (SGD) terms, although the performance at the individual country level has been quite mixed. The Eurozone countries performed well in SGD terms thanks to the appreciation of the Euro. Among the Eurozone fixed income markets, Italy was the best performer in both local and SGD terms as the Italian bonds were well supported by the markets (especially by the domestic banks) after the European Central Bank (ECB)’s Outright Monetary Transaction (OMT) announcement in 2012. Most other “safe-haven” countries had a negative performance due to the bear steepening of the yield curves as the US Federal Reserve (Fed) was widely expected to wind down its quantitative easing (QE) programme. Hurt by the weakening yen, Japan took last spot with the worst performance in SGD terms in 2013.

As mentioned previously, 2013 is the year of transition during which the global economy will shift towards a sustainable recovery. In the United States, there has been a strong

DeVeLOPeD MaRKeT FIXeD INCOMe

Singapore dollar adjusted and Local Currency YTD returns

recovery in the labour market, the housing industry has shown signs of normalisation, households have reduced debt burden, financial intermediaries have de-levered and consumer spending has started to pick up. The impact of fiscal consolidation at the federal level, with the tax increases and sequester, was less severe than expected. However, corporates remain cautious in their capital spending.

In June, the Fed stepped back from its hawkish tone and did not begin tapering its QE programme in September. The Fed communicated that it would wait for more evidence of a recovery before it begins tapering the stimulus measures. As a result, the 10-year yield fell from a peak of 2.99 per cent before the September Fed meeting to 2.50 per cent post-meeting. After seeing more promising signs of recovery in the labour market, the Fed announced to taper the QE programme by 10 billion to 75 billion a month in its December Federal Open Market Committee (FOMC) meeting. As we expected, the announcement was accompanied by more dovish forward guidance, stating that the first rate hike



would take “well past the time” that the unemployment falls below its threshold of 6.5 per cent. We believe that the pace of reduction of the QE programme would depend on the incoming economic data and would be accompanied by strong forward guidance and the emphasis that “tapering” is not implying “tightening”. The Fed may also decide to lower the unemployment threshold to 6 per cent, include an inflation floor or introduce a press conference after every FOMC meeting for better forward guidance. We expect the entire tapering exercise to complete within six to nine months and be evenly distributed between Treasury bonds and mortgage-backed securities, with all the securities held till maturity.

In this case, we expect the 10-year US Treasury (UST) yield to be range-bound between 2.90 and 3.25 per cent in the coming quarter as monetary policy changes and the economy recovers. Hence, we foresee the two to 10-year spread widening but the 10 to 30-year spreads flattening due to sticky 30-year rates. The recent employment data has been stronger than expected and the rates would likely maintain their steepening bias. In addition, at current yield levels, the term premium for 10-year treasury bonds is just around 1 per cent and as growth picks up, investors are likely to demand compensation which will push up the term premium. In terms of currency, we are constructive on the US dollar (USD) as we believe that the US’ economic recovery along with the Fed’s tightening in the coming years will be positive for the USD.

Across the Atlantic, the ECB unexpectedly cut rates in its November meeting due to a rising disinflationary trend in the peripheral nations. We expect the ECB to use more tried and tested tools such as the Euro OverNight Index Average (EONIA) rate cut and long-term refinancing operation (LTRO) along with strong forward guidance to tackle deflationary fears before it enters the unchartered territory of negative interest rates.

Most of the tail end risks from Europe have subsided even though the structural issues in Eurozone still remain.

The low yields for the peripherals helped to moderate the risks of a currency breakdown and ensured that Spain and Italy maintain regular access to liquid capital markets. In 2013, both Italy and Spain had large funding requirements, but both were well supported by their respective domestic banks, which significantly increased their government bond holdings. In 2014, both countries could come under pressure as the ECB is expected to conduct an Asset Quality Review early in the year and another round of bank stress tests. This means that the banks might be less inclined to buy a sizeable amount of their domestic government bonds and the funding gap would have to be met by international investors. Among the core Eurozone countries, Germany is a clear leader with stable growth and encouraging leading indicators. We remain modestly positive on Germany’s growth but we remain mindful that the stagnation of global trade, growing real wages and its effect on profitability, capital spending and

Source: Bloomberg, 30 August 2013

US Treasury 10-yr

1.30

1.50

1.70

1.90

2.10

2.30

2.50

2.70

2.90

3.10

11/3

0/20

12

12/3

1/20

12

1/31

/201

3

2/28

/201

3

3/31

/201

3

4/30

/201

3

5/31

/201

3

6/30

/201

3

7/31

/201

3

8/31

/201

3

9/30

/201

3

10/3

0/20

13

11/3

0/20

13

US Treasury 10 yr

Source: Morgan Stanley Research, “The Global Interest Rate Outlook”, November 2013

UST 10-Year Term Premium and Fed Fund Target Rate

-1

0

1

2

3

4

5

6

7

Jan-99 Jan-02 Jan-05 Jan-08 Jan-11 Jan-14

Term Premium Fed Funds Target Rate

%



Source: Bloomberg, 30 November 2013


German Bunds 10yr

French Bonds 10yr

1.00

1.20

1.40

1.60

1.80

2.00

2.20

11/3

0/20

12

12/3

1/20

12

1/31

/201

3

2/28

/201

3

3/31

/201

3

4/30

/201

3

5/31

/201

3

6/30

/120

3

7/31

/201

3

8/31

/201

3

9/30

/201

3

10/3

1/20

13

11/3

0/20

13

German Bunds 10yr

1.50

1.70

1.90

2.10

2.30

2.50

2.70

30/1

1/12

31/1

2/12

31/1

/13

28/2

/13

31/3

/13

30/4

/13

31/5

/13

30/6

/13

31/7

/13

31/8

/13

30/9

/13

31/1

0/13

French Bonds 10 yr

new emerging competition from the US (low energy price) and Spain (low labour cost) could pose a potential risk to Germany’s growth. As for France, its economy is still lagging behind but the technicals remain supportive due to investors’ chase for yield. The signs of recovery from the previous quarter mostly faded away with weak Gross Domestic Product (GDP) and Purchasing Managers’ Index (PMI) data. S&P also downgraded France a second time to a rating of AA, highlighting concerns of inadequate reforms and the country’s inability to consolidate public finances due to low economic growth.

Source: Bloomberg, as of 30 November 2013

UST-German 10yr Spread

We expect the 10-year German Bunds to steepen slowly from current levels, reaching the 1.75 to 2 per cent range by the end of the first quarter of 2014. The spread between UST and German Bunds has been widening and is currently above 100 basis points (bps), making it a multi-year high. We expect the spread to hover around these levels or even continue to widen as the US Fed and ECB diverge in their policy stances. We are overweight in Bunds and neutral on duration.

For France, we continue our underweight call given the continued drag in its economy. Even though Spain still has a long way to go towards implementing the approved reforms, it has seen rather positive market reactions towards its efforts. Hence we are neutral on Spanish bonds and duration.

(100.00)

(50.00)

-

50.00

100.00

150.00

1/1/2007 1/1/2008 1/1/2009 1/1/2010 1/1/2011 1/1/2012 1/1/2013

UST - German 10yr Bonds

Germany Bunds 10yr

French Bonds 10yr

For Italy, though we expect the government to stay for now, its political instability is still clouding its economic recovery. Hence, we maintain our underweight for Italian bonds. For currency, we are short on the euro, given the ECB’s loose monetary policy bias compared with the other major central banks.




UK Gilts 10 yr

1.40

1.60

1.80

2.00

2.20

2.40

2.60

2.80

3.00

3.20

11/3

0/20

12

12/3

1/20

12

1/31

/201

3

2/28

/201

3

3/31

/201

3

4/30

/201

3

5/31

/201

3

6/30

/201

3

7/31

/201

3

8/31

/201

3

9/30

/201

3

10/3

1/20

13

11/3

0/20

13

UK Gilts 10 yr

After starting the year with a weak recovery, the UK economy picked up some pace in the later part of 2013 with strong contributions from both the services and manufacturing sectors. However, macro headwinds such as stagnant wage growth, subdued inflation and unemployment remain and we expect growth to continue to pick up as the recovery to-date has been quite broad-based. For Gilts, we are changing our call to underweight as we do not expect the Bank of England to restart QE in the near future, given that growth is surprising on the positive side. We foresee the 10-year range between 3 to 3.25 per cent by the end of the first quarter, closely following the US treasury. We are neutral on the British pound.


3.50

4.00

4.50

5.00

5.50

6.00

11/3

0/20

12

12/3

1/20

12

1/31

/201

3

2/28

/201

3

3/31

/201

3

4/30

/201

3

5/31

/201

3

6/30

/201

3

7/31

/201

3

8/31

/201

3

9/30

/201

3

10/3

1/20

13

Italian Bonds 10yr Spanish Bonds 10yr

UK Gilt 10yr

The Japanese economy showed some signs of improvement thanks to Abenomics. The inflation rate has been hovering above zero since the middle of the year and improvement can be seen in business sentiments, industrial production and labour market conditions. While the GDP growth for the third quarter has slowed, the growth momentum could pick up if consumption improves ahead of the consumption tax hike which will kick in in April 2014.

The Japanese yen has weakened about 18 per cent in 2013 and the weakening trend is likely to continue. Japan’s current account balance is weak as the stable services and income account are more than offset by the deteriorated trade balance. For net exports to pick up meaningfully, a weak yen needs to be accompanied by growth momentum in the importing countries. With regards to its monetary policy, the Bank of Japan (BoJ) targets to achieve 2 per cent consumer price index (CPI) inflation by 2015 and is expected to maintain its easy stance. The Japanese government bond yield has fallen versus its developed counterparts and this further contributed to yen weakness. In addition, the reversal of safe haven flows due to improving risk sentiment is negative for the Japanese yen. We would recommend an underweight in the yen.

The Japanese government bond yield has been kept low with the significant home bias of Japanese investors, which has helped to maintain the interest burden at a moderate level despite a high stock of government debt. However, if the BoJ succeeds in reaching its inflation target, it will be hard to see how the low government bond yield can be maintained at the current level. The high government debt level and the likely path of Japanese bond yield would justify the underweight in Japanese government bonds.

In Australia, the Australian dollar (AUD) has appreciated significantly over the last decade as higher commodity prices led to increased capital inflows to fund the substantial increase in mining investment. As commodity prices fell from their peak and mining investments decline from the record levels reached in 2012, the exchange rate depreciated. Reduced monetary stimulus in the United States compared with relatively easier monetary policy in Australia was another contributing factor to the weaker currency.



While the liquefied natural gas (LNG) industry has not passed the peak of its investment stage, investment in iron ore has peaked and the industry is transiting from investment to production stage. The large volume of mining investments added significantly to capacity and supported growth in resource exports. This transition translated to lower demand for labour working in the iron ore industry. Overall, the labour market condition, which remained soft, is expected to see higher unemployment. Structural and cyclical influences are contributing to a higher unemployment rate.

GDP growth is expected to be below trend this year with lower investments. One bright spot could be the construction sector. Improved conditions and higher prices in the housing market provide the impetus for dwelling investment which looks to be on an upward trend. Residential building approval and other forward looking indicators of activity such as loan approval and first home owner grants for new dwellings have increased noticeably over the past year. The lower demand for labour in the resource sector as it transits to production stage may provide the workers needed in the construction sector.

Historically, the Reserve Bank of Australia (RBA) does not increase rates when the labour market is soft and unemployment rate is expected to trend higher. Therefore, the central bank is likely to hold policy rates at an accommodative level. The housing market has benefited from low interest rates and that is probably another reason why the RBA would not want to dampen this source of growth for the economy at a time when the resource sector is slowing. The longer end of the Australian government bond (ACGB) curve however tends to track the direction of US treasury (UST) yield and poses upside risk. With the front end of the ACGB curve pricing in a low RBA rate and the long end at risk of tracking UST yield higher, we recommend to underweight AUD while holding a neutral stance on ACGB.



eMeRGING MaRKeT FIXeD INCOMe

The past quarter has seen bond yields stabilise due to lower volatility in the UST yields. This allowed emerging market (EM) yields to outperform as spreads tightened. During the period, the Fed stunned the markets by deciding at its September meeting not to commence tapering and that brought about a sharp relief rally in the UST market. That was a dramatic reversal from the chairman’s stance in May 2013 that the tapering would likely start later in the year. In our view, the Fed’s decision may have been motivated by the potential fiscal showdown in the US and the sharp volatility in rates following the May’s announcement. However, the US Fed surprised the market again by announcing a USD 10 bn tapering on 18 December 2013. Despite the tapering, the US Fed put out dovish statements to assure the market that the interest rate will stay low until unemployment rate drops well below 6.5% per cent.

For EM bonds, this provided a relief and led the Emerging Market Bond Index – Global Diversified (EMBI-GD) yields lower from a high of around 6.25 per cent to a low 5.5 per cent before ending end November at around 5.85 per cent. Fears of another EM crisis – similar to the Asian Financial Crisis - also proved unfounded as EM central banks stepped in to shore up liquidity. This was quite apparent in Indonesia, India and Brazil, which have taken steps to raise interest rates and provide liquidity to local banks.

outlookIn recent periods, growth in the US has continued to grind higher with the unemployment rate falling. Meanwhile, growth in most EM economies has clearly slowed down. On balance, we saw a growth DM-EM growth dynamics, even as inflation has stayed benign. For example, energy and food prices have been relatively stable in 2013, removing pressure for EM central banks to increase interest rates. Over the course of the next one year, we expect to see a convergence between growth in EM and developed markets (DM), although growth rates in EM economies will still be higher than those of DM economies.

A key event for the coming quarter will be the amount of additional tapering the US Fed will announce. We are of the view that the Fed will continue to taper in the first quarter of 2014 and guidance for future interest rates will signal continued easier monetary policy for the foreseeable future. We think that this should be positive for EM bond spreads and should provide some buffer for rising bond yields.

However, there are also structural challenges that some EM countries face too. Countries such as Indonesia and Brazil have been growing strongly, with inflationary pressures creeping in as the economies have enjoyed a period of booming growth, with low unemployment and easy credit. This has led to widening current account deficits as import demand outstrips exports. The good news is that the situation has been brought to light and domestic central banks have tightened monetary policy, while EM currencies have also weakened against the USD at the same time, thus causing imports to be more expensive and exports relatively cheaper. We believe that this adjustment is healthy, although there is still space for further adjustment in 2014 – mainly through a weaker currency rather than aggressive monetary tightening.

Real GDP, q-o-q annualised (%)

Source: IMF World Economic Outlook, October 2013



In the immediate horizon, we do not see an acceleration in EM growth in a situation where commodity prices are muted and monetary tightening is taking place across most EM economies. However, we are not overly alarmed by this, but rather view it as part of the business cycle, where periods of strong growth increase inflationary pressures which then lead to slower growth. The long term outlook for EM remains positive, supported by factors such as positive demographics, a growing middle class and improving business environment.

strategyIn terms of portfolio strategy, we remain cautious on higher duration credits due to the expected rising interest rate environment. Therefore, we prefer to trade duration from the short side. However, we think that EM spreads are wide, having sold off in reaction to outflows from this asset class. Anecdotally, we believe much of the outflows are driven by retail investors, while institutional investors are still net investors into this asset class. Overall, the big picture strategy is to be cautious on long duration credit and we favour EM high yield credits over investment grade names in order to capture the possible moderation in credit spreads. At the same time, we strongly believe that sector, company and country selection will be the ingredients to better performance in 2014.



aSIa FIXeD INCOMe

outlook and strategy Over the past quarter, the Asian credit market recovered following a meltdown in the second quarter of 2013 (Q2 2013). In the 30 September to 4 December period, the market returned 1.58 per cent, up from 1.29 per cent registered in the third quarter of 2013 (Q3 2013) and a fall of 4.34 per cent in the second quarter (Q2 2013). Credit spreads have tightened 17 bps for the quarter to date, after a 7 bps tightening in Q3 2013 and widening of 22 bps in Q2 2013. On a year-to-date basis, the Asian credit market is down 1.36 per cent while credit spread is 19 bps wider.

We are of the view that with credit spreads above 300 bps, this is a good entry level given that credit spreads rarely stay above this level for too long.

Despite the strong Asia credit performance, the performance of Asian currencies (FX) was lacklustre in comparison. Asian FX (as proxied by the JP Morgan Asia Dollar Index) rose a modest 0.3 per cent during the end September to 4 December period after being flat in Q3 2013 and falling 1.5 per cent in Q2 2013. On a year-to-date basis, Asian currencies are still down 1.8 per cent. The Southeast Asian currencies continued to underperform the North Asian currencies as the trade balances in most of the Southeast Asian countries continued to deteriorate. Meanwhile, North Asian countries such as Taiwan, China and Korea continued to enjoy improvement in their trade balances. The table below indicates that 5 out of 10 Asian countries experienced worsening trade balances over the past six to 12 months. Indonesia, Thailand, Malaysia and India appeared to have suffered the fastest pace of trade balance deterioration over the past 12 months.

Asian credit spreads – JACI Index

Source: Bloomberg, 5 December 2013

JACI Spread

100

200

300

400

500

600

700

800

5-Dec-06 5-Dec-07 5-Dec-08 5-Dec-09 5-Dec-10 5-Dec-11 5-Dec-12 5-Dec-13

bp

s

JACI spread

100 103 106 109 112 115 118 121 124 127 130

4-Dec-10 4-Jun-11 4-Dec-11 4-Jun-12 4-Dec-12 4-Jun-13 4-Dec-13

bp

s

JACI Total Return Index (28 Feb 2010=100)

JACI Total Return IndexAsia credit market rose 1.58% in Q4 from +1.29% in Q3; YTD

Asia credit is still down 1.36%




We believe that the Indonesian rupiah (IDR), Thai baht (THB) and Malaysian ringgit (MYR) will face the biggest downside risk over the next three to six months due to their worsening trade balances and relatively expensive currencies. Chart 3 indicates that the Philippine peso (PHP), Chinese yuan (CNY), THB, SGD, IDR and MYR have gained the most on a real effective exchange rate (REER) basis over the past 10 years.

PHP, CNY, THB, SGD and IDR have gained the most over the past 10 years

Source: Bloomberg, November 2013

45.739.6

28.2 26.319.3

15.38.5 4.8

3.2

-1.8 -11.5

-24.1-31.3-40

-30

-20

-10

0

10

20

30

40

50

PHP CNY THB SGD IDR AUD MYR NZD KRW TWD HKD JPY INR

& change on REER vs 5 years ago % change in REER vs 10 years ago

Real GDP growth in Asia is now slowing down faster than in Europe and the US (see Chart 4). This also reduces the attractiveness of holding Asian securities.

Asia now slowing faster compared to Europe and US

Source: Bloomberg, November 2013

Asia US Europe World

-10

-5

0

5

10

15

Q3 2001 Q3 2003 Q32005 Q3 2007 Q3 2009 Q3 2011 Q3 2013

GD

P g

row

th, % chang

e

trade Balance, 12m rolling sum (usd mn) china Hong

Kong india indonesia Korea malaysia Philippines singapore taiwan thailand Asia

Jun 2012 181,829

-57,709

-180,162

11,538

26,331

37,234

10,199 36,523 28,154 -18,085

69,884

sep 2012 197,549 -59,154

-185,913

4,899 27,509 32,668 10,942

33,184

28,818

-19,906

77,666

dec 2012 232,765

-61,594

-193,995

-1,659

28,285

31,209

11,362

28,670

30,708

-20,752

85,224

June 2013 272,034

-64,888

-200,914

-5,513

37,421

22,264

11,930

32,480

33,824

-25,032

120,596

current (september 2013)

254,101

-64,556

-181,890

-8,947

40,805

22,442

12,197 33,035

35,476 -24,773

117,890

current vs sep 2012, % change

28.6 9.1

-2.2 -282.6 48.3 -31.3 11.5 -0.4 23.1 24.4

51.8

current vs dec 2012, % change

9.2 4.8

-6.2 439.2 44.3

-28.1 7.3 15.2 15.5 19.4

38.3

Source: CEIC

chart 4

chart 3



Another key market risk for Asia is the possibility of a further spike in UST yield. The 10-year UST yield has risen 127 bps from the year-low of 1.63 per cent on 2 May 2013 to 2.83 per cent on 4 December. Our internal model suggests that the fair value for the 10- year UST is around 2.5 per cent. However, the model also indicates that if QE is removed, the fair value for the 10-year UST yield will rise to 4.10 per cent. The US Fed announced on 18 December that they are tapering the QE programme by USD 10bn monthly. We believe that the gradually improving US economy will compel them to end the QE programme by end of 2014. Hence, we maintain our view that the trend for interest rates is clearly on the upside.

The Asian credit market remains highly sensitive to sharp rises in UST yields. As a result, we will overweight credits that have duration of less than five years. Within the high grade segment, we will overweight BBB-rated credits and underweight credits that are A-rated and above.

We think that the Chinese BB-rated property sector and the Hong Kong high grade property developer credits are trading at attractive valuations. Despite the draconian anti-speculation measures in China, property developers continue to report healthy property sales figures. We also think that some of the high grade offshore renminbi (CNH) credits offer good value as well as good downside protection against higher interest rates. Within the investment grade sector, we prefer the BBB credits space given that their higher yields provide better protection against rising interest rates compared to the A-rated credits.

Within the sovereign and quasi sovereign credits, we see value in Mongolian sovereign bonds (which are giving an attractive yield of 7.4 per cent for its 10-year paper) and Indonesian quasi-sovereign bonds, which are now trading at more than 100 bps above the sovereign credit. We also think that the Indonesia 10-year sovereign credit, which is trading at a yield of 5.5 per cent, offers a good risk-reward trade-off.

In terms of country allocation, we are underweighting India and Indonesia corporates due to concerns of deteriorating macro fundamentals. However, we do see some value in Indonesia sovereigns and quasi sovereigns and will express

Performance of Asian High Grade (HG) v Asian High Yield (HY)

Asia HG is up 1.23% in Q4 while HY is up 2.66% in Q3 2013; On YTD basis, HG is down 2.43%

while HY is up 1.58%


Investment grade total return Non-investment total return

120 130 140 150 160 170 180 190 200 210 220

4-Dec-10 4-Dec-11 4-Dec-12 4-Dec-13

our underweight position in Indonesia by underweighting the corporate sector.



SINGaPORe FIXeD INCOMe

macro ReviewThe Singapore economy contracted 1 per cent quarter-on-quarter (q-o-q) seasonally adjusted in Q3 2013, lower than the 16.9 per cent revised growth registered in Q2 2013. In year-on-year (y-o-y) terms, real GDP expanded 5.1 per cent in Q3 2013, higher than the revised 4.2% in Q3 2013. The slowing growth momentum was mainly due to the contraction in the manufacturing sector (-3.4 per cent q-o-q seasonally adjusted in Q3 3013 from 33.5 per cent q-o-q seasonally adjusted in Q2 3013) and the construction sector (-8.8 per cent q-o-q seasonally adjusted in Q3 3013 from 20.9 per cent q-o-q seasonally adjusted in Q2 3013), contributed by weakness in the electronics and pharmaceutical industries as well as a decline in public sector construction activities.

Headline inflation accelerated to 2.0 per cent y-o-y in October from 1.6 per cent y-o-y in September. On a year-to-date basis, CPI inflation was up 2.4 per cent y-o-y compared to a rise of 4.6 per cent in 2012. Core inflation, which excludes private road transport and accommodation, accelerated to 1.8 per cent y-o-y from 1.7 per cent y-o-y in September.

We think that the government remains highly concerned over the high inflation data. In October 2013, the MAS maintained the modest and gradual appreciation path of the Singapore dollar nominal effective exchange rate (S$NEER) policy band, with no change to its slope, width, and the level at which it was centred. This policy stance, which has been in place since April 2012, has helped to alleviate inflationary pressures and anchor inflation expectations, as well as facilitate the restructuring of the economy. While the MAS maintained its tight monetary policy in 2013, we believe that with the US Fed likely to taper its QE programme over the next six months, Asian currencies could come under selling pressure. We expect the SGD to weaken further.

credit ReviewIn October and November of 2013, the HSBC SGD Non-Government Local Currency Bond Index rose 0.57 per cent after a massive 3.78 per cent sell-off in Q3 2013 on the back

of QE tapering fears. On a year-to-date basis, the index has fallen 0.74 per cent. The secondary market was supported by a limited supply of investment grade issues. Shorter dated papers and corporate perpetuals were well supported as investors picked up the bonds on dips. Indian credits were in demand as investors chased yields despite negative headlines such as S&P’s downgrade of IDBI Bank in late November to BB+/B with a negative outlook.

Primary issuances picked up as interest rates stabilised post QE tapering fears. Established names such as Sembcorp Industries Ltd, United Overseas Bank as well as DBS capitalised on the low interest rate environment to issue long-dated bonds. Chinese property developer China Vanke Company Ltd issued S$140 million of its maiden 4-year bond. Apart from these investment grade issuances, primary issuances were saturated by mid-sized Singapore companies of S$100 million or less. These issuances were mainly supported by private banking clients while institutional investors stayed on the sideline.

Given the higher number of high yield issuances by mid-capitalisation companies in 2013 compared with the previous year, we expect similar issuers to tap the SGD bond market in 2014. However, we do not foresee significant tightening of credit spreads as investors have become highly selective in the current volatile environment.

42 QUARTERLY INVESTMENT STRATEGYFourth Quarter 2013

Please refer to the last page for the important notice & disclaimer. UOB Asset Management

CURRENCIES

CuRReNCIeS

During the period from end-September to 4 December, most G10 currencies (FX) rose against the US dollar (USD) as good economic data spurred a rally in most European currencies.

G-10 currencies against US Dollar

-4 -3.51

-3.1 -2.29

-1.23 -1.08

0.28 0.48 0.49

1.22

-4.5 -4 -3.5 -3 -2.5 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 3

Japanese Yen Canadian Dollar Australian Dollar

Norwegian Dollar New Zealand Dollar

Swedish Krona Swiss Franc

Danish Krone Euro

British Pound

% change versus USD from 30 September to 4 December 2013


Asia FX versus USD


-4.8 -4.0

-3.0 -0.9

-0.1 0.0

0.1 0.4

0.5 1.1

1.3

-5 -4 -3 -2 -1 0 1 2

Indonesian Rupiah Japanese Yen

Thai Baht Philippines Peso Taiwanese Dollar

Hong Kong Dollar Singapore Dollar

Indian Rupee Chinese Renminbi Malaysian Ringgit

South Korean Won

% change versus USD from 30 September to 4 December 2013

The performance of Asian currencies performance against the USD was mixed. The worst performers were the Indonesian rupiah (IDR) (-4.8 per cent), Japanese yen (JPY) (-4.0 per

cent) and the Thai baht (THB) (-3.0 per cent), as Indonesia’s and Thailand’s trade balances deteriorated faster than most other countries in Asia. North Asia is deemed as a relative



Trade balance deteriorating in Asia except for China

Source: CEIC, 04 December 2013

Asia-10 trade balance (12m rolling sum)Asia-6 (exclude China, HK, India and Thailand)Asia-9 trade balance (excluding China, 12m rolling sum)

outlook and strategy On the whole, the Asian Dollar Index (ADXY) fell 0.3 per cent over the period, taking the year-to-date decline to 1.8 per cent. The market turned very unforgiving towards countries with current account deficits. Several Southeast Asian countries have sharply deteriorating external balances. Hence we expect the Malaysian ringgit (MYR), IDR, THB and Philippine peso (PHP) to come under selling pressure in the first quarter of 2014.

safe haven compared with Southeast Asia as the former has much stronger external balances and foreign reserves.

-200000

-100000

0

100000

200000

300000

400000

Apr-99 Apr-01 Apr-03 Apr-05 Apr-07 Apr-09 Apr-11 Apr-13

US

D m

n



COMMODITIES

We maintain our neutral call in commodities. Although economic data has showed steady improvement in recent months, we share short-term concerns about the potential negative impact that could stem from a reduction in the US monetary stimulus. The timing, extent and duration of the US Federal Reserve’s tapering activity are expected to have interconnecting impact on Treasury yields, the housing market and business capital spending. Investors also remain concerned about Chinese domestic credit conditions, and may want to see if current restocking strength ahead of Chinese New Year continues through the first quarter.

We remain overweight in energy, and are positive on the prospects for both Crude Oil and Natural Gas. Crude oil prices appear to be well supported for now, as the growth in US shale oil production has been offset by continuing OPEC production problems and the high marginal production costs of non-OPEC supply sources. Although high marginal costs should limit the downside risk to long-term crude oil prices, a resurgent global economy could push prices well above the US$100 per barrel , even without help from geopolitical supply shocks. US natural gas price has now strengthened above the US$4.00 per thousand cubic feet (mcf) level, and should continue to benefit from traditional seasonal strength over winter. There have already been reports of particularly cold weather across many US states.

We have downgraded Gold to a neutral call, with the gold price remaining under pressure from a continued sell-down in aggregate Gold ETF holdings and increased short interest in the COMEX futures market. There are concerns that gold will look increasingly unattractive as US real rates turn increas-ingly positive once the US Federal Reserve starts to reduce monetary support. However, there is also the potential for a “liquidity trap”, if higher rates stall US economic growth and prompt renewed levels of monetary support. There is also continued strong buying from China, with China now ac-counting for more than half of global demand. In addition, registered gold stocks at COMEX have continued to decline, with November 2013 seeing a new all-time high ratio of gold open interest relative to COMEX registered gold stocks. This raises the possibility of insufficient stocks to settle COMEX trades in physical gold at some future date.

neutral position in commodities

– n +

Gold

instant commodities

oil

Agriculture

47QuaRTeRLY INVeSTMeNT STRaTeGYFourth Quarter 2013

uOB asset Management

We have moved to a neutral position in Bulk commodities and Base metals. Iron ore prices have remained above US$130 per tonne given continued strong demand from China and inventory restocking in other regions. We expect iron ore prices will remain strong into the first quarter, given relatively low inventory levels and that Chinese steel plants remain operational during the Chinese New Year while domestic mines typically close. Spot thermal coal prices have started to show seasonal strength and are expected to remain strong throughout the winter months. Base metal prices have been subdued as new mine supply comes into the market, but should show some resilience if current supportive PMI data is converted into increased industrial activity.

We remain in an underweight position for Agriculture. Grain prices continue to face downward pressure following this year’s excellent harvest, and with potential changes to the US’s Renewable Fuel Standard. In the United States, planted areas are forecast to remain at similar levels into 2014, raising prospects for another strong harvest. While sizeable planted acreages would typically be positive for the fertilizer sector, sentiment remains overshadowed by Russian potash politics, Chinese export tax revisions and new capacity for nitrogen fertilizer production. These are likely to place downward pressure on potash fertilizer prices.



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The contents in this report were updated as of end December 2013.

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