29 July 2013

Macro Strategy Update

Market Update

The divergence theme continues to play out with the release of the flash PMI reports for the major economies. China's manufacturing continues to be in contraction, now at a 11-month low1. On the other hand, both Europe and the US saw improvements, especially with Europe moving into positive territory2. The eurozone saw its first expansion since January 2012 for the private industry, according to the PMI flash estimates. The final data, to be released later this week, will likely confirm this trend: that China and the emerging world is slowing, while the developed world is growing.

Other fundamental data also points to a sustainable growth story for the developed world. In the US, the housing market continues to grow with new home sales rising to a five-year high3. Homebuilders are increasingly more confident, as seen from the Housing Market Index rising to levels not seen since 2006 (Figure 1). Home prices are likely to continue rising, given the solid momentum seen in sales and builders’ confidence, reinforcing the positive cycle. All these would probably more than offset the negative effect of rising mortgage rates4. We say 'probably' because the market is signaling some weakness for the moment. The HGX has been consolidating after a fantastic run (Figure 2). A more constructive technical picture would give us more confidence on the sustainability of the current housing market uptrend.

Friday’s employment reports are likely to drive market action for the next few months as a better report will cement the view that the Fed will begin tapering the bond purchase program. Judging by how little bonds have recovered from their May/June losses, it is highly probable that tapering will begin. The divergence in equity and bond performance will most likely begin as higher interest rates drive bond performance lower and better economic growth pushes stocks higher.

Having recovered from the bulk of last month’s losses, developed market equities are now overbought (Figure 3) and a period of consolidation is expected. We still see no signs to suggest that this is THE top for developed markets and continue to expect another leg up for markets like the US, Europe and Japan.

Figure 1: US Homebuilders’ Confidence Rising

Image courtesy of Stockcharts.com

Figure 2: Housing Equity Index Consolidating

Image courtesy of Stockcharts.com

Figure 3: Developed Markets Overbought

Portfolio Positions

Further to our last report, we have already made recommendations for the rebalancing of all CPF portfolios to underweight emerging market equities in favour of developed market equities. Please refer to your advisers if you have any questions on this recommendation.

1. China July Flash HSBC PMI falls to 11-month low. 23 July 2013. Reuters.
2. Euro zone and US bounce back but China stalls, PMI data shows. 25 July 2013. Sydney Morning Herald.
3. U.S. New-Home Sales Surge 8.3%. 24 July 2013. WSJ.com.
4. U.S. Mortgage Rates for 30-Year Loans Rise to 2-Year High.

IMPORTANT NOTES: This report is provided for the information of the intended recipient only and should not be reproduced, published, circulated or disclosed to any other person without the prior written consent of GYC. The information and opinions expressed herein reflect a judgment of the markets at its original date of publication and are subject to change without notice. GYC does not warrant the accuracy, adequacy or completeness of the information herein and expressly disclaims liability for any errors or omissions. The information is given on a general basis without obligation and on the understanding that any person acting upon or in reliance on it, does so entirely at his or her own risk. Any projections or other forward-looking statements regarding future events or performance of countries, markets or companies are not necessarily indicative of, and may differ from, actual events or results. Neither is past performance necessarily indicative of future performance. You should make your own assessment of the relevance, accuracy and adequacy of the information contained in the information provided and make such independent investigations as you may consider necessary or appropriate. Accordingly, neither GYC nor any of our directors, employees or Representatives can accept any liability whatsoever for any loss, whether direct or indirect, or consequential loss, that may arise from the use of information or opinions provided.

GYC FINANCIAL ADVISORY PTE LTD  1 Raffles Place #15-01 One Raffles Place, Singapore 048616
Tel: (65) 6349-1441 | Fax: (65) 6349-1440 | Email: enquiries@gyc.com.sg | Co Reg: 199806191-K
Website: www.gyc.com.sg