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Business Times of 10 Jan 2007
MONEY MATTERS
Equities outlook
still positive; surge in home prices likely
GST hike can be avoided if proceeds from government land sales
are included in Budget calculations
By JOSEPH CHONG 
THIS is the time
when many look back on the old year and try to figure how the new
year will shape up. Having just celebrated the fifth anniversary of
the firm I founded makes this a particularly poignant time..
How different things
were back then. It was barely three months after 9/11 in New York and
Singapore was mired in its worst recession since 1965. Companies were
closing shop or leaving Singapore in droves. Indeed, our first office
(and most of the office furniture) was inherited from a failed dotcom
company - and there were many then. Many thought we were mad to start
up when there was blood on the streets.
In the past five
years, we have also published some of our views in BT. We look at two
contrarian calls we made - in 2003 and 2004 - which are still relevant
today: the bull in global equities, and the bull market in Singapore
homes.
Global equities: We predicted the start of a new global bull market
for equities even as Singapore and other Asian countries were in the
grip of Sars, which threatened to go global (BT, May 14, 2003).
Indeed, our analysis indicated that most global stock markets were
very cheap. For example, the US market was some 40 per cent
undervalued. The S&P 500 at 1,420 is currently more than 50 per cent
higher than our call then.
Looking ahead, the bull market may not be youthful anymore but the
macro picture for global equities is still positive relative to
expected returns from fixed income and cash. Although economic growth
is expected to moderate in 2007, it will be still a very positive
number.
We no longer expect a meltdown in the US housing market. Indeed, the
housing market has probably already bottomed. The US National
Association of Home Builders Index (NAHB), a leading indicator of the
US housing market, appears to have bottomed after a year-long plunge,
going by data from Moodys’ Economy.com..
TWith inflation receding, we have a Goldilocks environment that
will set the stage for price earnings ratios to expand (they are
currently low relative to fixed income yields). Our favourite region
is Europe while Japan is our most underweight market. Stock markets
cannot perform without steady and rising domestic demand and Japan's
is clearly faltering. The Japanese central bank has made a mistake by
prematurely restricting money supply. Indeed, we see a weaker yen and
perhaps even a rate cut in Japan in 2007.
Singapore homes: We also predicted the start of a new bull market for
Singapore residential properties in an article in BT (Jan 16, 2004).
We now know that the first quarter of 2004 was the bottom for private
residential properties, according to numbers from the Urban
Redevelopment Authority (URA).
With a recovering Singapore economy and compelling affordability,
private properties were very cheap then, especially older prime
freehold properties with low plot ratios.
So, will property prices correct soon? The inventory of new homes
has fallen to about one year's supply and land sales scheduled for
2007 will, unfortunately, come on stream only in 2009. Moreover,
vacancy rates have fallen dramatically from about 10 per cent a year
ago to only 6 per cent.
Taken together, these factors will drive both rentals and, hence,
capital values higher in 2007. I would not be surprised to see a surge
in residential prices by mid-2007. Bull markets seldom die with a
whimper; they invariably blow off. Would this be the catalyst for
excessive government land sales, sowing the seeds of the next
downturn?
Regarding land sales, my main wish for 2007 is for the government to
defer indefinitely the GST hike from 5 per cent to 7 per cent. Two of
the many reasons given for the hike bother me: First, the need to keep
pace with Hong Kong. Now that Hong Kong has dropped its GST plans, the
logic for this reason falls.
Second, the need to balance the Budget with the GST hike. The Budget
will be balanced if government land sales, which is a true cash
inflow, is included in Budget calculations. The government does not
actually sell land; it sells leases, most of which are 99 years or
less. In due course, the land reverts to the state or the leases are
topped up, for example, Farrer Court which is expected to deliver $400
million to the treasury. Hence, the cash inflow is similar to rental
income and thus recurring in nature. Indeed, not including government
land 'sales' in Budget calculations as part of operating revenue is an
economic distortion which appears to result in over-taxation.
The 2 per cent hike in GST will raise an additional $1.5 billion in
revenue but the chart (data from the Ministry of Finance website)
shows that proceeds from land sales are in excess of this amount.
The author is CEO of financial adviser New Independent. He welcomes
feedback at
josephchong@ni.com.sg This article is for information only.
Readers should seek independent advice before making any investment
decisions.
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