Reaffirmation: The Worst Is Over!

Francis Tan
Investment Strategist

26th August 2020

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2
It’s Been 70 Days! How Has Everyone Been?
Let’s do a short recap…

3
It’s Been 70 Days! How Has Everyone Been?
Let’s do a short recap…

4
4 Questions To Answer TODAY

2. Why Are Stocks, Bonds, Properties, Gold,

etc, So Strong When People Are Losing Jobs?

4. Since Assets Have Gone Up So Much,

Are They Expensive? Is It Too Late To
“Get In” Now? 5
1. Global Economies Are In BAD Shapes,
What’s Happening To Asset Prices?
 Singapore’s 2Q 2020 Real GDP

Real GDP Employment Chg

2020 2020
2018 2019 I II 2018 2019 I IIp

GDP AT MARKET PRICES 3.4 0.7 -0.3 -13.2 45,300 69,800 -25,200 -131,500
Goods Producing Industries 4.9 -0.8 6.2 -9.2 -9,600 10,400 -8,900 -24,300
Manufacturing 7.0 -1.4 7.9 -0.7 -2,400 -2,100 -3,200 -9,600
Construction -3.5 2.8 -1.2 -59.3 -7,100 12,600 -5,900 -14,300
Utilities -0.8 0.6 0.3 -7.3
Other Goods Industries -0.1 5.1 1.2 -23.3 -100 -100 100 -400
Services Producing Industries 3.4 1.1 -2.3 -13.4 54,900 59,400 -16,300 -107,200
Wholesale & Retail Trade 2.8 -2.9 -5.6 -8.2 1,600 -4,000 -8,500 -19,300
Transportation & Storage 0.0 0.8 -7.7 -39.2 7,700 3,100 500 -5,500
Accommodation & Food Services 3.1 1.9 -23.8 -41.4 1,300 6,200 -10,900 -30,800
Information & Communications 6.5 4.3 2.6 -0.5 8,400 7,300 700 -1,000
Finance & Insurance 7.2 4.1 8.3 3.4 7,600 6,400 2,600 -1,100
Business Services 2.4 1.4 -3.4 -20.2 10,600 18,600 -700 -16,900
Other Services Industries 2.2 2.6 -3.7 -17.8 17,800 21,900 100 -32,700
Ownership of Dwellings 4.8 4.3 2.7 1.4
Gross Value Added At Basic Prices 3.8 0.7 0.1 -11.7
Add: Taxes on Products -2.3 0.9 -6.2 -39.7
7
Amount Lost Took Us Back To 2014 Levels
All in a single quarter!

Singapore Real GDP (SA)

Rebound

“To put things in context, this is our worst quarterly

performance on record. The forecast for 2020 essentially
means the growth generated over the past two to three
years will be negated.” Trade Minister Chan Chun Sing

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 Building & Construction Activities
2019 2020
2016 2017 2018 2019 I II III IV I II
Percentage Change Over Corresponding Period Of Previous Year
CONTRACTS
-2.3 -6.1 23.1 9.8 2.8 16.4 46.8 -14.3 -26.3 -21.3
AWARDED
Public 16.2 2.9 15.5 4.0 -22.0 -9.3 122.9 -21.7 -3.4 12.2
Private -20.1 -18.6 36.5 18.5 32.1 61.5 -14.3 5.9 -42.2 -54.3
CERTIFIED
-3.4 -20.7 -4.7 6.4 5.1 4.4 5.8 10.1 1.8 -49.6
PAYMENTS
Public 5.5 -10.2 -7.8 6.3 4.1 7.6 2.8 11.0 7.2 -47.8
Private -10.0 -29.9 -1.3 6.5 6.4 1.5 9.0 9.3 -4.7 -51.4

9
Economies Suffering, Equities Outperforming
How can stocks be loved when future cash flows are uncertain?

Selected 2Q 2020 Real GDP Selected 2Q 2020 Equity Index

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Economies Suffering, Properties Outperforming
How can property prices still go up when jobs security is uncertain?

Selected 2Q 2020 Real GDP Selected 2Q 2020 Resid Property Index

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It Was A Mad Bull Run!
Most Stocks Mkts Have Gained Since 23 March

Selected Performance of World Stock Markets Since 23 March Low

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US Home Sales Roaring Back
Low mortgage rates, (slow) but steady employment recovery…

US Existing Home Sales

Home
sales are
back!

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Wait and See? Now, Supply Is Dwindling

US Existing Homes Inventory (Months of Supply)

Too much supply!

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As Supply Dwindles, Builders Rush In
To satisfy the strong housing demand

US Housing Starts

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Demand Up, Supply Down  What Happens??
You can wait and wait… Prices do not wait.

US Average Sales Price of Existing Homes

Price gains back to

normal pace

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Lower Unemp  Stronger Housing Demand

US Unemployment & Housing Market Index

Improvement in
unemployment &
housing market

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 2. Why Are Stocks, Bonds, Properties,
Gold, etc So Strong When People Are
Losing Jobs?

Answer:
1. You are looking at a lagged indicator.
2. Investors do not wait for economic indicators to trend higher.
3. Huge support from governments – fiscal & monetary.
4. Situation is, actually, improving!
 2. Why Are Stocks, Bonds, Properties,
Gold, etc So Strong When People Are
Losing Jobs?

Answer:
1. You are looking at a lagged indicator.
2. Investors do not wait for economic indicators to trend higher.
3. Huge support from governments – fiscal & monetary.
4. Situation is, actually, improving!
GDP Data = Too Slow, Too Dated
We need better data to find out what’s happening now

Singapore Real GDP Singapore Purchasing Managers’ Index

2021 Q2

Rebounded
since May

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Commonly Heard…
17 Jun 2020

1. Situation is VERY BAD now ✔

2. We are in a RECESSION! ✔

3. Unemployment rates will shoot up ✔

✘
4. Let’s Wait until the Recession is over, then talk

21
 2. Why Are Stocks, Bonds, Properties,
Gold, etc So Strong When People Are
Losing Jobs?

Answer:
1. You are looking at a lagged indicator.
2. Investors do not wait for economic indicators to trend higher.
3. Huge support from governments – fiscal & monetary.
4. Situation is, actually, improving!
Market Always Bottom Before Recession Ends

17 Jun 2020

23
If You Waited Till Recession Ends…
You will be TOO LATE…

Average Dow Jones Performance During A US Recession

17 Jun 2020

17 Jun Webinar for We are here!

$$

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It Was Not An Academic Exercise Only
But once again satisfied the same hypothesis

Selected Equity Indices (LCY)

Govt tells you it
RECESSION was a recession

Opportunities
17 Jun Webinar

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Do Not Wait Till Recession Ends
Start to do your homework now. Have a watch list, zero-in.

Performance of URA PPI (Pte Resid) Around End of SG Recession

17 Jun 2020

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Property Prices Rise Before Recession Ends

Performance of URA PPI (Pte Resid) Around End of SG Recession

17 Jun 2020

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 2. Why Are Stocks, Bonds, Properties,
Gold, etc So Strong When People Are
Losing Jobs?

Answer:
1. You are looking at a lagged indicator.
2. Investors do not wait for economic indicators to trend higher.
3. Huge support from governments – fiscal & monetary.
4. Situation is, actually, improving!
Shown In June

17 Jun 2020

29
 The Circular Economy
When the invisible hand breaks down, the visible one steps in.

Fed Corp Bonds Funds

ops/shares
buybacks

Buys
Corporates

Pay Buys
wages goods/svcs
Buys Govt Bonds US Treasury

Households
Investors

Equities, Properties, Gold 30

Zero Yields, Ample Cash…
Suddenly, anything that doesn’t give yields is also “Can Buy!”

Interest Rate Expectations Fed Balance Sheet & Ted Spread Rate

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The Man Who’s Theory Remained Relevant

Interest, investment and capital

Irving Fisher
(February 27, 1867 – April 29, 1947)

Debt-deflation

32
 Understanding Fisher Equation
What are central banks thinking?
Nominal interest rates Real interest rates Expected inflation

𝑒
𝑖 =𝑟+𝜋
(Known) (Unknown) (Known)

Real interest rates Nominal interest rates Expected inflation

𝑒
𝑟𝑟 = 𝑖 − 𝜋
(Unknown) (Known) (Known)

= 2 − 2 =0
Example:

𝑟 = 2 − 3 = −1
𝑟 = 2 − −2 = +4 33
 Understanding Fisher Equation
What are central banks thinking?
Nominal interest rates Real interest rates Expected inflation

𝑒
𝑖 =𝑟+𝜋
(Known) (Unknown) (Known)

Real interest rates Nominal interest rates Expected inflation

𝑒
𝑟 =𝑖−𝜋
(Unknown) (Known) (Known)

Global Financial Crisis: Still high!

Fed cuts rates to

𝑟 = 0 − −1.24 = +1.24 34
Understanding Fisher Equation
What are central banks thinking?
Real interest rates Nominal interest rates Expected inflation

𝑒
𝑟 =𝑖−𝜋
(Unknown) (Known) (Known)

Fed cuts rates to Inflation exp rises Great!

𝑟 = 0 − 1.51 = −1.51
3m SIBOR MAS core inflation

𝑟 = 0.4 − −0.4 = +0.8

We need some To bring this
inflation! down 35
Rule Number X In Finance

Inflation
You Don’t Want

36
US Treasuries Giving Negative Real Yields
Free-falling, negative rates/yields causing the spike in asset prices

Real US Treasury Yields

US Govt paying to Investors are Happy

borrow $$$

1. Zero i/r
2. QE slowed
Rate Cuts

US Govt getting paid 1. Zero i/r

1. Zero i/r 2. 2. QE
to borrow $$$! 2. 2. QE
Investors are Unhappy

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Negative Side Effects Of QE

38
Effects Of Massive “Printing Of Money”
Generate inflation? Yes, but of a different kind. With externalities too.

Consumer Inflation QE
Punishes
Lenders/Savers

Asset Inflation
Rewards
Borrowers/Investors

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UST Yields Drop Further, Gold Keeps Rising
But when yields start moving higher decisively, sell gold!

Gold Prices & Real US Treasury Yields

Correlation = -0.8 to -0.9

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 2. Why Are Stocks, Bonds, Properties,
Gold, etc So Strong When People Are
Losing Jobs?

Answer:
1. You are looking at a lagged indicator.
2. Investors do not wait for economic indicators to trend higher.
3. Huge support from governments – fiscal & monetary.
4. Situation is, actually, improving!
Not Back To Normal, But Improving

Google Community Mobility Data - Singapore

Circuit Breaker

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Daily Increase In COVID-19 Cases By Countries

Well Done! Well Done! Well Done! Well Done!

Daily Increase In COVID-19 Cases By Countries

Well Done! Well Done! Well Done!

Well Done! Well Done!

Most Economies In Manufacturing Recession
PMI over 50 means Expansion

Global Manufacturing PMI Market Breadth (ie: How Many With PMI > 50?)

“Level” is still bad,

17 Jun 2020 but “change” is positive

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PMI Only Useful Once In A Long Time
As a bullish contrarian indicator

Global Manufacturing PMI Market Breadth (ie: How Many With PMI > 50?)

Latest

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PMIs Tell Us A lot About Current Economy
Even more timely than GDP data

Purchasing Managers’ Indices (Manufacturing)

China

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US & China – Key Economic Indicators

Rebound since March Worst on record,

Rebound in 2Q
Rebound since April

Expect best record Best on record in May

in 3Q
Recovered in May

Worst on record Worst since WW2 Worst on record

48
Selected China High-Frequency Indicators
It is Business as (more than) Usual!

49
12
 3. So If Economies Are Recovering, Will
Asset Prices Start To Free Fall?

Answer:
1. Asset Prices will rise further.
2. Not all sectors will move up equally.
Economy & Stock Market Moves In Tandem
In fact, stock market leads economy by 3-6 months

Singapore Nominal GDP & Straits Times Index

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Property Prices & GDP Are Related!
For how can home prices rise when incomes fall? Incld its 1st derivative

Singapore Real GDP & PPI (Pte Resid) Growth Trends

Yes, Prices will Drop,

But…

17 Jun 2020
UOB Private Bank 52
Property Prices & GDP Are Related!
For how can home prices rise when incomes fall? Incld its 1st derivative

Singapore Real GDP & PPI (Pte Resid) Growth Trends

Yes, Prices will Drop,

But…
Only slightly

-13.2
• Govt acted too fast
• Investors acted fast too
Latest
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2nd Wave Concerns In The US?
Not true. Moreover, incremental cases are falling

COVID 19: US Daily New Cases COVID 19: US Daily Deaths

2
1

1 2

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Not a 2nd Wave in the US
Even latecomers are improving since mid-July

Daily Increase of COVID-19 Cases By US States

Southern Region:
Delaware, Florida, Georgia, Maryland,
North/South Carolina, Virginia, Alabama,
Kentucky, Mississippi, Tennessee, Arkansas,
2
Louisiana, Oklahoma, Texas

1 EARLY LATE

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“Time Spent at Work” Back Up Again

Homebase App: Amount of Time Hourly Workers Spent At Work

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Economic Recovery, Lower COVID-19 Increments
Presidential election odds are changing accordingly too

PredictIT: Which Party Will Win The Presidency In 2020?

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Economic Recovery, Lower COVID-19 Increments
Odds are changing accordingly too

PredictIT: Who Control SENATE? PredictIT: Who Control HOUSE?

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 4. Since Assets Have Gone Up So Much,
Are They Expensive? Is It Too Late To
“Get In” Now?

Answer:
“Assets” is a term that’s too generic. If you “divide” them up by
asset types, geographies, individuals, some are REALLY
expensive, and some are still VERY cheap
Current Valuations Reached Late-90s
But doesn’t mean a correction is paramount. Why?

S&P 500 BEst P/E Ratio

EXPENSIVE

CHEAP

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S&P 500's Stellar Rise is a Tech Story

S&P 500 Information Technology’s Share of Total Market Cap

14%
13%
12%
9.6%
8.4%
7.8%
2.6%
2.6%
2.4%

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Growth Did Outperform Value
But there’s “value” in value stocks!

S&P 500 Growth Stocks S&P 500 Value Stocks

Sell Some
Buy Some

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Growth P/E Higher Than “Trend”, Not Extreme
Value P/E still below trend and has room to improve.

S&P 500 Growth vs Value Stocks P/E

Extreme
Expensive

Cheap

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 Identifying Where We Are On The Biz Cycle
And prepare early…

春 夏 秋 冬
EARLY MID LATE RECESSION

Peak

We are here
We were here
Trough

EARLY MID LATE RECESSION

Fiscal/Monetary stimulus Fiscal/Monetary stimulus slows Fiscal/Monetary tightening Fiscal/Monetary stimulus

Economic growth starts Economic growth slows, still Economic growth peaks, Economic growth & mfg
increasing positive stagnates, slows contracts, retail drops

Employment picks up,
confidence improves
Corporate profits increases
strongly
Stronger employment growth,
confidence continues to grow
Margins peaking, management
buys back shares to boost
profits
Unemployment at lowest
levels, wages increasing,
tight lab mkt
Earnings disappoints though
expectations remain high
Unemployment shoots up,
wages contract, confidence
declines
Earnings contract, Bank
lending drops
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 What Asset Classes/Sectors To Look For?
Top-down investment approach

EARLY MID LATE RECESSION

Commod Peak
Stocks Commod
OW Bonds Stocks Commod Bonds
Bonds Stocks
Bonds

UW Stocks Comm Bonds Bonds Bonds

Comm Stocks Stocks
We are here Trough Comm
Do You Believe In Cycles?
SECTORS EARLY MID LATE RECESSION
Financials 5 0 0 0
Real Estate 10 0 0 -10
Consumer Disc 10 -5 -10 0
Info Tech 5 5 -10 -10
Industrials 10 0 0 -10
Materials 5 -10 10 0
Consumer Staples 0 0 10 10
Health Care -10 0 10 10
Energy -10 0 10 0
Comm Svcs 0 5 0 -5
Utilities -10 -5 5 10
The LIGHT at the end of the tunnel
is the GOAL of the Property
Industry

It is only the tunnel that is temporary

And we are EVEN nearer
to the LIGHT now
Francis Tan
Question & Answer Session

Francis Tan
Investment Strategist, First Vice President
Investment Products and Solutions
United Overseas Bank (UOB) Private Bank
Francis is an Investment Strategist with UOB Private Bank. Before this, he was an
economist with UOB’s Global Economics and Markets Research team, where he
was responsible for ASEAN economics. Francis also provides regular economic
commentaries in English and Mandarin through local and international print and
broadcast media.

Before joining UOB, Francis held roles in Asian and global financial institutions as an
investment strategist and an investment manager. His career also included stints as
an economist at the Singapore Ministry of Trade and Industry and the Singapore
Tourism Board, where he specialised in Tourism Economics.

Francis holds a Bachelor of Social Science (Honours) in Economics and a Master of

Social Science in Applied Economics from the National University of Singapore.
Continuing his academic interests in the field of applied economics, Francis also
contributed a chapter titled "Tourism Demand in Singapore: Estimating
Neighbourhood Effects" in the Handbook of Tourism Economics (2013) and
published a paper titled “Growth and Environmental Quality in Singapore: Is There
Any Trade-off?” in the Ecological Indicators journal (2014).

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