Get set for a liquidity rally - the DBS Vickers Securities Equities ...

Regional ETF Focus
Get set for a liquidity rally
Meanwhile, deregulation of the cross-strait direct
transportation and tourism (since 2H08) may be yielding
positive return. Though it is not easy to identify whether the
growth in Taiwan’s services industry is cyclical or structural
because of the sharp swing in global economic cycle as a
result of the financial crisis, one interesting observation is
that services employment recovered ahead of
manufacturing employment, particularly in the sub-sectors
of accommodation and food services (Chart 4). This is
probably a sign demonstrating the benefits realized from
cross-strait links of tourism and transportation.
Chart 4: Services employment vs, manufacturing
persons, th
6250
6150
6050
5950
5850
5750
5650
Latest: Jul10
Services (LHS)
Manufacturing (RHS)
persons, th
3000
2950
2900
2850
2800
2750
2700
2650
The risks to asset inflation are still on the upside, as the
current monetary policy remains highly accommodative and
interest rate levels are far below neutral. Although the
central bank raised the benchmark discount rate for the first
time since crisis, by 12.5bps in June, the hike has had little
impact on market rates (Chart 6). This is because of
abundant market liquidity resulting from still-strong external
surplus, continued FX intervention and incomplete
sterilization, as well as competition amongst the banks.
Note that official foreign reserves increased by USD 9.7bn in
the Jul-Aug period to a new record high of USD 372bn, and
base money growth has reached double-digit rate on the
sequential basis (15.8%.3M/3M saar as of July). Moreover,
Taiwan’s central bank schedules monetary policy meeting
only once every three months. The process of interest rates
normalization will naturally take longer than many regional
peers (and increase upside risks to asset inflation) should the
central bank continue raising rates in baby steps of 12.5bps
each meeting.
Chart 6: Interest rates at ultra-low levels
% pa
7.5
6.0
Policy discount rate
New loans rate
O/N interbank rate
5550
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
2600
4.5
Latest: Jul10
Asset inflation is a concern
Asset inflation is a concern in Taiwan. Residential property
prices have continued to rise sharply, with the Sinyi price
index (for existing home sales) registering a 12.7% YoY rise
during 2Q, and the Cathay index (for new home sales)
gaining 9.1% YoY (Chart 5). This is despite the central
bank’s attempt to cool the property market through
mortgage regulations and moral suasions in the second
quarter.
Chart 5: Housing prices continued risisng
Index
170
150
130
110
90
Sinyi Housing Price:
Mar91=100
Cathay Housing Price:
2006-2008=100
3.0
1.5
0.0
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10
Policymakers will have to be cautious about the impacts of
low interest rates on asset markets and overall financial
stability. Lesson learnt from the 2008 global financial crisis is
that loose monetary policy can fuel asset bubbles and
excessive leveraging. We think the central bank would have
to accelerate the pace of monetary policy normalization
sooner or later. In our interest rate forecast, we have
penciled in a 12.5bps hike at the upcoming policy meeting
in end-September, followed by 25bps hike per quarter from
4Q onwards till end 2011. The risks to our forecast mainly
stem from external factors such as weaker-than-expected
growth performance in the US and China.
70
Latest: Jun10
50
Mar-98 Mar-01 Mar-04 Mar-07 Mar-10
Page 34