Impact of QE on Risk Assets

In the course of my job, the first question that most relationship managers and clients ask me is, "what will the Federal Reserves' Quantitative Easing do to stocks and other investments?" Actually, it is not just the Fed that is printing money. Bank of Japan has just announced an increase in their bond purchases by JPY10 trillion or around USD130 billion. ECB has set up an ESM, and agreed to purchase sovereign bonds of Spain and Italy. The amount could be in EUR trillions although they vowed to sterilise it.

Let's look at the impact on various asset classes:

Real Estate

Singapore residential in general is one of the worst areas to invest. In descending order, the biggest bubble is

1) the OCR, especially if it's not near anyone of the industrial centres such as Jurong, Tampines, Paya Lebar or Woodlands / Sembawang. Rental yields hover around 3 - 4% and they are leaseholds. Imagine when these properties have 80 years left. Every year, the apartment will depreciate by 2%. Effectively, the net rental yield is between 1 - 2%.

2) RCR and CCR are areas where investment will have less downside when QE finally eases. The rental yields are the same as OCR's, but the rental demand is unlikely to fall as much as in OCR because they are nearer the CBD and nearer industrial / office sites like Paya Lebar.

For the foreseeable future, real estate prices will be pushed up by the flood of liquidity from central banks. But the downward forces will be: further government measures, such as raising the LTV to buy properties, supply coming in 2013 - 2015.

Look at the first evidence. Developers are already stuck with inventory that is higher than in 2007. It is an omnimous sign that developers may become increasingly desperate to clear their inventory.

 The vacancy rates shown below are still at record lows, indicating that there is still a shortage in supply. It means rental yields will stay at current levels for 2012, although 2013 will be interesting.

Bottom line: very little movement up or down until QE eases off. It will be a standoff between downward and upward forces. Rental yields could fall to 2% by 2015 while prices rise another 10 - 20%. However, once QE eases off, the property prices will fall. I am no longer bearish on Singapore properties for the next 3 years. But neither am I bullish. It's about the yield game and investors must be very disciplined in looking for properties that give very high yield. Do not be contented with just 3%, but look for 4 - 5% for residential, 5 - 6% for shops, 6 - 7% for industrial. Otherwise, I'd rather look overseas because yields are 5 - 7% in London, 10 - 15% in certain cities in the US.

Next up, my comments on other asset classes.