GLOBAL FIXED INCOME STRATEGY - uobam.com.sg€¦ · Fixed income overview Fixed income Asset Allocation 2q13 Policy uoBAm weight (%) Benchmark weight (%) change from 1q 2013 developed

GLOBALFIXED INCOMESTRATEGY

Fixed income overview

Fixed income

Asset Allocation 2q13Policy

uoBAm weight (%)

Benchmark weight (%)

change from 1q 2013

developed Underweight 30.0 70.0 =

government Underweight 40.0 71.0 =

High grade Overweight 52.0 21.0 ↓High yield Neutral 8.0 8.0 ↑

emerging Overweight 70.0 30.0 =

Asia Overweight 32.0 30.0 =

latin America Neutral 33.0 33.0 =

cis/ee** Underweight 24.0 27.0 =

middle east/Africa Overweight 11.0 10.0 =

**CIS–CommonwealthofIndependentStates,EE–EasternEurope

in the developed markets, we remain underweight onGovernment debts specifically in the Eurozone area. WereduceouroverweightoninvestmentgradecorporatecreditsduetopossiblyhigherratesonthelongendoftheUSyieldcurve.Weare neutral on high yield credits on thebackofsustainable economic recovery in the US. Duration will bekeptneutral/shorttothebenchmark.

in emerging markets, wemaintain an overall overweightrelativetothedevelopedmarkets.WeareoverweightonAsiaandCIS,neutralonLatinAmerica,MiddleEastandAfrica,and underweight on Eastern Europe. We are selectivelypositiveonlocalcurrencyEMcredits,supportedbyattractivecarryandsuperiorgrowthprospects.

29QUARTERLY INVESTMENT STRATEGYSecond Quarter 2013

Please refer to the last page for the important notice & disclaimer. UOB Asset Management

Source:YieldBook,asof28February2013

Bond Market returns

Local currency returnsSingapore dollar adjusted returns

-6.4%

-3.9%

-2.0%

-1.2%

-1.0%

-0.9%

-0.5% -0.4%

-0.4%

-0.1%

0.0%

0.1%

0.1%

0.3%

1.0%

3.1%

3.5%

4.7%

-1.5%

-1.1%

0.3%

0.1%

-0.6%

-1.5%

-1.4%

0.1%

-0.9%

-0.9%

0.2%

0.1% -0.4%

0.1% -2.0%

0.1%

2.6%

3.0%

4.2%

0.2%

-8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0%

UK

Japan

Canada

Switzerland

Denmark

Netherlands

France

Finland

Belgium

Germany

Australia

Austria

Italy

Sweden

United States

Spain

Portugal

Ireland

G7

The G7 index has returned -1.5 per cent year-to-date inSingapore dollar (SGD) terms given the underperformancein the UK, Japan and Canada. The peripheral EuropeancountrieswerethebestperformersbecausethemarketcrisisintheEurozonehasmostlybeensidelinedfollowingtheOutrightMonetary Transactions announcement last year. US Treasuryalsoperformedwellyear-to-datereturningonepercentinSGDtermsastheUSdollar(USD)strengthenedagainsttheSGD.UKGiltsweretheworstperformerintheG7inSGDtermsastheBritishpound(GBP)fellsignificantlyagainstallmajorcurrenciesdue to quantitative easing (QE) expectations and persistingeconomicconcernsintheUK.Japan’snegativereturninSGDtermswasalsoduetocontinuedweaknessintheYen.

GLOBaL FIXED INCOME

The US continued to exhibit slow but steady growth in therecent quarter. Although theGDPgrowth has been sub par,the employment scenario and the housingmarket has seena robust recovery during this quarter. TheUSconsumer hasremainedsupportiveofthegrowthoutlookeventhoughtheyearstartedwithanincreaseintaxratesafterexpirationoftheBush-erataxcuts.Weexpectthatthiswillbeayearoftransition,witheconomicgrowthimprovinginthesecondhalfoftheyear.Theprivatesectorshouldcontinuetoshowresilience,supportedbythehousingmarket,consumerspendingandthewillingnessoftheUSbankstolend.Inflationisunlikelytogainasthereisstillunderutilisationintheeconomyandwagegrowthiswellbelowitshistoricaverage.Capital spending isalso likely to improvegiven the current high margin levels in the corporate sectoraccompaniedbylagginggrowthrates.

30 QUARTERLY INVESTMENT STRATEGYSecond Quarter 2013

Please refer to the last page for the important notice & disclaimer.

TheFederalReserve (Fed)maintained itsdovishstandandcontinueditsQEbybuyingUS$85billionofTreasurybillsandmortgage backed securities (MBS) everymonth. A debatehas started among the Federal Open Market Committee(FOMC) members regarding the costs and benefits of QEon the economy in the long term. FOMC’s chairman BenBernankereiteratedtheFed’sstandinhisrecentcomments.AsthisroundofQEisnottime-bound,weexpectdiscussionsarounditsrisksandexitstrategytocontinueinsubsequentFOMCmeetings.Thismaycreatesomevolatilityintheratesmarket,whichisfearfulofanearlyFedexit.WeexpectQEtocontinueat its currentpace this year,before starting totaperoffnextyear.WewillbewatchfulofanysignsgivenbytheFOMCregarding theirconcernsofapotential threat tofinancialstabilityduetooverheatinginthecreditmarket.

*Privateindustryworkers.**NonfarmbusinesssectorSource:DepartmentofLabour,GoldmanSachsResearch-“EconomicOutlook-Movingoverthehump”,6February2013

Wages and Unit Labour costs still weak in the US

15

10

5

0

-5

15

10

5

0

-5

Per

cent

cha

nge,

yea

r ag

o

Per

cent

cha

nge,

yea

r ag

o

1975 1980 1985 1990 1995 2000 2005 2010

Average Hourly EarningsEmployment Cost Index*Unit Labour Costs**

Source:Bloomberg,asof28February2013

US Treasury yield curve

Rat

e (M

id C

onve

ntio

nal %

)

2.00

1.50

1.00

0.50

0.00

3.0

2.50

125 US Treasury Actives Curve 02/28/13125 US Treasury Actives Curve 06/01/12

ThemuchdebatedsequesterofUS$85billioncutstriggeredon 1March includes even cuts in the defence sector anddiscretionaryspending.TheexpectedimpactonGDPis-0.7per cent.We expect the sequester to have limitedmarketimpactas the issue ismorepolitical rather thaneconomic.There is some chance that we may see a partial reversalof the sequester cuts if pressure builds up from variousimpacted sectors, especially defence, which has alreadytakenthebiggesthitfromthefiscaltightening.

In the US treasury market, we expect the yield curve to steepen but remain range bound betwee 1.9 per cent to 2.3 per cent in Q2 on the back of improving economicgrowth. We foresee private sector demand, healing ofhousehold sector (creating wealth effect) and stabilisationintheglobaleconomiestoremainthedriversofgrowththisyear.However,thevolatilityintheEurozoneduetothehungparliamentinItalyislikelytokeeptheyieldsmoderated.WeareneutralonUSallocation,underweightonduration,andoverweightontheUSD.


UOB Asset Management

Source:Bloomberg,28February2013

US Treasury 10-yr

1.30

1.40

1.50

1.60

1.70

1.80

1.90

2.00

2.10

Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13


Italian and Spain – 10 year bonds

4.00

4.50

5.00

5.50

6.00

6.50

7.00

7.50

8.00

Jun-

12

Jul-

12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Feb

-13

Italian Bonds 10yrSpanish Bonds 10yr

Structural issues in the Eurozone remain. We expect thecontractiontocontinuein2013butthedivergencebetweenthe core and peripheral Eurozone nations will widen. Asprivate and banking sector deleveraging and public sectorconsolidationhavealongwaytogoinmostoftheEurozonecountries,thelowgrowthenvironmentwillcontinue.However,the OMT announcement made last year by the EuropeanCentralBank(ECB)didprovideabackstopfortheperipherals,solvingconsiderablytheliquiditycrisis.AstheannouncementoftheOMTitselfhasbeenquiteeffective,wedonotexpectit to be triggered unless there is some unexpected event.ThekeyconcernsintheEurozonearethedistractionsfromstructural reformsby theperipheral countries - the relief inthe sovereign bond market, rising social unrest regardingacceptanceofreformsandbailoutinCyprus.

The Italiangeneral election resulted in a ‘hungparliament’,withtheirlowerHousegoingtotheleftcoalitionandtheUpperHousesplitthreeways.WethinkthatthepoliticaluncertaintyinItalywillcontinueforafewmonthsandwillconcludewithare-election.Asaresult,structuralreformsinItalytoaddressits competitiveness and productivity problems are likely tobedelayed.Therefore,weareunderweightonItaly.Spain’sfiscaladjustment,on theotherhand, ismoving in the rightdirection. Its 2012 budget deficit was reduced to 6.7 percent,asignificant improvement from2011’sninepercent.Since theOMTannouncement lastyear,Spain’ssovereignbonds have also seen renewed interest from internationalinvestors, whose share has fallen significantly when theSpanishgovernmentbondyieldssoaredattheendof2011.

Source:Bancad’Italia,SpanishMinistryofEconomyandCompetiveness,takenfrom“FocusEurozone-RaiffeisenResearch”dated20Feb2013

Share of public debt held abroad

50%

45%

40%

35%

30%05 06 07 08 09 10 11 12

ItalySpain (term investment)




German Bund 10-yr

1.00

1.10

1.20

1.30

1.40

1.50

1.60

1.70

1.80

Jun-12 Jul-12 Aug-12 Oct-12Sep-12 Nov-12 Dec-12 Jan-13 Feb-13

German Bunds 10-yr


Ireland and Portugal – 5 year bonds

-

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

Jun-

12

Jan-

13

Feb

-13

Jul-

12

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Ireland 5-yr sov yieldPortugal 5-yr sov yield

At the point of writing this report, the Euro bloc hasannounced that it is targetingaCypriotbailoutdealby theendofMarch,whichwethinkmaynotbeachievedas thenegotiationsaroundthetermsof thebailoutwill takesometime.However,thetoneofdiscussionhasbeenpositive.WedonotexpectCyprustoendupina“Greece-like”scenarioandexpectthebailoutdealofeuro17billiontobeachievedbyMay. Policymakers also remain supportive of the othercountries in theprogramme,suchas IrelandandPortugal,given that they are making good efforts on meeting theirfiscal and structural reform targets. Thiswas evidenced intherecentEurogroupmeeting,atwhichministersagreedtoconsiderextendingtheofficialloanmaturitiesofIrelandandPortugal.Internationalinvestorsalsoremainpositiveonthesecountries as both countries have successfully syndicateddeals this year. Ireland is also expected to tap themarketwithafewmoresyndicatedealstotestitsaccessibilitytothemarketbeforefullyreturningtothemarkets.

IncoreEurope,Germany,afterhittingasoftpatchattheendof2012,hasseenitsrecenteconomicdatastartingtoturnaround,albeitataslowpace.WithGermanyreorienting itsexportsfromtheEurozonetotherestoftheworld, leadingindicatorsarepointing toapositive recovery fromthe lowsseeninthelastquarterof2012.WiththeupcomingfederalelectioninSeptember,weexpectmarketstabilisationtotaketop priority, prompting risk-averse policymaking. We maystarttoseesignsofwageinflationgiventhedivergenceintheeconomicsituationinGermanyversustheperipheralEurozonenations.InFrance,stronginvestordemandforbetteryieldsthanbundyieldsishelpingtokeepthecurrentFrenchyieldsatlowlevels.Asfundamentalproblemsofhighdebt,budgetdeficit and unemployment continue to persist, structuralreforms with a focus on fiscal consolidation and labourmarketareneededforFrancetoregaincompetitiveness.Weexpecttheeconomicstagnationtocontinueafterashallowrecessioninthefirsthalfofthisyear.Giventhecurrentyieldlevels, we are underweight on both Germany and Francewithashortdurationinboth.However,asthepolicymakers have been successful in keeping the market crisis at baywhileavertingaEurozonebreakupscenario,weareneutralontheeuro.




French Bonds 10-yr

1.90

2.00

2.10

2.20

2.30

2.40

2.50

2.60

2.70

2.80


French Bonds 10-yr


UK Gilts 10-yr

1.40

1.50

1.60

1.70

1.80

1.90

2.00

2.10

2.20

2.30


UK’s macroeconomic situation continued to be belowexpectations, with persistently above-target inflation despitestagnantrealGDP.WithnegativeGDPgrowthinthelastquarterof 2012, thecountry achieved zerogrowth for the year as awhole.WeexpecttheBankofEngland(BoE)torestarttheQEprogramme soon, given fears of a triple dip recession.MarkCarney,thenextgovernorofBoE,hassignalledhisfocuswillbe on pro-growth policies, keeping rates low with a flexibleinflationtarget.Weexpecttheyieldtoremainrangeboundinthe1.90-2.10percentlevelsandareoverweightonGiltswithalongduration.WeareneutralontheGBPasmostoftheQEexpectationshavebeenpricedin.

The Reserve Bank of Australia (RBA) has cut the policyrate by 175 basis points since late 2011 in response totheweakeningoutlook for domestic economic activity andbenigninflation.InthemostrecentmonetarypolicymeetinginearlyMarchthisyear,theRBAleftthecashrateunchangedat threepercent. Itsassessmentof theeconomies in theUS,Europe,ChinaandAsiaisgenerallythatofstabilisationthoughtheforecastforglobalgrowthisalittlebelowaverage.The monetary policy statement mentioned that resourceinvestment is approaching a peakwhile there is scope forother areas of demand to strengthen. The central bankassessed that inflation will be consistent with the target(two to threeper cent) over thenextone to two years, ascompanies focus on improving efficiency under conditions of moderate demand growth and a somewhat softeninglabourmarketcontainswagepressure.TheRBAleftopenthepossibilityofeasingpolicyratefurther,whilenotingthatthesubstantialeasingandeasiermonetaryconditionsarehavingsomeoftheexpectedimpactalthoughthefullimpactwillstilltakesometimetobecomeapparent.Thecentralbankalsoassessedthat theexchangeratehasremainedhigher thanexpectedgiventhedeclineinexportprices.

Investmentoutsideofminingissubduedbutstabilisingwhilemininginvestmentisapproachingapeak.Thetermsoftradefor Australia is at a multi-year high and this in turn couldcoincide with some weakening in its currency. Australia’seconomy expanded by 0.6 per cent quarter-on-quarter inlastquarterof2012,withgrowthsupportedbynetexports,a modest upturn in household consumption and publicdemand.

Whileabiastowardseasiermonetarypolicytendstosuggestaweakercurrencyahead,thehighsovereignratingandhighgovernmentbondyieldscomparedwiththatofmanyotherdeveloped economies have been a strong support for thecurrency.Wethink that theRBAhas roomtoease interestratesfurtherbutweexpectthatthemagnitudeofcutsbyyearendwillbe lessaggressive thanthe50basispointspricedby themarket.Weshare the viewof thecentralbank thatthecurrencyisstrongerthanexpected.WewillunderweightthecurrencyandholdaneutralweightingontheAustraliangovernmentbonds.



Japan’s new Prime Minister Shinzo Abe managed to talkdowntheJapaneseYenandhadthestockmarketcheeringwhilegovernmentbondyieldswerekeptlow.Asetofpoliciesmeant topullJapanoutofdeflationandweakgrowthhadbeen advocated and comprises mainly of bold monetarypolicy,fiscalpolicyandgrowthinitiatives.TheJapaneseYensold off on expectations that the currency could weakenfrommoreaggressivemonetarypoliciessuchasextendingthematurityofbondpurchases,increasingthesizeofassetpurchases, purchasing foreign bonds and revision of theBank of Japan Act to hold the central bank accountablefor achieving the inflation target. Beyond using fiscal andmonetarypolicytolifttheeconomyfromdeflation,economicgrowthalsoneedstobesustainable.Someofthepotentialgrowthinitiativesincludeloweringthecorporatetaxratewhichiscurrentlyextremelyhigh,gifttaxreformsandderegulatingsomesectors.WithJapan’sdebt toGDP level standingatbeyond200percent,thesuccessofthegrowthinitiativesisimportanttoensuredebtsustainabilitywhilefiscalexpansionisimplemented.

Besides demographic changes, finding a reliable energysource is another big challenge the Japanese economyfaces. The currency weakness was partly brought on bythe shrinking current account surplus which resulted fromanincreaseinenergyimportsaftertheshutdownofnuclearplants two years ago.While aweaker Yenmay potentiallyboostcompetitivenessofJapaneseexports,itwillalsoinflatetheimportcostofenergy.

It will probably take some time before the benefits of a cheaper Yen on exports will outweigh the higher cost ofimports.Therecoveryofexportswillalsodependonexternaldemand and at least in the near term, global growth isexpectedtobelow.IftheUStreasuryyieldsincreasefasterthan expected and the interest ratedifferentialwidens, theYencouldweakenfurther.However,ifthepoliciesexpectedbythemarketdonotcometofruition,theYentrajectorycouldpotentiallyreverse.WhiletheYenhasweakenedmorethan20percentagainsttheUSDsincelastSeptemberandhasthepotentialtoreachtripledigitsagainsttheUSD,itisprobablyclose to the resistance level based on market positioningand pending further impetus. We would recommend tounderweight the Japanese government bonds and hold aneutralweightingontheYen.



EMErGING MarkEt FIXED INCOME

In the last threemonths, emergingmarket (EM) sovereignbondsgaveupsomeoftheirpriorgains,dueprimarilytotheupwardmovementinUSTreasuryyields,whichpushedEMbondyieldshigher.The10-yearUSTreasuryyieldstartedtheyearat1.76percentandwastradingat1.88percentbytheendofFebruary,reachingahighof2.06percentduringtheperiod.TheupwardmovementinUSTreasuryratesreflectsthebettereconomicdatacomingoutoftheUS,leadingthemarkettopositionitselfforapossibleendtoQEbytheFed.

Good news out of the US includes a pick up in the ISMindicatorfrom50.2inDecember2012to53.1inJanuaryand54.2inFebruary.EmploymentdatahasalsobeengoodwiththeUSunemploymentratefallingto7.7percentinFebruaryfrom 7.8 per cent in December 2012. Overall, there is a sensethattheUSrecovery isunderwayandthattheFed’sloose monetary policy will come to an end sometime inthefuture.Ourownviewconcurswiththerecentdata.Wethink that the10-yearUSTreasuryyieldwill tradebetween 1.8 per cent and 2.2 per cent. However, we do not thinkthe Fed will tighten monetary policy this year as inflation remainswellcontained.

EM growth also showed some signs of improvement withtrade data picking up. For example, Brazilian exports rose 2.1percentyear-on-year(y-o-y) inQ42012afterfallingby3.2percenty-o-yinQ32012.InSingapore,totaltraderose1.4 per cent y-o-y in January after falling by 8.2 per centy-o-y inthepriormonth.Meanwhile,consumerpriceshaveremainedsubdued,withfoodandenergypricesfalling.

This backdrop of improving growth and subdued inflationshould be positive for credit spreads. We have seen EMsovereignbond spreadswiden from the tight levels of lastyear,whilespreadsonEMcorporatebondshaveseensometightening.EMHighYieldbondscontinuetooutperformEMInvestmentGradebonds.

Goingforward,withourpositiveoutlookforcreditspreads,weprefertoholdEMcorporatebondsoversovereignbonds.Thisstrategyhasworkedforusandwebelievethereisstillpotentialforfurtheroutperformance.Intermsofinterestraterisk,wearemorecautiousgivenourview that10-yearUSTreasury yieldwill tradebetween1.8per cent and2.2percent.We prefer to be short on credit duration against thebenchmark.Creditselectionwillbeimportantinthecomingquarterand likely so for the foreseeable future. In termsofcurrencies,weremainlongMexicanPesoandChineseYuanasourpreferredEMcurrencyexposure.



aSIa FIXED INCOME

TheAsiancreditmarketperformancewasweakinQ12013.TheAsiancreditmarketreturnedadismal0.1percentduringtheperiodbetween31December2012and8March2013on the back of credit spreads widening and 10-year USTreasury(UST)yieldsrisingby28.5basispoints(bps)sincethebeginningof theyear.Asiancreditspreadswidenedby4bpsto267bpsduringthisperiod.TheperformanceinQ12013palesincomparisontothe2.2percenttotalreturninQ42012and4.8percenttotalreturninQ32012.

Thekey reason for thepoorAsiancreditperformancewastherapidlyrisingUSTyields.Thesecondaryreasonwastheheavysupplyofnewbondissuancesinthefirsttwomonthsof2013.TherewasagrossbondissuanceofUSD26.8bninthefirst2monthsof2013versusUSD23.4bnoverthesameperiodin2012-ariseof15percent.

Looking ahead, we see signs of the US economystrengtheningwith the recent PurchasingManagers’ Index(PMI)andnon-farmpayrolldatasurprisingontheupside.ThisshouldcontinuetoputupwardpressureonUSTyields.

Theglobaleconomycontinuestoshowsignsofarecovery.For the third consecutivemonth, the global PMI posted areadingstrongerthan50.TheglobalPMIpostedareadingof50.8 inFebruary (51.4 inJanuary).China (50.1), theUS(54.2)andGermany (50.3)allposted readingsabove50 inFebruaryalthoughtheEurozonePMIremaineddepressedat47.9inFebruary.

Asian credit spreads – JACI

JACI spreads widened by 4 bps to 267 bps between 31 December 2012 to 8 March 2013 having tightened

by 22bps in Q4 2012

Source:Bloomberg,12March2013

JACI Spread

200

250

300

350

400

450

Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13

bp

s

Global PMI above 50 for past 3 months


JPM Global Manufacturing

30

35

40

45

50

55

60

Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13

JACI Total Return Index

JACI rose 0.1% between 31 December 2012 to 8 March 2013 compared to a rise of 2.2 per cent in Q4 2012


JACI Total Return Index (28 Feb 2010 = 100)

100103106109112115118121124127130

Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13

bp

s



Ataspreadof267bpson8February,theAsiacreditmarketispricinginrealGDPgrowthofaround7.5to8percentoverthe next 12months.Our fair value for Asia credit spreadsremainsat380bpsasweexpectrealGDPgrowthofaverage6 to 6.5 per cent over the next 12months.We think thatvaluationsforAsiancredit,bothonspreadandyieldbasis,arelookingstretched.Asacomparison, theAsiacreditmarketgave an average yield of around 6 per cent from 2005 to2007.Despitethestretchedvaluations,wedoacknowledgethatmassive liquidity injections fromcentral banks globallycouldhelptosupporttheAsiancreditmarket.

Wehavemovedourportfoliotoaslightoverweightonhighyieldcreditsandaslightunderweightonhighgradecredits.Previously we were underweight on high yield credits andoverweight on high grade credits. Within the high gradecredits sector, we are overweight short duration offshoreRenminbi(CNH)bonds.

The market is currently supported by massive liquidityinjections by the central banks of developed nations.However,asUSinterestraterises,theAsiancreditmarket,especially the high grade credits, could come underpressure.Ourcurrentportfoliopositioningisgearedtowardsprotection against capital losses from rising interest rates.Ouroverweightpositiononhighyieldcreditswilloffersomeprotectionagainstrisinginterestratesashighyieldcreditsarelesssensitivetointerestraterises.Meanwhile,shortdurationCNHcreditsarerelativelyimmunetorisinginterestratesasmostofthemhaveamaturityoflessthanthreeyears.

InHigh grade, we are overweighting China, Hong Kong,Singapore and Australia high grade corporates. ThesecreditsincludeLeighton,CoscoPacific,TemasekHoldings,ChampionReit,sun Hung Kai Properties,Wesfarmers,AiA,PccWandcapitaland.Thesecompaniesofferdecentyield over similarly rated credits and duration without acompromiseincreditquality.

In High yield, we continue to prefer good qualitycorporatebondslikemie Holdings,longFor Properties,guangzhou r&F,long yuan,Kaisa,Bharti telecoms andFosun. Thesecorproateshave strongbalance sheetsandsolidbusinessmodels.Within the sovereignhigh yieldspace,welikethemongoliansovereignbonds.

30

35

40

45

50

55

60

65

Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13

Europe PMI is still below 50 while that of the US and China have been above 50 for the past several months

Source:Bloomberg,30November2012

ECB Manufacturing PMIChina Manufacturing PMI

US Manufacturing ISM

Performance of Asian High Grade v Asian High Yield

High grade credits tightened by 4 bps and high yield widened by 8 bps since the beginning of 2013 versus as tightening of 21 bps

for high grade and a tightening of 27 bps for high yield in Q4 2012.


JACI HG JACI HY

100

200

300

400

500

600

700

Mar-09 Mar-10 Mar-11 Mar-12 Mar-13

bp

s



SINGaPOrE FIXED INCOME

Second Quarter 2013 Macro review

Q42012realGDPgrew1.5percenty-o-yfrom0percentinQ32012.Fullyear2012realGDPgrowthslowedto1.3percent from5.2 per cent in 2011. Themanufacturing sectorcontinued tobe the keydragongrowth inQ42012. Thissectorshrank1.1percenty-o-y(revisedupfrom-1.5percenty-o-y)whiletheservicessectorcontinuedtoexpand,rising1.7percenty-o-yinQ4from0percentinQ3.Meanwhile,theconstructionsectorslowedto5.8percenty-o-y inQ42012from6.7percenty-o-y inQ32012.ThegovernmentexpectsrealGDPtogrow1to3percentin2013.WeexpectrealGDPgrowthof2.5percentin2013.

CPIinflationslowedto4.0percentinQ42012from4.2percent inQ32012,whichtook2012 inflationto4.6percentfrom5.25percentin2011.Coreinflationslowedto2.0percenty-o-yinQ4from2.3percenty-o-yinQ32012.Fullyearcore inflationcame inat2.6percent from2.2percent in2011.Despite theslower inflationarypressures inQ42012andsub-pargrowthoverthelastfewquarters,wethinkthatthe government remains highly concerned over the highinflation data and hence expect theMonetary Authority ofSingapore(MAS)tokeepthemonetarypolicytightinthenextmonetarypolicymeetinginApril2013.WhiletheMASislikelytomaintainitstightmonetarypolicyin2013,webelievethatweakness inotherAsian foreigncurrencies like theKoreanWon (KRW), Taiwan dollar (TWD) and Japanese Yen (JPY)coulddragtheSGDweakeragainsttheUSDoverthenextthreemonths.We expect the SGD to trade in the 1.2450to1.2550rangeagainsttheUSDoverthenextthreetosixmonthscomparedto1.2385atendFebruary.



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GLOBAL FIXED INCOME STRATEGY - uobam.com.sg€¦ · Fixed income overview Fixed income Asset Allocation 2q13 Policy uoBAm weight (%) Benchmark weight (%) change from 1q 2013 developed