June

UNITED STATES

June 2015
CAFE
MONTHLY
The
Hike
Up

“Be
sure
you
put
your
feet
in
the
right
place,
then
stand
firm.”

-‐
Abraham
Lincoln

Page | 1 CAFE MONTHLY: UNITED STATES
MENU OF THE MONTH

WRITTEN
BY

Ang
Shiu
Wen

Daryl
Lim

Nathaniel
Leong

Seah
Wei
Hao

Shannon
Sin

Sheranne
Kwok

Wilson
Soh

Contents

THE
IMPENDING
HIKE

The
Federal
Funds
Target
Rate…………………………………..
2

INVESTMENT
IMPLICATIONS

Allocation
Overview……………………………………………………
5

Fixed
Income…………………………………………………….
8

Equities………………………………….……………………….
11

Equities
Screener………………………….…………………
14

CONCLUSION

Year-‐end
Hike…………………..…………………………..………….
20

CAFE MONTHLY: UNITED STATES

2 | P a g e

USA
The Hike Up

The
Federal
Open
Market
Committee
(FOMC)
determines
the
course
of

monetary
policy.
Historically,
it
has
been
one
of
the
most
watched
events

due
to
its
impact
on
the
U.S.
economy
and
the
global
economy.
More

interesting
in
the
months
to
come
would
be
the
issue
of
divergent

policies
between
U.S.
and
the
rest
of
the
world,
with
U.S.
planning
on

raising
its
interest
rates
while
other
economies
such
as
Japan
and
Europe

are
maintaining
an
easing
stance
on
their
monetary
policies.

The
FOMC
has
emphasised
on
how
its
policy
rates
will
be
data

dependent
rather
than
date
dependent.
However,
the
timing
of
its
policy

and
the
scale
of
its
hike
will
be
key
issues
of
contention
and
this
report

seeks
to
identify
historical
trends
as
well
as
current
economic
situations

and
discuss
the
investment
implications
of
such
a
hike.

The
FOMC
typically
looks
at
the
following
as
key
indicators
of
its

economy

1. Unemployment
rate

2. Non-‐farm
payrolls

3. Personal
Consumption
Expenditure
(PCE)
Deflator

Be
ready
for
the
Hike

Fed Fund Target Rate
The Hike Up

As
a
measurement
of
the
level
of
employment,
an
indicator
commonly

looked
at
is
the
change
in
nonfarm
payrolls,
which
have
been
steadily
on

the
rise
(Figure
1).

Figure
1:
Fed
Fund
Target
Rate
vs
Nonfarm
Payrolls

The
Fed
also
looks
at
the
unemployment
data
to
base
it’s
monetary
policy

decisions
on,
which
have
been
dropping
corresponding
to
the
rise
in

nonfarm
payrolls
(Figure
2).

Figure
2:
Fed
Fund
Target
Rate
vs
Unemployment
Rate


4 | P a g e

Indicators

The
Federal
Reserve
keeps
a
close
watch
on
the
PCE
deflator
as
well
since

the
U.S.
economy
is
largely
driven
by
domestic
consumption.
Instead
of
the

CPI,
the
PCE
deflator
is
used
due
to
the
PCE
more
appropriately
reflecting

shifting
consumption
patterns
as
compared
to
the
CPI’s
fixed
basket
(Figure

3).

Figure
3:
Fed
Fund
Target
Rate
vs
PCE
Deflator

While
there
have
been
concerns
on
slowing
wage
growth,
our
research
has

shown
that
average
hourly
earnings
is
still
on
track
to
increase
(Figure
4).

This
should
in
turn
spur
consumer
spending.

Figure
4:
U.S.
Unemployment
Rate
vs
Average
Hourly
Earnings

Indicators

On
the
back
of
more
promising
labour
data,
the
Feds
have
released
their

press
release
on
17th

June
changing
their
wordings
describing
growth
from

“slowed”
to
“expanding
moderately”
and
employment
via
changing
their

statement
to
“underutilisation
of
labour
resources
diminished”
from
the

prior
release
of
“was
little
change”.

Not
relying
on
the
press
release
alone,
the
dot
plot
released
indicates
that

majority
of
the
members
are
favourable
towards
a
rate
liftoff
by
year
end.

S

Source:
Federal
Reserve

With
our
research,
we
believe
September
will
see
the
first
rate
liftoff
due
to

our
expectations
of
favourable
labour
data
releases
in
the
following
months

to
come.
We
also
expect
a
gentler
liftoff
due
to
prevailing
uncertainty

against
the
backdrop
of
diverging
monetary
policy
of
Eurozone
and
Japan.


6 | P a g e


The
U.S.
stands
out
against
the
backdrop
of
a
weak
global
economy.
This

can
be
seen
from
the
stock
market’s
bullish
run
for
the
past
6
to
7
years,

with
the
S&P
500
and
its
counterpart
Dow
Jones
and
NASDAQ
stock

indexes
relentlessly
breaking
new
all-‐time
highs.

The
continued
divergence
in
monetary
policies
further
makes

overweighting
on
U.S.
investments
a
wise
choice
for
investors.

In
a
rate
hike
cycle,
stocks
tend
to
perform
well
amongst
the
asset

classes.
Commodities
have
a
historically
inverse
relationship
to
the

dollar,
and
as
such
are
expected
to
dip
as
the
dollar
rises.
Stocks
largely

outperform
bonds
in
a
rate
hike
cycle
(Figure
5).
It
is
perhaps

appropriate
to
note
here
that
long-‐term
yields
of
bonds
are
currently

depressed
due
to
Quantitative
Easing
in
other
parts
of
the
world.

However,
we
see
from
the
chart
that
in
a
similar
environment
during

the
2004
-‐
2006
bond
conundrum,
equities
still
performed
significantly

better
than
bonds.
Investors
might
hence
want
to
shift
their

investments
to
cyclical
stocks
to
take
advantage
of
the
bullish
market.

Figure
5:
Equity
&
Bond
Performances
in
Rate
Hike
Cycles

Source:
Thomson
Reuters
Datastream

With Rate Hike

Allocation Overview
With Rate Hike

No
doubt
the
tremendous
growth
of
U.S.
equities
in
2015
makes
them

relatively
expensive
to
invest
in.
However,
with
the
rate
hike
due
in
the

near
future
and
the
economy
on
a
strong
recovery
track,
we
believe
that

there
is
still
more
room
for
growth.


8 | P a g e

Fixed Income
With Rate Hike
Balance

Despite
the
strong
recommendation
to
invest
in
equities,
it
may
still

be
wise
for
investors
to
hold
on
to
some
bonds.

Why
investors
might
still
want
to
consider
fixed
income:

1.
Diversification
of
Portfolio

Given
the
amount
of
volatility
in
the
financial
market

today,

diversification
of
portfolio
is
pertinent.
Holding
on
to
fixed
income

assets
allows
investors
to
manage
their
liabilities
as
bonds,
unlike

equities,
can
provide
a
fixed
income
stream
to
offset
loan
repayments

and
immunise
the
overall
portfolio.

2.
Potential
Bond
Conundrum

Figure
6:
Potential
Bond
Conundrum

Fixed Income
With Rate Hike

With
the
anticipation
of
the
Fed
rate
hike,
investors
should
be
moving
away

from
bonds
due
to
expected
fall
in
prices
as
yields
increase.
However,
as

seen
from
the
above
chart
(Figure
6),
the
10-‐year
Treasury
yield
has
been

on
a
steady
decline
since
the
start
of
2014.

The
combination
of
Quantitative
Easing
by
ECB
and
BOJ
and
the
flight
to

safety
amidst
the
global
turmoil
has
resulted
in
massive
capital
inflow
into

U.S.
Treasuries.
This
suppresses
yields
and
hints
at
a
potential
revival
of
the

bond
conundrum.

This
is
an
appealing
time
for
investors
to
enter
the
U.S.
bond
market
as
U.S.

bonds
are
relatively
cheaper
and
they
can
take
advantage
of
the
higher

yield
(Figure
7).

Figure
7:
USD
VS
US-‐Germany
10Y
Bond
Spread


10 | P a g e

Fixed Income
With Rate Hike

Characteristics
of
bonds
to
avoid/
look
out
for:

1.
Shorten
Duration

With
the
Fed
raising
interest
rates
soon,
investors
holding
fixed
income

assets
should
consider
shortening
the
duration
of
their
bonds.
As
long

term
instruments
are
more
price
sensitive,
the
potential
rate
hike
will

result
in
a
steeper
fall
in
prices
for
bonds
with
longer
duration.
Investing

in
bonds
with
shorter
maturity,
higher
coupon
frequency
and
yield
to

maturity
are
generally
wise
moves
in
a
bid
to
shorten
bond
duration.

2.
High
Yield
Bonds

Investing
in
high
yield
(junk)
bonds
is
also
another
move
that
investors

should
consider.
As
the
Fed
only
raises
interest
rates
at
times
when
the

economy
is
sound,
default
risk
of
such
bonds
are
generally
low.
Since
the

U.S.
is
at
the
recovery
stage
of
the
investment
cycle,
taking
up
such
bonds

will
be
an
astute
move.

3.
Putable
and
Convertible
Bonds

In
a
rate
hike
cycle,
bond
yields
tend
to
increase
and
bond
prices

consequently
fall.
Putable
bonds
allow
investors
to
sell
back
at
a
fixed

exercise
price
and
thus
reduce
the
risk
of
rising
interest
rates
diminishing

bond
value.

In
addition,
as
equities
tend
to
do
well
in
the
early
stages
of
a
rate
hike,

investors
should
also
consider
convertible
bonds.
However,
one
should

always
factor
in
the
premiums
paid
for
such
bonds.

Equities
With Rate Hike

The
stock
market
has
been
on
a
six
year
bull
run,
courtesy
of
the
Fed’s

policy
of
near
zero
interest
rates
since
2008.
The
prolonged
period
of

depressed
rates
has
fuelled
credit
creation
in
the
economy
by
lowering

the
cost
of
borrowing
and
pushed
investors
into
equities
by
making

alternative
investments
(cash
and
bonds)
less
appealing.
Now,
it
faces

an
impending
rate
hike
which
threatens
to
derail
its
incredible
run.

As
the
Fed
enters
into
the
initial
stages
of
a
rate
hike
cycle
on
the
back

of
stronger
economic
fundamentals
relative
to
the
aftermath
of
the

2008
Global
Financial
Crisis,
we
expect
a
surge
of
liquidity
as
capital

flows
into
the
U.S.
market
seeking
greater
yield.

This
inflow
of
capital
is
exacerbated
by
the
phenomenon
of
diverging

global
monetary
policies:
the
Fed
raising
interest
rates
at
a
time
where

other
central
banks
are
cutting
rates.

Figure
8:
S&P500
Performance
in
Rate
Hike
Cycles

Source:
Thomson
Reuters
Datastream


12 | P a g e

Equities
With Rate Hike

As
hot
money
surges
into
the
U.S.
economy,
it
tends
to
park
itself
in

the
equities
market.
As
seen
in
the
previous
rate
hike
cycles,
the
S&P

500
rallied
when
the
Fed
raised
the
target
rate
(Figure
8).

A
rate
hike
signifies
that
the
economy
is
doing
well
enough
to

warrant
pre-‐emptive
action
from
the
Fed
to
prevent
runaway

inflation.
We
thus
recommend
going
overweight
on
U.S.
equities
to

take
advantage
of
the
market
exuberance
that
characterises
the

initial
stages
of
a
rate
hike.

There
is
fear
that
the
Fed
will
strangle
the
bull
market
by
cutting
off

its
main
driving
force
-‐
near
zero
interest
rates.
However,
this
is
less

of
a
concern
this
time
round
as
the
Fed
is
raising
interest
rates
from

the
lowest
level
in
history.
This
gives
the
Fed
Funds
target
rate
more

room
to
rise
before
it
starts
to
create
a
drag
on
the
economy.

Against
the
backdrop
of
a
strongly
appreciating
dollar,
we

recommended
that
investments
be
made
in
dollar-‐denominated

stocks
and
funds.

Other
considerations:

1. A
rate
hike
typically
causes
the
equities
market
to
fall
first,

then
rise
when
there
is
confidence
that
the
economy
can

withstand
the
rate
hike.

2. Prior
QE
efforts
led
to
massive
liquidity
in
the
U.S.
market,

and
a
delayed
rate
hike
may
actually
be
good
news;
“Bad

news
is
good
news”
because
if
the
Fed
hikes
rate
later,
then

companies
can
continue
to
enjoy
low
interest
rates.
This

reduces
the
cost
of
financing
and
provides
favourable

conditions
for
stock
prices
to
rise.

Equities

3. There
is
potentially
a
bubble
forming
in
the
U.S.
equities
market

with
the
SPX
index
hitting
new
highs
in
recent
months.
However,

we
feel
that
there
is
greater
room
for
the
equities
market
as
a

whole
to
carry
on
growing
as
investors
flock
towards
U.S.
equities

in
a
flight
to
safety
before
the
bubble
bursts.

Figure
9:
Investment
Cycle

Source:
Fidelity
Worldwide
Investment

A
rate
hike
usually
occurs
at
recovery-‐overheat
stage
(Figure
9).
We
see

the
current
strong
economic
fundamentals
as
a
convincing
sign
of

recovery
and
suggest
a
reallocation
of
portfolio
weight
in
the
sub-‐sectors.

• Invest
in
cyclical
sectors
rather
than
defensive
sectors

• Shift
from
staples
to
discretionary

With Rate Hike


14 | P a g e

EQUITIES SCREENER
For Rate Hike

Figure
10:
FFTR
vs
S&P
Consumer
Discretionary
and
Staples

Source:
Bloomberg,
CAFE
USA
Observers

Sectors
to
look
at:

Since
U.S.
is
in
its
recovery
stage,
we
should
look
at
sectors
such
as
the

Consumer
Discretionary.
This
is
attributed
to
its
performance
over

Consumer
Staples
as
supported
by
the
chart
above
(Figure
10).
In

addition,
the
global
collapse
in
oil
prices,
coupled
with
the
slow-‐down
in

China’s
growth
does
not
bode
well
for
companies
in
the
energy
sector.

To
capitalise
on
the
recovery
of
U.S.
and
also
the
bull
market,
investors

should
consider
looking
at
companies
of
small
and
mid
cap
and
also

growth
stocks
which
tend
to
outperform
value
stocks
in
uptrends.

EQUITIES SCREENER
For Rate Hike

General
Coverage
of
Each
Sector:

1. Healthcare

Often
considered
to
be
a
defensive
sector,
healthcare
continues
to

outperform
given
the
current
poor
economic
conditions.
Coupled
with
the

prevalent
trends
of
an
increasing
global
population,
the
onset
of
chronic

diseases
and
medical
advances,
this
provides
a
strong
backdrop
for

investors
to
discover
profitable
businesses.

2. Financials

With
the
current
low
interest
rate
environment,
financial
services
firms
tend

to
perform
better
due
to
the
increase
in
loans
and
mortgages.
With
the
US

economy
showing
some
signs
of
recovery,
this
would
lead
to
additional

investments
and
financing
being
made.
Stricter
compliance
and
regulations

on
banks
provide
security
to
investors
and
mitigate
the
riskiness
of
their

businesses.
However,
with
the
expected
rise
in
interest
rate,
financial

services
firms
performance
may
in
time
be
less
promising.

3. Consumer
Discretionary

The
performance
of
firms
in
the
consumer
discretionary
sector
is
strongly

correlated
to
interest
rates
and
to
the
performance
of
the
economy.
With

the
US
job
market
slowly
picking
up
with
some
signs
of
wage
growth,
this

would
increase
consumer’s
ability
to
spend
and
allow
firms
to
benefit
from

the
subsequent
rise
in
consumption.

4. Technology

Performance
of
technology
companies
ties
in
strongly
with
the
condition
of

the
economy.
As
economic
data
starts
to
show
some
signs
of
recovery,
tech

firms
will
outperform
other
sectors
due
to
an
increase
in
demand
for
their

services.
This
is
also
in
line
with
the
current
global
demand
and
reliance
for

technological
services,
both
for
corporations
and
consumers.


16 | P a g e

EQUITIES SCREENER
For Rate Hike

5. Basic
materials
(Consumer
Staples)

Currently,
poor
global
economic
conditions
are
weighing
down
on

the
consumer
staples
sector.
However,
we
expect
the
global
trend
of

rising
incomes—especially
among
the
emerging
markets—to

continue.
Firms
with
a
larger
global
footprint
will
thus
have
the

potential
to
benefit
from
higher
consumption
volume
in
the
future.

6. Utilities

Commonly
understood
as
a
defensive
sector,
utilities
tend
to
remain

strong
during
turbulent
economic
conditions.
Investors
should
thus

remain
their
weights
on
the
utilities
sector
due
to
higher
dividend

yields
and
capital
stability.

7. Industrials

Industrials,
being
completely
responsible
for
production
of
oil
rigs

and
drilling
machines,
are
under
immense
pressures.
Even
sector

leaders
like
U.S.
Steel
and
Halliburton
are
seeing
drastic
drops
in

share
prices
of
up
to
37%.

8. Energy

Profitability
of
companies
in
the
petroleum
industry
directly

correlates
to
prices
of
oil.
Upstream
oil
companies
-‐
involved
in
the

production
of
crude
oil,
will
take
a
hit
due
to
thinning
margins.

Downstream
companies,
involved
in
the
refining
and
distributing
of

finished
products,
will
also
be
affected
but
to
a
lesser
extent.

Generally,
the
fall
in
prices
have
an
adverse
impact
on
the
whole

industry
due
to
thinning
profit
margins.

EQUITIES SCREENER
For Rate Hike

Based
on
historical
performance
of
sectors
during
an
investment
cycle,

we
have
decided
to
screen
for
equities
from
the
Industrials,
Consumer

Discretionary,
Healthcare,
Information
Technology
and
Financial
sectors.

These
selected
sectors
have
proven
to
outperform
the
other
sectors

during
the
recovery
stage
of
the
investment
cycle
which
we
strongly

believe
that
the
U.S.
is
in.

Filters:

Security
Exchange:
United
States

GICS
Sectors:
Industrials,
Healthcare,
Financials,
Consumers,
Technology

Current
P/E
Lesser
than
or
Equal
to
Relative
Sector

EPS
Growth
Greater
than
or
Equal
to
Relative
Sector

Average
Volume
Traded
Greater
than
or
Equal
to
Relative
Sector

By
applying
these
criteria,
the
screener
selects
equities
that
are

relatively
priced
cheaper
and
has
greater
earnings
growth
as
compared

to
their
respective
sector
benchmarks.
In
addition,
liquidity
of
the

equities
selected
has
to
be
higher
than
the
respective
sector’s

benchmark
as
well.


18 | P a g e

Ticker
Short
Name
Current

P/E

Relative

Sector

Current
P/E

EPS
-‐
1
Yr

Growth

Relative
Sector
EPS

–
1
Yr
Growth

Consumer
Discretionary

BBY
U.S.

Equity

BEST
BUY
CO
INC
13.45
27.05
66.45
27.49

HRB
U.S.

Equity

H&R
BLOCK
INC
13.38
27.05
83.33
27.49

GM
U.S.

Equity

GENERAL

MOTORS
C

8.50
27.05
625.00
27.49

Consumer
Staples

WBA
U.S.

Equity

WALGREENS

BOOTS

19.02
23.89
161.33
35.82

Health
Care

CNC
U.S.

Equity

CENTENE
CORP
29.94
33.81
83.05
69.84

ABT
U.S.

Equity

ABBOTT
LABS
28.07
33.81
150.00
69.84

BIIB
U.S.

Equity

BIOGEN
INC
28.01
33.81
72.41
69.84

SYK
U.S.

Equity

STRYKER
CORP
21.72
33.81
210.53
69.84

HCA
U.S.

Equity

HCA
HOLDINGS

INC

15.42
33.81
80.77
69.84

GILD
U.S.

Equity

GILEAD

SCIENCES

12.90
33.81
100.69
69.84

Information
Technology

BRCM
U.S.

Equity

BROADCOM

CORP-‐A

28.73
30.43
25.00
11.14

MA
U.S.

Equity

MASTERCARD

INC-‐A

27.48
30.43
21.92
11.14

TXN
U.S.

Equity

TEXAS

INSTRUMENT

18.81
30.43
40.91
11.14

AMAT
U.S.

Equity

APPLIED

MATERIAL

18.54
30.43
36.36
11.14

CSCO
U.S.

Equity

CISCO
SYSTEMS
16.33
30.43
14.29
11.14

AAPL
U.S.

Equity

APPLE
INC
15.99
30.43
40.12
11.14

GLW
U.S.

Equity

CORNING
INC
15.77
30.43
42.86
11.14

FLEX
U.S.

Equity

FLEXTRONICS

INTL

12.55
30.43
228.57
11.14

MU
U.S.

Equity

MICRON
TECH
8.01
30.43
26.09
11.14

Source: Bloomberg

From
the
results
as
shown
above,
there
are
a
total
of
19
equities
that
fulfils
the
criteria
as
listed.

Equities
in
the
Information
Technology
sector
are
highly
represented
with
9
equities.


20 | P a g e

CONCLUSION

With
the
inevitability
of
the
rate
hike,
it
is
only
a
question
as
to
when
the

Fed
would
start
to
raise
the
benchmark
interest
ratefom
their
near-‐zero

levels
since
2008.
As
stated,
based
on
favourable
data
releases
in
the

upcoming
months,
we
believe
the
first
initial
rate
liftoff
to
be
in
September.

This
will
have
a
definite
impact
on
investors
and
their
portfolio
allocation.
It

is
in
our
opinion
that
investors
should
take
advantage
of
the
U.S.’s
recovery

to
shift
weights
into
sectors
like
Consumer
Discretionary
and
Information

Technology.
These
are
the
sectors
that
have
historically
outperformed

during
this
stage
of
the
investment
cycle.

We
also
believe
that
investors
should
be
wary
and
remain
underweight
in

bonds.
This
is
supported
by
the
poor
historical
performance
of
bonds
as

compared
to
equities
in
rate
hike
cycles.
In
addition,
the
recent
sell-‐off
of

bonds
and
the
lack
in
liquidity
present
a
cause
for
concern
for
bond

holders.

Overall,
we
believe
that
the
data
of
U.S.
is
starting
to
show
a
steady

recovery
of
the
economy
despite
minor
blips.

Year-‐End
Rate
Hike

MONTHLY DECK - USA
Faced with the
increasing dollar and
the looming hike of the
interest rates,
corporate profits will
continue to take a hit as
exports dip even further
and translation and
transactions risks
increases.

Equities

Sliding
S&P
500
Growth

Corporate
profits
serve
as
the
fundamental
driving
force
to
the

performance
of
the
S&P
500.
It
can
be
seen
as
a
leading
indicator

to
the
movements
in
the
index;
the
strong
correlation
of
the

trend
can
even
be
seen
in
the
subprime
mortgage
crisis
from

2008
to
2009.

Of
late,
corporate
profits
dipped
into
the
red
zone
signalling
a

turnaround
in
the
3-‐year
rally
by
the
S&P500.
We
feel
that

despite
the
improving
current
conditions
of
the
U.S.
market,

there
is
a
need
to
be
cautious
and
watchful
of
potential
dips
in

the
index.

Corporate Profits vs S&P 500


22 | P a g e

MONTHLY DECK - USA
We expect to see both
the Bond Price Index
and S&P 500 Index
continue rising in the
near future as Japan
and Europe continue
their QE.

Equities

Stocks
Charging
Ahead
of
Bonds

In
a
typical
U.S.
rate
hike
cycle,
equities
tend
to
perform
better.

While
investors
flock
to
stocks
in
light
of
a
strengthening
economy,

many
shift
out
of
fixed
income
in
fear
of
suffering
capital
losses.
This

is
best
seen
from
the
chart,
where
the
1999
and
2004
rate
hike
both

drove
a
divergence
between
stock
and
bond
prices.
Taking
into

account
the
coming
rate
hike,
the
Bond
Price
Index
should
start
to

fall
as
per
before,
yet
it
is
not
the
case.

We
believe
that
this
trend
can
be
attributed
to
Europe
and
Japan

investors’
flock
to
safety.
Commonly
known
as
the
bond
conundrum,

long-‐term
bond
yields
are
depressed
despite
expectations
of
a
rate

hike.
We
expect
to
see
both
the
Bond
Price
Index
and
S&P
500
Index

continue
rising
in
the
near
future
as
Japan
and
Europe
continue
their

QE.
Hence,
we
believe
it
is
fairly
safe
for
investors
to
invest
in
U.S.

bonds
now
and
enjoy
high
yields.

Equity & Bond Performances in Rate Hike Cycles

MONTHLY DECK - USA
The
outperformance of
dividend yields of
stocks over bonds
would continue to
persist with the
presence of greater
opportunities in the
stock market.

Equities

Dividend
Yields
Moving
Ahead
of
Bond
Yields

With
the
10Y
Treasury
starting
to
fall
below
the
S&P500’s
dividend

yield,
we
believe
that
investors
are
increasingly
moving
into

equities.
The
outperformance
of
dividend
yields
of
stocks
over

bonds
would
continue
to
persist
with
the
presence
of
greater

opportunities
in
the
stock
market.
This
is
supported
by
the
strong

rally
in
the
prices
of
stocks
in
the
S&P500.

What
we
would
also
need
to
do
is
to
observe
how
the
10Y
Treasury

moves
in
the
near
future
and
whether
the
gap
between
the
two

yields
will
continue
to
widen.

Dividend & Bond Yield Spread vs S&P500


24 | P a g e

With a stronger
economy as a
backdrop, people have
more income and are
more inclined to spend
on luxurious products.
MONTHLY DECK - USA

Equities

Shift
From
Consumer
Staples
to
Discretionary

Moving
from
a
rate
cut
to
a
rate
hike
cycle,
it
is
common
to
see
a

shift
in
consumer
spending
from
staples
to
discretionary.
This
is

evident
in
the
shift
from
the
green
to
red
areas
before
the
1999

and
2004
rate
hikes.
This
is
because
rate
hikes
usually
happen
at

the
recovery
to
overheating
stage.
With
a
stronger
economy
as
a

backdrop,
people
have
more
income
and
are
more
inclined
to

spend
on
luxurious
products.

As
the
U.S.
is
now
approaching

a
rate
hike,
we
see
from
the
chart

that
consumer
discretionary
performance
is
strong.
We
would

hence
suggest
investors
to
invest
in
discretionary
stocks
to

capitalise
on
their
high
growth.

FFTR vs S&P Consumer Staples & Discretionary

MONTHLY DECK - USA
With poor economic
results and
announcements these past
weeks, the optimism in
the market is seemingly
dampened.

Equities

Declining
Optimism
Reflected
in
the
Markets

As
the
volatility
of
the
Leading
Economic
Indicator
Index
is

starting
to
consolidate,
so
is
the
S&P500.
However,
the
S&P
is
still

seeing
negative
growth
on
a
quarter
on
quarter
change
for
the

past
2
years.

With
poor
economic
results
and
announcement
these
past

weeks,
the
optimism
in
the
market
is
seemingly
dampened.
The

chart
shows
the
recent
dip
in
the
leading
economic
indicator.

With
that
being
said,
the
current
short
term
rallies
in
the
S&P500

must
be
interpreted
cautiously.

Leading Economic Indicators Index vs S&P500

Equities


26 | P a g e

We attribute the dip
to labor shortages
and hold a positive
outlook on the
housing market on
the back of a strong
recovery in the US
economy.
MONTHLY DECK - USA

Rising
Home
Prices

The
National
Association
of
Home
Builders
Index
(NAHB)
has

been
a
good
indication
of
the
U.S.
single-‐family
housing
market.

Historically,
it
has
been
a
good
leading
indicator
for
US
home

prices.

In
recent
months,
we
see
a
dip
in
the
NAHB
for
three
consecutive

months
to
53
in
March.
However,
we
note
that
it
is
still
above
50,

indicating
a
favorable
view
of
the
housing
market.

A
strong
word
of
caution
goes
out
to
investors
looking
to
move

into
the
real
estate
sector
in
light
of
the
possible
rate
hike.

Sentiment and Prices in the US Housing Market

Housing

MONTHLY DECK - USA
Higher borrowing
costs could put
buyers off big-
ticket purchases
such as housing till
brighter days.

Housing

Improving
Labour
Market

The
National
Association
of
Home
Builders
index
measures
sentiment

for
the
U.S.
housing
market.
As
seen
from
the
chart,
there
is
a
fairly

good
correlation
between
10Y
yields
and
the
NAHB
Index.

The
consistently
elevated
10Y
yields
from
2006
to
2009
corresponded

to
a
lack
of
enthusiasm
in
the
housing
market
in
that
period
due
to

higher
borrowing
costs.
That
being
said,
the
2009
QE
stimulus

managed
to
reverse
the
6-‐year
gloom
on
the
US
housing
market.

We
believe
that
rising
interest
rates
in
light
of
a
rate
hike
could
once

again
turn
this
trend
around.
Higher
borrowing
costs
could
put

buyers
off
big-‐ticket
purchases
such
as
housing
till
brighter
days.

NAHB vs 10Y Treasury Yields


28 | P a g e

MONTHLY DECK - USA
We expect these
figures to rise with
the temperature in
the coming months.

Consumers

Retail
Sales
fall
with
Consumer
Credit

The
chart
shows
falling
retail
sales
and
consumer
credit
in
the

U.S.
economy
in
the
recent
months.
Retail
sales
growth
is
of

particular
concern,
being
in
the
negative
region.
This
suggests

significant
slowdown
taking
place,
partially
attributable
to
the

bad
weather
in
the
past
few
months.
Harsh
winters
have

contributed
to
weakening
sales
and
consumer
credit
in
previous

years.

We
expect
these
figures
to
rise
with
the
temperature
in
the

coming
months.
Nonetheless,
both
numbers
should
be
watched

closely
as
a
sustained
decline
signals
a
potential
slowdown
in
the

economy.

Retails Sales vs Consumer Credit

MONTHLY DECK - USA
We believe that the fall
in non-farm payrolls
for March should not be
unexpected as initial
claims for February
was increasing,
reaching a high of 327
000.

Labour

Improving
Labour
Market

Initial
claims
have
generally
been
a
good
leading
indicator
of
the

level
of
hiring
companies
are
doing.
As
seen
from
the
chart,
the

underlying
trend
for
initial
claims
have
been
gradually
falling

since
the
2008
financial
crisis
corresponding
to
a
steady
increase

in
non-‐farm
payrolls.
Non-‐farm
payrolls
for
March
this
year
fell

significantly
to
126
000,
way
below
market
forecast
of
245
000.

We
believe
that
such
divergence
from
the
usual
trend
could
be

due
to
the
increase
number
of
job
seekers,
an
optimistic
sign
of

Americans
returning
to
work.
Initial
claims
for
March
has
also

been
falling
and
thus
we
remain
confident
about
the
labour

market,
a
good
indicator
that
the
U.S.
economy
remains
bright.

Initial Claims vs Non-Farm Payrolls


30 | P a g e

USA
The Fed is rightfully being
cautious about raising
rates. A rate hike that
comes too early might
cause inflation and
growth to take a step back
from their (already low)
current levels.
MONTHLY DECK - USAMONTHLY DECK - USA

Bonds

Narrowing
Yield
Spreads

Ever
since
the
Zero
Interest
Rate
Policy
(ZIRP)
came
into
place
in

2008,
the
2
year
treasury
yield
(as
a
proxy
of
expectations

regarding
the
policy
rate)
has
been
consistently
near
zero
(refer

to
chart).
From
2014
onwards,
the
2
year
treasury
yield
has
been

showing
a
gradual
shift
from
a
flattened
to
an
upward
trend.
The

10
year
yield,
in
contrast,
is
showing
a
downward
trend.

Combined
together,
there
was
a
contraction
of
the
yield
spreads.

This
serves
as
a
confirmation
of
market’s
expectations
of
an

impending
Fed
rate
hike.
However,
what
is
worrying
is
that
the

economy’s
expectations
of
growth
and
inflation
(as
reflected
in

the
10
year
yield)
is
not
increasing
proportionally.
There
could
be

a
potential
inverted
yield
curve,
a
harbinger
of
a
recession.

2-10Y Treasury Yield Spread

Both indicators
point towards a
renewal in
confidence of the
US economy.
MONTHLY DECK - USA

Consumers

Low
Unemployment
Reduces
Defaults

The
U.S.
has
observed
a
continual
decrease
in
both
consumer

credit
defaults
and
unemployment
rates
since
2009
with
its

general
easing
policy
in
encouraging
growth
in
the
economy.

However,
we
can
see
from
the
graph
that
unemployment
rates

are
approaching
historic
lows
which
is
indicative
of
an
impending

rate
hike.
We
also
observe
a
generally
improving
credit

environment.

Both
indicators
point
towards
a
renewal
in
confidence
of
the
U.S.

economy.
However,
growth
might
be
stumped
as
it
approaches

historical
lows.

Consumer Credit Defaults vs Unemployment Rates

Consumer
Defaults
Unemployment
Rate


32 | P a g e

MONTHLY DECK - USA
Investors should be
wary in light of the
incoming rate hike,
which might bear
down on credit and
correspondingly
the S&P 500.

Consumers

Compressed
Consumer
Credit

As
seen
in
the
chart,
Consumer
Credit
and
the
S&P
500
Index

move
in
tandem
most
of
the
time.
A
rise
in
Consumer
Credit
is

indicative
of
future
spending,
and
this
generally
bodes
well
for

consumer-‐driven
U.S.
companies.

The
only
apparent
deviation
in
2010
was
due
to
widespread

expectations
of
an
incoming
QE
and
a
political
shift
in
favor
of

Republicans,
which
caused
investors
to
rush
into
U.S.
stocks.

Both
consumer
credit
and
the
S&P
500
have
leveled
off
since

2012,
and
are
currently
seeing
a
dip.
We
believe
that
investors

should
be
wary
in
light
of
the
incoming
rate
hike,
which
might

bear
down
on
credit
and
correspondingly
the
S&P
500.

Consumer Credit vs S&P500

MONTHLY DECK - USA
With falling
sentiment, the long
end of the yield
curve (which signals
inflationary
expectations) also
comes down.

Sentiment

Falling
Sentiment,
Falling
Yields

As
seen
from
the
chart,
the
10Y
Treasury
Yield
is
falling
with

the
ISM
Composite
Index.
This
index
is
obtained
by
taking
a

simple
average
of
the
ISM
Manufacturing
and
non-‐
Manufacturing
sectors,
giving
an
indication
of
the
overall

sentiment
in
the
US
economy.
Both
indicators
tended
to
rise

and
fall
together
for
most
of
the
period.

With
falling
sentiment,
the
long
end
of
the
yield
curve
(which

signals
inflationary
expectations)
also
comes
down.
Of
late,

both
the
10Y
yield
and
ISM
Composite
have
been
falling.
This

does
not
bode
well
for
the
US
economy
and
may
result
in
a

further
delay
of
the
Fed
rate
hike.

ISM Composite vs 10Y Treasury Yield


34 | P a g e

Contact
Details

Ang
Shiu
Wen

email:
angs0062@e.ntu.edu.sg

Daryl
Lim

email:
dary0007@e.ntu.edu.sg

Nathaniel
Leong
email:
nleong001@e.ntu.edu.sg

Seah
Wei
Hao

email:
wseah002@e.ntu.edu.sg

Shannon
Sin

email:
ssin002@e.ntu.edu.sg

Sheranne
Kwok
email:
kwok0043@e.ntu.edu.sg

Wilson
Soh

email:
wils0012@e.ntu.edu.sg

Address:
Centre
for
Applied
Financial
Education
(CAFE)

Nanyang
Business
School

Nanyang
Technological
University

50
Nanyang
Avenue

Singapore
639798

Tel:

(65)
6790-‐4250

Disclaimer

This
report
was
produced
by
students
of
the
Platform-‐Based
Learning
track
in
Banking
and
Finance
under
the

Centre
for
Applied
Financial
Education
(CAFE)
at
the
Nanyang
Business
School
in
the
Nanyang
Technological

University,
Singapore.

This
report
may
not
be
reproduced
(in
whole
or
in
part)
or
delivered
or
transmitted
to
any
other
person

without
prior
consent
from
CAFE.

This
report
does
not
constitute
a
personal
solicitation
or
a
recommendation
to
buy/sell
any
securities
or
take

into
account
investment
objectives,
financial
situations,
or
needs
of
the
reader.

Information
and
opinions
contained
in
this
report
are
published
for
reference
only
and
are
not
to
be
relied

upon
as
authoritative
or
without
the
reader’s
own
independent
verification,
or
taken
in
substitution
for
the

exercise
of
judgment
by
the
reader.

June

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