S&P rating downgrade for US

This is a week of roller coaster ride, sparked off by the Standard & Poor's downgrade of the US rating from AAA to AA+. For ages, never has a country whose currency is world reserve currency being downgraded.

What are the implications for the Singapore property market? Let's look at how the US market reacted and how it would backflow to us.

Firstly, the US will find that the borrowing costs would go up, until they stem the deficit they are facing now. Estimate is that the US is seeing a deficit 100% of their GDP. With their credit rating taking a hit, bond yields would rise and push the interest rates up. On the other hand, the US economy is weakening. This sparked an exodus to bonds, pushing the prices up & the yields down. Of the 2 opposing forces on the bond yields, the one on the US economy is the stronger one. The panic saw 2 days of 500+ points drop in the Dow Jones.

We are of the opinion that a mild recession is on the plate. With the property bubble already burst, the strong speculative forces are already out of the market. So, the recession is due to the usual inventory cycle downturn, a milder recession than one due to property market collapse where every citizen is affected.

The US would have spent all that they have and do not have much ammunition to fight the forces of inventory unwinding induced recession. Quantitative Easing 3 (QE3) would cause the US$ to tank further and result in even more inflation later. Politically, tanking the US$ would not be acceptable to China, the US' biggest creditor now.

In Singapore, we expect that the US winds of recession to blow over to here. It would be a milder one compared to the 2009 recession when the US sub-prime crisis was at its peak. The balance sheet of Singapore is strong, there are little excesses in the financial markets or property market. In fact, the 3 dampening measures from last year to this year on the property market by the Singapore government has helped to keep "irrational exuberance" in check. Given the relatively strong holding power of the owners in the market (with almost no speculators), it is envisaged that the "downturn" would be mild. We would hazard a guess that the Singapore property prices would just be flat until the US economy turns up again in 1 or 2 years time.

For long term holders of Singapore properties, it is just time to hunker down and wait out the flat period. The good times will come back once the winds blow over.

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