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Friday, December 30, 2011

Fasten your seat belts for 2012

Source: The Business Times
Author: Vikram Khanna 30/12/2011

NO, the world is not going to crash in 2012 - although financial markets might just - but it's going to be a bumpy ride.

In 2009 and 2010, we were all transfixed by what America was doing to fix the global financial crisis that blew up there and was unleashed across the globe. In 2011, we were more fixated on the eurozone.

In 2012, it will be the 17-nation grouping again, only even more so than in 2011. And Asian economies will feel the ripples.

To be sure, it will not be all gloom in 2012. There is a fledgling economic recovery underway in the United States, where the unemployment rate has dipped below 9 per cent, the housing market is stabilising and analysts are projecting 2.5 per cent growth. The Japanese economy will also benefit from post-tsunami reconstruction, which will move into full swing in 2012. But these positives could be swamped by the deepening problems in Europe.

Throughout 2011, the eurozone has lurched from crisis to crisis, following a script that has become all too familiar. Nervous bond markets push up yields of eurozone sovereign bonds to levels which, if sustained, would lead to default. In response, eurozone politicians organise periodic summits to fix the problem. They come up with patchwork solutions disguised as rescue plans.

These have included:

•establishing the European Financial Stability Facility - which turned out too small;
•repeated bailouts, first for Greece, then for Ireland and Portugal;
•haircuts of 50 per cent on private banks' holdings of Greek debt, which only led markets to panic about possible haircuts on other sovereign holdings, driving yields higher;
•demands for recapitalisation by banks to protect against possible losses from sovereign defaults, which caused lending cutbacks; and
•repeated pledges of fiscal austerity by heavily indebted countries, even in the face of street protests, which has deepened the recession in these countries, rendering ever more elusive their targets on deficits and debts.
Meanwhile, the European Central Bank (ECB) has steadfastly refused to step in as a lender of last resort, confining itself to providing liquidity to banks and making ad hoc purchases of sovereign bonds when things get really bad, but making clear that it is doing this only reluctantly - which only makes market players ask: if even the ECB doesn't like buying this stuff, why should we?

The latest eurozone leaders' summit of Dec 9-11 was billed as a make-or-break event, one that would finally yield a rescue plan that lived up to the description. It came just days after bond yields for Italy and Spain were at record levels, causing markets to panic about a possible Italian default, which could sink the eurozone. Expectations of a dramatic, game-changing announcement were running high.

In the end what materialised was a so-called 'fiscal compact' championed by German Chancellor Angela Merkel, which commits eurozone members to budgetary discipline under the threat of sanctions. The ECB stayed on the sidelines, making no commitment to act as a lender of last resort, though hinting it might do something different if a fiscal compact comes about.

Assuming that it does materialise - it may still need to be passed by national parliaments - it will essentially condemn the eurozone to a prolonged period of budgetary austerity. As such, it is more a suicide pact than a rescue act. Continent-wide spending cuts and tax hikes will further worsen deficits and debts all around, aggravate financial distress and could even precipitate political revolts.

Denied the option of devaluing their currencies, heavily indebted eurozone countries can regain their competitiveness only through enormous 'internal devaluations' - essentially wage and price cuts. This textbook result is extremely unlikely in practice. Wages and prices are usually not flexible downwards, especially in heavily unionised countries such as those of continental Europe.

On Dec 5, the credit rating agency Standard & Poor's put 15 eurozone members, including France and Germany, on negative credit watch, citing 'deepening political, financial and monetary problems'.

There is now a more than even chance that France, for one, will lose its AAA credit rating by March next year. This will not be a disaster in and of itself, but will complicate matters, as France is a major potential funder of any eurozone rescue facility - the costs of which would rise. A downgrading would also raise the cost of funding for French banks and the French state.

The downgrading of other eurozone sovereigns would raise their funding costs as well - no small matter, given that eurozone sovereigns need to raise some 1.6 trillion euros (S$2.69 trillion) next year.

Thus, a plausible scenario for at least the first quarter of 2012 is repeated bouts of panic in the financial markets - even if punctuated by occasional rallies - as it becomes increasingly obvious that the fiscal compact favoured by the German leadership is not going to work.

Some economists believe that eventually - perhaps when the panic intensifies to the point of a market crash - the ECB will finally be forced to unveil its 'bazooka' - that is, open its monetary spigot full blast - as did the US Federal Reserve after the collapse of Lehman Brothers in 2008. But as at now, the ECB and the German leadership seem determined to wring as much fiscal austerity out of the eurozone as possible before considering other options.

Loans to banks

Meanwhile, however, the ECB has unleashed a 489 billion euro programme of cheap three-year loans for eurozone banks. The new credits, which have been gratefully snapped up, will help banks cope with liquidity strains. However, banks will still be burdened with having to raise more capital to get their core tier-1 capital to 9 per cent by mid-2012 to conform to the directives of the European Banking Authority. With the market not conducive to new equity issuance, banks will seek to achieve this target at least partly by cutting back lending, which in turn will deepen the eurozone recession. If banks are unable to raise enough capital, or experience creditor or depositor panic, some of them could face nationalisation - another trend to look out for in 2012.

For the rest of the world, including Asia, a deeper recession in the eurozone, which accounts for 25 per cent of global GDP, is a dire scenario. While it is unlikely that it would lead to a seizure of credit markets as in 2008-09 - policymakers are wiser to this danger now and the ECB is plugging liquidity gaps - it will mean a loss of exports and jobs, the more so if it also threatens to nip the US recovery in the bud.

Bouts of market turmoil will also mean a withdrawal of funds from Asian asset markets as investors flee to safety - a process that has already started and has been felt most acutely in India, where the stock market has corrected by one-third this year and the currency has dived about 18 per cent against the dollar. Further currency market turmoil could be in store for next year, when the euro, in particular, could come under severe pressure. However, a weaker euro (though not a euro collapse) would, on balance, be a plus for the eurozone, mainly because it would provide a boost for the German economy. This is the only silver lining so far in the sorry prognosis for the 17-member grouping.

China's slowdown

Asia will face additional complications in 2012, coming from within the region. Whereas in 2008-09 China was able to ram through a US$586 billion stimulus package, this time it's a different story. The past stimulus - which was essentially an indiscriminate investment binge - led to the build-up of huge overcapacity, especially in capital good industries. It would be a folly for China to add further to this, and it will probably not. High inflation and a crisis in Chinese local government finances are other reasons to avoid further pump priming.

The Chinese authorities are also coping with a fast-deflating real estate bubble in several cities, the consequences of which will become clearer in 2012. They may not be catastrophic, but they will not be pleasant. The European slowdown will further aggravate China's slowdown, which in turn will reverberate across Asia's supply chain, hitting producers of electronics, machinery, commodities and raw materials. Indeed, commodity prices have already started to weaken.

No surprise then that economists have been downgrading their forecasts for the region, including for the Singapore economy. The latest projection is 3 per cent growth during 2012 - which actually might be a good outcome given the circumstances.

But Singapore might have to work for even that much. During the 2008-09 crisis, it had to resort to unorthodox measures - such as the Jobs Credit scheme and loan subsidies for companies - to see itself through. It would be prudent for policymakers to keep in reserve similar extraordinary measures for possible use in 2012. The state of the global economy is such that we need to prepare for the worst, even if we hope for the best.

MRT stations and property prices

30 December 2011
Ku Swee Yong

As more and more MRT stations are built in Singapore, there has been much discussion over whether the presence of an MRT station will boost the prices of residential units nearby.

Let's use the recently completed Circle Line for discussion. According to one school of thought, when the Circle Line and the locations of its stations were first announced in the early 2000s, prices of developments within walking distance to the stations started to pick up. Very quickly, advertisements for developers' new launches and classified ads placed by real estate agents highlighted the benefits of the future MRT stations: Accessibility and travel convenience, resulting in increased demand from both owner-occupiers and tenants, leading to improved rentals and higher transacted prices.

Some investors believe in entering the market early because with the view that when the MRT stations are completed and the line starts running, the market for residential properties nearby would have already "priced in" the premium of the convenience. There is also a view that in the very long term, most Singaporeans will be living within 500m from an MRT station and any "price premium" arising from such proximity will disappear.

It seems that we still lack solid data to substantiate and quantify the effects. But I think it is correct to say that there is an initial euphoria as sellers of properties around the named stations will immediately raise their prices.


However, what follows after is about five to seven years of construction work for the MRT lines and the stations. During this period, there will be traffic diversions and residents in the vicinity are inconvenienced by the noise, dust and poor traffic conditions.

Based on our observations from serving investors and tenants, expatriates and locals looking for units to rent or buy typically shun condominiums where there is construction nearby. This is especially true for condominiums that suffer limited access due to the construction works for the MRT line and the stations.

For example, residents of LevelZ, Spanish Village and Gallop Gables at Farrer Road were inconvenienced during the construction of the Circle Line's Farrer Road Station, when there was reduced access to their main entrances. Farrer Road itself had many changes and diversions, with new twists and turns appearing every few months or so. Residents had to bear with dust, noise and the occasional movement of heavy construction equipment. The result: Lower occupancy rates and longer periods of vacancies between tenants, which led to weaker rentals and, in many cases, lower-than-market transaction prices.

As completion nears and the streetscape is brought back to normal, with roads straightened and potholes patched up, prospective tenants are more willing to consider renting these properties in the knowledge that the MRT line will begin operating soon. Once the station is open, tenants are willing to pay a bit more and may also make quicker decisions on signing the tenancy agreements. Therefore rentals rise and as yields in Singapore remain within 3 per cent per annum, the prices of the condominiums will grow with the rental growth.

It is difficult, almost impossible, to use a standard yardstick to measure the opportunity costs or the relative underperformance of property values affected by MRT construction. Some cases can be pretty obvious as evidenced by the retail outlets around Chun Tin Road and Beauty World Centre. Due to a reduction in parking lots and traffic congestion, patronage of the food outlets is reduced and, therefore, rentals drop.

In the case of residential properties, things are less obvious. Rental data is not rich for comparison and over the five-to-seven-year period, rentals and sale prices may go up or down depending on the overall external economy, en bloc exercises and new launches, etc.

However, we do have snippets of data that can support our empirical observations. From the chart, we can compare the median rental prices for residential properties around Lorong Chuan and Farrer Road MRT Stations over the last three years.

We see that from May to Sept 2009, when Lorong Chuan MRT Station began operating, median rentals climbed 55 per cent from S$1.97 per sq ft per month to S$3.06 psf per month. Over the same period, median rentals along Farrer Road rose about 30 per cent from a three-month average of S$3.01 psf per month (Note: I have used the average of April to June 2009 because of the spike in May) to S$3.91 psf per month in Sept 2011. In fact, during the period in May to Dec 2009, when rentals around Lorong Chuan station were creeping up steadily, the average rentals along Farrer Road were flattish, due to the fact that Farrer Road was still in a mess as far as the traffic flow and the MRT construction were concerned.


I would summarise it as such: Prices of residential properties rise due to exuberant expectations when the locations of the MRT stations are announced, subsequently underperform the rest of the market during the construction period, and then trend up again when the work is completed.

So, buy at the correct time: When the MRT stations are about to be completed, not when the stations are announced and certainly not when the construction is at its peak.

In a previous commentary in Today, I had recommended that investors avoid Upper Bukit Timah, Thomson and Upper Thomson, especially the latter locations as two major infrastructure projects will be built at the same time - the North South Expressway and the Thomson MRT line - choking north-south traffic until 2020.

With Circle Line's Stages 4 and 5 - from Marymount to Harbourfront - running since October and cutting travelling times to Holland Village, Buona Vista, Science Park, NUS, etc, where the working population and student population are high, I am optimistic that the residential markets will begin to show rental and price growth.

Furthermore, I believe that price growth will not be limited to the two new stages. Stage 3 of the Circle Line (Bartley to Marymount) began operations in May 2009, while Stages 1 and 2 (Dhoby Ghaut to Bartley) commenced services last April. Looking at the potential of the residential segments across these stations, I believe there are several locations that are particularly promising:

1) At Bartley MRT Station, where works on the Bartley viaduct and the Paya Lebar underpass had inconvenienced traffic for several years, watch out for a new condominium launching soon between Lorong How Sun and Bartley Road. This residential precinct has been neglected by investors for a while due to the lack of new projects and the traffic situation. Now that traffic has improved and the environment is nice and neat like it used to be over 10 years ago, property values can begin to rise with the convenience of the expressways and the Circle Line.

2) Lorong Chuan MRT Station is surrounded by a cluster of private condominiums. Several international schools and major shopping malls are within a five-to-10 minute drive. In the past, a resident here would take 30 minutes to an hour to commute by public transport to Alexandra, Pasir Panjang or NUS. Today it takes 20 to 40 minutes. The 10-year-old condominiums there are priced at S$800 to S$1,100psf, with rental yields of 3.5 per cent per annum and higher.

3) Pasir Panjang MRT Station, where freehold condominiums are trading around S$1,000psf. I would consider them undervalued relative to mass market locations at the same price level, given that these condominiums are within a five-to-10 minute drive to the financial district and both the integrated resorts.

Ku Swee Yong is the founder of real estate agency International Property Advisor, specialising in property services for high-net-worth clients. He is the author of Real Estate Riches: Understanding Singapore's Property Market in a Volatile Economy.

Thursday, December 29, 2011

Banks, telcos said to be safe bets in 2012

29 December 2011
Yvonne Chan

SINGAPORE - Singapore banks and telcos have been pitched as safe bets for investors next year - away from more volatile sectors such as commodities and property.

Analysts expect the wider market to dip further in 2012, before a rebound later in the year. A decline of 16 per cent thus far, makes Singapore the worst performer in Southeast Asia. It is about on par with Japan's decline but not as steep as the drop in Hong Kong, India or mainland China.

Company valuations have suffered in lock-step with the slide, with Singapore stocks trading at around 1.2x book value, which is now below the four-year average of 1.5x, says OCBC Research.

Residential property developers are expected to remain under pressure. The sector underperformed this year - down about 40 per cent on year following recent unexpected cooling measures by the government, and slower foreign investment.

Offshore industries such as shipping may also continue to hurt from slowing global trade. In this context, defensive, dividend yielding stocks are commonly recommended.

"We'll muddle through an economy where we'll see sluggish growth, but not outright recession and in those environments, dividend yield is very important," said Steve Brice, Chief Investment Strategist at Standard Chartered Bank.

While some analysts are underweight on financials, some say Singapore banking stocks hold great appeal. "Valuations in terms of dividend yield stocks are actually yielding between 4.5 to 5 per cent. So it's ... very, very attractive compared to your current cash deposits rates," said Kelvin Tay, Chief Investment Strategist at UBS Wealth Management.

OCBC Bank is also overweight in banking and telecommunications with stock picks for 2012 including DBS, UOB, M1, SingTel, and StarHub.

Receiving a reasonable dividend offers some protection in a market so open to the swings of the international economy.

"We believe there will be a recession in the euro zone next year, about minus 0.7 per cent. The Singapore stock market could ... fall anywhere between 30 to 35 per cent before it actually hits the bottom," said Mr Tay.

There is also the risk that European banks will pull investment from their Asian operations. While that is a potential risk for Singapore's economy, some experts say that the country's inherent strengths will keep it in good stead. If there is one consistent mantra among fund managers and analysts - it is, to look for the long-awaited upswing, in the second half of 2012.

Wednesday, December 28, 2011

A year for dividend investing in Asia

Executive Money
Published December 28, 2011

A convergence of global and domestic influences means 2012 will be an opportune time to invest for dividends in the region, says LEE KING FUEI

AMID the upheaval in global financial markets, it is useful to take a step back and re-assess one's long-term investment strategy.

While fears of a cyclical slowdown in China may put many investors off the region, the reality is that the bigger-picture trend of stronger economic growth driven by urbanisation, industrialisation and positive demographics will continue to unfold across Asia over the next two decades. Here, we discuss why now is an opportune time for long-term investors to develop their portfolios in Asia through a dividend-investing strategy.

Despite the market's obsession with share price appreciation, historically, almost two-thirds of long-term equity returns in Asia have come from dividends.

Unlike share price appreciation - which is affected by a myriad of factors including non-fundamental influences such as sentiment and momentum - dividend return represents actual cash paid out by companies to their shareholders.

In addition, because dividends can only be paid out of earnings, which are in turn driven by the economy, dividend return tends to have a stronger correlation with existing economic conditions than share price appreciation.

Investors seeking exposure to the multi-decade Asian economic growth story would do well to pay close heed to the dividends that they are capturing from their equity investments.

Critics of income strategies wonder why they should bother with boring dividends when they are really lusting after the exciting growth story of Asia. After all, Gordon's Model tells us that only companies that have run out of growth projects to invest in, pay dividends.

Try telling that to the executives at Astra International, an Indonesian motorcycle distributor that has steadily raised its dividend payout from nil to 45 per cent over the last decade, while growing its earnings more than 10-fold.

The real world is a very different place from theory. Because managers of companies have better information about their future prospects and loathe cutting dividends, they will often only pay high dividends today if they are comfortable that their expected earnings in future are strong enough to sustain the high payout.

This is also why, in practice, companies that have high dividend payouts usually experience much faster subsequent earnings growth than their low dividend-paying counterparts.

Academics coined this phenomenon the 'dividend-signalling effect'. Our research shows that this dividend-signalling effect is particularly strong in Asia, and can last as long as four years in markets like Singapore.

In a region laden with corporate governance landmines, focusing on dividends when investing in Asia has the benefit of helping investors avoid potential blow-ups. By returning excess cash to shareholders as dividends, companies avoid the temptation to squander that money on value-destructive investments, while subjecting themselves to more stringent levels of stakeholder scrutiny when they next tap the markets for funds.

Because dividends can only be paid out of real earnings and real cash flow, focusing on dividends helps investors avoid companies with dubious earnings, as these companies are unlikely to have the actual cash required to make dividend payments. Owing to these factors, companies with strong dividend payouts tend to possess higher corporate governance standards in Asia.

With high dividend-paying companies having stronger future earnings growth and better corporate governance, it is little wonder that over the last 20 years, high dividend-yielding stocks have outperformed both the market and low-yielding stocks in Asia.

That said, the benefits of investing for dividends are not unique to Asia. Studies have shown that in the US and Europe, dividend-investing strategies also outperform. However these benefits seem to manifest themselves strongest in Asia, with the Asian strategy delivering returns several times that of their global, US, Japanese and European counterparts over the last decade.

A convergence of global and domestic influences has meant that now is an opportune time to invest for dividends in Asia. In addition to boasting the strongest economic fundamentals in the world, the region also has one of the highest dividend yields globally; second only to Europe where the unfolding debt crisis continues to raise questions about dividend sustainability.

The region also benefits from current low interest rates as a result of Asian central banks pegging, or managing, their exchange rate policies against the US dollar.

Until monetary policies in Asia are altered so that the low interest rates in the US are not imported into the region through its exchange rates targeting, the huge divergence between Asian dividend yields and domestic interest rates represents a unique opportunity for investors to enter the dividend-investing strategy at little opportunity cost.

Investors now get to receive regular dividend payments from Asian corporates that far outstrip the interest rate payments that they would otherwise have received on their bank deposits, while continuing to participate in potential future share price appreciation - a clear win-win situation (if there ever is one in the world of finance!).

Our research shows that the current environment represents one of the best times to adopt a dividend-investing strategy. Just as the strategy underperforms in the period leading into a bubble climax (i.e. when the market discards fundamentals and chases hope), the strategy outperforms very strongly for an extended period of time after the crisis as the market repents its past mistake of ignoring fundamentals.

This was true at the end of the Asian crisis and after the technology bubble, and continues to be the case following the 2008 credit crisis. In fact, we believe the Asian crisis fundamentally changed the regional corporate landscape, and was the catalyst for the current dividend trend.

Undoubtedly, the corporate restructurings that followed the crisis led to higher corporate profitability, burgeoning cash flows and low debt levels which have given rise to the higher dividend payouts we see today. - BT

The writer is fund manager for Asian equities at Schroders

Wall Street is losing its lustre

28 December 2011
William D. Cohan

We are witnessing the decline and fall of the investment banking profession as we have known it for the past 40 years.

The evidence is everywhere. The increasing regulations on Wall Street - as required by the Dodd-Frank law and still being written by the Federal Reserve, the Securities and Exchange Commission, the Commodity Futures Trading Commission and other agencies in the United States and Europe - will require the remaining companies to increase their capital, curb their risk-taking and reduce their principal investing.

Aside from the fact that investing principal and proprietary risk-taking per se had nothing to do with the recent financial crisis - and that the ability of Goldman Sachs Group to make a huge proprietary bet against the mortgage market probably helped saved the firm - these new rules will greatly curb Wall Street's revenue and profitability at a time when the business itself is suffering a severe slowdown. (What sunk Wall Street in 2008 was the seemingly more conventional business of being a middleman for the manufacture, packaging and sale of increasingly risky mortgage-backed and other debt securities.)

Not being able to make those big proprietary bets when you see them developing - in effect, the closing of the casino that Wall Street has become over the past few decades - will severely limit bankers' money-making opportunities. It will also protect the rest of us when those big bets go wrong or are perceived to be too risky. (For every Goldman Sachs acting brilliantly, there is an MF Global Holdings acting foolishly).

There is little debate anymore that Wall Street had become highly dependent on its trading operations. Something like 90 per cent of Bear Stearns' profits in the years leading up to its March 2008 demise came from its trading and debt origination activities. The percentages are not that much different at Goldman Sachs, where its traditional investment banking operations last year generated only US$1.3 billion (S$1.69 billion) of US$12.9 billion in pre-tax earnings, about 10 per cent. All but US$1 billion or so of the rest of Goldman's pre-tax earnings came from its trading, lending and investing businesses.

The slowdown in business, combined with the looming trading curbs, has resulted in job losses across Wall Street. Morgan Stanley recently announced it was firing 1,600 employees. Goldman Sachs has done its usual turn of eliminating the bottom 10 per cent of its workforce and a group of its long-serving partners. Bank of America announced that about 30,000 employees would be chopped by the end of 2012, although a number of the firm's investment bankers lost their jobs in the past month.

Yet those suffering the most are the foreign firms that were trying to break into Wall Street's business. Nomura Holdings has pretty much scuttled its most recent Wall Street experiment (it bought Lehman Brothers Holdings' European and Asian banking operations) and firms such as Societe Generale SA, UBS AG, Credit Suisse Group AG and Royal Bank of Scotland Group PLC are all cutting Wall Street bodies.

In November, Bloomberg News estimated that more than 200,000 people who work in finance had already lost or would lose their jobs this year.

Not only will the head count reduction on Wall Street continue for the foreseeable future, but the vast sums overpaid to bankers and traders will inevitably continue to fall as well - as many of them are finding out this bonus week. There is simply no easier and quicker way for Wall Street firms to keep up a modicum of profitability than by cutting pay for the people who still work there. Needless to say, the inevitable decline in Wall Street's compensation will mean less tax revenue for New York City and New York State and fewer government services for the rest of us (absent higher taxes).

The most reliable leading indicator of Wall Street's future prospects is the way recent graduates of Harvard, Princeton and Yale - supposedly America's best and brightest - choose to spend their time after graduating. For years, hordes of graduates from those schools beat a fast path to Wall Street. Now the road is far more difficult to travel. For those who choose to make the journey, there is the prospect of incurring the wrath and scorn of fellow students who make up the various Occupy Wall Street movements - a fact not likely to deter many - and then there are dimmer prospects for a job on Wall Street generally, what with the slowdown in business.

According to a Dec 21 article in The New York Times, whereas in 2006 some 46 per cent of Princeton graduates who had jobs lined up after graduation went to Wall Street, four years later that number had fallen to 36 per cent. At Harvard, in 2006, a quarter of the class got jobs in finance; by this year, that number had fallen to 17 per cent. At Yale, in 2006, 24 per cent of the graduates had jobs in finance and on Wall Street, while last year, the number of graduates going to Wall Street had fallen to 14 per cent.

The word around Goldman Sachs, I am told, is that even those offered a still highly coveted entry-level job at the firm are having second thoughts about taking it. More and more, banks are losing talent to Teach for America, a fact that may turn out to be one of the most heartening consequences of the financial crisis. BLOOMBERG

William D Cohan, a former investment banker and the author of Money and Power: How Goldman Sachs Came to Rule the World, is a Bloomberg View columnist. The opinions expressed are his own.

Saturday, December 24, 2011

What should I do with my life?

Saturday, 24 December 2011

Most people have good instincts about their calling in life, but they make poor choices and waste years


I HAD dinner with a reader some months back. During dinner, I lamented how the modern economy is compensating people in the finance industry. 'Because of that, all the bright brains are flocking to the financial sector. The other more productive sectors of the economy suffer as a result,' I said.

The reader countered. 'The market has a way of adjusting itself. Back in '80s, the shipbuilding, the marine sector was very lucrative. It attracted a lot of talent. Then there was a downturn, and wages plunged. In the '90s, the semiconductor industry was the place to be. In the early 2000s, it was the information technology sector. Now we have the banking sector which is drawing in the big bucks. But already we are seeing signs that the banking sector is set to shrink in the years ahead.'

That conversation lingered in my mind. And a few days ago, a friend posted a link on Facebook to an article titled 'What should I do with my life?'. The article wasn't new. It was published in 2007 but I found it still offers a lot of good insights and it's timely that we be reminded of them.

Written by Po Bronson, and adapted from his book 'What Should I Do with My Life? The True Story of People who Answered the Ultimate Question', the article said instead of focusing on what's next, let's get back to what's first.

'People don't succeed by migrating to a 'hot' industry ... They thrive by focusing on the question of who they really are - and connecting that to work that they truly love (and, in so doing, unleashing a productive and creative power they never imagined).

'Companies don't grow because they represent a particular sector or adopt the latest management approach. They win because they engage the hearts and minds of individuals who are dedicated to answering that life question,' he wrote.

Now that we've come to the end of what has generally been regarded as a terrible year, I thought it's a good time for us to pause and reflect on who we really are, and how one goes about finding that answer.

As part of the research for his book, Mr Bronson interviewed more than 900 people 'who have dared to be honest with themselves'. Below are what he gleaned from them.

Except for a select lucky few, for most of us, our calling is not something that we inherently know. Far from it. Almost all of the people he interviewed found their calling after great difficulty.

'They had made mistakes before getting it right. For instance, the catfish farmer used to be an investment banker, the truck driver had been an entertainment lawyer, a chef had been an academic, and the police officer was a Harvard MBA. Everyone discovered latent talents that weren't in their skill sets at age 25.'

Most of us don't get epiphanies. We only get a whisper, a faint urge. That's it. It's up to us to make the discovery.

'This lesson in late, hard-fought discovery is good news. What it means is that today's confused can be tomorrow's dedicated. The current difficult climate serves as a form of reckoning. The tougher the times, the more clarity you gain about the difference between what really matters and what you only pretend to care about.'

The thing is, most people have good instincts about where they belong. But they make poor choices and waste productive years on the wrong work because of a number of basic assumptions we have about the work we are supposed to have.

'These are stumbling blocks that we need to uproot before we can find our way to where we really belong,' said Mr Bronson.

Money and meaning

One common false assumption is that I would make my money first, and when I have enough money, I'd walk away and use my savings to fund my dreams.

It turns out that people hardly walk away even after they have achieved financial independence. 'Making money is such hard work that it changes you. It requires more sacrifices than anyone expects. You become so emotionally invested in that world - and psychologically adapted to it - that you don't really want to ditch it.'

Money is not the shortest route to freedom. 'The shortest route to the good life involves building the confidence that you can live happily within your means. It's scary to imagine living on less. But embracing your dreams is surprisingly liberating. Instilled with a sense of purpose, your spending habits naturally reorganise, because you discover that you need less.'

Next, 'What am I good at?' is the wrong starting point. People who attempt to deduce an answer usually end up mistaking intensity for passion. To the heart, they are vastly different. Intensity comes across as a pale busyness, while passion is meaningful and fulfilling, said Mr Bronson. A simple test: Is your choice something that will stimulate you for a year or something that you can be passionate about for 10 years?

But stimulating work is not an end in itself. In the past decade, the working world has become a battleground for the struggle between the boring and the stimulating, he noted. We think that work should not only be challenging and meaningful, but also invigorating and entertaining.

'But really, work should be like life: sometimes fun, sometimes moving, often frustrating, and defined by meaningful events.'

Those who have found their place don't talk about how exciting and challenging and stimulating their work is. Their language invokes a different troika: meaningful, significant, fulfilling. And they rarely ever talk about work without weaving in their personal history, he said.

Place defines you

Every industry has a culture. And every culture is driven by a value system. One of the most common mistakes is not recognising how these value systems will shape you, said Mr Bronson.

'People think that they can insulate themselves, that they're different. They're not. The relevant question in looking at a job is not 'What will I do?' but 'Who will I become?' '

Once you're rooted in a particular system, it's often agonisingly difficult to unravel yourself from its values, practices, and rewards.

Ultimately, the answers to who we are, what our callings are, are very individual. On his journey, Mr Bronson met people in bureaucratic organisations and bland industries who were absolutely committed to their work. That commitment sustained them through slow stretches and setbacks. They never watched the clock, never dreaded Mondays, never worried about the years passing by. They didn't wonder where they belonged in life. They were phenomenally productive and confident in their value.

In places unusual and unexpected, they had found their calling, and those callings were as idiosyncratic as each individual.

Asking 'What should I do with my life?' is the modern, secular version of the great timeless questions about our identity, said Mr Bronson. 'Asking The Question aspires to end the conflict between who you are and what you do. Answering The Question is the way to protect yourself from being lathed into someone you're not. What is freedom for if not the chance to define for yourself who you are?'

Mr Bronson said he spent two years in the company of people who have dared to confront where they belong. They didn't always find an ultimate answer, but taking the question seriously helped get them closer.

'We are all writing the story of our own life. It's not a story of conquest. It's a story of discovery. Through trial and error, we learn what gifts we have to offer the world and are pushed to greater recognition about what we really need. The Big Bold Leap turns out to be only the first step.'

Thursday, December 22, 2011

Risk of Singapore slowdown rises as export demand falls

22 December 2011
Millet Enriquez

SINGAPORE - Economists are forecasting a difficult year for Singapore in 2012 as it faces the brunt of a slowdown in export demand.

"Our prognosis is for the Singapore economy to actually bottom out in the second quarter of next year," said Mr Kelvin Tay, chief investment strategist at UBS Wealth Management.

"The global slowdown that we saw, in the PMIs (Purchasing Managers Index) lately, will be felt more sharply in the first and second quarters of next year."

Singapore's economy is forecast to grow by more than 5 per cent this year. But things could get rougher next year, with economists projecting slower growth at between 2 and 3.5 per cent - slightly higher than the Government's forecast of 1 to 3 per cent.

"We are looking at Singapore perhaps being the most vulnerable country of the ASEAN countries over the next 12 months," said Mr Song Seng Wun, regional economist at CIMB Research.

In particular, analysts say small businesses and ordinary Singaporeans must brace themselves for tighter credit and labour markets.

Manufacturing and trade will take a hit, while financial services and real estate will pull back as risk activities are curtailed.

"We haven't pencilled in a technical recession in the first quarter of next year. But of course, depending on how the whole European situation goes, we cannot fully discount a risk of that happening in the first half of next year," said Ms Selena Ling, head of treasury research & strategy at OCBC Bank.

Wednesday, December 21, 2011

Euro zone debt crisis may spread next year, warns ECB president

21 December 2011

BRUSSELS - The euro zone debt crisis is set to spread and deepen next year, European Central Bank (ECB) president Mario Draghi has warned, as Britain refused to contribute to the latest International Monetary Fund (IMF) bailout fund for distressed states.

A European Union proposal to plough e200 billion (S$340 billion) into the IMF to enable it to bail out regional countries in trouble floundered after UK Chancellor George Osborne told his fellow European finance ministers on Monday that Britain would not contribute its e25 billion share.

Germany had earlier offered Britain an olive branch, with its Foreign Minister Guido Westerwelle insisting that Europe did not have a secret plan to undermine the City of London. In the event, Brussels announced that only e150 billion had been pledged for the IMF package, well short of target.

Mr Draghi told the European Parliament's economic committee late on Monday that pressure in the bond markets in the first quarter would be "really very, very significant, if not unprecedented" as hundreds of billions of euros in debt come up for renewal.

He warned that e230 billion of bank bonds, e300 billion of sovereign bonds and more than e200 billion of collateralised debt obligations will all become due in the first three months of next year.

The ECB president said he had "no doubt whatever about the strength of the euro, its permanence, its irreversibility" but he reiterated his view that the central bank had no role to play in buying up sovereign bonds on a long-term and enhanced basis.

In its semi-annual Financial Stability Review, the ECB said tensions in the region had now reached the "systemic crisis proportions" seen at the time of the Lehman Brothers collapse in 2008 - partly because of the failure of politicians to act in time. The central bank warned that contagion from the debt crisis could afflict other euro zone countries and spread across the globe.

At press time yesterday, world stock markets were mixed in holiday-thinned trade while the euro was up 0.5 per cent at US$1.3064 (S$1.70).

Sentiment was helped by data that showed German business sentiment rose sharply in December, underscoring the strength of Europe's biggest economy despite the regional crisis. The Munich-based IFO think-tank's business climate index, based on a monthly survey of 7,000 companies, rose to 107.2 this month from 106.6 last month.

On another positive note, yields on short-term Spanish debt plunged in an auction yesterday, with analysts saying that banks were waiting to tap into the ECB's first-ever three-year offer of unlimited liquidity today for the carry trade.

Spain sold e3.7 billion of three-month paper at 1.735 per cent, sharply below an average yield of 5.11 per cent last month. It sold e1.9 billion of six-month paper at a yield of 2.435 per cent, down from 5.227 per cent.

Meanwhile, Sweden's central bank lowered its main interest rate by a quarter of a percentage point to 1.75 per cent, the first cut since 2009 as the region's debt woes sapped growth in the largest Nordic economy. AGENCIES

Tuesday, December 20, 2011

Global economy fragile and unbalanced in 2012

20 December 2011
Nouriel Roubini

The outlook for the global economy next year is clear, but it is not pretty: Recession in Europe, anaemic growth at best in the United States, and a sharp slowdown in China and in most emerging-market economies.

Asian economies are exposed to China. Latin America is exposed to lower commodity prices (as both China and the advanced economies slow). Central and Eastern Europe are exposed to the euro zone. And turmoil in the Middle East is causing serious economic risks - both there and elsewhere - as geopolitical risk remains high and thus high oil prices will constrain global growth.

At this point, a euro zone recession is certain. While its depth and length cannot be predicted, a continued credit crunch, sovereign-debt problems, lack of competitiveness and fiscal austerity imply a serious downturn.

The US - growing at a snail's pace since last year - faces considerable downside risks from the euro zone crisis. It must also contend with significant fiscal drag, ongoing deleveraging in the household sector (amid weak job creation, stagnant incomes, and persistent downward pressure on real estate and financial wealth), rising inequality and political gridlock.

Elsewhere among the major advanced economies, the United Kingdom is double dipping, as front-loaded fiscal consolidation and euro zone exposure undermine growth. In Japan, the post-earthquake recovery will fizzle out as weak governments fail to implement structural reforms.


Meanwhile, flaws in China's growth model are becoming obvious. Falling property prices are starting a chain reaction that will have a negative effect on developers, investment and government revenue.

The construction boom is starting to stall, just as net exports have become a drag on growth, owing to weakening US and especially euro zone demand. Having sought to cool the property market by reining in runaway prices, Chinese leaders will be hard put to restart growth.

They are not alone. On the policy side, the US, Europe, and Japan, too, have been postponing the serious economic, fiscal and financial reforms that are needed to restore sustainable and balanced growth.

Private- and public-sector deleveraging in the advanced economies has barely begun, with balance sheets of households, banks and financial institutions, and local and central governments still strained. Only the high-grade corporate sector has improved.

But, with so many persistent tail risks and global uncertainties weighing on final demand, and with excess capacity remaining high, owing to past over-investment in real estate in many countries and China's surge in manufacturing investment in recent years, these companies' capital spending and hiring have remained muted.

Rising inequality - owing partly to job-slashing corporate restructuring - is reducing aggregate demand further, because households, poorer individuals and labour-income earners have a higher marginal propensity to spend than corporations, richer households and capital-income earners.

Moreover, as inequality fuels popular protests around the world, social and political instability could pose an additional risk to economic performance.


At the same time, key current-account imbalances - between the US and China (and other emerging-market economies), and within the euro zone between the core and the periphery - remain large.

Orderly adjustment requires lower domestic demand in over-spending countries with large current-account deficits and lower trade surpluses in over-saving countries via nominal and real currency appreciation. To maintain growth, over-spending countries need nominal and real depreciation to improve trade balances, while surplus countries need to boost domestic demand, especially consumption.

But this adjustment of relative prices via currency movements is stalled, because surplus countries are resisting exchange-rate appreciation in favour of imposing recessionary deflation on deficit countries. The ensuing currency battles are being fought on several fronts: Foreign-exchange intervention, quantitative easing, and capital controls on inflows. And, with global growth weakening further next year, those battles could escalate into trade wars.


Finally, policymakers are running out of options.

Currency devaluation is a zero-sum game, because not all countries can depreciate and improve net exports at the same time. Monetary policy will be eased as inflation becomes a non-issue in advanced economies (and a lesser issue in emerging markets). But monetary policy is increasingly ineffective in advanced economies, where the problems stem from insolvency - and thus creditworthiness - rather than liquidity.

Meanwhile, fiscal policy is constrained by the rise of deficits and debts, bond vigilantes and new fiscal rules in Europe. Backstopping and bailing out financial institutions is politically unpopular, while near-insolvent governments do not have the money to do so.

And, politically, the promise of the G-20 has given way to the reality of the G-0: Weak governments find it increasingly difficult to implement international policy coordination, as the world views, goals, and interests of advanced economies and emerging markets come into conflict.

As a result, dealing with stock imbalances - the large debts of households, financial institutions and governments - by papering over solvency problems with financing and liquidity may eventually give way to painful and possibly disorderly restructurings. Likewise, addressing weak competitiveness and current-account imbalances requires currency adjustments that may eventually lead some members to exit the euro zone.

Restoring robust growth is difficult enough without the ever-present spectre of deleveraging and a severe shortage of policy ammunition. But that is the challenge that a fragile and unbalanced global economy faces next year.

To paraphrase Bette Davis in All About Eve, "Fasten your seat belts, it's going to be a bumpy year!" PROJECT SYNDICATE

Nouriel Roubini is chairman of Roubini Global Economics and professor at the Stern School of Business, New York University. His detailed 2012 global growth outlook is available at

Singapore Analysts' Stock Picks for 2012

Analysts: Stock markets likely to stay volatile next year

CIMB Research
Ascendas Reit
CDL Hospitality Trusts
Genting HK
Sembcorp Ind

DBS Research
Comfort Delgro
Global Logistics,
SembCorp Industries

Goldman Sachs
Genting Spore
Indofood Agri
Golden Agri
Jardine C&C

Keppel corp

Kim Eng Research
Genting Spore

Sembcorp Ind
CapMall Trust
CapComm Trust

OCBC Research
Golden Agri

Philips Securities

UOB Research
First Resources
Genting Spore

Share Investment
12 sparkling stocks in 2012.

Kep Corp

The Edge - Ten Stocks for 2012
Bukit Sembawang
CapMall Asia
FJ Benjamin
Genting HK
Pan-United Corp

Marc Faber's Picks
Wing Tai

Happy Trading and Investing

Note: I purposely omit the Target Price, let's just assume a possible upside of 10% to 20% from 31 Dec Price.

Friday, December 16, 2011

Singapore property - Much ado about nothing

16 December 2011
Colin Tan

The dive in property stock prices following the Dec 7 announcement of additional cooling measures is an admission by the market that it believes that the bulk of home buying in recent quarters - if not years - were investment purchases and not driven by owner-occupiers or upgraders as many had claimed for so long.

How else can we interpret the strong reaction and thinly-disguised anger and bitterness in some of the comments in news reports over the recent days? I was actually more taken aback by these comments than the actual measures themselves. However, the party which should be the most aggrieved - the developers - appears to have taken the latest measures far better than others.

The day after the announcement of the additional buyers' stamp duties of between 3 and 10 per cent on certain transactions, the developers came out in droves - 22 in all - to bid for a landed housing site in Chestnut Ave in Upper Bukit Timah. There is no doubt that the buyers of landed homes are less affected by the cooling measures, but the number of bids and the prices were above expectations. Only one developer was successful, which means 21 others had spare cash to spend. Is this a sign of vulnerability?

If indeed the majority of home purchases this year had been underpinned by strong demand fundamentals - shrinking household sizes and rapid population growth that had resulted in severe undersupply as suggested by some analysts four to five months ago - why is there a panic reaction now?

We have been overwhelmed by numerous negative comments, with almost all analysts predicting at least a 10-per-cent drop in home prices in the next year, with some forecasting a plunge as much as 30 per cent. This translates to an average loss of 2.5 per cent per month or 7.5 per cent per quarter.

Such a steep drop in such a short period - if it occurs - indicates a severe loss of market confidence. Maybe we are thinking about the last decline during the global credit crisis that followed the collapse of Lehman Brothers. However, we should not forget that Singapore experienced its deepest post-independence recession then. Are we expecting a recession of the same magnitude next year? The latest economists' forecast is that the Singapore economy will grow 3 per cent next year.

If you had read the report in question, the 30-per-cent drop was predicated on slower population growth and unprecedented home supply, not on slower economic growth or a recession. Some analysts have also drawn comparisons to the 1996 price decline which was precipitated by the introduction of anti-speculation measures in May that year. It is not a fair comparison as the problem then was rampant speculation and it was nipped in the bud. There was no low-interest rate environment.

From the statements accompanying the announcement of the latest measures, it is clear that the authorities see potential destabilising investment flows as the problem. Clearly, they are saying that it is a money issue first before it is a real estate problem. However, most of our market analyses thus far have largely ignored this aspect or dwelt on it only in passing.

Many continue to treat it as a real estate problem, ignore the economic aspect of it and then still expect buyers to be rational in their buying. It will be by pure chance if their calls turn out to be right. I am not saying these analysts are wrong but if you truly understand the complexity of the real problem, it is premature to call a drop in prices at this point in time.

I would also not be unduly worried by some analysts' comments that the heavier stamp duties are making a dent in Singapore's standing as a major property investment destination while giving rivals such as Hong Kong a boost. These comments do not give due recognition to what many respected economists are warning about - the destabilising investment flows into our part of the world.

To continue with a non-interventionist approach in the face of such hot money would be foolhardy - it would be courting disaster. In fact, I would say the current measures have enhanced Singapore's standing as a safe haven and an extremely attractive property investment destination.

Colin Tan is head of research and consultancy at Chesterton Suntec International.

Chinese property hits lofty ceiling

16 December 2011
Jamil Anderlini

In a showroom built to resemble an ancien regime palace, a platoon of salespeople stands idle on the frontline of a looming Chinese property bust.

The luxury apartments of Versailles Residentiel de Luxe La Grand Maison, located next to a polluted river in the third-tier coastal city of Wenzhou, have not yet been built but are already on sale for as much as 70,000 yuan (S$14,415) a square metre. That is more than double the annual income of the average Wenzhou resident, who would have to save every penny for 350 years to buy a 150 sq m home in this development.

But even the few who can afford it seem to be having second thoughts. "We have been told to say publicly that everything is going very well and our apartments are selling even though none of the other developments in the city can sell theirs," says one sales assistant who asks not to be named for fear of losing his job.

Prospective owners have paid deposits on only a dozen or so of the 198 apartments on sale at La Grand Maison. "Prices are dropping fast and everyone is waiting for them to fall further before they think about buying," says the sales assistant.

Across the country, from the big cities of Beijing and Shanghai to the smallest regional towns, countless such complexes have sprung up in recent years as developers and local governments have rushed to capitalise on the frenzy for property. But now, following a decade-long boom and nearly two years of attempts by the central government to cool the overheated sector, the market appears to have turned. Sales volumes have slid and prices are falling as developers try to tempt reluctant buyers with discounts.

"China's property bubble is bursting," says Mr Andy Xie, an independent economist. From their current elevated levels, "prices may fall by as much as 25 per cent soon and by another similar amount in the following two to three years".


The downturn comes just as the market expects a wave of new supply, particularly in smaller cities such as Wenzhou, on China's prosperous eastern seaboard. The country's 80,000 property developers own enough land to build nearly 100 million apartments. Add this to vacant apartments for sale, according to estimates by Credit Suisse analysts, and China already has the capacity to satisfy housing demand for up to 20 years.

The consequences of a crash would be dire for the wider Chinese economy and for the economies of many other countries that rely on China to fuel their own growth.

Last year, property construction accounted for 13 per cent of gross domestic product, and for more than one-quarter of all investment in what is the most investment-dependent economy in history. Property directly accounts for 40 per cent of Chinese steel use; the country itself produces more steel than the next 10 producing countries combined, making it by far the most important buyer of inputs such as iron ore.

Construction in China is also important for a host of other industries, from copper, cement and coal to power generation equipment. The sector "matters to an extraordinary degree for overall Chinese growth, for commodity demand, household expenditures, external trade and underlying heavy industrial profitability", says Mr Jonathan Anderson of UBS.

He calls it "the single most important sector in the entire global economy, in terms of its impact on the rest of the world".

The increasing prospect that this sector could come to a screeching halt has serious implications for the global economy at a time of deepening gloom and uncertainty. It is especially important for commodity exporters that have seen their economies boom on the back of Chinese demand for raw materials.

"The growth model China has followed for the last few years, which has involved a whole lot of property construction, is running out of steam," says Mr Mark Williams of Capital Economics. "People have not priced in the coming re-balancing of China away from commodity-intensive development and this has to be bad for economies like Australia, Brazil and Chile."


Chinese housing prices have soared so high and so fast that the dream of owning an apartment is now out of reach for almost anyone who does not already have one. Growing public dissatisfaction prompted the government early last year to start introducing increasingly tough restrictions, such as higher deposit requirements and outright bans in some cities on the purchase of more than one apartment. But the measures have started to work only in recent months.

According to government figures -which most analysts believe understate the reality - average housing prices more than doubled in the last four years nationwide, while in Beijing and some other regions, the price increase was more like 150 per cent. Data are incomplete but analysts say the price of an average apartment in a Chinese city is now about eight to 10 times the average annual income nationwide; in cities like Beijing and Shanghai, the ratio is closer to 30 times.

Even at the height of the United States real estate bubble in 2005, the price-to-income ratio for the whole of America peaked at about 5.1, while cities such as Las Vegas, where the bubble was biggest, saw the ratio reach 5.6, according to Zillow, a real estate information company. Historically, US home prices have tended to be about three times average annual incomes and they are close to that level again now, six years after the bubble burst.

Government policy over the last decade set up perverse incentives that almost seem designed to create a bubble, say Chinese analysts and economists. To start with, all land belongs to the state and local government officials have monopoly power over its supply. In an autocratic, opaque and corrupt system, that gives them enormous authority to decide who gets to use that land and how.

Faced with chronic revenue shortfalls but forbidden to run deficits, local governments have come to rely on land sales (the "sales" are actually only of land-use rights of up to 70 years) for up to 40 per cent of their income. Analysts say the tax system encourages real estate speculation by wealthy Chinese who have few other investment alternatives and face negative real interest rates if they deposit their money in the bank.

Apart from pilot projects in Shanghai and in Chongqing to the west of the country, nowhere is an annual property tax levied and the property transaction tax that exists is derisory.

"Right now the high housing price is not due to limited supply - it is because of endemic speculation but the government doesn't combat speculation because high prices keep GDP growth and revenues high," says Professor Yi Xianrong at the China Academy of Social Sciences, a government think-tank.

"China's real estate bubble is undeniably the biggest in history but our property taxes are lower than Zimbabwe's; the situation is laughable."


China's domestic financial system, which sailed through the global financial crisis mostly unscathed, is also vulnerable. When Beijing unleashed an enormous stimulus package in late 2008 to combat the effects of the crisis, much of the money went into construction.

The government says developers and mortgage borrowers account for about 20 per cent of all loans but senior regulatory officials admit that figure probably significantly understates the true exposure of the broader financial system to a downturn in the sector.

A banking stress test conducted this year by China's biggest banks concluded that non-performing loans would tick up only slightly if real estate prices halved. But analysts say the test did not take into account a steep fall in transaction volumes that has already hit much of the country or recognise how falling prices would affect the wider economy when construction inevitably slowed down. Nor did the test try to estimate how falling land sales and prices would affect the value of bank collateral, even though the vast majority of collateral in the system is land or property.?

In Wenzhou, often seen as a bellwether for the wider economy, house prices fell 5.2 per cent in October from the same time a year earlier and dropped 4.6 per cent from a month earlier. Prices have not yet fallen as much elsewhere - but transactions across the country were down 11.6 per cent from a year earlier in October, compared with a 7 per cent fall in September, and in the 15 largest cities the drop was 39 per cent.

"The volume of land transactions has also dropped sharply as developers hold off on new projects and will probably continue to weaken as home-buyer sentiment falls further," says Mr Du Jinsong, China property analyst at Credit Suisse.


So far, the government has stood firm on its commitment to bring down property prices and has refused to roll back any of its restrictions. This year, it unveiled a plan to build 36 million subsidised housing units for low-income families in just three years, in the hope that this would make up for the slowdown in commercial house-building.

But there is some evidence this plan is already faltering, because of opposition from developers and local governments who are expected to build and pay for units on land they would have otherwise been able to earn big profits from.

"The subsidised housing is all very poor quality and in terrible locations," says Professor Cao Jianhai, a real estate expert at the China Academy of Social Sciences. "Local governments are not willing to build affordable housing that can compete with commercial residential developments."

Given the importance of the sector to the overall economy, most analysts believe that if prices drop too far, Beijing will step in to save the market by lifting purchase restrictions and pumping more credit into the economy.

But others warn that saving the property sector would require another flood of liquidity into the system and would only re-inflate the bubble, leading to higher inflation and an even bigger crash in the future.

"The government is in a very difficult position," says Professor Tao Ran, an economics don at Renmin university in Beijing. "If they relax macroeconomic policy the bubble will get worse. But if they don't relax policy then the bubble will pop and the economy will stall."

It is an eventuality that may already be confronting the backers of the faux French development in Wenzhou. The Financial Times Limited

Jamil Anderlini is the FT's Beijing bureau chief and has been a correspondent covering China since 2003.

Thursday, December 15, 2011

Protect Profits by Having a Plan

Thursday, December 15, 2011
Michael Kahn

After the last two bear markets, most investors understand that they have to have a plan to protect their portfolios. Traders live and die by this. They are taught that knowing when they should sell is more important than when to buy.

In other words, they recognize when it is time to cut their losses. Investors should understand this, too.

How many of us are guilty of thinking that a lower stock price is always a better value? This was the case in November 2007 just after the last bull market peaked as analyst forecasts were still rather rosy. And during the 2008 bear market it was also the case, as we often heard news reports that "the financial crisis is near its end" or that "housing is about to bottom."

Were all the profits you booked over the 2003-2007 bull market protected? Did you have a plan to take at least some money off the table when it became clear that the market was no longer healthy?

The market usually gives off many signals when the good times are about to end. One example is deterioration in market breadth, when the average stock starts to stumble well before the major indexes peak. Stocks with marginal fundamentals are left behind, unlike in bull markets when investors buy anything and everything.

Another example comes from the rising trend itself. In a healthy bull market, the general direction of the market is clear, even with the normal sequence of rally and pullback. However, when the rallies start to shrink and the pullbacks start to grow, we can get a good idea that the trend is changing.

For most investors, knowing what to watch and having the time to watch it can be a problem. Therefore, they need a more mechanical plan.

How do investors create such a plan? A tool called a "stop" or "stop loss" order is one way to help mitigate losses. Basically, you determine how much money you are willing to lose on any investment - how much you are willing to risk - and if the stock reaches or surpasses the price you specified, an order will trigger to sell. Stop orders allow you to ride an upswing and limit your losses on a downswing even if you're not watching the market every minute.

If you just bought the stock, you take your loss and move on.

If you owned it for a while and you have a profit, you set your stop based on today's price, not the price you paid. You may still walk away with that profit, but keep in mind that once the order triggers, it becomes a market order and could execute well below your stop price if the stock takes a sharp drop. Using stop orders can be an excellent strategy to prevent loss, but it can also be very unpredictable if the market or the stock is particularly volatile.

Remember, big losses can begin with small losses.

While it is always possible that the stock will rebound, causing you to sell a good investment, you can help mitigate losses during a bear market with carefully placed stop orders. You are managing your risk. And you will live to invest another day.

No matter which way you think the market is heading, if you own stocks you must know what has to happen to cause you to sell. Sometimes it is a change in the fundamentals, and other times the market reacts in advance to tell you something is wrong. That will be the time to consider managing risk rather than seeking that last nickel of profit.

Big revamp of SGX’s Central Depository system under way

SGX to allow stock broking firms access to clients’ accounts

By Goh Eng Yeow
15 December 2011

The Singapore Exchange (SGX) is embarking on a radical overhaul of its Central Depository (CDP) system, which holds the shares of some 1.4 million individual investors here.

The revamp, which will take three years to complete, will make big changes to the way shares are bought and sold here and hopefully, raise the quality of advice given by stockbrokers.

One key change will be to enable Singapore’s stock broking firms to gain access to a client’s CDP account to find out exactly what stocks are in his portfolio - if he gives them the permission to do so.

With this information, brokers will be in a better position to advise clients how to tweak their portfolios in response to market movements.

The move will reverse a longstanding policy which was first introduced in 1987 when stock trading went paperless.

The rationale then was to offer assurances to investors that their shares would be safe with a central depository specially set up to hold them, rather than with a broking firm that might trade the shares without clients’ knowledge, or lend their shares out and expose clients to unnecessary risks.

But this system has since gone out of sync with the practice in most developed stock markets worldwide, said SGX chief Magnus Bocker, revealing details of the revamp to The Straits Times in an exclusive interview.

‘In most other countries, you keep your stocks with the broker, so that your broker can see what you have and tell you what to buy and what to sell,’ he explained.

‘In our market, if our shares are kept in the CDP, the broker doesn’t know. This is negative for the equities market.’

The CDP’s overhaul will also see the introduction of computer hardware and software that will cut down the considerable paperwork generated each time an investor buys or sells shares.

Currently, an investor receives at least two mailers from the CDP each time he makes a transaction. In future, he can choose to get the statements online.

Mr Bocker said he hoped the revamp will allow investors to develop much closer relationships with their brokers and allow them to assess whether dealers were offering good advice.

‘I also think there is an opportunity to grow the retail participation in the stock market,’ he added.

‘Out of the 1.4 million accounts, we only have 200,000 doing one transaction per quarter and 20,000 doing a trade a day. Stocks should be a natural part of anyone’s long-term savings.’

The investment in a new CDP system also marks a further step in SGX’s efforts to boost its ageing infrastructure. The CDP uses technology which is already more than 20 years old.

In August, SGX installed a new $250 million trading engine - reputedly the world’s fastest - that can execute trades 3,000 times faster than the blink of an eye.

Phillip Securities’ managing director Loh Hoon Sun said the overhaul will be good for both investors and dealers.

His view was echoed by veteran stock investor Denis Distant, who pointed out drawbacks of the current system

‘In the United States, you will know right away if you key in a sell order whether you have the shares or not,’ he explained.

‘Here, with all shares kept in the CDP, you have to remember exactly how many shares you own. Otherwise, you may end up over-selling and the mistake can be costly.’

Wednesday, December 14, 2011

Taking stock of interest rates

Published December 14, 2011

As demand for funds continues to outpace deposits, spreads - including mortgage spreads - may rise, reports TEH HOOI LING

WHILE Singapore interest rates are generally expected to remain low next year, there might be a chance that mortgage rates will rise as banks begin to charge higher spreads should demand for funds continue to outpace deposits, economists Executive Money surveyed said.

Rising mortgage rates, if that comes to pass, will be yet another piece of bad news to hit property owners and investors in Singapore following a slew of tightening measures introduced by the government this year.

Most of the forecasts for the three- month Singapore Interbank Offered Rate, or 3M Sibor, ranged from 0.38 per cent to 0.5 per cent.

Barclays puts the probability of Sibor falling below 0.5 per cent next year at 75 per cent. 'With Europe now likely to embark on quantitative easing on a larger scale to fight recession, we expect that could accentuate the liquidity excesses around the world,' said its economist Leong Wai Ho. 'Flush liquidity conditions worldwide, coupled with the perception of Singapore as a safe haven, could put pressure on money market rates here to move even lower.'

While the base case scenario of most economists is that short-term rates would stay low, there are possible events that could trigger interest rates to spike.

OCBC's Selena Ling said: 'Our base case scenario is that short-term interest rates will probably be fairly well-anchored, with the 3M Sibor likely to stick to a 10 to 15 basis point range from the current 0.39 per cent fixing. Our end-2012 forecast for 3M Sibor is 0.49 per cent. We put 50 per cent probability on this scenario.'

This is predicated on the following:

No double-dip recession for the US, but a sub-par growth with a stagnant labour market. The FOMC (Federal Open Market Committee) sticks to its very low rates for an extended period of time, at least until mid-2013;

Meanwhile, Europe continues to 'muddle through' with no disorderly default by any of the financially weaker countries, and policymakers bite the bullet and adopt the necessary policy measures and economic reforms;

China decelerates but there's no hard landing (defined as GDP growth falling to below 7 per cent) and it manages its policy risks well. The risks are well-known - property markets, the informal banking sector (for example, Wenzhou) and local government financing vehicles.

'Essentially no policy mistakes,' said Ms Ling, 'else the downside caveat is risk of global recession or financial crisis.'

She reckons there is at least a 25 per cent probability attached to two tail risks which could cause funding costs to spike. One, the worst-case scenario materialises in the eurozone, and we get a Lehman-type event. Two, the Monetary Authority of Singapore (MAS) eases monetary policy again in April 2012 in an environment where global risk-off sentiment dominates.

This could cause some capital outflows that could temporarily impact domestic liquidity and drive short- term Singapore dollar rates higher, she said.

The possible easing of the MAS policy, via a shift to neutral (i.e. zero per cent appreciation) stance, was also flagged by Citi and UOB.

Citi's economist Kit Wei Zheng said 3M Sibor could rise to the 0.6 to 0.7 per cent range, depending on how MAS policy and USD Sibor rates evolve.

UOB's Chow Penn Nee noted that swap offer rates - which are more sensitive to market movements - may move up if the MAS shifts its monetary policy stance to neutral from the current gradual appreciation stance.

The probability of MAS shifting to a neutral stance is growing, she said, given the much slower domestic growth outlook for 2012 - 2.5 per cent based on UOB's projection - and continuing uncertainties and weakness in the external economy. Also, inflation is moderating.

But even if short-term rates stay low, mortgage rates could increase gradually by 0.5 to 1 per cent over the next two to three years, said Bank of America Merrill Lynch's economist Chua Hak Bin.

'We expect the banks to charge higher spreads (including mortgage spreads) as the loan-to-deposit ratio has climbed to a five-year high of 86 per cent. The ratio was 68 per cent in April 2007. The bargaining position of banks increases as the loan-to-deposit ratio rises,' he said.

While loan growth going forward will probably cool, given the slowing economy and strict property measures in Singapore, growth in demand for loans may continue to exceed deposit growth for quite some time, Mr Chua said.

MAS reported that domestic banking non-bank loans grew 31.1 per cent year on year in the third quarter of this year. This compares with deposit growth of just 12 per cent.

'China's monetary tightening and European banks' deleveraging have introduced opportunities and gaps for Singapore banks to step in,' said Mr Chua.

While rising interest rates are a possibility, OCBC Bank's Ms Ling reckons that 'the bigger headwind for property investors could be the recent slew of property curbs which have cooled market sentiment'.

In a report yesterday on the impact of additional stamp duties on property purchases in Singapore, DMG & Partners' chief regional strategist Craig Irvine said: 'We are clearly reminded of cooling measures applied in early 1996. After that policy intervention, residential prices in Singapore fell by over 40 per cent over the next three years.

'Then, as now, the government had acted strongly to dampen speculative activity after a particularly 'frothy' period. This time, the measures primarily (and rightly, in our view) target foreign liquidity, which has become a key driver of incremental demand.

'We think the impact will go beyond the foreign money to overall sentiment.'

Optimism over tech stocks points to US recovery

Published December 14, 2011

(WASHINGTON) Profit forecasts for computer and software makers are holding up better than any industry in the world, a sign of confidence that corporate spending will keep the American economy expanding next year.

Net income at companies from Apple to Oracle will rise 11 per cent in 2012 on average, according to more than 2,900 analyst projections compiled by Bloomberg.

The profit estimate is down 2.3 per cent from its peak this year, the smallest reduction of any industry in the MSCI World Index. Utility forecasts were cut the most at 29 per cent.

The resilience in technology, which accounts for more of the US market than any other industry, underscores optimism that the American economy is recovering even as Europe's debt crisis spreads and China's growth slows.

'Technology companies are being helped by the dramatic improvement in the health and profitability of corporations,' Stephen Wood, who helps oversee about US$163 billion as the New York-based chief market strategist for Russell Investments, said. 'When the market finally has the time to assess fundamentals, IT stocks will be one of the sectors that will benefit.'

Bears say estimates for record profits are too high and investors risk the same losses they suffered in 2000 and 2007, when computer- related shares began declines exceeding 56 per cent.

Capital spending at US companies is the highest since 2008 and investment in equipment and software climbed at a 15.6 per cent annual pace in the third quarter, according to the Commerce Department.

Technology expenditures may climb 3.9 per cent to US$2.7 trillion in 2012, research firm Gartner Inc said on Oct 17.

Concern that Europe's debt crisis would trigger a global recession dragged equity markets in 37 of the 45 countries in the MSCI All- Country World Index into bear territory in 2011, or declines of 20 per cent from a peak.

Technology stocks are trading at lower valuations than drugmakers or housewares suppliers.

The industry has a so- called PEG ratio, an indicator popularised by Fidelity Investments' Peter Lynch, of 0.87.

The PEG ratio, found by dividing the price-earnings multiple by estimates for profit growth over the next three years, for healthcare providers in the MSCI gauge is 1.11. Household product makers trade at 1.49 and the full index is valued at 1.11. The closer the ratio is to 0, the cheaper the company.

'They're at very reasonable valuations,' Tom Wirth, who helps manage US$1.5 billion as senior investment officer for Chemung Canal Trust Co in Elmira, New York, said. 'The outlook is fabulous for the tech group, mainly because this is the one area where businesses feel they need to invest.'

The MSCI World slipped less than 0.1 per cent last week to 1,187.29 after the European Central Bank damped speculation that it would boost sovereign debt purchases. The gauge of computer- related shares increased 0.7 per cent in the past five days, the second- biggest advance among 10 industries, to pare its decline for the year to 0.8 per cent.

Technology stocks in the MSCI Asia-Pacific Index climbed the most of 10 industries on the measure on Monday.

The decline hasn't kept some of the smartest investors from buying technology companies. Warren Buffett, the billionaire chief executive of Berkshire Hathaway Inc, spent more than US$10 billion on shares of International Business Machines Corp, making the company his second-biggest holding.

IBM climbed 2.6 per cent last week to a record US$194.56, bringing its 2011 gain to 33 per cent.

Estimates for 2012 income at Oracle and SAP, which develop business software, have risen more than 4.6 per cent this year, according to analysts' forecasts compiled by Bloomberg. Projections for technology firms have fallen less than for any other group in the MSCI World this year amid increased spending on iPhones, tablet computers and digital cameras.

Forecasts for telephone service operators fell 9.7 per cent since peaking on May 2; estimates for raw material producers and oil suppliers were reduced more than 10.8 per cent.

Analysts say computer companies will post more growth next year than drugmakers or producers of household goods, the only MSCI World industries with rising share prices this year.

Healthcare providers in the global equity benchmark may increase income by 4.5 per cent in 2012, while an index of grocery store operators, foodmakers and tobacco companies will earn 9.3 per cent more, according to data compiled by Bloomberg.

'People may reduce spending in other places but they won't cut their smartphone,' said Arthur Kwong, the head of Asia-Pacific equities for BNP Paribas Investment Partners, in an interview from his Hong Kong office on Nov 22. 'It's something people can't live without.' - Bloomberg

Staying calm in volatile markets

Published December 14, 2011

Short-term losses and volatility are inevitable and investors have to live with them rather than be stifled by them, writes PETER BROOKS

THE choppy markets of the past few months may have made investors feel like they were reliving 2008 all over again. The bad news is that spikes in market volatility appear to be here to stay. The good news, however, is that there are ways to navigate safely through such times by purposefully managing our responses.

Higher volatility usually comes with higher levels of investor discomfort. Many investors consider pulling out of falling markets while those who see a buying opportunity can find it difficult to commit due to fear of mis-timing the purchase.

If higher volatility becomes the new norm, it is important for investors to better understand and take control of their investing behaviour. There are three easy strategies investors can adopt to increase their comfort in difficult markets: (i) keep the correct perspective of time horizon; (ii) rebalance assets; and (iii) keep an investment diary.

Strategy 1: Keep the correct perspective of time horizon

An investor attempting to perfectly time markets dominated by sentiment is unlikely to succeed. When asked how clients know they won't get caught by another big drop in the markets, I tend to give a very honest answer - you don't! Volatility and short-term losses are inevitable and you have to live with them rather than be stifled by them.

All of us have long-term financial goals, yet we often assess our progress towards them over short horizons. The more frequently you monitor your portfolio, the more risk you will perceive. This sense of greater risk can lead to irrationally conservative portfolios.

Think about what you would observe if you were to watch the markets closely. On a second-by-second basis, you will see prices move up and down with no apparent pattern. Obviously, that is an extremely short investment horizon that no private investor would use.

However, at monthly assessments, you would see losses on an equity portfolio (MSCI World) about 40 per cent of the time. Extend this out to annual horizons and you can expect to see losses about 25 per cent of the time. Clearly, how often you check your portfolio can lead to different perceptions of the amount of losses you are experiencing, impacting your stress levels.

It is helpful to simply check your investment valuations less frequently so that you do not over-perceive risk - after all, it is the actual risk of your portfolio that matters. This longer-term monitoring is a useful strategy for those with low composure who typically find it difficult to stay invested. It will mean that any trading decisions are not based on misperceptions of your actual portfolio risk.

Strategy 2: Rebalance your assets

The second strategy you can employ would be to rebalance your assets. This simple strategy is often neglected during times of stress because it can be emotionally difficult to commit to.

The process of rebalancing means that you will sell assets that have performed well and have become a larger part of your portfolio. You then use the proceeds to buy the assets that have performed less well.

It sounds simple until you have to execute the trades. Committing to sell better performing assets at times of turmoil is difficult. It seems almost illogical to increase exposure to the assets that are getting pummelled in the markets. If traded sensibly, though, this strategy will beat a buy and hold strategy, and massively outperform anyone who sells falling assets because of fear. The important thing is to commit to rebalancing frequently and stick to it.

Strategy 3: Keep an investment diary

The third good investing habit we would recommend is to keep an investment diary to help you stay focused on your rationale. By holding an asset at any point in time, you are implicitly assuming that it offers among the best risk-reward trade-offs available to you based on your expectations of the future and your other existing holdings. Any past gains or losses are not relevant to this decision (capital gains taxes aside) since your returns are determined in the future - not the past.

Keeping an investment diary is one way that you can help yourself. If you write down the rationale for the investments you make or don't make, then in times of stress you can read your original rationale and determine whether anything has fundamentally changed - or if it is only your stress levels that have shifted.

Imagine that three months ago you invested in Stock ABC and you wrote in your investment diary your reasons for making that particular investment. Let's say Stock ABC today is trading 20 per cent below your purchase price, and you are feeling anxious.

If you re-read your investment rationale and agree that it still holds, then you should be more comfortable holding on to Stock ABC. You may even consider buying more if you feel that the long-term prospects are unaltered and the fall has been driven by sentiment.

If you re-read your investment rationale and feel that the prospects for Stock ABC have changed, then you should ask yourself whether you can build a case for adding it to your portfolio now if you didn't own the stock. If you cannot convince yourself that you would invest in that particular stock at that point in time, then you should consider if there are better opportunities elsewhere. This approach will help you stay focused on your investment rationale and not trade on short-term moves.

While it is difficult to dramatically improve your position in the short term relative to your long-term goals, attempting to time volatile markets or becoming fearful and sitting on cash in the short term can drastically decrease your chances of achieving your investment goals.

Remember that although we all live in the here and now, our investment objectives are rarely realised in the present. Keeping the correct perspective and developing good investment habits will help you be a better investor.

The writer is head of behavioural finance, Asia Pacific, at Barclays Wealth. He holds an M Sc in economics and econometrics, and a Ph D. in behavioural and experimental economics from the University of Manchester. Barclays Wealth is the wealth management division of Barclays.

Thursday, December 8, 2011

Equities losing appeal in global financial system - survey

WASHINGTON | Thu Dec 8, 2011

WASHINGTON (Reuters) - Equities are losing their role in the global capital markets, creating a gap over the next decade between investor demand and companies' needs to fund growth, according to a new study on Wednesday.

The McKinsey Global Institute study projects that the share of global financial assets in publicly traded equities could fall to about 22 percent by 2020 from 28 percent now.

"This gap will amount to approximately $12.3 trillion in the 18 countries we model, and will appear almost entirely in emerging markets, although Europe will also face a gap," the report said.

As a result, the cost of equity for companies could rise, forcing them to resort to debt to finance growth. It said companies, especially banks, that need to meet capital requirements could find equity more expensive and less available.

"With more leverage in the economy, volatility may increase as recessions bring larger waves of financial distress and bankruptcy," the report said.

"At a time when the global economy needs to deleverage in a controlled and safe way, declining investor appetite for equities is an unwelcome development."

Factors ranging from aging populations to the growth of alternative investments such as private equity, to increased volatility in stock markets were sapping investor appetite for equities in developed nations.

The study predicted that emerging markets will become an important force in shaping the global financial system over the next decade.

While investors in developed nations now hold nearly 80 percent of the world's financial assets, that is growing slowly relative to emerging markets, the study said.

"The financial assets of private investors in emerging economies will rise to as much as 36 percent of the global total by 2020, from about 21 percent today," said the report.

"But unlike in developed countries, the financial assets of private investors in these nations currently are concentrated in bank deposits and government securities."

Emerging market financial assets grew 16.6 percent annually over the past decade, nearly four times the rate in mature economies. These assets stood at about $41 trillion in 2010 and constituted 21 percent of the global total, up from 7 percent in 2000, the report said.

"Depending on economic scenarios, we project that emerging market financial assets will grow to between 30 and 36 percent of the global total in 2020, or $114 to $141 trillion," it said.

The study forecast China's financial assets could be as much $65 trillion by 2020 and India's could reach $8.6 trillion.

(Reporting by Lucia Mutikani; Editing by Leslie Adler)

Wednesday, December 7, 2011

Equities getting cheap in a sea of troubles

Published December 7, 2011

It pays to go for quality companies and tilt to safety where possible


THE world is in a terrifying situation but investors should still have a near normal weight in global equities, said one of Wall Street's most well-respected strategist, Jeremy Grantham of GMO, in his latest quarterly letter.

But go for quality companies, tilt to safety where possible, and avoid lower-quality US stocks.

Also try to avoid duration risks in bonds. For the long term, they are desperately unattractive, he said. 'Don't be too proud (or short-term greedy) to have substantial cash reserves.'

And for him personally, he likes resources in the ground on a 10-year horizon. Now, he is only nibbling slowly because he still fears a further short-term decline in commodities as a result of less bad weather and economic weakness, especially in China.

So what's terrifying about the world now? The problems plaguing the eurozone is one thing. Secondly, the United States, and to some extent the world, will not easily recover from the current level of debt overhang, the loss of perceived asset values and the gross financial incompetence on a scale hitherto undreamed of.

Third, the US and the developed world have permanently slowed in their GDP growth. This is mostly due to slowing population growth, an ageing profile and an over-commitment to the old which leaves inadequate resources for growth.

Also contributing to the slowdown, particularly in the US and the UK, are inadequate long-term savings. Latest numbers showed that the US personal savings rate has fallen once again below 4 per cent.

In the US, its notably depleted infrastructure, marked fall-off in the effectiveness of education and training and its much-decreased effectiveness of government, particularly in its ability or even willingness to concern itself with long-term issues, will threaten its competitiveness.

Also of concern is the drastic decline in US income equality, and the stickiness of economic position from one generation to another.

The net result of these factors is a growing feeling of social injustice, a weakening of social cohesiveness and, possibly, a decrease in work ethic. In such an environment, it is difficult to achieve a healthy growth rate.

Furthermore, economic balance will slowly be eroded in an economy in which the average worker makes little or no economic progress.

Sales of ordinary goods will be weak and erratic, resulting in weaker and more unstable growth. Sales are erratic because, with little or no income progress, buying surges by the 'middle class' depend increasingly on shifts in confidence and a willingness to go into debt.

'Sitting on planes over the last several weeks with nothing to do but read and think, I found myself worrying increasingly about the one per cent and 99 per cent . . .' he wrote.

Meanwhile, the equity markets have been bombarded by bad news in the last few months. The news is complicated and inter-related. 'How one factor, say, 'Greek default', or 'China stumbles' interacts with others such as double-dipping economies and generalised financial crisis are impossible to know,' he said. 'One can only make more or less blind guesses.'

Looking out a year, the overall picture seems so much worse than the generally benign forecast of 4 per cent global growth from the International Monetary Fund.

'The probabilities of bad outcomes are not as high for us today as they were in early 2008. But the possibility of extremely bad and long-lasting problems looks as bad to me now as it ever has,' he said.

Record margins

Curiously, the S&P 500 - unlike other global equities - has hung in there and staged rallies whenever the bad news eased. A model developed by Mr Grantham and his colleague showed that the US market's performance can be explained by three factors: general good news, profit margins and inflation.

Inflation is benign now, and profit margins in corporate America are 'weirdly' at record levels. This explains why the US markets would rally whenever the negative news cools.

'But the longer you look at these record and still-rising margins and compare them to the miserable unemployment and substantial spare capacity, the stranger these high margins look.'

The margins will come down to more normal levels eventually. Probably by then, the negatives would have resolved themselves. If not, the US market could decline a lot, and test his 'No Market for Young People' thesis.

The thesis is this. All major equity bubbles broke way below trend line values and stayed there for years. But ex-chairman of US Federal Reserve Alan Greenspan and his successor Ben Bernanke introduced an era of effective overstimulation of markets which has resulted in 20 years of overpriced stocks and abnormally high profit margins.

Therefore, the markets didn't even reach their trend line in 2002, and took only three months to recover to trend in 2009. But now, with wounded balance sheets and perhaps an empty arsenal, the next bust may well be like the old days.

GMO looked at the 10 biggest bubbles of the pre-2000 era and calculated that it typically takes 14 long years to recover to the old trend. It will not be a pretty picture if that happens.

All the negatives out there notwithstanding, the fact is global equities are getting cheap.

The average growth estimate for Europe, Australasia and the Far East, emerging and US high-quality stocks was almost 7 per cent per annum real on GMO's seven-year forecast.

Good showing

This explained his recommendation of maintaining a near normal weight in global equities. In fact, GMO has adopted this position since July and it has a good report card to show for it. Preliminary numbers indicated that its largest equity strategy, GMO Quality, outperformed the flat S&P 500 Index by 9.1 per cent year-to-date net of fees yet.

Its GMO Global Balanced Asset Allocation Strategy, meanwhile, is 4.2 per cent ahead of its benchmark.