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Tuesday, January 31, 2012

Why property prices will remain high

Published on Jan 31, 2012

THE report ('Record number of homes to be built, further easing prices'; last Saturday) quoted experts forecasting a steep decline in home prices of up to 15 per cent this year. This was based on a drop in transactions last month and a record supply of 77,089 uncompleted homes at the end of last year, of which 39,184 remained unsold.

And in the public housing market, an overwhelming supply of 25,000 units will be released, on top of last year's batch of 25,000 units, which is unprecedented in recent years.

Despite the large incoming supply and cooling measures, which will put pressure on home prices, an excessive price fall is unlikely because of current strong fundamentals.

What is also vital to consider is the equally huge demand backlog in private and public housing.

Between 1995 and 2010, there was strong population growth amid an undersupply of housing. This led to a dire imbalance, which resulted in robust home transactions and escalating prices in recent years.

Based on official data, the population of citizens and permanent residents expanded by 758,200 in the 1995 to 2010 period. But the increase in available private homes within the same period was only 128,896.

Working on 3.5 persons per household, 758,200 equates to 216,628 households. So, as of December 2010, there was a housing deficit of 87,732 (216,628 minus 128,896).

This strong pent-up demand can easily absorb the 77,089 uncompleted homes in the pipeline until 2015. And this is not taking into account the housing requirements of new immigrants, who may need about 20,000 to 30,000 homes from now until 2015.

Last year, 107,000 foreigners were added to the population. According to some experts, a 1.8 per cent population growth will most likely support home price growth in a favourable environment.

Currently, the property market is well supported by favourable key fundamentals such as low interest rates, low home vacancies, future population growth and the spillover effect from an imbalance in the resale HDB market.

All these factors will contribute to a positive impact on the residential property market in the coming years.

In the absence of a severe global economic recession accompanied by massive job losses, a sharp property price correction is highly unlikely this year.

Wong Toon Tuan

Thursday, January 26, 2012

Why Singapore has the cleanest government money can buy

26 January 2012
Bloomberg editorial

Singapore's Prime Minister, Mr Lee Hsien Loong, isn't often taken publicly to task. But when you make S$3.1 million annually to run a country, people tend to expect results. When they don't get them, the aggrieved masses turn to that lowest-of-common-denominator gripes: Hey, how much are we paying this guy?

Lots compared with, say, Mr Barack Obama, who as United States President gets US$400,000 a year. Mr Lee's compensation will fall 36 per cent, and that of Singapore's President will drop 51 per cent, to S$1.54 million. The cuts were based on the recommendations of an advisory committee formed three weeks after last May's elections, when opposition party candidates made hay with the pay issue - and the ruling People's Action Party won with the narrowest margin since independence in 1965.

Such still-fat pay cheques may give pause. Yet let's applaud Singapore for what it's trying to achieve by paying top salaries to leaders and ministers: Attracting the best and brightest to public service and reducing the temptation to engage in graft.

Done properly, such initiatives can make government more efficient and economies more vibrant. Transparency International has ranked Singapore among the world's top five least-corrupt governments since 2001, and according to Worldwide Governance Indicators, an index supported by the World Bank, it has also been among the best governed.


Since the 1997 Asian crisis, the region's other governments have had a mixed record in holding public servants to account, making growth more efficient, and creating the institutions - independent judiciaries, central banks and media as well as freer watchdog groups - needed to clean up political and economic systems.

One way for Asian countries, home to a big share of the world's households living on US$2 (S$2.53) per day, to boost their economies is to increase the pay of their civil servants.

Take Cambodia, which ranked at the bottom of a recent regional Transparency International corruption survey. Its government workers pad their paltry, sporadic pay by demanding bribes for everything from birth certificates to school grades.

One oft-cited International Monetary Fund working paper argues that paying civil servants twice the wages of manufacturing workers is associated with a reduction in corruption. In Cambodia, civil servants make less than half what a garment worker makes.

In China, corruption is the common link between state-owned banks doling out billions of dollars to cronies; land grabs by local government officials; and the negligence that killed 40 people in a high-speed rail crash last July.

If Beijing paid higher salaries, it might reduce the incidence of graft and rent-seeking that aggravates the lopsidedness of China's development. Its Gini coefficient, an income-distribution gauge, has climbed to almost 0.5 from less than 0.3 a quarter-century ago.


Japan should consider fattening public pay cheques, too.

Although Japan's best and brightest are still drawn by the prestige of a government career, over the past two decades the differential between private and public salaries has grown. Ministerial slush funds help make up the difference, and in recent years, numerous scandals have arisen involving bureaucrats using such money for limousines, louche excursions, and golf-club memberships.

More fundamentally, Japan's economic model encourages dangerous collusion between the public and private sectors. The root of the problem is "amakudari", or "descent from heaven". It's the main gravy train for public servants; when they retire, ministers and bureaucrats get cushy jobs in industries they oversaw while in government. The incentive is to look out for your future employer, not taxpayers.

Japan's nuclear crisis, for example, was made worse by power-industry regulators focused on their post-government careers, not Japan's 126 million people. Pledges by the ruling Democratic Party of Japan to abolish "amakudari" have gone unfulfilled. But for the sake of its citizens' welfare, Japan needs to end the practice, perhaps in return for better salaries and pensions.


Of course, throwing money at corruption won't make it go away. If it did, countries such as Kenya, which pays its Members of Parliament handsomely - more than US$13,000 a month - would be paragons of virtue instead of cellar-dwellers in Transparency International's annual Corruption Perceptions Index.

Decent salaries are just one incentive that can tilt the cost-benefit analyses of potential bribe-takers toward probity: More important than reducing the potential financial benefits of corruption is increasing the probability of detection and meaningful punishment.

Singapore isn't exactly a hotbed of anti-corruption muckraking. According to the 2010 US State Department Human Rights Report, journalists in Singapore practise "self-censorship", the level of public debate is "moderate", and opposition parties face "formidable obstacles".

Yet the city-state does have an aggressive Corrupt Practices Investigation Bureau; professional courts; a ramrod political will inculcated by its first Prime Minister, Mr Lee Kuan Yew (father of Mr Lee Hsien Loong); and a ruthless, relentless emphasis on efficiency and results.

Not every country can follow that recipe, especially those with larger, more diverse populations. Still, countries like Cambodia can start by auditing its public services to get a sense of how bad corruption really is - something that it will have to do in any case to comply with the United Nations Convention Against Corruption.

Civil-society groups can help greatly in that process: We think the UN would be wise to let them take part in the process it has created to review a country's anti-corruption efforts.

Japan could benefit greatly from an independent watchdog agency to investigate corruption; given its global influence, we also don't understand why it is one of only 35 countries yet to ratify the UN convention.

And even if the huge internal challenges of fighting corruption in China risk tampering with the prerogatives of Communist Party control, the government could crack down on the pervasive bribe-mongering of Chinese companies overseas, which presents a huge global challenge.

There's an old saying in Asia that the real money is in government. Not the pay cheques, but the kickbacks. Isn't it possible that a bit more capitalism at the highest levels of public service will make capitalism itself more efficient and equitable? We think Singapore proves it can. BLOOMBERG

Monday, January 23, 2012

Stock Trading Lowest in U.S. Since 2008 After Fund Withdrawals, Job Cuts

By Lu Wang - Jan 23, 2012 1:01 PM GMT+0800 .

Trading (MVOLUSE) in U.S. stocks fell to the lowest level since at least 2008 amid mutual fund withdrawals and Wall Street job cuts.

An average of 6.69 billion shares changed hands on U.S. exchanges in the 50 days ended Jan. 18, the fewest on record in Bloomberg data starting three years ago that excludes over-the- counter venues. On the New York Stock Exchange, volume has tumbled to the lowest level since 1999, the data show.

The slowdown in trading shows that investors remain skittish after five years of withdrawals from mutual funds that buy U.S. equities and one of the most volatile years on record for the Standard & Poor’s 500 Index. While the benchmark index is having its best January rally since 1997, securities firms around the world cut more than 200,000 jobs last year.

“Investor confidence is shaky at the very least,” Mark Turner, head of U.S. sales trading at Instinet Inc. in New York, said in a telephone interview on Jan. 20. His firm handles about 4 percent of the total daily U.S. equity volume. “We need to see the U.S. economy improve. We need to see some sort of a plan in place to deal with Europe’s debt crisis before the market gains some confidence. At that point, we’ll start to see an increase in volume.”

Daily equity trading approached 12 billion shares in May 2009, near the start of a three-year bull market in which the S&P 500 has almost doubled. The total is based on the 50-day average volume on venues including those run by NYSE Euronext, Nasdaq OMX Group Inc., Bats Global Markets Inc. and Direct Edge Holdings LLC.

Share Value
This month’s 4.6 percent rise in the S&P 500 has failed to offset the decline in volume. About 6.85 billion shares worth $209.6 billion have changed hands each day this year, down 16 percent and 12 percent, respectively, from the same period in 2011, Bloomberg data show. The S&P 500 rose to an almost six- month high of 1,315.38 last week.

The New York Stock Exchange (MVALNE) has fared worst among the biggest venues. Trading on the Big Board slumped to the lowest level since 1999, with the 50-day average reaching 847.5 million shares last week, according to data compiled by Bloomberg. Based on value traded, the average stood at $25.1 billion, a level not seen since at least 2005.

On the Nasdaq Stock Market, the 50-day average dropped to 1.72 billion shares, the lowest in six years. Daily value of stock transactions has been $45.1 billion, the lowest since 2010, the data show.

Biggest Venues
Trading is declining faster on the biggest venues, which hosted almost all U.S. equity volume as recently as 2000, following the spread of alternative venues such as Jersey City, New Jersey-based Direct Edge and Bats in Lenexa, Kansas. Direct Edge and Bats now account for more than 20 percent of transactions.

More than 40 equity venues, including electronic communications networks such as Citigroup Inc.’s LavaFlow and so-called dark pools such as Goldman Sachs Group Inc.’s Sigma X, make up the American stock market today.

Individuals withdrew cash from mutual funds for a fifth year and money managers suffered losses in 2011 amid widening price swings. The S&P 500 moved 1.3 percent a day between April and December, compared with 50-year average of 0.6 percent before 2008.

They started pulling money in 2007, just as securities related to subprime mortgages started to plunge, causing $2 trillion in global bank writedowns and losses tied to subprime loans and spurring the worst bear market since the 1930s. Withdrawals continued as concern Greece would default pushed the Stoxx Europe 600 Index down 26 percent last year between Feb. 17 and Sept. 22.

‘Not Willing’
“Investors are not willing to take a lot of risk, especially after a bad year in 2011,” Nikolaos Panigirtzoglou, a London-based analyst who studies fund flows at JPMorgan Chase & Co., said in an e-mail.

While the S&P 500 was virtually unchanged last year, 55 stocks lost more than 30 percent compared with a total of 13 in the prior two. The Dow Jones Industrial Average alternated between gains and losses of more than 400 points on four days for the first time ever in August. Daily share swings in the S&P 500 averaged 2.2 percent that month, the most for any August since 1932, Bloomberg data show.

Equity mutual funds focused on large companies had their worst year since 1997, with only 17 percent beating the S&P 500 in 2011, data from Chicago-based Morningstar Inc. show.

Losing Money
Hedge funds, largely unregulated investment pools that aim to make money whether markets rise or fall, lost 4.9 percent last year, according to the Bloomberg aggregate hedge-fund index. Managers have cut leverage, or money borrowed for trading, to 2.54 times this month, suggesting reduced activities, according to a Jan. 17 note by Credit Suisse Group AG. Leverage peaked in 2011 at above 2.7 in April, the firm estimates.

Volume is decreasing even as data suggest the American economy is recovering. Sales of previously owned U.S. homes rose in December to the highest level since January 2011 and claims for U.S. jobless benefits fell to the lowest level in almost four years, reports showed last week. The economy is projected to grow 2.3 percent this year, according to the median forecasts from 72 economists surveyed by Bloomberg.

Decreasing volume threatens to curb the rally that has added more than $700 billion to U.S. share values this year, according to Brian Jacobsen of Wells Fargo Advantage Funds. The S&P 500 has jumped 20 percent from a 2011 low in October.

Rational Decision
“Traders have rationally been sitting on their hands knowing there are some pretty big events coming up that could pull out the rug from underneath this rally,” Jacobsen, who helps oversee about $219 billion as chief portfolio strategist at Wells Fargo in Menomonee Falls, Wisconsin, said in a Jan. 20 telephone interview. “With the low volume, it doesn’t give me a lot of conviction.”

The slowdown has been worsened by cuts at banks that are under regulatory pressure to reduce costs and curb risky trading in the wake of Lehman Brothers Holdings Inc.’s 2008 bankruptcy, Jay Lefkowicz, a strategist at Concept Capital Markets LLC in New York, said in a Jan. 19 phone interview.

Morgan Stanley, owner of the world’s largest brokerage, said last month it plans to cut about 1,600 jobs. New York-based WJB Capital Group Inc., with 100 employees, is shutting its brokerage operation.

“You are taking players out of the game,” Lefkowicz said.

Saturday, January 21, 2012

World economy and investment outlook

Published January 21, 2012


THE latest rating downgrades to various countries in Europe and its bailout fund itself are a reminder the European crisis is continuing. However, the downgrades tell us nothing new - indeed European shares actually rallied after the news. Moreover, I was determined after writing endlessly about Europe last year that my first note this year would not be on Europe.

In fact, this note takes a different tack to normal Oliver's Insights. Having just gone through a time of lists for Christmas presents and New Year resolutions, I thought it would be useful to provide a summary of key views on the global economy and investment outlook in simple point form, both from a 2012 and a medium-term perspective. In other words, a list of lists. So here goes.

Key themes for 2012

Fiscal austerity and deleveraging in Europe and the US.

Monetary reflation with quantitative easing in Europe, the US, the UK and Japan, and rate cuts in the emerging world and Australia.

The emerging world to again account for most global growth.

Global growth of 3 per cent, 1 per cent in advanced countries, 5 per cent in emerging countries and 3 per cent growth in Australia.

Falling inflation and price deflation in some areas, thanks to plenty of spare capacity.

A volatile first few months in markets on continuing European woes, but then improving market conditions and returns as markets start to anticipate the next economic upswing helped by attractive valuations and easy monetary conditions.

Key risks for 2012

Europe fails to reflate sufficiently or in time, resulting in a deep recession and possible break-up of the euro.

The US fails to extend payroll tax cuts and expanded unemployment benefits.

China eases too late to prevent a property crash and hard landing in growth.

Tension regarding Iran leads to a growth-threatening surge in oil prices.

Four (or five) key indicators to watch

The spread to German bond yields for Italy, Spain and France - a further narrowing would be a good sign.

Chinese money supply growth - it has recently bounced off a decade low, but should improve if policymakers continue to ease.

The US ISM manufacturing conditions index as turn-downs in mid-2010 and mid-2011 both inspired false 'double dip' alarms.

The A$ is a good indicator of global growth - if it stays up things are okay. So far so good.

... and Dec 21 when the Mayan calendar apparently ends, although as far as disaster movies go, 2012 was rubbish compared to Towering Inferno!

Five reasons why the emerging world is in reasonably good shape

Low public and private debt levels.

Low per capita income levels = huge potential for further catch-up in living standards and hence urbanisation and industrialisation.

Inflation is falling, clearing the way for more monetary easing.

The monetary transmission mechanism still works.

Generally sensible economic management.

Seven reasons why if the world does go into recession it would be unlikely in Australia

Long way to go to zero for interest rates. Roughly 85 per cent of mortgages are variable-rate and hence households get a huge boost to spending power as rates fall.

Low public debt by global standards means scope for fiscal stimulus if necessary.

The A$ will fall if need be, providing a buffer.

Corporates have low gearing and are cashed up.

Households have high savings rates which provide a buffer.

The mining investment boom provides resilience.

Our trading partners are in reasonable shape.

Four reasons why the Australian dollar is likely to remain strong on a medium-term view

Commodity prices are likely to remain in a long-term uptrend on the back of emerging world industrialisation.

Australian interest rates are likely to remain well above US, EU and Japanese interest rates.

Quantitative easing will increase the supply of US dollars, euros, pounds and yen relative to the supply of Australian dollars.

Safe haven buying of Australian bonds as it's one of only a few countries with a 'stable' AAA credit rating. The others are Denmark, Norway, Sweden, Switzerland, UK, Canada, Liechtenstein, Singapore, Hong Kong and Germany (for now anyway).

Why medium-term (5-10 year) economic growth in advanced countries and investment returns will be constrained and volatile

Private-sector deleveraging in advanced countries has a way to go, which will be a headwind for growth.

Excessive public-sector debt levels in Europe, the US and Japan and ongoing fiscal austerity.

Extreme monetary policy settings, eg, zero interest rates and quantitative easing, can inspire extreme market volatility when changes occur.

The easy gains from 1980s and 1990s disinflation are over, and deflation or rising inflation would be bad for shares.

Social unrest is on the rise and politics is becoming more polarised.

The policy pendulum is swinging back to the left with less growth friendly policies (tax the rich, re-regulate markets, trade barriers, etc) after the economic rationalism of Thatcher, Reagan and Hawke/Keating.

Greater reliance for global growth on emerging countries which are usually more volatile.

What should investors consider in the current environment (partly inspired by my friend Dr Don Stammer)?

The cycle lives on - history tells us that times of gloom will eventually give way to boom, and vice versa. There is no such thing as a new era, new paradigm or new whatever. As the Bible tells us, there is nothing new under the sun.

The power of compound interest - regular investing of small amounts can compound to a big amount over 20 year-plus timeframes.

Buy low and sell high - starting point valuations matter. And the lower valuations thrown up by market weakness over recent years provide opportunities for far-sighted investors.

Focus on investments providing decent and sustainable cash flows - dividends, distributions, rents - as they are a good guide to future returns, a good buffer in volatile times and provide good income.

Invest for the long term but for those with a short-term horizon, such as those close to or in retirement, consider investment strategies targeting desired investment outcomes whether in the form of a targeted return or cash flow.

Avoid the crowd - just as the crowd got it wrong piling into the 'Japanese miracle' in 1989 (with Japanese shares falling for the next two decades), the 'Asian miracle' of the mid-1990s (which turned into the Asian crisis of 1997-98), the 'tech boom' of the late 1990s (which turned into the tech wreck of 2000-03), the credit and US housing booms of mid last decade (which turned into the GFC), it might also find that the dash for cash of the last few years will ultimately prove to be wrong over the next five years or so.

The writer is head of Investment Strategy and chief economist at AMP Capital Investors

Getting paid while you wait

Buying high dividend paying stocks trading at deep discounts to
their asset values can be a viable strategy

Getting paid while you wait

Show me the Money
21 Jan 2012
By Teh Hooi Ling
Senior correspondent

IN a chat with Benny Ong, founding director of Life Planning
Associates, in October last year, he shared his strategy of buying
high dividend paying stocks which are trading at deep discounts to
their asset values. It’s a strategy that pays you while you wait, so
to speak.

In October last year, the market was still very much weighed
down by uncertainties over the eurozone crisis. So Mr Ong’s
message was: there continues to be opportunities out there
despite the very poor market sentiment. “You can buy now if you
can hold. I’m not too concerned about the crisis in Europe and the
US,” he said. “The worries in China will not last long.”

Companies with under-appreciated value will sooner or later be
recognised, either via privatisation or when the market turns
around. The risk in the case of a privatisation, of course, is that
investors might continue to be slighted with a low offer price.

That risk notwithstanding, investors should take note of a few
things for this strategy to work. First, ascertain that the assets of
the company have been valued fairly and realistically. Second, it is
good if these deep value stocks are also paying decent dividends.

“Three-quarters of such companies you have in your portfolio must
pay you dividends. You don’t know when they are going to be
privatised,” said Mr Ong.

Third, make sure that these companies have little borrowings.
Since then, I’ve been wondering what kind of performance an
investor would get if he or she were to pick a basket of stocks
with high dividend yields, but low price-to-book ratios.

So this week, I decided to test out the strategy. I downloaded the
list of stocks trading on Singapore Exchange every year on March
31, starting from 1990.

Included in the data is the dividend yield of each stock, its price-
to-book ratio (that is its share price relative to the historical cost
after depreciation of its assets), and its last traded stock price of
the day.

I ranked the stocks based on the ratio of their dividend yield over
the price-to-book (PTB) ratio. So if the dividend yield is 4 per cent
and the PTB is 2 times, then the number I get is 2.

Stocks are ranked based on that number, from the highest to the
lowest. They are then divided into 10 groups of equal number of
stocks. Decile 1 would be stocks with the lowest dividend yield but
the highest PTB ratios, and Decile 10 are stocks with the highest
dividend yield, and the lowest PTB. No screening was done on the
quality of the assets and the debt levels of these companies.

So each year, there will be 10 groups of stocks. I then tracked the
returns of the stocks in these 10 groups a year later. I used the
median price appreciation to represent the return of that group. I
also added in the median dividend yield to calculate the total return
for that group of stocks.

Each year, the groups of stocks will be
different depending on their dividend yield and PTB as at March
31. Let’s assume that 10 investors started 1990 with $100.
Investor 1 will always invest in Decile 1 portfolio, and Investor 10
in Decile 10.

At the end of the first year, each investor’s portfolio would be the
median return of the stocks in each decile, plus the median

The amount of money at the end of the first year will then be
reinvested into the second groups of stocks in the various deciles
in the second year.

The process goes on for 22 years, from 1990 till Jan 17, 2012.

How did the strategy do?

As you can see from Chart 1, buying stocks with the highest
dividend yield, but lowest PTB ratio appears to be a winning
strategy. Following that strategy over 22 years would turn $100
into $1,575. That’s a compounded annual return of 13.3 per cent a
year. This group of stocks are relatively resilient during downturns,
supported by the dividend yields.

In comparison, stocks with the low dividends and high PTB fared
miserably. The $100 invested in Decile 1 would have diminished to
just $16. That’s a decline of 7.9 per cent a year. Meanwhile, the
Straits Times Index’s capital appreciation over that period was 3
per cent a year. That figure excludes dividends.

Chart 2 shows the performance of the Decile 10 portfolio vis-a-vis
the movement of Straits Times Index. As you can see, the declines
in the Decile 10 portfolios during bear markets were not as sharp
as that of the index.

Finally, Chart 3 shows the compounded annual returns of the
various deciles over the 22 year period. Other than Deciles 8, 9
and 10, the others are all money losing propositions.

All the above calculations do not take into consideration
transaction costs. But it does show that in general, buying into
stocks which pay high dividends but are priced cheaply relative to
their assets is a viable strategy.

Readers who are interested in knowing the list of Singapore
stocks which fit these criteria can now find them in the Monday
issue of The Business Times.

In the coming columns, I will generate the returns for baskets of
stocks based purely on say, their PTB, or dividend yield, or price-
earnings ratio. We will then see which strategy works the best.

Until then, I’d like to wish all readers a healthy and prosperous
year of the Dragon.

The writer is a CFA charterholder


Wednesday, January 18, 2012

Retirement: how much is enough?

Published January 18, 2012


Funding your retirement years comfortably is a trade-off between playing it safe, taking risks and spending prudently


AT A FAMILY function, my 60-year-old cousin Peter asked me for my views on retirement planning. He said that over the last 35 years he has worked hard, consistently saved and prudently invested his money. When he retires in two years' time, this should provide him with a nest egg of about $500,000. As I listened to him, it seemed that he had secured his financial future. But he kept asking: 'Is it really enough?'

At this age, many would expect to have a significant retirement nest egg. If they don't, they had better do something about it now.

In Singapore, our official statistics show that there are more than 300,000 individuals aged between 50 and 54 who are due to retire in 10 to 15 years' time. As a financial adviser, I often discuss this subject with my clients but often this issue is not treated as a top priority. Understandably, there are other priorities, such as children's education and mortgage repayments or other immediate needs, that take precedence over retirement planning.

Given the current economic volatility, the outlook for those planning their retirement is very cloudy. Over the last two years, we have seen the cost of living here increasing yearly, making retirement more expensive and resulting in many more Singaporeans having to put off retirement for a few more years. With higher longevity and people not saving enough, the working population of those aged 60 and over will inevitably continue to rise.

In Peter's case, he and his wife are healthy and they are likely to have a long life ahead of them. So it would be a mistake to concentrate solely on what's happening now or even on what might happen months from now. Rather, they should focus on coming up with a spending and preservation plan that can assure them of enough money to live comfortably for the next 25-30 years, if not longer.

Hence, funding your retirement years is a trade-off between playing it safe, taking risks and spending prudently.

With the nest egg that Peter has accumulated, he can create a cash flow, and that is the most important consideration during his retirement. At this point, he has to set a reasonable withdrawal rate that will give him the spending cash he needs but won't deplete his nest egg too soon. Peter asked: 'How much can I safely withdraw from my retirement fund every year?' It is obvious that a miscalculation could result in an involuntary return to the workforce or having insufficient funds for retirement.

To help Peter understand how much he can withdraw, I produced a table to show the number of years his money will last.

The table shows withdrawal rates ranging from 4 per cent to 13 per cent and annual growth rate of investment from 3 per cent to 12 per cent, which resembles a 100 per cent stocks to a 100 per cent bonds portfolio.

It also shows how many years a sum will last at various withdrawal rates and various rates of return. If the withdrawal rate and the rate of return are the same, the principal will not change. For example, when $100,000 earns 8 per cent per annum and 8 per cent is drawn, the principal stays the same. This is another strategy by which a retiree can create an income stream. So if Peter invests $500,000 in a diversified investment that can give him 5 per cent returns, he can make $25,000 per year of withdrawals without affecting his principal.

However, if $100,000 earns 4 per cent per annum ($4,000) and 8 per cent ($8,000) is withdrawn annually, the $8,000 annual income will continue for 17 years before the principal is gone.

It is important to understand that the rate of return and the withdrawal rate determine how many years the principal will last. There are no guarantees, of course, but generally the lower your withdrawal rate, the better the chances that your money will last throughout your retirement. But when the earnings are less than the amount that is taken out, you are dipping into your principal, so your money will not last for a long time.

If you start withdrawing a small amount from your portfolio, and adjust it for inflation, the chances are that your money will last longer whether you invest relatively conservatively or aggressively.

So to enjoy a decent retirement, you need to be responsible for your old age by starting to save adequately and invest prudently for your retirement as early as possible. I also believe that it is just as important that people take financial advice well in advance of their anticipated retirement. We have to carefully assess their investment portfolios, as this could make all the difference in the long run.

Singaporeans are intending to retire later, and those planning to stop working between the ages of 60 and 65 will double in the future. With increased longevity comes increased risk of potentially outliving one's retirement assets.

Another point to note is the unexpected 'life events' that may happen. No one can predict what lies ahead in their retirement journey. While we can determine when we want to retire and exercise to keep in good health, there are no certainties in life. Planning for one's retirement years must include taking into consideration life events that have the potential to disrupt your retirement years.

Hence, certain protection products - like medical, hospitalisation and long-term care insurance - are still needed during one's retirement to protect against the potentially devastating effects of unexpected life events like death and chronic illness. We need to have a financial strategy that is flexible enough to adapt to a person's changing needs and circumstances. Retirement can truly be great, but only if you carefully manage your money throughout your golden years.

Note: The strategy described in this article may not be suitable for all readers. If you are in doubt, consult a financial adviser.

The writer is chief executive officer of Grandtag Financial Consultancy (Singapore) Pte Ltd. He can be reached at

Asia big opportunity, but risks persist

Published January 18, 2012

Asia isn't out of the woods yet but its attractive medium-term growth outlook remains unchanged, says ASHISH GOYAL

LOOKING into 2012, I get a distinct sense of déjà vu. At this time last year, for example, I was advising investors to brace themselves for volatility. Today, my views are largely the same. With hand on heart, I admit that Asia isn't out of the woods yet. I foresee more volatility in 2012. But equally, I see such value that my main focus now is on how best to 'play' this. So I repeat my advice to look beyond the turmoil and focus on Asia's three to five-year outlook; the opportunities are too good to miss.

Asia's attractive medium-term growth outlook, for example, remains unchanged. Asian growth is forecast to be some 3 per cent higher than developed markets, despite the headwinds blowing from Europe and elsewhere. Asia's twin domestic growth engines of investment (think urbanisation and infrastructure) and consumption (think autos, household electronics, travel and financial services) should continue to do well.

I am encouraged to stick with this view, because on the whole 2011 unfolded within the range of outcomes I had expected.

Growth was considerably superior (and pretty commendable in absolute terms) when compared with global growth, despite the difficult environment and spate of natural and man-made disasters.

Asian banks demonstrated, again, that they do not share the problems of either US or European banks. They do not have complex and toxic credit exposures. They are well-capitalised. They are (mostly) conservatively run and function as healthy, profit-making entities.

Asian consumers remained strong. There was some slowdown, given 2009's and 2010's strong surge, but growth continues, underpinned by strong savings rates.

Corporate Asian competitiveness continues to strengthen. Capital management continues to improve. Scale and sophistication continue to improve. And leverage continues to decline.

I remember, for example, when Hyundai Motor group had a low share of the US car market and was discounting heavily against the Toyotas and the Hondas. How times have changed. Hyundai today has a much bigger share of the US market; its cars are well-accepted (as evident in the residual value of vehicles post three years of use). Hyundai also offers smaller discounts on its cars than do Toyota and Honda. Similarly, Samsung now outsells Apple in smartphones. The story goes on and on as you look around Asia.

Nevertheless, there have been changes.

Asian central banks, for example, judiciously tightened monetary policy throughout 2011 in the face of rising inflation and cyclical pressures. As growth has slowed and inflationary pressures have waned, some have started reversing monetary policy, a trend that will likely continue into 2012. (Unlike their Western counterparts, central banks in India, China, Australia and elsewhere in Asia possess considerable monetary firepower should economic growth slow).

Asian currencies weakened to varying degrees in 2011. To some extent, this surprised markets. This strengthening is likely to continue for those economies that are managing their fiscal affairs well and will be more volatile for those that have fiscal and trade surplus challenges. Take India, for instance.

Probably the most significant change is that Asian equity valuations are attractive once again following 2011's pull-back. Last year, I was concerned that the profit forecasts were too aggressive and anticipated a fall; this indeed occurred with forecasts now being at levels I consider more realistic. We are in the final leg of this correction, which I think should end in the next six months. As a result, the conditions for strong equity returns - a positive earnings outlook and a good starting valuation - are falling into place.

No discussion on Asia should end without talking about the risks. Policy error is always a risk in Asia. China remains a market with many policy controls; missteps could be costly. India has already made a few mistakes and is paying the price in terms of elevated wage inflation and continued infrastructure shortages. Korea and Taiwan tend to be more export-oriented; their dependence on Europe and the United States remains high even as their export destinations are moving from developed to developing markets.

Pulling my thoughts together, how am I approaching the markets this year? I strongly believe that there are very good returns to be made for the patient medium-term investor in Asia.

With this in mind, my advice to investors with an appetite for volatility (and aware of the risks) is that they could add to their Asian equity positions during periods of panic when the valuation case becomes even stronger. That is what I have been doing with my funds.

But, apart from looking for value, I am also focusing on income. In today's volatile markets where value is apparent, an equity income strategy looks attractive. For investors who have a lower risk tolerance, a strategy of focusing on dividend-paying stocks may be appropriate. This is a proven investment strategy with an attractive risk-return profile and modestly lower levels of risk.

In conclusion, I reiterate the same point that I made at this time last year: Asia presents a large opportunity, but not without its risks. Plan for the future. Pick up value when it is there. Do not chase it when it is not.

The writer is chief investment officer, Asian equities, Prudential Asset Management (Singapore)

Saturday, January 14, 2012

Making the best of leveraged investing

Published January 14, 2012

A good trader minimises mistakes and if he does make a mistake, acts to minimise the damage by exiting from the situation quickly.


OPENING an account with a private bank can be a glamorous and exhilarating event. With a prestigiously branded partner to provide expert investment advice and solutions, investors feel confident, sophisticated and empowered to grow their wealth. Armed with this false sense of security, some investors welcome the idea of using leverage for exponential returns as a wealth creation strategy. They are comfortable with using leverage as it is akin to buying a property or running a business, which could have brought them much wealth in the past.

However, leveraged investing on securities, currencies and derivatives is a different business. Investors face market risks and other variables beyond their control. Without proper risk management and investment experience, leverage can lead a high-net-worth individual to financial ruin. In the accompanying table, an investor plans to invest in a basket of shares valued at $3.4 million, with a loan. The bank being prudent, determines that the portfolio has maximum lending ratio of 70 per cent. In other words, the maximum loan value it can provide would be 70 per cent of the portfolio's market value while the investor has to fund the other 30 per cent himself. The investor was prudent and took a smaller loan of 50 per cent and funded the rest with his cash.

Therefore, the portfolio was acquired with $1.7 million in cash and $1.7 million in borrowings with the portfolio itself as collateral.

When the market value of the unleveraged version of the portfolio rises by 25 per cent, the leveraged version would have a gain of 50 per cent on the investor's initial cash outlay.

Attractive as the scheme may sound, leverage cuts both ways. A 25 per cent fall in the unleveraged version would mean a huge 50 per cent loss for the leveraged investor.

The maximum loan value funded by the bank is limited by a lending ratio unique to the investment concerned. In this example, the new maximum lending value (NMLV) of 70 per cent on the portfolio after it has depreciated by 25 per cent is $1,785,000. (Lending ratio of 70 per cent X Portfolio Value). As long as the amount borrowed, at $1,700,000, is less than the new maximum lending value, a margin call would be avoided. The investor would still have a chance to recoup his losses.

If losses widen sharply to 40 per cent, the market value of the leveraged portfolio would fall to $2.04 million and its NMLV of 70 per cent would be reduced to $1,428,000. Since the existing $1.7 million loan has exceeded the NMLV, the bank would need to exercise a 'margin call' and the investor would need to pay $272,000 to reduce the loan to keep it within the NMLV rule.

If the investor is unable or chooses not to meet the margin call within the agreed time frame, part of his portfolio will be liquidated to pay for the outstanding loan.

By then, the investor would have lost 80 per cent and without the initial leveraged facility, it would be difficult to recoup the losses. On the other hand, the non-leveraged portfolio of shares has a good chance of recovering its value over time.

In a worst-case scenario, if a systemic tail-risk occurs, causing the leveraged portfolio to fall 60 per cent, the investor would have lost $2.04 million and now owes the bank $340,000!

Investors must always avoid a margin call and the best way is to avoid aggressive leverage. Between 2005 and 2007, it was easy for investors to profit from markets and they may have attributed their success to their superior investment ability. Those who used leverage could have been seduced to take up bigger positions as judgment gets clouded.

It is likely that they failed to recognise an overvalued market and a stock market bubble set to explode. Moreover, it only takes an unforeseen and rare outlier event to hit a highly leveraged portfolio badly enough to wipe out an account. Some investors end up in a sad state as they try hard to recoup earlier losses, only to repeat the same mistakes until they end up broke.

This is a classic case of the fate of gamblers, which an investor may refuse to admit. When systemic risks and market volatility increase, leverage should be reduced or used very carefully. If leveraged is kept low, margin calls are kept at bay and investors would be able to survive a few bad investment decisions. Investors have to carefully monitor their own leveraged positions to avoid margin calls. In a volatile market, loan value ratios can change widely. Leveraged investing is thus a risky proposition if not managed well. Investors can learn from investment legend Jesse Livermore who used leverage to amass a fortune in 1907 and famously made US$100 million (equivalent to US$1.26 billion) in 1929. His advice reflects the experience of making millions to becoming a bankrupt not once but a few times, and his views remain relevant today.

Firstly, always minimise mistakes. According to Livermore: 'Being wrong is acceptable; staying wrong is unacceptable.' A good trader minimises mistakes and, if he does make a mistake, acts to minimise the damage by exiting from the situation quickly. This means having a written plan for each trade entered, the most important element of which is the stop-loss.

For many investors, it is often easy to exit a profitable trade early but difficult to cut losses. People dislike being wrong and pride is one of the reasons. An investor holding on to a losing trade may cite the excuse that he is a long-term investor and not a trader or speculator, only to suffer the consequences. It is important to remain humble and admit to mistakes early.

However, most investors have a loss-adverse nature which makes them unable to adopt and execute a stop-loss rule early. A losing trade is usually held onto until the loss becomes unbearable or when an investor gets a margin call from the lender and is forced to close a position. Depending on the level of leverage used, a small 5 per cent loss can be swiftly magnified to 70 per cent or more. From a mathematical perspective, the bigger the loss, the harder it will be to recover. Therefore, mistakes must be acknowledged and stopped early.

Secondly, avoid the folly of trying to find a good reason to sell a leveraged investment. Answers take time to come and it would usually be too late to act profitably.

Livermore feels that 'the only reason an investor or speculator should ever want to have pointed out to him is the action of the market itself'. Investors are encouraged to use technical analysis to make trading decisions rather than rely on assumed market fundamentals.

Thirdly, it is important that an investor invest with leverage only when the risk-rewards ratio is great. As leveraged losses can be heavy, investors need to be patient and wait for potential returns that are large enough to make business sense and to cover interest costs.

Next, stick to liquid investments that you understand. In 2008, individuals and a few institutional investors especially in Hong Kong, were sold financial derivative products such as 'accumulator' notes which were leveraged. At the worst of the 2008 crisis, investors had difficulty unwinding their positions and suffered huge losses. One can appreciate how Livermore was fully aware of the risks involved in leverage investing when he set aside money in a trust to protect his family from his own trading activities.

Despite all the rules and dedication, he suffered from depression and lost all he had in 1934. In 1940, he published a book, How To Trade Stocks, where he described his experiences and techniques in trading in the stock and commodity markets. Shortly after, he shot himself in the head in the cloakroom of the Sherry Netherland Hotel in Manhattan.

The writer is vice-president & deputy investment head at GYC Financial Advisory

Wednesday, January 11, 2012

Highrise boom precedes economic downturn

Barclay's Andrew Lawrence
TNN | Jan 12, 2012,

WASHINGTON: Construction of great highrises precedes major economic downturns. A property analyst with Barclay's Capital has contended that a boom in skyscraper construction foreshadows economic bust, and warned that China and India are in for a reality - and realty - check, given how they are reaching for the clouds.

Skyscrapers are defined as buildings over 240 meters tall. By that token, China is home to more than half of the world's skyscrapers currently under construction (75 out of around 124). India is a distant second with 14 in the works, but Mumbai will be home to the second tallest structure, 720-meter India Tower, which when completed will be overshadowed only by Dubai's 828-meter Burj Khalifa, the world's tallest building, and will be ahead of the 632-meter Shanghai Tower, according to the Council on Tall Buildings and Urban Habitat.

But these are not causes for celebration, cautions Barclay's Andrew Lawrence. Having studied the link between highrises and downturns , Lawrence warns in his annual skyscraper index report released this week that China and India may be in for a bust. Over the past 140 years completion of skyscrapers has coincided with periods of economic turmoil such as the Great Depression (which followed construction of New York City's Empire State Building and Chrysler Building (in the 1930s), the economic crisis of 1974 following the completion of World Trade Center complex and Chicago's Sears Towers), and the Asian financial contagion (which came after the Kuala Lumpur's Petronas Towers).

"If history proves to be right, this building boom could simply be a reflection of a misallocation of capital, which may result in an economic correction in the next five years," Lawrence wrote in the report, noting that India was playing "catch-up " with China.

Tuesday, January 10, 2012

Why young American savers are avoiding stocks

By Chris Taylor
Tue Jan 10, 2012 11:11am EST

(Reuters) - Ask any money manager about people who don't invest in stocks, and the answer is probably a little condescending. They just don't understand the market; they're not thinking about the long-term; they're unsophisticated, preferring to stick their money under a mattress.

But Diane Casaretti is no rube. She's a successful marketing rep in Stamford, Connecticut, and in her career has worked with many Wall Street banks and brokerage houses. But she's made a conscious, rational decision: Stocks just aren't for her.

"My parents always invested their money in the stock market, and all my friends' families did too," says the 26-year-old. "When the whole thing came crashing down with the financial crisis, that's when I said, 'No way am I comfortable with this.' To me it just doesn't seem logical, that you could save all that money and then potentially lose it all down the road."

It's a refrain that you're hearing more and more these days - and not from risk-averse seniors, as you might expect, but from those just starting out in their working and investing lives. Even with decades to go until retirement, and plenty of time to rebound from market collapses, many young Americans don't trust the stock market with their savings.

Take a recent Investing Sentiment Survey by Boston-based money managers MFS Investment Management. The poll discovered that 29 percent of people say they will never be comfortable investing in stocks - a shocking number in and of itself. But among Generation Y investors under 31, that number spikes to 52 percent.

If that sentiment holds, it means that a large chunk of an entire generation of investors could be shunning equities for years to come. And that's not exactly a tailwind for the Dow. "Those numbers are surprising to us, but you can't really blame them," says William Finnegan, MFS' senior managing director. "Younger folks are essentially saying that the market is a very scary place - and as a result, a lot of their money is just being held in cash."

Like Diane Casaretti, whose savings are sitting in a bank account earning around 1 percent. She's so freaked out by the wild market ride of the last few years that she never even set up her 401(k), with its promise of a company match.

That jibes with the MFS survey, which asked investors which asset classes they would deem an "excellent or very good place to invest." The only area on the rise: Safe harbors like bank CDs, savings accounts and money markets. As for stocks, from February to October of last year, that number was sliced in half: Only 18 percent of Americans now see equities as a very good place to put their money.

Judging from fund flows, that dire sentiment is having very real effects on asset allocation. Retail investors pulled almost $37 billion from stock funds in 2010, and more than $101 billion over the first 11 months of 2011, according to the Investment Company Institute.

In such numbers we may be witnessing the deep psychological damage the recession has wrought, MFS' Finnegan notes. "It's much like during the Great Depression, when the people who came through that became very conservative," he says. "It looks as though the new wave of younger investors is very conservative, and only comfortable with bank products. I don't think that changes in the short-term."

Of course, retirement prospects for Generation Y don't look very glamorous when their savings aren't even keeping up with inflation. Keeping savings in cash at a young age isn't going to help fund luxurious retirements. But given the power of compounding, an early aversion to stocks could prove especially harmful. According to data from Baltimore-based fund shop T. Rowe Price, if one saver puts away $500 a month from ages 21 to 30 and enjoys a 7 percent annual return, she will end up with almost a million bucks at age 65. That handily beats another saver who waits for that level of return until age 31 yet contributes all the way to 65, despite putting up $150,000 more than the first investor.

There is one bright spot for equities: The 401(k) plan. Despite the profound gloominess expressed in sentiment surveys, mutual-fund giant Vanguard Group notes that investors in its retirement accounts actually boosted their stock allocation in 2010, to 70 percent - up 2 percent over the previous year. That's in part thanks to industry trends like auto-enrollment, designed to hike plan participation rates. New investors are sometimes automatically slotted into target-date funds, which feature high doses of equities for younger investors.

At some point, younger investors may get past the trauma associated with the Great Recession, and come back to stocks as their best long-term bet for portfolio appreciation. For now, though, the financial industry is going to have to deal with legions of skittish investors like Ryan Holiday. The 24-year-old marketing director for clothier American Apparel is among those who have washed their hands of equities.

"My parents' portfolio got demolished with the financial crisis, and I just don't want to roll the dice with the money I've saved up," he says. "Down the road, if the volatility goes away and the stock market becomes a different place, it might be a different discussion. But right now, it all seems so shaky and sketchy. I just can't see myself jumping in." - Reuters

Monday, January 9, 2012

How cheap is the Singapore market?

Published January 9, 2012


HOW cheap is the Singapore market now?

Based on equity risk premium (ERP) - a measure of the expected return of an equity investor over and above the risk free rate - the market is at its cheapest since 1999, with the exception of the period during the global financial crisis in 2008/9 (See chart 1).

The ERP is calculated by using the earnings yield (the inverse of price-earnings ratio) minus the one-year interbank rate as a proxy for ERP. The higher the ERP, the higher the expected return for holding equities.

However, if we take the past 10 years' average PE to calculate the ERP, then we are at our absolute cheapest since 1999 (Chart 1).

In terms of forecast PE for next year, we are in mid-range. However, if we look at historical PE, there appears to be significant value in the market (Chart 2). Similarly when it comes to dividend yield and price-to-book ratios (Chart 3).

So overall, the various metrics suggest that we should be putting some new money to work in the market, but not to the extent of using up all of one's cash. It is still advisable keep some powder dry. In Jeremy Grantham, one of Wall Street's shrewdest strategist's words: 'Responding to the ebbs and flows of major cycles and saving your big bets for the outlying extremes is, in my opinion, easily the best way for a large pool of money to add value and reduce risk.'

Meanwhile, I've also generated lists of stocks with the highest dividend yield, the lowest price-earnings ratios, the lowest price-to-book ratios and the highest dividend coupled with the lowest price-to-book ratios.

These are metrics that usually indicate value in a stock. I've limited the lists to stocks with market capitalisation of $50 million and above. Data are from Bloomberg.

Friday, January 6, 2012

Extract from Report on National Strategy for Palliative Care

Coordinated by the Lien Centre for Palliative Care

Besides deaths due to infection, acute coronary events or injuries, most
people will experience a period of progressive disease and disability before death. More than half will have some form of chronic illness before death. This period may extend from days to months to years before death, based on the trajectory of the illness.

Three illness trajectories have been identified:

(a) Progressive cancer trajectory
Patients with progressive cancer have a gradual decline in physical
ability over weeks, months or sometimes years. The patient’s physical
ability declines rapidly during the final days or weeks before death when
the disease overwhelms the patient’s functional reserves.

Despite longstanding WHO recommendations (since 1990) to involve
palliative care from cancer diagnosis, specialist palliative services
traditionally catered to this group of patients only during the last days or
weeks of life. However, as mentioned previously, there is a move
towards initiating palliative care further upstream in the trajectory to
interface with disease-modifying cancer treatment.

(b) Chronic organ failure trajectory
Patients with organ failure, especially heart and lung failure, have a
gradual decline in physical function over many months or years, with
occasional episodes of exacerbation. During these acute exacerbations,
the patient experiences worsening of the symptoms and is often
admitted to the hospital. Each episode may be severe and may result in
death, although the patient often survives many episodes. The timing of
death is often unpredictable and sudden.

Specific needs for patients in this group include empowering patients
and families on how to recognise symptoms and prevent the worsening
of symptoms through the effective use of medications. Patients may
require home oxygen and appropriate home adaptations. Home care
teams can provide treatment at home to reduce the need for hospital

(c) Dementia and frailty trajectory
Patients in this group start with a low baseline of cognitive and physical
disability due to decreased cognitive ability (such as Alzheimer’s disease
or other forms of dementia), or frailty as a result of decreased reserves in
multiple organ systems. Patients may survive many years and may
succumb to an acute event, such as pneumonia.

Patients in this group require the caregivers at home to meet basic
needs of patients. In the absence of caregivers, these patients will
require quality care in long-term care facilities.


Thursday, January 5, 2012

Greek PM Says Country Faces Risk Of Disorderly Default In March

ATHENS (Dow Jones)--Greece faces the risk of a disorderly default in March if it doesn't complete negotiations for the country's second bailout starting later this month, Prime Minister Lucas Papademos said Wednesday.

In a copy of his comments made in meetings with employer and employee groups, Papademos said the coming weeks and months are "exceptionally crucial" for the country as Greece needs to secure funding from European peers and the International Monetary Fund. Among the financial pressures faced by the heavily indebted government are EUR14.5 billion of bonds expiring in March.

"As a result of our actions and decisions in coming weeks, everything will be decided," he said.

His comments are in line with stark warnings from other government officials stressing the gravity of talks with representatives from the European Commission, International Monetary Fund and European Central Bank on Greece's second bailout worth EUR130 billion.

Details of the deal, which comes after a first EUR110 billion bailout in May 2010, remain unsettled, particularly a provision calling on creditor banks to write down a significant portion of their Greek government bond holdings.

Earlier, labor union leaders cited the prime minister as saying that the Greek government appears to be nearing a deal with banks on a debt plan and developments are expected in the next 15 days.

Until this week, Greek officials have avoided raising the possibility of Greece leaving the euro zone and returning to its own currency, a process that could cripple the Greek economy and its financial system.

However, the stakes are rising as Greece pushes the sensitive issue of reducing private-sector salaries, under pressure from creditors to quicken reforms.

Private-sector labor union GSEE said the government has instructed them to start discussions with employers on ways to reduce costs.

GSEE General Secretary Nikolaos Kioutsikos said the talks will run until the start of February and cover lowering the minimum salary and reducing annual pay by up two months.

"As Papademos told us, there are no barriers to these cuts," he told reporters.

GSEE rejects any talk of pay cuts and will propose ways to lower other costs and protect jobs.

The IMF has been pressing Greece to move more aggressively in liberalizing its labor market and opening up private-sector professions that are now protected by a web of restrictions that curtail competitiveness. According to the Prime Minister, significant changes are needed to help secure a positive review from creditors and Greece can't hope for a sustainable recovery without a boost to competitiveness.

Greece's cabinet is expected to convene Thursday and will discuss the deregulation of road transport industries affecting trucks and taxis.

Changes are also brewing on the country's political landscape as former Prime Minister George Papandreou announced his intention Wednesday to step down from leading the Socialists and won't be a candidate for prime minister at the country's next elections, according to a party official.

-By Stelios Bouras and Nektaria Stamouli,