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Wednesday, October 31, 2012

US out of 10 most prosperous nations' list

Norway, Denmark, Sweden ranked best for wealth and well-being in Legatum survey; Singapore third in economy sub-index

31 Oct 2012 09:52

 The US fell to 12th position from 10th in the Legatum Institute's annual prosperity index amid increased doubts about the health of its economy and ability of politicians -PHOTO: AFP

[NEW YORK] The United States slid from the world's top 10 prosperous nations' list for the first time in a league table which ranked three Scandinavian nations the best for wealth and well-being.

The US fell to 12th position from 10th in the Legatum Institute's annual prosperity index amid increased doubts about the health of its economy and ability of politicians. Norway, Denmark and Sweden were declared the most prosperous in the index, published in London yesterday.

With the presidential election just a week away, the research group said the standing of the US economy has deteriorated to beneath that of 19 rivals.

"As the US struggles to reclaim the building blocks of the American Dream, now is a good time to consider who is best placed to lead the country back to prosperity and compete with the more agile countries," Jeffrey Gedmin, the Legatum Institute's president and chief executive officer, said in a statement.

The six-year-old Legatum Prosperity Index is a study of wealth and well-being in 142 countries, based on eight categories such as economic strength, education and governance. Covering 96 per cent of the world's population, it is an attempt to broaden measurement of a nation's economic health beyond indicators such as gross domestic product.

The Legatum Institute is the public policy research arm of the Legatum Group, a Dubai-based private investment group founded in 2006 by New Zealand billionaire Christopher Chandler.

The report shows that even amid the worst financial crisis since the Great Depression, global prosperity has increased across all regions in the past four years, although the sense of safety a nd security is decreasing amid tension in the Middle East and fear of crime in Latin America.

Norway and Denmark retained the pole positions they held last year in the overall prosperity measure, while Sweden leapfrogged Australia and New Zealand into third. Canada, Finland, the Netherlands, Switzerland and Ireland rounded out the top 10. The Central African Republic was ranked bottom.

In its sub-indexes, Legatum named Switzerland the strongest economy and home to the best system of governance. Denmark is the most entrepreneurial and New Zealand has the best education, while health is best in Luxembourg and Iceland is the safest. Canadians enjoy the most personal freedom and Norwegians have the greatest social capital.

With President Barack Obama and Republican challenger Mitt Romney tussling for the White House, Legatum said the US economy declined two places from last year to 20th. It found that 89 per cent of Americans believe hard work produces results, up from 88 per cent last year, and the government's approval rate dropped to 39 per cent from 42 per cent.

Plagued by the euro-area debt crisis, 24 out of 33 European nations have witnessed a decline in their economic score since 2009, according to Legatum. On the prosperity scale, Greece recorded the biggest drop in 2012, falling 10 places since 2009 to 49th. Spain held on to 23rd place.

The UK remained 13th, one place ahead of Germany, and Legatum predicted it will overtake the US by 2014 as it scores well for entrepreneurship and governance. Nevertheless, the status of its economy remains a weakness as it slid five places to 26th on that score and job satisfaction is low.

In Asia, Hong Kong, Singapore and Taiwan all ranked in the top 10 for their economies and the top 20 overall. So-called tiger cub economies Vietnam and Indonesia also rose. Indonesia experienced the largest gain in prosperity of any country since 2009, jumping 26 positions to 63rd.

Switzerland, Norway and Singapore topped the economy sub-index, which measures satisfaction with the economy and expectations for it, the efficiency of the financial sector and foundations for growth. In a gauge of entrepreneurship, Denmark ran ahead of Sweden and Finland for the strength of innovation and access to opportunity.

Switzerland also topped the rankings for best government. The highest marks for education went to New Zealand, Australia and Canada.

Luxembourg, the US and Switzerland were graded the best for health treatments and infrastructure as well as preventative care and satisfaction with the service. Iceland, Norway and Finland topped the chart for safety and security; Chad, Congo and Afghanistan ranked the lowest on that index. - Bloomberg

Saturday, October 27, 2012

In search of 'progressive' dividend policies

Institutional investors find a company attractive when its dividends gradually increase as a proportion of profit


DIVIDENDS have emerged as a major investment theme since the financial crisis. But how committed are companies to paying and growing them, even when times are tough?

Simon Bailey, equity portfolio manager at UK-based M&G Investment Management, is on the lookout for Asian companies with a "progressive" dividend policy. This means an explicit commitment to pay out a portion of earnings - and to grow that payout even when profits drop.
There are only a handful of Asian companies, he says, with a track record comparable to the US, where an estimated 94 companies have grown their dividends in each of the past 25 years.
"What we think is very important is dividend growth, rather than just chasing dividends . . .

Dividends are important because paying them disciplines the company. Pretty much every company wants to grow as fast as possible, but often a lot of growth isn't value creative. They invest in projects that are unnecessary and generate no returns, because often they have too much money.
'What we think is very important is dividend growth, rather than just chasing dividends...

Dividends are important because paying them disciplines the company. Pretty much every company wants to grow as fast as possible, but often a lot of growth isn't value creative.'
- Simon Bailey

"We think that committing to pay a portion of income back to shareholders forces (companies) to prioritise which of the projects they should be doing and to choose better projects. So the business generates better returns on capital."

M&G is part of the Prudential plc group. It manages about US$317 billion in assets.
The common thinking is that companies will pay dividends out of residual earnings, or what is left over after all suitable investment projects have been financed. In theory, if companies have good investment opportunities, they will retain more of their earnings for these investments. A "progressive" dividend policy, however, is one where dividends gradually increase as a proportion of profit. This is something that institutional investors find attractive.

Global dividend fund
Persistently low interest rates and market volatility have whetted investor appetite for income as a means to enhance returns and cushion volatility. Historically, dividends have proved to be the main driver of returns over long periods.

A DWS study has found, for instance, that over five years, dividends account for 80 per cent of returns, and this share rises to 90 per cent over longer periods.

M&G runs a global dividend fund which is available to sophisticated investors. The fund aims to deliver a total return while generating a dividend yield in excess of the world average and a rising income stream over time. The fund has US$5.9 billion in assets.

Mr Bailey is spending 4-5 weeks in Asia, visiting companies in Singapore, Hong Kong and Taiwan among various countries, to suss out companies' dividend policies. "We look for companies with reasonable track records. Trying to get them to where they can continue to grow their dividends going forward is the challenge.

"Often companies have a great dividend history in Asia because they are growing earnings consistently. But we're trying to work out what would happen if there was another crisis and they saw earnings decline. Would that involve a cut in dividends? . . . What is encouraging is that companies are moving towards a more progressive dividend policy, but there is a long way to go."
Asian companies in the group's portfolio include Hong Kong's Link Reit and DBS.

Companies with progressive dividend policies include cyclical mining companies such as BHP Billiton and consumer giant Johnson & Johnson. A progressive stance forces companies to take a long- term view of business cycles, and to evaluate projects with a view to the most attractive risk-adjusted return.
Mr Bailey says: "Asian businesses have been growing rapidly and they have good potential to reinvest in the business. Therefore, by returning money to shareholders, you give up some of the potential to grow the business. But if you look at Asian businesses as a whole, return on capital tends to be inferior to the West. I think it's because they chase growth too much.

"We're not saying to return everything to shareholders. We're just saying to find the right balance . . . And the amount or split will depend on the opportunities."

He reckons the payout ratio could sit somewhere between 25 and 75 per cent of earnings.
"For businesses that have really good projects and can generate good returns on capital, then 25 per cent can be paid out and the bulk reinvested in the business. If they pay more than 75 per cent to shareholders, we think they'll struggle to grow the business. We want them to grow the business to pay a growing dividend stream."

Growing income stream
Mr Bailey warns that chasing yields could be dangerous. Investing in companies with progressive dividend policies often means eschewing those with the highest yields, where dividends are also more volatile. "We think you get superior performance by sacrificing a bit of initial yield by not chasing 6 per cent-yielding stocks. But if you can find stocks that yield 4 per cent, but grow their dividends 10 per cent a year, within 4-5 years you'll get a better yield."

There is also potential for capital appreciation as the market warms to a stock where the income stream is growing. "This investment style should hopefully give you a growing income and capital return, whereas a lot of income funds give you income but not growth in the value of investments," says Mr Bailey. He seeks to ascertain that dividends are paid out of underlying earnings and cash flow rather than debt or a share issue.

Asian companies are predictably under-represented in the portfolio because very few have a progressive dividend policy.

Mr Bailey sums up: "I'm just looking to see the options in Asia. How flexible do we need to be to find enough options for a global fund? Maybe in Asia we just have to be more flexible to say - we can't get the same types of dividend track records. But if a business has shown over time good dividend growth with only minor cuts in dividend, maybe that would be good enough for us."

Saturday, October 20, 2012

Financial survival in a time of fiscal peril

Advisers are asking investors to exercise restraint, develop a plan and stick with it over the long term. By Paul Sullivan
 20 Oct 2012 09:08

 BEST STRATEGY'Sit down with yourself or your adviser and figure out what you're trying to accomplish over the rest of your life. Develop a plan with as few moving parts as possible and then stick to that plan,' advises John Taft, head of RBC Wealth Management. - PHOTO: REUTERS

BETWEEN now and the end of the year, investors who are paying even the slightest bit of attention to the news will hear the term "fiscal cliff" repeated so often that it will surely either strike fear into their hearts or numb them to possible risks ahead.

For some, it may sound like the warning they wished they had received ahead of the 2008 crash, or a signal that it is time to retrench. For others who have their money in cash or bonds, the chatter may confirm their worst fears about living in an uncertain time and persuade them to wait longer to invest in stocks. It should do neither.

The phrase itself refers to a confluence of tax increases and spending cuts that will happen automatically on Jan 1, 2013, if the US Congress and president do not come to an agreement to avert them. Think of skid marks ahead of a precipice.

If the government does not hit the brakes and all the provisions that make up the fiscal cliff come to pass, however, the impact on gross domestic product will be to reduce it 4 per cent, according to the Congressional Budget Office. The non-partisan Tax Policy Center made the impact more personal: 90 per cent of Americans will see their taxes rise, with an average increase of US$3,500. The US economy will slide back into recession.

As if this were not scary enough, the news from other major economies is not encouraging. China appears to be slowing down just as its leaders are distracted by the once-a-decade leadership change. While events in Europe are not making headlines as they did last year, the debt situation there is not vastly improved. And don't forget the numerous flash points of the Middle East and the peril they could pose to global energy markets.

What should investors do? Neeti Bhalla, head of the tactical asset allocation team at Goldman Sachs, said that they need to learn to live with uncertainty for quite some time.

"We won't have an answer to the fiscal situation after the election," Ms Bhalla said. "We won't have an answer to the European crisis after they come up with some fiscal union. We won't have an answer to China after they transfer power. The issues everyone is concerned about don't have a finite end to them."

That's the bad news. The good news is no analyst interviewed for this article thought the government would drive over the fiscal cliff, since many of the expiring provisions have bipartisan support.
"Our belief is Congress is going to punt," said Thorne Perkin, a managing director at Papamarkou Wellner Asset Management, which advises very wealthy investors. "They will turn the fiscal cliff into a fiscal hill and do some form of compromise people can live with. I don't think anyone wants to go through the full shock."

But even a hill implies some pain to an economy that is not experiencing strong growth right now.
There are two complementary schools of thought on getting through the turmoil of the next six months. Both involve restraint and planning. The first requires investors to return to their plan.

What advisers are asking is not that investors necessarily take big risks in the face of the fiscal cliff - after all, really bad economic things could still come to pass at the beginning of 2013. But they are asking that they return to a normal asset allocation and get back to being broadly diversified.
This sounds simple. But it may not be for investors who have been putting their money in cash, whose value is eroded by inflation, and low-yielding US Treasury bonds.

"The people we are advising have been overallocated to asset classes that they consider to be safe and conservative - cash and fixed income," said John Taft, head of RBC Wealth Management in the US. "Cash has the certainty that your purchasing power will be eroded by the rate of inflation. Bonds have the risk that when and if monetary policy tightens, rates will go up and they'll be exposed to principal loss."

Bond interest rates move in the opposite direction of bond prices, so a one percentage point increase in rates on new bonds would result in about a 15 per cent loss in the price of a previously issued bond on the open market.

For those who are skittish and want to cling to their cash and low-yielding bonds, G Scott Clemons, chief investment strategist at Brown Brothers Harriman, advises a mental accounting fudge. He has told clients to have enough money in cash to pay expenses for a period of years that makes them comfortable and put the rest into an investment plan meant to increase the value of the portfolio for years after that.

"If an investor has set aside three years of spending needs, she's bought three years of time horizon for the rest of the portfolio," he said.

For those with more gumption, who think the fiscal cliff will lead to buying opportunities when falling asset values prompt sell-offs, recommendations vary.

One favourite is dividend-paying stocks, which may seem counter-intuitive since the tax rate on dividends could increase to as high as 43.4 per cent from the current 15 per cent.

But Barbara Reinhard, chief investment strategist at Credit Suisse Private Bank, sees two reasons to favour dividend stocks: First, the stocks themselves are inexpensive relative to their historical earnings, and second, companies that are paying and increasing dividends now are strong and often diversified, so they are best positioned to weather any volatility over the next few months.

Ms Reinhard said that all else being equal, an increase in both the dividend and capital gains rate to 20 per cent would be preferable to having capital gains taxed at 20 per cent and dividends taxed as income, which could go as high as 43.4 per cent for the highest earners.

She and other analysts were not worried about the impact of an increase on most investors. Mr Taft estimated that a third of dividend-paying stocks were owned by foreign investors and another third were owned in pension funds or retirement accounts that did not pay taxes.

For the other third, particularly those who depend on the dividend for income, the increased taxes will be a hit.

Defensive portfolio
There are other hedging strategies for people worried about volatility. Harry Clark, chairman and chief executive of Clark Capital Management, which oversees US$3 billion for smaller investors, said his firm had purchased a combination of exchange-traded funds and notes to cap any loss for clients at about 10 per cent. "We don't worry about a massive decline," he said. "But there are other ways to make a portfolio defensive, like buying companies in the materials, energy, consumer essentials and utilities spaces."

The thinking here is that if the worst happens, there are still some essential things, such as soap and gas, that people will need to buy. "I think the biggest risk is in the bond market," Mr Clark said. "That's the next disaster waiting to happen. They're going to drop like a rock when rates go up."
For those with the deepest risk appetite - or deepest wallets - the best strategy is one that allows them to look beyond all the noise the fiscal cliff will create. Real estate and private equity come to mind. Mr Perkin said that he was putting together a group to invest in a unique way in the oil boom in North Dakota: lodging.

"Every oil company in the world is going gaga over the Bakken oil fields," he said. "The problem is there is zero infrastructure: terrible roads, no restaurants, nowhere to stay, the airport is awful, no hospitals or schools, nothing."

Despite all that, he said, he has a group of clients investing US$60 million into a hotel project with another US$40 million of investments planned.

This is not without risks beyond the lack of liquidity in the deal. If the price of oil drops below US$60 a barrel, the demand for Bakken crude could slow, he said. But right now, he said, clients like investments that appear uncorrelated with the market volatility the fiscal cliff could cause.
For most investors, even those with many millions of dollars, the best strategy may be to take a similarly long view without as much risk.

"Most investors are best served by the following strategy, and I say this with 100 per cent conviction," Mr Taft said. "Sit down with yourself or your adviser and figure out what you're trying to accomplish over the rest of your life. Develop a plan with as few moving parts as possible and then stick to that plan."

"Individual investors are notoriously bad about making tactical, short-term changes to their portfolios," he added. "That's basic advice, but it's the best advice there is." - NYT

Lessons in picking small cap stocks

Investors need a sound knowledge on how to value stocks, do their research and be prepared for higher volatility

 20 Oct 2012 09:08


WHETHER it is because investors are tired of being scared, or have finally decided that it is riskier to keep money in the bank earning close to nothing, or that indeed there have been improvements made by governments to solve some of the problems plaguing the world economy, or a combination of all the above, appetites for risk assets have returned to the markets.

Here is the tally for the Singapore market as of yesterday: Between Sept 13, 2011 and this week, the Straits Times Index chalked up a total return of 15.6 per cent.

The FT Straits Times Mid Cap Index fared significantly better - its total return came to 25.4 per cent.

The small cap index is in between, at 19.2 per cent.

In the market, just like in the physical world, dust and straw and feathers - things with neither weight nor value in them - fly easily.

So, based on the numbers above, it would appear that the small- and mid-cap sectors are fertile ground for high returns.

But, not so quick. Further analysis of the numbers tell a different story.

I did my analysis from the time we stopped our small cap column on Sept 12 of last year. At that point in time, 758 stocks were listed on the Singapore Exchange. More than half of those stocks - 57 per cent to be exact - were companies with market capitalisation of $100 million and below.

The average market cap in this category was $37.8 million. Twelve per cent of the market had a market cap of between $100 million and $200 million. The average was $146 million in this group.

Another 18 per cent of the market was made up of stocks with market cap of $200 million to $1 billion. The average there was $446 million. And finally, the remaining 13 per cent had market cap above $1 billion; the average was $6.9 billion.

How have the various groups fared since then?

Well, on average, the smallest stocks in the market chalked up the highest average price appreciation. But this is extremely misleading. The fact is, there are a few outliers which lifted the average figure. For example, the best performer in the group is GSH Corporation. According data from Thomson Financial, the stock's share price shot up from 0.3 cents last year to 9 cents yesterday - a near 30-time jump.

In the market, just like in the physical world, dust and straw and feathers - things with neither weight nor value in them - fly easily.

Here is another fact: Slightly more than half the stocks in this category, that is, those with market cap of $100 million or less, actually have not managed to make any advance in terms of share price in the last year or so.

Only 49 per cent of them did. This explained the zero median price appreciation for this category.

For the next group of stocks, those with market cap of $100 million to $200 million, the average price appreciation was 6 per cent. The median was 2.3 per cent. Only 55 per cent of the stocks have risen in the past year. The top five performers in this category are Asiasons Capital, LMA International, United Fiber, Popular and Nera Telecom.

For stocks with market cap of $200 million to $1 billion, the average return was 12.8 per cent, the median, 5.8 per cent.

Fifty eight per cent saw their share price appreciate between September last year and now. The chart toppers in this group are Yeo Hiap Seng, Ezion, Aspial, Roxy-Pacific and Tat Hong.

Finally, for stocks worth more than $1 billion, the average return was 13.2 per cent and the median, 16.2 per cent. Three in four stocks in this category managed to raise their share price in the past year. Here, the stars are APB, Fragrance Group, F&N, Thai Beverage and First Resources.

So, as you can see, for every point of return per unit of risk that you expose yourself to, the odds are the best in big cap stocks.

Without having a sound knowledge on how to value and pick stocks, the chances of your picking a winner in the small-cap space is significantly reduced.

As mentioned, 51 per cent of stocks below $100 million are still trading at the same levels or lower than in September last year. For the big cap stocks, on the other hand, three in four are already above water - and at quite a comfortable level at that.

As part of this exercise, I relooked at some of the stocks which were in our small-cap portfolio as at Sept 12, 2011.

Some of them have done spectacularly well. Others have bombed. On average, the total return of that portfolio between then and now was 17.5 per cent. The median 10.8 per cent.

Between then and now, the best performer in that portfolio was Roxy-Pacific. Its total return amounted to 112 per cent. Next was Kian Ann, at 105 per cent. Tat Hong came in third at 98 per cent, followed by Adampak at 69 per cent. Fortune Reit was next at 65 per cent, then Pan-United Corporation at 63 per cent.

Those which bombed included China Sky, China Essense, Courage Marine and Ziwo.

I reflected on the reasons I picked those stocks and here are some of the things I realised:

Stocks which did well are those which have established a consistent track record in their respective industry. At that point in time, their stock prices were not hyped up by any upcoming new projects or new trends.

In other words, barring upheavals in the industry that they are in, companies which have created a niche for themselves and continue to plod away at those niches have turned out to be rather good bets.

In fact, for most of these stocks, I did not meet the management of the companies. The metrics on which I based my decisions are return on equity (ROE), return on assets (ROA), price-earnings ratio (PE), price to book ratio (P/B) and dividend yields.

I find that talking to the management of companies can actually cloud one's judgement. Some of the founders and chief executives can be so convincing in painting a picture of abundance in the future, that one is swayed into relaxing one's selection criteria.

For example, the PE of the stock may not be that cheap. But because the management told you about all the wonderful plans that it has for the company, you bought into them.

Another group of stocks in the portfolio which tanked were recommended by friends and contacts who supposedly knew the companies quite well through their business dealings with those companies.

Again, I suspect, the friends and contacts bought into the story of abundance painted by the companies to them.

And then of course, there are the Chinese stocks which have failed big time in the corporate governance department.

Some stocks in the group actually rose more than 40 to 50 per cent in the few months after September last year, but have since given back most of those gains to the market.

In short, here are the few things I observed in small-cap investing: One, understand the industry, and look purely at the track record of the company in terms of its ROA and ROE and its valuation numbers, such as PE and P/B. Buy companies which have shown consistent profitability record and are trading at a cheap level in an established industry.

Two, do your research. Do not listen to tips from friends, or chase after the latest hot stock in the market.

Three, be ready to take profit once you think the market has become too enamoured with one of the stocks you own. The market's enchantment with that stock can go just as quickly.

Four, once the industy outlook turns bad for the small-cap stock you own, sell. If not, the losses can be huge, and chances of the stock staging a comeback are slimmer than, say, a blue chip which has hit a bad patch.

No doubt, the return from small caps can be rewarding. But be prepared to contend with higher volatility. For those with neither time nor skill to do their research, blue chips are as good a place to be. Especially if you buy them at a crisis time.

Wednesday, October 10, 2012

Is Your Dividend Safe?

Wednesday, 10 October 2012
In this low-interest-rate environment, dividend investing is very popular. Where else can you find 4 percent yields in quality companies--particularly yields that are growing every year?
So it's no surprise that investors are pouring their money into dividend stocks and chasing yield.
But investors should have a clear understanding of what they're getting themselves into. Picking a stock with a low dividend yield won't be as destructive to net worth as picking a higher-yielding stock that cuts its dividend.

Typically, when a company cuts its dividend, the share price falls hard. Even leaving the dividend the same can be seen as extremely negative if a company has a long track record of raising dividends.
So when investing for income, yes, you want to receive a solid yield and one that is growing every year. But you need to ensure that the dividend growth is sustainable.

Here's how:
Look at a company's payout ratio. The payout ratio is the percentage of a company's profits that is paid out in dividends. The calculation is simple. Divide dividends paid by net income.
If a company has $100 million in profits and paid out $50 million in dividends, the payout ratio is 50 percent ($50 million divided by $100 million).

Generally speaking, I look for companies with a 75 percent payout ratio or less. That way, if the company reports weak earnings, there is still enough of a buffer to continue to pay (and hopefully raise) its dividend.

Let's look at a real life example.
Medtronic (MDT) has raised its dividend every year for thirty-five years. Over the past twelve months it has earned $3.66 billion. During the same period it has paid out $1.03 billion.
Divide $1.03 billion by $3.66 billion and we get a payout ratio of just 28 percent. That tells me the company has plenty of room to raise the dividend, even if earnings are subpar going forward.
Considering that the company has raised the dividend every year since the Carter Administration, you can be fairly sure that the company will do everything in its power to raise it again next year, no matter what kind of earnings it reports.

Cash Flow is King
Net income is great. We definitely want our companies to be profitable. But there's an even better metric to use instead of net income--cash flow.
Net income is calculated using revenue, expenses and all kinds of made-up accounting tricks like depreciation, amortization, non-cash compensation, etc.
Cash flow more accurately represents how much cash a business took in. Since dividends are paid with cash, not with earnings, I also use cash flow from operations to determine the payout ratio.

Here's an example:
AT&T (T) has raised its dividend for twenty-eight consecutive years. Over the past twelve months it earned $4.68 billion and paid out $10.28 billion for a payout ratio of 219 percent. That could be a scary figure. After all, a company paying out more than twice its profits in dividends might not be sustainable.

But when we look at cash flow from operations, we see that the company generated $35.35 billion in cash flow, making the payout ratio based on cash flow a very comfortable 40 percent.
So even though the company's profits were less than $5 billion, it actually brought in over $35 billion in cash.

Naturally, I'd always like to see higher net income, but as long as the company is generating enough cash to sustain and raise the dividend, I feel confident that it is secure.

A payout ratio starts creeping above 75 percent is a yellow flag. If it continues heading higher, you may want to start looking for a different stock. Dividend payers tend to be safer investments than the average stock. The last thing you want is to get hurt because your dividend payer cut its distribution.
Armed with the payout ratio, not only can you find investments that will provide you with great income, but reliable income as well.

Marc Lichtenfeld is the author of Get Rich with Dividends, A Proven System for Earning Double Digit Returns, the Associate Investment Director of the Oxford Club and the Editor of the Ultimate Income Letter.

US investors in no hurry to buy China stocks: Citigroup

10 October 2012

SINGAPORE - Investors in the United States are "in no hurry" to buy China's stocks on concern earnings will slump further as the economy slows and policymakers refrain from adding stimulus measures, according to Citigroup.

Only about 25 per cent of the investors that Citigroup officials met during a US trip may consider purchasing equities, "though with low levels of convictions", according to a report. There is concern the economy or earnings may get worse before they get better, the report said.

"The majority of investors seemingly are sidelined and are in no hurry to participate, even if it means missing an initial 10-per-cent run," said Mr Shen Minggao, a Hong Kong-based analyst at Citigroup, who met about 60 equity investors in the US recently.

Investors are concerned "Chinese equity is not as cheap as the numbers have suggested or there is no clear sign that the de-rating is near its end".

The Chinese government is seeking increased foreign investment in the nation's equities after the benchmark Shanghai Composite Index briefly dropped below the 2,000 level on Sept 26 to a three-year low. It climbed 2 per cent to 2,115.23 at the close yesterday. Bloomberg

Dark clouds ahead

10 October 2012

WASHINGTON - The International Monetary Fund (IMF) said yesterday that the risks of "a serious global slowdown are alarmingly high", with an 80-per-cent chance of recession in the euro zone next year, 25 per cent in Japan and 15 per cent in the United States.

In its bleakest assessment of global growth prospects since the 2009 recession, the IMF blamed policy uncertainty in the US and Europe for its gloomy position in a quarterly update of its World Economic Outlook.

It now foresees global growth of 3.3 per cent this year and 3.6 per cent in 2013, down from 3.5 per cent this year and 3.9 per cent next year in its last report in July.

Financial market stress, government spending cuts, stubbornly high unemployment and political uncertainty continue to dampen growth in high-income countries, the IMF said.

At the same time, the emerging-market countries that fuelled much of the recovery from the global recession, such as China and India, have continued to cool off, with global trade slowing.

"The recovery has suffered new setbacks, and uncertainty weighs heavily on the outlook," the IMF said, warning that its forecasts might be overly optimistic if policy makers in Europe and the US fail to carry out pro-growth policies. "Downside risks have increased and are considerable."

The latest report focused on the higher-income countries whose political and economic troubles are posing significant risks to the rest of the world. The IMF estimated that these advanced economies, including the United States and Germany, would grow about 1.3 per cent this year, down from 1.6 per cent last year.

Growth prospects were upgraded for only one major nation. The IMF projected the US would grow 2.2 per cent this year, 0.1 percentage point higher than previously estimated.

The 17-country euro area economy will contract 0.4 per cent this year, 0.1 percentage point worse than the forecast in July, and grow 0.2 per cent in 2013, less than the 0.7 per cent predicted three months ago, the IMF said.

"Low growth and uncertainty in advanced economies are affecting emerging market and developing economies through both trade and financial channels, adding to homegrown weaknesses," said Mr Olivier Blanchard, the IMF's Chief Economist.

But he told reporters yesterday a more optimistic scenario was possible if the right measures were taken, such as fixing the banks in European countries and reducing the uncertainty about US policies.
The IMF report called for US policymakers to find an alternative to planned automatic tax increases and spending cuts that would trigger a recession.

Europeans must follow on their commitments for a more integrated monetary union, and many emerging markets can afford to cut interest rates or pause tightening to fight off risks to their economies, the IMF said.

Emerging markets are expected to grow four times as fast as advanced economies at 5.3 per cent this year and 5.6 per cent next year, but the IMF took a sharp knife to its estimates for India.

India's economy may grow 4.9 per cent this year and 6 per cent next year, lower than previous forecasts of 6.2 per cent and 6.6 per cent respectively. China's estimate was cut by 0.2 percentage point each year to 7.8 per cent last year and 8.2 per cent in this year.

Under the IMF's definition, global gross domestic product does not have to shrink for the world to be in recession. The IMF defines recession as a decline in real per-capita GDP, along with weaknesses in other indicators including industrial production, trade, capital flows and joblessness. Agencies

Monday, October 8, 2012

Is property investing stifling enterprise here?

8 October 2012
Richard Hartung

Property investment has become so attractive to so many people here, it seems, that it may actually have reached the point where it is increasing risk and crowding out other investments that could be better for the Singapore economy.

In many countries, income from investment in residential property is a blip in overall economic indicators and a small percentage of GDP. Deutsche Bank noted in its Real Assets report, many private households in other regions "mainly hold residential property for owner-occupation".

While home ownership is high here too, residential property investment is so large that it has its own line on GDP data from SingStat called "ownership of dwellings" and individual investors' returns from those investments account for more than 4 per cent of GDP.

Even at that high level, there's a thirst for more. The latest Asia Property Market Sentiment Report last month - prior to last Friday's property market cooling measures - showed that 62 per cent of Singaporeans polled want to buy another property in the next six to 12 months.

As one blogger on Singapore Watch put it, many people will buy an HDB flat as their first property and then slowly save up for their second property. Friends talk about properties they are investing in and the gains they expect, so owning a second property starts to seem like the norm. Many investors, then, aspire to investing in property rather than in the next Google or LinkedIn.


Investing in real estate is not necessarily bad. Research by University of Sydney Professor Maurice Peat, for example, showed that including residential real estate in a well-diversified portfolio can generate significant diversification benefits.

As Prof Peat also found, however, too much focus on real estate and a relatively undiversified set of investments can create additional risk.

One challenge of the focus on property, then, is that a large swathe of Singaporeans may become too dependent on residential property for their financial security. If anything negative happens in the Singapore property market, that security is at risk. The aftermath of the housing bubble in the US shows how severe the risk can be.

Putting so much money into residential property investment may also stifle entrepreneurship and innovation.

Private investors may prefer to put their money into property rather than new ventures. One economist here noted, although data is limited, that capital may be diverted into being landlords rather than business owners or inventors. Private capital that could fund start-ups or business growth may go into real estate instead.

What funding there is for new ventures often comes from younger investors, who may have less money for investment in the first place.

Angel investors in Singapore tend to be younger than in other locations, the Angel Investment Network (AIN)here noted, with the majority being 25-34 years old. And young or old, AIN noted, Singaporean business angels tend to invest more often in the retail and hospitality sectors than in technology.


For Singapore to be able to grow into the entrepreneurial hub of technology innovation that it aspires to, a shift in focus by investors may be needed. Making that shift happen may involve at least two fundamental changes to shift investors' aspirations.

One change is to orient investors towards a more diversified portfolio. Education could help make this shift occur. Organisations like SIAS or the Singapore Exchange, for example, could do more to educate investors about diversification or provide new avenues for investments other than property.
Given the long-ingrained focus on real estate, however, less popular options like policy shifts to reduce the attractiveness of property investments may be a more viable option.

A second change is then to shift some of the money that would have gone into property into funding new ventures or business growth. It is not necessarily easy to create the buzz about investing in start-ups or business expansion that exists in Silicon Valley. Education could again be a first step, with organisations educating investors on investing in new ventures. Again, though, policy or fiscal shifts may be more likely methods to make change happen.

While there is no harm in some property investments, it is the magnitude here that creates potential imbalances. Admittedly, shifting peoples' aspirations from owning a second or third property to becoming the next big investor in a business growth story like Google is not easy.

If nothing changes, though, Singapore could gradually move towards becoming a nation of landlords, especially at the upper end. It seems better to start shifting now than never, even if change may take a long time to happen.

Richard Hartung is a consultant who has lived in Singapore since 1992.

Friday, October 5, 2012

There's money in recycling

5 October 2012
Tan Chin Keong

When real estate investment trusts (REITs) in Singapore need capital for an asset acquisition or expansion, they normally turn to the equity market to raise funds through a secondary share placement or a rights issue. For this reason, REITs have earned the reputation for asking back what they have given to shareholders.

REITs are highly sought-after investments because they generate high dividends. For their continued sustainability, REITs need to be generous with these dividends. To qualify for their tax-transparent status, Singapore REITs have to disburse at least 90 per cent of their distributable earnings to shareholders. While this makes them a reliable source of income, the downside is that REITs hardly retain any of their earnings for future capital expenditures, so they - especially those with high levels of debt - tap the equity market. This in turn dampens their share prices.

The good news is that alternative ways of fund raising have emerged as the REIT sector begins to mature.

One of these is the perpetual bond market that was established in Singapore earlier this year. As I highlighted before in this column, REITs can now issue perpetual bonds to finance a potential acquisition instead of issuing new ordinary equity. In doing so, they avoid diluting shareholders and causing a near-term share-price overhang. This option makes all the more sense given that a perpetual bond is also considered a form of equity but is cheaper to finance than ordinary equity.

Other than perpetual bonds, an increasingly popular way for REITs here to raise funds is asset recycling. When REITs are in acquisition mode, they normally look for property whose rental values can be boosted through asset-enhancement initiatives, such as redevelopment, provision of new facilities and improving the tenant mix. But once these assets have reached their full potential, it may be time for the REITs to recycle them.

Asset recycling involves divesting selected properties that have sat for a while on the REITs' balance sheets and have little residual enhancement potential, then using the proceeds for newer assets with better enhancement potential. We understand that this is an established practice in some of the larger and older REIT markets such as Australia. We began to notice such asset-recycling activities in Singapore in 2010 from some of the office REITs, continuing last year up to the present.

Indeed, the practice has spread into other property sectors. Some of the industrial and retail REITs in Singapore are taking advantage of the current buoyant markets in their segments by recycling and divesting some assets in their portfolio for a profit. We believe these activities will continue to gain in popularity as the REIT sector matures - in other words, as some of the REIT assets age - and as long as the property market remains buoyant.

All this is part of the evolution of the REIT sector in Singapore. As the market develops, players will find new and different ways of financing their asset acquisitions and expansion. Whether it is through perpetual bonds, asset recycling or some other source of funding that does not involve tapping the secondary equity market, it could help lower REITs' equity capital-raising risks and remain a viable investment option for investors with a lower risk appetite.

Tan Chin Keong is an analyst at UBS Wealth Management Research.

Wednesday, October 3, 2012

As China’s economy slows, real estate bubble looms

By Jia Lynn Yang
Published: October 3
The Washington Post

BEIJING — Sitting on the floor of his apartment surrounded by the toys of his 1-year-old son, Guo Hui tallied the homes he and his wife had acquired over the years.

There was this place, in a compound a half-hour from downtown Beijing. There was a second apartment to the north, a third place near the site of the 2008 Olympics and a fourth home close to the Forbidden City that was given to him by his parents.

Guo gestured to the wall behind his couch. His neighbor? He owns six apartments in this compound alone. Guo’s friends, too, all own at least two homes each.

“There is definitely a bubble,” said Guo, whose homes have tripled in value in roughly a decade.
As home prices have skyrocketed, many Chinese households have gone all in on real estate by pouring years of savings into buying as many homes as they can.

But as the country’s economy slows to its worst pace in years, China’s dependence on real estate for growth — it’s a bigger driver than even exports now — has put the government in a tough position.
Allow prices to continue rising and help the economy in the near-term, but the real estate bubble gets worse. Cool things off and the entire economy slackens too much.

The nightmare scenario, though, is a bubble that bursts. A major drop in prices would ripple through the Chinese economy and potentially the rest of the world. Real estate investment constituted 13 percent of the country’s gross domestic product last year. The sector feeds steel, concrete and dozens of other industries.

A downturn would also be devastating to the wealth of Chinese households.

Urban housing stock made up 41 percent of Chinese household wealth in 2011, compared with 26 percent in the United States, according to Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics.

Lower home values could make Chinese consumers rein in their spending, making it tougher for U.S. and foreign firms to sell their products here.

The Chinese government has acknowledged that real estate prices have gotten too high, adding some rules in the past few years to limit how many homes people can buy and requiring people to put more money down. This helped bring prices down starting last year, though they edged back up this summer.

These policies, though, have had a limited effect. Chinese home buyers have been accumulating houses for years, mainly because they have few options for safely stashing their savings. The stock market has lost money in recent years. People are wary of putting money into savings accounts, because low interest rates are not even keeping up with inflation.

The obsession with real estate is also embedded in the culture. People are expected to own homes before they get married, and there is a deep faith that real estate is a fool-proof investment.
Since private homeownership has existed here only since the 1990s, no one has ever seen firsthand what happens when housing prices start dropping.

“Just like in the U.S., that’s what the speculators thought in Vegas and Florida, that there’s only one way to go but up,” Lardy said. “Expectations could change very dramatically.”

Monday, October 1, 2012

Walter Schloss' 16 Golden Rules For Making Money In The Stock Market

Factors Needed to Make Money in the Stock Market

1. Price is the most important factor to use in relation to value

2. Try to establish the value of the company. Remember that a share of stock represents a part of a business and is not just a piece of paper.

3. Use book value as a starting point to try and establish the value of the enterprise. Be sure that debt does not equal 100% of the equity. (Capital and surplus for the common stock).

4. Have patience. Stocks don’t go up immediately.

5. Don’t buy on tips or for a quick move. Let the professionals do that, if they can. Don’t sell on bad news.

6. Don’t be afraid to be a loner but be sure that you are correct in your judgment. You can’t be 100% certain but try to look for the weaknesses in your thinking. Buy on a scale down and sell on a scale up.

7. Have the courage of your convictions once you have made a decision.

8. Have a philosophy of investment and try to follow it. The above is a way that I’ve found successful.

9. Don’t be in too much of a hurry to sll. If the stock reaches a price that you think is a fair one, then you can sell but often because a stock goes up say 50%, people say sell it and button up your profit. Before selling try to reevaluate the company again and see where the stock sells in relation to its book value. Be aware of the level of the stock market. Are yields low and P-E rations high. If the stock market historically high. Are people very optimistic etc?

10. When buying a stock, I find it helpful to buy near the low of the past few years. A stock may go as high as 125 and then decline to 60 and you think it attractive. 3 years before the stock sold at 20 which shows that there is some vulnerability in it.

11. Try to buy assets at a discount than to buy earnings. Earning can change dramatically in a short time. Usually assets change slowly. One has to know much more about a company if one buys earnings.

12. Listen to suggestions from people you respect. This doesn’t mean you have to accept them. Remember it’s your money and generally it is harder to keep money than to make it. Once you lose a lot of money, it is hard to make it back.

13. Try not to let your emotions affect your judgment. Fear and greed are probably the worst emotions to have in connection with the purchase and sale of stocks.

14. Remember the work compounding. For example, if you can make 12% a year and reinvest the money back, you will double your money in 6 yrs, taxes excluded. Remember the rule of 72. Your rate of return into 72 will tell you the number of years to double your money.

15. Prefer stock over bonds. Bonds will limit your gains and inflation will reduce your purchasing power.

16. Be careful of leverage. It can go against you.