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Sunday, June 30, 2013

Financial pillow talk - not sexy but necessary

Published on Jun 30, 2013

Discussing money early could make for a happier marriage

By Jessica Cheam

Financial planning is easy when you are young, single and have little money.

My responsibilities were simple when I began working - pay rent, set aside money for my parents, have enough for food and drink. I was free to decide how much to save, what to invest in, and any wins or losses were my own.

Things get more complicated when your life becomes increasingly intertwined with someone else's - and you may find that while sparks flew when you met that special someone, a different set of sparks is ignited when it comes to the heavy pillow talk - financial and investment planning.

Talking numbers, unfortunately, does take some romance out of a relationship but if you are taking it to a serious level, it is an inevitable step.

My husband and I discovered this when we started making decisions that involved big sums of money. First, it was deciding to rent an apartment with some friends - we split the rent and utilities equally between us and it was relatively simple.

Then, when the global financial crisis triggered a property market correction in 2009, I saw the opportunity to invest in our first home. Except that we weren't married and had not talked about it at that point.

But time and tide await no man and that's even truer of Singapore's property market. We bought an apartment as "unrelated singles" as we could just afford it with the depressed property prices. We decided to buy it as joint tenants, which meant that on the death of one owner, the apartment would go to the surviving one. Then we had to decide how much each would pay for the down payment, renovations and subsequent mortgage instalments.

Thinking about death and mortgages was the first big decision we had to make as a couple. It was the first of many - how much should each pay towards the mortgage? Do we start a joint account?
We split the costs equally for the most part, but it is quite common for couples to agree to contribute an equal percentage of their incomes on shared expenses, since whoever earns more can pay for more.

Then it was about how we should invest our money. He favoured trading in foreign currencies but never had the time to keep up, while I preferred investing in equities.

I bought some penny stocks some years ago which tanked and are still floundering at 1 cent per share. Every time we have an argument about money, he trots this out as the "shining example" of my investment acumen and I point to his pointless forex trading which has lost us money.

Needless to say, we have driven each other insane in many of these conversations. Experience has taught me that it's best to agree on what to pool your money together for. Beyond that, husband and wife should be left to invest their personal wealth however they deem fit.

A more controversial subject: how we spend our money. In our earlier years, I used to say to our friends jokingly that with my husband's monthly bar bill, we could have serviced a second mortgage on another property. They thought I was joking except that I wasn't. I'm not a big spender on shoes or bags but I would sometimes splurge on, say, an expensive camera, prompting some raised eyebrows.

Naturally, these were sources of conflict and it shows how tricky it can get when couples start combining their personal wealth and have strong opinions about how this should be spent.

Experts such as OCBC Bank's head of mass segment, Ms Ng Li Lian, say it is useful for couples to discuss their financial situation and aspirations as soon as they have intentions to get married.

Looking back, we should probably have had a lot more conversations about money than we cared to have.

According to the experts, some key considerations include sources of income and expected costs. A checklist of big-ticket mid-term milestones - such as buying a home, throwing a wedding and going for a honeymoon - can be useful. Estimate the costs and discuss how to fund it.

Ask difficult questions such as "Can we afford it?", "How much can we borrow?" and "Who pays for what?" Going through these questions helps couples visualise the financial commitment required and understand how their lifestyle may be affected, says Ms Ng.

That is one of the first steps. Once you are married, there is a laundry list of boring but necessary things to sort out - should joint bank accounts be set up, how much should we be saving, what are our monthly expenses, and what insurance policies should we buy.

The answers will differ from couple to couple. We found that sharing expenses equally and having separate accounts worked better for us. But I know of couples who combine all their wealth in one account and somehow manage to agree on how they spend it.

Financial planners say couples should be saving 10 per cent to 20 per cent of their incomes, and set aside six to 12 months of income in savings for emergencies. Term insurance or mortgage insurance is also recommended to ensure that, if any misfortune happens to either party, the other is left with a decent sum of money to service loans.

Beyond that, longer-term goals such as upgrading to a bigger home, having children or planning for retirement should be discussed. Some common mistakes that couples make include a lack of discipline in saving money or tracking expenses, and not setting clear financial goals, say the experts.

Many also over-stretch their finances in their desire for bigger homes or cars. One important question to ask is whether you can still afford a purchase if there is an increase in interest rates or if one of you loses a job.

Such conversations are not easy to have, and definitely not the sweet talking you expect to hear from your spouse. But a bit of early financial planning could help you avoid potential, larger conflicts further down the line - and make for a happier marriage.

Good debt, bad debt

Published on Jun 30, 2013

One type of debt reaps returns while the other has no investment value

By Rachael Boon

Credit cards, car loan most common debts for young

While experts recommend young people should start investing as soon as possible, those in their twenties will often find it hard to do so as they are busy clearing their debts.

Take Mr Perry Siow for example. At 23, he racked up a debt of more than $50,000, because his business partner ran away with everything from the accounts of the trading firm they had set up together.

This happened during a business trip to Indonesia to source for more clients, and the former derivatives trader returned home to find his dreams of earning big bucks completely dashed.

To add insult to injury, he was a guarantor for a friend who had borrowed $20,000 from a loan shark.
Mr Siow, 37, an associate senior vice-president at realtor HSR, said: "No one taught me about money management, I was depressed. I also had to pawn my mother's gold jewellery to help with my debts. I get emotional thinking about that."

Faced with immense pressure and bouts of suicidal thoughts as a young adult, he found religion which drove him to find a new job and cleared his debt little by little.

The Christian found his calling in real estate and by the second year of working, he paid off all debts and redeemed his mother's gold.

It was a life of all work and no play for Mr Siow, who skipped all social functions and would be distributing real estate fliers until 2am. "I was also a part-time trader for a client and if I had time, I'd be a banquet waiter from 6pm to 11pm, even though that earned me only $20 per hour. I worked every day for two years."

Youth debt in numbers
According to Credit Counselling Singapore (CCS), last year it counselled 563 people in debt, aged 35 or younger.
The male to female ratio was 69:31, and 374 had A-level or higher education, while 217 were married with children.
The lowest amount of debt reported was $3,401, and the highest was $707,772, which was lower than 2011's highest reported debt at $875,203.
In a report released early this year, the Credit Bureau Singapore found that motorists aged 21 to 34 have the highest delinquency rate - a measure of failure to pay their monthly instalments within 30 days - while consumers above 54 have the lowest delinquency rate, a trend that is consistent with other loan products.
On the other hand, those aged 21 to 34 are managing credit card payments well, compared to the overall population, with only 3.66 per cent in delinquency - where one's credit card payments are 30 or more days overdue - compared with the overall population at 4.95 per cent in the three months to March.
Good and bad debt
But financial planners say there is both good and bad debt.

Ms Geraldine Lam, investment specialist at independent financial advisory firm Providend explained: "Good debt may be defined as debt incurred to reap investment returns. A good debt should also be one that the debtor can afford to repay on time."

Examples of good debt are mortgage, property, study or business loans.

Mortgage loans are considered good debts because property generally appreciates, like from 2002 to last year, when residential property prices here appreciated by about 6 per cent per year, said Ms Lam.

Hence, for young adults looking to move out on their own or planning to wed and buy their first home, a mortgage loan may help.

Ms Lam said: "Taking up a mortgage loan is not only necessary for most people to have their own residence, it also makes economic sense as paying for a property through instalments allows money to be freed up for other uses such as investments."

SingCapital chief executive Alfred Chia added that "taking advantage of other people's money, also known as the bank's money" when interest rates are low, makes a lot of sense especially in a property bull run, but warns of the risk of being in debt.

For study and business loans, Ms Lam said the long-term returns of a university education and a profitable business "far outweigh the cost of paying interest on the debt incurred".

On bad debts, Mr Chia said they are often debts "incurred for purchases that are useless, or for depreciating assets".

A 60-inch TV set will not produce an income, as well as many brand-name bags, "though many ladies are not going to agree with that", he added.

Credit Counselling Singapore says overspending, followed by job-related debt, are the top reasons for those who seek counselling.

Common debts of young adults
Credit cards and car loans are the most common causes of debt among young adults.

Ms Chng Bee Leng, head of mass affluent at OCBC Bank, said that people in the age range of 18-35 tend to have study loans to repay for tertiary education, and credit cards for their various expenses.

OCBC Bank has also found that young adults tend to use credit cards for expenses such as dining (43 per cent of customers), fashion (37 per cent), and travel (34 per cent).

Mr Chia has advised young clients with more than $500,000 in credit card debt.
How do they get to that stage?

He said: "Most of the time, it's the attraction of spending future money to enjoy the current moment, for travel, and those interest-free instalment plans.

"Having a car and spending their money excessively give them a sense of freedom.

"And the impulse to get a coveted item is stronger than the logic that it is too expensive."

Ms Pam Siow, 32, chief executive of online marketing coaching business Internet Biz Owners Club, went through all that when she got her first credit card at 25.

Four credit cards and three years later, things spiralled out of control as she found herself $14,000 deep in credit card debt.

She recalled: "Well, at that point in my career, I had earned a degree of spending power. And after spending a good deal of my life feeling like my finances were not secure, I felt it was time to let loose and rebel against my 'former life'.

"With that, credit cards became my greatest source of debt. The thing is, I didn't use cash because I was spending money that I didn't have."

She spent 20 to 30 per cent more than what she could really afford with her monthly salary then, on clothes and holidays.

At this point, Providend's Ms Lam would suggest cancelling "all credit cards and lines of credit to stop impulse spending, and be forced to spend only cash".

"Non-essential expenditure has to be severely reduced and a strict budget imposed."

Websites such as financial education portal MoneySense have useful tools such as debt and budget calculators to help young adults, she added.

Ms Chng also suggested OCBC Money Insights, an online financial management tool available on OCBC online banking.

She said that it "can help young people be aware of their spending trends and cash flow position".
Public relations executive Eunice Lim, 23, does not have major debts, but said she does enjoy shopping and forgets to pay her bills once in a while, leading to a late payment penalty. Today, she is more mindful of payment dates.

Managing debt
Just like how debt forced Mr Siow to find a way out and eventually find his passion in real estate, Ms Siow discovered a knack for Internet-related businesses because of her dire situation.

She said: "This turnaround began at the lowest point in my situation, when I made it my mission to pull myself out of it and achieve my dream life.

"I managed to get out of debt by starting my first online business, which helped me quit my marketing job within four months too and pay off my debts within one year. This resulted in helping me start my Internet marketing coaching business."

Mr Siow - an avid reader of books on debt - has one unique tip.

Be gentle when it comes to speaking to creditors, he said.

After all, it was how he managed to get extensions from the loan shark and banks.

"Being hostile and not answering your creditor's call are not going to work. When they can't get hold of you, it may lead to immediate action being taken," he said.

"Having debt is not a crime but it has just been mismanaged. Take it easy and be calm, negotiate with your creditor. They will understand it because they just want their money back."

He added that young adults should be pro-active about clearing their debt, instead of moping about it, and "don't buy something that you don't need to impress people that you don't like".

Armed with first-hand knowledge of how debt works and how to manage it, Mr Siow is fine with having some good debt, such as paying for training for his staff.

He said: "Remember that getting into debt is easy, but getting out of it is difficult and extremely stressful."

Financial independence - how to get there

Published on Jun 30, 2013

First step is having the discipline to spend less than you earn

By Goh Eng Yeow Senior Correspondent

For those of you who have just embarked on your working life, the notion of achieving financial independence no doubt seems like an elusive goal.

Just trying to make ends meet is a challenge.

And then there are those many temptations to live it up, such as buying a flashy car or going on an expensive holiday.

This makes saving on a regular basis nigh on impossible for many people.

But anyone looking ahead has to factor in the fact that Singapore has the fourth-longest life expectancy in the world. Women here can expect to live to 85 and men to 80.

So, unless you do some really serious financial planning early on, you may find yourself working till your 70s - and that is assuming someone is still willing to employ you at that age.

So, it was heartening to read recently in this newspaper of young people who are managing to squirrel away at least some of their money for investments.

However, as I read on, I realised that they were mostly driven by short-term objectives such as trying to get a better return from the stock market. Such a ploy would be unlikely to help them to secure their long-term financial security.

To be financially independent is to be able to maintain your desired standard of living, without ever facing the risk of running out of money. And being financially independent will enable you to choose what sort of work you want to do, as well as the luxury of working because you want to, rather than because you need to.

Trusting the vagaries of the stock market to try to achieve that goal is really too much like a roll of the dice.

I have spent 27 years around the financial markets and seen many of my friends attain financial independence, so I can offer a few tips on how to get there.

Work out a financial plan
Becoming financially independent requires you to have the discipline to spend less than you earn and the wisdom to save the difference.

But just blindly trying to save a portion of your salary every month is not going to get you anywhere. You have to know where you get your income and how you are spending it.

Start by drawing up a monthly cashflow statement to capture your income and major expenditures such as your credit card spending and transport fares.

Just gaining an understanding of your finances will help you to cut down on wasteful spending.

Cover yourself medically
The worst fate that can befall anyone is to be saddled with a huge medical bill in old age with no one and no income to rely on.

One of the biggest regrets harboured by my friends is that they failed to take out medical insurance when they were young and healthy.

It was only upon discovering medical conditions such as hypertension or diabetes that the importance of medical coverage hit home. By then, it was too late and they found that any coverage would exclude their pre-existing medical ailments.

For a start, at least get yourself covered on the MediShield Insurance scheme, for which the premiums can be deducted from your CPF account. Ensure you stick with it, even if you suffer a temporary setback such as losing your job.

There is no telling when a medical disaster may strike - and it may turn out to be very costly if you are not prepared.

Get a roof over your head
For most of us, buying a house is the biggest financial commitment we will ever make in our lives and we quite often literally spend a lifetime paying for it.

Getting a bank loan to pay for a roof over your head is a good example of how to leverage on other people's money - the bank's in this case - to make a tidy profit as the value of the house goes up.

It is the best example of the "buy and hold" strategy advocated many times in this column: Buy a house, stay in it for decades, while holding down a job and raising a family. Then when you retire, you have the option to sell the house and pocket the gains, as you downsize to a smaller property.

The strategy worked in my parents' generation and it is working in mine. It should work for future generations too, as Singapore's economy continues to grow, enabling real estate prices to appreciate over the long term.

Open an SRS account
Regular readers of this column will know this is among my favourite themes. Go to a local bank and open a supplementary retirement scheme (SRS) account. Any money you put into the SRS account is tax-free, so every dollar put into the SRS reduces your taxable income by a dollar.

The great benefit of the SRS is that the savings do not have to be locked up in a cash deposit but can still be used for stock investments.

I have more than doubled the money I have put into my SRS account through stock investments since I opened it in 2001. It is a resounding testimony that the proof of the pudding is in the eating.

Friday, June 28, 2013

Attempting To Grasp A Whole New World Without Cheap Money!

 by Gabriel Gan 28/06/13 6:45 pm

A fortnight ago, we witnessed the worse correction in more than a year after Fed Chairman Ben Bernanke breathed words of a gradual withdrawal of stimulus measures. Already so used to life in the stock market with cheap money, investors sold shares, bonds and gold so much so that buyers who had missed the entire rally refused to bargain hunt.

When Bernanke came out to utter comforting words, the stock markets rallied believing that it was a miscommunication that had led to the selloff. The Dow Jones Industrial Average (DJIA) attempted a rally from below 15,000 to as high as 15,340 before falling again when Ben Bernanke, in his post-FOMC meeting media conference, confirmed that the Fed would reduce the amount of bond-buying this year followed by a total withdrawal of Quantitative Easing (QE) III by mid of 2014 should the US unemployment figure hit 7 percent.

This rattled investors into selling as the DJIA plunged from a high of more than 15,300 before the Fed meeting to as low as 14,551 in a matter of just three trading days. The 800-point swing is still considered mild when compared to other markets, especially China and Hong Kong.

From peak to trough in the month of June alone, the Shanghai Composite Index (SSE) lost almost 450 points – a whopping 19.4 percent – and would have fallen into the bear market if not for the strong intra-day rebound on 25 June when it recovered from 100 points down to close at 1,959! If we were to take the closing of 2,421 points on 18 February and compare it against the close on 26 June, then the index is precariously close to a bear market. If the index breaks 1,936 points, then the index would have lost 20 percent from the high of 2,421 points.

As for Hong Kong, the Hang Seng Index (HSI) reached a high of 23,685 on 4 February and fell all the way to 19,855 on 25 June, representing a monstrous 3,830-point drop or 16.1 percent. From the recent closing high of 23,493 on 20 May, the index fell 3,053 points to close at 20,440 on 27 June. While the HSI has yet to fall into bear market territory, it is also dangerously close to that level despite a rebound that started on 25 June.

Why The Correction?

There are two main factors that contributed to the correction: Firstly, the world is very used to government intervention in the financial markets so much so that we can safely attribute the 4 1/2 year Bull Run to an unprecedented amount of money being printed by the US central bank.

A lot of money has been printed but it does not seem that much has gone to help the economy outside of the financial markets. Money that has been printed has been used to buy up bonds, stocks but precious little has been invested in the real economy. The main aim of the stimulus measures has been to artificially deflate interest rates so that credit is available cheaply to those who need it although those who really need it do not have access to such funds. When so much money is in the financial system, funds are then parked in assets from silver to gold to stocks and bonds. Investors who are tired of the miserable returns on risk-free deposits are forced to seek higher returns via riskier assets. The appetite for risks has helped to fuel a Bull Run despite the economy not doing spectacularly well.

This has changed, and will change very soon after Ben Bernanke’s latest comments. The Fed chief has finally decided to stop serving alcohol and investors who have been in a drunken stupor all these while have finally sobered up and realised that we are facing a whole new world.

This whole new world has been made worse by the fact that China – the fastest-growing economy in the world for the last decade – will no longer be growing at the same pace and may not even grow at the pace anticipated by China’s government.

The sudden credit crunch in China has led to a sharp rise in the interbank borrowing rate, pushing up interest rate amid an environment where the government continues – and will continue – to drain off money supply in the financial system after learning its lesson in the previous stimulus exercise whereby inflation shot to the sky.

The key reason for the stock market’s weak performance was largely due to the fact that investors had earlier expected the new leaders to boost the economy but, instead of meeting expectations, Premier Li Keqiang decided to restructure the economy by relying less on exports, boost domestic consumption and wean the economy off its reliance on readily available credit that proved to be detrimental to the economy in the long run.

Now that US is readying itself for life without stimulus and China adapting to a whole new world of economic restructuring and slower growth, it will take the wind out of the sails of the stock market for quite a while until investors adapt to the paradigm shift. This paradigm shift, while painful in the short-term, is actually a positive for the global economy as a whole because the world cannot be surviving more printed money and ballooning national debts.

When the real economy is ready to stand on its own feet without crutches provided by stimulus measures, it will ultimately benefit the stock market. This is the time when economic growth is real and solid, backed by fundamentals and probably more consistent with reality.

Key Supports And Resistances

If we were to look at the DJIA, it does not seem that the impending end of QE III has done much harm. After falling to a low of 14,551 – the new support level for the DJIA in the near-term – the index is now at 15,024 points. It has met a minor resistance at the 9-day moving average and unless the index can move above 15,300, investors should not bet on the DJIA moving into a new uptrend.

While the US market looks rather strong despite it being the “epicenter of the earthquake”, Asian markets have suffered the most

For China and Hong Kong, they almost fell into bear market territory but are now enjoying a good spell after the People’s Bank of China acted to ease the credit crunch by injecting liquidity into areas where money is needed. It is also helped by certain Fed officials who are quick to downplay Bernanke’s earlier stance that QE III will be reduced by this year and put to a stop by next year. These officials quickly reassured that Bernanke’s statement was meant to say that QE III will end only if the economy was strong enough to stand on its own.

The HSI has staged a V-shaped rebound and continues to rise on 28 June after the DJIA staged a triple-digit rebound. The index may face some resistance at between 21,000-21,200 after rallying for a couple of days and owing to the weak sentiment. Support remains at the recent low of 19,426 points.

The weakest rebound took place in Singapore with the STI rising very little from its recent low and the overall market weak. It is unlikely that the index can go above the recent high of 3,235, as it is already struggling to overcome the resistance zone at between 3,150 to 3,180.

It will take time for the world to get used to slower growth and, most importantly, life without a stimulus measure. We cannot be sure that once the stimulus measures have been withdrawn, the economy can stand on its own but, as already mentioned, it is for the long-term good.

Wednesday, June 19, 2013

Retirement can be bad for your health

Teddy Roosevelt once said “the best prize that life has to offer is the chance to work hard at work worth doing”.

19 Jun 2013.

Teddy Roosevelt once said “the best prize that life has to offer is the chance to work hard at work worth doing”.

Recent research suggests he may have been more right than he knew: Life’s “best prize” might actually extend life itself.

Our common perception is that retirement is a time when we can relax and take better care of ourselves after stressful careers. But what if work itself is beneficial to our health, as several recent studies suggest?

One of them, by Ms Jennifer Montez of Harvard University and Ms Anna Zajacova of the University of Wyoming, examined why the gap in life expectancy between highly educated and less educated Americans has been growing so rapidly.

Examining the growing education gradient in life expectancy from 1997 to 2006, Ms Montez and Ms Zajacova focused on white women aged 45 to 84. In addition to the difference in smoking trends by education, they concluded that, among these women, “employment was, in and of itself, an important contributor”.

The life expectancy of less educated women was being shortened by their lower employment rates compared with those of highly educated women.

The researchers tried to test whether the problem was that less educated people had worse health, and therefore could not work. But they found that “the contribution of employment to diverging mortality across education levels is at least partly due to the health benefits derived from employment”.


Researchers at the Institute of Economic Affairs in the United Kingdom have also recently identified “negative and substantial effects on health from retirement”. Their study found retirement to be associated with a significant increase in clinical depression and a decline in self-assessed health, and that these effects grew larger as the number of years people spent in retirement increased.

Similarly, a study published in 2008 by the National Bureau of Economic Research found that full retirement increased difficulties with mobility and daily activities by 5 per cent to 16 per cent and, by reducing physical exertion and social interactions, also harmed mental health.

The broader literature on the question of whether retirement harms health has been more mixed. The big question is whether the observed physical deterioration after retirement occurs because it is underlying poor health that leads people to end their working life.

Some studies that try to control for this reverse causality, such as a 2007 paper by Mr John Bound of the University of Michigan and Mr Timothy Waidmann of the Urban Institute, find that retirement does not harm health — and may actually improve it.

Another study, by Mr Esteban Calvo of the Universidad Diego Portales in Chile, Ms Natalia Sarkisian of Boston College and Mr Christopher Tamborini of the Social Security Administration, finds harm from early retirement but no benefit from delaying retirement beyond the traditional age.


My own reading of all of these studies is that there is at least strongly suggestive evidence that not working, in and of itself, can be harmful to your health. And this raises the question of what it means for the puzzling finding that overall life expectancy appears to rise, not fall, during recessions.

Now, I’m only speculating, but the answer could lie in the fact that, even during a recession, most people still work. Because a larger-than-usual minority don’t, pollution is reduced, traffic fatalities decline and the quality of staffing at nursing homes improves — and these changes boost the health of the people who are still working.

It’s terrible to say, but the research seems to suggest that being out of work yourself may hurt your health — but having other people out of work may help it.

Which brings us back to Roosevelt. Most of us seem to think that we would be in better health if we won the lottery and spent our days on the beach, rather than struggling with sometimes stressful jobs.
Yet, the next time you think your job is killing you, just remember that the evidence, if anything, suggests the opposite: Your job may be saving your life. BLOOMBERG

Peter Orszag is Vice-Chairman of Corporate and Investment Banking and Chairman of the Financial Strategy and Solutions Group at Citigroup.

Bank on six principles of income investing

The Business Times © Singapore Press Holdings Limited

THE current macroeconomic and financial market environment remains supportive of income-focused strategies, say Aymeric Forest and Iain Cunningham, fund managers of Schroder ISF global Multi-Asset Income, in an article.

There was an exodus from high-yielding securities after the US Federal Reserve talked about stimulus tapering a month ago. The Singapore real estate investment trusts (S-Reits) index plunged by some 14 per cent in the three-and-a-half weeks after.

But according to Messrs Forster and Cunningham, the deleveraging process that began in Western economies in 2008 has forced developed market central banks to provide support for economic growth. They have cut interest rates and printed money as customers and businesses reduce expenditure and repair their finances. This has led to near- zero interest rates in many developed nations and resulted in investors struggling to meet their income requirements. "Although progressing well, we believe the current deleveraging that is currently taking place still has some way to go."

In the US, aggregate debt peaked at 385 per cent of GDP in early 2009 and has since declined steadily to 355 per cent of GDP. "In the 1930s, however, debt-to-GDP ratios fell to levels considerably below where they peaked, leading us to believe that we are only part way through the current deleveraging process," they said.

Against this, where continued deleveraging is acting as a headwind to economic growth in the developed world, central banks are likely to have to maintain highly accommodative monetary policy measures to encourage growth.

This was the case in the 1930s, where interest rates were moved to near-zero in the early 1930s and remained there until the early 1940s. "The requirement for policymakers to provide this support at present should, in our view, lead to a continuation of near-zero interest rates until the current deleveraging process has further progressed," they said.

In this environment, where it remains challenging for investors to meet their income requirements, income-focused strategies should remain well supported by continued demand for higher-yielding assets.

Tread carefully

However, given that the current environment is characterised by tepid growth and plentiful liquidity, they believe that investors who are searching for income should tread carefully when exposing themselves to asset classes that are more volatile than they are used to.

Messrs Forest and Cunningham set out their principles for income investing which they hope will help guide investors through the challenges of the current environment.

The six principles are:
•One, be careful when investing in passive-income products. Investing in generic income products like exchange-traded funds (ETFs) can result in unnecessary exposure to avoidable risks. For example, income-focused equity ETFs can be highly concentrated in a small number of sectors, such as utilities, leaving investors exposed to, for example, regulatory risk. They say investors should pursue more bespoke strategies designed to minimise such risks.

•Two, pursue a diversified approach. Investing in single- asset classes for income can leave investors exposed to the specific risks inherent within those asset classes. Whether it is market risk in equities, liquidity risk in high-yield debt or the political risk inherent in emerging-market debt, these risks can lead to significant underperformance by particular asset classes. By investing across a spectrum of asset classes, investors can diversify these risks and produce superior risk-adjusted returns.

•Three, focus on higher-quality assets with sustainable income. One of the biggest risks in investing is the risk of permanent capital loss. Investing in higher-yielding securities without paying attention to the security issuer's future ability to pay dividends or meet coupon and principal payments risks permanent capital loss. It is imperative to focus on investing in high-quality securities that are able to sustain and, for equities, to grow their income streams in order to minimise the risk of capital loss.

•Four, take advantage of opportunities globally. Investors who are geographically restricted (for example, by focusing too narrowly on their home market) have a reduced opportunity set compared to those who invest globally. Assets in certain regions can be expensive at points in time, while assets in other regions can simultaneously be cheap. By investing globally, investors can take advantage of opportunities in different regions whenever they present themselves.

•Five, be flexible and unconstrained. Different asset classes offer value relative to other asset classes at different points in the economic cycle. A flexible and unconstrained approach should be taken when managing exposure to different income sources. This allows investors to take advantage of relative value opportunities in different asset classes, styles and market cap size over time.

•Six, analyse risk and manage it carefully. By following the first five principles above, concentration risk and the risk specific to individual asset classes and securities should be minimised. However, it is also important to take into account liquidity risk to ensure that assets can be bought and sold with ease.

It is also important to understand the amount of risk being taken and to examine how your portfolio will perform in different market environments. An active approach to risk management, in order to understand the sources and portfolio implications of different types of risk, can assist in protecting a portfolio during turbulent markets, they said.

Saturday, June 15, 2013

Equity risk premium - an added perspective

Professor Aswath Damodaran of the NYU Stern School of Business sees it as a receptacle for investor hopes and fears

15 Jun 2013 08:55

GLOBAL equities markets - especially those outside of the US - have gone on roller-coaster rides since the US Federal Reserves chairman Ben Bernanke suggested on May 22 that the central bank was poised to taper off its money printing action.

Here are the numbers. In Singapore, the Straits Times Index has fallen 8.4 per cent in the last three and a half weeks - giving back all the gains that it had made so far this year.

Hong Kong's Hang Seng Index is down nearly 10 per cent since May 22, and it is down 7.4 per cent for the year. Nikkei 225 has plunged by just under 20 per cent in the last three and half weeks, but it is still up 22 per cent for the year. The South Korean and Taiwanese markets are down by about 5 per cent each since the topic of "tapering" was broached. The former is also down by about 5 per cent for the year but the latter still manages to cling on to a 3 per cent gain year-to-date.

Meanwhile, Jakarta is down 8.6 per cent since the third week of May, but is still up 10 per cent for the year. As for the US, the S&P 500 shed only 1.1 per cent since May 22, and is in the black by nearly 15 per cent for the year.

All the above numbers are in local currency terms. Given the strengthening of the US dollar, the US market's gain is even higher and the losses in some of the regional markets more severe.

Three weeks back, I calculated the equity risk premia (ERP) for some of these markets and showed that these risk premia - the expected compensation to investors for exposing themselves to equity risk - are high by historical standards.

I calculated the ERP by dividing the 10-year average earnings per share of the market by the current market price, and then subtracted the one-year interbank rates. The high levels of ERPs suggest that the markets are not overvalued, and in fact, there may still be room for further appreciation, I noted.

Aswath Damodaran, professor of finance at the Stern School of Business at New York University, in his latest blog post, added a new perspective to the discussion on ERPs.

Comparing the expected cash flows of US stocks relative to the S&P 500 as at May 18, Prof Damodaran came up with an ERP of 5.45 per cent. "The ERP is the extra return that investors demand over and above a risk free rate to invest in equities as a class. Thus, it is a receptacle for investor hopes and fears, with the number rising when the fear quotient dominates the hope quotient. In buoyant times, when investors are not fazed by risk and hope is the dominant force, equity risk premiums can fall," explains Prof Damodaran.

The average implied equity risk premium between 1961 and 2012 in the US is 4.02 per cent. If the equity risk premium, currently at 5.45 per cent, does drop to 4.02 per cent, the S&P 500 would trade at 2,270, an increase of some 38 per cent from current levels.

Prof Damodaran adds more granularity to the discussion on the ERP. "The high ERP in 2013 is very different from high ERPs in previous time periods and extrapolating from past history can be dangerous," he says.

The expected returns of stocks have two components - one, the risk free rate; and two, the ERP.
Prof Damodaran plots the expected returns of stocks from 1962 till last year, and decomposes them into ERP and the risk free rates. (See chart)

He notes that over the last decade, the expected return on stocks has stayed surprisingly stable at between 8-9 per cent. Almost all of the variation in the ERP over the decade has come from the risk free rate. In particular, the higher ERP over the last five years can be entirely attributed to the risk free rates dropping to historic lows. In fact, the expected return on stocks on May 18, 2013 of 7.40 per cent is close to the historic low for this number of 6.91 per cent at the end of 1998.

While the relationship between the level of the ERP and the risk free rate has weakened over the last decade, the two numbers have historically moved in the same direction, says Prof Damodaran. When risk free rate goes up, so does ERP, leading to lower stock prices.

In light of this, consider again two periods with high ERPs. In 1981, the ERP was 5.73 per cent, but it was on top of a 10-year US treasury bond ( rate of 13.98 per cent, yielding an expected return for stocks of 19.81 per cent. On May 1, 2013, the ERP is at 5.70 per cent but it rests on a US treasury bond rate of 1.65 per cent, resulting in an expected return on 7.35 per cent.

"An investor betting on ERP declining in 1979 had two forces working in his favour: that the ERP would revert back to historic averages and that the US treasury bond rate would also decline towards past norms. An investor in 2013 is faced with the reality that the US rate does not have much room to get lower and, if mean reversion holds, has plenty of room to move up, and if history holds, it will take the ERP up with it," he says.

But there is some good news. Even if risk free rates move to 3 per cent and the equity risk premium drops to 5 per cent, the S&P 500 index is still undervalued by about 5 per cent, according to Prof Damodaran's calculations. But if rates rise to 4 per cent and the equity risk premium stays at 5.5 per cent, the index is overvalued by about 8 per cent.

So there is still some room for the rates to move around before the market is deemed overvalued.
In a previous post, Prof Damodaran has noted that stocks do not look overpriced based on (1) robust cash flows, taking the form of dividends and buybacks at historic highs for US companies, (2) a recovering economy (and earnings growth that comes with it), (3) ERP at above-normal levels and (4) low risk free rates.
Thus, he says his argument is a relative one: given how other financial assets are being priced and the level of interest rates right now, stocks look reasonably priced.

The danger, though, is that the US T.Bond rate is not only at a historic low but that it may be too low, relative to its intrinsic level, based upon expected inflation and expected real growth.

"If you believe that the T.Bond rate is too low, then you have the possibility that you are in the midst of a Fed-induced market bubble(s) and that script never has a good ending," he cautions.

The scary part is that there are no obvious safe havens: gold and silver have had a good run but don't seem like a bargain and central banks around the world seem to be following the Fed's script of low interest rates. "You could use derivatives to buy short-term insurance against a market collapse but, given that you are not alone in your fears about the market, you will pay a hefty price."

So the market is dancing to the Fed's tune. It is not a question of whether the music will stop, but when, writes Prof Damodaran. "When long-term interest rates move back up, as they inevitably will, the question of how much the equity markets will be affected will depend in large part on whether the ERP declines enough to offset the interest rate effect."

But while Prof Damodaran says he would not be arguing that stocks are cheap, simply because the ERP today is higher than historic norms, he is not ready to scale down the equity portion of his portfolio (especially since he has no place to put that money).

As mentioned, there is enough room for rates to move around before the market is considered severely overvalued.

Hence Prof Damodaran says he will continue to buy individual stocks, while keeping an eye on the ERP and T.Bond rate.

Hopefully, the above analysis will soothe the nerves of some investors out there. Just a note, the professor shares his research and views on his blog frequently and readers can download spreadsheets to input their own numbers to come up with their own conclusions. Therefore, the blog should be a frequent stop for investors keen to continually improve on their investment knowledge.

Friday, June 14, 2013

Property stocks despite current turmoil

14 Jun 2013

Property stocks have returned 11.6 per cent per year over the past 10 years to the end of May this year — ahead of both equities in general and government bonds and in line with our long-term annual expected returns from the sector of 10 to 12 per cent. This includes a period of significant volatility following the onset of the global financial crisis in 2007.

Being traditionally viewed as a more defensive asset class than equities in general, real estate stocks have a lower volatility with a greater proportion of their total return being driven by income. The length of rental agreements ensures a steady, bond-like income stream that can provide a degree of insulation against inflation.

Listed property stocks have fallen more than wider markets in the recent sell-off as a result of concerns that the sector is more sensitive to interest rate moves and that an increasing bond yield will make alternative income streams, such as those from real estate less attractive.

Our view has been that the spread, or risk premium, between the yield provided by physical property assets and government bond yields of about 400 basis points provides us with a healthy buffer before increasing bond yields will impact property values.

The historical spread is 200 to 250 basis points, so this suggests investors in real estate are already discounting higher bond yields in the future.

We also take comfort from the fact that the reason the United States Federal Reserve is considering tapering quantitative easing is due to signs of better-than-expected economic growth. Ultimately this should translate into greater occupational demand for real estate assets and, as a result, rental growth. There are already signs of this, most notably in the US, and this should have a positive impact on capital values in the future.

We, therefore, still expect average property values to recover in line with tenant demand, given the general lack of new development and, as a result, the medium-term outlook for property, even in a modestly rising rate environment, is healthy. However, in a weak economy there will be a big difference between the best and the rest. Equity market volatility is likely to persist over the coming months but with an attractive dividend yield and access to capital markets, the companies in which we invest remain well placed.

We are currently positive on the US as we believe that taking into account the whole universe of 140 stocks, we expect the dividend yield of North American real estate investment trusts (REITs) at 4 per cent to grow at around 10 per cent in each of the next two years as both free cash flow and payout ratios rise. The quality of the portfolios of many of the larger REITs is still good, notably in the regional mall sector, where we are seeing increasingly positive trends in same-store sales growth. The apartment sector also continues to experience rental growth, despite the beginnings of a revival in house prices. Other sectors, such as healthcare, self-storage and lodging are also seeing improving fundamentals.

We also remain fundamentally positive on the Japan story despite the volatility in stock prices. There are already some signs of improvement in the Tokyo office market, where the majority of our exposure sits, and while share prices will be dictated by macroeconomic factors in the short term, we expect these improving fundamentals to be reflected in share prices over the medium term.

Elsewhere in Asia, Hong Kong and Chinese developers look cheap, but often do, and any re-rating will require a shift in investor sentiment.

Singapore REITs also seem fairly valued, offering attractive dividend yields. Australia’s real estate sector also offers good yield, but with macro uncertainty and currency weakness we remain underweight.

In Europe, we are overweight in the United Kingdom (especially London), France and Scandinavia. London is the only market with any significant growth in rental values — in both office and retail — and the appetite of investors for good properties is undiminished. Our French overweight is stock-specific and based on valuation. The Scandinavian economies are generally in better shape than their European counterparts and we have exposure to Stockholm and the Oresund region.

Although the global economy faces significant challenges — maintaining growth against a backdrop of political, monetary and fiscal uncertainties — it may be fair to say the risks are reflected in the price. While equity markets may remain volatile in the coming months, and investors may use this as a reason to take some profits, the real estate sector is on an improving path in most markets globally and ultimately this is what will drive property share prices.

The yield provided by both physical property and property stocks will also remain attractive relative to alternatives, even with bond yields rising.

Listed property companies remain well placed in terms of asset and balance sheet quality and are continuing to exploit their cost-of-capital advantage, making earnings-enhancing acquisitions. They have also used the low-yield environment to both extend the duration of their debt and diversify their funding sources, meaning they are less exposed to rising rates.

This research is provided by Henderson Global Investors (Singapore) and represents the house view. The information is intended for information, illustration or discussion purposes only and should not be relied on for any investment decisions.

Sunday, June 9, 2013

I'm not buying a home in Iskandar

Published on Jun 09, 2013

But I may consider investing there when commercial activity picks up and prices come down

By Yasmine Yahya

I have visited Iskandar Malaysia seven or eight times this year to write about the development, prompting friends and others to ask the inevitable question: Have you bought a house there yet?

The short answer is: No.

I have met many happy people who have bought homes in Iskandar; some more than one, while others are looking to buy their second or third property.

I don't think they're foolish or wrong but I will not be joining their ranks any time soon.

Singaporeans and Singapore-based expatriates are buying homes in Iskandar for two main reasons: to live in a low-cost and spacious environment or to invest in what could be a boom town for property.
I don't really want to do either of those things.

For starters, I think we are at a point where it is either too late or too early to jump into the market.

Property prices in Iskandar have doubled or even tripled in the past two to three years. True, homes are still much cheaper than in Singapore, but a good investment is not one that is merely cheap, but one that holds great potential value.

Several bankers and property consultants I have spoken to have even started calling the area's property market a bubble.

In fact, they noted, prices in Iskandar - population 1.3 million - are already level with those in Kuala Lumpur, yet Kuala Lumpur is a mature city where multinationals place their offices and expat staff.

If there is a city in Malaysia where you could most easily get rental income, it would be Kuala Lumpur.

Iskandar's commercial scene, on the other hand, has yet to take off. The multinational firms already doing business there are mainly operating out of factories and hire blue-collar workers.

These companies are more interested in renting dormitories for their workers than swanky apartments for themselves while the bosses are buying their own homes.

For now, a lot of hope is being pinned on Pinewood Iskandar Malaysia Studios, the Nusajaya offshoot of the British film studio that produced the James Bond and Harry Potter movies.

It is expected to create a constant pool of transitory workers that will fill the rental market once it opens next month. The firm said it will create 1,500 jobs by the end of the year.

It will then bring in a stream of actors, directors and other movie production professionals, all of whom will need housing in Iskandar while shooting films for months at a stretch.

This will likely create some demand for rental accommodation, but Pinewood Studios remains the only big commercial player to start operations soon.

Many others, such as billionaire Peter Lim's Motorsports City and Afiniti Medini, which will have a hospital and a corporate training centre, are still years away.

In the meantime, there are now 430,000 homes in Iskandar, with 64,000 more under construction and still much more land that is yet to be developed.

I would consider investing in Iskandar in the future but I would first like to see a pickup in commercial activity there, and for prices to come down to more reasonable levels.

Of course, many people are buying houses in Iskandar as getaway homes, but I don't want to live in Iskandar because I don't drive and I don't want to get a driving licence.

Many of its new and sparkly housing developments are in Nusajaya, a former jungle that has been cleared - yet much of it is still empty and amenities are spread out.

There is one public bus that comes by hourly. If you are in a hurry or want to go somewhere not along the bus route, you would have to drive.

The Iskandar residents I have interviewed say they enjoy the peace and quiet of the place and the fact that there are no crowds, unlike in Singapore.

But I like living in a city. I enjoy the constant buzz and excitement of city life while my flat gives me all the peace and quiet I need.

Plus, if I move to Iskandar, wouldn't I be contributing towards a more crowded Johor?

I'm looking at this over the long term. Eventually, more and more Singaporeans will move across the Causeway to retire in the house of their dreams.

I will still be in Singapore, enjoying empty MRT seats and reading a book in peace and quiet.

Thursday, June 6, 2013

Markets’ rally ending? Analysts stay upbeat

Cai Haoxiang 6/6/2013 

STOCK markets worldwide have gone up a fair bit in the last four years, especially in the past six months. Worries have surfaced on whether the rally is finally going to end. As if on cue, a correction hit at the end of May.

But most analysts and fund managers interviewed by The Business Times in the past few weeks remain bullish, saying that signs of irrational exuberance have not yet appeared.

They point to how price to earnings (PE) ratios, a measure of the value of stocks, are still at their historical averages, and how corporate earnings are keeping pace with their pricier valuations.

They also point to how the world economy is slow but improving, with a clearly recovering US and a resurgent Japan - even as China's growth slows and Europe is expected to remain weak.

And they say that easy liquidity conditions, a precursor for equity outperformance, will still persist for a year or two. Even if the US Federal Reserve decides to slow down or stop its quantitative easing (QE) programmes this year - hints of which have caused some profit-taking on the markets recently - there is nothing to fear.

Said Simon Flood, chief investment officer of Asian fund manager Lion Global Investors: "(Fed chairman) Bernanke has made it clear he's not going to do anything dramatic. For people not to be concerned about the end of QE, they need to be confident that the baton has passed from the public to the private sector.

"Now, we're beginning to see the private sector coming up."

As at June 4, the S&P 500 index in the US is up 15 per cent year-to-date, and trading at double 2009 levels. Singapore's own Straits Times Index is above 3,200 points, though it recently slid from highs above 3,400 points. It is still up 4 per cent year-to-date after a 20 per cent surge last year, and also trading at around twice of its 2009 level.

Japan has been the hot story of the year, with the money printing, public investment and yen depreciation policies of Prime Minister Shinzo Abe propelling the benchmark Nikkei 225 to new highs. The index saw a sharp correction recently, but it is still up 60 per cent from a year ago and up 25 per cent this year.

The stockmarket rally had led to warnings from some quarters in early May that the market was overvalued. In a May 9 report titled Raging Bull, Bank of America Merrill Lynch wrote: "The risk of a melt-up in stocks is high and rising. Positioning, price-action, policy and a range-bound economy can conspire to cause an overshoot."

But the party is not expected to stop anytime soon, underpinned by a fundamentally stable global growth outlook and low inflation. In a report on May 22, Citibank said that it forecast global growth to be 2.6 per cent this year and 3.2 per cent in the next.

"Even with improving financial conditions and modestly better growth prospects in some cases, we believe monetary policy is likely to loosen further in a range of advanced economies near-term and to remain loose for an extended period," it said.

"With highly supportive financial conditions, the Fed may be able to taper bond purchases later this year while continuing with MBS (mortgage-backed securities) bond purchases into 2014."

On May 20, investment bank Goldman Sachs raised its forecast for the S&P 500 index to 1,750 by year-end, 1,900 in 2014 and 2,100 in 2015. Goldman expects the US economy to recover from the economic stagnation that has plagued it for the last six years.

Earlier last month, an InvestmentNews article compiled 10 views from market gurus on whether the rally in the US stock market is ending. Three were worried about unsustainable debt and potential asset price bubbles, but the remaining seven were bullish.

Larry Fink, CEO of BlackRock, an asset management firm, was quoted in a May 7 interview that investors need to be "heavily invested" in stocks. "Despite this huge run-up in markets, corporate earnings have kept pace," he said.

Markets blogger and pundit Joshua Brown explained in a May 16 post comparing a previous bull market with this one: "In 1999 the S&P finished at 1,469, earned 53 (US) bucks per share, and paid out US$16 in dividends.

"The 2013 S&P 500 is earning double that amount - over US$100 per share. The index will also be paying out double the dividend this year, more than US$30 per share, and returning even more cash with record-setting share repurchases.

"The current S&P 500 trades for a PE of 14 versus 33 for 1999. So double the fundamentals for half the price."

Investor sentiment has shifted towards equities.

David Lim, Singapore CEO and head of private banking South-east Asia for Bank Julius Baer, said that clients both still crave for yield and are bullish on equities. "That's why you see both a strong bond and equity market," he said. "Money going into equities is coming from cash."

As for where to put one's money, the traditional developed economies of the US and Japan remain favourites due to their sheer size and potential, compared to emerging markets. In Asia, Singapore is not preferred even though analysts like the transparency and defensiveness of the market.

Real estate investment trusts (Reits) have suffered steep falls recently on concerns that interest rates will rise, increasing interest expenses. OCBC Investment Research argued in a June 4 note that the selling was overdone, and maintained its "overweight" rating on the sector.

But Mr Flood said that it is difficult to see another year of 20 per cent returns in Singapore. Comparatively, the US looks better. "The distance it has to go to recover its former position is further," he said.

Outside Japan, David Clark, Deutsche Bank's Asia head of equity research, said that the bank is positive on construction, some financial companies, infrastructure and shipping, and concerned about coal, steel and palm oil.

He called for "significant upside" in both China and India - a view also shared by asset manager Allianz Global Investors. Allianz Asia-Pacific chief investment officer Raymond Chan said that the Asean market is getting expensive, but aggregate valuations in Asia ex-Japan "are still reasonably underpinned by strong fundamentals".

For China, Mr Flood said that concerns about political transparency and creditworthiness of the financial sector there continue to cause equities to trade at a discount.

Yet hope springs eternal. Lorraine Tan, S&P Capital IQ vice-president of research for Asia, said that some high net worth clients whom she advises are still nervous. This might show how the market still has legs. "Markets are not exuberant yet," she said.

As for risks, another correction in Asian markets might come from news of Chinese bad debts. There is no systemic risk but negative sentiment could overflow to Asian equities if one or two Chinese local governments are allowed to go under, she said.

The eurozone is also still contracting and if things drag out longer, there will be a financial system risk. And continued budget cuts in the US could dampen US growth and confidence, she said.

But with equities still at a spread of 4-5 per cent to bonds, there is still upside: "I think we have a couple more years to go in Asia."

Monday, June 3, 2013

Why the gold rush is over for the long haul

By Nouriel Roubini
3 June 2013

The run-up in gold prices in recent years — from US$800 (S$1,000) an ounce in early 2009 to above US$1,900 in the fall of 2011 — had all the features of a bubble. And now, like all asset-price surges that are divorced from the fundamentals of supply and demand, the gold bubble is deflating.

At the peak, gold bugs — a combination of paranoid investors and others with a fear-based political agenda — were happily predicting gold pricesreaching US$2,000, US$3,000, and even to US$5,000 in a matter of years.

But prices have moved mostly downward since then. In April, gold was selling for close to US$1,300 an ounce — and the price is still hovering below US$1,400, an almost 30 per cent drop from the 2011 high.

There are many reasons why the bubble has burst, and why gold prices are likely to move much lower, towards US$1,000 by 2015.


First, gold prices tend to spike when there are serious economic, financial and geopolitical risks in the global economy. During the global financial crisis, even the safety of bank deposits and government bonds were in doubt for some investors. If you worry about financial Armageddon, it is indeed, metaphorically, the time to stock your bunker with guns, ammunition, canned food and gold bars.

But even in that dire scenario, gold might be a poor investment.
At the peak of the global financial crisis in 2008 and 2009, gold prices fell sharply a few times. In an extreme credit crunch, leveraged purchases of gold will cause forced sales, as any price correction triggers margin calls. Gold can be very volatile — upward and downward — at the peak of a crisis.

Second, gold performs best when there is a risk of high inflation, as its popularity as a store of value increases.But, despite very aggressive monetary policies by many central banks — successive rounds of “quantitative easing” have doubled, or even tripled, the money supply in most advanced economies — global inflation is actually low and falling further.

The reason is simple: While base money is soaring, the velocity of money has collapsed, with banks hoarding liquidity in the form of excess reserves. Ongoing private and public debt deleveraging has kept global demand growth below that of supply.

Thus, firms have little pricing power, owing to excess capacity, while workers’ bargaining power is low, owing to high unemployment. Moreover, trade unions continue to weaken, while globalisation has led to cheap production of labour-intensive goods in China and other emerging markets, depressing the wages and job prospects of unskilled workers in advanced economies.

With little wage inflation, high goods inflation is unlikely. If anything, inflation is now falling further globally as commodity prices adjust downward in response to weak global growth. And gold is following the fall in actual and expected inflation.


Third, unlike other assets, gold does not provide any income.
Whereas equities have dividends, bonds have coupons, and homes provide rent, gold is solely a play on capital appreciation. Now that the global economy is recovering, other assets — equities or even revived real estate — thus provide higher returns.
Indeed, US and global equities have vastly outperformed gold since the sharp rise in gold prices in early 2009.

Fourth, gold prices rose sharply when real (inflation-adjusted) interest rates became increasingly negative after successive rounds of quantitative easing.
The time to buy gold is when the real returns on cash and bonds are negative and falling. But the more positive outlook about the United States and the global economy implies that over time, the Federal Reserve and other central banks will exit from quantitative easing and zero policy rates, which means that real rates will rise, rather than fall.

Fifth, some have argued that highly indebted sovereigns would push investors into gold as government bonds became more risky — but the opposite is happening now.
Many of these highly indebted governments have large stocks of gold, which they may decide to dump to reduce their debts.
A report that Cyprus might sell a small fraction — some €400 million (S$657.2 million) — of its gold reserves triggered a 13 per cent drop in gold prices in April. Countries like Italy, which has massive gold reserves (above US$130 billion), could be similarly tempted, driving down prices further.


Sixth, some extreme political conservatives, especially in the US, hyped gold in ways that ended up being counter-productive. For this far-right fringe, gold is the only hedge against the risk posed by the government’s conspiracy to expropriate private wealth.
These fanatics also believe that a return to the gold standard is inevitable as hyperinflation ensues from central banks’ “debasement” of paper money. But, given the absence of any conspiracy, falling inflation and the inability to use gold as a currency, such arguments cannot be sustained.

A currency serves three functions: Providing a means of payment, a unit of account and a store of value. Gold may be a store of value for wealth, but it is not a means of payment; you cannot pay for your groceries with it. Nor is it a unit of account; prices of goods and services, and of financial assets, are not denominated in gold terms.

So gold remains John Maynard Keynes’ “barbarous relic”, with no intrinsic value and used mainly as a hedge against mostly irrational fear and panic. Yes, all investors should have a very modest share of gold in their portfolios as a hedge against extreme tail risks. But other real assets can provide a similar hedge, and those tail risks — while not eliminated — are certainly lower today than at the peak of the global financial crisis.

While gold prices may temporarily move higher in the next few years, they will be very volatile and will trend lower over time as the global economy mends itself. The gold rush is over. PROJECT SYNDICATE

About the author:

Nouriel Roubini is Chairman of Roubini Global Economics and Professor of Economics at New York University’s Stern School of Business.