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Wednesday, July 31, 2013

It’s time to diversify investments

The Business Times
Teh Hooi Ling

INVESTORS should diversify their investments and not hide in a single asset class any more as the US Federal Reserve's tapering is a game-changer, said Andy Warwick, BlackRock's managing director and portfolio manager of the firm's global multi-asset income fund.

Here in Asia for his whirlwind tour to promote his fund, Mr Warwick said the world is moving on. "The Fed's tapering is a game-changer. It signifies the end of the bond bull market. That has huge ramifications for all asset classes as well."

Investors, he said, have to have a diversified portfolio across as many different asset classes as they can. They have to try to find a variety of streams of income.

Although diversification is supposedly a mantra of good investment practice, not many actually do that, he said. "The fund flows into fixed income in the past five years have been absolutely extraordinary. And up till the beginning of this year, equities have had consistent outflows. We are just seeing people diversifying this year."

Multi-asset strategy

But increasingly, investors are coming round to the idea of diversification. Fund flows into BlackRock's multi-asset strategy have been rising. As at today, there are US$150 billion assets under multi-asset strategy. Overall, BlackRock has some US$4 trillion assets under management.

Mr Warwick said BlackRock is on target in attracting well over US$1 billion this year to its multi-asset strategy funds.

One fund under multi-asset strategy is the income fund managed by Mr Warwick. Established a year ago, the fund is seeing an inflow of "US$1 million to US$2 million" a day. The fund size is now about US$220 million.

About US$100 million of that has come from Korea. The fund has also got good support from Italy. Mr Warwick said the income fund invests in as many asset classes as it can. It invests in loans, real estate debts, infrastructure, solar farms and master limited partnerships - publicly traded vehicles that derive most of its cash flows from real estate, natural resources and commodities.

These instruments generate a net yield of 5.3 per cent. The income fund aims to generate 4 to 6 per cent of yield to pay out to unitholders, and one to 3 per cent of capital growth. In the first year of its operation, the fund chalked up returns of 10.5 per cent.

"Our whole rationale is we want to pay out of the income we generate. We are not going to pay out of capital," said Mr Warwick.

Clients' feedback to BlackRock is that they are not looking for a decumulation type of product. They want something that will give them some form of capital growth as well, he added.

With 40 per cent in equities - 25 per cent in developed market equities and 15 per cent in developing markets - Mr Warwick is looking to increase the equities allocation to 45 per cent. He is positive on the United States, and Europe in particular. He still likes high yields, as the cushion between the spreads is still very high.

Areas which are challenged are government bonds and emerging market equities. But within that two big space, there are pockets of opportunities. Italian and Spanish bonds still look attractive because they are "priced to fail", which BlackRock thinks is the wrong assessment. Brazilian and Mexican government bonds are appealing as well.

In emerging market equities, Mr Warwick is positive on the Asean region, in particular the Philippines and Thailand. "Singapore is simply in a permanent goldilocks scenario - decent growth, low inflation etc."

But China may likely find it difficult particularly in the short term.

"I'm not a perma China bear," qualified Mr Warwick. "I think China can probably come out of this very strongly. But this could be three to five years away. I think the journey to that ending is going to be a rocky one, to say the least."

From an investment point of view, Mr Warwick said the challenge is persuading clients that they are not going to be able to achieve their return expectations and goals by still sticking to fixed income. "You've got to take risks to get return."

Bond selling

One risk that Mr Warwick can identify now is bondholders rushing for the exit at the same time when they see losses in their statements for the first time in two or three years. "Clearly that amount of bond selling would put extreme pressure on bonds and yields. The investment risk here is that bond yields spike too quickly, and the Fed or other governments lose control of their bond markets. That would not be good."

Also, BlackRock's view is that interest rates are on hold until at least 2015. Another risk is that this assumption turns wrong and interest rates rise aggressively before 2015.

Another big risk, he said, is a sudden rise in inflation in the US and emerging markets. "There's no sign of that at all now. But if for some reason, it rears its head, and that forces the Fed to act aggressively, again that will be a big big risk."

BlackRock's main road map, added Mr Warwick, is that "the US grows 2 to 3 per cent, with low inflation, very low interest rates. Corporate profits hold up. And that has obviously a positive effect on the rest of the globe".

Real estate cycle near inflexion point: Redas

Ong Chor Hao

THE head of the Real Estate Developers' Association of Singapore (Redas) has said that Singapore's real estate cycle is approaching an "important inflexion point".

Chia Boon Kuah said two clear trends are emerging - increased market volatility and a maturing property cycle.

Speaking at the Redas Property Prospects Update 2013 Seminar, he said that on one hand, record low interest rates and sustained inflation growth have driven buyers towards property, which has become "a strong magnet as a store of wealth".

On the other hand, risks remain in the real estate market from a combination of factors. Among these are a potential pullback on the US' easy monetary policy, which will push up interest rates; China's recalibration of domestic policies which will also affect the global economy, as will a steady supply of real estate becoming available here in the next four years.

Mr Chia said that against this backdrop, "prudence and a long-term perspective are essential for the health of the property market eco-system".

He said the government's slate of cooling measures were achieving their intended outcomes on the property market: private home prices rose just 1 per cent in the second quarter of the year on falling sales volumes, and HDB resale prices climbed at their slowest pace since the first quarter of 2009.

Property developers will stay invested in Singapore; they have invested between $10 billion and $12.6 billion annually in the past three years in tenders called under the Government Land Sales (GLS) programme, he noted.

"Our interests are aligned to realise a stable, sustainable and resilient property market that can stay the course through many market cycles."

And when Redas members are collectively successful, they will be able to give back to the community, he added. Redas announced in February that it will set up Redas Foundation, a non-profit body that will "coalesce the efforts and resources" of its members to improve not only their welfare but also the living environment and the future of communities.

Mr Chia said that the Redas seminar should examine various outlooks, trends and opportunities in the market.

Besides him, other executives and consultants from various estate, architectural and construction agencies also spoke at the event at the Grand Copthorne Waterfront Hotel.

Petra Blazkova, the head of research for Singapore and South-east Asia at CBRE, for example, presented a breakdown on capital inflows into Singapore.

She said domestic investors have comprised up to 85 per cent of the $109 billion in Singapore property transactions since the global financial crisis. Net buyers are real estate investment trusts (Reits) and listed companies, with foreign investors offloading their assets.

Ku Swee Yong, the chief executive of International Property Advisor, offering his take on how the government can tackle rising housing prices, said the first step is to rein in the rise in prices of Housing and Development Board flats. The rapid growth in prices for HDB flats has created a pool of upgraders who are driving up suburban condominium prices.

Mr Ku also suggested tweaking the GLS system by holding open auctions like in Hong Kong. This will prevent the "winners' curse", where a developer bids well in excess of his nearest competitor.

Lee Lay Keng, the head of Singapore research at DTZ, spoke about how Singapore and Hong Kong differ in their approach to decentralising office space. Hong Kong has made several areas, notably Kowloon East, key nodes in this effort, so the bulk of the upcoming office supply will be in Kowloon East.

Singapore, on the other hand, has gone for a mix of decentralised, CBD and fringe CBD space in the upcoming supply to 2017, so the overall composition of supply in Singapore will remain largely the same.

Tuesday, July 30, 2013

The importance of equities for retirement

The Business Times

LAST week, the Singapore Exchange (SGX) and consultancy Oliver Wyman released a paper on retirement savings. It suggested scrapping the $40,000 requirement to invest Central Provident Fund (CPF) Special Account so that Singaporeans can start early, have a chance of accumulating high returns and ride out market volatility.

The paper said that the average Singaporean reaches the current $40,000 threshold too late, at age 40, to start allocating money to higher-risk equities through the CPF. Also, just 12 per cent of the CPF was put in equities, compared to 49 per cent in Malaysia's pension scheme equivalent, 68 per cent in the US and 69 per cent in Australia.

Stock markets have a propensity to reward people who can stomach its wild gyrations. But the rewards can be decent. The US S&P 500 index has returned an average of around 8 per cent a year over the last 60 years. Singapore's Straits Times Index has returned 9.3 per cent a year in the last 10 years, though this was distorted by a low point in 2003 and a 20 per cent surge last year. Still, these 10-year returns are noticeably better than fixed deposits (1.3 per cent), inflation (2.7 per cent), Singapore government bonds (2.6 per cent) and even property (6.3 per cent).

Stocks, particularly solid, income-generating businesses, should be promoted as a viable investment choice. To promote retail participation, a lot more investor education is needed. This can be on basics such as the benefits of diversification and the concept of investing over a time period to cut costs. However, SGX's suggestion to do away with the CPF Special Account limit is not necessary.

The current floor rate of 4 per cent a year for the Special and Retirement Accounts is a decent, risk-free return. The study itself said that the CPF will provide 68 per cent of a Singaporean's working income in retirement. This is within the World Bank's recommended range of 53 per cent and 78 per cent.There is no need to fix something that isn't broken.

What is also interesting is SGX's conclusion that the expense fees for many investment products are too high and people are paying more for middlemen expenses than actual investment management. This is true for structured products, many investment funds and investment-linked insurance policies. Singaporeans need to be warned against investing in products they do not understand, promoting minimal returns at low risk levels but high fees. Online brokerages offer a low-cost alternative that many are not aware of.

Many Singaporeans tend to view stocks as a form of gambling. Others are scarred by their memories of the global financial crisis. Yet those who shied away from the market missed out on a strong rally over the past four years, and many dividend payments in between. Ultimately, investors lose money because they trade too much and too hastily. If they invest for the long-term and start early, their eventual portfolio can help bolster their CPF retirement savings.

Monday, July 29, 2013

Best to leave CPF Special Account money untouched

Goh Eng Yeow

RECENTLY, a study commissioned by the Singapore Exchange (SGX) throws up an interesting poser: Can the guidelines on investing the monies locked up in the Central Provident Fund (CPF) be relaxed to get higher returns?

The argument in the paper released by the SGX and consulting firm Oliver Wyman is beguiling: Based on its calculations, Singaporeans can achieve returns that hit 79 per cent of their pre-retirement income.

That will be considerably higher than the 68 per cent level which they can expect to get currently.

But to get the higher returns, they will have to put their CPF monies into "life-cycle funds" which invest in higher-risk assets when they are younger that then switch automatically to safer but lower-risk assets as retirement approaches.

Now, most Singaporeans use the bulk of the monies they keep in their CPF Ordinary Accounts for housing. That leaves only the monies in the Special Accounts for investments.

Even so, this is no trifling sum to sneeze at. The study estimates that there is a staggering $15 billion lying idle in the CPF Special Accounts earning the default interest rates offered by the CPF Board.

But there is a snag: CPF members must keep at least $40,000 in cash in their Special Accounts. They can use the remaining balance in excess of the threshold amount for investments.

That, said the paper, is a big dampener. The average Singaporean will reach the minimum $40,000 threshold in their CPF Special Accounts only when they reach 40. "This is a much later age to start investing in equities, compared to retirement saving schemes in many other countries," it said.

Currently, the CPF Ordinary Account pays a return of 2.5 per cent, while the Special Account pays 4 per cent. In addition, the first $60,000 of each person's CPF balance will get an extra 1 percentage point in interest.

But last year, if CPF members channelled their monies into funds under the CPF Investment Scheme (CPFIS), that had been established with a view to give people more investment options for their CPF savings, they could have done better.

Lipper, the fund ratings company, noted that CPFIS investors made an average gain of 10.35 per cent last year.

Those who put their money on CPFIS equity funds enjoyed a 12.27 per cent growth, while bond funds rose an average of 4.73 per cent.

So at first glance, it would seem that taking an active investment approach may be more sensible than leaving the funds idle in the CPF account.

But there are powerful arguments to be marshalled against any relaxation in the CPF investment rules.

Some will say that the SGX may have its commercial interests in mind in trying to get the guidelines relaxed on the use of Special Account monies.

As CIMB Research analyst Kenneth Ng noted in a recent report, SGX had been pushing a lot of initiatives to spur retail participation in the stock market, but so far, that had not seemed to push up the frequency of shares traded.

There is also no way to tell if Singaporeans will do any better putting their money into the so-called life-cycle funds proposed by the SGX-commissioned paper, as compared with the investments now available in the CPFIS scheme.

Statistics show that between 1993 and 2004, nearly three in four people who invested under CPFIS ended worse off than if they had just parked their money in the CPF.

This explains why many financial advisers tell their clients to leave their monies in the CPF Special Account.

Many commercial funds find it difficult year after year to beat the 4 per cent return in the Special Account, which is guaranteed by the Government.

There is also the virtue of compounding. Using a back-of-the-envelope calculation, a 40-year-old Singaporean, with $40,000 untouched in his Special Account, will find the sum growing to about $95,000 by the time he retires at 62, if the interest rate stays at 4 per cent.

If the bonus 1 percentage point in interest is thrown in, the sum adds up to $117,000.

The Finance Ministry was also remarkably prescient when it explained the importance of safeguarding CPF members' monies in a letter to this newspaper in 2007.

This is considering the many financial upheavals we have encountered since then.

It said: "The past two decades have been an exceptional period for global financial markets. Looking ahead, we cannot rule out protracted market downturns, lasting several years. Most CPF members have small balances and will not welcome these risks. Neither will older members waiting to withdraw their retirement funds."

The current CPF arrangement enables all CPF members to earn fair and risk-free returns on their retirement savings, while benefiting from the good performance of GIC and Temasek Holdings through the annual Budget, it added.

The letter concluded: "This is the right way to help Singaporeans save for their old age, and enjoy peace of mind in their golden years."

Many of us would agree.

What return is attractive?

Cai Haoxiang

LAST week, a complicated but rigorous way to value a business called the discounted cash flow (DCF) model was discussed.

This method says a business is worth the sum of all its future cash flows, discounted to their present day value.

I showed how an investor can try to price a real company using its free cash flows. However, many assumptions have to be made.

This week, we continue the discussion of how to price businesses using the DCF model. There is plenty of financial jargon for the uninitiated, but not to worry - the underlying ideas are not as difficult as they seem.

The DCF model equation has two major inputs. The first, cash flow, goes into the numerator. The higher the cash flow, the higher the valuation of the company. This makes intuitive sense. If a company is generating more cash every year, investors will want to pay more for it.

The second input, the cost of capital, goes into the denominator. How people calculate this number is the topic for today.

The cost of capital is the interest rate which investors can be persuaded to invest in the company you are valuing. It is also a measure of risk. The higher the risk, the higher the interest rate an investor will demand to take on the risk.

Investors would not want to pay the same amount of money for a company that suddenly became more risky due to, say, a strike by unhappy workers. They will pay less.

Similarly, if you want to persuade me to invest in a country that is currently torn apart by civil war, the returns had better be really, really good.

For example, if I invest $1 million in a company in Singapore and can get a 5 per cent annual return, or $50,000 a year, I would not want to invest in a company in war-torn Syria and only get $50,000 a year. Maybe I need to get $200,000 a year - a 20 per cent return - before I can be convinced to part with my $1 million.

After all, the company's factories might get bombed. It might not be able to expand anywhere due to the huge uncertainty caused by the civil war. I could lose my entire investment.

If investors now demand a cost of capital of 20 per cent, and the company's cash flows remain at $50,000 a year, its valuation will be just $250,000.

So if a company becomes riskier, its cost of capital will go up. Because the cost of capital is in the denominator, a higher cost of capital would result in a lower overall valuation.

Conversely, if a company is less risky, a lower cost of capital results in a higher valuation.

A large telco with a monopoly over its customer base will have a much lower cost of capital than a small biotechnology startup. Banks, for example, are willing to lend money at a lower cost to the telco. Investors, too, do not require a high return for the telco, because there is relatively little risk taken to get a steady return.

Calculating the cost of capital

How is the cost of capital calculated? This is when we take a deep dive into some financial theory.

In a DCF valuation model for a business, cash flows are discounted by the weighted average cost of capital (WACC) of the business.

As the words "weighted average" implies, there is more than one component to a company's cost of capital. A company's capital often comprises two parts: debt, or how much it owes others, and equity, what is due to its owners.

To calculate WACC, you need to answer these questions:

* How much debt does the company have as a proportion of its total debt and equity? In other words, what is the company's debt weight?

* What is the company's after-tax cost of debt?

* How much equity does the company have as a proportion of its total debt and equity? In other words, what is the company's equity weight?

* What is the company's cost of equity?

Once you have the answers to these questions, you get WACC by this equation that adds the two costs together after adjusting for their weights in a company's capital structure: (debt weight)(after-tax cost of debt) + (equity weight)(cost of equity).

Debt and equity weights

Let's start with the easy part and calculate the respective weights to be assigned to the cost of debt and the cost of equity.

To do that, you need to know the total capital the company is using to finance its business. You use debt valued at market prices, and equity valued at market prices.

If a company's debt is not traded, as is often the case, the book value of debt is used.

To calculate equity valued at market prices, take the company's share price and multiply it by the number of shares it has outstanding.

For example, if a company has $1 million of debt and $3 million of equity, its debt weight is 25 per cent and equity weight is 75 per cent.

Preferred shares have to be separately weighted along with the cost of preferred equity.

Sometimes, the company you are trying to evaluate is not listed or does not trade often. You can't determine the market values of its debt and equity. In that case, it might be better to find a comparable company and use that company's debt and equity weights instead.

Cost of debt

Now, you have two "weights", 25 per cent and 75 per cent. You need to attach an interest rate to each of the weights, and you will have your weighted average cost of capital.

The cost of debt can be seen in the financial markets. It is the interest rate a company would pay to borrow money.

Riskier companies pay a higher interest rate. The larger and more stable the company, the lower the interest it pays.

If the company's debt is rated by a credit rating agency and traded on the bond markets, it is easier to get the exact interest rate its debt is trading at through a search of market data providers like Bloomberg.

Another way to estimate the cost of debt is to use a company's interest expense, how long more before the debt matures and its book value. One can use a financial calculator or a spreadsheet to work out the yield to maturity.

Otherwise, an estimate has to be made from a comparable company.

Interest payments on debt that is used to finance income-producing assets are tax-deductible in Singapore. To account for the tax deductions and get the true cost of debt, you multiply the cost of debt by (1 - tax rate).

Cost of equity

Figuring the cost of equity is the subject of numerous finance textbooks. A popular model to determine the cost of equity is called the Capital Asset Pricing Model, or CAPM.

Essentially, you get a company's cost of equity by adding the risk-free interest rate - the minimum rate investors demand - to the product of the company's beta and the equity risk premium.

The risk-free rate is usually the yield on a 10-year government bond.

Beta is a measure of risk. The riskier the company, the higher the beta and thus the higher the cost of equity.

Risk is measured by volatility, or how much a stock price change differs from a change in the benchmark.

Mathematically, beta is measured by the covariance between the percentage return of the stock and the benchmark return, divided by the variance of the benchmark return. You can get a list of prices from sites like Yahoo Finance, and use an Excel spreadsheet to do this.

A beta of one means price movements are perfectly correlated with the STI. A beta higher than one means the stock is riskier than the benchmark, and a beta lower than one means the stock is less risky compared to the benchmark.

Websites like Reuters, Financial Times and Yahoo Finance will also have the beta of listed companies available. Cyclical companies such as airlines will have higher betas compared to companies selling essential goods.

The equity risk premium, meanwhile, measures how much investors are compensated by buying riskier stocks compared to risk-free government bonds.

Studies have been done showing historical equity risk premiums of around 4 to 7 per cent. There is no consensus on what this figure should be.

If the company you are looking at has a beta of 1.5 and an equity risk premium of 6 per cent, and the risk-free rate is 3 per cent, the CAPM model says its cost of equity would be (0.03) + (1.5)(0.06) = 12 per cent.

With an after-tax cost of debt of 4 per cent, and with the two different weights, we are now ready to calculate the company's weighted average cost of capital.

The equation for its WACC is: (0.25)(0.04) + (0.75)(0.12) = 10 per cent.

Sunday, July 28, 2013

Don't get obsessed with money

Published on Jul 28, 2013

Invest it wisely in things that will reap dividends beyond monetary worth

By Goh Eng Yeow Senior Correspondent

For many people, money is literally a life-and-death proposition, a sometimes malignant force that tears families apart and sets the best of friends at each other's throats.

So I was slightly perturbed to find that my colleague Jonathan Kwok is tracking every cent he spends as he goes into an austerity drive. I was worried it might become an unhealthy, all-consuming obsession.

However, what warms my heart is that he has his priorities right.

Some of my friends' adult children still get allowances from their parents even though they have started working themselves. But despite trying to save as much as possible as he strikes out on his own, Jonathan gives his parents some money every month and does his bit to help the less fortunate.

I find his gesture of filial piety touching. More than the money, it is the thought that counts. He has certainly done his parents proud in this respect.

Having worked around the financial markets for 25 years, I can say that getting obsessed with money may ironically not be the best way to make it.

I know many traders who spend all their time trying to achieve a certain return from the stock market every year.

Yet for all their efforts, they are not conspicuously richer than the rest of us. Even those who achieve their objective may not be any happier. I know of one top trader who surrounds himself with unseen bodyguards for fear that he gets mugged or kidnapped. That is surely not the way anyone wants to live his life.

Markets move in cycles, and it is important to understand that there will be long periods when stock investments offer only a meagre return. But over a lifetime, you will find pockets of opportunities when share prices fall to abysmally low levels because of the financial crises that flare up with distressing regularity.

I have encountered several of them - the Pan-Electric crisis in 1985, the Asian financial crisis in 1998, the dotcom bust-up in 2000, the Sars crisis in 2003 and the global financial crisis in 2008.
That would be the time to be very greedy in making your investments when others are fearful - to paraphrase investment guru Warren Buffett.

Those of us who have savoured the sweetness and bitterness of life will also appreciate the salient observation made by US central banker Ben Bernanke that money is a means and not an end in itself.

Let me offer an example. My best-ever investment was a small donation made to Temasek Junior College (TJC) where I had been a member of the school advisory committee for many years.

Some years back, the Securities Investors Association of Singapore gave me a prize in financial journalism and kindly allowed it to be monetised.

I persuaded TJC's then principal, Mrs Loke-Yeo Teck Yong, to use the money to establish an award to be given to a student each year for outstanding community work.

I left the committee after that, and I thought that was the end of the story. But recently, a Reuters reporter e-mailed me: "Are you the Goh Eng Yeow in the TJC Goh Eng Yeow Trophy for Community Outreach, given yearly to the student who is a champion of, and demonstrates a passion for, community service?"

It turned out that Mrs Loke had named the award after me and it was given this year to a student named Kwek Jian Qiang who had been flamed online for purportedly having an elitist mindset.

That had followed the poor choice of words he used in drawing comparisons between the run-down facilities at some junior colleges and the much better equipped vocational institutes which attract less academically inclined students.

Jian Qiang was taken aback by the vitriolic attacks and quickly recanted. But far from getting badly scarred by the experience, he was able to match deeds to words and show that he was a much better man than what he had been made out to be.

He became actively involved in community work, immersing himself in projects such as helping the underprivileged in TJC's Bedok neighbourhood. And his college recognised his efforts by giving him the award that bore my name.

Jian Qiang had been tried and tested and he had measured up, and I am glad that through the award, it had not gone unnoticed.

In stock market terms, my small donation has turned into a priceless investment that reaps a bountiful dividend year after year. When I started out on my journey as a financial writer, I had not expected seemingly small decisions and actions to have such a dramatic impact. It has been a truly amazing and humbling experience.

So do not get obsessed with money. Learn to use it wisely.

Thursday, July 25, 2013

Trouble in emerging-market paradise

By  Nouriel Roubini
25 July 2013

During the last few years, a lot of hype has been heaped on the BRICS (Brazil, Russia, India, China and South Africa). With their large populations and rapid growth, these countries, so the argument goes, will soon become some of the largest economies in the world — and, in the case of China, the largest of all by as early as 2020.
But the BRICS, as well as many other emerging-market economies — have recently experienced a sharp economic slowdown. So, is the honeymoon over?

Brazil’s gross domestic product grew by only 1 per cent last year and may not grow by more than 2 per cent this year, with its potential growth barely above 3 per cent. Russia’s economy may grow by barely 2 per cent this year, with potential growth also at around 3 per cent, despite oil prices being around US$100 a barrel.
India had a couple of years of strong growth recently (11.2 per cent in 2010 and 7.7 per cent in 2011) but slowed to 4 per cent last year. China’s economy grew by 10 per cent per year for the last three decades, but slowed to 7.8 per cent last year and risks a hard landing. And South Africa grew by only 2.5 per cent last year and may not grow faster than 2 per cent this year.


Many other previously fast-growing emerging-market economies — for example, Turkey, Argentina, Poland, Hungary and many in Central and Eastern Europe — are experiencing a similar slowdown.
So, what is ailing the BRICS and other emerging markets?

First, most emerging-market economies were overheating in 2010-2011, with growth above potential and inflation rising and exceeding targets. Many of them thus tightened monetary policy in 2011, with consequences for growth in 2012 that have carried over into this year.

Second, the idea that emerging-market economies could fully decouple from economic weakness in advanced economies was far-fetched: Recession in the euro zone, near-recession in the United Kingdom and Japan in 2011-2012 and slow economic growth in the United States were always likely to affect emerging-market performance negatively — via trade, financial links and investor confidence.
For example, the euro-zone downturn has hurt Turkey and emerging-market economies in Central and Eastern Europe, owing to trade links.

Third, most BRICS and a few other emerging markets have moved towards a variant of state capitalism. This implies a slowdown in reforms that increase the private sector’s productivity and economic share, together with a greater economic role for state-owned enterprises (and for state-owned banks in the allocation of credit and savings), as well as resource nationalism, trade protectionism, import-substitution industrialisation policies and imposition of capital controls.
This approach may have worked at earlier stages of development and when the global financial crisis caused private spending to fall; but it is now distorting economic activity and depressing potential growth.
Indeed, China’s slowdown reflects an economic model that is, as former Premier Wen Jiabao put it, “unstable, unbalanced, uncoordinated and unsustainable”, and that now is adversely affecting growth in emerging Asia and in commodity-exporting emerging markets from Asia to Latin America and Africa.
The risk that China will experience a hard landing in the next two years may further hurt many emerging economies.


Fourth, the commodity super-cycle that helped Brazil, Russia, South Africa and many other commodity-exporting emerging markets may be over. Indeed, a boom would be difficult to sustain, given China’s slowdown, higher investment in energy-saving technologies, less emphasis on capital- and resource-oriented growth models around the world and the delayed increase in supply that high prices induced.

The fifth, and most recent, factor is the US Federal Reserve’s signals that it might end its policy of quantitative easing earlier than expected, and its hints of an eventual exit from zero interest rates, both of which have caused turbulence in emerging economies’ financial markets.
Even before the Fed’s signals, emerging-market equities and commodities had underperformed this year, owing to China’s slowdown. Since then, emerging-market currencies and fixed-income securities (government and corporate bonds) have taken a hit. The era of cheap or zero-interest money that led to a wall of liquidity chasing high yields and assets — equities, bonds, currencies and commodities — in emerging markets is drawing to a close.


Finally, while many emerging-market economies tend to run current-account surpluses, a growing number of them — including Turkey, South Africa, Brazil and India — are running deficits. And these deficits are now being financed in riskier ways: More debt than equity; more short-term debt than long-term debt; more foreign-currency debt than local-currency debt; and more financing from fickle cross-border interbank flows.

These countries share other weaknesses as well: Excessive fiscal deficits, above-target inflation and stability risk (reflected not only in the recent political turmoil in Brazil and Turkey, but also in South Africa’s labour strife and India’s political and electoral uncertainties).
The need to finance the external deficit and avoid excessive depreciation (and even higher inflation) calls for raising policy rates or keeping them on hold at high levels. But monetary tightening would weaken already-slow growth. Thus, emerging economies with large twin deficits and other macroeconomic fragilities may experience further downward pressure on their financial markets and growth rates.

These factors explain why growth in most BRICS and many other emerging markets has slowed sharply. Some factors are cyclical, but others — state capitalism, the risk of a hard landing in China, the end of the commodity super-cycle — are more structural. Thus, many emerging markets’ growth rates in the next decade may be lower than in the last — as may the outsize returns that investors realised from these economies’ financial assets (currencies, equities, bonds and commodities).

Of course, some of the better-managed emerging-market economies will continue to experience rapid growth and asset outperformance. But many of the BRICS, along with some other emerging economies, may hit a thick wall, with growth and financial markets taking a serious beating.


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

Wednesday, July 24, 2013

Benefits of starting early

The Business Times
Teh Hooi Ling

HIGH expense fees on many investment products and restrictions on investing in risk assets at an earlier age act to limit the growth of retirement funds of the average Singaporean, a Singapore Exchange (SGX) and Oliver Wyman paper on retirement savings said.

CHART 1 - Risk averse


Data from the Central Provident Fund (CPF) and research and analysis by Oliver Wyman, a global consultancy, showed that as at the third quarter 2012, CPF members held $196 billion in "fixed deposits" - funds which are invested ultimately in Special Singapore Government Securities. Some $156 billion had been withdrawn for property purchases and only $29 billion were in risk assets. But out of the $29 billion allocated to risk assets, 67 per cent went into insurance policies, 18 per cent into unit trusts and only 15 per cent into stocks, loan stocks and property funds.

Relative to people in other countries, Singaporeans have allocated the highest proportion of their retirement funds to fixed deposits - at 72 per cent. Only 12 per cent were allocated to equities. Malaysians, based on their EPF (Employees Provident Fund) allocation split, had 49 per cent in bonds, 49 per cent in equities and only 2 per cent in fixed deposits in 2011. Australians, meanwhile, parked 69 per cent of their retirement funds in equities, 19 per cent in bonds and 12 per cent in fixed deposits.

Based on its analysis, Oliver Wyman concluded that the average Singaporean in full-time employment today can expect an income replacement ratio (expected post-retirement income versus pre-retirement income) of around 68 per cent. That's still within the range recommended by the World Bank and comparable to those seen in OECD (Organisation for Economic Co-operation and Development) countries. This is attributable to the relatively high savings rate, and the relatively high interest rates paid by the "fixed deposits" offered by the CPF Board.

However, some Singaporeans may aspire to a higher replacement ratio. This can be achieved through both increasing savings rate and to/or target higher rates of return on these savings. But even if Singaporeans were to allocate more of their retirement funds to risk assets, their retirement income is expected to increase only by a measly 3 per cent. The reasons are: one, the high fees on many investment products and, two, investing in risk assets too late in life, concluded the paper. The expense fees on many investment products are too high for long-term investment and can eat up up to about 20 per cent of expected return through time, said the paper. "A high proportion of these fees are paying for the distribution of these investment products rather than actual investment management."

For unit trusts eligible for inclusion in CPF, Oliver Wyman observed total expense ratios (TERs) of between one per cent and 1.95 per cent per annum. These levels are similar to unit trusts' TERs outside the pension system both in Singapore and in other comparable countries. "CPF retirement savers who wish to invest in a unit trust or other investment products typically buy and administer these investments through one of the qualifying Singaporean banks. Much of the fee expenses are used to pay for advice, sales, compliance and administration costs incurred in the process."

Oliver Wyman and SGX observed that in some other countries, systems have been created to offer a simplified, narrower set of investment products for retirement savers. Savers are guided into a particular fund depending on their age together with the use of centralised or similar scalable administration systems.

This creates significant cost savings and typically brings expense ratios down to between 0.3 and one per cent per annum. Some of these systems are state-run, such as the UK Nest or Swedish AP7, while others are sponsored either by corporates, such as the US 401k, and by unions, such as in the Netherlands, or by asset managers, such as i-Shares lifestyle exchange-traded fund products listed in the United States. "If investment costs in the Singaporean system could be reduced closer to this range, this would increase the uplift in expected retirement incomes from 3 per cent to 6 per cent," said Oliver Wyman and SGX.

Meanwhile, the Minimum Sums that are required in the CPF accounts before members could invest the balance in risk assets means that the average Singaporean could invest his or her CPF funds in risk assets only beyond age 40, noted the paper. "If Singaporeans can invest earlier in their lifecycle, the accumulation period of higher returns will be extended and the risk of market volatility should be diminished due to longer holding horizons," the paper said.

A famous Dow Theory letter gave the example of two persons - A and B. A starts saving at age 19. She saves $2,000 every year from age 19 until 25. Then she stops. In other words, she puts only $14,000 into her portfolio. B, meanwhile, starts saving at age 26. And he is very disciplined. From age 26 until 65, he puts $2,000 yearly into his savings. By age 65, he has contributed $80,000 to his portfolio.

Let's assume A and B are able to generate 10 per cent on their savings and portfolios every year. At age 65, the difference in the two portfolio sizes is quite negligible. By then, A's portfolio would be worth $944,641 and B's portfolio would be at $973,704. This, despite A putting in only $14,000 over seven years, while B has contributed $80,000 over 40 years!

That's the magic of compounding. The earlier you allow it to start, the greater the benefits. Now imagine starting investing at age 40, and generating less-than-desirable returns because of all the fees paid to financial intermediaries.

That's the gist of SGX and Oliver Wyman's paper.

Tuesday, July 23, 2013

HK Inc no longer appealing to Li Ka-shing?

23 July 2013

ParknShop chain review prompts speculation about tycoon's plans

By Li Xueying Hong Kong Correspondent

ASIA'S richest man, Mr Li Ka-shing, could be putting his mega-supermarket chain ParknShop on the block, a move that has sparked talk here that the tycoon no longer finds Hong Kong an attractive place to do business.

Indications are that Mr Li's Hutchison Whampoa conglomerate was looking to exit the mature grocery industry with its limited future growth even as it eyes richer pickings in Europe.

But swirling speculation that Mr Li - nicknamed Superman for his investing savvy - is prompted by other considerations, including politics, has prompted the city's No. 2 leader, Ms Carrie Lam, to reassure the public that Hong Kong is "doing very well".

"In terms of Hong Kong's economic competitiveness and in terms of our economic fundamentals, we are doing very well," said the Chief Secretary on Sunday when asked whether the potential pullout would affect the confidence of overseas investors here.

"So I am not at all concerned about the individual business decisions of enterprises about their own investments. I suggest that we don't read too much into this individual enterprise's decision."
Hutchison Whampoa said over the weekend it is conducting a strategic review of the supermarket chain to "optimise value for shareholders".

No timetable has been set for the review and there is no certainty of a transaction being completed, it said in a statement. This came after a report by the Wall Street Journal saying Hutchison Whampoa had hired investment banks to sell ParknShop for up to US$2 billion (S$2.5 billion).

ParknShop is half of Hong Kong's supermarket duopoly, commanding 33 per cent of the market share with 345 stores. The other is Wellcome, operated by Dairy Farm International Holdings, which hogs 40 per cent of market share, according to market research firm Euromonitor.

Mr Li has stressed that whether his supermarket chain would be sold is an individual business decision and would not affect other areas of his empire, which has a finger in almost every lucrative pie in Hong Kong, from property to telecommunications.

Speaking to reporters outside his home, he called the review "a normal business activity", said the South China Morning Post.

Still, the move has set tongues wagging on whether it was prompted by other reasons.

Hong Kongers have been increasingly vocal about their unhappiness over the income gap. In April, Mr Li found himself vilified when striking dock workers linked to his port company and complaining of being underpaid found a measure of public sympathy for their cause.

"There is a strong anti-market and anti-rich sentiment in Hong Kong," says Professor Francis Lui, associate business dean at the Hong Kong University of Science and Technology. "Many people do worry whether investors would feel comfortable in such an environment which is no longer pro-business."

There has also been talk that Mr Li - a supporter of Mr Leung Chun-ying's rival, Mr Henry Tang, during the Chief Executive race last year - does not agree with Mr Leung's policies.

But, asked by reporters, Mr Li denied the possible move to sell ParknShop was related to the political situation or public opinion of Mr Leung. "Please do not speculate," he said.

Monday, July 22, 2013

DCF modelling: a messy exercise

The Business Times
Cai Haoxiang

THE discounted cash flow (DCF) model is a complex model used to determine the value of a business. This is because numerous variables go into it.

Valuing a business

One major variable is the cost of capital. This goes into the denominator, and is the interest rate investors use to evaluate the attractiveness of the business versus its risk.

Another major component is the cash flow itself. This is the numerator of the calculation.

Here is a brief example of how one might value a real company. I use mainboard-listed watch retailer, The Hour Glass, whose cash flow statement I introduced last month.

Usually, analysts project how much a company will earn three, five or even up to 10 years into the future. Beyond that, they will calculate a terminal value for the company using some kind of perpetuity or multiple model, because it becomes increasingly impossible to project cash flows with certainty the further away you get from the present day.

In my very simplified model, I do not make a detailed analysis of the company's investment and earnings cycle. I assume the company, with most of its revenues coming from a mature market like Singapore, has reached a steady state of affairs and will just chug along as it had done so in the past.

In the numerator of the DCF model, I have to estimate free cash flows to see how much cash the company is actually generating. I notice The Hour Glass's free cash flows fluctuate as they spend money on opening new stores and on working capital. So, I take a five-year average and assume - rightly or wrongly - that this number is representative of the future.

Free cash flow is the cash that is left after a company funds capital expenditures with the cash generated by its day-to-day activities. You get this by taking a company's cash flows from operations and deducting its expenditure on property, plant and equipment. Both items are found in the cash flow statement.

The company generated average free cash flows of $13.3 million a year in the last five years. Taking an average of the last eight years, I get $13.3 million a year as well. So, I will use $13.3 million in my numerator.

Now, I have to figure out the company's cost of capital and growth rate, which goes into my model's denominator. Calculating this properly is a complicated process and will be discussed in next week's article. The average investor, however, might not have time to get all the data required to do so. I will make some assumptions, again.

What growth rate do I use? The Hour Glass sells luxury watches. Global sales in Swiss-made timepieces have grown at a breakneck pace in the last few years and slowed recently. Last year, total exports of Swiss watches rose 10.9 per cent to 21.4 billion Swiss francs ($28.8 billion) from the year 2011.

Can I use 11 per cent as the growth rate? That sounds too optimistic. It is hard to imagine something growing at 11 per cent a year forever. For example, if a company sold just one $1,000 watch a year, and this revenue grew by 11 per cent a year, its revenues would be $34 million in 100 years and $1.2 trillion in 200 years.

Most of The Hour Glass's revenue comes from Singapore. Its revenue has grown at a compounded rate of roughly 8 per cent a year since 2006. But again, perhaps this was driven by strong consumption from the Chinese - one of the world's largest groups of consumers of luxury goods. Going forward, as China's economy slows, we might not see such a strong increase in sales a year. For a model that forecasts growth forever, we need to be careful about the growth rate we use.

I could use 5 per cent, the 2008-2012 average of retail sales growth for watches and jewellery announced by the Department of Statistics Singapore. Another possible number could be 3 per cent, the historical growth rate of the US economy in the last 100-odd years.

What about the cost of capital? According to a database on the website of New York University professor and valuation guru Aswath Damodaran, retailers have a cost of capital of 9 to 10 per cent. A July 10 JP Morgan Cazenove investment research report on Swiss high-end watch company Swatch Group notes that its DCF model incorporates assumptions of "medium term growth of 5.5 per cent, terminal growth of 2.6 per cent, WACC (weighted average cost of capital) of 9.6 per cent". I could use some of these assumptions as well.

In the table, we see that a cost of capital of 9.5 per cent and a growth rate of 6 per cent would give a market value of about $380 million for the company. This value is premised just on future cash flows. The Hour Glass has quite a bit of cash in the bank that we must add to get how much it is worth.

It has $79.5 million of cash and $41.2 million of debt. Assuming we use the cash to pay off the debt, the company is net cash to the tune of $38.3 million.

We thus add that to $380 million and get around $418 million - close to the market valuation of $420.66 million, or $1.79 a share, that the company was trading at as of Friday.

To sum up, I could arrive at the company's current market valuation using a $13.3 million steady state free cash flow assumption, a growth rate of 6 per cent and a cost of capital of 9.5 per cent.

Remember, no model is perfect. I am just embarking on a thought exercise. The DCF model is just one among many used to make an investment decision.

Is The Hour Glass's cost of capital higher than 9.5 per cent? The stock is not very liquid. No trades were made on Thursday and Friday. Perhaps it costs even more to get money from the local equity markets. If so, its valuation will be lower. And is it realistic to price in a 6 per cent perpetual growth rate?

If my cash flow assumption is not too pessimistic, my conclusion - based on this simplistic model - is that the company is slightly pricey.

Today’s value from tomorrow’s numbers

The Business Times
Cai Haoxiang

A FORTNIGHT ago, we discussed two possible ways to value a company.

Discounted Cash Flow Model

The first way values a company using an estimate of the dividends it will pay out next year, divided by the yield at which investors will be enticed to invest in the company.

This is the most basic incarnation of a group of stock valuation methods called discounted cash flow models.

The other popular method highlighted was to take a company's net profit and multiply that by a certain number of times to get an estimated value of the stock.

This is known as a price-to-earnings (PE) multiple. The investor determines the PE multiple the company is likely to trade at by taking an average of the PE multiples that similar companies are trading at, or have historically traded at.

This is part of another broad group of stock valuation methods called valuation by multiples.

But this method depends on the prices that other companies are trading at. It is a relative measure, though one that is easy to use - pick a number and multiply it by projected earnings to get your valuation.

Investors looking for a more fundamental measure of value will think about how much cash a company will generate in the foreseeable future, instead of net profit numbers that can distort the real cash flow a company is getting.

We thus return to the first method and drill deeper into the principles underpinning discounted cash flow (DCF) models.

DCF models are used by investment banks and funds to evaluate how much one should actually pay for a company.

They are preferred due to their flexibility. As investment research firm Morningstar writes on their website: "Despite their complexity, valuations based on DCF models are much more flexible than any individual ratio, and they allow an investor to incorporate assumptions about such factors as a company's growth prospects, whether its profit margins are likely to expand or contract, and how risky the company is in general."

Knowing how these models work will enable you to understand why analysts value a stock at a certain price, or why a company is willing to pay so much to acquire another company.

Today, we discuss three scenarios under which a company can be valued using a DCF model: zero growth, slow growth, and a period of fast growth followed by slow growth.

Discounted cash flow models are so named because they predict the cash flows a company will generate, and discount these values to their lower present-day numbers.

The main idea is this - that the value of a business is the present value of all its future cash flows.

A fixed sum of money forever

Recently, a famous braised duck rice coffeeshop along South Buona Vista Road, Lim Seng Lee Duck Rice Eating House, closed down after 45 years. The founder retired due to health reasons and because his children did not want to take over the business.

Let's say the success of the business was due to a secret recipe and a special way of preparing the duck and gravy that can be passed on to the next business owner.

And let's say you - yes, you - want to buy it.

Assume you have no plans to expand the business and no debt to pay off. At the end of each year, you know the business makes a profit of $500,000 in cash.

How did I come up with $500,000? This number is for illustrative purposes only. How to do a cash flow estimate for valuation purposes is briefly mentioned in the article below.

But let's picture this: raking in half a million dollars next year, and the next, and the next, till the end of time.

Sweet deal. What's the selling price?

To value the business, you have to add all these $500,000 payments up.

But the total does not add up to infinity. You won't pay all the money in the world just to own a duck rice shop.

This is because of the time value of money, a topic we discussed before. Getting a sum of money today is better than getting the same sum 20 years from now, because you can invest the sum of money today and grow it to become much more 20 years later.

For example, you can grow $107,000 today to become $500,000 in 20 years' time, assuming an 8 per cent interest rate. In other words, the $500,000 cash flow 20 years from now is only worth $107,000 today.

To figure out how much you should pay for the business, you have to value the perpetually-$500,000-generating duck rice shop at today's prices.

That means you have to discount each cash flow in the future to its present value, before adding everything up.

You are essentially adding up a stream of decreasing payments over time that eventually dwindles to near zero. For example, the $500,000 cash flow the business will generate 100 years from now is only worth $227 today. (See Table 1)

How do you add up an infinite number of payments, discounted to their present-day value? The mathematical shortcut to use is called a perpetuity calculation, named after the financial product that pays you the same sum of money forever.

To calculate the value of a perpetuity, you simply divide the payment stream a year by your selected interest rate, called the discount rate and otherwise known as your cost of capital.

The cost of capital represents the price investors are willing to pay to invest in a certain business or project.

It is the rate of return investors will earn on an enterprise that carries a similar risk.

Determining the cost of capital can be another complicated calculation. But for now, let us assume your cost of capital is 8 per cent.

To value the business, you simply divide the cash flow you get every year, $500,000, by 8 per cent, and get $6.25 million.

Notice this calculation is the same as the first stock valuation method we introduced two weeks ago. If you get a dividend payment of $500,000 every year from a business forever, and you need an 8 per cent return from your investment, you will be willing to pay a maximum of $6.25 million for the business.

If the going price for the duck rice coffeeshop was $10 million, you would laugh and walk away. This is because you know you can invest that $10 million in another business and get an 8 per cent return a year, or $800,000. That is superior to the $500,000 a year you get from this deal.

Conversely, if the price of the business was just $5 million, you would jump at the opportunity. If the business yields $500,000 a year, you are getting a return of 10 per cent. This is superior to the 8 per cent you get elsewhere.

Getting a steadily growing sum

The owner of the duck rice coffeeshop takes you aside and says, hey, it is unrealistic to assume my duck rice business will only pay $500,000 a year forever.

He is more optimistic than that. More and more customers will come to eat at his shop, which he can deal with over time through improved technology and productivity changes. In short, his profit will keep increasing.

Let's say the profit from the business can grow at the rate of 2 per cent a year. Again, determining this growth rate requires another potentially tricky calculation, so we shall just assume it for now.

The shop's profit of $500,000 this year will thus grow to $510,000 next year. And $520,200 in the next. And so on, until the end of time.

How much is this business worth?

The mathematical calculation used here is called the Gordon growth model.

The model states that the value of a business that gives a steadily increasing cash payment every year is simply next year's cash payment divided by the difference between the cost of capital and the growth rate.

In this case, the duck rice business will be worth $510,000 / (0.08 - 0.02) = $8.5 million. The growth assumption of 2 per cent added more than $2 million to the value of the business.

Of course, if your growth assumptions are higher, the business will be worth even more.

With a growth assumption of 6 per cent, the business will be worth a whopping $530,000 / (0.08 - 0.06) = $26.5 million. Growth assumptions make a big difference.

Growth spurt and maturity

The growth rate of a business cannot exceed your cost of capital, or the equation will not make sense as the denominator becomes negative.

But sometimes, companies can grow at 30 per cent a year - a phenomenal rate that far outstrips any normal cost of capital assumption.

This is when we need to tweak our valuation model.

Suppose the owner had grander plans for the business, before poor health forced him to retire. He wanted to expand his business to other parts of the island and build his own duck rice empire.

As a result, he enthusiastically projects his earnings to grow by 30 per cent a year as he progressively invests, recoups his cost of investment, and thus conquers the palates of another area.

Based on his reading of the Singapore market, he thinks this growth spurt can last for five years.

So, next year, the business will earn $650,000. Year two, $845,000. By year five, whoever owns the business will be raking in $1.86 million a year. No business can grow at a 30 per cent rate forever. After five years, let's assume this duck rice enterprise has established a dominant position in the market. Thereafter, it will keep up a relatively sedate 2 per cent pace of growth a year forever.

The appropriate valuation model to use is known as the two-stage model.

The first stage calculates the present value of the cash flow the business throws out during its growth spurt. To do so, you discount every year's cash flow to its present value, for five years in this case.

The second stage calculates the present value of the cash flow of the business after the growth spurt, when cash flows are assumed to either not grow at all or grow at a slower pace forever. The value of the business at this stage is calculated by either a perpetuity or Gordon growth model. Alternatively, one can use an earnings multiple.

This process is known as calculating the terminal value of a company.

In our duck rice shop example, the present value of the five cash flow payments during the growth spurt adds up to $4.5 million.

Using a Gordon growth model to calculate terminal value, we end up with a value of $31.6 million for the business at Year 5. After discounting, the present value is $21.5 million. (See Table 2)

The total valuation of the duck rice business, assuming a five-year expansion plan, is thus $26 million.


We have described three ways to value a company that has a predictable cashflow stream.

For most companies, however, the reality is that cash flow streams are uncertain and might even fall for a few years. The DCF model might not be suitable for cyclical companies where it is difficult to forecast with any certainty how fast they will grow.

Many assumptions for revenue growth and profit margins have to be made. You need to think about the fundamentals of the company, the industry, and the company's position in the business cycle.

To make sure your assumptions are not off the mark, use various methods to arrive at the company's intrinsic value. Build in a generous margin of safety - the more risky the company, the greater the margin of safety. For example, give another 30 per cent discount to the intrinsic value you calculated to make sure you are not paying too much for the stock relative to other options.

After all, duck rice isn't everything. Maybe chicken rice is cheaper and more delicious.

SGX, POSB launch new Invest-Saver product

By Yvonne Chan
POSTED: 22 Jul 2013 11:11 PM

SINGAPORE: To encourage more Singaporeans to start investing early for retirement, the Singapore Exchange (SGX) and POSB have come up with a new product that allows one to invest in exchange traded funds while also saving for retirement.

SGX added that it is on the lookout for potential partnerships that can make long term investing more accessible for their customer base.

Ninety-seven per cent of Singaporeans’ retirement funds are tied up in fixed deposits, property and insurance, and the remaining three per cent are in equities, mutual funds or unit trusts, revealed a SGX-Oliver Wyman study on retirement savings.

A low interest rate environment and rising inflation has eroded the dollar value of one's savings, especially retirement savings. Far more retirement savings in Singapore are still held in fixed bank deposits than in many other countries, said the SGX-Oliver Wyman study.

Only 12 per cent of investible CPF savings are held in equities versus the 50-70 per cent in a range of other countries including US, UK, Hong Kong, Malaysia and Australia.

Research shows that 41 per cent of Singaporeans have never saved specifically for retirement while 60 per cent of Singapore's working adults save less than 20 per cent of their monthly income.

With families becoming smaller, experts say it is increasingly less viable for Singaporeans to depend on their children for financial support in their retirement years.

By the time Singaporeans reach retirement age, CPF savings will only be sufficient to meet 68 per cent of their pre-retirement income, revealed the SGX-Oliver Wyman study.

But with the new POSB Invest-Saver product, a combination of a regular savings plan and exchange traded fund, saving for retirement could start from as little as S$100 a month with no brokers involved.

An exchange-traded fund is an investment fund traded on stock exchanges, much like stocks.

Potential investors can subscribe for the product via any of 1,100 ATMS islandwide.

The POSB Invest-Saver is linked to the Nikko AM Singapore STI ETF, an exchange-traded fund that tracks the performance of Singapore’s top 30 blue chip companies.

DBS, the largest local bank in Singapore, hopes that the product will make long term investing more manageable for young Singaporeans.

Tan Su Shan, managing director and group head of Consumer Banking and Wealth Management at DBS Bank, said: "Singaporeans are a little bit barbelled in their investment approach. We either have cash or we have properties, so either very liquid or very illiquid and possibly not enough in fixed income or equities. So this speaks to the asset diversification that we're trying to promulgate right now."

Chew Sutat, executive vice president of SGX, said: "If you look at the amount of cash savings we have, both in CPF systems and banking deposits, every year we as a nation are potentially leaving S$3-5 billion of investment returns on the table by not investing.

"As long as we have like-minded partners who share common goals of wanting to bring more accessible investing to their customer base… we'll be happy to support them."

Potentials investors in this latest product could expect to reap an annual average return of between 2 and 3 per cent.
- CNA/jc

Sunday, July 21, 2013

Here's how to apply for an IPO

Published on Jul 21, 2013

Market for initial public offerings is heating up; more launches on the way

THE local initial public offering (IPO) market is heating up, with two prominent listings - SPH Reit and OUE Hospitality Trust - launched last week.

More IPOs are expected in the coming months.

Here's a step-by-step guide on how to apply for these IPOs, with information adapted from the Singapore Exchange (SGX).

1 Open a broking account
You should open a stock broking account and Central Depository (CDP) account before applying for IPOs.

The broking account will allow you to trade the shares, should you be successful in your IPO application.

There are nine retail brokerages where an investor can open a broking account: AmFraser Securities, CIMB Securities, DBS Vickers, DMG & Partners Securities, Lim & Tan Securities, Maybank Kim Eng, OCBC Securities, Phillip Securities and UOB Kay Hian.

Most brokerages require the applicant to show up in person.

2 Open a CDP account
The CDP account is for the settlement of trades and it maintains all the securities you buy and sell on SGX.

If you are above 18 and not an undischarged bankrupt, you can apply by filling in a form for the opening of a CDP direct securities account.

You are able to apply for a CDP account with your broker personally with the necessary identification documents.

When you open your broking account, you will be required to fill in a CDP linkage application form.
The opening and linking of individual CDP accounts are free.

To trade, the CDP account has to be linked to the investor's broking account. There is no limit as to the number of broking accounts which can be linked to the CDP.

3 Check for new listings, read IPO prospectus
This can be done on the SGX website under the "Company Disclosure" section.
You can also find out when the offer ends.

From there, you can also view and download the IPO prospectus, which provides detailed information on the company seeking a listing.

The prospectus will also list the size and price of the offer, as well as highlight potential risks. Bear in mind that some IPOs are not open to retail investors.

4 Apply for the IPO
This can be done via ATMs or Internet banking with the three local banks - DBS Bank, United Overseas Bank or OCBC Bank - or by completing and submitting a printed application form.

The application must be done before the closing date and time, usually before noon on the day the offer ends.

The IPO application fee is $2 per transaction, and you must have sufficient cash to pay for all the shares you are applying for.

5 Check IPO ballot results
You will not necessarily get the number of shares you apply for, as it depends on the response to the IPO.

If an IPO has been substantially oversubscribed, you may receive a smaller number of shares on the basis of the ballot ratio, which is decided by the placement agent and a random selection process.
You may also end up with none.

If successful, the shares will be credited into your CDP account and you may start trading these shares on the listing date via your broking account.

If unsuccessful, the amount debited previously will be refunded and credited back into your bank account within 24 hours of the balloting date for electronic applications, and three market days from balloting date for printed forms.

Ways to deal with rising interest rates

Published on Jul 21, 2013

Experts give advice on how investors and home loan borrowers can minimise risks

By Melissa Tan

Bonds will be affected most, say analysts
The spectre of rising interest rates is spooking global markets.

Bond yields have spiked and stock prices have fallen in anticipation of rates going up after the United States Federal Reserve signalled recently that it may reduce its monetary stimulus programme, also known as the third round of quantitative easing.

The question foremost on the minds of analysts is the timing of the inevitable rise in interest rates.

"It is no longer about if it happens and more about when it does," said Barclays Asia investment strategist Wellian Wiranto, who reckons that the Fed's tapering of the quantitative easing could start in September this year.

"Still, investors should note that US policymakers are unlikely to withdraw liquidity massively and suddenly."

UOB economist Alvin Liew said the rise could be capped by factors such as weakness in US economic output, potential euro zone risk events or a sell-off in equities.

He expects that the first increase in short-term interest rates will come only in the first quarter of 2015.

Rising interest rates will have an impact on consumers' loans, especially if they hold significant mortgages. Their investments across the different asset classes might also be affected.

The Sunday Times asks experts what investors can do to minimise the risk of rising interest rates.

Property loans
DBS chief executive Piyush Gupta told private banking clients last Monday that "if you're a borrower, then I would say start thinking fixing rates, or at least swopping floating to fixed", according to a Business Times report last week .

Indeed, many consumers who hold floating-rate home loans may now be thinking of making the switch to a fixed-rate mortgage to lock in potentially cheaper rates.

Home loans are usually either at a fixed rate or a floating rate, though some banks offer a hybrid package.

Floating rates tend to be pegged to benchmark market rates such as the Singapore Interbank Offered Rate (Sibor) or the Swap Offered Rate, to which banks then add on a premium.

OCBC head of consumer secured lending Phang Lah Hwa said that fixed-rate housing loans are suitable for those who want their monthly instalments to remain stable.

"As the interest rate is fixed for the lock-in period, the monthly instalments will be fixed and will not change," she said.

"Market-pegged interest rates are more suitable for savvy property owners who would like to capitalise on the current low interest rates to minimise the interest payments they make on their current loans," Ms Phang added.

DBS senior vice-president of deposits and secured lending Linda Lee said that most of its customers opted for fixed-rate mortgages in 2010, but that over the last two to three years, more have picked floating-rate packages.

"Consumers need to realise that the best time to lock in an attractive set of long-term fixed rates is during a low interest environment," Ms Lee said.

"Home buyers should remember that during a rising interest rate environment, fixed rates will rise in tandem. In addition, some home owners may not be able to switch to fixed rates in a timely fashion if there is a lock-in period for their existing mortgage programme."

HSBC's Singapore head of customer value management Harmander Mahal said that the bank's Sibor-pegged home loans were "still much more popular" right now among its customers.

The three-month Sibor is expected to remain at around 0.37 per cent for the second half of this year, according to a report this month by HSBC Global Research, though OCBC's head of treasury research and strategy Selena Ling expects it to move up to around 0.39 per cent by the end of this year.

Ms Ling said the rate could also move up to 0.48 per cent by the end of next year, assuming that Singapore's economic output growth improves from 2 per cent this year to 3 per cent next year, and headline inflation stabilises at around 2.8 per cent this year and 3 per cent next year.

UOB's Mr Liew expects the three-month Sibor to be at around 0.35 per cent by the year end and remain below 0.4 per cent for most of next year.

The part of an investor's portfolio that will be most hit by rising interest rates is bonds, analysts said.

Standard Chartered Bank's head of fixed income, currencies and commodities investment strategy Manpreet Gill said investors can minimise the risk from rising interest rates by holding bonds with shorter maturities.

"A bond with a one- to two-year tenor is less sensitive to a change in rates than a bond with a nine- to 10-year tenor or perpetual bond. High-yield bonds offer the biggest buffer to higher rates," Mr Gill said.

Maybank Singapore's regional wealth management head Alvin Lee added that the recent sell-off in bonds "has created some buying opportunities where the higher yields are worth the risk".

"Investors should be very selective and be careful not to be over- exposed to any high-risk areas, and over-leverage in the current environment," he said.

Stocks are also likely to feel some impact from a potential rise in interest rates, analysts said.

"Rising US yields in general reflect an improving economy and are usually positive for risk assets such as equities, high-yield bonds and commodities," said Mr Kelvin Tay, UBS Wealth Management's regional chief investment officer for the South Asia-Pacific region.

He noted that Singapore banks would benefit from rising rates "as they have a large savings and current account deposit base to fund their loans portfolio".

However, he added that stocks with high yields but of low quality, and real estate investment trusts holding poor assets would be most at risk.

Mr Tay said: "In a rising interest rate environment, investors are likely to increase their scrutiny on asset quality."

Citibank Singapore's head of research and advisory Joyce Lim said that rising interest rates will exert downward pressure on asset prices in general.

Ms Lim added that recent mortgage restrictions imposed by the Monetary Authority of Singapore late last month will put a further dent in asset prices.

For instance, Citi expects private home prices to fall 5 per cent over the next 12 months, she said.

Rising interest rates can cause gold prices to go up or down depending on why central banks are raising rates in the first place, Phillip Futures investment analyst Joyce Liu said.

"If interest rates rise because of rising personal consumption expenditure, then that is most likely bullish for gold prices because at the same time, investors will be rushing into gold as a hedge against inflation," she said.

But ANZ commodity strategist Victor Thianpiriya said that in general, a rising interest rate environment is negative for gold prices.

"Gold essentially has no yield. This raises the opportunity cost of holding it," he said. "However, it also depends on the outlook for inflation, which is supportive of the gold price."

OCBC economist Barnabas Gan added that as consumers may put aside more money for savings as interest rates rise, demand for commodities such as gold could be dampened.

Moderate risk portfolio
For an investor with a moderate risk profile, DBS investment communications manager Yeoh En-Lai recommends allocating 52 per cent to stocks, 36 per cent to bonds, 4.5 per cent to alternative investments and 7.5 per cent to cash.

UBS recommends that an investor hold 10 per cent in cash, 25 per cent in bonds, 45 per cent in stocks, 15 per cent in alternative investments such as hedge funds and 5 per cent in commodities.

Thursday, July 18, 2013

'We are sure that we have a way to treat myopia'

Published on Jul 18, 2013

By Poon Chian Hui

FOR 16 years, doctors at the Singapore National Eye Centre (SNEC) have been trying to find a way to stop myopia in its tracks.

They say they finally have the answer: eyedrops with a concentration of 0.01 per cent atropine.

"We are at a stage where we are sure that we have a way to treat myopia," said SNEC medical director Donald Tan, adding that the eyedrops could be available for prescription in the next six months. "This is a breakthrough in the fight against myopia here."

With 80 per cent of people afflicted by the time they turn 18, Singapore is considered the myopia capital of the world.

The eyedrops do not cure myopia, but they seem to slow down its degenerative effects by up to 60 per cent. This means that a short-sighted child, whose eyesight would normally get worse by 100 degrees a year, will only experience a 40-degree increase.

For decades, it has been known that atropine, which is extracted from certain plants, can be used to counter myopia. The drug seems to stop the eyeball from growing longer, a hallmark of myopia. But it has not been widely used because of the side-effects caused by eyedrops with 1 per cent atropine, the normal available dose.

As the drug dilates the eye's pupil, letting in more light, children needed to wear sunglasses before going out in the day. Atropine also stops the eye muscles from working, making it harder to focus on near objects.

That meant that children needed to wear bifocal eyeglasses when reading. Several other studies also found that when the use of atropine stopped, the myopia "rebounded".

The answer was eyedrops with 0.01 per cent atropine.

In an SNEC study which began in 2006, 400 short-sighted children were put on daily eyedrops with three different concentrations: 0.5 per cent, 0.1 per cent and 0.01 per cent. The children were tracked for five years.

Results showed that side-effects were minimised for the most diluted eyedrops. Children did not need sunglasses or bifocals, but could go about their daily lives as usual. There was almost no rebound effect when the eyedrops were stopped for a year.

After five years, those on the 0.01 dose also fared the best, with the least decline in their eyesight.
The findings were presented at an international conference earlier this week.

Dr Lam Pin Min, an ophthalmologist at KK Women's and Children's Hospital, said he was "certainly looking forward" to the new eyedrops.

Currently, he prescribes regular (1 per cent) atropine to several young patients. But they have to use special spectacles due to the side-effects. With price tags of $400 to $1,000, the cost of the spectacles can be "prohibitive", said the MP for Sengkang West.

Tuesday, July 16, 2013

Why property is still investors’ pick

Lee Su Shyan

THE regulator's recent move on bank lending is not meant to be another property market cooling measure but it will certainly have a bearing on anyone contemplating a real estate investment.

It's not that buyers haven't already been softened up somewhat, given there have been seven rounds of cooling measures since 2009 in a bid to slow rising home prices.

The Urban Redevelopment Authority (URA) index for private properties is up about 60 per cent from 2009.

But even as prices remain at an all-time high and even as buyers appear to take every new cooling measure in their stride, there is little doubt that the market has started to cool its heels.

Data shows that flash estimates of prices for the second quarter increased just 0.8 per cent. For the first quarter, they inched up 0.6 per cent.

Measures to date
THE first round of measures in 2009 included scrapping an interest absorption scheme which allowed buyers to avoid interest for a certain period. The confirmed list of government land sites for sale was reinstated.

In February 2010, a seller's stamp duty was imposed on residential property and land bought and sold within a year.

Loan-to-valuation (LTV) limits - the proportion of a home's value that a buyer can borrow - were tightened. They were reduced to 80 per cent, meaning a 20 per cent downpayment was required.
In August 2010, the holding period for the seller's stamp duty was increased to three years.

The LTV limit was cut to 70 per cent for those with other home loans, meaning a downpayment of 30 per cent would now be required.

In January 2011, the seller's stamp duty was extended to homes sold within four years of acquisition and the rates were increased.

The benefit of these moves was to help remove the speculative froth from the market. People had been turning up at new launches and then flipping properties within a few months for a quick buck.

In December of that year, the additional buyer's stamp duty (ABSD) was introduced. Foreigners now had to pay a 10 per cent duty on their first purchase while Singapore citizens were hit once they bought a third and subsequent properties.

These measures were aimed at curbing foreigner demand, one of the factors seen as responsible for surging prices.
The measures changed tack last year and focused less on speculation. This time there was more of a focus on curbing investor demand while tackling more comprehensively the risk of borrowers taking on too much debt.

First-time buyers remained untouched.

Last September's measures included capping new home loan tenures at 35 years.

The seventh set of cooling measures unveiled in January this year included raising the ABSD by between 5 and 7 percentage points. The proportion of a home's value that a buyer can borrow was slashed to as low as 20 per cent for certain buyers, while minimum cash down payments for those with at least one housing loan were raised.

Chief operating officer at DTZ Southeast Asia Ong Choon Fah noted that the measures "have resulted in a sharp decline in foreign demand from about 20 per cent in the last quarter of 2011 to the current 7 per cent."

Total debt servicing ratio
WHILE not regarded as a cooling measure as such, the latest policy move - called total debt servicing ratio - took effect on June 29 and imposes a new lending framework on banks.

A person's total monthly debt repayments cannot now exceed 60 per cent of his gross monthly income so anyone applying for a new mortgage will have to consider how their entire debt load stacks up. That means any car or personal loan will now be factored into the debt equation as well.

These measures are timely as the cheap flow of money stemming from the United States Federal Reserve that has depressed interest rates here and elsewhere looks like it is going to be eased.

It is also clear that there is a group of borrowers in Singapore who are potentially at risk from rising interest rates. First-quarter numbers from the Credit Bureau show that about 12 per cent of borrowers held multiple loans.

Deputy Prime Minister Tharman Shanmugaratnam noted over the weekend that with interest rates set to rise, between 5 and 10 per cent of borrowers may be over-leveraged.

Unintended consequences
EVERY policy has side effects. One of them here is that banks may end up having their hands tied too much.

Take the 30 per cent discount that has to be imposed on the variable element of a borrower's pay. While that is a prudent move, banks need to appreciate that in the ever-changing workplace, there are fewer jobs where a fixed pay is the norm.

In efforts to be more responsive to changes in market conditions, more jobs may offer pay with a higher variable element. Banks should be given some leeway to ensure that while prudence remains the priority, they are also sensitive to the growing number of people whose pay fluctuates from month to month and indeed year to year.

Rethinking property investing
THE question is often asked if all these measures will sound the death-knell for the Singaporean's undying love affair with property, one that is shared by those in Malaysia, Hong Kong and China.
Yet the issue may be wider than that. To encourage people to invest in other asset classes may require a review of the alternatives out there.

What drives many investors is the search for yield in a market where it is increasingly difficult to find good returns.

But many are loath to view stocks as the new Prince Charming in waiting. One reason could be investors' painful experience of the global financial crisis.

Another could be how the Central Provident Fund (CPF) rules skew investors towards property.

If I have $5,000 in my account that is allowed to be invested in equities or unit trusts, I can buy only $5,000 worth of SingTel shares. However, I can start paying for a $1 million residential property in Singapore with regular monthly CPF payments.

And while investing in blue chips on the Straits Times Index should be a safe bet from a corporate governance point of view, investors have to be conscious of market risk as these big boys expand overseas.
What it means is that putting $100,000 in CapitaLand requires an understanding of the risks the firm faces in the China market, for example, while buying DBS Group Holdings shares means understanding policy risks in Hong Kong and Indonesia.

Indeed, the daily gyrations of shares may engender a sense of insecurity and the challenge of deciphering financial statements makes stocks appear riskier and more complex.

While the price of some S-chips has plunged practically to zero, the perception is that property in Singapore will at least retain some of its value and offer a regular income stream.

That is why many investors feel comfortable buying a property here. Simply put, a property investor living in Pasir Ris and buying an investment property in the same area feels more comfortable with the risks and growth potential. He knows if new amenities are coming up nearby. He can see the condo taking shape. He knows there are laws to protect him should a developer go bust.
Meanwhile other suitors stand waiting in the wings.

Anecdotally, many investors have made a beeline for property in Iskandar, Kuala Lumpur, London and Australia.

DTZ's Ms Ong notes that since January, there has been a sharp increase in demand for properties in Iskandar. Others have ventured into more speculative investments such as land in the United States, she adds.

A few hundred thousand dollars can get you a property in Thailand. Around $200,000 offers a chance to own a serviced apartment in Dubai.

The irony is that Singaporeans are starting to put their funds in markets overseas, which are harder to track and where the investor protection framework is sometimes less established.

There are risks to owning property such as not being able to rent out the place or not being able to meet loan repayments.

But for most people, a property still speaks to a fundamental need for a source of retirement income and a sense of security. A change in that mindset will require a review of our investing framework.

Sunday, July 14, 2013

'Screenagers' out of touch with reality

Published on Jul 14, 2013

Tips from American trainer on connecting today's tech-savvy children with the real world

By Jane Ng

A single mother whose sons wanted iPhones and iPads made them sit beside her while she paid the family's bills to show where their money went every month.

The boys eventually saw there were essentials to be paid for, and no way their mother could afford the gadgets.

American author and trainer Tim Elmore, 53, who coined the term and wrote the book Artificial Maturity: Helping Kids Meet The Challenge Of Becoming Authentic Adults, gave this example to show how parents can make their children more aware of reality.

This is one way to help a generation overexposed to online information from an early age, yet woefully underexposed to real-life experiences.

Addressing 500 educators at Temasek Polytechnic's Seventh Character and Leadership Education Forum last Friday, Dr Elmore shared his research in the United States on the character traits of these "screenagers" - so-called because of their love for gadgets with a screen - and what parents can do if their children are having too much screen time.

Children who do not have enough real-life responsibilities could end up with a warped sense of reality or entitlement, with opinions formed by what they see on Facebook or YouTube, for instance, said Dr Elmore.

"This is the first generation of children that don't need adults to access information. But they do need adults to process the information, to help them interpret the data," he said.

One way is to give them more responsibilities and raise their awareness about the world around them.
He said parents should help children identify their strengths and match their talents with real-life work, so that the children can move beyond thinking they are "successful" online just because they have several hundred Facebook friends or win online games.

It also helps to get them interacting with other adults.

"Connecting face to face with people on a regular basis can deepen their emotional intelligence and empathy," he said, citing a University of Michigan study that showed that empathy levels among college students in America have dropped by 40 per cent in the last 10 years.

Encouraging young people to serve the community is worth trying too.

"Let them see there are others who need help. Give them community service opportunities to balance their self-service time," he said.

Recognising the traits of this generation will help alleviate the frustration many educators and employers face dealing with them, said Dr Elmore.

He suggested that teachers make some changes to the way they teach, so as to better engage this generation.

His suggestions: Use YouTube videos or visual images to hook them in, and explain why something is urgent or critical, before delivering the actual lesson content.

He recalled a maths teacher who found his students were not paying attention to his algebra lessons. The teacher decided to post videos of his lectures on YouTube and let students watch them at night, and used lesson time to help them with their homework.

Employers hiring the new generation need to change their mindsets too, said Dr Elmore.

Instead of mentoring schemes for new workers, consider "mutual mentoring" where older colleagues share their experience and younger ones are allowed to value-add with what they know.

Participants at the forum said they got a better idea of what made this generation tick.

Mr Damien Chiang, 36, who teaches mathematics at Anglo- Chinese School (International), said he has been using methods used by his own teachers and they may not be suitable for today's students.

"My teachers did not give me a lot of airtime but children today feel a greater need to be heard," he said.

"And even though they may appear aloof and withdrawn face to face, they open up when communicating via a screen, for example, through SMS. So I will make an effort to connect with them first before imparting knowledge to them."

Mr Sreedharan Denesh, 54, who conducts character and leadership lectures at Temasek Polytechnic, said even though Dr Elmore's research was based on children in the US, he found many of the survey findings to be true of young people in Singapore as well.

"It was a good reminder that even if the children appear confident and are savvy enough to learn things on their own, they still need a good role model or guidance from teachers. They may seem smart in the subjects but struggle with other soft skills," he said.

Money matters... but only to a point

Published on Jul 14, 2013
Those most worthy of admiration are ones who have made best use of their advantages

By Goh Eng Yeow Senior Correspondent

Few people here talk about the five Cs any more.

Once seen as the Singapore dream, these five rungs on the ladder of wealth were the ultimate goal of many young Singaporeans.

The belief was that if one could accumulate the five Cs - a pile of cash, credit cards, a car, a condo and a club membership - then life would be a fairy tale come true.

Whether or not money can indeed buy a dream life, the cold hard facts have now made this aspiration all but unattainable.

In recent years, even securing a university degree and landing a good job is no guaranteed pathway to getting all the five Cs.

Owning a new car can set you back by $100,000 or more, while even a modest condo unit will cost more than $1 million.

As for credit cards, plenty here enjoying the good life have learnt the hard way that spending must go hand in hand with the ability to repay. Fail to do so, and credit card firms will come after you with gusto - and your credit rating will take a nasty hit.

And nowadays, securing a coveted job is tough going. Last year, an eye-popping 7,000 applications were made for 60 places in two programmes at DBS Bank.

Even cash - perhaps the most achievable of the five Cs - can be quite a tall order for many.
I sympathise with the friend quoted in this paper by my colleague Jonathan Kwok. He lamented that he would never get rich based on today's salaries and cost of living.

Many young people see saving $100,000 as nearly impossible, let alone becoming a millionaire - unless they have rich parents.

But I am hopeful that despite sky-high car and condo prices, which put at least two of the Cs out of the reach of today's graduates, life will still work out all right for them in the end.

United States Federal Reserve boss Ben Bernanke summed it up best when he remarked on the unpredictability of life during his speech to fresh Princeton University graduates earlier this year.

He said: "Talk to any alumnus participating in his or her 25th, or 30th, or 40th reunion. Ask them, back when they were graduating 25, 30 or 40 years ago, where they expected to be today. I am willing to bet, those life stories will in almost all cases be quite different, in large and small ways, from what they expected when they started out."

But he noted that just because our lives are so influenced by chance and seemingly small decisions and actions, this does not mean that there is no point in making any plans at all in our lives.

"Whatever life may have in store for you, each of you has a grand, lifelong project, and that is the development of yourself as a human being… If you are not happy with yourself, even the loftiest achievements won't bring you much satisfaction," he said.

But it is on the thorny issue of money, which all of us must grapple with, that I find Mr Bernanke's observations extremely insightful.

He said: "I am not going to tell you that money doesn't matter because you wouldn't believe me anyway. In fact, for too many people around the world, money is literally a life-or-death proposition.
"But if you are part of the smart minority with the ability to choose, remember money is a means, not an end."

And his advice to today's graduates starting out in life is to not just take the best-paying job that comes along.

"A career decision based only on money and not on love of the work or a desire to make a difference is a recipe for unhappiness," he said.

Of course, a cynical observer will say that it is easy for Mr Bernanke to say this as life has panned out okay for him. He has transformed himself from a college professor into one of the most powerful men in the financial world with the power to move financial markets with his utterances.

But in a lesser way, his comments have held true for me as well. I recall that as fresh graduates, many in my cohort expressed similar misgivings about getting ahead in life financially, given the uncertain career prospects which they then faced.

Most of us had started working during the 1985 recession when the pay of fresh accountancy graduates sank to as little as $800 a month. In my case, I had graduated with a physics degree and thought that I would end up as a teacher for good. But I stumbled onto financial journalism and ended up covering the ups and downs of the stock market for most of my working life.

As I get older and hopefully wiser, I have come to realise that it is not the five Cs which are most important but my family, my friends and what I can make out of life.

To quote Mr Bernanke once more, I find that those most worthy of admiration are those who have made the best use of their advantages or cope most courageously with their adversities.

As he noted: "Most of us would agree that people who have, say, little formal schooling but labour honestly and diligently to help feed, clothe and educate their families are deserving of greater respect - and help if necessary - than many people who are superficially more successful. They are also more fun to have a beer with."