Maybank’s home loan promotion creates a buzz

Other banks won’t get into price war, says OCBC’s chief executive

(SINGAPORE) Maybank’s promotional home loan package has apparently drawn massive interest from new home buyers and home owners looking to refinance.

But at least one bank here has come out to say that this is unlikely to spark a mortgage price war in Singapore.

Maybank told BT that since the launch on Tuesday till end of Wednesday, the bank had received more than 1,500 inquiries at its call centre and branches. ‘We have received close to 200 applications just for one and a half days,’ said Helen Neo, head, consumer banking, Maybank Singapore.

She added that there is an equal split of applications for refinancing and new purchases and most of the applications are for private property home loans.

However, she said the promotion is not likely to be extended.

The low rates apply to those taking a loan amount of $300,000 and above and for owner-occupied properties.

On Tuesday, the Qualifying Full Bank slashed its three-year fixed home loan rates from 3.58 per cent for all three years to 1.68 per cent for the first year, 2.68 per cent for the second and 3.38 per cent for the third year. Maybank’s new first-year interest rate is about 40 per cent lower than similar packages being offered in the market.

‘We expect this promotional package to bring in new home loan customers. With this very attractive package, we do expect to meet the target we set,’ said Ms Neo.

In response to Maybank’s mortgage rate cut – which he referred to as a ‘fire sale’ – David Conner, OCBC Bank’s chief executive, said banks are unlikely to be dragged into undercutting each other on rates.

‘We’re not likely to see a big price war with the mortgage portfolio,’ said Mr Conner at yesterday’s OCBC results briefing. ‘We should see pricing firming and not deteriorating.’

He noted that most big multinational banks are strapped for capital and that credit spreads are rapidly rising. ‘We have to be more careful with our pricing,’ he said, adding that Singapore still remains one of the cheapest places to get a mortgage.

He noted that Singapore’s interest rates are low today because the strengthening of the Singapore dollar – designed to stave off inflationary pressure – has attracted liquidity into the market.

He said the strengthening of the currency should slow down in the second half of the year, and liquidity will ebb as people move to other foreign currencies. This will bring down interest rates.

He added: ‘Banks do better if interest rates are in the 3, 4 or 5 per cent range.’

DBS Bank had earlier said it has ‘no plans to adjust rates’ for now, while United Overseas Bank and HSBC both said they would monitor the situation before making a decision.

Citibank and Standard Chartered shied away from saying if they will review rates, but pointed to their Sibor packages, which they say give customers control in repricing loan packages.

Meanwhile, banking industry insiders said that fundamentals of the property market are still there, and that even with talk of the industry demand softening there was no panic selling.

They added that valuations for home prices have not come down and that there is still buying activity among the middle markets.

 

Source: Business Times 22 Feb 08

$200m note issue from HDB

THE Housing and Development Board (HDB) launched a $200 million, two year fixed-rate note issue yesterday under its $7 billion medium-term note programme.

The issue will have a coupon of 1.64 per cent per annum, payable semi-annually in arrears, HDB said.

The notes will be issued in denominations of $250,000 and will be offered to investors by way of placement. Application is being made to list the notes on the Singapore Exchange (SGX).

The lead manager is Citicorp Investment Bank (Singapore).

Last Friday, HDB launched a $300 million, 15-year fixed-rate note issue with a coupon of 3.63 per cent per annum, also payable semi-annually in arrears.

Under the programme, HDB issues bonds or notes to finance its development programme and working capital requirements, as well as to refinance existing housing development loans.

 

Source: Business Times 21 Feb 08

Falling stock volumes reflect bearish market

Many investors stay on sidelines despite STI’s rebound from last month’s drop

THE stock market’s recovery after the nasty pre-Chinese New Year selldown was nothing short of spectacular, but the headline numbers tell only half the story.

While the Straits Times Index (STI) has shot up 5.7 per cent, or 166 points, in the last fortnight, daily traded volumes have barely been registering a pulse.

Daily volume has fallen to just 1.69 billion shares worth $1.8 billion so far this month from January’s 1.95 billion shares worth $2.26 billion.

The fall from the same period a year ago is even more dramatic.

At the start of last year, foreign funds poured billions into the region, sending average daily volumes in the first quarter to 2.3 billion shares worth $2 billion. The STI responded by rocketing 8 per cent to cross 3,000 points for the first time.

As the bull run accelerated in the second quarter, daily average volumes hit 3.5 billion shares worth $2.2 billion, while the STI jumped a further 10 per cent.

On July 18, the bulls were beside themselves, with the overall market volume hitting a staggering 9.22 billion shares worth $4.4 billion – an all-time daily record.

The slide began in August, when sub-prime worries in the United States spooked global markets and sent many investors scurrying to the safety of the sidelines.

Trading levels have been reflecting the growing sense of investor unease.

Average daily volume fell to 3.1 billion shares worth $2.6 billion in the third quarter, and further to 2.26 billion shares worth $2.4 billion in the fourth quarter, with the slide continuing this year.

Nowhere is the pain of anaemic trading volumes felt more strongly than at the Singapore Exchange (SGX), which relies on clearing trades for the bulk of its income.

Its shares over the past 12 months tell a similar story of a slowing market.

SGX’s share price climbed from $5.95 on Jan 3 last year to a record high of $16.40 on Oct 8, before falling to as low as $8.70 on Jan 22.

While trading on the broad market has fallen sharply, however, blue chips continue to be traded actively, with their share prices moving in tandem with other blue-chip stocks in the rest of Asia.

This suggests that hedge funds – which deploy sophisticated investment strategies – are actively trading in and out of their portfolios as they react to day-to-day developments in the US.

That gives most other global investors little reason to cheer, and the speed of the market’s deterioration is causing much concern, said Citigroup’s chief Asian equities strategist, Mr Markus Rosgen.

The problem is that while shell-shocked investors are no longer complacent, their stock portfolios might still be filled with counters, such as banks and real estate, which prosper only in a bull market.

‘This will prove the undoing of many an investor,’ said Mr Rosgen.

Still, one dealer noted that recent trading patterns indicate that retail investors are turning out to be a savvy bunch and have avoided taking fresh positions in penny stocks.

The UOB Catalist Index – which tracks penny stocks – has fallen by 28 per cent since last October. But daily traded volumes in its shares plunged even more steeply – from an average 402.9 million shares then to only 110 million shares now.

Some experts believe that the market may undergo another round of selling before reaching a ‘bottom’, presenting investors with a good buying opportunity.

‘Between now and then, patience is what is required, and the winner is the one who loses least,’ said Mr Rosgen.

 

Source: The Straits Times 20 Feb 08

Maybank’s home loan rate cut sets cat among pigeons

Analysts divided on whether this will signal undercutting among the banks

(SINGAPORE) Maybank has fired a salvo that could shake up the home loan market here by slashing its rates.

This has led to speculation that banks might start to undercut each other to drum up business. Meanwhile, the banks themselves are adopting a cautious stance in a falling interest rate environment that could change direction.

For a three-week period, Maybank is launching a promotional three-year fixed rate home loan package which is the lowest of all the banks surveyed.

Home-owners pay 1.68 per cent per annum for the first year, 2.68 per cent pa for second year and 3.38 per cent pa for the third year. The rates apply to both HDB and private home loans. Homeowners are subject to a three-year lock-in period and fees will apply in case of early redemption, prepayment and cancellation during that time.

Before this promotion, the Qualifying Full Bank’s rates stood at 3.58 per cent pa for all three years. Maybank’s new first-year interest rate is about 40 per cent lower than similar packages being offered in the market (see table). But it has a lock-in period of three years while other banks generally have a two-year lock-in.

Helen Neo, head, consumer banking, Maybank Singapore, explained that interbank rates have softened over the past few months. ‘However, we expect interest rates to rebound in view of rising inflation in Singapore,’ she said.

‘Against a backdrop of potential rising interest rates, home loan customers who take up this fixed rate package will enjoy the prevailing low rates and are protected from future interest rate increases for the next three years.’

Mortgage rates are affected by the Singapore interbank offer rate (Sibor) – the rate at which banks lend to one another. Sibor has been on a downward trajectory since late last year, after hovering around 2.5 per cent.

Yesterday, the three-month Sibor fell to 1.44 per cent, its lowest level since December 2004. Economists say it is expected to go even lower by mid-year, partly due to the US steadily cutting its key interest rate. Sibor takes its cue from interest rates in the US, and last month the US Federal Reserve slashed its key interest rate from 4.25 per cent to 3.5 per cent, and then to 3 per cent.

Maybank’s move to reduce rates is prompting speculation among mortgage consultants that banks could follow suit with foreign banks leading the way. ‘I’m not surprised that this round of interest rate reductions is led by foreign banks again,’ said Dennis Ng, spokesman for Mortgage Consultancy Portal www.HousingLoanSG. com. ‘From past experience, local banks have typically lagged behind foreign banks in adjusting interest rates down.’ This is because the three local banks have the lion’s share of the housing loan market. ‘If they reduce interest rates, they have more to lose,’ said Mr Ng. While cutting rates would let them gain some more business, the advantage would be neutralised if their existing clients start paying lower rates.

But with Sibor falling, other banks could follow suit in lowering their interest rates, Mr Ng said. The last time banks were seen aggressively undercutting each other on rates was in 2003-2004, where foreign banks actively led the charge in introducing lower rates.

Leong Sze Hian, president of the Society of Financial Service Professionals, agreed that banks would be nudged into lowering their rates. ‘Sibor rates are dropping and once Maybank lowers its rates, everyone will follow, otherwise customers will move,’ he said.

However, consultants like Tang Yin Fong, a mortgage advisor at wealth and investment outfit Providend, said local banks already have Sibor-linked packages which track the movement of Sibor, and do not need to lower rates to be competitive.

‘Such packages have been relatively attractive in the current lowered Sibor environment and have since been the main packages that the banks recommend to homeowners,’ she explained.

She also added that in the current situation where the Singapore property market still seems to be on the rise and more homeowners are seeking mortgage loans, banks may be less willing to lower their interest rates.

Meanwhile, DBS Bank said it has ‘no plans to adjust rates’ for now, while OCBC and United Overseas Bank both said they would monitor the situation before making a decision.

Foreign banks Citibank and Standard Chartered shied away from saying if they will review rates but pointed to their Sibor packages, which they say give customers control in repricing loan packages. Stuart Kamp, head of mortgages, Standard Chartered Bank, added, ‘We expect interest rates to trend down over the coming months.’

 

Source: Business Times 19 Feb 08

CPF to keep OA interest rate at 2.5% for Apr-June

THE Central Provident Board said yesterday that it will continue to pay 2.5 per cent interest a year for members’ CPF savings in their Ordinary Account (OA) from April 1 to June 30.

The concessionary interest rate for HDB mortgage loan, which is pegged at 0.1 percentage point above the CPF interest rate for the OA, will remain unchanged at 2.6 per cent a year over the same period, the Housing Development Board (HDB) said in the joint statement.

Although the computed CPF interest rate derived from the major local banks’ interest rates for the three months between November and January works out to 0.74 per cent a year, the CPF Act provides for a minimum CPF interest rate of 2.5 per cent a year.

The prevailing CPF interest rate from January to March for the Special, Medisave and Retirement

Accounts (SMRA) is 4 per cent. This was computed based on the 12-month average yield of the 10-year Singapore Government Security (10YSGS) plus one per cent under the new CPF reforms announced last year.

The SMRA interest rate for April to June will be announced in March after the average yield of the 10YSGS is computed. To help members adjust to this floating rate, the 4 per cent floor for the SMRA rate will be maintained for the first two years, as earlier announced.

An extra one per cent interest will also be paid on the first $60,000 of a member’s combined balances, with up to $20,000 from the OA. The extra interest from the OA will go into the member’s Special or Retirement Account to enhance his retirement savings.

The CPF interest rate will continue to be reviewed quarterly, the CPF said.

Source:

CPF to keep OA interest rate at 2.5% for Apr-June

THE Central Provident Board said yesterday that it will continue to pay 2.5 per cent interest a year for

members’ CPF savings in their Ordinary Account (OA) from April 1 to June 30.

The concessionary interest rate for HDB mortgage loan, which is pegged at 0.1 percentage point above the

CPF interest rate for the OA, will remain unchanged at 2.6 per cent a year over the same period, the

Housing Development Board (HDB) said in the joint statement.

Although the computed CPF interest rate derived from the major local banks’ interest rates for the three

months between November and January works out to 0.74 per cent a year, the CPF Act provides for a

minimum CPF interest rate of 2.5 per cent a year.

The prevailing CPF interest rate from January to March for the Special, Medisave and Retirement

Accounts (SMRA) is 4 per cent. This was computed based on the 12-month average yield of the 10-year

Singapore Government Security (10YSGS) plus one per cent under the new CPF reforms announced last

year.

The SMRA interest rate for April to June will be announced in March after the average yield of the

10YSGS is computed. To help members adjust to this floating rate, the 4 per cent floor for the SMRA rate

will be maintained for the first two years, as earlier announced.

An extra one per cent interest will also be paid on the first $60,000 of a member’s combined balances,

with up to $20,000 from the OA. The extra interest from the OA will go into the member’s Special or

Retirement Account to enhance his retirement savings.

The CPF interest rate will continue to be reviewed quarterly, the CPF said.

CPF floating rate to be announced next month

THE interest rate for the Central Provident Fund (CPF) Special, Medisave and Retirement accounts (SMRA) for April to June this year will be announced next month, after the average yield of the 10-year Singapore Government Security (SGS) is computed, said the CPF Board yesterday.

The SMRA is based on the average yield of the 10-year SGS plus 1 per cent. A 4 per cent minimum will be maintained for two years to help CPF members adjust to the floating rate.

In addition, an extra 1 per cent will be paid on the first $60,000 of a member’s combined balances, with up to $20,000 from the Ordinary Account. This will go towards the member’s Special or Retirement account to enhance retirement savings, said CPF.

The CPF interest rate and HDB mortgage rate will remain the same for April 1 to June 30.

In a joint statement yesterday, the CPF Board said it would pay interest of 2.5 per cent a year for savings in the Ordinary Account to its members.

The concessionary interest rate for HDB loans, pegged at 0.1 percentage point above the CPF Ordinary Account rate, will remain unchanged at 2.6 per cent a year. The CPF interest rate is reviewed quarterly.

 

Source: The Straits Times 19 Feb 08

Capital will keep flowing into Asia, says fund manager

CAPITAL will keep flowing into Asia despite the turbulence across global stock markets, according to a senior executive of an international fund manager.

Fidelity International’s global head of institutional investment, Mr Michael Gordon, said long-term investors remain positive on Asia’s prospects, as the region is not plagued by debt problems being witnessed elsewhere in the world.

Fidelity is a global investment management company with more than US$276 billion (S$390.3 billion) in its portfolio.

Mr Gordon expects Asian stocks to fare ‘a little better’ than global equities this year.

Global equities will end the year about where they are now, he predicts.

‘We are still clearly favouring Asia over the rest of the world,’ he told The Straits Times.

‘Capital will continue to flow to Asia. I don’t see that changing any time soon,’ he added.

‘The debt problems that are killing markets elsewhere are not present here. In Asia, debt has not driven things. The credit crunch is not biting here.’

Global equities endured a torrid time last month. About US$5.2 trillion were wiped off their value, as investors took cover in the face of economic uncertainties.

However, that has not dampened the positive sentiment among investors with a long-term view towards Asian markets.

‘There are no nerves about Asia. The longer-term investors remain as committed to their investments in Asia as they were last summer,’ Mr Gordon said.

On his outlook for global equities this year, he said: ‘The volatility will quiet down a little bit. From here, things will probably be flat from today.

‘I expect it to close down about 5 per cent to 10 per cent overall for the year.’

He also feels Asia will be ‘quite insulated’ in the event of an economic recession in the United States.

The region’s long-term financial health is thriving, with strong foreign exchange reserves and current account surpluses, he explained.

Asia is also no longer as dependent on US capital now as it was 10 years ago, he said.

Source: The Straits Times 19 Feb 08

BUDGET 2008: ESTATE DUTY – Analysts hail scrapping of estate duty

Story Print Friendly Page

Move will boost S’pore’s economic competitiveness

ESTATE duty is finally dead. Tax consultants and financial advisers yesterday hailed the scrapping of the tax – denounced as ‘death duty’ by its opponents – saying that the move would boost the wealth management industry and Singapore’s overall economic competitiveness.

Eliminating the tax on a person’s assets at death puts Singapore on par with rival Hong Kong, which abolished estate duties two years ago, and would make Singapore a more attractive place in which to live, they said.

‘It’s been a long time coming,’ said Ooi Boon Jin, executive director of tax services at KPMG. ‘It’ll be a boost to the wealth management industry, and it’ll also encourage families to come and sink their roots here.’

Peter Tan, tax partner at PricewaterhouseCoopers Singapore, said that it was right for the government to remove the ‘archaic’ tax and ‘keep up with countries that have already seen the light’.

Other countries such as Malaysia, India, New Zealand and Australia have already done away with estate duties.

But there are countries that still retain an inheritance tax, such as the US and the UK.

‘It’s a misconception that estate duty only applies to the super-wealthy. It applies to middle-income people as well,’ said Mr Ooi.

Here, estate duty was previously payable on all assets of an individual upon death, subject to various exemptions, including the first $9 million of residential property and the first $600,000 for non-residential assets. The tax rate was 5 per cent on the first $12 million of taxable assets and 10 per cent for assets in excess of $12 million.

‘If you had $600,000 in your Central Provident Fund (CPF) accounts, that would have soaked up your $600,000 exemption,’ said Mr Ooi. ‘Anything else outside CPF you left behind would be subject to estate duty.’

Finance Minister Tharman Shanmugaratnam yesterday said that Singapore’s estate duty – inherited from the British when the island was a colony – would be removed with immediate effect, including for people who died yesterday.

He acknowledged that Singaporeans who had built up their savings from a lifetime of work wanted to pass on their wealth to their families. Some people became liable for estate duty when their estates received large cash payouts from life insurance policies.

Roy Varghese, director of financial planning practice at financial advisory firm ipac Singapore, said: ‘Wealth redistribution should not be at the expense of those who accumulate assets legitimately and diligently.’

Critics of estate duty have long pointed out that the tax generates insignificant revenue for the government and that wealthy people can avoid it by transferring their assets into offshore trusts.

The Inland Revenue Authority of Singapore’s latest annual report for the fiscal year to last March-end shows that it collected just $98 million in estate duties, or 0.4 per cent of the total $22.9 billion in tax collections for that year.

In contrast, corporate income tax and personal income tax collections were $8.5 billion and $4.7 billion respectively.

Removing estate duty could also give a boost to the budding philanthropic sector in Singapore, as rich individuals who had already planned for estate duty may give the money to a worthy cause, said Terry Farris, Asia-Pacific head of philanthropy services at private bank UBS. ‘It may be an opportunity to give that directly to a philanthropic initiative.’

In his Budget speech, Mr Tharman also urged wealthy individuals to make a contribution to society.

With estate duty gone, the government’s remaining tax on individual wealth is property tax, which Mr Tharman said would stay. Unlike estate duty, property tax ‘does not affect our middle and upper-middle-income estates disproportionately compared to wealthier ones’, he said.

 

Source: Business Times 16 Feb 08

Lower interest rates for clients with good credit card record

Citibank is latest to offer tier pricing on rates for unsecured credit products

CITIBANK has joined the likes of Standard Chartered Bank (Stanchart) and American Express in introducing a scheme to reward customers with a good credit record with lower interest rates for unsecured credit products.

Under the scheme, known as tier pricing, Citibank will offer from April 1 annual rates of 18 per cent on rollover credit for its most creditworthy clients – below the industry average of 24 per cent.

A Citibank spokesman declined to give more details, but the scheme will apply to Citibank Gold and Platinum cards initially.

Customers are evaluated on a number of factors, including how long a customer has been a cardmember, usage and payment behaviour, the bank said.

If the customer, however, fails to pay at least the minimum sum required by the due date twice or more within six months, then the interest rate could go as high as 27 per cent a year. An account is considered past due if the minimum payment due is not received in full before the payment due date.

This rate will revert to the usual 24 per cent a year once a customer’s account is no longer twice or more past due in the last six months, it said.

‘We want to be able to reward customers who have shown good payment behaviour over a period of time with a promotional lower interest rate,’ said Mr Radha Suvarna, director of portfolio management and cross-sell, Citibank Singapore.

‘The implementation of tiered pricing based on payment behaviour seeks to encourage all customers to adopt good payment practices and be rewarded for it.’

From the standpoint of a consumer, in particular a creditworthy one, using credit cards that offer different interest rates depending on spending behaviour and risk profile, or risk-based pricing in short, can be beneficial.

For one, a customer could save on interest charges.

Take Citibank’s rates, for example. Your credit statement shows that you owe the bank $5,000 and you decide to pay off $1,000.

The prevailing annual interest rate of 24 per cent will see you being charged 2 per cent a month on the $4,000 outstanding balance. This works out to $80 in interest.

Now, suppose you are a customer who pays your bills diligently. With these changes, you will save money as you could possibly enjoy interest rates of 18 per cent a year, or 1.5 per cent a month.

This would work out to just $60 in interest instead.

In other words, you could save $20 as a result of this tier pricing system that, according to one banker, is already ‘the norm’ in countries like the United States.

Some bankers say the industry will move their unsecured credit products, such as credit cards, towards such a system in the near future, as ‘tiered interest rates’ catch on among customers.

‘It’s the next level of competition,’ said Mr Kartik Taneja, Stanchart’s head of credit cards.

‘We’ve had competition on fees, and that has pretty much wiped out annual fees. Nowadays, you can hardly find any card that charges an annual fee.

‘Typically, if you look at the evolution of the industry, once you stop competing on fees, then you start on the interest side.’

When contacted, the likes of DBS Group Holdings and OCBC Bank said they had no plans currently to introduce risk-based pricing on unsecured credit products.

According to OCBC’s head of group marketing services and unsecured lending, Mr Andy Chan, their customers want a ‘choice of financial tools to help them rationalise and consolidate their borrowings’. He also said the bank recognised that their customers have ‘different credit needs and payment habits’.

 

Source: The Straits Times 7 Feb 08

‘Stormy 2008′ expected for financial services

LONDON – THE financial services industry should expect ‘turbulent conditions for 2008 and beyond’ and may report an additional US$300 billion (S$429.8 billion) in losses related to the United States sub-prime crisis, according to a study by consulting firm Oliver Wyman.

‘We expect a stormy 2008,’ Oliver Wyman said in its State Of The Financial Services Industry report. ‘While governments, central banks and regulators scramble to address the aftermath of the sub-prime fallout, several other crises are mounting.’

A slowdown in European real estate, especially in Britain and Spain, potential weakening of the US dollar and a possible collapse in commodity prices may hurt the global economy, according to the report.

A drop in Chinese and Indian stocks may be a fourth ‘potential disruption’ this year, Oliver Wyman said.

Senior executives and investors are gathering at the World Economic Forum in Davos, Switzerland, amid concerns the world’s biggest economy is sliding into a recession.

The mood contrasted with the buoyancy of last year’s meeting, where guests celebrated a bumper year of corporate profits and bonuses and the strongest global economy in three decades.

The US Federal Reserve this week lowered the target rate for overnight bank loans in the first emergency cut since 2001, as it tried to prevent a recession.

US President George W. Bush and House lawmakers announced an agreement on an economic stimulus package that would distribute rebate cheques to 117 million families.

Economists at Goldman Sachs Group and Merrill Lynch are predicting the US economy will fall into its first recession in seven years this year.

Chief executive officers (CEOs) of financial services companies surveyed by Oliver Wyman said they expected share prices of financial services companies to increase between 5 per cent and 14 per cent this year.

The same prediction was made last year, according to Mr Alex Paidas, a spokesman for Oliver Wyman.

Instead, the industry contracted by 7 per cent. This year, 48 per cent of the CEOs surveyed cited deteriorating market conditions as a key threat.

Sixty-nine per cent of the CEOs polled in November and last month said they expected their companies to outperform the industry this year.

‘North American financial services firms will have a tough year,’ Oliver Wyman said. ‘Market uncertainty, combined with further write-downs and expected home price and loan volume declines, implies more squeezes on earnings. Banks most likely will have to increase loan-loss reserves.’

Growth in Western Europe is likely to suffer, while Latin America has a positive outlook and ‘growth opportunities exist’ in Singapore, Taiwan, Indonesia and Korea, according to the report.

Private equity is an industry that is likely to grow, the consulting firm said.

 

Source: BLOOMBERG NEWS (The Straits Times 26 Jan 08)

GIC buys a slice of embattled Citigroup

The US$6.88b investment, with limited downside, makes it potentially one of the global bank’s largest shareholders

(SINGAPORE) It’s two giant purchases in as many months.

The Government of Singapore Investment Corp (GIC) is investing US$6.88 billion in Citigroup through a private offering of convertible preferred securities, it said yesterday. The downside is limited as the securities yield an annual coupon of 7 per cent until conversion. The upside – if Citigroup’s currently battered share price picks up – can be fairly attractive.

If converted to shares, the securities will bring GIC’s holdings in the global bank to some 4 per cent of its enlarged share capital. That would make GIC – which currently owns just 0.3 per cent of Citigroup, a stake built up slowly over the past 25 years – one of the bank’s largest individual shareholders.

The investment is part of a broader capital-raising exercise by Citi – which also reported a US$9.83 billion loss for the fourth quarter and further sub-prime- related writedowns of US$18.1 billion yesterday – to bring its capital ratio back in line with company targets.

Besides lowering its dividend and selling non-core assets, Citi is also seeking to raise at least US$14.5 billion from public and private investors – including GIC.

The private offering is worth US$12.5 billion and consists entirely of convertible preferred securities.

While GIC will take the largest portion, other investors include existing shareholders the Capital Group and Saudi Arabia’s Prince Alwaleed bin Talal.

The Kuwait Investment Authority, the New Jersey Division of Investment, and former Citi chief executive Sanford Weill and The Weill Family Foundation are also buying into the private offering. They will get the same terms as GIC.

Convertible preferred securities, also called perpetual convertibles, are structured to protect an investor from downside risk while giving a chance to participate on the upside.

To protect against downside if Citi’s share price falls further, the securities yield an annual coupon of 7 per cent, payable quarterly.

To participate on the upside, GIC may convert the securities at any time, although it must do so at a 20 per cent premium above a reference price. This will be set based on the average trading price of Citi shares over the next few days.

The securities have a perpetual maturity, which means they do not expire; however, Citi can call the securities – pay back the money – after the seventh year. Citi may also force conversion after five years, if its stock price exceeds 130 per cent of the reference price.

The terms also include ‘customary standstill provisions’ that cap GIC and others’ ownership in Citi and restrict them from seeking to influence management.

GIC will not be taking a seat on Citigroup’s board, it said in a statement.

Its deputy chairman and executive director Tony Tan said the bank is ‘one of the largest banks in the world with an attractive global franchise’ and ‘an excellent addition to GIC’s portfolio’. Citi has some 200 million customer accounts and does business in more than 100 countries.

GIC has confidence in Citi’s board of directors, headed by Winfried Bischoff, and the new management team headed by Vikram Pandit, Dr Tan said. He added that GIC also believes Citi has taken ‘decisive action’ to further strengthen the balance sheet and profitability of the bank, and that the nature of the convertible preferred securities ‘gives appropriate downside protection’.

Citi’s Mr Pandit said he has known GIC’s principals for years and is delighted that the ‘widely respected, long-term oriented financial investor’, and ‘other important investors’, have decided to buy in.

The offering is the second time since the subprime crisis hit last August that Citi has tapped sovereign capital. In November, it sold US$7.5 billion worth of mandatory convertible notes to the Abu Dhabi Investment Authority, which would convert to a nearly 5 per cent stake.

The bank’s share price has nearly halved in recent months, falling from over US$55 as of May last year to about US $29 at Monday’s close.

Its fourth-quarter net loss compares to a profit of US$5.1 billion a year ago, while its sub-prime writedowns are the largest announced by any bank thus far.

Market observer Terence Wong, chief investment analyst at SIAS Research in Singapore, said he was not surprised by GIC’s purchase. ‘I believe they are aggressively looking and have taken it as a great opportunity,’ he said.

‘If they don’t take it, other SWFs or investors will jump at the chance. It may not be the lowest price, but GIC is a long-term investor and it’s difficult to catch it right at the trough,’ said Mr Wong.

Just over a month ago, GIC said it was investing over $14 billion in UBS’ mandatory convertible notes, which if converted would give GIC a 9 per cent stake in the Swiss wealth management giant.

 

Source: Business Times 16 Jan 08

GIC places $430m with US property hedge fund Rosen

It steps up buying of foreign real estate assets as values plunge, growth slows

SAN FRANCISCO – THE Government of Singapore Investment Corporation (GIC) is investing in the United States property market, where values have fallen heavily in the past year.

GIC committed US$300 million (S$429.2 million) to hedge fund Rosen Real Estate Securities to invest in US real estate.

GIC also acquired a minority stake in the California-based firm run by Professor Kenneth Rosen, chairman of the University of California’s Fisher Centre for Real Estate and Urban Economics, he said in a statement.

Singapore is increasing investment in real estate companies in the US and other markets, where slowing growth and a contraction of global credit markets battered values. The Bloomberg Real Estate Investment Trust Index of 126 companies has dropped by 30 per cent in the past year.

‘US property had a huge fall last year and now would certainly be a better time to buy than last year,’ said Mr Shane Oliver, who helps manage the equivalent of US$113 billion at AMP Capital Investors in Sydney. ’Whether we have seen a bottom remains to be seen, but there’s certainly value to be had now.’

Dr Seek Ngee Huat, president of GIC’s real estate unit, said in a statement on Monday that his company chose to invest in the fund because he has known Prof Rosen and his team for ‘a very long time’.

Prof Rosen said in an interview: ‘GIC is not in a controlling position. It has a passive stake.’

The fund invests in US real estate investment trusts, homebuilders, mortgage companies and other securities, he said.

The transaction follows GIC’s 11 billion Swiss franc (S$14.4 billion) investment in UBS, which made it the single-largest shareholder of Europe’s largest bank with a 9 per cent stake.

GIC also owns a 3 per cent stake in British Land, Europe’s largest property trust.

The latest investment adds to the portfolio of GIC, one of the world’s 10 biggest real estate investors with properties in 30 countries.

The Singapore Government’s fund manager, set up in 1981 to run the nation’s foreign reserves, holds about a 10th of its more than US$100 billion of investments in real estate.

 

Source: BLOOMBERG NEWS (The Straits Times 16 Jan 08)

GIC pumps $9.8b into troubled Citigroup

THE Government of Singapore Corporation (GIC) is investing US$6.88 billion (S$9.82 billion) in the troubled American banking giant Citigroup, it said last night.

It is GIC’s second largest investment and came on a day of dreadful news for Citi, which has been battered by the credit crisis rocking the global financial system.

Citi reported US$9.83 billion in net losses for the fourth quarter, and is reportedly planning to axe 20,000 staff or more. It also took a massive US$18.1 billion write-down for exposure to dodgy sub-prime mortgages.

But GIC stressed yesterday that what at first glance might look like a risky investment has built-in safeguards that will protect its downside. The use of a certain kind of security means GIC gets a relatively lower rate of return, but has more protection if Citi’s share price plummets further.

Indeed, the investment’s structure ‘gives appropriate downside protection’ and meets GIC’s ‘long-term investment objective in terms of risk and return’, said Dr Tony Tan, GIC deputy chairman and executive director, in a statement yesterday.

Dr Tan described Citigroup as ‘an excellent addition to GIC’s portfolio as it is one of the largest banks in the world with an attractive global franchise’. He added that GIC has confidence in Citigroup’s board of directors, who have taken ‘decisive action to… strengthen the balance sheet and profitability of the bank’.

The Straits Times understands that the long-standing ties between GIC senior executives and Citi’s leadership were partly why GIC was one of the first institutions the US bank approached during this most recent round of cash-raising.

Citi chief executive Vikram Pandit told a results briefing in New York yesterday that GIC is ‘a widely respected, long-term oriented investor’ and that he has ‘known the principals for years’. The announcement caps a dismal period for Citi, which has been desperate to shore up its capital base.

GIC’s investment was the largest in a new round of fund-raising that netted a total of US$12.5 billion from private investors, including the Kuwait Investment Authority, Saudi Prince Alwaleed bin Talal and asset management firm Capital Research & Management.

Citi is also raising US$2 billion more from a public offering.

GIC made a similar strategic investment less then a month ago, spending 11 billion Swiss francs (S$14.45 billion) to buy a stake of about 9 per cent in the beleaguered Swiss bank UBS, another victim of the sub-prime meltdown.

The two deals are structured differently. The UBS investment is in the form of ‘convertible notes’, which pay an annual return of 9 per cent. These must be converted into UBS stock within two years of the date of issue.

The Citi deal employs a type of security called a perpetual convertible security. This provides a fixed annual dividend of 7 per cent and allows GIC to hold the securities for as long as it chooses, subject to certain conditions. GIC may convert these securities into shares at a fixed price, which will be 20 per cent above the stock’s average price over the next few trading days.

Citigroup shares closed in New York on Monday at US$29.06, a drop of 47 per cent over the last year.

GIC, which manages Singapore’s reserves, already holds a 0.3 per cent stake in Citi. The new investment will allow it to raise its holding to about 4 per cent, making it one of the largest single shareholders. But GIC stated that it is not seeking a board seat at Citi.

 

Source: The Straits Times 16 Jan 08

PRIVATE BANKING: Private banks still upbeat on 2008

Sub-prime woes have not changed their expansion plans in this part of the world, private bankers

LOSSES suffered by banking giants over sub-prime writedowns have not dampened the ambitious growth plans of their private banking divisions in Singapore.

Private banks here are upbeat on 2008, saying the wealth management pie will continue to grow strongly in this part of the world. But they expect the industry to be still facing issues such as a talent crunch and market volatility.

Soaring salaries and bonuses, the surge in the number of millionaires and a booming economy in 2007 – the private banking sector never had it so good.

The flip side of this was, of course, a fierce war for talent, with poaching rampant. New players also entered the market, all fighting for a share of the wealth management pie.

The sub-prime meltdown in the middle of the year did not help matters. Banking giants Merrill Lynch and UBS were beset with losses from writedowns on their collateralised debt obligations (CDOs).

The bright side of it all was that the sub-prime woes have not changed private banking expansion plans in this part of the world, private banks told BT.

Swiss bank UBS, which earlier announced $14 billion in losses from the sub-prime crisis, said the bank’s growth strategy is still on track.

‘Wealth management is UBS’s core business and we continue to be strategically bullish,’ said Yeong Phick Fui, UBS’s head of wealth management in Singapore. ‘We will continue to hire along the same rate as previous years.’ She added that UBS has about 200 billion Swiss francs (S$254 billion) under management in Asia Pacific and the industry is still growing. ‘No scale down is expected. Our strategy is to continue investing in the business,’ she said.

Francois Monnet, who heads Credit Suisse’s private bank here, agreed. ‘Private banking is strategically a core business for us. It is not something that we will walk away from when the market turns.’ The bank added another 100 private bankers in Singapore and Hong Kong last year.

Other private banks say they will still be actively hiring in 2008. BNP Paribas private banking said it is untouched by the sub-prime crisis and is still looking to grow 20 per cent annually. Similarly, Standard Chartered Private Bank said it is still looking to add on 200-300 private bankers in the next 3-4 years globally.

Banks are still on a hiring spree because the number of moneyed folk is likely to rise this year. Singapore is set to continue growing as a private banking hub.

‘There’s strong GDP growth in this region, we continue to see new IPOs, real estate is booming, companies are making profits, and millionaires will grow in number,’ noted Michel Longhini, head of BNP Paribas private banking Asia-Pacific.

Singapore had the fastest growth in the number of high net worth individuals (HNWI) in Asia Pacific, at 21.2 per cent in 2006, and also one of the fastest growing wealth markets in the world, according to a report by Merrill Lynch and Capgemini.

Today, Singapore’s role is in global private banking, Mr Longhini added, and growth is not just coming from Singapore, but from South-east Asia and Europe. Added to the fact that Singapore is attracting foreigners who book assets here, more millionaires will be minted next year.

‘The growth in millionaires in Singapore will be boosted by Singaporeans, expatriates and global HNWI who come to bank their wealth here,’ said Standard Chartered global head of private bank Peter Flavel. As a result of this, private banks will surge ahead with expansion.

‘The wealth creation cycle is highly correlated with the markets and economic growth,’ said Credit Suisse’s Dr Monnet. ‘With Singapore’s robust economic fundamentals, we expect continued growth in the private banking industry.’ Credit Suisse has the largest wealth management operations in Singapore outside of its headquarters in Switzerland.

The hunt for talent, therefore, ranks again among the top concerns for private banks in 2008, as it had been in 2007, the difference now being that banks have mostly done their en masse hiring and are now gunning for quality.

‘Today, private banks are much more selective, more quality-based,’ said BNPP’s Mr Longhini. ‘We now know who is good, who is not, and know the price we are willing to pay.’ Tan Su Shan, who heads Citi’s Private Bank here, agreed. ‘Before, we saw frenzied, mass hiring in newcomers (to the industry). Now we see consolidation in hiring.’ She added: ‘We’re also working with the resources we hired and are working to grow our internal talent pool by continuing to train and develop staff.’

The banks are casting their eyes on quality – meaning those who have prior private banking or other banking experience. ‘Quality hires will be able to command 30-35 per cent higher salaries,’ said Rahul Malhotra, Merrill Lynch’s head of global wealth management for Asia-Pacific. ‘We’re looking for 7 years’ experience or more.’ Banks say poaching is less predominant now, except among the new entrants, and most are looking inward at their corporate or investment bankers.

‘We see quality coming from within,’ said Mr Malhotra. Citi’s Ms Tan said they are now looking ‘organically’ for good people. ‘We have hirees from corporate banking and institutional desks such as equity or fixed income, or from private equity, investment banking or research,’ she said. ‘These people bring with them an institutional level of expertise and professionalism that can only enhance and improve upon the level of private banking in Singapore.’

Another challenge facing private banks this year is the market volatility and managing this tumultuous period for their clients.

‘From now to medium term, we’re looking at diversification of asset categories for our clients,’ said Mr Longhini.

Mr Malhotra said the bank is waiting to see what happens in the US economy early this year and looking at ’shifting from fixed income to equity’. ‘We are seeing more consolidation of assets into safer types like fixed income,’ he added.

The past year saw private banks focus on the wealth transfer theme for clients. In the new year, the private banks say a big focus will be on private investment banking. With the noveau riche earning their wealth through their businesses, private banks say this is where they can step up and help integrate their clients’ private wealth with business ventures.

‘Asia’s new wealth is coming from real estate, services, the professional segment, IT, manufacturing and the energy sector,’ said Citi’s Ms Tan. ‘We want our private bankers to understand what the client does, their wealth creation process, and help manage it.’

At Credit Suisse, Dr Monnet says almost every private banking client is an entrepreneur, ‘mostly first or secondgeneration owners of businesses with their wealth tied to their enterprises and to real estate’. He noted: ‘The classical private banking offering no longer serves these entrepreneurs well.’ Clients now require their banks to have expertise not only in private wealth management but also in corporate finance such as advising on mergers and acquisitions or on initial public offering (IPO) activities that can help them grow their businesses, Dr Monnet explained.

‘We have already seen many cases of our private-banking clients with investment banking needs, be it divesting large shareholdings they have, monetising those shareholdings or having certain hedging needs, financing requirements such as shared-backed lending, aircraft, ship or real estate financing or bringing private equity investments into entrepreneur clients’ businesses.’

 

Source: Business Times 3 Jan 08

Will investors’ confidence in bank stocks improve this year?

Developments and results in next few weeks will be closely tracked

WITH 2007 behind them, investors in the Singapore-listed banks will be closely watching developments in the next few weeks to see what 2008 has in store.

Analysts expect core lending to continue to do well, given strong loans growth so far. But the banks are unlikely to be spared if economic growth here slows in the year ahead.

One of the questions expected to be answered soon is who will take the helm of DBS Group as chief executive to replace outgoing CEO Jackson Tai.

The banks’ fourth-quarter results, expected in February, will also play a crucial role in restoring – or further denting – investor confidence in their shares.

Top of the list of things to look for in their earnings reports will be any further write-downs in the value of their collateralised debt obligation or CDO holdings.

In early November last year, OCBC Bank stunned shareholders when it slashed the value of its portfolio of CDOs, comprising pools of asset-backed securities (ABS), by $221 million to just $48 million – less than a fifth of the original value.

OCBC chief executive David Conner said at the time that the move was intended to ‘prepare for the worst’ after it became clear that the market for such debt securities had dried up amid the financial market turmoil.

OCBC’s write-down of its ABS CDO holdings against its earnings was the most aggressive so far among the three banks listed here, although it has another $372 million invested in corporate CDOs – those backed by corporate bonds – that could still see a fall in value.

United Overseas Bank (UOB) has charged $55 million so far against its earnings for its CDO investments of $388 million, of which some $90 million are in ABS CDOs.

And DBS took an $85 million charge against its third-quarter earnings for its CDO exposure, including a $70 million write-down of its $275 million investment in ABS CDOs. It has total CDO exposure of $2.36 billion – including $1.1 billion held by a special purpose vehicle.

The possibility of further writedowns has kept the banks’ share prices depressed in the weeks since they announced their Q3 earnings.

DBS and UOB have been buying back their own shares, which may suggest the banks believe their stocks are undervalued.

Equally important to watch out for will be signs of any weakening in the banks’ core revenue, operating profit and interest margins that would suggest they are in for a rougher ride in 2008.

In recent months the banks have benefited from the surge of activity in the property market and broader economic growth.

Overall bank lending to the property sector – including home loans to individuals and commercial loans to property developers and other businesses in the building and construction industry – has climbed steadily since January and reached an all-time high of $107.2 billion at end-November, according to the most recent estimates from the Monetary Authority of Singapore.

So far then, the impact of the global financial market turmoil that began in late July has been limited to writedowns in the value of the banks’ CDO holdings, losses suffered on trading securities and derivatives from widening credit spreads and – less directly – from lower interest margins resulting from a defensive shift of funds into lower yield short-term assets in the face of volatile financial markets.

These effects – while significant enough to drag the banks’ profits down for the second half of 2007 – are unlikely to last into 2008 and are relatively easy for the banks to manage.

Of greater concern is whether the malaise will affect the banks’ core lending business. That could happen if, as widely expected, broader economic growth worldwide slows and companies here – squeezed by higher costs and lower demand – start cutting back on expansion plans and new investments.

Slower loans growth – particularly to property developers, home-buyers and small businesses – would be one of the first signs of this.

Other symptoms of longer-lasting effects of the financial storm on the banks would be a rise in the proportion of bad loans if the businesses they lend to run into financial trouble, or a decline in fee and commission income from investment banking and wealth management, if the appetite for such services wanes.

In Singapore, the banks’ retail business will likely face greater competition from Citigroup’s consumer subsidiary Citibank Singapore, which has been expanding rapidly into the heartland through its tie-up with transport operator SMRT Corp.

With stiff competition at home, it will also be important to see how well the banks fare in new markets, particularly China. All three Singapore banks have now received approval from Chinese regulators to set up local subsidiaries and are expected to expand their operations there.

But other overseas ventures have proved difficult. Over the past year, Thailand’s banking sector has been particularly troublesome for DBS and UOB.

The value of DBS’s 16 per cent stake in Thailand’s TMB Bank plummeted some 40 per cent in 2007. In July, DBS took a $159 million charge against its Q2 earnings. And in Q3 it wrote down the investment by another $38 million to $270 million.

Since the end of September, TMB’s share price has dropped a further 20 per cent. At a rough estimate, that would make a $50 million dent in DBS’s Q4 earnings if it decides to write down the value of the investment a third time.

Meanwhile, sharply higher charges for bad loans led UOB to a pre-tax loss of $25 million for its Thai operations in the first half of 2007 – the most recent published figures for the group’s business there – reversing a $19 million profit a year earlier.

Also from Jan 1, 2008, the three Singapore-listed banks and Citibank Singapore will be subject to the new Basel II rules governing how much capital banks need to set aside based on the risks they face.

That will put to the test the millions of dollars the banks have poured into new computer systems and staff training over the last two years. Among other things, the international guidelines are supposed to help banks deploy their capital more efficiently while guarding against the risk of collapse.

But events in recent months – especially the reluctance of large banks in the US and Europe to lend to one another at prevailing interest rates – have revived old criticism that the Basel II framework puts too much emphasis on how to measure the credit risk on loans, even though the collapse of British bank Northern Rock suggests a lack of ready funds – liquidity risk – can ruin a bank just as easily as a mountain of bad debt.

 

Source: Busines Times 2 Jan 08

Funds tailor products for the nest egg

(NEW YORK) Wall Street has repeatedly sounded alarms to spur working Americans to save more for retirement, but it has been less interested in helping convert nest eggs to spendable, post-paycheque income.

Of course, mutual funds emphasising dividends have long been available, along with plans for withdrawing principal. More recently, the industry has offered life-cycle funds that become more conservative as investors age. And some companies have been offering advice, like the so-called Monte Carlo calculations, that show the odds of what a given rate of spending will provide for the rest of one’s life.

Yet many investors, even those without traditional pensions, still reach retirement with only the vaguest notion of how to switch from accumulating assets to tapping them to finance their usual standard of living.

Now, however, as the first baby boomers start to collect Social Security cheques, fund sponsors are coming up with a series of new products catering mainly to those who are knocking at the gates of retirement – or are already inside.

‘As you enter the phase where you’re going to be receiving income and drawing down assets, you need a different style of investment,’ said Keith Hartstein, president of the John Hancock Funds. ‘You need a targeted distribution fund as opposed to the accumulation type.’

At least a half-dozen sponsors, including Fidelity Investments and the Vanguard Group, have either begun marketing retiree-oriented funds or have announced plans to do so.

More are undoubtedly on the way, predicted Burton Greenwald, a mutual fund consultant in Philadelphia.

‘It’s a natural evolution,’ he said. ‘All the major fund sponsors will have such products in a short period of time.’

Investors can choose among significantly different approaches. Some retirees will expect a specific monthly payout while others will favour a variable amount, based on what the portfolio generates. Some will want a fund whose principal is depleted by a certain year – say, 2028 – while others will want one that leaves assets for their heirs.

But while some funds offer annuity-like features, and expect to make consistent payouts, none carry an annuity’s contractual guarantee of specific payouts.

One of the first firms off the mark this fall was Fidelity, whose Income Replacement Funds come with a choice of 11 targets, or time horizons, from 2016 to 2036. You specify how big a cheque you want each month to be paid from the portfolio’s earnings from other Fidelity stock and bond funds, supplemented with as much of your principal as is necessary.

If all goes well, your payment will rise each year to keep pace with inflation. The asset allocation of the fund shifts more toward bonds as the years pass. By the horizon date, the fund is liquidated.

Vanguard’s entry, called Managed Payout Funds, is expected to be available in December or January, and is not intended to deplete itself. But whether it can sustain payouts without returning at least some shareholder capital will depend on investment results.

Vanguard will set the payout annually, based on fund performance for the three preceding years: The Real Growth fund expects an initial 3 per cent distribution rate, the Moderate Growth fund a 5 per cent rate and the Capital Preservation fund a 7 per cent rate. Lower payouts imply a greater probability of long-term growth and capital appreciation; Vanguard, unlike Fidelity, will invest in a broad spectrum of asset classes to include commodities, real estate and a new market-neutral fund.

Diversity of assets, with little performance correlation to one another, can aid capital preservation as well as returns.

‘The availability of a distribution service in a fund without having to sign up and move assets and try to figure out where to take them is an attractive vehicle for people,’ said Ellen Rinaldi, a principal in Vanguard’s investment counselling and research unit.

Retirees want access to their money, she added, and unlike annuities, which tie up your principal, mutual funds provide it.

What distinguishes John Hancock’s proposed Retirement Income Portfolio and Retirement Rising Income Portfolio from the Vanguard funds is that the dividend is fixed in dollars and cents. In the Rising Income portfolio, it climbs by the inflation rate each year.

At Charles Schwab, the Premier Income fund, with three share classes and a minimum investment of US $100, was started at the end of October after raising US$116 million during a four-week subscription period. The fund is focused purely on income, not a combination of income and total return, the way some competitors’ offerings are, said Patrick Waters, Schwab’s director of retirement investment products.

Other new offerings tailored for retirees are three funds from the Russell Investment Group with specific payouts for 10 or 20 years. They are to be available early next year.

 

Source: NYT (Business Times 28 Nov 07)

Bull market in Asia in mature stage

Value investing advisable

THE bull market in Asia ex-Japan equities is in the mature stage, says Markus Rosgen of Citi Investment Research, and he advises investors to switch from momentum investing towards value.

In the value space, Mr Rosgen, Citi’s chief Asian strategist, favours large cap stocks which he says have only just begun to outperform. The sectors with more value support are semiconductor, banks and utilities. Those with the least value are software, healthcare, industrials and the consumer space.

Up till now, the playground for momentum plays has been the mid-cap space, he says in a Nov 19 report. ‘The alpha trade has been to go long mid/small caps and short the index against it as a hedge, effectively shorting large caps. This has stopped working and given them higher ROE, higher margins and the fact that large caps are free cash flow-to-sales positive … will serve them well in this time of increased economic uncertainty’.

In his report, Mr Rosgen debunks the notion that in the Asia ex-Japan equities space, it’s different this time. Asia, he says, is now trading at valuation premiums to the MSCI World index. The last time this occurred was in 1988.

In terms of price-to-book value, Asia last traded at a premium from 1993 to 1995 when Asian ROEs were superior to the developed markets. This time, valuations in Asia are superior but ROEs are inferior.

The decoupling theme, he says, has become a global consensus ‘among a large enough pool of investors to frighten me’. ‘The more recent the investor is to Asia, the stronger the view is held. The longer an investor has been involved with Asia, the higher the degree of scepticism.’

Trade linkages, he says, are stronger after 2000 than at any time over the last 20 years. ‘This makes decoupling hard… Far from rising, consumption share in GDP has fallen as export and investment shares have risen. Nor, regrettably, has the Asian consumer ever behaved counter cyclically. Finally, stock markets themselves are the most correlated they have been over the last 30 years.’

Reviewing the changes in the sectoral composition of Asia ex-Japan markets, he finds that while the weights have changed significantly, the difference in PEs between 1975 and today is just 0.9 multiple points. Over the period, the difference averages just 0.3 PE points.

While investors may believe that valuations have changed dramatically over time, the statistical tests on Asian multiples show that valuations are mean reverting. In addition, buying high PE stocks since 2000 has not led to outperformance. On a 12-month basis, buying stocks with PEs of over 30 times results in negative returns.

‘The bottom line is that we do not deny that things change over time as far as market composition and perception of actual or implied risk; they clearly do. What one finds is that investors have a tendency to over-emphasise or extrapolate changes and thus overpay for the perceived change.’ He adds: ‘… excessive growth expectations are now in the price of Asian equities with 44 per cent implied earnings growth for the region and in excess of 60 per cent for China and India’.

China’s market cap to GDP ratio stands at 123 per cent today. The ratio for Japan in 1990 was 150 per cent, and that of the US in 2000 was 131 per cent. But GDP per capita in Japan in 1990 was 10 times larger than China currently; and in 2000, the US’ ratio was 14 times larger. ‘If China continues to grow nominal GDP at 12 per cent per annum, it would take 20 years to reach the Japanese GDP per capita set in 1990 when valuations were comparable. It would take 23 years to reach the same level of GDP per capita as the US in 2000 when market cap to GDP was similar.’

 

Source: Business Times 28 Nov 07

Sub-prime woes continue to hold sway

ST Index hits two-month low after 2.5 per cent fall, in line with Hang Seng Index

AS EXPECTED, the local stock market was unhinged yesterday by Wall Street’s continuing fears over the impact the sub- prime crisis might have on its earnings and the US economy, fears which have now rendered the two interest rate cuts of the past seven weeks nothing more than a distant memory.

The end of a weak session saw put warrants – instruments that gain in value in a falling market – occupy 18 of the 20 spots available in the top gainers list, while the Straits Times Index (STI) stood 88.55 points or 2.5 per cent down at 3,511.12, the lowest in two months.

This loss was very much in line with that in Hong Kong, where the Hang Seng Index closed 1,117.68 points or 3.9 per cent lower at 27,665.73.

Other than describe the market as ‘very nervous’ and ‘jittery’, brokers were at a loss to comment further on the present sentiment. ‘Who knows what might spook Wall Street next?’ asked a dealer, echoing the feelings of the majority. The December futures contract on the Dow Jones Industrial Average, usually a reliable guide to how Wall Street might open later that same day, first dropped 50 points but regained about 40 points by 5pm.

The broad market experienced one of its worst performances, registering only 61 rises versus 497 falls and 266 unchanged or untraded counters, excluding warrants. This works out to about eight falls for each rise.

Since peaking at an all-time high of 3,875 almost exactly one month ago, the STI has now lost 364 points or just under 10 per cent. A weak Wall Street has been chiefly responsible, with stocks coming under severe pressure following announcements by the major banks of large write-offs relating to the sub-prime problems in the US.

Here, banks have also led the decline. In yesterday’s session, falls in the three banks cut a total of 25 points off the index. DBS continued to lead the sector’s decline, losing 70 cents at $19.80 versus 50 cents for UOB at $19.60 and 15 cents for OCBC at $8.50.

With sentiment as shaky as it is, positive broking recommendations had little impact – Kim Eng’s ‘buy’ on construction firm Lian Beng with a $1.22 target price, for example, was shrugged off by the market, and the stock closed 2.5 cents weaker at 74 cents. The local broker based its call on the upswing in construction, the company’s healthy profit margins and sound financial management.

‘We are initiating coverage with a $1.22 target based on a sum-of-the-parts valuation with 16 times FY09 PE on recurrent income from its construction business, along with the addition of the present value of development profits,’ said Kim Eng.

On the outlook for Wall Street, US newspaper Barron’s Nov 5 issue carried the results of its latest Big Money poll of fund managers, which is always an interesting read. Some of the findings are: 22 per cent thought Wall Street (with the Dow at 13,595) was overvalued, 23 per cent undervalued and 55 per cent fairly valued.

The single factor seen which could lift stocks over the next few months was better-than-expected corporate earnings while, overall, 42 per cent of respondents said they are still bullish on stocks. However, this figure was down from the 64 per cent of a year ago.

 

Source: Business Times 13 Nov 07

two cents’ worth – Smart investors scout for the best place to park their money

SPORTS teams consider intelligent scouting vital to their long-term success. The same applies to financial investments.

Before deciding where to park their money, investors should scout around for the best bargain; that is, they need to gather and sift through information about the money managers they are considering and the strategies these managers employ.

Depending on their financial objectives, investors can invest with either active managers or index funds. For example, an investor seeking exposure to large-capitalisation stocks can place money with a large-cap active manager or an index fund that mirrors the S&P 500.

How do active managers fare against indexes? Not well. Over a recent five-year period, the indexes outperformed over 40 per cent of all the active managers; over 10 years, more than half of the active funds underperformed the benchmark. This type of result has been consistent over time.

Given how well the indexes have fared, investors can learn a thing or two from how these indexes choose the best candidates for investment, that is, for index inclusion.

The most widely used benchmark for equity fund performance is the S&P 500. The S&P Index Committee uses various criteria when looking for index candidates:

• Liquidity: The stock must have sufficient liquidity and float.

• Fundamental analysis: The company must have put in four quarters of positive net income on an operating basis.

• Market capitalisation: The figure must exceed US$4 billion (S$5.8 billion).

• Sector representation: The committee tries to keep the weight of each sector in line with the sector weightings of the universe (of all eligible companies). It typically does so by adding stocks in underweight sectors, not by removing stocks in overweight ones.

Excerpted from Michael Mauboussin’s More Than You Know, published by Columbia University Press.

 

Source: The Sunday Times 11 Nov 07

Financial crises: True picture still to emerge

GLOBAL stock prices tumbled this week in North America and Europe as losses mounted at US banks. Meanwhile, oil and gold prices rose, indicating the jittery mood of international investors.

Of course, dips are not unusual: stock markets have suffered bigger single falls in the past. And yet, there is something highly unusual and potentially much more serious about the financial markets’ current behaviour.

The credit crunch is a good example. The turmoil hit two major US-based banks: Merrill Lynch and Citigroup.

Both fell victim to the so-called ’sub-prime crisis’, initially limited to low-quality American mortgages advanced to people with bad credit records, but now assuming a more ominous dimension, overshadowing much of the global financial system.

The two banks admitted that their losses are much heavier than originally anticipated. Their top executives have resigned, and the provision for non-performing loans has been increased.

In theory, this should be the end of the story. Only that it isn’t, and for a simple reason: nobody knows how big the losses of other banks are, and, as regulators admitted this week, it may take a long time before the true picture emerges.

Adding to the air of uncertainty is the plight of the US dollar.

The currency has been pounded from all directions. It has dived to its lowest level against the euro. The last time the British pound stood at such a high level against the US dollar was more than a quarter of a century ago.

China, holder of no less than US$1.43 trillion (S$2.06 trillion) worth of foreign currency reserves, is already hinting that it may diversify its deposits away from the American currency.

So are other governments, particularly in the Middle East or Russia.

And it is hard to see what the US Federal Reserve can do to boost its currency. Raising interest rates could plunge America into an economic recession; not doing so, however, will keep the dollar weak.

Meanwhile, in order to defend the integrity of the banking system, the US central bank may have to pump extra dollars into the economy.

Some analysts have already rushed to the conclusion that the US dollar has finally been kicked off its perch as the world’s reserve currency, to be replaced by the euro or a basket of other currencies. This, after all, is what happened to the pound a century ago. And, once the process starts, it moves fast and is usually irreversible.

But this prediction is almost certainly off the mark. The pound’s global pre-eminence was destroyed by World War I, which shattered all European economies and led to the emergence of America as a superpower.

No such cataclysm is expected.

More importantly, the supposed alternative to the dollar – the euro – is still a young currency. It may be gaining in credibility but it has its own problems.

It is usually forgotten that the US dollar suffered from credibility problems in the early 1970s when America was hit by high inflation.

But its supremacy was quickly re-established, and there is no reason why this may not happen again.

Nevertheless, there is little doubt that the current market crisis is deep and troubling, mainly because it remains so unpredictable both in its extent and duration.

 

Source: The Straits Times 10 Nov 07

Climate Change plans ‘green buildings’ fund

It will start meeting investors in Q12008 to raise ‘hundreds of millions’ of dollars

(SINGAPORE) Climate Change Capital, a London-based fund manager and adviser on global warming, plans to start a fund to invest in properties that use energy more efficiently.

Climate Change, which manages about US$1.6 billion, will start meeting investors in the first quarter of 2008 and aims to raise ‘hundreds of millions’, said James Cameron, vice- chairman. So-called green buildings cut energy usage and reduce carbon dioxide emissions.

‘We will build a portfolio of properties, either retrofitted or improved, and buildings built from scratch or those that already meet the high standards that we would like to own a piece of,’ Mr Cameron said in an interview in Singapore yesterday. ‘It is not yet proven but perhaps we will get more value because it’s green.’

Scientists say carbon dioxide is one of the main emissions causing temperatures to rise, which may lead to potentially irreversible climate shifts and rising sea levels that would threaten world economies, ecosystems and human health.

The Kyoto Protocol binds 35 industrialised nations to curb carbon emissions by 5.2 per cent from 1990 levels by 2012. Developing nations including China and India are not required to cut emissions.

The United Nations’ climate change body will host its annual meeting in Bali next month to discuss a successor to the Kyoto Protocol. The European Union (EU) introduced ‘The Directive on the Energy Performance of Buildings’ in January 2003, to increase awareness of energy use in buildings and result in a substantial increase in investments in energy efficiency measures, according to Frost & Sullivan, a research company.

European countries wasted at least 20 per cent of their energy due to inefficiency in 2006 and applying more stringent standards to new buildings and renovations will enable the EU to reduce greenhouse gas emissions and realise an energy-saving potential of more than 20 per cent by 2020, Frost & Sullivan said.

‘The case is not proven that we will get a premium at all, but what we are sure about is that the changes that are taking place in Europe will stratify the market,’ Mr Cameron said. ‘There will be winners and losers and there will be value shift in the property sector and we want to be on the right side of that value shift.’

 

Source: Bloomberg (Business Times 8 Nov 07)

Inflation risks remain high: Citigroup

CPI may not be capturing full extent of inflation pressures: report

OVERHEATING and inflation risks in Singapore remain high and further monetary tightening may be on the cards, says Citigroup.

While recent government remarks suggest that the economy is not overheating, the US bank – in a Singapore Market Weekly report published yesterday – is less sanguine. Indeed, it is ‘concerned that inflation pressures are accelerating and that the CPI (consumer price index) statistic may not be capturing the full extent of inflation pressures’.

At 0.4 per cent in September, the rise in the CPI’s housing component lags actual steep increases in property prices and rents, Citigroup economist Chua Hak Bin points out. ‘These housing costs will show up more visibly next year and could potentially lift CPI inflation sharply to 4 per cent or above in the first half of the year.’

There are also considerable upside risks from escalating energy, food and wage costs in an economy now at full employment.

Other economists have also pointed to rising price pressures and overheating concerns amid robust growth. But the government maintains that the recent spike in inflation to near-3 per cent is due primarily to July’s two-point Goods and Services Tax (GST) hike, and that the CPI rise is likely to ease to perhaps 2-2.5 per cent in the second half of 2008.

The Citigroup report concedes that slower global growth next year is likely to cool demand and ease inflation pressures. But for now, the biggest challenge facing the government is overcoming supply bottlenecks and containing overheating pressures, it says. And ‘more tightening measures may be in the pipeline’ as new data show up the price pressures. ‘Some prioritisation and deferment of investment projects may also be necessary to manage demand pressures.’

Citigroup reckons that there is a good chance of ‘another move’ by the Monetary Authority of Singapore (MAS) next April, as its recent ’slightly’ steeper Singdollar appreciation bias ‘may be too gentle a move’.

Dr Chua says: ‘Prospects of a stronger Singdollar appreciation are therefore likely next year.’

Citigroup also does not expect the Q3 9.4 per cent gross domestic product (GDP) flash growth estimate to be downgraded despite weaker-than-expected September manufacturing data. Stronger services and construction growth will probably provide some offset, it believes.

And despite concerns about the global economy, Singapore will most likely outperform the early official forecasts of 4-6 per cent growth in 2008 – as it has every year for the past four years.

 

Source: Business Times 6 Nov 07

Market hit by property, bank fears

ST Index suffers 1.2 per cent fall, due also to sharp plunge in Hang Seng Index

SINGAPORE stocks started the week yesterday on a sour note due to renewed fears in the property and financial sectors, and a sharp plunge in Hong Kong’s main share index.

The Straits Times Index (STI) ended 45.14 points or 1.2 per cent lower at 3,670.18. Earlier in the day, it fell as much as 2.2 per cent below Friday’s close. Around the region, most major share indices also ended lower.

Hong Kong’s Hang Seng Index plunged 5 per cent – the largest one-day fall in percentage terms since Sept 12, 2001, the day after the terrorist attacks in the US.

Investors in the Hong Kong market were reacting to Chinese Premier Wen Jiabao’s remarks over the weekend, dampening hopes that a plan announced in August to allow mainland Chinese to buy Hong Kong stocks would be approved by Beijing in the near future.

The effects were felt in Singapore, as Hong Kong-based companies in the STI made up three of the top six laggards dragging the index lower at yesterday’s close.

Property developer Hongkong Land fell 4.9 per cent to US$4.64, while conglomerates Jardine Matheson and Jardine Strategic fell 4.3 per cent and 4.2 per cent to US$29.20 and US$15.80 respectively.

Singapore-based developers were also hit yesterday, as worries persisted over the impact of the government’s withdrawal of the deferred payment scheme for property purchases on Oct 26 to discourage speculative buying.

Among the large developers, CapitaLand fell 20 cents or 2.5 per cent to $7.70, while City Developments finished 20 cents or 1.3 per cent lower at $14.90.

Wing Tai, another developer, saw its share price slide 5.8 per cent to $2.94. It was the largest percentage loser among the blue chips yesterday.

In the banking sector, United Overseas Bank (UOB) led the losses in the STI, falling 50 cents or 2.4 per cent to $20.30 and dragging the index down 8.9 points. UOB’s share price has fallen $1.70 or 7.7 per cent since the close of Monday last week, the day before the bank reported its third-quarter earnings.

Its rivals DBS Group and OCBC Bank also saw their share prices dip in intraday trading, as some analysts said they expected to see more dents in the banks’ earnings due to further write-downs in the value of their collateralised debt obligation or CDO holdings.

Last week saw a slew of bad news from several major international banks which said they had suffered much bigger losses from the recent credit market turmoil than earlier estimates had suggested. The revelations led to Citigroup chief executive Chuck Prince quitting on Sunday – the latest high-profile casualty of the problems that started in the US sub-prime mortgage market.

Here, DBS’s share price closed 20 cents or 0.9 per cent lower at $21.40, while OCBC’s share price ended unchanged.

Of the STI’s 47 members, 28 fell and nine rose. Technology stocks were among the large gainers. Creative Technology saw the largest percentage gain among the blue chips, ending 5.6 per cent higher at $6.60, while electronics contract manufacturer Venture Corp rose 2.3 per cent to $13.50.

In the broader market, stocks mostly ended lower, with all but one of the SGX market sub-indices registering losses including the UOB Sesdaq index, which fell 7.66 points or 3.3 per cent to 225.58. Only the electronics sector showed a slight gain.

Overall, falling counters outnumbered rising ones by 445-86, excluding warrants and bonds. Trading volume, including warrants and bonds but excluding shares traded in foreign currencies, was 2.24 billion units worth $2.4 billion.

 

Source: Business Times 6 Nov 07

INSIDE MARKETS – More sales deals than buys for the first time in 19 weeks

Bearish sentiment prevails with 17 firms recording 73 disposals last week

BUYING activity plunged while sales by directors and substantial shareholders remained constant last week based on filings to the Singapore Exchange from Oct 29 to Nov 2. The sentiment was bearish as sellers recorded more trades than buyers for the first time in the past 19 weeks, with 17 firms recording 73 disposals versus 29 companies with 71 acquisitions last week.

The sales figures were consistent with the previous week’s 21 companies and 75 disposals while the buy figures were sharply down from the previous week’s 42 firms and 122 purchases. There were also more sellers than buyers among institutional shareholders, with 10 fund managers posting 36 disposals against nine asset managers with 37 purchases last week.

The steep fall in the buying coupled with sellers posting more trades than buyers coincided with the 1.5 per cent drop in benchmark Straits Times Index last week to 3,715.32 points.

There were several significant sales by directors and substantial shareholders last week. Four stocks investors must watch out for are Asia Dekor Holdings, Banyan Tree Holdings, Hengxin Technology and Keppel Land. On the buying side, a top board member provided price support in underperforming stock OSIM International. The trade was significant as it was his first trade since his appointment in 2005.

Asia Dekor

Value Partners Limited (VPL) recorded its first sales in mainland laminated floor producer and distributor Asia Dekor since it became a substantial shareholder (for the second time) in June. The group sold 1.8 million shares on Oct 16 at an estimated price of 22 cents each and a further 8.9 million shares on Oct 29 at an estimated price of 19 cents each. The sales reduced its deemed holdings by 16 per cent to 55.5 million shares or 5.9 per cent of the issued capital.

VPL previously acquired 21.8 million shares from June 4 to Aug 8 at estimated prices of 17 cents to 22 cents each.

VPL reported an initial filing on June 4 of 500,000 shares at 17 cents each, which raised its interest to 5 per cent.

That initial filing was made after the share price rose by 31 per cent from 13 cents in April.

Prior to that purchase, the fund manager ceased to be a substantial shareholder on Jan 15 following the sale of 9.3 million shares at an estimated price of 15.5 cents each, which lowered its stake to 4.9 per cent. The counter closed at 18 cents on Friday.

Banyan Tree

The Capital Group Companies unloaded more shares of premium resorts, hotels and spas manager and developer Banyan Tree Holdings at lower than its previous sale prices.

The group sold 6.1 million shares from July 27 to Oct 30, which reduced its deemed holdings by 7 per cent to 76.1 million shares or 10 per cent. The stock during that period traded in the range of $2.49 to $1.69 each.

The group previously sold 25 million shares from May 29 to July 26 at estimated prices of $2.87 to $2.41 each.

Overall, Capital has sold more than 31 million shares since the last week of May, a reduction in its holdings of 29 per cent.

Prior to the disposals, the group acquired a net 30.5 million shares in the open market from June 22, 2006, to Feb 9 this year at estimated prices of $0.83 to $1.70 each.

The sales by Capital since May reduced its stake to its former level during the IPO. Capital acquired an initial 76.7 million shares or 10.2 per cent in the IPO in June last year at 82.8 cents each.

Banyan Tree announced its Q2 results on Aug 14 with a net profit of $3.2 million for the three months to June 30 versus a loss of $2.7 million in the same quarter last year. The stock closed at $2.10 on Friday.

Hengxin Technology

Sales by Siskin Investments in communications and technological products manufacturer and seller Hengxin Technology since the third week of May totalling 55 million shares reduced its direct holdings by 80 per cent to 13.7 million shares or 4.1 per cent.

The disposals were made from May 22 to Oct 24 at progressively lower prices from 42 cents to 26 cents each. The trades were hefty as they accounted for 32 per cent of the stock’s trading volume.

The bulk of those sales were made last week with 30 million shares sold from Oct 22 to 24 at an estimated average price of 28 cents each, which reduced its stake by 69 per cent.

Hengxin Technology announced its Q2 results in August with profit after tax down by 5.4 per cent to 27.38 million renminbi for the three months to June 30. Earnings in the first half fell by 10.6 per cent to 39.07 million renminbi.

The counter closed at 29 cents on Friday.

Keppel Land

Managing director Kevin Wong King Cheung recorded a rare sale in property developer Keppel Land with 150,000 shares sold on Nov 1 at $8.45 each. The trade reduced his direct holdings by 12 per cent to 1.09 million shares.

The disposal was made on the back of the 10 per cent rebound in the share price since September from $7.70. The sale was significant as that was Mr Wong’s first on-market trade since October 1994 when he sold his entire holdings of 20,000 shares at $2.49 each. (He was executive director prior to 2000.)

The sale this month was made at a huge profit based on the 983,000 shares that he acquired via exercise of options from January to April 2006 at an average of $1.67 each. Although the recent disposal by Mr Wong may have been made for personal reasons, the timing of the trade with the bourse trading at historical highs is a negative signal for the broader market. The shares of Keppel Land closed at $8.30 on Friday.

OSIM International

CFO Peter Lee Hwai Kiat recorded his first buy in healthy lifestyle products distributor and franchiser OSIM International since his appointment to the board in 2005 with 208,000 shares purchased on Oct 31 at 59 cents each.

The trade increased his direct holdings by 289 per cent to 280,000 shares.

The rare acquisition was made on the back of the 71 per cent decline in the share price since October 2006 from $2.06.

The purchase was also made after the group announced its Q3 results on Oct 24. OSIM posted a loss of $6.71 million for the three months to Sept 30 versus a loss of $9.42 million in the same period last year. For the first nine months, the group posted a loss of $26.91 million versus a profit of $5.38 million in the same period last year.

Founder, chairman and CEO Ron Sim bought shares prior to the results with two million shares purchased from May 8 to Sept 20 at 74 cents to 59 cents each, which increased his stake (direct and deemed) to 285.6 million shares or 52.7 per cent. He previously acquired 700,000 shares in November 2006 at $1.65 each. The counter closed at 64 cents on Friday.

The writer is managing director, Asia Insider Limited

 

Source: Business Times 5 Nov 07

US rate cuts won’t defuse sub-prime mess: ‘Mr Yen’

Asia, though not much affected so far, must be vigilant

(SINGAPORE) Interest rate cuts by the US Federal Reserve – which have amounted to 75 basis points since Sept 18 – are unlikely to defuse the US sub-prime mortgage crisis, according to the influential economist Eisuke Sakakibara.

Mr Sakakibara, formerly Japan’s vice-minister for finance and international affairs and now a professor at Tokyo’s Waseda University, also warned that global financial markets are likely to face further bouts of volatility. What we have seen thus far ‘is only the tip of the iceberg’, he said, adding that the problem will probably linger for 6-18 months.

Speaking at a lunchtime forum organised by newly listed Uni-Asia Finance Corporation, Mr Sakakibara pointed out that interest rate cuts by the Fed were likely to be ineffective in addressing the problems emanating from the US sub-prime mortgage sector because the cost of funding is not the key issue; rather it is the uncertainty surrounding the valuations of sub-prime assets and other structured products held by many financial institutions.

He indicated, however, that the ’superfund’ proposed by some major American banks (including Citigroup, Bank of America and JPMorgan) to buy sub-prime assets could be helpful, as might a move to provide government financial support to distressed borrowers, which is being discussed in the US Congress. But such initiatives would take time to work.

Mr Sakakibara, who was Japan’s vice-minister for finance during the Asian crisis of 1997/98, cautioned that although Asia has been relatively unaffected by the US sub-prime woes thus far, it needs to be vigilant. He recalled that during the Asian crisis, US policymakers thought that the American economy would be relatively insulated – until they were shocked by the Russian bond default of 1998 and the ensuing collapse of a large hedge fund.

The world economy is highly integrated now, he said, and it is highly possible that the US – still its primary engine – will slow down sharply or even go into recession. In such an event, Asia cannot be unaffected.

While Asian economies are doing well and will account for an increasing share of the global economy, right now, Asian asset markets are ’somewhat bubbly’, Mr Sakakibara said. ‘The situation in Asia seems too good, and usually a ‘too good’ situation doesn’t last.’

When it does turn, the decline could happen ‘very abruptly’.

Of all the Asian markets, China is ‘the biggest bubble’, Mr Sakakibara added, with both investment and GDP growth expanding at breakneck speed.

Chinese policymakers know they have to tighten monetary policies sooner or later, and a major adjustment in China’s asset markets is inevitable, perhaps in 2008, after the Olympics. If China’s economy slows down in tandem with the US, that would exacerbate the problems for the global economy, Mr Sakakibara warned.

The economist – who was known as ‘Mr Yen’ when he was a policymaker because his statements were viewed as affecting currency markets – said that as long as the Bank of Japan is unable to raise interest rates, the Japanese yen will remain undervalued. The bank actually did want to raise rates in September, he added, but refrained from doing so on account of the US sub-prime mortgage problem.

With near-zero interest rates at home, Japanese investors are continuing to seek higher-yielding investments overseas, and while this trend persists the yen will probably continue to trade within the range of 110-115 to the US dollar, he said. But if, owing to some trigger such as a dramatic US slowdown, the outflows from Japan dry up or reverse, the yen would rebound sharply from its ‘really cheap’ current level, he said.

 

Source: Business Times 2 Nov 07

Credit crisis has lessons for Asia: SM Goh

Region can learn about risk and crisis management from recent US sub-prime turmoil

ASIA has escaped relatively unscathed from the recent global credit crisis, as it has not yet developed newfangled complex financial instruments, said Senior Minister Goh Chok Tong yesterday.

But Asia can glean some lessons about risk and crisis management from the recent credit market turmoil, he said.

He was giving the keynote address at the one-day inaugural Barclays Asia Forum at the Shangri-La Hotel yesterday, attended by almost 400 Barclays clients from institutions and corporations across the region.

‘The current sub-prime crisis shows that we cannot afford to be less than vigilant in the financial industry.

There are some lessons we can learn here,’ said Mr Goh.

Asia was relatively shielded from so-called sub-prime crisis, which involves United States housing loans with relatively high risks of default – which were rolled into complex financial instruments.

The main reason for this is that Asia has yet to move into sophisticated structured credit financing in a big way, said Mr Goh.

But rather than shy away from such instruments, Asia should ‘press on with its efforts to develop the capital markets’ and create robust and efficient systems, he said.

Asia will inevitably see more sophisticated products coming to the fore, he said.

‘So market players and regulators alike must refine their understanding of the attendant risks,’ he said.

They need to understand how shocks can be transmitted through these products and develop tools to deal with these risks.

The central bank, the financial regulator and the guardian of the public purse must also work closely together to set up frameworks that minimise damage to the system in case financial institutions run into trouble.

Mr Goh said Asia’s growth is unlikely to be derailed by ‘potential wild cards in the region’ such as North Korea’s nuclear programme, tense cross-strait relations between Taiwan and mainland China, and instability in Myanmar.

Indeed, Asia’s share of the world’s economy has been rising steadily, increasing from 19 per cent in 1980 to 36 per cent today, and is expected to reach 45 per cent by 2010.

But Asia faces key challenges to its growth, such as global financial imbalances arising from large capital inflows to Asia, noted Mr Goh. This has created inflationary pressures and asset bubbles in the stock and housing markets.

He also noted that Asean countries will get a competitive boost when Asean evolves into a single market and production base with free flow of goods, services, investment and skilled labour by 2015.

‘Challenges remain but I see none which are insurmountable,’ concluded Mr Goh.

 

Source: The Straits Times 2 Nov 07

Banks lend big for property and share investments

Share financing grows a thumping 74.8% over the year

(SINGAPORE) Bank loans to the property sector in September grew at the fastest annual pace in nearly eight years, according to new data released yesterday.

Meanwhile, lending by banks to individuals to buy shares rebounded to its highest level since end-July, when the recent financial market turmoil started, the latest estimates from the Monetary Authority of Singapore (MAS) show.

‘All these reflect the robust growth of the domestic economy,’ said CIMB economist Song Seng Wun.

Loans to the broad property sector, which comprises consumer home loans and business loans to the building and construction industry, reached $102.4 billion at end-September – up 15.1 per cent from a year ago.

The year-on-year expansion was the largest since October 1999, when property-related lending grew by 19.5 per cent, said Mr Song.

Over the month of September, property-related loans grew 2.4 per cent from end-August, the fastest monthly pace since May last year. The property-related loans make up nearly half of all outstanding bank loans.

The MAS data also shows that share financing grew 74.8 per cent over the year to $1.26 billion at end-September – the highest since end-July, when it hit $1.42 billion.

The year-on-year growth in share financing is by far the fastest among all consumer loan segments, although it is still the smallest segment, accounting for just 1.2 per cent of total consumer loans.

Over the month, share financing grew 7.1 per cent, reversing a 17.2 per cent fall in August, when financial markets worldwide were rocked by the collapse of several hedge funds and widespread uncertainty stemming from problems in the US mortgage market.

‘After the jitters of August, the market sort of bounced back,’ said Mr Song. Since then, ‘both property lending and share financing have been growing very rapidly’.

Total customer deposits grew 22 per cent over the year to $308.7 billion at end-September, while total loans grew just 12.8 per cent to $218.7 billion.

But while deposit growth continued to outpace loans growth on a year-on-year basis, monthly growth in loans has exceeded that of deposits since June.

Overall, loans to businesses grew at a faster pace than consumer loans, both on a monthly basis and when compared to a year ago.

Loans to businesses grew 15.1 per cent over the year and 2.7 per cent over the month to $117 billion – just over half of total bank loans at end-September.

Among the business sectors, loans to the transport, storage and communications industry showed the fastest year-on-year growth at 36.6 per cent, followed by loans to the building and construction industry, which grew 21.2 per cent.

Meanwhile, consumer loans expanded 10.1 per cent over the year and 1.8 per cent over the month to $101.7 billion. Next to share financing, credit card debt grew the fastest among consumer loans over the year, rising 13 per cent to $4.3 billion.

 

Source: Business Times 1 Nov 07

COMMENTARY – Even the experts can get it so badly wrong

History is replete with heavy trading losses that were all too easily incurred

WITHIN less than a fortnight, two Singapore shipbuilders have announced massive currency trading losses. How and why these losses were incurred will surface only after investigations have been conducted.

However, history is replete with financial case studies of how heavy trading losses can be all too easily be incurred by individuals or corporations. In early 1995, we discovered that Barings trader Nick Leeson had blown a US$1.4 billion hole trading in financial futures on Simex here in Singapore. Three years later, in 1998, veteran traders and Nobel prize winners at the US-based Long Term Capital Management (LTCM) suffered losses of more than US$3 billion in the short space of nine months because of heavily leveraged trades. In 2004, China Aviation Oil blew more than half a billion US dollars on oil derivatives trading.

And just this week, we have discovered that even blue-chip investment banking giants like Merrill Lynch and UBS are continuing to report multi-billion dollar losses from complex mortgage-related debt portfolios that have become nigh impossible to unravel.

How do such trading losses – and we stress we are not talking about SembMarine and Labroy here – pile up? Here are some clues to consider.

Leverage is a two-edged sword. Making bets based on only a fraction of the underlying sums transacted is attractive because profits are correspondingly magnified – but then so are the losses. In the case of blue-chip US hedge fund LTCM, their convergence trades were basically bets that too-large price differentials between different types of bonds should become smaller over time – something which they backed with state-of-the-art trading models which studied historical price movements.

Between 1994 and 1998, LTCM reportedly leveraged US$5 billion in client capital into US$125 billion worth of borrowings, and outstanding swap positions worth more than US$1 trillion in nominal value.

Murphy’s Law. ‘Anything that can go wrong, will – at the worst possible moment.’ In the case of LTCM, the fallout from the Russian debt default of August 1998 shrank their capital from more than US$4 billion at the start of 1998 to just US$600 million by September that same year.

Nick Leeson had to throw in the towel when already bad losses on his large Nikkei futures contracts skyrocketed following a massive earthquake in Japan in January 1995 and forced the Japanese stock market into free-fall.

This time around, one fear which refuses to go away out there is that the sub-prime debt crisis could spiral further out of control – forcing another panicky flight to quality.

Double or nothing usually means you end up with nothing. Every veteran trader knows that he must squeeze the most money out of his good bets but keep loss limits tight on those that go awry.

But human nature often finds people cashing in too quickly on the good stuff but massaging losses for far too long – in the hope that they will come right someday, somehow. In the case of Barings and China Aviation, history tells us that record-sized positions – and therefore record losses – were accumulated because of a desperate effort to average down the cost of what was to become awfully wrong (and highly leveraged) bets about the direction of the Nikkei and oil prices respectively.

Here’s a simple example. Let’s say that about one year ago, your banker persuaded you to buy US$100,000 at S $1.60 because it could enhance the yield on your fixed deposit by at least 2 per cent. Then, as the US dollar fell, he encouraged you to buy more to average down your cost. Let’s say that you bought another US$100,000 at S$1.55 and again at S$1.50.

By July 2007, you own US$300,000 at an average of S$1.55. In August this year, the US dollar rebounded to S $1.54. Had you sold out then, you would have reduced your total currency loss to S$3,000 – which is more than offset by the extra US$6,000 in interest earnings from your US$300,000 deposit.

If however, you had chosen to hold on until now – hoping for an even stronger US dollar rebound – the currency losses would have swelled to S$30,000 as the US dollar has now fallen to S$1.45.

Admission is free, you pay to get out. As banks from Goldman Sachs to UBS have found out to their detriment, it is all too easy to find rocket scientists who will happily structure complicated financial products – whether based on derivatives or housing loans – which offer superior yields. And the longer the tenure, the more you stand to make.

But here’s the problem. When you discover, as they have, that nobody is willing to fund those fancy CDO (collateralised debt obligation) structures, or buy them back from you when you need to sell them, then you are also stuck with losses for a nerve-wrackingly long time. Worse, the structure can be so complicated that you are not even sure how much they are worth at a given point in time, or how to unravel them without paying a hefty penalty.

Illiquid can too quickly become insolvent. Buying an asset at tempting yields is all too easy. But any corporate treasurer worth his salt will also want to find out how easily he can dispose of the asset. LTCM could not find any buyers for their less than desirable bonds when Russia’s declared moratorium on US$13.5 billion of its Treasury issues caused a nervous flight to quality in fixed income markets.

The other important lesson from LTCM to take home here is that historical evidence must be taken with a pinch of salt. There’s always a first time for everything, even a default of ’safe’ government bonds.

It is not known whether some of these problems, so painfully experienced elsewhere, also touched SembCorp Marine and Labroy Marine. But these firms’ shareholders will want to know how they could have allowed themselves to get so deeply embroiled in foreign exchange speculation when their core business is the building of oil rigs.

Why the US dollar party may yet end…

… And why the Singapore dollar is the investment holding currency of choice

FOR all the foolish chatter about an ‘unprecedented’ meltdown, the ongoing CDO (collateralised debt obligations) crisis is but a re-run of a regular occurrence in the banking industry: that of a cycle of extremely poor credit decisions by professional lenders, in this case matched by extremely poor investment decisions by professional investors.

Common in the emerging markets, that this happened in the world’s richest and most developed economy in the era of sophisticated Basel II credit risk standards speaks volumes about the triumph of hubris in American ’sell or die’ business practices.

Many professionals appear to have forgotten, or simply didn’t know, that these events happen somewhere in the world as regularly as a really decent British summer – that is, around once in five years. Indeed, they are regular enough to keep some people in almost permanent employment cleaning them up, myself included.

There is one difference this time around. In the good old days of the traditional bank crises, that is, reckless lending to those with no ability, or intention, to ever pay back, the bank suffered the consequences. Now that we have the fabulous invention of a structured market with a cool name to pass on such stupidity to even more foolish investors, it becomes a market crisis instead.

Of course, most of the world’s major hedge fund joined in, but as we all know most hedge funds don’t really know anything about anything. The surprise was that the very large, sophisticated banks with top-quality credit risk management one would have expected never to have written these risks themselves were only too happy to buy such poor-quality risk written by lenders with no standards.

As usual, Wall Street got paid handsomely for the privilege of selling garbage dressed up – tech stocks yesterday, CDOs today. Even worse, nobody ends up knowing quite who actually owns this junk or who the end-risk is. The ratings agencies went along for the ride and the regulators appeared asleep at the wheel.

I see no reason for undue pessimism on the broad economy outside the US. The US has been slowing for at least four quarters. While problems in the housing sector appear to be amplifying this trend and hurting the American consumer, the damage to the US$13 trillion US economy is containable. Corporate balance sheets, profits and debt levels remain in good shape.

Too much is made of the level of export dependency of Asia on the US, and some pain over the next six months will not derail the largest, consumer-based Asian countries – China, India and Indonesia. For the medium term, I maintain my long-held bullish view on both Asia broadly and the Asean economies as well as Asian currencies.

Other than some tech exporters, and employees of the wrong banks, I do not believe you should be unduly worried.

Given my focus on long-term fundamental trends with the background of the sorry tale of US sub-prime, this seems an appropriate time to revisit my favourite worry – the greenback. I have not voluntarily held a US dollar, other than as a short, for over four years. However, consistent dollar bears have often been in the wrong, particularly versus the yen. From March 2002, the yen did strengthen through to March 2005 with the recovery in the Japanese economy, but then turned negative again. Within a year the US dollar was back to 120 yen and has range-traded ever since until recent events. The yen remains the most undervalued major currency. The euro has followed the script better, although again from March 2005 it gave back some of its gains and only reverted to strength against the dollar from May last year.

The core of the bear argument has always been an economic fundamentalist view that goes like this: US debt levels are unsustainably high and continue to grow at an alarming rate; this debt has to be externally financed demanding high relative yields, US interest rates and the level of the dollar are supported by dollar demand via external financing, principally by Asian nations retaining dollars in trade and purchasing dollar debt; and that in doing so, these nations maintain lower yields and weaker currencies than their economic fundamentals would otherwise suggest.

A decade ago Asian nations held one third of global reserves. Now they hold two thirds, mostly in dollars.

The core of the argument for the dollar bears, such as myself, has always been that such a cosy arrangement eventually would have to slow and revert to norm, and that with the purchase of dollars on this magnitude even a slowdown of buying would depress the currency in the process.

For dollar bulls, their argument has been that if Asian and other nations continue to believe in the perpetual cycle of US economic strength and dollar dominance, the attractiveness of US assets, and the exporting advantages of maintaining relatively weaker currencies; then there is no reason at all why the party should ever end.

Asia will continue to export to the US consumer, and simply recycle the dollars back by building dollar reserves and buying US debt.

For a long while it seemed as if dollar bulls were right and a sort of perpetual motion had been built up with the understanding of all parties that this was the game. Capital saving countries, read Asia, have continued until recently to buy and hold US dollars at an unprecedented rate. But all parties eventually come to an end.

I believe that we may be finally seeing the beginning of the end of a long-awaited, slow decline of an aged warhorse, just as the sterling gracefully declined a generation ago.

Of course, the dollar has some uses, which I am sure will continue. I do admit that a wad of dollars has no equivalent for bellboys, and visas-on-arrival in Asian airports. For buying oil, and weapons, dollar remains the currency of choice, as I hear it is for the drug trade and other interesting segments of the cash economy. But even that may change over time.

If the greenback remains on my short list, what then is our currency of choice? Of course, if you are a speculator, going long, the Asian units undervalued on a purchasing power parity basis makes sense – particularly the yen, the ringgit, and the won.

But as economic fundamentalists we do not believe in currency speculation, despite the modern trend to call it an asset class. What an investor in real assets needs is a currency that provides all of the upside potential of the Asian economic growth story, with stability and smart management against extreme volatility.

The ideal would be a balanced currency basket of a weighted proportion of the best of those currencies, continually managed and adjusted relative to macro economic movements. There is such a basket. Even better, it is managed by some very bright folks who charge nothing for the service. It is called the Singapore dollar, and it remains our investment holding currency of choice.

The author is managing director of the Calamander Group and the economic spokesman of the British Chamber of Commerce in Singapore.

 

Source: Business Times 1 Nov 07

Govt won’t let space crunch hinder finance hub ambitions

THE space crunch that has hit the office sector and sent rents soaring will not be allowed to derail Singapore’s aim to be a key financial centre.

The pledge came from National Development Minister Mah Bow Tan, who also pointed out that the tight supply – itself a factor of the booming economy – provides a huge opportunity for developers and investors.

‘The time is now,’ said Mr Mah yesterday. ‘There is no better time for investors to consider real estate development and investment opportunities in Singapore, given the robust outlook and comprehensive development plans we have in place.’

Mr Mah told the closed-door Macquarie Asia Forum 2007 that the supply shortage will be tackled in part by land releases that will be calibrated to allow developers to make informed decisions about their investments.

And he stressed that the Government’s aspirations for developing Singapore as a major financial centre ‘will not be constrained by space availability’.

Mr Mah’s comments – the most forthright since the property market took off two to three years ago – could be a sign that the Government believes the problem is reaching a critical point.

‘Overall, I think the Government will probably have to prioritise its investment plans, given the tight commercial and residential market and labour markets,’ said Citigroup economist Chua Hak Bin.

‘We may be reaching an inflexion point, where supply constraints and higher rents and wages are starting to bite.’

Government data shows that prime median rentals of new office leases are now at $11.89 per sq ft per month, compared with $5.05 at the end of 2004.

Rents for prime office space, which are in demand by players in the booming financial and business services sectors, have shot up on tight supply to the point where some companies are resisting the rapid increases by moving further out or to industrial locations.

But this is expected to be a short-term problem, with relief coming in 2010, when major projects such as Phase 1 of the Marina Bay Financial Centre are completed.

The Government has already taken steps to address the supply shortfall by releasing transitional office sites.

More space will be made available, but land releases will be ‘calibrated and measured’, with a view to meeting needs on a sustained basis, said Mr Mah.

There will also be a focus on developing new zones for financial and business hubs, including in Jurong and Paya Lebar, to take the heat off office space in the central business district.

Mr Chua backed the Government’s view that growing the financial centre should remain a major priority.

‘But other less important investment initiatives may need to take a back seat, to reduce the intense competition for workers, office space and construction materials,’ he added.

Mr Mah also put the rent rises in a broader perspective: ‘Despite the recent surge in demand, Singapore’s office rentals remain very competitive compared to major cities like London, Tokyo and Hong Kong.’

DTZ Debenham Tie Leung executive director Ong Choon Fah told The Straits Times that London has consistently been the most expensive city in the world in terms of office rents.

‘But it has always attracted businesses because that is where the talent and the money is,’ said Ms Ong. ‘At the end of the day, it’s not just the costs but the value proposition that Singapore can offer.’

 

Source: The Straits Times 1 Nov 07

Real estate stocks hurt after end of payment plan

THE axing of the deferred payment scheme for homebuyers hit home with a vengeance yesterday when property shares dived while the rest of the market soared.

The big guns felt the most pain. City Developments fell 50 cents, or 3.1 per cent, to $15.80. Allgreen Properties was down nine cents, or 5.1 per cent, to $1.69, while Wing Tai Holdings lost 18 cents, or 5 per cent, to $3.44.

Their operations are more centred on the local market, and so they seem to be more vulnerable to a change in financing conditions.

By contrast, CapitaLand, which has extensive overseas operations, rose five cents to $8.10 after falling 20 cents initially.

Analysts remain confident that the selldown was just a knee-jerk reaction to the Government’s surprise move on Friday night. It scrapped the deferred payment scheme, requiring buyers of uncompleted homes to make progressive payments rather than letting them delay the bulk of their payments.

Citigroup analyst Wendy Koh said this will likely affect only a small group of HDB upgraders who cannot afford two mortgages.

It should not affect first-time homebuyers whose ‘affordability remains strong’, she added.

Ms Koh also noted that the run-up in the residential property market is well-supported by strong fundamentals. These include high economic growth, rising rental rates, and a tight supply of new properties coming onto the market.

However, DBS Vickers said that removing deferred payment would dampen home sales as potential buyers might have seen the scheme as a way to come out with a smaller initial outlay in capital.

It also believed the move will curb speculative buying on high-end properties.

Equally bearish is CIMB-GK, which said yesterday that selling prices may fall by 10 to 15 per cent as the speculative froth is removed.

And the worst hit may be the mass market where buyers are ‘typically more cost-sensitive and reliant on deferred payment’.

Investors will not have missed the irony of yesterday’s share market action.

While property was suffering, the rest of the market in Singapore and around the region climbed, cheered by hopes that the United States Federal Reserve will cut interest rates by at least 0.25 percentage point tomorrow. Its aim: to shore up the US property market.

 

Source: The Straits Times 30 Oct 07

WARRANT WATCH – Property contracts in the limelight

WARRANTS of property counters drew the attention of investors yesterday, following the withdrawal of the deferred payment scheme last Friday.

Homebuyers in Singapore will now have to make progressive payments in step with the construction process, instead of deferring payment till the property is completed a few years later.

The most heavily traded CapitaLand contract was a Macquarie call warrant with a strike price of $8.50, which expires on Feb 1.

That warrant closed a cent higher at 13 cents with 24.83 million units done.

CapitaLand shares ended five cents higher at $8.10.

Another active property contract was a City Developments call warrant with a strike price of $15.42, which expires on Jan 10.

The warrant finished 4.5 cents lower at 16.5 cents with 2.86 million units traded.

The share closed 50 cents down at $15.80.

A call warrant lets an investor buy into a stock or index at a preset price over a period of three to nine months.

A put warrant allows an investor to sell the stock or index at a preset price over a fixed period of time.

 

Source: The Straits Times 30 Oct 07

Norwegian firms here expect rosy 2008

However, spiralling business and manpower costs are a concern for them

MOST Norwegian firms in Singapore expect to see their businesses expand in the next 12 months, as Norway became the sixth-largest foreign investor here in 2005.

However, many are increasingly concerned about spiralling business and manpower costs in the city state.

In a survey by the Norwegian Business Association in Singapore (NBAS), it was found that some 88 per cent of 60 respondents expect more businesses here in the coming year, while 12 per cent said business prospects would remain at the same level.

There are more than 150 Norwegian business entities in Singapore comprising firms which have opened offices or relocated to Singapore, making Norwegian-owned companies one of the fastest growing classes of overseas business investors in the republic, NBAS said in a statement.

Citing figures from the Department of Statistics, NBAS said that Norway pumped in foreign direct investments (FDI) of $7.9 billion here in 2005, the latest year for which figures are available. This makes it the sixth-largest foreign investor here in 2005.

In terms of European investors, Norway now ranks the fourth-largest investor in Singapore behind only the UK ($50.2 billion), the Netherlands ($31.7 billion) and Switzerland ($21.7 billion).

The survey revealed that Norway’s business presence in Singapore remains very focused on the shipping/logistics and the marine/offshore sectors.

Some 59 per cent of responding firms consider themselves from these sectors, underscoring the already large and growing influence of Norwegian companies on Singapore’s maritime sector.

The steep rise in the cost of office rental, manpower costs and the difficulty in attracting senior executives and talent were widely remarked upon by respondents.

Some 25 per cent of respondents said office rentals were the main concern for Norwegian companies based in Singapore, while 21 per cent are worried about rising wage bills.

A further 21 per cent cited recent steep rises in living cost as their biggest concern, but only 9 per cent said their main concern for their Singapore location was the ‘increasing attractiveness of other locations’ in the region.

Norwegian firms were asked about the main reasons for their firms locating in Singapore and many cited reasons such as the legal infrastructure, strategic location and expanding activities in Singapore in the light of the booming shipping markets.

Other reasons include Singapore’s status as a leading oil trading centre, good communications, the good quality of life for overseas managers and the ‘good business environment and secure systems’.

Still, there were companies that felt that Singapore workers need to be taught initiative and decision-making as they ‘are not used to the flat structure of a Norwegian working culture’, said one respondent.

Another advised Norwegian firms that are setting up operations here to ‘use service apartments and offices in the first few months in Singapore as it is difficult to take major decisions on location for the office and family before you are actually in Singapore and can see how things function’.

The respondent adds: ‘It is also often difficult to hire the right people and, therefore, much better to have temporary staff in the beginning to allow enough time to have proper interviews and discuss this with other Norwegian companies that have been in Singapore over a longer term.’

 

Source: Business Times 26 Oct 07

WALL STREET INSIGHT – Analysts dismiss spectre of crash, but selling’s not over

Last week’s 4% slide due more to recent sharp run-up than to fear of another crisis

IN NEW YORK

AS STOCKS plummeted on earnings outlooks and renewed credit worries last Friday on the 20th anniversary of Black Monday, Wall Street forecasters couldn’t help but draw parallels to that record-setting dire day of October 19, 1987, when the Dow Jones Industrial Average crashed by more than 500 points, and more impressively, a whopping 23 per cent, in a single day.

But in truth, last Friday’s sell-off, which caused the bluechip index to give up on a percentage basis only a tenth as much as investors lost in the infamous Black Monday crash 20 years ago, was more reminiscent of much more recent history, namely the early weeks of last August, when the unknowns of the ramifications of the burgeoning global credit crisis were turning investors’ euphoria over new record highs in the US equity markets into fear, uncertainty and the risk aversion that goes with it.

‘It’s easy to invoke Black Monday on its 20th anniversary as we’re experiencing a sell-off, but there really is no parallel with today,’ observed Hugh Johnson, the chief investment officer at Johnson Illington Advisors.

‘Back then, the markets had been churning their way down for a while, and you could sense the vulnerability as fear on the trading floor built higher and higher over the course of a few weeks. But in the case now, you have to remember that, just last week, investors – and Wall Street economists – were talking about having a Goldilocks economy, a soft landing,’ he said.

Federal Reserve chairman Ben Bernanke started to burst that bubble last Monday when he said that the drag from housing was worsening, and would hit growth in the fourth quarter and in 2008, and his warning was soon echoed by corporate profit outlooks.

Leading companies such as Caterpillar, 3M and Schlumberger beat third quarter estimates, but offered cautious earnings forecasts for the fourth quarter, leading to renewed concerns over the spread of the credit crisis beyond the financial sector.

But while the previous weeks’ euphoria seems to have clearly been out of touch with the realities of what remains a stock market still vulnerable to the unknowns surrounding the impact of last summer’s credit crisis, to say nothing of skyrocketing oil prices that have risen to potentially crippling levels and have oil analysts speculating on when the price of a barrel of light sweet crude might hit triple digits, many other of the market’s fundamentals appear far too solid to invoke the spectre of anything resembling a Black Monday-like panic.

‘Last week’s downturn was more a function of the sharp run-up in share prices over the past several weeks and over stretched positive expectations than fear that we’re about to get into crisis mode again,’ said Tobias Levkovich, Citibank Smith Barney’s chief investment strategist.

‘Various measures of credit market distress have eased lately, including increased functionality in commercial paper and even high-yield debt markets,’ he noted. And unlike the last period of severe turmoil in credit markets in the fall of 1998, commodity prices are rising and economic activity abroad is strong, Smith Barney chief economist Steven Weiting wrote last week.

So, while Wall Street traders were quick to dismiss the potential for a crash of epic proportion, investors’ newfound caution and sober outlook is likely to result in more selling and bearish risk aversion, with the potential for a 10 per cent sell-off such as the market experienced in the month between July 16 and Aug 16.

‘I think everyone was just a little too eager to say that we’d put the liquidity crisis behind us and the worst was over,’ said Richard Maclemore, a money manager at Goodman Securities. ‘Then, when we get a few of our major companies saying that it’s not just going to hit the third quarter earnings, but that the fourth quarter isn’t going to look too good either, you get a quick ‘uh-oh’ reaction, which is what we saw on Friday,’ he said. Uh-oh indeed.

The Dow Jones Industrial Average sank 366.94 points, or 2.64 per cent, to 13,522.02 on Friday. The S&P 500 was off 39.45 points, or 2.56 per cent , at 1,500.63, and the Nasdaq Composite plunged 74.15 points, or 2.65 per cent, to 2,725.16. Friday’s firesale brought an abrupt end to the major averages’ five-week winning streak.

For the week, the Dow and the S&P 500 each lost 4 per cent, and the Nasdaq gave back 2.9 per cent. It was the worst downturn for the indices in two months. The only things that rose last week were negative indicators. The CBOE Volatility Index, often called the fear index, added 24 per cent on Friday to a reading of 23, its highest in a month. Oil surged briefly to a record US$90 a barrel and gained 6 per cent for the week, while two-month Treasury bills rallied the most since Sept 11, 2001.

This shows that investors have re-embarked on a flight-to- quality trade. The week’s wave of earnings reports could offer some relief, as several major names from outside the disastrous financial sector announce their third-quarter results and offer outlooks for coming quarters.

‘It would set a lot of minds at ease if some of these companies say that next quarter isn’t looking too bad,’ said Mr Johnson. As many as 163 more S&P 500 companies are scheduled to report this week, including six Dow components.

Thus far, with 121 S&P 500 companies having reported over the past week, growth expectations for the thirdquarter earnings season have sunk to negative 0.1 per cent, compared with expectations for earnings to grow 3.6 per cent on Oct 1, according to Thomson Financial.

 

Source: Business Times 22 Oct 07

5.5m population more achievable for Singapore

THE 6.5 million population used as a guide for planning purposes in Singapore is not within reach in the next 50 years, an academic said yesterday. Saw Swee Hock of the Institute of Southeast Asian Studies said 5.5 million is a more achievable target.

Prof Saw – the second Singaporean after former deputy prime minister Goh Keng Swee to be elected an honorary fellow of the London School of Economics – was speaking at the soft launch of the second edition of his book The Population of Singapore.

His comments are consistent with those of Minister Mentor Lee Kuan Yew, who indicated in August that Singapore’s population is unlikely to touch 6.5 million.

Prof Saw said yesterday that for the population to hit 6.5 million by 2050, Singapore needs an influx of 1.85 million newcomers after 2015, assuming the non-resident population rises from 0.8 million in 2005 to 1.01 million in 2015.

The proportion of newcomers arriving after 2015 would constitute 40.5 per cent of the total population in 2050 – the highest ever.

But for the population to hit 5.5 million in 2050, the number of newcomers entering Singapore after 2015 would be 1.63 million and they would make up a smaller 29.6 per cent of the population.

‘The 5.5 million target is not only more achievable viewed in terms of the type of newcomers we want, but also more conducive to the maintenance of a harmonious multiracial society,’ Prof Saw says in his book.

The figures were generated assuming the total fertility rate stays constant at 1.31, which will result in the resident population growing from 3.55 million in 2005 to a peak of 3.64 million in 2015, before shrinking steadily.

The challenge, said Prof Saw, is to get newcomers to stay to make up for the declining resident population.

Alongside a contracting resident population, the resident labour force is estimated to decline from 1.74 million in 2005 to 1.15 million in 2050.

Workers aged 60 and over are projected to make up 13.6 per cent of the workforce in 2050, up from 4.4 per cent in 2005. And workers aged 30-39 are expected to account only for 19.3 per cent of the work force in 2050, down from 28.7 per cent in 2005.

 

Source: Business Times 20 Oct 07

Nervousness on the rise as Black Monday anniversary looms

IT’S usually possible to pinpoint a theme or two that drove prices throughout a week just past. Sometimes it’s a play on the banks, other times it’s property, shipping or China. This week though, is remarkable for the fact that there really is no single unifying theme that could be readily identified – except for heightened volatility of course.

In almost all five trading days, the Straits Times Index underwent wild swings, opening sharply lower or higher, depending on Wall Street’s overnight close, then reversing direction quickly afterward.

One hundred point moves were thus common, depending on how Hong Kong, China and/or the US futures market performed.

What this meant was that structured warrants were the favoured investment vehicles since these instruments thrive on volatility. In play were mainly those written on the Hang Seng and STI, while China shipyard Cosco Corp’s push to new highs ensured its warrants were also in heavy demand.

On Wednesday, when the STI underwent its wildest ride of the week, traversing 130 points from low to high, $312 million was traded in the warrant segment, roughly three times the recent average.

Increased volatility also meant increased nervousness, a situation not helped by the fact that yesterday was the 20th anniversary of the crash of Oct 19, 1987.

Put a nervous market that had reached giddy new heights together with the superstition associated with that Black Monday date, then throw in a 75-point drop in the December futures on the Dow Jones Industrial Average, and perhaps yesterday’s 61.71-point drop in the STI to 3,747.98 comes as no surprise.

For the week, the index lost 110 points or 2.9 per cent.

The biggest index losers in yesterday’s sell-off were the Singapore Exchange, the banks and SingTel.

SGX’s 80-cent loss at $14.90 cut 12 points off the index while the banks’ loss accounted for a total of 23 points.

It wasn’t just the index that experienced a volatility spike. In the second line, Japanese-owned finance company Uni-Asia Finance exhibited violent moves to the downside early in the week when broking firms imposed trading restrictions on its shares, in most cases limiting the quantity of Uni-Asia that could be bought and/or requiring cash payment upfront for purchases.

After having ended last Friday at $2.50 (it touched an intra-day high of $2.79 that day) Uni-Asia’s shares yesterday ended at $1.59, a loss of 36 per cent for the week. It listed in August at an offer price of 55 cents and the bulk of its rise since then came earlier this month.

Other second liners that saw activity to varying degrees were mainly China-based, the outcome of a belief that China stocks listed here – dubbed S-shares – should command the same lofty valuations as those listed on the mainland.

Low-priced issues have always been popular in the local market and this week was no different. Ei-Nets and Memstar have been in play after the entry of Jade Technologies’ boss as a strategic shareholder, while construction issues such as Lian Beng and Yongnam have been the subject of various broking upgrades because of the obvious property boom angle.

 

Source: Business Times 20 Oct 07

Economy’s solid growth to spill into 2008: NTU

It cites uptick in world electronics demand, sizzling construction activity

THANKS to the sustained health of the global economy, an uptick in world electronics demand and sizzling construction activity here, the rosy picture for Singapore’s economy will persist into next year, Nanyang Technological University economists said yesterday.

Singapore’s gross domestic product is expected to grow 8.3 per cent this year and 7.5 per cent in 2008, the Econometric Modelling Unit (EMU) of the Economic Growth Centre at NTU said in its bi-annual forecast for the economy.

‘The expected growth in 2008 is due to external demand conditions, mainly the world economy is expected to remain healthy, China and India are expected to drive growth in Asia and the aggressive policies of the Federal Reserve with regard to the sub-prime mortgage market in the US would likely contain the credit squeeze in the US,’ said NTU Associate Professor Joseph Alba.

Based on leading indicators for the electronics cluster, the upturn in global electronics demand will likely gather pace in 2008, while construction activity amid buoyant property prices and spillover effects from the building of the two integrated resorts here will provide further stimulus, he added.

The forecasts were made barring additional risks in the Middle East that could cause oil prices to spike further, but assumed high oil prices of US$80 a barrel.

Assoc Prof Choy Keen Meng, who has been spearheading the macro-economic forecasts since 2001, said the impact of oil price spikes on economic growth is not discernable as there are offsetting factors.

‘Historically, the impact of oil price increases on the Singapore economy has been ambiguous,’ said Assoc Prof Choy.

For the fourth quarter of this year, EMU expects Singapore’s economy to grow 8.6 per cent after the government’s advance estimates showed the economy growing 9.4 per cent in Q3.

Giving a sectoral breakdown, Assoc Prof Alba said growth in manufacturing, hotels and restaurants, transport and storage and information and communications is expected to accelerate in 2008 from 2007. But sectors like construction and financial services could see slightly slower growth in 2008 given the high base of comparison in 2007.

EMU also projects that one-off impact of the two percentage-point hike in the Goods and Services Tax will likely blow over by 2008, with the Consumer Price Index (CPI) to be 2.6 per cent in Q4, 1.6 per cent for the whole year and 2.4 per cent in 2008.

This falls within the official CPI forecast by the Monetary Authority of Singapore of 1.5-2 per cent for 2007 and 2- 3 per cent for 2008.

The buoyant economic outlook is expected to put more pressure on inflation as labour costs increase, EMU said, but added that these wage pressures may moderate in 2008 as productivity growth accelerates or employment is allowed to grow through Singapore’s flexible foreign labour policy.

It estimates that job creation will reach a record of 200,000 this year, after an all-time high of 176,000 last year.

EMU’s projected job creation would take the unemployment rate to 2.3 per cent for 2007 and 2 per cent for 2008 – the lowest level in a decade.

 

Source: Business Times 18 Oct 07

Foreigners sell record US financial assets in Aug

(WASHINGTON) International investors sold a record amount of US financial assets in August as tightening access to credit threatened economic growth and spurred an exodus from American equities.

Total holdings of equities, notes and bonds fell a net US$69.3 billion after an increase of US$19.2 billion in July, the Treasury Department said on Tuesday in Washington. Including short-term securities such as Treasury bills and non-market trades such as stock swaps, foreigners sold a net US$163 billion, compared with a gain of US$94.3 billion a month earlier.

Demand for US stocks overseas declined as the deepening housing recession and credit market turmoil threatened investment and hiring, slowing the economy.

‘There is acute uncertainty in the market,’ said Gabriel De Kock, chief currency economist at Citigroup Global Markets Inc in New York, before the report. ‘There are lots of people who are reducing their risk and taking money off the table.’

Economists predicted that international investors would buy a net US$60 billion of long-term securities in August, based on the median estimate in a Bloomberg News survey.

The Treasury’s reporting on long-term securities captures international purchases of US government notes and bonds, stocks, corporate debt and securities issued by US agencies such as Fannie Mae and Freddie Mac, which buy mortgages.

International holdings of US stocks fell a net US$40.6 billion, compared with net purchases of US$21.2 billion in July. The Standard & Poor’s 500 Index rose 1.3 per cent in August, while the Dow Jones Industrial Average gained 1.1 per cent.

International demand for Treasuries decreased by US$2.6 billion, compared with a loss of US$9.4 billion the previous month. The yield on the benchmark 10-year note in August averaged 4.73 per cent, compared with 5.04 per cent in July.

Holdings of agency debt increased a net US$9.6 billion after a US$8.7 billion net gain the month before.

US investors bought a net US$34.5 billion of overseas assets in August, after buying US$5.5 billion in July.

Private investors sold a net US$10.6 billion, compared with a net US$20.6 billion in purchases a month earlier. Official purchases, including those by central banks, fell by US$24.2 billion after an increase of US$4.4 billion in July.

Foreigners sold a net US$1.2 billion of corporate bonds, compared with a US$4.5 billion increase in July.

Some economists said that the difference between the US trade gap and securities purchased by foreigners is an indicator of how easily the nation can finance its external obligations. The trade deficit in August shrank 2.4 per cent to US$57.6 billion, the smallest since January, as exports climbed to a record, the Commerce Department said on Oct 11.

The US current account deficit, a broader measure of trade that includes investment income and transfers, narrowed to US$190.8 billion in the second quarter.

 

Source: Bloomberg (Business Times 18 Oct 07)

TAKING STOCK – Record oil prices beat down markets

Trading curbs on Uni-Asia spark fears of similar moves on other soaring stocks

THE bull run in China-related stocks was stopped in its tracks yesterday as bourses from Hong Kong to Sydney turned jittery over soaring crude oil prices.

Market sentiment in Singapore was also spooked as some brokerages imposed trading curbs after the recently listed Uni-Asia Finance had a spectacular run-up.

Traders fear that similar curbs might be placed on other counters that have risen sharply during the dramatic rebound from August’s sub-prime lows.

‘The mood change was so drastic. We were still brimming with enthusiasm as we came into the office. The screen started to flash red and everyone wanted to get out,’ said a dealer yesterday.

Most Asian markets had initially taken Wall Street’s overnight weakness in their stride. Singapore’s Straits Times Index (STI) was down just 20 points, while Hong Kong’s Hang Seng Index rose 380 points, or 1.2 per cent, early on. But sentiment deteriorated as the crude rose from US$86 a barrel to nearly US$88, spooked by concerns that Turkey will invade Iraq and disrupt supplies.

In the rush for the exits, China stocks were among the worst hit as they have been the biggest beneficiaries during the recent run-up.

While the STI ended 51.3 points, or 1.33 per cent, lower at 3,810.72, the PrimePartners China Index, which tracks 25 China counters, fell 2.5 per cent to 297.71. The Hang Seng closed down 586.23 points.

The big blue-chip losers included Singapore Airlines, down 50 cents at $19.60, and Singapore Exchange, 40 cents lower at $15.40. China favourites such as Yangzijiang Shipbuilding lost 11 cents to $2.53.

With nerves already fraying, traders then had to deal with the plunge in the shares of Uni-Asia, which listed only two months ago.

With soaring oil prices turning the big picture murky, traders fear smallish China stocks could be hit by the kind of sharp sell-off that belted penny stocks in July.

Uni-Asia, which arranges the financing of transport-related assets, was set up by former Japanese bankers and is run out of Hong Kong. In just two days, its shares have plunged by 96 cents, or 38.4 per cent, to $1.54, wiping $238 million off its market value.

Traders said the selldown started after Kim Eng Securities ‘imposed trading restrictions’ on the stock on Monday. This came after the shares had quadrupled over the past three weeks to close at a record $2.50 last Friday.

Kim Eng told its dealers to get upfront payments from clients before they bought Uni-Asia shares.

The news sent Uni-Asia shares down 55 cents on a hefty volume of 62.9 million shares on Monday.

Other brokerages, including UOB Kay Hian and CIMB-GK, followed suit yesterday, triggering another selldown.

The shares dived 41 cents to close at $1.54 with 53.5 million units changing hands.

‘The market is rife with rumours on the stock but nobody knew exactly what was going on. It is not surprising that brokerages are imposing cash upfront payments because its rise was simply incredible,’ said a remisier.

A Singapore Exchange query on Monday also produced a blank.

Uni-Asia said there has been no substantial changes in its list of major shareholders, despite the heavy trades in its stock.

Rising S$ will hurt many tech firms: Citibank

LOCAL tech stocks, which have long lagged the surging broader market, may be dealt another blow by the recent appreciation of the Singapore dollar, which is expected to squeeze margins further, Citibank says in a report.

Although many tech firms have a natural hedge between revenue and raw material purchases, most have revenue that is largely US dollar-denominated and operating costs that are based on Asian currencies – typically the ringgit, yuan or Sing dollars – and report earnings in Sing dollars.

‘Hi-P, Jurong Tech and Venture would be the most affected in our coverage universe given their large operating capacity in China and Malaysia,’ Citi analysts Low Horng Han and Tan Han Meng say in the report.

Chartered Semiconductor and Creative Technology would be less affected since most of their revenue is in US dollars and they report their earnings in US dollars, the analysts say. But their risks lie in operating costs, given their Asian base.

As for CSE Global, the analysts say the impact is minimised by its diversified geography.

If there is going to be one winner in the tech universe, it is likely to be Datacraft Asia, the Citi analysts reckon.

‘Datacraft would be the key beneficiary since it reports in US dollars and both sales and expenses are in US dollars and Asian currencies,’ they say.

The Sing dollar has risen to a 10-year high of 1.4630 against the US dollar since the Monetary Authority of Singapore said last week that it is increasing slightly the slope of the S$ Nominal Effective Exchange Rate (S$NEER) policy band in the face of rising cost pressures, while maintaining the gradual and modest appreciation of the Sing dollar. S$NEER has been edging up at the higher end of the policy band following renewed weakness in the US dollar.

This slight increase could add 0.2-0.5 per cent to the current annual appreciation bias of about 1.9 per cent, Citi analysts say.

But they caution that this slightly steeper appreciation bias may not be sufficient to contain inflationary pressures, particularly given the currently lower Sing-dollar interest rates. This may result in a need for further tightening next year via more fine-timing of the appreciation bias or non-exchange rate measures.

‘We would not be surprised if the government follows through with tightening via other policy instruments via fiscal, labour or property measures to tackle inflation and overheating pressures,’ the analysts say.

Citi economists expect the Sing dollar to reach 1.39 – up from an earlier estimate of 1.41 – against the US dollar by end-2008 and average inflation to be 2 per cent for 2007 and 3 per cent for 2008, up from earlier projections of 1.5 per cent and 2.5 per cent respectively.

With its monetary statement last week, MAS raised its CPI inflation forecasts to 1.5-2 per cent for 2007, from 0.5-1.5 per cent in the preceding policy review, and 2-3 per cent for 2008.

 

Source: Business Times 16 Oct 07

Finance sector: future demand trends

The office space needs of financial institutions are changing globally. CHRIS ARCHIBOLD discusses how Singapore is rising to the challenge

THE financial services sector has seen unprecedented growth in Singapore over the last two or three years, both as a result of domestic growth and the influx of regional and global jobs into the market.

The accelerated growth, supply pressure and innovation in terms of workplace strategies are having a fundamental impact on the type, location and nature of property required by these financial institutions.

Jones Lang LaSalle’s Banking and Finance Industry Group has done much work studying the drivers behind the occupational strategies of this sector, some of which will be covered here. Additionally, we have looked at the pivotal role that the city’s office stock will play in maintaining the inflow of investment in this sector.

In the last 20 years, the defining trends in financial markets have been globalisation in the wake of deregulation and liberalisation; growth of markets resulting from demand due to greater securitisation, privatisation policies and developments in emerging markets; and the impact of technology. These trends, in turn, have led to innovation in products and services and to intense competition between financial centres – and firms within those centres – to capture cross-border trade.

Deregulation: The sector has experienced unprecedented levels of change in the last decade. Historically, it could be characterised as a series of highly regulated government monopolies. While this is changing, deregulation is happening faster in the West than the East. In addition to deregulation, which has resulted in increased competition (foreign and domestic), changing consumer demands and improvements in technology have been the key drivers of change.

Globalisation: The sector is going through a spate of mergers and acquisitions (M&A) as banks build global platforms critical to the success of organisations wanting to compete in the global marketplace.

Technology: The technology revolution has enabled the e-banking age, resulting in significant changes in retail banking. This impacts the need for physical branch space (auto lobbies, etc) and associated staff. Technology has also changed bank processing, enabling many tasks to be executed electronically and, often, remotely in a different part of the world where costs are lower.

Within office accommodation and portfolios, economies are being sought through:

• The consolidation of functions to decentralised locations

• Selection of cost-efficient locations

• Appropriate adjacencies

• Improved technical reliability/performance.

  Corporate banking has high margins and is a client- driven business. It therefore prefers proximity to its client base and is likely to retain its core CBD presence. Exceptions to this may occur where high-specification buildings are available at a rental discount to the traditional city core.

Front office presence

As cost becomes a stronger driver, particularly in the current economic environment, banks are challenging how much corporate and investment banking needs a front office presence.

In recent years, there has been an increasing trend globally to decrease the percentage of ‘front office’ accommodation situated in expensive downtown locations. Many traditional non-client-facing functions have been relocated to the city fringe or decentralised locations for a number of reasons:

• Lower cost

• Control of dedicated facilities and consolidation into one ‘campus’-style location (hence promoting synergies between business units)

• Convenience and amenities for staff.

  The relative split between front and back office accommodation varies significantly depending on the bank involved although current ‘best practice’ is considered to be 60 per cent back and 40 per cent front office. This split often varies more towards the front office in the case of a global or regional headquarters.

  Our benchmarking analysis undertaken on some 40 banks and financial services companies globally indicated the following trends in respect of front and back office splits:

• North American and European-based companies traditionally have a higher decentralised component.

• The impetus to move was primarily due to availability of better-quality buildings with cost savings being ranked second.

• Staff amenities and facilities were a major issue.

  Providing a higher percentage of decentralised facilities is becoming a major priority for Asian-based banks as infrastructure and technology improve.

  Recent technology and globalisation trends have impacted the real estate requirements of large banks (and other corporations). In general terms, the requirements are grouped into a range of location, design, occupancy and tenure considerations. A number of core objectives of large banks include:

• Flexibility and ability to accommodate rapid growth

• Building design that promotes workplace flexibility, efficiency and interaction between employees

• Cost-effectiveness and cost certainty

• Security.

  Flexibility has become a key issue for large financial institutions, particularly in the last five years, as market cycles, economic conditions and M&A activity demand industry participants to be quick in reacting to change.

Flexibility

One of the greatest challenges is the rate of change, the unpredictability of space requirements and the ongoing need to manage costs. As a result, the emphasis in planning administrative office portfolios has shifted to a need to plan for flexibility. This is manifested in a number of ways:

• Standardising modules of space, providing structured IT and services infrastructure that allow the relocation of ‘people, not desks’.

• Providing exit strategies for buildings, whether owned or leased as well as considering both local market leasing practices and financial considerations, and also depending on the nature and criticality of the functions housed therein.

• Providing strategy for rapid growth, especially in supporting unpredictable but rapid growth of new delivery channels.

  The style and design of accommodation has over the last 5-10 years has become increasingly important, as occupants realise the impact it has on staff retention, a cooperative working environment and flexibility.

  Workplace planning and strategy is a huge topic and issue in its own right. Recent trends and design consideration will likely be investigated during an exploration of occupier objectives.

  Singapore has some of the most reliable infrastructure within Asia and is fully able to support centralised facilities.

  This benefit of putting this infrastructure in place has been demonstrated by the massive influx of investment by financial institutions over the last two years.

  The latest Grade A office development, One Raffles Quay, serves as a excellent barometer of this expansion activity. Analysis of the occupancy of this development shows that over 80 per cent of the space is leased to financial institutions and over 60 per cent of this take-up is expansion space.

  To date, much of the activity has been centred in the core CBD area and while we expect to see more of this over the next 12-18 months we are also predicting that many of the major financial institutions will turn their attention to splitting their operations and growing their back office operations. The reasoning behind this prediction is as follows:

• We now have significant real estate cost differentials between the CBD and decentralised locations. In some locations, rents are only 25 per cent of Grade A CBD core rents.

• Rental fluctuations in many back office locations are very low (in dollar terms) compared to CBD locations and therefore afford the occupiers more cost certainty, which aids business planning.

• Many of the banks have reached critical mass (in terms of area occupied) making a front office/back office split a viable option.

• Some locations afford the occupier the opportunity to enter into a build-to-suit, giving total control over the type of environment created.

• Current island-wide supply is limited. Build-to-suit back office premises can be constructed within tight timelines, some as short as 18 months.

  There are a number of companies currently looking at their back office portfolio and while they are considering a number of potential locations, many are focusing their attention on Changi Business Park and the HarbourFront/Alexandra area.

  Banks appear to be moving to more ‘campus’-style buildings for their back offices with larger floor plates that encourage business unit interaction. The real drivers in location selection are expected to be the quality of specification, design of available floor plates/buildings, and the ability to attract and retain quality staff at competitive salaries.

   

  Source: Business Times 16 Oct 07

Businesses roll with stronger S$ but some brace for a crunch

Singapore companies keep firm eye on competitiveness as US dollar slides

(SINGAPORE) Some are thinking of shifting their operations to cheaper locations like China and Vietnam. But for most businesses here, the strengthening Singapore currency and weakening American dollar have not made more than a dent on their cost competitiveness – at least not yet.

Even as the Sing dollar shot up to a 10-year high against the greenback at $1.463 last week, industry sources say it’s still early days to assess the impact on the economy here.

‘For now, businesses have not felt the pinch. The economy is doing well,’ says one industry leader.

Just last week, the Ministry of Trade and Industry (MTI) released estimates showing the economy expanded by a blistering 9.4 per cent in the third quarter, trumping analysts’ forecast.

The government seems not particularly concerned about the falling US dollar, the common currency for global trade and business. More concerned about inflation, the Monetary Authority of Singapore is moving to raise slightly the pace of appreciation for the trade-weighted Singapore dollar.

That is good news for local businesses that are importing a lot. ‘The drop in value of the US dollar is beneficial in the sense that it becomes cheaper for us to buy fuel which is quoted in US dollars,’ says Tammy Tan, spokeswoman for transport group Comfort Delgro.

MTI has declined to comment, but BT understands government planners are keeping a close watch on the local currency’s movements – especially against the US dollar.

The Singapore Tourism Board, keen to draw more visitors, says it is too soon to say if tourism would be affected by the stronger Sing dollar.

The Singapore Chinese Chamber of Commerce and Industry (SCCCI) expects local retailers and service providers in the tourist trade to be affected by a dip in tourist spendings.

Small exporters who ship their goods direct to the US will also be among the hardest affected, it says.

‘A strong Singapore dollar will definitely affect the price competitiveness of our exports done in Singapore dollars,’ says Chew Ker Yee, vice-president for business at Wangi Industrial, a provider of surface finishing and optical thin-film coating solutions. His company is moving its operations to lower cost countries like China and Vietnam, where ‘the local currency appreciation against the US dollar is not as steep’.

Erman Tan, chief executive of Asia Polyurethane, a chemical exporter, finds his costs rising in tandem with the falling US dollar.

Even companies not dealing with the US are feeling the effect, because they have to convert revenues mostly in the US dollar to the Singapore currency.

Miline International, which ships its plywood to Australia, Malaysia, Thailand and the United Kingdom, has sustained ‘book losses’ of 16 per cent in the past four years, when the Singapore dollar climbed from $1.69 to $1.45 against the greenback. ‘A stronger Sing dollar will not benefit us as we trade 100 per cent in US dollars,’ says Mikell Koh, Miline’s managing director. Homegrown technology company Aztech Systems is in similar straits, but says the losses which the company sustains ‘will not be significant to the group’s operations’. Still, Aztech is considering hedging to ease the effect of the falling US dollar, says Herman So, its vice-president for finance.

Some businesses, like logistics provider Lorenzo International, worry that if the greenback keeps tumbling and hence boosting the Sing dollar, profit margins will be squeezed.

Says Raju Chellam, vice-president of market research firm Access Markets International in the Asia-Pacific region: ‘If the US dollar continues its slide, we may need to re-negotiate with our local partners to accept payment in US dollars, instead of in local currency.’

On the other hand, Victor Loh, CEO of the VicPlas Group, a producer of building plastics and medical devices, is fretting that clients may seek to pay in US dollars if the greenback keeps falling.

But there are also gains to be made in cheaper imports and lower inflation. This is seldom mentioned among businesses, lest they have to pass the gains to customers.

Nizam Idris, an economist and currency strategist at UBS bank in Singapore, says the falling US dollar is very much what’s needed to correct the troubling global imbalances fed by excessive consumption in the US and Europe.

In any case, he says that in real trade weighted terms, the Sing dollar has not strengthened much against its trading partners.

Similarly, Fortis Bank strategist Joseph Tan also does not expect the weakness of the US dollar to affect Singapore’s trade ’so starkly’.

He says Singapore’s chief competitors in Asia have also seen their currencies appreciate – some even more – against the greenback, leaving Singapore’s competitiveness relatively unscathed.

But Mr Tan is concerned that the falling US dollar, along with the recent cut in the Fed rate, is exporting US inflation to the rest of the world.

While a strong Sing dollar could hit exports, the SCCCI does not see any long-term harm to Singapore’s competitive edge.

‘For most large corporations, the rising Sing dollar is unlikely to have a major impact as these companies leverage on niche manufacturing capabilities and efficient supply-chain and logistics management to compete globally,’ it says.

The more immediate concern for many businesses is the recent sharp hike in residential and commercial rentals, according to SCCCI.

Says an expatriate businessman: ‘This almost bubble aspect of commercial and private rents is making Singapore a much less attractive place to do business than in the past.’

 

Source: Business Times 15 Oct 07

Why Singapore is what it is

Minister Mentor Lee Kuan Yew was the keynote speaker at the opening of the International Bar Association’s annual conference last night. This is his address.

TO UNDERSTAND Singapore, you have to know how we were suddenly thrown out of the Federation of Malaysia in 1965 and became an independent state. Peninsular Malaya had been Singapore’s hinterland ever since the British founded Singapore in 1819.

We faced a bleak future. We had no natural resources. A small island-nation in the middle of newly independent and nationalistic countries of Indonesia and Malaysia, each determined to cut Singapore off as the middleman. To survive, we had to create a Singapore different from our neighbours – clean, more efficient, more secure, with quality infrastructure and good living conditions.

We sought to provide an environment that our neighbours did not provide – First World standards of reliability and predictability. Important for investors and economic growth is the rule of law, implemented through an independent judiciary, an honest and efficient police force and effective law enforcement agencies. Had we not differentiated Singapore in this way, it would have languished and perished as a shrinking trading centre instead of becoming the thriving business hub it is today.

I studied law in the Cambridge Law School and am a barrister of Middle Temple, an English Inn of Court. I practised law for a decade before I first took office in 1959 as prime minister of self-governing Singapore.

Therefore I knew the rule of law would give Singapore an advantage in the centre of South-east Asia where the law was often what was decided by the leader, whether a president or prime minister, often an ex-military man.

Singapore inherited a sound legal system from the British. Clear laws, easy access to justice and an efficient legal system provide the basis for citizens to compete equally in the market and to grow the economy.

A stable and predictable legal environment facilitates the enforcement of contractual rights and protection of property rights. The common law heritage and its developed contract law are known to and have helped attract investors. Our laws relating to financial services are similar to those of leading financial centres in other common law jurisdictions such as London and New York. As these are the two leading financial centres in the world, their laws govern most financial transactions worldwide. They are used freely in Singapore.

Since 1959 we have adopted English as our working language.

While we have kept key English legal principles; after the United Kingdom joined the European Union, it adopted EU laws and doctrines. We have not followed them. Instead we have amended our laws to fit our needs and circumstances.

The independence of our courts is protected by the Constitution that prevents removal of judges from office by the executive. We established our final Court of Appeal in place of the Privy Council as our courts would be more familiar with our own legislation and local conditions and culture.

We still look to English precedents and examples, but increasingly we look also to those of United States, Australia, New Zealand and other Commonwealth countries. Even civil law countries have given us useful concepts and ideas, especially those adopted and incorporated as part of UNCITRAL trade laws.

Needs-based legislation

WE have special legislation to meet our needs: A multi-racial and multi-religious society is prone to conflicts.

Race, language and religion in Singapore have to be handled sensitively, especially during elections. We have enacted the Religious Harmony Act and set up the Presidential Council for Minority Rights. We created Group Representation Constituencies to ensure minority representation in Parliament.

For good industrial relations, we enacted the Employment Act and Industrial Relations Act to provide the framework for our tripartite system of industrial ties, a system for collective bargaining, and an Industrial Arbitration Court to resolve industrial disputes.

For law and order, we have strong deterrent sentences for offences such as drug trafficking, kidnapping, unlawful possession of firearms.

The Immigration Act provides for caning sentences to deter illegal immigrants and overstayers.

For national security, the Internal Security Act allows for preventive detention, an effective response to terrorists.

By the 1980s, the system of courts we inherited from the British could not cope with the increasing volume of work. It needed to be modernised and to make use of IT. This also needed a chief justice who is not only legally qualified, but also has managerial and administrative experience to reform the system.

It was Chief Justice Yong Pung How (1990-2006) who had practised law for over two decades before he became a merchant banker and finally chairman of Singapore’s largest bank. He restructured the system, instituted new procedures, used IT in the courts, increased the number of judges and courts and selected the most able and balanced of those at the Bar to become judges.

The World Bank, in a report this year entitled Judiciary-led Reforms In Singapore – Framework Strategies And Lessons, stated: ‘Over the past 15 years, Singapore’s judicial system has been transformed from one that many viewed as characterised by inefficiencies, delays, and inadequate administrative capacity to one widely seen as among the most efficient and effective in the world.’

Attorney-General Chan Sek Keong, who has since become Chief Justice, will maintain these standards.

Good governance, a sound legal framework and judiciary have resulted in stability and economic growth.

Transparency and integrity

OUR emphasis is on meritocracy, the building blocks of sound governance and integrity in our judiciary and legal system. The integrity of our financial systems withstood the turbulence of the 1997 Asian financial crisis that caused several of our neighbours’ banking systems to collapse. Singapore’s firm regulatory framework has facilitated economic progress.

Corruption, endemic in parts of the world, was seeping into Singapore in the 1950s when elections had introduced elected ministers in the transition to internal self- government. In 1959 when we took office in the first fully elected government, we moved swiftly to rid ourselves of corruption before it could become endemic.

Transparency International, a civil society organisation against corruption based in Berlin, has repeatedly listed Singapore among the top five of 163 countries. And the only one from Asia in the first five.

Our system does not tolerate corruption and we have avoided the problems of widespread corruption that have plagued Asia. Our Corrupt Practices Investigation Bureau (CPIB) annually tabulates the cases brought against officers and executives from the public and private sectors. In two cases, it led to the conviction and prison sentence of a junior minister. Another, a Cabinet minister, committed suicide after being investigated for corruption.

Three factors enabled Singapore to escape the poverty that plagued the region: First, clean and efficient government; second, the character and capabilities of the leadership in charge; third, an industrious people, eager and quick to learn to be productive and gainfully employed.

Defamation

POLITICAL leaders in Singapore take action against opponents who make statements against them that impute dishonesty and lack of integrity. Situated in a region where ‘money politics’ is part of the political culture and an accepted way of life, any allegation of corruption in Singapore must be taken seriously.

It leads to an investigation by the CPIB, and/or an action for defamation against the person making the allegation to clear any doubts on the integrity of the government.

As a result, people in Singapore do not equate their political leaders with second-hand car salesmen.

Economic competitiveness

INTERNATIONAL surveys of economic competitiveness of countries always include the legal framework and the administration of justice as key criteria in ranking such countries.

The Political and Risk Consultancy, World Economic Forum and other polls show that both foreigners and Singaporeans believe we have good judicial and legal systems, and fair administration of justice.

The Institute For Management Development World Competitiveness Yearbook has consistently ranked Singapore in the top two positions since 1997 under the Legal Framework component. (This category examines if the legal and regulatory framework encourages the competitiveness of enterprises.)

The World Bank released its study Doing Business Report 2007 in September last year. Singapore fared better in 2006, compared to the previous year, and has replaced New Zealand at the top spot.

Despite these endorsements, we cannot be complacent. We have to respond to new challenges that technology and globalisation have brought upon us.

With technology increasingly sophisticated in a world that is increasingly borderless, crime has become multifaceted, and multi-jurisdictional. Our legislative mechanisms have responded to meet these challenges. Many legal issues today require an international cooperation for solutions.

Law firms are also taking advantage of new global business opportunities and technologies. US and British law firms are able to venture aggressively into new markets, following their clients’ multi-jurisdictional businesses.

Businesses span many countries and lawyers must meet the needs of their multinational clientele.

We need to maintain Singapore’s position as a city par excellence, with an environment that is clean, safe and vibrant to work in and live in. We try to retain our best, and we attract the best to come, settle and raise their families here.

 

Source: The Straits Times 15 Oct 07

NEWS ANALYSIS – Asset inflation may not always be a bad thing

Property owners, for instance, could gain as asset prices climb

AS RECENTLY as four years ago, it was the fear of falling consumer prices and its corrosive effect on the stock market and residential properties which gave investors sleepless nights.

Now, economists are worrying about the very opposite phenomenon – rising levels of inflation and their impact on the global economy.

Inflation, like its cousin deflation, is usually seen as an economic bogeyman with the potential to wreak economic havoc if it runs out of control.

But there are circumstances under which investors – property buyers for instance – can win from rising consumer prices.

First, think back to 2003, when Sars stalked much of East Asia and the deflation beast was on the loose.

Buying sentiment was so poor that even though residential property prices plummeted, there were few takers.

Downward spiral

AND nearly every condo owner had a grim tale or two to tell of the blight on their posh estates – when, say, an unfortunate neighbour’s flat was repossessed by the bank and put up for mortgagee sale, after he had defaulted on his mortgage.

Such scenarios often turn into a downward spiral. The more buyers postpone purchases, the more sellers are forced to cut prices.

Deflation becomes the enemy of the borrower saddled with huge debts.

Even though he might have borrowed at a 1 per cent interest rate from the bank, if the price of his property falls by 5 per cent, he is actually paying 6 per cent rates in real terms.

Worse, he may suffer negative equity, as the value of his home slips below the amount owed on the mortgage.

In practice, this type of nasty economic downward spiral works like a massive dampener on the stock market too. From 2000 to 2002, the benchmark Straits Times Index ended lower each year for three consecutive years.

Fast forward to now, and the scenario could hardly be more different. Property prices are soaring and there is an air of growing prosperity.

The main gripe now is about how expensive condos are and how much extra cash is needed to fill up the car’s petrol tank, as inflation climbs.

Those old enough to have lived through the tumultuous 1970s, when inflation was in double digits, warn that too much inflation is a bad thing.

Then, like right now, inflation was unleashed by a lethal cocktail of rocketing oil prices and low interest rate policies by successive United States Federal Reserve chairmen, which caused prices of goods to surge, even as the global economy wallowed in recession.

But those looking back at the 1970s also observed that the era provided ample opportunities for great fortunes to be created.

Overall, the stock market performance back then was decidedly unimpressive.

After hitting record highs in 1972, blue chips such as OCBC Bank and United Overseas Bank sank to a fraction of their values, as a gigantic stock market bubble burst with the onset of rampant inflation, after oil prices quadrupled.

But in Singapore and Hong Kong, this also created an environment where interest rates on loans became effectively negative, as inflation galloped ahead of mortgage rates.

In other words, paying off a loan with 5 per cent interest was a breeze if, for instance, prices – and presumably wages – were rising at 7 or 8 per cent year.

Those who took out big loans to finance real estate purchases in Singapore and Hong Kong, where prime land was in scarce supply, were amply rewarded for taking the risks.

Inflation eroded the costs of their borrowings, while providing the perfect backdrop for soaring property prices.

This spawned a new generation of billionaires such as Hong Kong’s Li Ka Shing and the Hong Leong group’s late patriarch Kwek Hong Png, as they rode the property bubble caused by worldwide stagflation – inflation coupled with stagnant economies – to create massive business empires.

It is too early to say whether the world is on the verge of entering a scenario like that seen in the 1970s, which wrought havoc in global economies but also richly rewarded the few who were fortuitous enough to recognise how they might profit from it.

But one thing is certain. Inflation is here to stay, as long as oil prices continue to stay at their current sky-high levels of above US$80 a barrel.

Negative interest

AND with the Fed bowing to domestic pressure by cutting interest rates to combat a souring mortgage crisis back home, prices of prime assets such as Singapore real estate may go on a roll, as funds flee from the falling returns offered by a weakening dollar.

So just like in the 1970s, home owners may get to enjoy effective negative interest rates once again, as theirhome prices appreciate well above the servicing costs on their mortgages.

For a young couple just starting out in life, the best bet is to get married early and apply for a new HDB flat.

Although they will have to slog to pay back the enormous home loan they take out, it will be the best insurance they can take out to protect their Central Provident Fund life savings from being eroded over the years by inflation.

The odds are good that, like their parents before them, they will stand to reap huge capital gains, as property prices swing up.

Inflation can pose some serious economic headaches if it begins to run out of control, as it can create major uncertainty throughout an economy. People on fixed salaries suffer badly too.

But for some investors at least, inflation can represent a happy problem to live with, at least for now.

As one economist observes, the opposite of inflation – deflation – is like quicksand, easy to get stuck in, but difficult to escape.

Inflation may have its problems but, for some, it can be turned into fabulous investment opportunities.

 

Source: The Straits Times 15 Oct 07

MAS seeks amendments to financial market laws

Changes aim to enhance regulatory oversight, responsiveness to market innovation

LAWS relating to the financial market in Singapore will be amended, with regulators asking for comments on the proposed changes.

The Monetary Authority of Singapore (MAS) has released a policy consultation paper on proposed changes to the Securities and Futures Act (SFA) and the Financial Advisers Act (FAA).

This is the third in a series of policy consultations that the MAS is conducting following a review of the two pieces of legislation that started last year.

The proposed changes aim to enhance MAS’ supervisory oversight of capital markets services and holders of financial advisers’ licences and the responsiveness of the regulatory framework to market innovation.

One of the changes proposes to let the holders of licences for capital markets services (CMS) and financial advisers (FA) have perpetual licences so that they do not need to renew their permits every three years.

MAS is proposing to amend the law to require foreign regulators to obtain its permission to inspect CMS and FA licence holders.

Noting the increasing globalisation of capital markets, MAS said that it has been receiving more requests from foreign regulators to inspect licence holders whose parent entities they supervise.

The authority said that such inspections should be subject to safeguards including the requirement to protect confidentiality of information and reciprocity by foreign regulators to its requests.

MAS is also proposing to extend the power to issue a prohibition order to banks, insurance and finance companies which are at present exempt from licensing.

Currently MAS is empowered only to issue such orders against CMS licence holders.

Other changes also propose to amend the definitions of ’securities’ and ‘futures contract’ to let MAS prescribe new products as securities as well as exclude other products which may not be considered as financial instruments.

The consultation paper can be found on the MAS website. Comments should be sent by Nov 9.

 

Source: Business Times 12 Oct 07

Henderson’s dividend fund wary of Reits

It favours banks as they’re the cheapest sector in Asia

HENDERSON Global Investors’ Asian equity dividend fund favours banks but is wary of real estate investment trusts (Reits), its manager said yesterday.

Mike Kerley, who manages the US$100 million Horizon Asian Dividend Income Fund, also said the fund was ‘underweight’ exporters due to their vulnerability to a slowdown in the US economy and the weak dollar. Banks are the cheapest sector in Asia due to concerns about their exposure to US sub-prime mortgages, Mr Kerley told reporters on the sidelines of presentation.

He said he also favoured Asian banks because they were a proxy for domestic demand, which will hold up better than exports in the event of a US recession.

‘We’ve talked to virtually all the banks we owned about their sub-prime exposure. It’s possible there may be something we don’t know about but I’m pretty confident the amount is low,’ he added.

Asian bank stocks, like their counterparts in the US and Europe, have fallen in recent months because of concerns about the US housing market. The shares have since recovered from their lows.

Mr Kerley said the Henderson Asian dividend fund’s holdings include South Korea’s Kookmin Bank, Singapore’s United Overseas Bank (UOB), Hong Kong-listed Hang Seng Bank and Bank of China, Australia’s Westpac Banking Corp and Malaysia’s Bumiputra Commerce and Malayan Banking.

UOB had a better franchise and more creative management than Singapore rival DBS Group, he added when asked why the fund did not hold DBS. Mr Kerley had earlier said in a presentation that DBS ‘looked pretty cheap’.

Turning to other sectors, Mr Kerley said he was wary of owning Reits because they had become relatively expensive. Several Reits had been structured to boost earnings in the initial years and it was not clear whether the dividends were sustainable, he added.

In terms of country allocation, Mr Kerley said he liked Taiwan because valuations were attractive. The Taipei stock market may also benefit from a ‘liquidity overflow from China’ as investors sought safer bets.

Mr Kerley said in addition to picking stocks that offer a mix of dividend and growth, the fund also writes put options on its portfolio to lock in gains and will use synthetic products in certain countries to reduce withholding tax.

 

Source: Reuters (Business Times 12 Oct 07)

Wise not to ignore market risks

SINCE the US Federal Reserve’s somewhat surprising 50-basis points interest rate cut on Sept 18, investors all over the world have piled back into stocks with much gusto. Wall Street on Monday rose to a new all-time high while most Asian markets continue to set records of their own.

The mood is once again bullish, restored by a seemingly unshakeable confidence that the Fed can be relied upon to cut rates further to keep the ball rolling. While the momentum is clearly positive however, over-eager investors have to be mindful of making the same mistake as before – ignoring risks while focusing solely on returns.

Although the Federal funds futures market is pricing in a further 25 basis points cut at the end of this month, this is by no means a certainty. September’s rate lowering has seriously undermined an already weak US dollar – which has now declined even against currencies such as the Turkish lira, Saudi rial and Canadian dollar – and over time, this cannot be good for an-already slowing economy labouring under the burden of a crashing housing market. Moreover, various Fed governors warned this week that more rate cuts can only be justified if the economy shows signs of very drastic weakness, which means that perversely, investors are buying stocks today in the hope that growth worsens significantly tomorrow – Monday’s Wall St record for example, was set after release of a weak manufacturing report that showed new orders dropping for the third consecutive month. This is an anomalous state of affairs. While it might last for a while, eventually reality will prevail.

Speaking of reality, the full extent of the sub-prime mess may not have been revealed yet. US and European banks have only just started to show alarming profit weakness stemming from sub-prime losses and there is doubt over whether rate cuts are sufficient to reverse losses.

That said, markets could continue to rally in the short term. One likely explanation for the strong bounces seen over the past fortnight is that they have come from widespread programme trading – with markets as interconnected as they are today, the big money has to employ sophisticated computer-driven trading strategies in order to react quickly enough and capitalise on shifts in economic and sentiment indicators.

As such, once certain parameters are met, powerful momentum forces take over and markets move almost as one. Invariably, the targets are always the largest stocks – that is why in Singapore at least, while the Straits Times Index has very rapidly regained new ground, the broad market has lagged.

The real danger however, is that the same momentum shifts work equally effectively on the downside.

Given that volatility has not subsided over the past few months – it has in fact increased – and given that the chances of a US recession are quite real, it would be wise for investors to be as cognisant of risks as they are of returns.

 

Source: Business Times 4 Oct 07

ARA Asset Mgt files prospectus for listing in S’pore

IPO pricing slated for Oct 25 after roadshows; listing on Nov 5: sources

REAL estate fund firm ARA Asset Management yesterday filed its prospectus in Singapore for an initial public offering which sources close to the deal said may raise US$200 million for its shareholders and the firm.

Singapore-based ARA, which managed US$4.7 billion of assets at the end of June, said the company would offer new shares while two of its shareholders, JL Investment Group and Cheung Kong Investment, would also sell shares in the firm.

JL Investment Group, owned by ARA chief executive John Lim, owns 70 per cent of the firm while Cheung Kong Investment, a unit of Asia’s richest man Li Ka-shing’s flagship group, owns the rest.

The prospectus did not say how big a stake the key shareholders planned to offload in the IPO.

But sources close to the deal said the firm would sell 243 million shares or 42 per cent of the enlarged share capital.

The real estate fund management firm has appointed Credit Suisse and Singapore’s DBS Bank as lead managers, the prospectus said.

The firm manages private funds and real estate investment trusts, or Reits, including two which are listed in Singapore – Fortune Reit and Suntec Reit .

ARA also manages Prosperity Reit in Hong Kong and Amfirst Reit in Malaysia, according to its website.

Its private funds include Al Islami Far Eastern Real Estate Fund and China Capital Partners.

The prospectus said that the IPO would raise S$39.8 million as seed capital for ARA Asia Dragon Fund and S$21.4 million for other real estate projects and the remaining for working capital.

It said the ARA Asia Dragon Fund plans to raise US$1.3 billion for real estate projects in Asia.

The firm plans to organise investor roadshows from Oct 9 to 23, while the IPO is expected to be priced on Oct 25, the source said. The company will be tentatively listed on Nov 5, the source added.

 

Source: Reuters (Business Times 3 Oct 07)

MONEY MATTERS – Yes, sub-primes still offer an investment opportunity

And this is despite the matter having morphed into a more general credit crunch problem

By JOSEPH CHONG

I RECEIVED a few queries from readers of my last article in BT (‘Deciphering the message of the markets’, Aug 1), which discussed, among other things, the origins of the recent sharp market retrenchment. There were two main issues:

1. The graphics were unfortunately left out of the published column. Here they are. The five-day chart demonstrates the tight correlation between the fall in European markets and the strength of the yen as hedge funds and Mrs Watanabe (Japanese housewives) got unwound by margin calls.

2. Was I opining that the fall in markets was an investment opportunity? My apologies about being insufficiently explicit. Yes, the answer is that it was a buying opportunity.

Indeed, I believe this is still an investment opportunity although the sub-prime problem has morphed into a more general credit crunch problem arising from the loss of confidence within the global financial system.

Due to the lack of transparency, it is difficult for each bank to determine what sub-prime debt exposure their banking counterparts have. Although much of the sub-prime mortgages have been replicated as bonds and sold off to investors worldwide, banks have off-balance-sheet liabilities in the form of ‘conduits’, etc, where borrowers (who hold these bonds backed by sub-prime mortgages) could draw on lines of credit with these bonds as collateral.

Central banks around the world have generally managed this fiasco fairly well. There is no loss of confidence amongst depositors except in the UK, where Northern Rock unnecessarily suffered the ignominy of a bank run.

The confidence of depositors is not misplaced. Most of the world operates a system of fiat money with central banks (who control the monetary printing press) being lenders of last resort. Any problem which can be solved by ‘printing’ money is in principle a straightforward one for central banks to deal with.

The individual exposures may be hard to ascertain but things look different from a system perspective. Here’s my quick analysis:

• Combined profit of all listed banks and insurers at US$1.1 trillion.

• Total sub-prime debt at US$0.6 trillion.

• Assuming a write-down of 30 per cent of collateral value, loss at US$0.18 trillion. This would be a one-off loss equal to only about two months of profits of all listed banks and insurers.

• Yet, the loss of market capitalisation at the market nadir was US$1.5 trillion for global financials and US$4 trillion (more than 20 times the projected loss on sub-prime debt) for the global equity markets.

  Does the market reaction make rational sense? Nonetheless, the dislocation in the capital markets has had an impact on business confidence surveys globally. The imponderable is, as always, the contagion effects. How does this affect the wider economy? Exact quantification is difficult. It is not only uncertainties with the economic modelling; policy response also plays a significant role in the outcome.

Fight or flight?

To get a measure of our ‘fear factor’, I did another quick analysis. This time I used the most recent economic cataclysm: the Telecom-Media-Technology (TMT) bust of 2000 to 2003. Capex spending was running far in excess of GDP growth. It is estimated that the overinvestment in capex leading to 2000 globally was (cumulatively) circa 10 per cent of global GDP, or US$2.5 trillion.

This eventually led to write-offs and bankruptcies on a massive scale. The subsequent impact on global GDP is estimated to be (cumulatively) about minus-6 per cent. See demonstrative charts (above), which were sourced from Moody’s Economy.com – the horizontal dash line marks the level of trend GDP growth in the US and the euro zone.

The impact of this sub-prime fiasco appears tolerable as the drag on global GDP is expected be in the region of 0.5 per cent. Ironically, this could be the enforced rest that the global economy requires in order to keep inflation at bay.

Indeed, the rise in money supply from rate cuts combined with reduced demand from the real economy could expand equity PERs over the next few months as excess money supply rises. Fundamentally, the S&P Global 100 Index trades at about 13.1 times, trailing earnings (about 12.1 times one-year forward earnings), which is compelling relative to long-term fixed income yields. For example, 10-year USTs are trading at a yield of 4.6 per cent.

The writer is CEO of financial adviser New Independent. He welcomes feedback at josephchong@ni.com.sg.

This article is for information only. Readers should seek independent advice before making any investment decisions.

 

Source: Business Times 3 Oct 07

Inflation rises to 2.9% – highest since December 1994

Climbing food prices and higher transport and communication costs drive CPI up

CONSUMER prices rose by 2.9 per cent last month from a year earlier, the biggest increase since 1994, as the effects of the goods and services tax (GST) hike continued to set in.

The August figure came in above the median market expectation of 2.8 per cent.

Economists are predicting that inflation could pick up in the months ahead, with crude oil prices at record highs.

But they do not expect any change in the key monetary tool available to tackle inflation – the central bank’s stance on the Singapore dollar which is up for its semi-annual review next month.

Last month’s increase follows a 2.6 per cent rise in July, when a 2 percentage point hike in the GST took effect.

Climbing food prices and higher transport and communication costs, which together make up nearly half of household spending, helped to hoist the Consumer Price Index (CPI) last month.

Food prices crept up by 3.3 per cent year on year, according to data released by the Department of Statistics yesterday. This is the fastest pace since the 4.7 per cent seen in Jan 1995, noted HSBC economist Prakriti Sofat.

Meanwhile, transport and communication costs rose 3.4 per cent, while health-care costs climbed the most – by 6 per cent.

The acceleration in consumer prices is largely explained by a further pickup in food, housing and transport costs with some further impact of the July GST hike also flowing through, Ms Sofat added.

On a month-on-month basis, last month’s CPI rose 0.3 per cent over July, after increasing 2.1 per cent over June.

For the first eight months of the year, consumer price inflation averaged 1.3 per cent.

Economists are predicting year-on-year monthly inflation to nudge above 3 per cent by the end of this year.

‘In September, we expect to see inflation above 3 per cent as oil prices hit record highs. And the increase in bus fares in October will continue to add to price pressures,’ predicted United Overseas Bank economist Ho Woei Chen, She also forecast inflation of 1.8 per cent for the full year.

She expects the Monetary Authority of Singapore (MAS) to maintain its current policy of a modest and gradual appreciation of the Singdollar at next month’s review.

While inflation is at multi- year highs, DBS economist Irvin Seah believes that further monetary tightening – via a steeper appreciation path – to combat inflation is not on the cards.

‘I think MAS will stand pat for now, because there is a sense that the substantial upward trend in inflation is largely due to the GST hike,’ he said.

A steeper Singdollar appreciation path is more effective in curbing imported inflation, and could hurt Singapore’s exports at a time when the global economy is cooling, said Mr Seah. A strong Singdollar makes Singapore exports more expensive in foreign markets.

‘You will need other non- monetary measures to keep domestic inflationary pressures in check.’

 

Source: The Straits Times 25 Sept 07

INSIDE MARKETS – Buy and sell transactions hit low levels; fund managers quiet

PURCHASES by directors and substantial shareholders was low for a second straight week with only 34 companies posting 72 ‘buys’, based on filings on the Singapore Exchange from Sept 17 to 21. The figures were consistent with the previous week’s 35 companies and 72 acquisitions. Investors should note that the buying has been low in each of the past two weeks, with the number of purchases sharply lower than the 124 acquisitions in the first week of September and 106 trades in the last week of August. Sales activity last week were also down with only 23 firms posting 52 disposals, sharply lower than the previous week’s 28 companies and 100 disposals.

Fund managers were quiet. Only six institutions each posted 16 purchases and 22 disposals, against the previous week’s eight asset managers with 30 acquisitions and nine institutions recording 43 disposals.

Several buyers made their maiden entry on the local market last week. The chief executive of Dutech Holdings made his first purchase after the group announced its second-quarter results, while the managing director of Soilbuild Group Holdings returned to the market after being absent since 2006. Legg Mason Inc raised its interest in Straits Asia Resources by 7 per cent to 5.1 per cent. On the sales side, there were bearish signals in Hongguo International Holdings and Aztech Systems as two fund managers lowered their respective stakes to below 5 per cent.

Dutech Holdings

Chairman and CEO Johnny Liu Jiayan recorded his first buys in recently-listed ATM manufacturer Dutech Holdings, after the stock fell below 40 cents per share. The purchases were also made after the group announced its Q2 results on Sept 12. The CEO acquired an initial 200,000 shares on Sept 13 at 39 cents each. He picked up a further 200,000 shares on Sept 17 after the stock fell to 35 cents, doubling his stake to 400,000 shares. Mr Liu is one of two directors who have bought the company’s shares since the stock was listed on Aug 2.

Independent director Graham Macdonald Bell acquired an initial 17,000 shares on Aug 7 at 37 cents each.

Dutech Holdings posted a 5.3 per cent gain in net profit to 12.64 million yuan (S$2.54 million) for the three months to June 30, 2007. Earnings in the first half rose by 14.9 per cent to 23.29 million yuan. After rising from the IPO price of 33 cents to 46 cents on the stock’s trading debut on Aug 2, the counter closed sharply lower at 32.5 cents on Friday.

Soilbuild Group Holdings

Managing director Lim Chap Huat recorded his first buys in boutique property developer and construction firm Soilbuild Group Holdings since July 2006, with 229,000 shares snapped up from Sept 17 to 20 at an average of $1.27 each. The trades, which accounted for 44 per cent of the stock’s trading volume, boosted his holdings (direct and deemed) to 116.3 million shares, or 58 per cent of the issued capital.

Mr Lim is one of three directors who have bought shares in the past two months. Chairman of Remuneration Committee Kelvin Tan Wee Peng bought 10,000 shares on Aug 15 and 16 at an average price of $1.22 each, boosting his direct stake to 150,000 shares. Executive director Low Soon Sim, on the other hand, picked up 10,000 shares on Aug 16 at $1.21 each, raising his direct interest to 570,000 shares.

Soilbuild Group announced its interim results on Aug 14 with a net profit of $28.69 million for the six months to June 30, 2007, against a loss of $2.34 million in the same period last year. The counter closed at $1.30 on Friday.

Straits Asia Resources

Legg Mason Inc became a substantial shareholder of resource development and mining firm Straits Asia Resources on Sept 14 following the purchase of three million shares at $1.36 each. The trade increased its deemed holdings by 7 per cent to 46.8 million shares or 5.1 per cent.

But Fidelity International Ltd reported a disposal-related filing on Sept 11 of 1.2 million shares at an estimated price of $1.33 each, which reduced its deemed stake to 54.5 million shares or 5.9 per cent. The group previously sold 3.7 million shares from Aug 2 to Sept 10 at estimated prices of $1.18 to $1.33 each.

Overall, the fund manager’s stake is down by nearly 5 million shares or 8 per cent since August. Prior to the disposals, the group acquired 13.3 million shares from July 19 to Aug 1 at estimated prices of $1.42 to $1.18 each. Fidelity reported an initial filing on July 18 of 1.8 million shares at 94 US cents each, which raised its interest to 5.01 per cent.

Investors should note that CEO Richard Ong Chui Chat acquired 400,000 shares from July 13 to 31 at $1.43 to $1.17 each, or an average of $1.30 each, which boosted his deemed holdings by 129 per cent to 710,000 shares. He previously acquired 100,000 shares on March 6 at 76 cents each.

Straits Asia Resources announced its Q2 results on Aug 14 with net profit down by 39 per cent to US $7.11 million for the three months to June 30, 2007. Earnings in H1 fell by 41.4 per cent to US$15.53 million. The counter closed at $1.44 on Friday.

Hongguo International Holdings

Consistent sales by FMR Corp in fashion shoes designer, manufacturer, and retailer Hongguo International Holdings since the last week of June totalling 21.2 million shares lowered its interest by 52 per cent to 4.9 per cent. The disposals were made from June 28 to Sept 14 at estimated prices of $1.30 to $0.86 each.

The group last sold 969,000 shares from Aug 15 to Sept 14 at estimated prices of 86 cents to 95 cents each, which reduced its deemed holdings to 19.3 million shares or 4.9 per cent. Prior to the disposals, FMR Corp acquired nearly 21 million shares from December 2006 to June 27 at estimated prices of $0.54 to $1.32 each. The group became a substantial shareholder (for the second time) on Dec 21, 2006, following the purchase of 1.2 million shares at 54 cents each, which raised its interest to 5.2 per cent.

The fund manager’s sentiment is not entirely negative as Schroder Investment Management Group became a substantial shareholder on Aug 7 following the purchase of 884,000 shares at 97 cents each. The purchase, which was made on behalf of clients by its Hong Kong branch acting as Investment Advisors, boosted its deemed holdings to 20.6 million shares or 5.2 per cent.

Investors should note that managing director Li Wei purchased 1.75 million shares in January at $1.16 each, which increased his deemed stake by 9 per cent to 21.5 million shares or 5.4 per cent. Mr Li also has direct holdings of 17.4 million shares or 4.4 per cent. He previously acquired 1.7 million shares from Nov 28 to 30, 2006 at an average of 71.4 cents each. The stock closed at 88.5 cents on Friday.

Aztech Systems

Credit Agricole Asset Management SA ceased to be a substantial shareholder of contract manufacturer Aztech Systems on Sept 19 following the sale of 2.1 million shares at an estimated price of 49.5 cents each. The trade reduced its deemed holdings by 10 per cent – to 19.3 million shares or 4.6 per cent. The sale price was far below the group’s initial filing price in July.

Credit Agricole previously reported an initial filing on July 6 of 1.04 million shares at 61 cents each, which raised its interest to 5.1 per cent. But board member Patricia Ng Sok Cheng and the company bought shares on Sept 20. Ms Ng acquired 100,000 shares at 42 cents each, which increased her direct stake by 72 per cent to 239,000 shares. She also has deemed interest of 15 million shares or 3.6 per cent.

She previously acquired 1.7 million shares from Feb 28 to June 18 via exercise of options at an average of 10.6 cents each and 50,000 shares on Feb 14 on the open market at 41.5 cents each.

Prior to her trades this year, Ms Ng bought 50,000 shares in December 2004 at nine cents each. The company, on the other hand, bought back 500,000 shares on Sept 20 at 42.5 cents each. The group previously acquired 389,000 shares on Aug 17 at 48 cents each, 500,000 shares on Aug 2 at 60 cents each, and 1.2 million shares in March at 37 cents each. The trades since March were the company’s first buybacks since listing. The stock closed at 45 cents on Friday.

The writer is Managing Director, Asia Insider Limited

 

Source: Business Times 24 Sept 07

Rising costs, competition top list of SME concerns

Annual poll shows firms are squeezed by higher wages, input costs, rents

RISING business costs have overtaken staffing issues as one of the top hurdles faced by small and medium-sized enterprises (SMEs), an annual survey has found.

Stiff competition, a perennial worry, is the top concern, but escalating costs were the next biggest worry cited by firms polled in the latest SME Development Survey.

Amid strong economic growth, firms feel squeezed by climbing wages, followed by higher prices for raw materials and other inputs, as well as steeper rents.

Three out of five SME bosses cited rising wages as their biggest headache among cost components.

About half faced rising input prices while 37 per cent were concerned about steeper rents.

The findings were unveiled yesterday by DP Information Group, which conducted the poll, with partners Spring Singapore and IE Singapore. The exercise was supported by the Infocomm Development Authority of Singapore.

More than 1,200 SMEs took part in the survey, now into its fifth year.

This year, six out of 10 firms listed competition as their greatest worry, compared to 45 per cent last year.

But next on the list came rising cost pressures.

A total of 53 per cent of SME bosses this year said this was a major headache, up from just one-third last year, making it the fastest-growing SME concern.

‘With a strong economy, low levels of unemployment and demand for labour rising, it is to be expected that SMEs need to pay more to attract the right people,’ said DP Info managing director Chen Yew Nah.

‘The boom in China and India also fuelled the demand for raw commodities, with rising prices being felt across all industries,’ she added.

Among those most affected by rising wage costs are firms in the construction, services and food and beverage industries, the survey showed.

At the same time, however, SMEs polled are also gaining from the buoyant economy, with more firms reporting turnover growth of more than 10 per cent, and fewer businesses suffering losses.

Despite a tighter labour market, 68 per cent of firms surveyed said they pay the market average for salaries and staff benefits, and 16 per cent claim to pay ‘above-market rates’. Still, more than half of the SMEs polled reported problems hiring workers for roles from operational to managerial.

Meanwhile, worries about finding business opportunities and getting funding have taken a back seat this year.

More firms are growing their business by expanding abroad – with 70 per cent of respondents doing business overseas, up from 59 per cent last year.

The proportion of SMEs which reported problems finding new financing has fallen to 10 per cent, from 19 per cent last year.

‘There have been major improvements in the ability of SMEs to access funding, reflecting the responses of the banks and the Government to the needs of SMEs,’ said Ms Chen.

‘At Spring Singapore, we listen closely to our SMEs to gain insights into their challenges, issues and aspirations,’ said deputy chief executive Png Cheong Boon, outlining a series of public initiatives to improve SMEs’ access to money, markets, management skills and know-how.

There are about 148,000 SMEs in Singapore, making up 99 per cent of all enterprises and providing six in 10 jobs.

 Rising Cost

 

Source: The Straits Times 21 Sept 07

Asian stocks surge on Wall St gains

S’pore market scores 3.4% rise, led by banks and property stocks

(SINGAPORE) Asian stocks surged yesterday in tandem with Wall Street, following Tuesday’s move by the US Federal Reserve to slash its funds rate 50 basis points from 5.25 to 4.75 per cent.

Japan’s Nikkei 225 and Hong Kong’s Hang Seng Index led the way, rocketing 3.7 and 4 per cent respectively to 16,381 and 25,554 points. In the United States, the Dow Jones Industrial Average gained 2.5 per cent on Tuesday.

Here, the Straits Times Index (STI) jumped 116.61 points or 3.4 per cent to 3,594.36 yesterday, led by the banks, property stocks and the Singapore Exchange. Elsewhere in the region, Australia’s ASX 200 rose 2.6 per cent and Malaysia’s KLCI added 1.6 per cent.

The trigger for the gains was the outcome of the most eagerly awaited Federal Open Market Committee (FOMC) meeting of the year on Tuesday, at which the US central bank had been widely expected to lower its short-term lending rate to ease mounting pressure in credit markets created by a crashing housing mortgage market.

Analysts unanimously described the Fed’s rate cut as welcome. Canadian research house BCA Research called it a ‘bold start to a new Fed easing cycle’ and pointed out that although 39 per cent of respondents in an informal poll were against Fed action of any kind as it would constitute a bailout of speculators and hedge funds, the Fed’s motive was clearly to revive flagging US economic growth.

‘Although the economy has not fallen off a cliff, it seems clear that continued sub-par growth lies ahead,’ BCA said. ‘Against that background, 4.75 per cent is still too high.’

DBS Group Research also believes more rate cuts are justified as the US has been slowing for some time. ‘(US) growth has run at a paltry 2.2 per cent for full two years,’ it said. ‘Fed funds should have been cut to 4.75 per cent even before the recent blowout in credit markets.’

DBS expects a further 25 basis-point reduction at the Oct 30 FOMC meeting and possibly one more in December.

Bank of America economist Peter Kretzmer, on the other hand, said the Fed’s statement accompanying Tuesday’s meeting said it has no plans at this time to ease further.

‘We concur with the FOMC that there is more than the usual uncertainty surrounding the current economic outlook,’ Mr Kretzmer said. ‘Our presumption at this point is that the FOMC may well stay on hold for a time to assess the impact of its actions on the financial markets and US economy. We anticipate a year-end funds rate target of 4.5 per cent.’

Nomura Asia Pacific strategist Sean Darby said that in contrast to other big central banks, the Fed has chosen to ignore latent inflationary concerns to ease the credit crunch afflicting the interbank markets.

With central banks already running loose monetary policies, Nomura said the US move will exacerbate inflationary problems.

‘While domestic credit conditions have marginally improved, sentiment remains fragile,’ Mr Darby said. ‘We expect other global central banks to remain much more hawkish and refrain from rate cutting.’

 

Source: Business Times 20 Sept 07

Fed’s aggressive rate cut sparks global markets

A BIGGER-THAN-EXPECTED interest rate cut by the United States central bank sent global bourses sprinting ahead yesterday.

The half-percentage point cut by the US Federal Reserve was double the quarter-percentage point cut that most analysts expected – and immediately caused a surge in US stocks.

Last night, the optimism continued on Wall Street, with the Dow Jones Industrial Average up 97.30 points, or 0.71 per cent, to 13,836.69 at press time.

Asian markets were equally thrilled at the Fed’s move to restore confidence in global financial markets and head off the risk of a US recession after weeks of market volatility.

It was the Fed’s first cut of the benchmark Fed Funds rate in four years, and is set to relieve a credit crunch in the global financial system, sparked by a US mortgage market crisis, by flooding it with cheaper funds.

In a statement, the Fed said the ‘action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time’.

At home, the benchmark Straits Times Index registered its second biggest one-day gain in history when it soared 116.61 points to 3,594.36 yesterday – just 70.77 points shy of the record high of 3,665.13 hit on July 24.

Tokyo’s Nikkei-225 Index shot up 3.67 per cent, and Hong Kong’s Hang Seng Index soared 3.98 per cent to a record high.

Across Asia, lower interest rates are expected to give a fillip to the housing market and stimulate spending in big-ticket items such as cars.

This gave a big boost to real estate developers and banks, which were among the biggest gainers in the various regional bourses yesterday.

Analysts said the Fed’s move should also help to restore confidence in the troubled global credit markets, where international banks have been hoarding cash and refusing to lend to each other.

But they warned that the surge on Wall Street and other global bourses was fuelled by hopes of further interest rates cuts later on.

These cuts would, how- ever, depend on US economic data to be released over the next month, they said.

They warn that, going by the wording in the statement issued, the Fed might have been uneasy cutting interest rates with crude oil prices hitting record highs, fuelling fresh inflation fears.

The cut in the widely watched Fed Funds rate – which sets the pace for US interest rates – to 4.75 per cent came early yesterday morning Singapore time.

Wall Street immediately notched up its best one-day gain in four years as the Dow Jones shot up 335.97 points, or 2.51 per cent.

The size of the cut was a major surprise. It was correctly forecast by only 23 of 134 economists surveyed by Bloomberg News, while 105 predicted a quarter-percentage point cut; six forecast no change.

 

Source: The Straits Times 20 Sept 07

Govt: CPF move won’t hit capital market

Manpower minister fleshes out plan to enhance CPF returns first outlined by PM Lee

(SINGAPORE) Even as he spelt out how all CPF members would enjoy higher interest rates on their contributions and have a more comfortable cushion for their retirement years, Manpower Minister Ng Eng Hen said that the restrictions put on investing in the CPF Investment Scheme would have ‘no adverse impact’ on the capital market.

Under the proposals first outlined by Prime Minister Lee Hsien Loong at the National Day Rally last month, CPF members would be paid an additional one percentage point interest on the first $60,000 in their accounts, which would go towards boosting their retirement savings.

The $60,000 may comprise up to $20,000 from the Ordinary Account (OA) and the rest from the Special, Medisave and Retirement Accounts (SMRA).

While all the OA monies can still be used for existing housing, CPF insurance and education plans, Dr Ng yesterday said the first $20,000 in both the OA and Special Account can no longer be used in the CPFIS. The extra interest aims to provide a risk-free nest- egg for Singaporeans who are living longer.

The restrictions will kick in from April 1 next year and money already invested in CPFIS will not be affected. But some have speculated on the impact of this move on the capital market.

‘Even after these restrictions, $42 billion will still be available for use in the CPFIS,’ Dr Ng told Parliament yesterday.

According to CPF figures in June, about $81 billion was available for the CPFIS.

But as the government moves to provide more support to Singaporeans who could be in danger of outliving their retirement savings, it has unveiled a series of reforms to the CPF scheme.

While the OA rate, which is pegged to banks’ interest rates, has until now been 2.5 per cent, the SMRA rate has been 1.5 per cent higher at 4 per cent. The SMRA rate is now being re-pegged to the 10-year Singapore Government Security (SGS) rate plus one per cent.

The new SMRA rate pegged to the 10-year SGS will be set quarterly.

‘A month before the next quarter, we will compute the new SMRA rate from the average daily yields of the 10-year SGS benchmark of the previous year,’ Dr Ng said. ‘The average 10-year SGS yield computed on this basis would now be 3 per cent.’

Based on the revised SMRA formula, the SMRA rate would be 3 plus one per cent, or 4 per cent – the same as what members currently earn.

But historically, this yield has been higher.

‘Had the SMRA formula been in place since the first issue of the 10-year SGS (in 1998), the SMRA rate would have averaged 4.5 per cent,’ Dr Ng said.

Of course, the ideal peg would have been a 30-year SGS because that is the average time that the members’ SMRA monies stay in their accounts. Since Singapore does not have such ‘long bonds’, the 10-year SGS was picked as the peg for the SMRA rate because it is actively traded.

The additional one per cent would provide for the difference expected between the interest on the 10-year SGS and the 30-year SGS, if it had existed.

Dr Ng said the new interest rates will kick in on Jan 1 next year. To help CPF members adjust to the floating SMRA rate, CPF will keep the 4 per cent floor for the SMRA rate for the first two years.

‘The 4 per cent floor will also apply to the extra interest tier, in the very unlikely event that the 10-year SGS rate falls below 2 per cent,’ Dr Ng said. ‘After two years, the 2.5 per cent floor rate will apply for all accounts as prescribed under the CPF Act.’

He said all CPF members will enjoy higher interest payments under the new system, which will cost the government at least $700 million more in the first year – and more in subsequent years.

But Dr Ng said the government is not giving handouts through the CPF system, which is not meant to be subsidised.

‘We have put in place a long-term framework which provides a fair rate of return on CPF monies that compares well with any offer from private pension plans,’ he said. ‘Most importantly, our CPF system minimises the financial risk to members.’

But CPF members may still run out of savings if they live beyond 85 years. So the government is setting up a committee to look into starting a National Longevity Insurance Scheme, headed by Professor Lim Pin, currently chairman of the National Wages Council.

‘The extra interest that members will get in the new CPF system will be more than enough to pay for this longevity insurance,’ Dr Ng said.

He also said the government will be flexible in accommodating the different circumstances of CPF members and offer different ways to provide for their full-life expectancy.

Members of Parliament generally welcomed the CPF reforms, but some are concerned that yields from long-term bonds will fall, reducing the SMRA rate.

‘Can the government instead guarantee a minimum 4 per cent interest rate, which is what Singaporeans are already enjoying regardless of the market performance?’ said Lam Pin Min (Ang Mo Kio).

 

Source: Business Times 18 Sept 07

INSIDE MARKETS – Sellers outweigh buyers in bearish trading

Asean China Investment Fund was one of the top sellers as it lowered its stakes in Unionmet and SunVic Chemical, writes ROBERT HALILI

BEARISH clouds are looming as the trading environment turned negative last week. In all, 28 companies saw 100 director and substantial shareholder disposals while 35 firms had 72 acquisitions. The number of disposals was more than double the previous week’s 48 sales while the number of purchases was sharply lower than the 124 acquisitions in the first week of September.

Last week’s trades were also significant in that it was the first time since the end-July market correction that sellers recorded more trades than buyers. Funds were also bearish with nine asset managers posting 43 disposals against eight institutional shareholders with 30 acquisitions. The number of disposals was nearly triple the previous week’s 16 sales.

Among the top sellers last week was Asean China Investment Fund LP as the group lowered its respective stakes in Unionmet (Singapore) Ltd and SunVic Chemical Holdings to below 5 per cent.

Also bearish was The Capital Group Companies – the group unloaded more shares of ComfortDelGro Corporation at sharply lower than its sale price in June. Investors should also watch out for Shining Corporation Ltd as heavy sales by Louisson Investments Pte Ltd lowered its stake by 79 per cent to 1.8 per cent.

On the positive side, the executive chairman of Hong Kong-based English language newspaper South China Morning Post, Kuok Khoon Ean, boosted his stake in Wilmar International Limited by 257 per cent last week at sharply higher than his purchase price last month.

Unionmet (Singapore) Ltd

Asean China Investment Fund LP ceased to be a substantial shareholder of metals producer Unionmet (Singapore) Ltd on Sept 12 following the sale of five million shares at an undisclosed price, which reduced its direct holdings by 25 per cent to 15 million shares or 4.1 per cent of the issued capital. Investors should note that the counter surged on that day from the previous day’s 25 cents close to 37 cents. Prior to that price surge, the stock had been on a downtrend since the first week of February from 91 cents. The disposal by Asean China Investment Fund was a very bearish signal for the stock as the group previously sold 16.6 million shares on the stock’s trading debut on Jan 31 at an estimated price of 75 cents each. That sale in January was made at a huge profit, given the IPO price of 37 cents each. Unionmet (Singapore) announced its interim results in July with net profit down by 52 per cent to US$1.938 million for the six months to May 31, 2007. The stock closed at 34 cents on Friday.

SunVic Chemical Holdings Ltd

Asean China Investment Fund LP ceased to be a substantial shareholder of chemical producer SunVic Chemical Holdings on Sept 12 following the sale of 22 million shares at an estimated price of 39 cents each. The trade reduced its direct holdings by 43 per cent to 29.4 million shares or 4.9 per cent. The disposal was made on the back of the 64 per cent decline in the share price since the second week of February from $1.08. The sale by Asean China Investment Fund was likely made at a profit based on the stock’s IPO price of 30 cents each. The sentiment is not entirely negative as chief executive officer Sun Liping recorded his first trades since listing with 1.36 million shares purchased on Sept 10 at 30 cents each. The trade boosted his deemed holdings to 325.2 million shares or 53.9 per cent. Alternate director Teo Yi-Dar also acquired an initial 50,000 shares on Aug 30 at 26 cents each.

SunVic Chemical Holdings announced its Q2 results on Aug 14 with net profit down by 42.9 per cent to 23.307 million yuan (S$4.7 million) for the three months to June 30, 2007. Earnings in the first half fell by 50 per cent to 31.65 million yuan. The counter, which was listed on Feb 5, closed sharply lower from its trading debut price of 81 cents to 36.5 cents on Friday.

ComfortDelGro Corporation Ltd

The Capital Group Companies, Inc unloaded more shares of bus and taxi services provider ComfortDelGro Corporation at sharply lower that its disposal-related filing price in June. The group reported a disposal-related filing on Sept 11 of 25.4 million shares, which reduced its deemed holdings by 18 per cent to 119.9 million shares or 5.8 per cent of the issued capital. The filing stated that the sales were made from June 21 to Sept 11. The stock during that period fell from $2.30 to $1.86. Capital previously sold 508,000 shares on June 20 at an estimated price of $2.26 each. The sales since June were made at a profit based on the net 30 million shares that the fund manager acquired from May 2005 to Jan 11 this year at $1.43 to $1.65 each. Capital became a substantial shareholder in May 2005 following the purchase of 12.9 million shares at $1.64 each, which raised its interest to 5.6 per cent.

ComfortDelGro announced its Q2 results on Aug 13 with net profit up by 19 per cent to $70.8 million for the three months to June 30, 2007. Earnings in the first half rose by 10.8 per cent to $138.1 million. The stock closed at $1.96 on Friday.

Shining Corporation Ltd

Heavy sales of 10.1 million shares by Louisson Investments Pte Ltd in construction contractor and building materials distributor Shining Corporation this month reduced its stake by 79 per cent to 1.8 per cent. The disposals were made from Sept 6 to 13 at estimated prices of 17.5 cents to 23 cents each. The sales, which accounted for 31 per cent of the stock’s trading volume, were made after the counter rebounded from 10 cents on Aug 29. Louisson Investments last sold 6.5 million shares on Sept 13 at 19 cents to 23 cents each, which lowered its direct holdings by 71 per cent to 2.7 million shares or 1.8 per cent. The group previously sold 610,000 shares on Sept 7 and 3.1 million shares on Sept 6 at estimated prices of 17.5 cents to 19.5 cents each. The heavy sales this month were not surprising as the shareholder also disposed of 3.8 million shares in July at an estimated price of 18.5 cents each.

The sales in the past three months were made at a profit based on the group’s initial filing in 2004. Louisson Investments became a substantial shareholder in December 2004 following the purchase of 14 million shares at 15 cents each, which raised its interest by 539 per cent to 17.3 per cent. The stock closed at 17.5 cents on Friday.

Wilmar International Ltd

Non-executive director Kuok Khoon Ean acquired more shares of agribusiness firm Wilmar International (formerly Ezyhealth Asia Pacific Ltd) at sharply higher than his purchase prices last month. The director bought 180,000 shares on Sept 12 at $3.56 each, which boosted his deemed holdings by 257 per cent to 250,000 shares. He previously acquired 20,000 shares on Aug 29 and an initial 50,000 shares on Aug 16 at $2.94 each. The fact that he acquired significantly more shares this month at a sharply higher price is a very bullish signal for the stock. Also positive earlier this year was PPB Group Berhad with 987,000 shares purchased on July 31 at an estimated price of $3.40 each. The trade increased its direct stake to 559.1 million shares or 8.8 per cent. The group also has a deemed interest of 604.2 million shares or 9.5 per cent. Wilmar International announced its Q2 results on Aug 14 with net profit up by 142.4 per cent to US$39.553 million for the three months to 30 June 2007. Earnings in the first half rose by 105 per cent to US$65.583 million. The stock closed flat from Kuok Khoon Ean’s purchase price to $3.56 on Friday.

The writer is managing director of Asia Insider Limited

Rising costs here a big problem, say finance execs

Higher rents, property prices cited in survey of 508 professionals from S’pore and HK

MORE than six out of 10 finance industry professionals in Singapore, both locals and expats, regard the rising cost of living here as ‘a big problem’, a recent poll has found.

This hike in living expenses may ’cause the city to lose its appeal among finance professionals, both locally and abroad’, according to eFinancialCareers.com, a global online network site for jobs in asset management and investment banking.

Its poll of 508 professionals – 390 from Singapore and 118 from Hong Kong – found that 56 per cent of them considered Singapore’s rising cost of living to be ‘a big problem’.

Of the Singapore-based professionals, 246 of them, or 63 per cent, felt that way. The poll, which focused only on Singapore, sought the views of Hong Kong-based professionals too as they might consider a job here.

Still, some professionals point out that while costs have risen in Singapore, the Republic is still far cheaper than centres like London.

The other respondents in the poll saw no problem in higher costs (6 per cent of them), or felt it was ‘to be expected’, ’slight’ or ‘very small’.

Higher rentals and property prices were cited as the biggest bugbear. But rising parking costs and relatively pricey cars were also becoming a bigger concern.

ABN Amro’s head of business banking sales for Asia, Mr Jan-Arie A. Bijloos, moved here a year ago and has watched rents ‘go up quite dramatically’ in the River Valley area where he lives.

‘Cost of accommodation would be a concern in a year’s time if my salary does not rise in tandem to compensate for it,’ he said.

But the Government has said that it will monitor the market to ensure there is sufficient supply of homes. It will also be releasing more residential sites for sale in the second half of the year.

Investment banker A. Cohen, a self-termed ‘Broadway arts buff’ who moved here from Manhattan in May, groused about ‘unpalatable ticket prices’ for artistic performances.

Indeed, Singapore overtook New York in a recent ranking of the world’s most expensive cities by Mercer Human Resource Consulting.

Hikes in accommodation costs catapulted Singapore to 14th place, from 17th place a year ago, in the ranking.

Meanwhile, Hong Kong dropped from fourth to fifth place this year. This prompted Ms Sarah Butcher, global editor of eFinancialCareers.com, to note that the shrinking gap between the two cities could impact the ‘movement of finance talent between the two markets’.

But costs here were ’still manageable’ compared to elsewhere, where prices have also risen, said bankers such as Mr Salman Haider, from Citibank Singapore.

Moving here from London a year ago, he found Singapore also boasts pull factors such as ’security and a great educational system’.

‘Singapore is one of the most liveable cities in the world and certainly one of the best to bring up young children,’ he said.

 

Source: The Straits Times 13 Sept 07

Lessons from a blow-up

SHANE OLIVER goes back to the scene of the crime and uncovers the damning caveats

THE last month or so has seen big swings in markets on the back of the turmoil in credit markets. By and large though, most investors should have come through reasonably unscathed. However, some would not have been so lucky. Funds reported to have had the greatest losses seem to fall into three categories – funds with a heavy direct and geared exposure to US sub-prime debt, some of which have seen 80 per cent to 100 per cent of their capital wiped out; funds with a geared exposure to corporate debt which has been caught up in the fallout from the subprime problems; and quantitative equity hedge funds which have been caught out by the volatility in investment markets.

While conceding that the period of share market weakness and credit turmoil ‘ain’t necessarily over yet’, and without getting into the surrounding economic issues and the outlook going forward (which I have covered in previous reports), the blow-up in credit markets provides a number of lessons for investors. Specifically, these relate to financial engineering, diversification, gearing, the fact that there is no such thing as a free lunch and the need to invest in only what you understand.

Lesson 1: Beware of financial engineering

Financial engineering is at the centre of the storm now engulfing credit markets. Mortgages to very low quality borrowers (sub-prime mortgage borrowers) were packaged up into securities (collateralised debt obligations, or CDOs) which were sold off in various parcels, some of which came with high risk like equity but some of which came with AAA credit ratings (the highest possible credit rating).

So, due to the magic of modern finance, a portion of something which was regarded as high risk was able to be marketed as low risk. Hence it was always an artificial construct. And more fundamentally, because of a limited track record (usually just covering the last few years of relatively favourable conditions) risk was dramatically underestimated. Risk was underestimated both in terms of the performance of the underlying sub-prime mortgages and how the securities themselves would behave in times of market stress and poor liquidity (like we have seen over the last few months).

What’s more, this re-packaging and underestimation of risk arguably made the whole situation worse. By encouraging demand for the securities more money became available for lending to sub-prime borrowers which meant that lending standards became ever more lax. Such complex arrangements also led to a poor alignment of interests. Everyone was paid up front – the mortgage originators, the banks underwriting the securities, the ratings agencies, the CDO managers – except the end-investor who held all the risk. And mortgage originators had an incentive to write loans regardless of the quality of the borrowers. On top of all this, these complex securities were poorly understood and irregularly traded, adding to the difficulties involved in undertaking a decent risk analysis.

So when all is going well, there are no problems. But once the underlying investment (ie, mortgages to borrowers with poor credit histories) started to turn sour, the credit ratings proved unreliable. The securities proved impossible to sell because they were so complex and no one really understood them, let alone knew their true worth. And everyone ran for the exits at once.

The key lesson for investors from all this is to be sceptical of investments which rely heavily on financial engineering to meet their objectives, particularly if they haven’t been tested in both good and bad times. Such constructs often have a poor alignment of interests, the true risks may be poorly understood or hidden and, because so many parties are involved, the underlying fees may be excessive.

Lesson 2: Gearing is great – till it isn’t

We all know the benefits of gearing. Investing $1 of borrowed capital for every $1 of your own capital can turn a 10 per cent gross return into a 20 per cent gross return. But of course when returns are negative it can go badly wrong. In fact, very high gearing (eg 5 to 10 times) was at the centre of most of the big fund losses announced recently. For example, if debt is running at five times capital then just a 5 per cent drop in the value of the underlying investments will lead to a 30 per cent drop in the value of the fund for investors, viz: If initial capital in a fund from investors is $1 million and $5 million is borrowed, then the fund’s total investment is $6 million. If the underlying investments fall in value by 5 per cent to $5.7 million the lenders to the fund are still owed $5 million, but the investor’s capital in the fund drops to $0.7 million, or a 30 per cent decline.

Excessive gearing on top of the losses in the underlying securities explains why some funds with direct exposure to sub-prime debt have seen all or most of their value wiped out. It also explains the severity of the decline in value for some funds which were not directly invested in sub-prime related investments, but may have had an exposure to high yield corporate debt, where the decline in value has been modest.

A high level of gearing of this nature can also make the problem a lot worse. An ungeared fund might (depending on the ‘patience’ of its investors and whether it can freeze fund withdrawals if they are not patient) be able to ride out any market turmoil until pricing improves or the underlying securities simply mature by which time any actual losses (eg. owing to mortgage defaults) may be far less than current market conditions imply. But when gearing is huge, the fund’s creditors may seize the assets and sell them into weak markets pushing down their value even further (the equivalent of margin calls). Such fire sales only lock in the losses for investors.

It should also be noted that not only were the funds investing in sub-prime related securities geared, but there was additional gearing in the securities themselves. For example, CDOs that contain sub-prime debt could be up to 25 times geared. In this context it only takes a small increase in mortgage defaults to start causing big losses. As a result, there was effectively gearing on top of gearing.

So be wary of investments that rely on excessive gearing, both at the fund level and in the underlying investments.

Lesson 3: Diversification is good

Many of the funds at the centre of the recent storm appear to have been poorly diversified (particularly those with an excessive exposure to sub-prime related debt) and this has only magnified their losses. More diversified credit focused funds have held up much better.

Similarly, the events of the past month or so have also highlighted the downside of concentrated exposure to hedge funds. Some hedge funds, particularly quantitative long/short equity funds, had a particularly rough month with losses of around 30 per cent being reported at one point.

However, well-constructed funds-of-hedge-funds have generally come through in far better shape.

The point is that investors are always wise to make sure that funds they invest in are well diversified and not overly reliant on a particular type of investment or investment strategy.

Lesson 4: There is no such thing as a free lunch

Investor interest in credit investments and more recently in highly complex yield-based securities has its origin in the long-term decline in interest rates and bond yields on the back of the shift to low inflation over the last two decades.

Somehow, getting a 6 per cent return from government bonds in a world of 2.5 per cent inflation doesn’t sound quite as good as getting a 12 per cent return from bonds in a world of 8.5 per cent inflation (the 1980s). So investors with a desire for a high income flow, such as self-funded retirees, have been prepared to go in search of higher returns moving from government bonds into corporate debt. This was probably all fine because most corporate debt has a long history and so the risk involved can be reliably estimated and managed. In recent years though this has started to morph into funds investing in highly complex securities such as CDOs where risk was less well known.

However, while risk may remain dormant for many years leading investors to forget about it, the events of the past few months highlight that higher returns also come with higher risk. In other words, there is no such thing as a free lunch. The trick for investors is to make sure that they are aware of the extra risk they are taking on and to then make sure that it is managed appropriately in terms of diversification and gearing levels.

Lesson 5: Only invest in what you understand

A key lesson for investors from the events of the last few months is to only invest in what you understand. Modern credit instruments are incredibly complex and it would appear that many (including market participants) did not understand the nature of the investments being undertaken. Until recently most investors would not have known what a sub-prime mortgage was and most would have thought that a CDO was just another acronym for a senior company executive.

The writer is head of investment strategy and chief economist at AMP Capital Investors

 

Source: Business Times 12 Sept 07

Happy investing

Investors need to look within themselves to determine their life goals, before embarking on the road to financial contentment, financial planner Arun Abey tells GENEVIEVE CUA

WHAT does happiness have to do with financial planning? Some may say happiness is the fruit of a well-laid financial plan. After all all, such a plan should foster greater confidence in the future, leading to financial security – and, hopefully, happiness.

But what of the reverse?

Ipac group co-founder and executive chairman Arun Abey believes that getting your life together – in term of your goals and choices – should come first, and financial planning follows. Ipac manages US$9 billion in client assets globally, advising some 20,000 individuals and institutions. It began in Australia and has operations in Hong Kong and Singapore.

‘People use the phrase ‘lifestyle financial planning’ as a slogan. But it’s a real thing. It’s about putting the ‘life’ into financial planning. It’s how the two integrate.

‘I’ve increasingly become convinced that the financial planning part is an outcome. You get the ‘life’ part right and the financial planning is actually easy.’

He adds that the biggest hurdle in financial advisory is that clients typically do not have a clear idea of what they want. ‘I’ve become convinced that an important part of financial planning is getting clients to want what they need.

Clients come in with a list of ‘wants’. Those ‘wants’ are completely unrealistic.

‘They say I want to make a lot of money, but I don’t want to lose any money. That doesn’t work. As Warren Buffett says, give me a bumpy 15 per cent any time. I’d rather take a bumpy ride than no returns.’

Drawing on the experiences of clients, Mr Abey has just published a second book How much is enough?, in which he tackles the amorphous question of happiness and the more mundane but no less challenging issues of financial planning and investing. The book is co-authored with Andrew Ford.

The book is meant to be a companion to his first book Fortune Strategy, published in 2000 , which delves into portfolio construction against a backdrop of the historical pattern of risk and return. Fortune Strategy, he says, explained the behaviour of markets. This time, taking centrestage is the behaviour of investors themselves.

‘If you understand markets, you can do something. I’ve come to understand that that’s not enough. You need to look within to understand your behaviour… People who can be confident, who can manage their behaviour and not worry about what others are doing, are also people who can control their behaviour in investment markets. It’s the same neural pattern, I hadn’t realised that before.’

The book draws on the growing body of research on happiness and behavioural finance, written in a readable, down-to-earth fashion. A few chapters are devoted to the behaviours that can undo the best laid investment plans.

These include loss aversion as a wealth hazard – that is, in seeking to avoid loss, investors actually incur greater losses. In a chapter ‘The Madness of Myopia’, he writes that the more frequently investors evaluate their returns, the more likely they are to make inappropriate decisions.

Several of the foibles come up repeatedly among clients, he says. One is unrealistic expectations. Two is a poor understanding of risk. Risk covers not just a probability of loss, but also the failure to beat inflation. ‘With cash you’ll never see a negative return, but with inflation you’re losing buying power every year. That’s pretty serious. A capital guarantee doesn’t protect you from that.’

Manage your time

A third mistake is the belief that the right timing could be the ticket to success. ‘It’s a very naive belief that you can get the timing right. Over 4,000 days there may be 40 key days. If you miss those days you miss the returns of the whole market. You have a 1 per cent chance to get it right and you don’t do something for a 1 per cent chance.

‘Fortune Strategy and this book use the same core investment strategy. If you apply that, the odds are in your favour. The only thing you have to manage is time.’

Ipac advocates four key principles in investments. These are to invest in quality companies; to diversify; to avoid overpaying for assets; and to give your portfolio time.

But there is yet one more mistake – as Mr Abey sees it – that may be hard for Singaporeans to swallow. That is the tendency to over-invest in property. ‘Investing in residential property other than your family home is likely to result in higher risk and lower returns than investing in quality shares,’ he writes.

He argues that the risks of a property investment tend to be understated, and the returns overstated because of flaws in measurement. Assessment of values, for one, is infrequent and informal.

‘Property investors never see red ink on a statement unless it is on the day of sale. And most property investors never formally evaluate the performance of their investments at all.’

Mr Abey lives in Australia, where cities like Melbourne and Sydney, and more recently Perth saw the strongest home prices until recently. He himself does not ‘invest one cent in residential property outside of my family home’.

Perhaps the key chapter in the book is the one that presents a framework for understanding the role of money, which he calls the ‘bridge of well being’. The process of developing and implementing this framework is the essence of lifestyle financial planning itself.

There are three steps to this. One is to understand your goals. Two is to apply your resources towards those goals.

That includes saving and investing. The third is to have a simple investment strategy.

‘You need to develop a financial plan for yourself – not for your money … The aim … is to help you experience the good life you want to live, knowing sufficient money is there to support you.’

 

Source: Business Times 12 Sept 07

MONEY MATTERS – Time to get domestic

Recession in the US used to be the kiss of death for emerging economies, but that may no longer be the case

By MICHAEL PREISS

THERE was something inevitable about the worst US job reports in four years. They suggest that the American economy has now ‘officially’ slipped into recession and will ensure that the Bernanke Fed cuts the overnight borrowing rate at the next three open market committee meetings, starting Sept 18. Net-net, a 4 per cent Fed Funds rate is the last antidote to the liquidity squeeze and credit shock that has delivered a deflationary blow to Wall Street and the international banking system. Global stock markets are on edge, amid fear that the correction in equities could morph into something far nastier.

The risk is that the US stock market could re-test its August lows, because even a Fed rate cut cannot magically end the distress of millions of bankrupt homeowners and the financial bomb that has hit the mortgage-backed securities and credit derivatives markets. Main Street is going down and Ben Bernanke and his merry men at the Fed must act fast or risk economic disaster.

Fear cannot be captured in any economic model but it is the one human emotion more powerful than greed during a psychological U-turn.

Not even the most soothing words from Mr Bernanke can change the fact that as long as US house prices continue to fall, the leverage-embedded mortgage-backed securities and collateralised debt obligation markets – and investors in these markets – are in deep trouble.

The meltdown in sub-prime mortgages is not the real malaise affecting the capital markets. The real time bomb is the coming end of the structured finance business, in which financial innovation has often been nothing more than collusion between investment banks and ratings agencies to disguise highly risky mortgage and corporate debt as AAA securities.

When even the Bush White House is compelled to fulminate against Wall Street, a Congressional witch-hunt and more restrictive regulatory protocols are inevitable.

The Day After

The macro-economic impact of ‘The Day After’ on Wall Street will be a deflationary shock as broker-dealers and institutional investors de-leverage their exposure to mortgage-backed securities and structured finance. This means that new issues of corporate bonds and leveraged buyout loans will plummet because investment banks can no longer underwrite or syndicate credit risk, even though it has been re-priced higher since August.

Asset-backed commercial paper liquidity lines have come back to haunt the world’s largest banks, which must now necessarily cut bank credit growth. The markets are witnessing the dark side of securitisation as international banks are caught with untold billions of off-balance-sheet exposure. This is the real reason that central banks are desperate to pump huge amounts of liquidity into money markets frozen with fear.

Emerging markets have not escaped unscathed from the trauma in the world financial markets since August. Apart from China’s Shanghai A shares, market indices as diverse as Brazil’s Bovespa, South Korea’s Kospi, India’s Sensex and Russia’s RTS plunged 10-20 per cent in just four weeks as the Japanese yen carry trade unwound with a vengeance in the foreign exchange market and triggered a global scramble to sell risk.

This meant that billions of dollars fled emerging market equities, that spreads on emerging market sovereign debt widened above 200 basis points on US Treasuries and that the Chicago Volatility Index doubled in a month.

But what will be the end-result of the US credit bust on emerging markets?

In my view it will be a strong de-coupling from the now outdated and wrong assumption that the US dollar and US rates are the global benchmark and the so-called risk-free rate.

Emerging market spreads recently have been the narrowest in history. Does this mean that all emerging markets are over-valued? Or that the underlying assumption that US-dollar rates are the ‘risk-free-rate’ needs to be rethought?

Do the lessons of 1998 have any relevance in the months ahead? I believe so.

As US economic growth decelerates, the Fed will do its best to reduce the real cost of borrowing to zero – a prerequisite to avoid recession and re-liquify the banking system. This means the Fed Funds rate can well fall below 4 per cent some time next summer.

While this will most probably help the US equity market, it will mean a much lower value for the US dollar in the foreign exchange markets.

Ordinarily and in the past, a US recession is or was the kiss of death for emerging markets.

But this may not be the case now, particularly if the Fed, at the expense of a much weaker US dollar, cuts rates aggressively to pre-empt recession and global GDP growth, led by China, India, Brazil and Russia, anchors domestic demand and export growth in emerging markets.

As the US Treasury bond yield falls to 4.25 per cent, emerging market equities will be the biggest beneficiaries, as more and more global investors realise that the real victim of the sub-prime mess is the US dollar.

However, I recommend buying domestic demand, not export, plays in emerging markets in order to insulate a portfolio from the very real risk of a US slowdown.

Russian banks and telecom shares such as Sberbank, Vimplecom, MTS and Comstar provide exposure to one of the world’s highest-growth consumer stories in a petro-dollar state with 160 million citizens and US$400 billion of reserves.

The credit crunch may actually prove beneficial to the Russian stock market because it will force the postponement of many London floats, which cannot take place amid a mood of risk aversion.

The Singapore market was also victim of the stockmarket sell-off on Wall Street and the Asian bourses. In fact, Singapore property shares fell far more than even the Straits Times Index, as much as 20-30 per cent in some cases.

The Singapore Reit sector’s cost of capital has risen, but its growth prospects are tied to South-east Asia’s most compelling asset reflation story.

After all, the forward yield on the sector is now 5.2 per cent – a compelling value metric for long-term exposure. It is imperative to seek Reits that offer long lease contracts, high-quality assets and acquisition strategies, proven business models and attractive discounts to net asset value.

It is ironic that the largest, most liquid Singapore Reits have been hit the hardest, proving once again that during moments of panic, emerging market managers do not sell what they must, they sell what they can.

So CapitaCommercial Trust, CapitaMall Trust, Ascendas and Mapletree are all down 20 per cent from their August highs. The spread between the Singapore Reit forward dividend yield and the island’s bellwether 10-year government bond rate is now the highest since at least May 2006.

Singapore Reit shares will be the natural beneficiaries of central bank easing in the US and Europe, somewhat akin to Nasdaq stocks after the Greenspan Fed bailed out Long Term Capital Management in 1998.

Asian property in local currency could be the next big thing in emerging markets, especially as the US dollar takes a tumble when the Fed cuts rates aggressively.

Michael Preiss is a chartered wealth manager and can be reached at Michael@michaelpreiss.net

Source: Business Times 12 Sept 07

Bulls may resume charge soon?

THE next bull market in equities is just around the corner despite the current turmoil in financial markets, a top US investment manager said here yesterday.

According to Ken Fisher, founder and chief executive officer of private money management firm Fisher Investments, which looks after US$35 billion of assets, investors should be ‘aggressive’ in buying shares.

He recommends that the materials, industrials and energy stocks but not big blue chips. And he expects ‘a big up-move ahead later in the year tied to takeovers and share buy-backs’.

He also reckons the current uncertainty in the financial markets is encouraging companies and investors to hoard cash, which ‘at some point comes out’.

Mr Fisher, who writes a regular investment column for Forbes magazine, is in town for the three-day Forbes Global CEO Conference which started yesterday.

Another guest speaker at the conference, Prof Michael Spence, who won the 2001 Nobel Prize for economics, said that the problems in the US sub-prime mortgage market are unlikely to have an ‘excessive impact’ on the global economy or Asia. ‘I don’t think Asian countries are particularly vulnerable now,’ he told reporters.

Mr Fisher argued that despite fears of a credit crunch, the cost of borrowing for an average company with a triple-B credit rating is still cheaper than in June, before the current financial market turbulence started.

‘The only part of the world where the rates have gone up is at the junk-end.’

On average, corporate earnings yields, or a company’s earnings per share as a proportion of its share price, are still above 6 per cent for a typical company that trades at 15 times earnings per share, he said. This compares with after-tax borrowing costs of about 4 per cent for an average company with a triple-B credit rating.

The difference in borrowing costs and earnings yields still makes it highly attractive for companies to issue debt and buy back their own shares or acquire other companies, which Mr Fisher predicts will drive the next round of share price increases once investor confidence returns, which he expects will happen by Christmas.

Meanwhile, with investors demanding higher returns for staking money on ‘junk’ or high-risk bonds, smaller companies with poor credit ratings will be less able to defend themselves against a takeover by borrowing to raise cash, he said. ‘Sub-prime actually sets the stage for the next level of takeovers.’

Rather than buying blue chip shares, he advises investors to look at ‘companies that seem a little junkier’ because these are the most likely to see their share price rising when the takeover wave resumes.

 

Source: Business Times 11 Sept 07

A quick guide to sub-prime issues

How individual loan defaults in a faraway land can have a domino effect all over the world – including here

PAUSE for a moment to consider these facts: HSBC, the world’s third-largest bank, announced that 50 per cent of its earnings in 2006 were wiped out by sub-prime losses from its US subsidiary. Since the beginning of that year, over 50 US mortgage companies have put themselves up for sale, closed or been declared bankrupt. In July this year, Bear Stearns closed two of its ailing hedge funds, while in June, BNP Paribas announced the suspension of three of its funds due to exposure to US mortgages.

With news like this making waves in financial markets lately, it is hardly surprising to see the proliferation of doomsday headlines like ‘Market falls parallel previous collapses’, and ‘Anxiety attack knocks markets down’. No longer confined to the US real estate or financial markets, the topic of America’s sub-prime mortgage market has taken centre-stage, as fears of a spillover spread to financial markets in Europe and Asia – even Singapore.

How did it all begin?

Before the US real estate bubble burst, sub-prime lending was a rapidly growing segment of the mortgage market.

It worked by banks extending credit to borrowers who, for a number of reasons, would otherwise be unable to qualify for credit. According to the US Department of Treasury guidelines issued in 2001, ’sub-prime borrowers typically have weakened credit histories that include payment delinquencies, and possibly more severe problems such as charge-offs, judgments and bankruptcies’.

Most US sub-prime mortgages have an attractive initial fixed-rate mortgage payment for a few years, followed by a higher adjustable rate for the remaining life of the mortgage. The sub-prime mortgage industry began to proliferate earlier this century and estimates say that about 21 per cent of all mortgage originations from 2004 to 2006 were sub-prime – a sharp increase from 9 per cent in 1996-2004. At its height in 2005, sub-prime mortgages were worth US$805 billion.

Although not all sub-prime loans are necessarily high-risk, many of them were made to homebuyers with poor credit or little income. As the US housing market boomed, thousands of lenders greedily sought greater profits by aggressively touting loans to individuals with poorer credit ratings and making greater exceptions to guidelines. In certain cases, individuals were not even required to produce any proof of their income.

These sub-prime loans were bought mainly by big banks which bundled the debt and sold them to Wall Street firms. To sell these ticking time bombs, Wall Street packaged these risky loans with supposedly safer loans to create instruments known as collateralised debt obligations (CDOs) – making them more attractive to risk-averse investors. In 2006, an estimated US$100 billion of sub-prime debt went into US$375 billion worth of CDOs.

In pursuit of higher yields, investors stretching from Europe to Asia invested in these instruments for their potentially higher returns, as compared to bonds with the same ratings.

What went wrong?

Trouble started brewing when the US economy began showing signs of slowing down. Interest rates crept up, house prices tumbled and sub-prime mortgage defaults began climbing at an alarming rate, reaching 12.6 per cent at one point.

As default rates soared, creating losses on the underlying mortgages of CDOs, investors began to question the reliability of the models and ratings which valued these CDOs; indeed, credit rating agencies like Moody’s have come under fire for misjudging default rates in sub-prime mortgages. With the uncertainty surrounding the current analysis and valuation of credit risk, many investors have decided to pull back on investments in CDOs and hedge funds with stakes in such securities.

Explained Jeremy Goh, an associate professor of finance at the Singapore Management University (SMU): ‘When investors heard all these negative things about default rates in the news, they started withdrawing their money from hedge funds and parked them in safer money market instruments like treasury bills.’

The result was a triggered chain of reactions which affected markets worldwide. Hedge funds were forced to unload their assets in order to raise cash.

The scattered ownership of CDOs has in turn created widespread loss of confidence in financial markets. Besides affecting all holders of sub-prime-related assets, the greater and more serious implication of the sub-prime crisis is a squeeze on liquidity. Due to the uncertainty over other financial institutions’ exposure to sub-prime losses, they became unwilling to lend to each other.

A tsunami or ripple effect?

However, central banks around the world have responded by injecting liquidity into the markets to ease fears of a liquidity crunch. The US Federal Reserve has also cut its discount rate (which it charges for emergency lending to banks) from 6.25 per cent to 5.75 per cent.

Asian equity funds have also been hit hard, and among those affected the most are funds from Singapore and Malaysia. Data from Morningstar Asia showed that funds from both countries sank an average of 10 per cent.

Asian stock markets has also been tumultuous, spreading fears that a slowdown in the US economy will extend to the rest of the world.

Although the sub-prime crisis in the US may be a cause for concern, investors here should not be overly worried as Asian fundamentals remain strong. Many industry watchers agree that Asia’s economies are no longer as reliant on the US as in the past. As intra-regional trade grows, Asian giants like China and India have become increasingly important trade partners for other Asian countries instead of the US.

Fundamentals of Singapore’s economy remain firm as well, analysts agree. With the introduction of Formula One and the integrated resorts in the coming years, demand and consumption is likely to continue to propel Singapore’s growth.

Prof Goh concurs: ‘I think the jittery stock market in Singapore is only temporary, and I believe that highly-rated CDOs are still safe. Even if the US economy is heading for a recession, it will be a mild one, so the problem could be due to panic selling in the markets or hedge funds unloading some illiquid assets.

‘ As a result, it triggers fear in the lending market. Lenders are more reluctant to lend, which might have some effect on the economy – but nothing major, in my opinion.’

 

Source: Business Times 10 Sept 07

More market panic ahead as banks ‘fess up’ on sub-prime

Confidence in banks exceptionally low, says JP Morgan Asia

(SINGAPORE) Be prepared for more market panic as major banks continue to ‘fess up’ to their holdings of US subprime mortgage securities over the next several months, said Ivan Leung, JP Morgan Asia chief investment strategist.

The world’s financial markets are in turmoil as worries over exposure to the US sub-prime mortgage debt has led to a freeze in the credit market with global central banks having to step in to provide liquidity.

Around the world, banks are under intense pressure as investors and analysts cast a spotlight on their exposure to sub-prime, or high-risk, property loans in the US through their investments in collateralised debt obligations, known as CDOs.

There is little information on the amount of CDOs held by banks, which has led to ‘exceptional low’ confidence in the banks, said Mr Leung in an interview last week. In the past month, European and Asian banks including DBS Group Holdings and United Overseas Bank have revealed their CDO holdings.

‘(US banks) originate it, they package it, they sell it – but it doesn’t necessarily mean they hold on to it,’ Mr Leung said.

He said that, often, US banks do hold on to some of these CDOs in structured investment vehicles – off their balance sheets – so there is no transparency on their holdings. He described this as scary.

‘European banks, and to a lesser extent – so far as we have seen – Asian banks, were purchasers of these products,’ Mr Leung said.

‘So the crisis in confidence is not so much that there could be a 80 billion or even a 200 billion dollar loss of subprime; the confidence issue is that we don’t know exactly who is holding all this debt,’ he said.

And we don’t really know the prices of all this debt, and how much of it will be subject to default, he said.

‘The confessions, you see them once in a while; that’s why we think this is an issue, because over the next three to six months, some banks will begin to confess that they have some on their balance sheet, and some off-balance sheet, but clearly right now, nobody really has a true picture of what’s going on. ‘It’s the worst of all situations – nobody knows.’

Mr Leung expects the markets to veer between confidence and ‘blind panic’ each time there is another disclosure.

Bank shares skidded on Aug 24 after DBS and three of Asia’s biggest banks revealed bigger-than-expected exposure to the US sub-prime mortgage crisis.

DBS said that it had US$1.6 billion (S$2.43 billion) in holdings of CDOs – more than the S$1.3 billion disclosed on Aug 7.

An additional 1.5 million sub-prime borrowers may fall behind on their mortgage payments as introductory interest rates on those loans rise this year and next, US Federal Deposit Insurance Corp chairman Sheila Bair said last week.

Among the 2.5 million sub-prime mortgages with interest rates that are expected to be reset this year and next, ‘1.5 million will be in financial distress’, Ms Bair said.

Getting any kind of centralised data collection will be very challenging, she said.

JP Morgan estimates that US$600 billion worth of adjustable rate mortgages will be reset over the next 12 months.

But, following the adage that there are always opportunities when risks are high, Mr Leung said that one way for investors to take advantage of the current extreme volatility in the markets is to buy ‘plain vanilla’ short-term structured notes with capital protection.

The notes are designed to give a high payout even if the stock markets move only slightly higher, he said. ‘When volatility is as high as it is right now, we can go for simple structures,’ Mr Leung said.

The notes that JP Morgan is offering are meant for investors who share the view that the US mortgage crisis will not lead to a recession. Lower growth, yes, and therefore moderately bullish stock markets still.

Mr Leung said that JP Morgan was positive on undervalued markets such as Thailand and South Korea and favours Singapore and China companies which have superior corporate and economic fundamentals.

 

Source: Business Times 10 Sept 07

Sub-prime beast won’t drown in sea of liquidity

IN TOKYO

WHAT one veteran banker dubbed the ’securitisation monster’ created by financial innovation has bitten back. And it is proving to be a painful lesson for those who reposed faith in securitisation to make financial risk a thing of the past by spreading it around so thinly that it could no longer be detected.

The question now is, how much more damage will the beast do before it is tamed or put back in its cage?

One man who is not underestimating the dangers is Japan’s recently appointed minister in charge of financial services and administrative reform, Yoshimi Watanabe, who declared yesterday that the fallout from the sub-prime debacle could yet become a ‘tremendous problem’ for Japan.

The securitisation monster (as Shinsei Bank chief investment officer Mark Cutis has dubbed it) took a big bite out of the US sub-prime mortgage lending market. But not content with that, it went on to maul socalled structured investment vehicles and hedge funds, before snapping viciously at the very heart of the US and European banking systems.

Now, it turns out that Asian financial institutions have also been savaged more seriously than at first feared. Reuters published a list this week of Asia-Pacific firms that have revealed actual or potential damage through exposure to structured products such as collateralised debt obligations and asset-backed securities as a result of the fallout from the sub-prime market debacle.

As the Institute of International Finance in Washington has remarked, this could be just the tip of the iceberg. The roll call so far includes Australian hedge fund manager Basis Capital, Macquarie Bank and Rams Home Loan; Taiwan’s Cathay Financial Group; Singapore’s DBS Group and United Overseas Bank; the Bank of China, Industrial and Commercial Bank of China and China Construction Bank; Japan’s Sumitomo Mitsui Financial Group, Mitsubishi UFJ Financial Group, Shinsei Bank as well as Nomura Holdings.

There may be more to come in Japan, as minister Watanabe admitted. His agency will watch very closely the half-term results due soon from Japanese banks and other financial institutions to see how many more problems they reveal. But not all accounting regimes are as (relatively) transparent as Japan’s; and even in Japan (as in other advanced economies), the scope for ‘window dressing’ of accounts is  onsiderable.

Thus, the relative calm that has descended on Asian and other emerging markets may be deceptive, as the Institute of International Finance in Washington said recently. For one thing, asset holders domiciled in emerging market countries may simply not have recognised fully as yet the losses they have suffered on financial instruments linked directly or indirectly to defaulted mortgage-backed obligations in the US and elsewhere. For another, the tangled web of instruments spawned by securitisation is so hard to untangle.

Rating agency Standard & Poor’s also acknowledged this week that ‘global debt markets’ are in the midst of a jarring repricing of risk. ‘Uncertainty abounds, but we believe the financial sector as a whole has sufficient strength to absorb significant bank loan and securities markdowns, reduced earnings in investment banking and trading, and increased credit losses that are sure to come in the second half of 2007.’

The fact is that no one wants to take the blame for the meltdown that occurred in global financial markets last month – and which is still rumbling like an angry volcano beneath a surface that has been temporarily cooled by jets of emergency liquidity from central banks.

It has all been a kind of act of God from which we must learn lessons, was the message of leading central bankers meeting in Jackson Hole, Wyoming, last weekend.

There were suggestions from some of the lesser bankers that the current crisis is the price to be paid for financial innovation – a suggestion also advanced by a prominent analyst at a seminar that I moderated in Tokyo last week, where he argued that the crisis is simply the teething troubles of a ‘new financial architecture’ that was spawned recently.

Such arguments allow regulators to get off the hook too easily. They knew that financial innovation was running ahead of their ability to police sophisticated new markets effectively. The dictum caveat emptor (let the buyer beware) should never be applied in financial markets. That is one area where many buyers (and many market practitioners too) do not really understand what they are getting into.

The crisis is almost certainly not over yet and it demands much more considered and comprehensive response than just drowning it in liquidity or empty official assurances that all will be well.

 

Source: Business Times 6 Sept 07

TAKING STOCK – Market enjoys best outing in more than a month

THE Singapore bourse had its best day of gains in more than a month yesterday, as market watchers began to express hopes that the nasty recent correction is now over.

It took its cue from Wall Street, which returned to business after a Labour Day holiday with the Dow Jones Industrial Average gaining a healthy 91.12 points to 13,448.86. The Nasdaq Composite Index, meanwhile, rose 33.88 points to 2,630.24 .

The Straits Times Index (STI) climbed 69.02 points, or 2 per cent, to 3,445.08, a level it has not seen since July 31.

The STI has now recovered all its losses since Aug 17, when chaos over the sub- prime mortgage troubles in the United States resulted in the benchmark index losing as many as 190 points at one point.

AmFraser Securities research head Najeeb Jarhom said: ‘There is no new spate of nasty surprises.’

He said most news emerging now is incremental in nature, with the market discounting much of it.

Dealers said yesterday’s rise was probably due to stocks having been oversold previously.

‘We are playing catch-up with the rest of the regional markets,’ Mr Jarhom said.

Year-to-date, the STI is up by just 15 per cent. Only the Nikkei 225 Average has fared worse among the main regional indexes. It is down 6.2 per cent so far this year.

Among the best performers are Hong Kong’s Hang Seng Index, which has gained 21 per cent, and South Korea’s Kospi, up 30 per cent.

Key movers of the STI were the stocks of local banks, probably over subsiding fears that the sub-prime mortgage woes will have a significant impact on the lenders.

DBS Group Holdings’ share price rose 50 cents to $20.40 on a volume of 14.7 million shares. It contributed 7.7 points to the STI.

OCBC Bank’s stock rose 20 cents to $8.65 and added 6.8 points to the STI’s rise.

United Overseas Bank’s shares were 30 cents higher at $20.80. They brought in 5.3 points.

Other blue chips that were in positive territory included Keppel Corp, closing 30 cents higher at $13, and Neptune Orient Lines, up 75 cents at $5.75.

During the morning session, dealers and traders were distracted by an apparent technical glitch at the Singapore Exchange, which meant the STI was not being updated promptly. This was resolved by the afternoon session.

The market seems to be buzzing with more activity yesterday than of late.

Volume crossed the two billion-share mark at 2.1 billion shares, while the value also was healthier at $2.1 billion.

The actives included Liang Huat Aluminium, which rose half a cent to seven cents, with 151.4 million shares traded.

Sapphire Corp was unchanged at two cents on 103.8 million shares traded.

Genting International remained active, ending half a cent higher at 62.5 cents, but volume was lighter at 58 million shares.

 

Source: The Straits Times 6 Sept 07

Economists’ median growth forecast rises to 7.5%

Rosier estimate by 18 analysts is at mid-point of govt’s range of 7% to 8%

FORGET recent stock market woes and weak export numbers.

Projections by private-sector economists for Singapore’s full- year economic growth have turned even rosier over the past three months.

A quarterly survey of economists by the Monetary Authority of Singapore (MAS) threw up a median forecast of 7.5 per cent full-year growth, up from the 6 per cent in June’s survey.

This puts the latest consensus view right in the middle of the Government’s official 7 to 8 per cent forecast range.

This month’s findings were drawn from forecasts by 18 economists and analysts.

According to the survey results out yesterday, half of those polled predict that economic expansion this year will come in between 7 per cent and 7.9 per cent.

Over a quarter of them are even more bullish, gunning for at least 8 per cent growth.

For the current quarter, the median forecast is for growth of 7.8 per cent year-on-year.

The upbeat predictions come after second-quarter economic growth strongly beat market forecasts.

Despite disappointing export numbers, economic growth in the April-to-June period came in at 8.6 per cent, when the consensus forecast was 6.1 per cent.

The overall performance was lifted by two star sectors – construction and financial services.

Compared to the previous poll, economists now expect the two sectors to chart significantly stronger growth for the year.

The financial services sector is tipped to expand by a median 13.5 per cent this year, up from 10.2 per cent in the last survey.

Meanwhile, according to market consensus, construction would probably grow by 15 per cent this year, instead of the 10 per cent projected previously.

Predictions for manufacturing, wholesale and retail trade, as well as private consumption, also turned more bullish, compared to three months ago.

However, consensus forecasts for non-oil domestic exports and the hotels and restaurants business deteriorated.

Economists’ median expectations for consumer price index (CPI) inflation were raised.

They also forecast a lower jobless rate.

‘The CPI inflation forecast for 2007 rose to a median of 1.5 per cent, from the 1.2 per cent reported in the previous survey, while the outlook for the year-end unemployment rate edged down from 2.6 per cent to 2.5 per cent,’ said the MAS survey report.

Looking beyond this year, economists’ median prediction for 2008 economic growth came in at 6.5 per cent, an improvement over 5.8 per cent in the previous poll.

 

Source: The Straits Times 6 Sept 07

Property loans: local banks turn cautious

(SINGAPORE) Banks are tightening up on the way they lend money for buying homes while the property market is coming off the boil, housing agents report.

With the world’s financial markets in turmoil, following a crisis in US mortgage lending to people with bad credit records, bankers in Singapore say that when it comes to assessing home loan applications, the ability of borrowers to pay is paramount.

The trouble in the financial markets, coupled with the ‘ghost month’ here which makes the third quarter traditionally a slower period for home sales, has led to asking prices easing, especially in the secondary market, agents say.

Citigroup economist Chua Hak Bin says: ‘Banks have definitely become more cautious.

‘Just look at The Straits Times classifieds – they’re flooded with speculators trying to offload.’

Dr Chua reckons that property prices have cooled about 5-10 per cent.

Knight Frank managing director Tan Tiong Cheng has a different take on the situation; he says prices from actual deals that he has seen have not slipped. ‘That impression may have come from those ridiculous (asking) prices,’ he said.

He said the apparent increased wariness of bankers was a reaction to the volatility in the stock market which was affected by the US sub-prime mortgage crisis. And bankers’ ‘natural instinct’ is also to be more prudent, said Mr Tan.

Generally, banks continue to finance a maximum of around 80 per cent of the value of a property, despite rules allowing up to 90 per cent funding. And some housing agents say banks have become stricter in valuations and are lending less than 80 per cent of the value of the property.

‘Banks control the valuations,’ said one agent.

The agent said feedback from buyers is that banks can’t match the valuations and they have to cough up more cash for the purchase.

Especially at times of rapidly changing prices, the notional value of a property as set by expert valuers can be adrift from what buyers are actually called on to pay.

Banks say they rely on their panel of experts appointed from property consultant firms for valuations.

Some also have in-house valuers to provide a view of the overall market.

‘In general, we will take the valuations by the appointed valuer as fair value,’ said Gregory Chan, OCBC Bank head of consumer secured lending.

‘However, where new benchmark pricing is concerned, we will take the average. Although valuation is a key component, a borrower’s creditworthiness remains the primary consideration in determining loan eligibility and some factors taken into account include income level, credit history and repayment ability.’

Helen Neo, Maybank Singapore head of consumer banking, said the bank does not discriminate against high-end properties, especially where purchase price is supported by valuation.

‘However, we would take a more conservative stance in terms of loan quantum should the purchase price exceed valuation significantly,’ she said. ‘However, for loans amount of $2 million and below, we require the borrower to use our in-house valuer.’

A DBS spokeswoman said: ‘In assessing loan applications, we accept valuations professionally done by reputable certified valuers who are on the DBS panel. In addition, we consider the buyer’s ability to repay and the purpose of the purchase.’

At DBS’s second-quarter results briefing in July, chief executive Jackson Tai said the bank had been taking a ’stringent view’ on credit quality and had ‘avoided any concentration’ in a single development or district.

At the very high end, foreigners make up a significant portion of buyers – and banks have been seeing more of such borrowers.

Edmund Koh, DBS’s head of regional consumer banking, said there had been an increase in foreigners taking up loans, from 5.6 per cent of the total new loans book last year to 7.8 per cent for the year to date. United Overseas Bank executive vice-president Eddie Khoo disclosed last month at the bank’s secondquarter results that foreigners account for about 10 per cent of home loans. Overall, too, the bank was being cautious, given the market conditions.

‘As you know, property prices are moving up quite rapidly,’ said Mr Khoo. ‘But what’s good is that we are seeing less than 10 per cent of loans being booked (with) more than 80 per cent financing. We have a good portion of customers putting in more cash and equity in the purchase of property.’

Dr Chua said that banks were becoming more cautious in extending property loans to foreigners, especially in cases where prices were sizzling and people were buying for investment.

Anecdotally, he was aware of several cases where people could not get valuations to match their purchase prices.

For the mid-tier segment and if it is for owner occupation, banks are still more relaxed in their loan criteria, Dr Chua said.

Latest official data show that borrowing by homebuyers was up 8.1 per cent in July, accelerating from 6.9 per cent in June.

Mortgage growth had been sluggish for several months despite the Singapore property boom.

In the 11 months to March, mortgage growth in Singapore remained under 3 per cent even though home sales surged.

A key factor for this is the popularity of deferred payment schemes offered by developers, and many of these projects are approaching completion.

Dr Chua expects mortgage growth to reach double digits by the end of the year.

UOB and DBS said their Singapore mortgage book grew at 15 and 14 per cent respectively in the first half of this year.

There is little similarity between US lending practices and those in Singapore, where the banks have a good buffer in their exposure to mortgages. Although the Monetary Authority of Singapore eased financing limits from 80 per cent to 90 per cent two years ago, most banks said the bulk of their loans are booked at not more than 80 per cent financing.

They also said that investment properties do not account for more than 20 per cent of total loans.

 

Source: Business Times 5 Sept 07

Sub-prime will hit global economy: bank CEO

(FRANKFURT) Global economic growth will take a hit as a result of the US sub-prime mortgage crisis, says the chief executive of Deutsche Bank, Germany’s biggest bank.

‘Growth, especially of private consumption in the United States, will suffer because of the housing crisis and that can naturally not go without negatively affecting the world economy overall,’ Josef Ackermann said in a guest column to be published in the German business daily Handelsblatt today. The daily made a summary of the column available to other media at the weekend.

Mr Ackermann said that many banks and investors affected by the credit market turmoil that arose in the wake of the sub-prime crisis had apparently taken risks that exceeded their size and risk-bearing capacity.

‘This is, to say it clearly, above all negligence on the part of the managements of these houses,’ he said. The distribution of credit risks in the international financial system had not been transparent to supervisory authorities and market participants, Mr Ackermann said.

Deutsche Bank has shut down its proprietary credit trading desk in London and is laying off some of the 14-strong team, a source familiar with the matter said on Friday.

Earlier last month a source close to Deutsche Bank told Reuters the bank was set to ditch its credit relative value trading strategy used by the London proprietary trading desk after losses of about US$135 million.

Deutsche Bank has declined to comment.

Two German banks, SachsenLB and IKB, have been bailed out after running into trouble due to their exposure to US sub-prime mortgages.

 

Source: Reuters (Business Times 3 Sept 07)

Bank stocks hit by sub-prime worries again

Attention also shifts to impact on their fee income

(SINGAPORE) Banks here were hit yesterday by renewed concerns over their exposure to collateralised debt obligations or CDOs, after Goldman Sachs downgraded its stock ratings on DBS and OCBC, sending their share prices lower.

But analysts BT spoke to said the main worry for now was the impact of the current financial market turmoil on the fee income of all three banking groups, rather than potential losses from CDOs. These instruments are securities backed by batches of loans, which may include sub-prime or high-risk mortgages.

Separately, Merrill Lynch analyst Andrew Maule in Singapore yesterday issued a ‘buy’ call on DBS, saying the recent fall in its share price ‘exaggerates the likely damage to its long-term earnings power or capital ratios’.

Last week, DBS said its direct exposure to CDOs could rise by $1.1 billion if it were required to top up funding for a special-purpose vehicle it manages, causing its share price to fall.

In a statement on Monday, DBS said the vehicle has had to draw on funds from the bank following the market volatility in recent weeks. But it said there had been no change to its exposure to US sub-prime mortgages, as none of the CDOs in the vehicle has direct exposure to them.

David Lum at the Daiwa Institute of Research said: ‘Given the disclosed exposures so far, it should be nothing to worry about.’ He has an ‘outperform’ rating on all three banks, as of Monday.

Both DBS and OCBC were downgraded by Goldman Sachs from ‘buy’ to ‘neutral’ in separate reports yesterday, citing ongoing concerns over their CDO exposure.

United Overseas Bank (UOB) was already rated ‘neutral’ by the investment bank’s research team in its last update on Aug 16.

For OCBC, there are ‘no visible near-term catalysts to mitigate its CDO exposure overhang, which would make it difficult for the stock to outperform the broader market’, the report said.

Meanwhile, ‘DBS has one of the highest exposures among Asia ex-Japan financials, and it is the only Singapore bank yet to make any form of related provisions’.

Shares in all three banks fell yesterday as part of a slide in the broader market. DBS ended 2.9 per cent lower at $19.80, while UOB fell 2.4 per cent to $20.50. OCBC’s shares were down 1.2 per cent at $8.50.

Earlier this week, JP Morgan analyst Sunil Garg, who is based in Hong Kong, downgraded the weighting of Singapore banks in its model portfolio of financial sector stocks in Asia from 7.3 per cent to zero.

The investment bank said financial institutions that have been ‘too liquid, searched for yield and operated in sophisticated environments are most at risk’ from the current fallout in financial markets stemming from the subprime mortgage market in the US.

‘Singapore banks and Taiwan insurers appear to be the most at risk, and we see no merit in owning these stocks.’

Pauline Lee at Kim Eng Securities said her main concern now was slower fee income growth in the second half of the year and beyond, and how much the current market turmoil would affect demand for the banks’ services and products.

Non-interest income – which includes gains from the banks’ proprietary trading and risk management activities, as well as fees from investment banking, wealth management and securities brokerage – made up some 40 per cent of their total income in the second quarter.

While the market volatility ’should benefit the stockbroking subsidiaries, it could have a negative impact on investment banking’, said Tay Chin Seng at Macquarie Research in a report earlier this week. He also said that the banks’ CDO exposures were ‘unlikely to have a significant impact’ on their earnings.

A separate strategy note by Citigroup earlier in the week said banks here were trading at ‘attractive valuations’.

Citigroup said: ‘We believe that local banks’ exposure to sub-prime loans is relatively small compared to their asset bases and poses little threat to their financial position.’

 

Source: Business Times 29 Aug 07

Rattled bonds market to remain in spotlight

WHAT IT IS

NEWSFLOW from the badly shaken bonds market will continue to dominate headlines this week as global financial markets struggle to return to normal after the recent volatilities.

Given the uncertainties fuelled by the credit crunch crisis as the mortgage market in the United States sours, traders will be keenly watching for any fresh move by the US Federal Reserve.

This followed US Federal Reserve chairman Ben Bernanke’s remarks last Tuesday that he would use ‘all available tools’ to calm markets.

The return of risk aversion last Friday, as reflected by the Japanese yen’s 0.4 per cent gain to 115.91 against the US dollar, will also set currency traders’ nerves on edge.

The Straits Times Index ended almost flat on Friday when it closed 1.46 points down at 3,369.45.

WHY IT MATTERS

The chief worry for investors is whether the credit crunch crisis will start to affect the US economy. Consumer spending may slow down as a growing number of people lose their homes after defaulting on their mortgage payments.

Many traders are betting on the Fed to make an early cut in US interest rates to combat a possible slowdown by making money cheaper.

The other big worry is a possible unwinding of the yen carry trade, if the yen again appreciates against the greenback.

Investors who borrow massively in yen, due to Japan’s very low interest rates, may be forced to sell off their assets to repay their loans – and this may trigger a fresh sell-off in Asian markets.

GOH ENG YEOW

 

Source: The Straits Times 27 Aug 07

Exposure to US sub-prime loans negligible, says DBS

DBS Group has reiterated that its exposure to the United States sub-prime market is ‘negligible’.

Only US$188 million (S$286.7 million) of the bank’s collateralised debt obligations (CDOs) ‘directly reference some exposure’ to US sub-prime mortgages, said DBS group chief financial officer Jeanette Wong.

This makes up just 12 per cent of the bank’s total $2.4 billion holdings of CDOs.

‘There has been no change’ from what was disclosed earlier in terms of DBS’ exposure to the sub-prime market, she noted in an e-mail response to The Straits Times.

CDOs are debt instruments backed by assets. These assets can be made up of bonds, loans and their derivatives, and can include corporate loans and home loans, such as sub-prime mortgages.

DBS’ total exposure to CDOs makes up only 1 per cent of the bank’s overall assets, added Ms Wong.

She noted that more than 70 per cent of the CDOs are concentrated in high-quality financial instruments with AAA or AA+ ratings.

Ms Wong’s remarks came one day after DBS’ shares fell 30 cents last Friday to close at $20.30. This followed a Reuters report that highlighted DBS’ exposure to CDOs via its special-purpose vehicle or conduit called Red Orchid.

In total, Red Orchid has issued $1.4 billion worth of commercial paper, of which $1.1 billion is backed by CDOs.

Usually, third-party investors who buy commercial paper roll it over when it matures. If they no longer want to do so, DBS must provide back-up funding for the commercial paper.

In this case, DBS’ total direct exposure to CDOs would increase to $2.4 billion, Reuters cited a CLSA report as saying.

Investors’ appetite for the estimated more than US$510 billion of commercial paper worldwide has shrunk, after it emerged in Britain recently that some assets put up as collateral for debt may have a whiff of subprime mortgages.

Ms Wong clarified that the CDOs held in Red Orchid are ‘not exposed to the US sub-prime mortgage market at all’ and DBS ‘can fully fund any drawdown of the liquidity facility provided to the conduit’.

‘Red Orchid’s assets are mostly backed by AAA CDO assets as well as other bonds and loans. We do not expect these assets to default,’ said a bank spokesman.

Apart from Red Orchid, DBS does not have any other asset- backed commercial paper conduit which invests in CDOs.

Ms Wong noted: ‘DBS has one of the strongest capital positions of banks operating in Asia… We are comfortable with our present position and as always will monitor our risks closely.’

 

Source: The Straits Times 27 Aug 07

Reits a safe choice in roily market: Goldman

SINGAPORE’S real estate investment trust (S-Reit) market could be just the place to park your funds while weathering the storm in the equity markets, says Goldman Sachs executive director (Asia-Pacific Investment Research) Leslie Yee.

In a report on S-Reits, Mr Yee said: ‘We reiterate our positive view on S-Reits and recommend investors to buy in the prevailing choppy equity markets.’

S-Reits were sold down recently but Mr Yee believes the market is ‘under-appreciating the defensive qualities and overstating risks’.

Goldman Sachs highlighted four attributes that make Reits ‘defensive’. These are: low gearing, typically about 40 per cent; income payout which is often 100 per cent; secured leases, usually for three years; and limited development risk.

The report said that the current market volatility will affect the near-term ability of Reits to access capital market funding, but Goldman Sachs believes Reits have the necessary debt capacity and expect that equity markets will be willing to fund good acquisitions.

Goldman Sachs S-Reit Index has fallen by 11.8 per cent since July, which is slightly less than the decline in the Singapore property stock index of 15.3 per cent.

It has also lowered its target price for the nine S-Reits it covers by 0.5-10 per cent. Based on revised target prices, these S-Reits offer an upside of 7-37 per cent.

In particular, Goldman Sachs has added CapitaMall Trust to its ‘Conviction Buy’ list. It has upgraded Suntec Reit to ‘Buy’ from ‘Neutral’, and reiterates ‘Buy’ on K-Reit.

Goldman Sachs also likes sponsored Reits. And it does not matter if a Reit does not pay top dollar for a sponsor’s asset. ‘Our analysis on the sale of a completed asset shows the net benefit to a developer is roughly the same from selling to a Reit or from selling to a third party at a price that is nearly 20 per cent more,’ explained Mr Yee.

He said: ‘We see the current market providing a good entry point into Reits’, noting the sector leader’s – CapitaMall Trust – pull-back of 20 per cent from its share price two months ago.

In the near term, it does see cost of funding for acquisitions like the one-third stakes in One Raffles Quay by K-Reit and Suntec-Reit as a major risk.

But in the long term, it sees potential for growth through acquisition and argues that ‘win-wins’ can be created when a developer sponsor sells assets to Reits.

Goldman Sachs launched its Reit coverage in January when it also forecast the nine S-Reits would make $15 billion in acquisitions within a three-year period, boosting portfolio sizes by 75 per cent.

Based on announced acquisitions to date, the nine Reits have made $3.9 billion worth of acquisitions, which is 27 per cent of the target.

 

Source: Business Times 25 Aug 07

CapitaLand up nearly 15% as business in China grows

IT HAS been a good week for CapitaLand, with its shares gaining nearly 15 per cent.

The property giant not only rode on the market’s rebound from one of its worst slumps in 20 years.

It also got a leg up from its growing exposure to China’s property market. The exposure is helping it make its name, literally, in China.

Many dealers believe CapitaLand, with its growing profile, may be one of the first foreign stocks to benefit from any decision made by China to eventually buy into foreign equities.

China said on Monday that its citizens could soon invest directly in Hong Kong stocks.

Many now expect China to liberalise some more by letting its citizens buy regional equities if its ongoing experiment is successful.

This is where firms like CapitaLand will benefit because their names are already familiar among Chinese investors.

The potential is huge. The first wave of Chinese money going overseas has already ignited a property boom in Hong Kong, where mainland Chinese are snapping up upmarket condominiums.

The next wave may well involve buying shares in companies with successful operations in China itself, such as CapitaLand.

Some research houses feel that even on the merits of its China business alone, CapitaLand may be underpriced.

‘We believe the current share price does not reflect the significant progress CapitaLand has made in building its business in China, where it is now the largest foreign real estate group,’ said UBS Investment Research on Wednesday.

CapitaLand, it noted, has 40 per cent of its 8,500 staff in China, with offices in the key cities of Beijing and Shanghai.

UBS also believes that the value of CapitaLand’s China business will become increasingly transparent once it spins off two China residential development businesses as separate listed firms.

Volatile market conditions are also unlikely to affect CapitaLand, given that it has over $4 billion on hand to fund acquisitions.

The stock gained 10 cents to close at $7.35 yesterday.

 

Source: The Straits Times 25 Aug 07

DBS exposure to US sub-prime about $2.4b

Figure is almost twice the amount the bank declared a fortnight ago

DBS Group Holdings confirmed yesterday its exposure to the United States sub-prime mortgage crisis is about $2.4 billion – almost double the amount it had acknowledged previously.

The disclosure sent its stock falling by as much as 60 cents yesterday, hitting a low of $19.90 before clawing back to close 30 cents lower at $20.30.

The increased extent of DBS’ exposure was revealed in a report by broker CLSA this week.

DBS had stated about two weeks ago that its exposure to collateralised debt obligations (CDOs) – financial instruments backed by bonds and sub-prime mortgages – was US$850 million (S$1.3 billion). It also stated that it had distributed US$1.7 billion of structured products involving CDOs to institutional and private banking investors.

But CLSA said DBS has direct exposure to $1.1 billion worth of CDOs via a special investment vehicle called Red Orchid. This vehicle holds commercial paper – a type of corporate debt usually due in nine months or less – which is invested in CDOs.

This paper is due for renewal soon. DBS must provide back-up funding for it if third-party investors do not want to take up a new tranche. This is possible as the sub-prime crisis has made investors very risk-averse.

In this case, DBS’ direct CDO exposure becomes $2.4 billion, noted CLSA.

‘We are comfortable with our exposure to this’ commercial paper, a DBS spokesman said. She confirmed the figures cited in CLSA’s report, but clarified that the $1.1 billion of CDOs in Red Orchid had been included in the US$1.7 billion figure that DBS cited earlier in reference to structured products involving CDOs.

United Overseas Bank (UOB) has an investment vehicle similar to Red Orchid – it is called Archer – but it is tied up in bonds, not CDOs.

The bank’s CDO exposure amounts to $392 million, of which $91 million is asset-backed securities CDOs. Its shares dipped 10 cents to $20.60.

OCBC Bank has US$430 million invested in CDOs, of which US$181 million is invested in asset-backed securities. It does not have any investment instruments like Red Orchid. Its shares rose five cents to $8.65 yesterday.

Fitch Ratings said on Wednesday that Singapore’s three local banks, which have been ‘the most transparent in Asia’ in disclosing their CDO holdings, have limited exposure to sub-prime mortgage CDOs. ‘The overall CDO exposure of the Singapore banks, of around US$1.5 billion, could potentially give rise to losses that would dent annual earnings but would not materially weaken their capital.’

Nonetheless, the Monetary Authority of Singapore said yesterday it ‘continues to monitor the development of the US sub-prime market and the financial institutions’ exposure to this sector’.

It told The Straits Times that it urges the banks to ‘factor the current environment into their regular stress testing and take appropriate action where necessary’.

CLEARER PICTURE

The $1.1 billion of CDOs in Red Orchid was included in the US$1.7 billion (S$2.6 billion) figure DBS cited earlier in reference to structured products involving CDOs, says a bank spokesman.

 

Source: The Straits Times 25 Aug 07

DBS says has more direct CDO exposure

LAST UPDATED: 11.51 AM

SINGAPORE – DBS Group Holdings, Southeast Asia’s biggest bank, said on Friday that it has more direct exposure to collateralised debt obligations than previously declared, sending its shares down over 2 per cent.

Broker CLSA said in a report this week that while Singapore banks have limited exposure to collateralised debt obligations, DBS may have $2.4 billion (US$1.6 billion) worth of CDO holdings – nearly double the $1.3 billion direct exposure it initially declared.

It said DBS may have more direct CDO exposure through a special purpose vehicle that had commercial paper backed by $1.1 billion worth of CDOs, with the paper due for renewal.

‘We are comfortable with our exposure to the conduit,’ a DBS spokesman said. She confirmed the figures cited in CLSA’s report.

DBS bank had previously said that it had distributed US$1.7 billion of structured products involving CDOs that were backed by AA and AAA rated collateral to institutional and private clients. However, it had not said that part of these products were in commercial paper.

Standard & Poor Ratings Services said in early August that it has reviewed the exposure of Singapore banks to the US sub-prime mortgage-related instruments and has determined that their exposure is negligible at this time.

Share prices of banks have slid on worries about further fallout from a global credit squeeze, and two of Singapore’s three banks have also taken smaller hits on their books due to their exposure to complex debtlinked securities.

DBS shares were 2.43 per cent down at $20.10 by 0344 GMT, versus a 1.33 per cent fall in Singapore’s benchmark Straits Times Index .

Analysts have warned weaker markets may force banks to further mark down their portfolio of credit derivatives, amid looming risk of credit downgrades for these instruments.

CLSA said in its report that if the three banks mark down their entire asset-backed CDOs, the impact on financial year 2007 earnings would be around 11 per cent.

Oversea-Chinese Banking Corp said earlier this month it had marked down its portfolio of CDOs by US$33 million as of end June while the No 2 lender, United Overseas Bank , had made provisions of $34 million at end June.

But most analysts say despite the recent shift in risk appetite there is still growth potential for Singapore banks as resurgent construction and property sector and strong economic growth boost their loan books.

‘We continue to believe the sector offers significant long-term potential as the Singapore domestic growth story is still intact and the banks have never been better positioned to benefit from this growth,’ CLSA said.

 

Source: Business Times 24 Aug 07