Analysts paint bleak earnings outlook

Earnings per share growth of S’pore listed companies may not even make 6% this year

(SINGAPORE) Faced with a small domestic market and a very open economy, Singapore companies are highly susceptible to any global slowdown and are therefore expected to chalk up one of the slowest corporate earnings growths in Asia in 2008. This is the conclusion drawn from an aggregate of all analysts’ forecasts by StarMine Professional.

Overall, companies in Singapore may see earnings per share (EPS) improve by a mere 5.9 per cent in 2008, making it the market with the third worst outlook in Asia. Hong Kong fares even worse, with its companies expected to register a 2.5 per cent decline in EPS this year. Malaysia, too, has a negative 0.9 per cent earnings outlook.

StarMine, which compiles analysts’ estimates and provides equity research performance ratings, aggregated analysts’ forecasts of listed companies’ earnings in the coming 12 months and compared them to the trailing 12 months’ estimates.

It gives greater weight to forecasts by analysts which have proved to be the most accurate in the past, and to more recent estimates.

According to this data – called Smart Estimates – Thailand is poised to have the region’s highest growth in EPS – 50.9 per cent in the coming 12 months.

Second is China with an expected growth of 33.6 per cent. Listed companies in India, Indonesia and Korea are expected to boost their EPS by about 17 to 18 per cent each.

Some broking firms’ reports seem to conform with the big picture view presented by StarMine.

In a recent report, Merrill Lynch said that it had done a bottom-up stress test to assess the earnings risks and valuation contraction for the top 30 stocks in the Hang Seng Index (HSI).

‘In aggregate, we see potential 9 per cent downside to 2008E earnings. In this case, we would not see any earnings growth in the HSI this year,’ Merrill Lynch said.

The US investment bank, however, added that it believed the market outlook was unlikely to do worse than its assumptions. ‘The result shows that airlines, consumers, Chinese banks and insurance companies are most sensitive to either macro slowdown or poor A-share market sentiment. HK banks, utilities, oil and telecoms are the most defensive with respectable dividend yield,’ it said.

Citigroup, however, thinks that analysts and investors may still be a little over-optimistic.

‘Region-wide, a 41.5 per cent decline in earnings should not come as a surprise given that it has happened before (when the United States fell into recession),’ said its regional equity strategist Markus Rosgen. ‘A 41.5 per cent decline in 2008 earnings would leave the region on a P/E of 26.2 times, well above most investors’ comfort zone.’

And on the basis of price-to-book ratio, assuming that any upcoming recession is no better or worse than the last two, stock prices in Asia excluding Japan as a region could fall by 47 per cent from current levels, he warned.

Indeed, in the last 30 days or so, StarMine’s data showed that there have been continuous downward revisions of earnings for the region by analysts.

Sri Lanka has had the largest downgrades of earnings, by 5.3 per cent. Corporate Taiwan’s EPS estimates were also cut by 3.5 per cent compared with a month ago, while Japan’s and Singapore’s were trimmed by 2.9 and 2.5 per cent respectively.

The markets whose earnings estimates were upgraded in the last 30 days were Indonesia and India.

In aggregate, analysts bumped up their estimates of Indonesian companies by 1.7 per cent, and Indian companies by a marginal 0.4 per cent.

Generally, market prices are pegged to the growth outlook for the various markets. For example, China – with an expected earnings growth of 34 per cent – is trading at 24.7 times forward earnings and six times the book value of the companies’ assets.

In contrast, Singapore is trading at just 10.9 times its forward earnings and 2.5 times its book value.

Given that certain markets are valued richly based on the very high earnings expectations, any disappointments will have severe consequences on stock prices.

Meanwhile, there are also markets with high growth expectations but low valuation. Thailand and Korea are trading at just over 11 times their forward earnings, despite their pretty robust earnings growth expectations.

Timothy Wong, head of regional equity research with DBS Vickers Securities, explained that Thailand companies’ earnings are coming off from a low base. This accounts for the high EPS growth rates.

But the market’s overall valuation is low because it is perceived as a higher-risk emerging market.

‘On the political front, there remain a number of uncertainties, although things are moving in the right direction. And corporate earnings will come through only if the country progresses on the right course,’ he said.

As for Korea, the market has historically traded at a discount to other markets. This is due to the structure of the market where there are a lot of chaebols or conglomerates. Also, there are questions on corporate governance, said Mr Wong.

Calculations by Citigroup’s Mr Rosgen also showed investors to have very low expectations of Korea, Taiwan and Thailand, making them the three cheapest markets in Asia. ‘Given the risks in the global economy at the moment, we’d rather buy low expectations than high expectations,’ he said.

Source: Business Times 5 Mar 08

When that ‘bargain’ may be an illusion

IN THE thick of the Asian financial crisis, some listed companies were actually trading below their net cash value; in other words, the leftover cash in their bank accounts after paying off all their liabilities was higher than market capitalisation.

So theoretically, someone who had the money could have gone into the market and bought up 100 per cent of the shares in order to gain control of the company. He could then have used the company’s cash to pay off all its liabilities. The remaining sum of cash would still have been more than the amount he used to buy the 100 per cent stake, leaving him with some profit to pocket.

In addition, there would have been other assets like buildings or investments which he could have liquidated. These would have been the icing on the cake!

Of course, in practice it may not be so easy. There would be the controlling shareholder to contend with. And the traders out there, once they sense a big buyer, may pounce on the stock.

But the point is: for companies whose market value is below its cash net of all liabilities, it may be an indication of market mispricing.

Back in June 2003 in this column, I highlighted three companies that were trading at near their cash value. I noted that in a prolonged bear market, investor aversion is so severe that very often stocks end up trading way below their asset values. And in extreme cases, the share price is even lower than the cash holdings of the company after netting all liabilities.

‘Of course, if the company has no intention to return the cash to shareholders and its operations are bleeding cash, then the share price may well have reason to be trading below the cash net of liabilities per share,’ I wrote then. ‘Unless there is a turnaround in the business, the cash will eventually be depleted.’

The three companies that had a high component of cash in their share price then were Auric Pacific, General Magnetics and k1 Ventures. Then, Auric’s cash net of its total liabilities worked out to 99.7 cents a share. Its share price at the time was 90 cents. General Magnetics’ net cash per share was 13 cents versus its share price of 14 cents. And k1 Ventures’ net cash was 18.4 cents per share, compared with a share price of 20.5 cents.

Fast forward to today, and all three have underperformed the general market. So ultimately, it is the business that drives the share price. But still, there is something appealing about trying to identify companies with a strong balance sheet, and decent business, yet trading at a low valuation.

This week, I attempted to screen some of the stocks for such criteria.

Most of the stocks which showed up on the list were China stocks, and most were loss making. This explains the deep discount in their share prices to their asset value. For example, United Food barely had any liabilities in its accounts as at Sept 30, 2007. Its cash and deposits amounted to $92.4 million or about 8.3 cents a share. Take into consideration other assets like inventory, accounts receivable, properties and land use rights, and the net asset value per share for the stock came to 40.7 cents. In the market yesterday, United Food last traded at 14.5 cents. That’s a discount of about 63 per cent.

Is the market correct in factoring in such a big discount for the company when the business is producing a profit, albeit a declining one?

Perhaps. As mentioned, the group’s earnings have been declining for years now. The management has proved to be rather poor in charting out a viable strategy for the group and executing it. United Food and People’s Food were established in China in the early 1990s and were listed in Singapore around the same time, in the early 2000s.

In their latest third-quarter results, People’s Food registered a net profit of 84.5 million yuan (S$16.7 million) on revenue of 1.8 billion yuan. United Food, on the other hand, managed only 14.8 million yuan of net earnings and revenue of just 745 million yuan. And there’s no sign of things turning for the better as yet. The directors themselves are not positive about the group’s prospects.

Meanwhile, United Food’s operations continued to drain cash. Its inventory and accounts receivable were rising despite lower sales. That’s not a good sign. Still, at such a deep discount to its net asset value – assuming all the numbers are reliable – any positive news will give a big boost to the stock price.

In screening the stocks, I also considered whether the company is currently generating positive cash flow, and whether the management is positive about the immediate future.

Presumably, if both are positive, and yet the stock is trading at a deep discount, then perhaps the stock deserves a closer look.

Based on the above criteria, China Flexible Packaging showed up on the radar. In its latest quarter, revenue grew 7 per cent to 284 million yuan, and net earnings edged up 9 per cent to 43 million yuan. Gross and net profit margins are 30 per cent and 15 per cent respectively. Its cash amounted to some 350 million yuan and its accounts payable and liabilities came to about 90 million yuan. The other assets are plants and equipment and accounts receivable.

As mentioned, the group’s operations are generating cash. However, rising oil prices are a threat to the margin of the group. The group said it is working on ways to improve its efficiencies to mitigate higher raw material costs. It added that it is ‘optimistic about the group’s performance in 2008′.

The ‘consensus’ estimate – I think there’s only one analyst covering the stock – is 9.9 cents earnings per share for the year ending Oct 31, 2008. That’s quite an ambitious 22 per cent increase from FY2007. If that happens, China Flexible Packaging would now be trading at four times its forecast earnings for FY2008.

Meanwhile, the group has recommended a dividend of 1.91 cents per share. If approved next Friday at its AGM in Guangzhou, then the dividend yield works out to some 4.5 per cent. The thing is, the group has disappointed investors before. It remains to be seen if its optimism is justified. But with the current 30-plus per cent discount to its net asset value, the downside is perhaps limited.

The other two stocks which are trading at a discount, and yet have a positive operating cash flow as well as a positive management outlook, are Plastoform and China Powerplus. Their discounts, however, are not as steep as China Flexible Packaging’s.

Source: Business Times 23 Feb 08

Recent crises serve as wake-up calls

Focus on corporate governance; S’pore updating Companies Act: Lim Hwee Hua

(SINGAPORE) Think of the huge fraudulent trading losses at Societe Generale. Or think of the sub-prime mortgage fallout. The recent crises that have rocked the financial sector have also brought corporate governance under the spotlight, Minister of State for Finance and Transport Lim Hwee Hua said yesterday.

The perceived tardiness by major financial institutions in coming clean over their sub-prime exposure has led to unhappiness among investors and stakeholders, she noted. Revelations on how a rogue trader at SocGen racked up nearly US$7 billion of losses also raised questions over the robustness of internal controls, board supervision and oversight of risks.

‘Inadvertently, with financial crises of such magnitude, there will be renewed calls to strengthen and tighten corporate governance practices,’ Mrs Lim said. She was speaking last night at the Singapore Corporate Awards.

The US Securities and Exchange Commission (SEC) is now looking at tightening disclosure practices, particularly in strengthening the relationship between a company’s risk officers, the disclosure committee and the audit committee.

Singapore is not immune to financial scandals either, she added, pointing to the commercial fraud by an ex-finance manager of Asia Pacific Breweries and the allegedly unauthorised foreign exchange trading at SembCorp Marine.

As part of its continuing efforts to improve corporate governance practices among companies, the Ministry of Finance has convened an 11-member strong Steering Committee to review the Companies Act.

The Steering Committee is chaired by the Solicitor General, Professor Walter Woon, and the aim of the review is to retain an efficient and transparent corporate regulatory framework that supports Singapore’s growth as a global hub for both businesses and investors.

The committee will update the law to keep pace with relevant international legal developments and technological advances, promote greater accountability and transparency while keeping the compliance cost low.

It will be assisted by five working groups to study distinct segments of the Companies Act. The previous fundamental review of the Companies Act was done in 1999.

But Mrs Lim also noted that a robust company law framework can be an unwieldy and blunt tool and should only be used sparingly. A code of best practices will provide firms ‘the flexibility to put in place the rules and systems that are most appropriate to their context.’

To this end, the Audit Committee Guidance Committee, a joint effort of the Monetary Authority of Singapore, Accounting and Corporate Regulatory Authority and SGX, was set up to look at providing practical guidance to audit committee members.

In addition, Mrs Lim recommended the use of rewards and recognition to laud companies for adopting good corporate governance practices and going beyond best practices.

 

Source: Business Times 21 Feb 08

TAKING STOCK: Inflation worries hammer STI and regional bourses

NO SOONER does the market show some spark than another bout of bad news clobbers it back down again.

Yesterday, it was inflation concerns after oil rose above the US$100 a barrel mark.

Red ink flowed from the word go. The Straits Times Index (STI) opened lower and kept spiralling downwards, losing more than 78 points by the early afternoon.

Asian markets were also in a similar state of distress. Hong Kong’s Hang Seng was 2.2 per cent down, while Japan’s Nikkei and broader Topix indexes sank more than 3 per cent each. Markets in South Korea, Taiwan, Australia and China were also bruised.

The STI eventually closed down 71.23 points, or 2.3 per cent, at 3,026.83 – an unwelcome gloomy ending after five positive finishes in six trading days.

Volume was low – just 1.59 billion shares worth $1.88 billion changed hands.

‘Investors were discouraged by the early fall and wanted to play safe and stand by the sidelines to watch the show,’ said a dealer.

Telco SingTel led the market’s plunge, falling 14 cents to $3.78 and bringing the index down by a whopping 13.3 points in the process.

Morgan Stanley caused the sell-off, after it downgraded the stock from ‘overweight’ to ‘equal weight’, saying that strong competition from other mobile and broadband operators, as well as government initiatives to open up the broadband industry, pose long-term risk to earnings.

Banking stocks also weighed down the STI, dogged by news of Credit Suisse’s unexpected US$2.8 billion (S$4 billion) in sub-prime write-downs.

DBS Group Holdings was the worst hit, probably also due to profit-taking after six days of gains. It fell 46 cents to $17.90, United Overseas Bank lost 28 cents to $18, while OCBC Bank slipped seven cents to $7.45.

Among the few bright spots were oil-related plays, including Singapore Petroleum Co, up 26 cents to $6.65.

‘With the oil prices back to record highs, we could see a continued rally in offshore and marine stocks,’ a UOB Kay Hian report said yesterday, favouring Keppel Corp, ASL Marine, AusGroup, SembCorp Marine and Cosco Corp.

Source: The Straits Times 21 Feb 08

Sales activity surges to 42 disposals, buying falls to 79 purchases

INSIDE MARKETS

Fund manager sentiment turns negative, while companies’ buybacks stay sluggish for third straight week

THE buying was low while the sales activity by directors and substantial shareholders was high last week, based on filings on the Singapore Exchange from Feb 11 to 15. A total of 26 companies recorded 79 purchases versus 16 firms with 42 disposals. The buy figures were down from the previous week’s two-and-a-half-day totals of 33 companies and 83 purchases, while the sales were up from seven companies and 21 disposals.

The fund manager sentiment was negative last week with 10 asset managers that posted 33 disposals against nine institutions with 18 acquisitions. The figures are a sharp turnaround from the 12 institutions that recorded 41 acquisitions and seven asset managers that posted 18 sales in the previous week.

The buyback activity was also low last week with only three firms that recorded 13 repurchases worth $18.9 million. That was the third straight week of low buyback activity by listed firms. An average of only 1.4 companies and 2.5 trades were recorded per day since Jan 28, versus the daily average of 7.1 firms and 11 buybacks from Jan 7 to 25. Overall, a total of 33 repurchases worth $55.9 million were recorded in the past three weeks versus 165 trades worth $74.5 million in the previous three-week period.

The most active firm in the past three weeks has been United Overseas Bank (UOB) with 2.5 million shares purchased worth $44.3 million at an average of $17.65 each. That brought its buybacks since January to 5.14 million shares worth $91.2 million. Investors should note that UOB has cancelled more than 1.1 per cent of its issued capital since it started its second buyback programme in June last year.

There were several significant trades in the market last week. On the buying side, the chief executive officer (CEO) of Hiap Seng Engineering recorded his first buys since 2002 following the 61 per cent fall in the share price.

Meanwhile, Tembusu Growth Fund acquired more shares of Hongwei Technologies at below its subscription price.

Lastly, there was a rare buy by substantial shareholder Lim Eng Hock in FJ Benjamin Holdings which boosted his stake by 17 per cent. On the negative side, Cohen & Steers recorded its first sale in Fortune Real Estate Investment Trust at below its purchase price.

Hiap Seng Engineering

Purchases by chairman and CEO Tan Ah Lam in mechanical engineering firm Hiap Seng Engineering from Jan 21 to Feb 11 totalling 1.8 million shares accounted for nearly 7 per cent of the stock’s trading volume. The acquisitions, which were made at 39 cents to 34 cents each, boosted his direct holdings by 153 per cent – to 2.98 million shares or 0.98 per cent of the issued capital. Mr Tan also has deemed interest of 70.1 million shares or 23.1 per cent.

The purchases in the past month were made on the back of the 61 per cent drop in the share price since the last week of September 2007, from 94.5 cents. The counter is also sharply down since mid-July 2007, from $1.22.

Despite the fall in the share price, the CEO resumed buying at sharply higher than his previous purchase price based on the 150,000 shares that he acquired in February 2002 at 17 cents each. Hiap Seng announced its H1 results in November 2007 with net profit after tax down by 47.9 per cent to $3.90 million for the six months to Sept 30, 2007. The stock closed at 38.5 cents on Friday.

Hongwei Technologies

Tembusu Growth Fund Ltd has acquired more shares of polyester differential fibres manufacturer, Hongwei Technologies, at below its subscription price in May last year. The group picked up 800,000 shares on Feb 6 at an estimated price of 25 cents each. The fund manager previously acquired 794,000 shares on Jan 23 at an estimated price of 21.5 cents each.

The trades in the past month totalling 1.6 million shares have increased its direct holdings by 14 per cent – to 12.8 million shares or 5.7 per cent. Prior to those acquisitions, Tembusu Growth Fund subscribed for an initial 11.3 million shares or 5 per cent in May 2007 at 33 cents each. The stock has fallen sharply since October 2007, from 38 cents to 26 cents on Friday.

FJ Benjamin Holdings

Substantial shareholder Lim Eng Hock recorded a rare buy in fashion retailer and timepiece distributor, FJ Benjamin Holdings, with 10.9 million shares purchased last Monday at an estimated price of 59.5 cents each, which increased its holdings by 17 per cent to 75.9 million shares or 13.4 per cent. That was his first acquisition since September 2006. He previously sold 4.5 million shares in March 2007 at an estimated price of 70 cents each.

Prior to that sale, Mr Lim bought nearly three million shares in September 2006 at an estimated price of 49 cents each and 1.5 million shares in January 2006 at an estimated price of 37 cents each.

Investors should note that Lloyd George Investment Management (Bermuda) Ltd ceased to be a substantial shareholder on Jan 24 following the sale of 1.7 million shares at an estimated price of 61 cents each, which reduced its deemed holdings to 27.9 million shares or 4.9 per cent. The fund manager previously reported an initial filing on Aug 1, 2007, of 2.4 million shares at 84 cents each, which raised its interest to 5.4 per cent. The stock closed at 60 cents on Friday.

Fortune Real Estate Investment Trust

Cohen & Steers Inc recorded its first sale in Fortune Real Estate Investment Trust since it became a substantial shareholder in February last year, with 4.1 million units sold last Monday at an estimated price of $5.20 each. The trade reduced its deemed holdings by 7 per cent – to 52.9 million units or 6.5 per cent.

The group previously acquired 16.7 million units from February to July 2007 at $5.73 to $6.30 each. Cohen & Steers reported an initial filing on Feb 8, 2007, of 641,000 units at HK$5.90 each, which raised its interest to 5 per cent. The stock closed at $5.28 on Friday.

The writer is managing director at Asia Insider Limited

 

Source: Business Times 18 Feb 08

TAKING STOCK: Fresh US recession worries, Dow’s fall drag down STI

PROFIT-TAKING on renewed United States recession fears and Wall Street’s overnight dip delivered a one-two punch to abruptly halt the Singapore bourse’s two-day rally yesterday.

A sharp selldown came in the last 30 minutes, as the Straits Times Index (STI) closed 38.66 points lower at 3,038.42, after rising a combined 95 points in the previous two sessions.

A total of 1.55 billion shares worth $1.46 billion changed hands yesterday.

A dealer said: ‘Profit-taking was inevitable, after Monday’s strong pre-Chinese New Year surge and the Dow’s 108-point plunge overnight.’

The chief culprit for the STI’s fall was the financial sector.

Banking counters took a hit after US brokerages downgraded American banks and credit card firms, on signs that consumers are falling behind on debt payments.

United Overseas Bank (UOB) was among the day’s top losers, dropping 38 cents to $18.12. DBS Group Holdings fared no better, slipping by the same amount to $17.60, while OCBC Bank dipped eight cents to $7.55.

DBS Vickers has cut its target price for UOB from $27.50 to $20.80 and that for OCBC from $10.40 to $9.

It noted: ‘While sentiment in Singapore equities remain weak, we believe that earnings momentum for Singapore banks should remain positive, given the strong loans growth and asset quality.’

SingTel came under the spotlight after it announced better-than-expected results for its third quarter. It gained four cents to $3.90 and was the most heavily traded counter by value.

Citigroup said SingTel’s results were ‘better than expected’, while Morgan Stanley kept its ‘overweight’ call, citing healthy operating trends.

AmFraser Securities senior vice-president of research Najeeb Jarhom said: ‘It looks like SingTel may again come to the rescue of the broad market in the event of another downturn after the long holidays.’

There was also cheer for Chinese steelmaker Delong Holdings. It surged a whopping 47 cents, or 30.9 per cent, to $1.99, prompting a query from the Singapore Exchange.

ASL Marine had a bright outing as well, up five cents to $1.30, after the local shipbuilder reported that first half net income rose 67 per cent to $28 million.

The FTSE ST Mid Cap Index slid 0.7 per cent to 784.25 but the Small Cap Index gained 0.1 per cent to 681.31.

 

Source: The Straits Times 6 Feb 08

S’pore brokers check clients’ margins, take no chances

Margin calls, forced selling not surprising in current market, say some brokers

(SINGAPORE) Veterans of previous crashes say it’s not that bad this time, at least not yet. But broking houses are taking no chances.

They are battening down the hatches and checking the credit quality and margins of clients. Some investors are complaining about being required to make immediate top-ups or being forced into selling, as fear now rules the street.

‘Sure, there’s forced selling,’ said one local dealer who has been in the industry since 1986.

But the situation is not unusual given the panic selling, he added, saying that he has seen it all before.

‘We make sure clients’ credits and margins are okay,’ said another stock market veteran.

Hui Yew Ping, managing director of OCBC Securities, said: ‘With a market downturn like this, some level of margin calls are expected.

‘We have a good risk management process to handle this. Our overall prudent approach to share margin financing also ensures that we are able to continue business as usual as we are accustomed to market volatility.’

He added that OCBC Securities’s unique Share Financing Simulator comes in handy for customers to anticipate how market movements affect their margin account and, as a result, they can manage the risks and investment decisions better.

A DBS spokeswoman did not comment when asked if DBS Vickers was forcing clients to sell if they could not meet margin calls.

The Straits Times Index fell 50.6 points, or 1.7 per cent, yesterday to close at 2,866.55, its lowest since Dec 21, 2006. Since Monday, it is down 7.7 per cent, the biggest two-day drop since Sept 21, 2001. The index is down 25 per cent from its Oct 11 high, but many stocks have plummeted much more.

NOL yesterday at $2.80 is more than 55 per cent below its $6.15 high on July 16. The Singapore Exchange at $8.70 is almost half its $16.40 peak on Oct 8.

DBS Group Holdings and United Overseas Bank have lost about 30 per cent from their 52-week highs while OCBC is down almost 24 per cent.

‘It’s not that bad, actually,’ said Tang Wee Loke, executive director at UOB Kay Hian. He said the 1997-98 Asian financial crisis and the 2003 Sars outbreak had been far more damaging.

He recalled that the 1985 Pan-El crisis was the worst blow to the Singapore stockbroking community. The collapse of marine salvage, hotel and property conglomerate Pan-Electric led to a meltdown resulting in the shutdown of the stock exchange for an unprecedented three days. ‘Everyone thought they were going to die,’ he said.

Reforms which followed helped the industry weather the 1987 October stock market crash, he said.

A retired broker said the crash this time has yet to result in actual losses for some people because of their profits in 2007. ‘They are losing their profits and it’s cutting into the flesh, another 10 per cent more, then it would be into the bone,’ he said.

Assessing yesterday’s mood, Mr Hui said that overall it had been an orderly day in OCBC Securities’s dealing room.

‘Since last week, we have already issued an advisory to all our brokers and remisiers to exercise caution in view of the uncertainty in global equity markets,’ he said.

Timothy Wong, DBS Group Research’s head of regional equities, told clients yesterday that it was poor market sentiment, or high risk aversion, that was ailing the markets.

He said Asia is perceived as ‘a high risk, high return asset class, so with uncertainty on the horizon, you get flight to quality from foreign funds, back to their US and European home markets’.

He said: ‘There are a lot of absolute-return funds who must make money even in a falling market, and therefore seek out short positions.’

These funds cannot just stay neutral and out of the market, he said.

Phillip Securities analyst Leng Seng Choon said Asian economies are quite strong and this stock market crash is quite different from the 1997 Asian financial crisis.

‘Today, the balance sheet of many Asian countries are stronger than in 1997-98.’

Their relative strength will help offset a recession in the United States, should it happen, he said.

For instance, the Singapore economy has a stream of activities in the pipeline, including a robust construction sector, which will result in growth, said Mr Leng.

 

Source: Business Times 23 Jan 08

Analysts lower estimates after another bleak day

Key resistance levels pitched down as panic selling persists

(SINGAPORE) If Monday was the day when fear stalked the markets, then yesterday saw a phase when it took a firmer hold. There was no let-up in the selling frenzy and bourses around Asia bled for the second straight day with the ‘R’ word very much in the frame.

Hours before the US Federal Reserve slashed interest rates in the US, fear of a US economic recession saw investors in Asia diving for cover. Many equity analysts here have started revising their market estimates for 2008 – mostly downwards.

The Singapore stock market was by no means the worst hit yesterday. Hong Kong’s Hang Seng Index slumped another 8.65 per cent yesterday, while the Jakarta Composite sank 7.7 per cent and the Shanghai Composite fell 7.22 per cent. In contrast, the revamped Straits Times Index slipped 50.6 points or 1.73 per cent to 2,866.55 at the end of the day. At one point it appeared headed for a steeper fall, having slumped 5.84 per cent during intra-day trading, before being propped up by a late-afternoon rebound. But most analysts believed that it was a technical bounce rather than a signal of bottoming out.

In less than four months, the STI has shed 26 per cent off its record high of 3,875.77 points achieved last October.

Analysts are now re-doing their forecasts.

Gabriel Yap of DMG & Partners cut his end-2008 STI target to 3,568 points from 3,875. He fears that even after the worst of the selling is over, a bearish market sentiment could still persist.

Some analysts are also lowering their baseline estimates for the STI after the index breached the support line of 3,000 points on Monday – a level that now becomes a key resistance level from a technical point of view.

DBS retail market strategist Yeo Kee Yan revised his baseline estimate to 2,650 points from 3,000, while UOB Kay Hian analyst K Ajith cut his STI baseline estimate from 3,000 points to a long-term support line at the 2,760 mark.

Mr Yeo now advises that investors enter the market when the STI hits 2,650 points, down from his earlier recommendation to ‘buy at 3,000-3,100 and sell at 3,700-4,000′. Mr Ajith expects the STI to trade at 2,700-3,600 points rather than an earlier estimate of 2,960-3,900 points.

‘As it stands, valuations are already at depressed levels. We recommend selective bottom-fishing,’ Mr Ajith said.

He noted that although the jury is still out on whether the US economy is entering a recession, the market is already selling ahead of the release of some key economic data.

‘The question is whether one should even wait for two quarters, as a technical recession is simply two consecutive quarters of contraction,’ Mr Ajith said. From the looks of it, ‘the market is not waiting’, he added.

Speaking to BT before the US central bank acted, analysts had indicated that its moves would be critical. ‘If (Federal Reserve chairman) Ben Bernanke follows or indicates, like Greenspan, to bring interest rates down to one per cent, then a deep recession can be avoided,’ said Mr Yap of DMG.

But he said he did not expect the ‘Asian Crisis ghost to come haunt us’ – a period between Oct 7, 1997 and Sept 27, 1998 when the STI dropped 58 per cent from 1,921 to 801.

He advocates trading stocks that have been sold down indiscriminately, particularly those that have dropped 40-50 per cent from their recent highs without material changes in their fundamentals.

OCBC Investment Research head Carmen Lee said that she does not have a year-end STI target and is maintaining her ‘overweight’ calls on the oil and gas stocks and defensive stocks, which she believes are safe havens.

In a note released this week, CIMB-GK said it is maintaining a cautious view on the stock market even though valuations are cheap now.

‘Our preferred sectors are telecommunications, transport and multi-industry. Sectors that we advocate avoiding are manufacturing and property,’ it said.

But given the lingering uncertainty in the US economy and sub-prime loan-related writedowns by banks, it is not clear when the market will hit the bottom and how close it is to staging a rebound.

Mr Yeo of DBS said that he believes that the stock market has not hit bottom till investors start to dump even quality shares and trading volume escalates further. If that happens, even the safe haven stocks will get sold-down, he said.

But Mr Yap of DMG said that a technical bounce could start just as quickly as the market had corrected. ‘We are close to hitting the bottom simply due to the rapidity at which we have fallen,’ he added. ‘In terms of magnitude, we are another 8 per cent from the worst of the lows we have seen so far from corrections in the past 30 years. In terms of speed, this is the fastest ever in the past 30 years.’

Providing a contrarian view was Wong Sui Jau, general manager of Fundsupermart, who believes that now is a good time to enter the market. He is looking at a longer investment timeframe and also believes that the fundamentals are still in place.

‘The market is oversold,’ Mr Wong said. ‘Whether this is the bottom or not, at the current levels, I would expect gains for those buying in now and holding for two years or more.’

 

Source: Business Times 23 Jan 08

TAKING STOCK: STI ends bumpy ride just 51 points down

DBS, SingTel and SIA lead recovery in afternoon as rumours of US rate cut spread

INVESTORS are grateful for small mercies these days – and they got one yesterday when the local market salvaged some respect after another wild day across the region.

The 50.6-point fall in the Straits Times Index (STI) would have been welcome relief after a week that began with the bourse plunging 187.1 points, its worst day since 1987’s Black Monday.

It looked like yesterday would bring a similar amount of bloodletting, with investors bracing themselves for a battering.

The white-knuckle ride began with the STI moving up gingerly in the morning session. But it remained volatile, with gains being made and given up before a further decline as lunch neared.

The pace picked up after the break, when the STI fell swiftly to a low of 2,746.73, enough to get investors holding tight to the edge of their seats.

Just as it seemed as if the market was in a free fall, however, it swooped back up to 2,845.6 points just before 3pm. The index lingered there briefly, but by 4pm, it was was down to 2,757.57 before a hectic final five minutes.

From there, the STI went north to end at 2,866.55, its high point for the day.

While the market fell mainly due to margin calls on hedge funds, there were probably players out there also short-selling stocks as they expected the counters to fall further.

But with rumours of a United States interest rate cut making the rounds late in the afternoon – which turned out to be true last night – investors might have started thinking twice about short-selling and instead bought back stocks that had been oversold.

The V-shaped recovery was led by a few key stocks.

DBS Group Holdings, which had crashed to $16.40, its lowest since March 2006, staged a recovery of such proportions that it ended unchanged with a hefty 17.2 million shares traded.

SingTel helped to prop up the index by ending seven cents higher at $3.65, despite sinking to an intra-day low of $3.30.

Singapore Airlines (SIA) also did its part, rising 36 cents to $15.28 after falling to $14.30 in the afternoon.

Around 5.39 million shares were traded.

OCBC Bank, with 18.8 million shares traded, kept its nose above the water as it ended two cents up at $7.40.

CapitaLand was also two cents higher at $5.42, while CapitaMall Trust was one cent stronger at $2.66.

Palm oil giant Wilmar International dragged the index down, losing 58 cents to close at $3.67 with 21 million shares changing hands.

Another loser was Yanlord Land Group, which was 39 cents lower when it closed at $2.23.

Shipping favourite Cosco Corp had another bad day, sinking 48 cents to $4.15.

NRA Capital managing director Kevin Scully still expects worse to come and advises investors not to take any comfort from the last-minute rebound yesterday as a sign that the market has bottomed out.

He said the recovery was more likely to be the result of short covering and added: ‘We expect more margin calls and more redemption selling.’

Mr Scully sees the 2,800-point mark as an important support level for the STI. If market sentiment worsens, or US recession fears take deeper root, the STI could plunge far more.

Amfraser Securities senior vice-president of research Najeeb Jarhom said the next major support level, after the 3,000-point mark had been breached, is now 2,600 points.

He said: ‘If this leads to a global financial crisis of the scale of the Asian crisis of 1997-1998, then we could be looking at another protracted fall with the bottom seen not earlier than mid- year or even later.’

 

Source: The Straits Times 23 Jan 08

NEWS ANALYSIS: Panic and fear, not fundamentals, driving sharp market selldown

Widespread selling creating financial violence people hope to avoid, analysts say

NEW YORK – THE fear is spreading.

For months now, investors have been lured to overseas markets with the promise that surging growth and solid economic fundamentals in Asia and the Middle East would insulate them from the credit squeeze plaguing the United States market.

But the broad international sell-off yesterday and Monday has raised fresh concerns that a looming recession and the fallout from sub-prime mortgages could have global repercussions.

Some analysts saw the sell-off, with leading stock market indexes off 4 per cent to 8 per cent worldwide, as being driven by fear more than by fact.

‘I don’t think it’s warranted by the fundamentals,’ said Mr Edward Yardeni, an independent strategist. ‘The global economy’s resilience in the face of a credit crunch has been impressive.’

Mr Yardeni warned, however, that in a time of panic and fear, less attention is paid to fundamentals, like a fairly tight US job market and strong growth and the extraordinary build-up of foreign exchange reserves in emerging markets. The result is panic selling and the prospect of a global recession.

‘People are creating the financial violence that they hoped to avoid,’ he said.

Other analysts point out that the overseas uncertainty reflects the unpleasant, if not devastating, reality that the excesses of the long-running credit boom will not go away soon.

What makes this correction more dangerous, they say, is that the selling is not being driven by panicky retail investors, as it was in the collapse of the technology bubble, but by hedge funds and investment banks that find themselves saddled with illiquid securities backed by an array of valueless assets.

‘What you see is not a panic of the public. This is a panic of the sophisticated,’ said Mr James Sinclair, a wellknown gold trader who oversees a financial website and who has warned investors for years about the dangers of derivatives.

‘But this will have a tremendous impact on the public. It’s very serious, and drastic emergency economic action is needed.’

Most retail investors have not invested directly in the complex securities that have ruined the reputations of some of Wall Street’s most-respected minds.

Their exposure, however, to plummeting companies like Citigroup and Merrill Lynch, and now a broader basket of stocks affected by the market malaise, will add to the sense of wealth erosion that many are already feeling from the declining values of their houses.

On his blog, JSMineSet, Mr Sinclair has told his readers that as much as US$450 trillion (S$649 trillion) worth of derivatives could disintegrate, leading to a far greater and, in some ways, unpredictable calamity.

He argued that compared with the savings and loan crisis in the late 1980s, when the formation of a trust company for beaten-down institutions established a floor for sinking assets, the inability of the government to form a similar entity for suffering securities had heightened investors’ unease.

While the views of Mr Sinclair, who expects the price of gold to go to US$1,650, up from about US$870 now, might be taken with a grain of salt, other experts have also begun to warn of the dire consequences of the credit market collapse.

Mr Christopher Wood, a strategist based in Asia who publishes a widely read newsletter called Greed & Fear, pointed out in a note published this weekend that the potential insolvency of bond insurers like Ambac, MBIA and ACA Capital signals a larger market correction that has not yet been grasped by policymakers.

‘Greed & Fear’s view is that with the bond insurance business model fast unwinding, a full-scale crisis could be coming,’ he wrote.

The international selling has also stoked a long-held fear that flush Asian and Middle Eastern central banks and governmentbacked

investment funds will cut back on their US dollar-based investments – like Treasury bills and stakes in troubled investment banks – in the face of another round of interest rate cuts and continued weakness in the dollar.

These flows have been a crucial source of liquidity for an economy that produces little of its own domestic savings, and they have been lifelines for capital-starved banks. But no money manager, regardless of how long the timeframe, likes to invest in a falling market, and analysts fear that a spate of additional write-downs and market turmoil will signal to foreigners that the markets in Asia have not yet found their bottom.

One large investor, who asked not to be identified because he did not want to tip his hand, said the sell-off on Monday was a direct response to the stimulus package proposed by the Bush administration – not so much a judgment that the proposal was inadequate as a reflection of the weakness and drift of the world’s largest economy.

‘It is one thing to see the market go from 14,000 to 12,000,’ he said. ‘But when the president of the United States says we are sick, you can’t ignore that.’

 

Source: NEW YORK TIMES (The Straits Times 23 Jan 08)

STI plunges 6% in worst one-day fall since Oct 1987

Asian markets battered on fears of a US recession and possible writedowns by regional banks

 

SINGAPORE’S market yesterday suffered its worst one-day fall since the Black Monday crash in October 1987 while other Asian bourses had to go back to the Sept11, 2001, terror attacks for a day as bad as this.

The Straits Times Index was the region’s second-worst performer, diving a jaw-dropping 187.1 points, or 6.03 per cent, in the frenzied, fear-driven bail-out. The STI has now fallen 15.8 per cent since Jan 1, wiping $62 billion off the value of local shares.

India was the worst performer yesterday, with the Sensex Index initially plunging 12 per cent before a late recovery brought the final dip to 7.41 per cent.

Other casualties stacked up across the region – Hong Kong’s Hang Seng Index fell 5.5 per cent, Tokyo’s Nikkei-225 was down 3.9 per cent, and China’s resilient Shanghai Composite dived 5.14 per cent.

The causes were the same factors that have been hammering markets for months – a possible recession in the United States and concerns that regional banks will be hit by the massive writedowns that have belted Western banks.

‘Irrational fear is stalking regional markets. Fundamentally, things haven’t changed, and the economy is humming along nicely,’ said CIMB-GK research head Song Seng Wun.

One dealer said hedge funds – powerful investment vehicles with billions at their command – were trimming their positions across the region ahead of possibly more bad news from the US.

‘With the US markets closed for Martin Luther King Day, the funds are left rudderless as they struggle to find directions in the gloom and this is exacerbating the panic selling region-wide,’ he said.

Financial shares took the biggest hit. Bank of China and HSBC Holdings came under heavy attack, with investors spooked by fears of their balance sheets being hurt by big sub-prime writedowns, following Citigroup and Merrill Lynch’s massive losses.

DBS Group Holdings was one victim here, falling an eye-popping $1.18 to a 17-month low of $17.50. But SingTel’s 7.7 per cent slide to $3.58 and Keppel Corp’s 5.6 per cent fall to $10.80 stunned investors as well.

European markets were also well down when they opened yesterday afternoon. Financial stocks there sank on concerns of their possible exposure to the bond insurance market, which has been tainted by the US mortgage crisis.

At close, London’s FTSE-100 Index was down 5.48 per cent, Paris’ CAC Index fell 5.88 per cent, while Frankfurt’s Dax Index tumbled 7.16 per cent.

Even booming commodities markets suffered. Oil fell US$1.68 (S$2.42) to US$88.98 a barrel on fears of falling demand if the US slips into recession, and gold fell US$13.17 to US$870 an ounce.

However, anxiety over the US economy may be soothed over coming weeks if the financial results of multinationals such as Microsoft and AT&T are robust.

‘But more disappointing earnings could send stock prices down further, as they fuel the risk of a recession,’ warned Deutsche Bank Private Wealth Management’s chief Asian strategist Marshall Gittler.

But some traders here saw yesterday’s nosedive as a golden opportunity to pick up blue chips like DBS and UOB. ‘I view this sell-off as the last shoe dropping and I am sinking all my remaining funds into blue chips,’ said local remisier Bernie Tan.

 

Source: The Straits Times 22 Jan 08

Lie low till next quarter, Credit Suisse tells investors

THE Singapore stock market will continue its wild swings for the next few months – so keep clear.

That was the health warning from Credit Suisse’s head of Asian equity research, Ms Fan Cheuk Wan, who believes the bourse will start to stabilise and head north in the second quarter.

She estimates that regional markets will end the year 21 per cent higher than where they are now.

She said Asian markets are at an advanced stage of the bull market, where the easy money has been made and where valuations are ‘no longer cheap’.

Regional markets have been hammered by non-stop bad news about the sub-prime crisis and United States recession worries over the past few days.

This ‘perfect storm’ is the reason why investors fled the market in a panic, resulting in the volatility that has roiled regional bourses, including Singapore’s, said Ms Fan.

The good news, though, is that ‘we are now approaching the trough of the market correction’, with at most a ’single-digit per cent downside for the region’, she said.

Ms Fan expects the US subprime crisis and other problems to persist into the second quarter, however, which means ‘no imminent upside’, and so no real incentives for investors to enter the market now.

In fact, investors should batten down the hatches and sit tight until the second quarter, which she believes will offer ‘better opportunities’ for bargain-hunting.

By then, the full effects of the sub-prime crisis will be clear and the US Federal Reserve will also have outlined its plans for the faltering American economy.

Further cuts in US interest rates – inevitable, says Ms Fan – will boost global equity markets, including Singapore’s.

Investors will also have a clearer idea if a US recession is imminent, she said.

Good picks then, she said, would be ‘market leaders in their respective sectors’ with ‘good fundamentals in their domestic markets’.

Ms Fan said companies such as Keppel Corp, DBS Group Holdings and CapitaMall Trust should give investors a ‘good upside potential’.

Other picks include firms in ‘environmental protection and alternative energy’, such as Hyflux, or food producers.

Ms Fan also warned investors off export-oriented counters, such as semiconductor and technology stocks, especially now.

 

Source: The Straits Times 18 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

TAKING STOCK: Asian markets poised for further losses

Current decline in S’pore presents buying opportunity, say some brokers

ASIAN stock markets look set to run into more turbulence this week after Wall Street’s sharp plunge last Friday.

The Dow Jones Industrial Average’s 246-point dive – on fears that American consumers are tightening their belts – is likely to result in a regional knee-jerk selldown today.

The benchmark United States index slipped 1.5 per cent last week to close at 12,606.3 points after falling 4.2 per cent the week before.

Singapore’s Straits Times Index (STI) ended 150.45 points, or 4.4 per cent, lower at 3,287.34 for the week.

Average daily volume grew to 1.88 billion shares worth $2.12 billion last week, from 1.46 billion shares valued at $1.61 billion the week before.

Dealers say the local bourse has been suffering from a lack of fresh direction. This is set to continue.

‘There will be no focus and direction until the end of the month, when more corporate results are available.

The lack of direction is expected to persist until the next US Federal Reserve meeting,’ DMG & Partners Securities senior dealing director Gabriel Yap said.

The market is widely expecting the Fed to cut interest rates but no earlier than the end of the month.

Another direction-setter – Hong Kong – is expected to remain choppy. Analysts tip the Hang Seng Index to trade between 25,800 and 27,800 points this week. Last week, the index fell 2.4 per cent to 26,867.01.

The STI, meanwhile, is seen diving to as low as 3,000 points in the coming months.

A UOB Kay Hian technical report, however, said the ‘present decline is a buying opportunity’.

‘The STI has corrected marginally below 3,300; yet there is no major sign of panic. Even if the index breaks below 3,300, we think there will be secondary supports.’

A recent Merrill Lynch report is also upbeat over Singapore. The investment firm says it continues to favour Asean markets over those of South Korea and Taiwan.

‘Singapore’s ability to adapt to a changing economic environment has driven rapid output growth,’ it said.

‘The government has focused on three key themes: raising competitiveness, expanding the population and wealth management. This will support economic growth in the long term.’

Key US data to watch out this week will include December retail sales and reports on inflation and industrial production.

On the US corporate front, all eyes will be on the earnings of finance heavyweights such as Citigroup, JPMorgan Chase and Merrill Lynch. Much attention will be on the extent of their sub-prime losses.

Back home, the reporting season will move into full swing, with the likes of Singapore Press Holdings releasing its first-quarter results today and the Singapore Exchange its interim report tomorrow.

 

Source: The Sunday Times 13 Jan 08

NEWS OF ASSET SALE: Eng Wah shares soar to record high

CINEMA group Eng Wah Organisation’s share price shot up by 16.5 cents to 85 cents – an all-time high – on news that its portfolio of properties was up for sale.

The counter went as high as 91 cents during the day.

Eng Wah’s properties could be worth as much as $190 million so, based on the 150 million shares in the market, shareholders could get as much as $1.20 in cash per share if all the cash proceeds were distributed.

The group announced in May that it would buy the business of Japanese pharmaceutical firm Transcutaneous Technologies (TTI) by issuing new shares to TTI shareholders. Existing assets of Eng Wah would be sold off, with practically all of the proceeds going back to the shareholders.

Yesterday, Ms Goh Min Yen, Eng Wah’s managing director, reiterated that the asset disposal had always been part of the deal.

Still, a report unveiling details of the sale of the properties by marketing agent Jones Lang LaSalle breathed life into the counter.

Kim Eng Research calculated that each share’s fair value is $1.70. That means even after the jump to 85 cents, the shares look undervalued.

The assets up for sale are the Toa Payoh Entertainment Centre, Jubilee Theatre at Ang Mo Kio, the former Mandarin Theatre at Kallang Bahru, Empress Theatre at Clementi and the 16th floor of Orchard Towers.

 

Source: The Straits Times 11 Jan 08

Inflation fears drag global stock markets down

LONDON – ASIAN and European stocks tumbled yesterday as last week’s strong United States inflation data reduced expectations that the US Federal Reserve would deliver further interest rate cuts soon.

Also, in a sign that rising food and agricultural prices may push inflation up globally, US wheat futures surged more than 3 per cent and surpassed US$10 a bushel for the first time.

Investors took their cue from Wall Street’s sell-off last Friday in the wake of unexpectedly strong inflation figures.

US consumer prices jumped 0.8 per cent last month. On a 12- month basis, inflation hit 4.3 per cent, the fastest since June last year. New York’s Dow Jones Industrial Average tumbled 1.32 per cent last Friday in a volatile session as the price data raised fears of stagflation – a combination of slower growth and stubborn inflation pressures.

Inflation concerns generally weigh on equities as they erode corporate profits.

They are also nagging the world’s central banks as they wrestle with persistent tensions in money markets, which are showing only modest signs of easing after policymakers announced a plan last week to inject liquidity. The plan started yesterday.

Markets are now pricing in around a 78 per cent chance of a January Fed cut in benchmark interest rates to 4 per cent, which will follow three easing moves since the credit crisis broke in August.

Earlier this month, markets fully priced in a cut.

Developments in money markets are key in a week when investors will receive more evidence of how the financial sector is coping with the US sub-prime mortgage fallout as major US banks release quarterly earnings.

In morning trade, London’s FTSE 100 index of leading shares dropped 1.44 per cent, while Frankfurt’s DAX 30 slid 1.2 per cent, and Paris’ CAC 40 shed 1.88 per cent.

Earlier in Asia, Tokyo closed down 1.7 per cent, Hong Kong slumped 3.51 per cent, Seoul shed 2.9 per cent, Shanghai gave up 2.6 per cent, and Mumbai lost 3.8 per cent.

 

Source: REUTERS, AGENCE FRANCE-PRESSE (The Straits Times 18 Dec 07)

Central bankers’ liquidity plan fails to impress Asian investors

China and HK biggest losers in Asia; STI down 2%

(SINGAPORE) Investors in Asian stock markets, clearly sceptical that a plan by central banks to inject liquidity into the system to ease sub-prime pressure would work, yesterday braced themselves for an expected Wall Street sell-off by first dumping stocks throughout the region.

The losses were greatest in China and Hong Kong, where the major indices lost 2.5-3.7 per cent, while here, the Straits Times Index caved in by 69.94 points or 2 per cent to 3,479.31.

However, the STI had already risen 300 points or 8.5 per cent in little under the previous three weeks in anticipation of a US interest rate cut and/or bailout packages.

Similarly, although Hong Kong’s Hang Seng Index yesterday plunged 777 points or 2.7 per cent to 27,744.45, it had surged almost 3,300 points or 13 per cent over the same period.

Dealers said investors, who on Wednesday had apparently embraced news that the Fed is to join hands with other central banks in injecting money into the system by pushing Wall Street higher, had seemingly suffered a change of heart – the December futures contract on the Dow Jones Industrial Average yesterday suffered a loss during Asian trading, suggesting a weak session on Thursday.

‘Just like interest rate cuts, they’ve done it before and it hasn’t helped,’ said a dealer. ‘So markets are understandably cautious and sceptical.’

The New York Fed injected US$62 billion into the US banking system on Aug 9 and 10 in order to ease the credit market’s problems and followed this up with a discount rate cut a week later, but after initially rallying in response, stock markets have continued to suffer from a series of sub-prime related blows.

The suggestion was also made that the pressure of the past two days was due to disappointment over Tuesday’s 25 basis points cut in short-term US interest rates since 50 might have signalled greater Fed resolve to aid the credit market and stave off a recession.

An increasing number of economic commentators have been highlighting the increased likelihood of a US recession, most prominently Morgan Stanley.

In an Asia-Pacific Economics report released yesterday, it said the risk of credit problems attacking the heart of US growth, that is, household consumption, has increased significantly.

‘We believe that Asia ex-Japan (AXJ) will face the real test during the first quarter of 2008 as the US dips into recession,’ said Morgan Stanley.

‘We believe that the market may first be surprised on the downside as the growth trend slows in AXJ in 2008 before it builds the conviction for soft decoupling.’

The US bank also warned of potential turbulence in US equities. ‘In the past few years, globalisation of financial markets has meant that we cannot ignore the possible transmission of growth shocks through financial market linkages . . . during 2000-6, the average correlation between MSCI Asia-Pacific ex-Japan and MSCI US was 72.6 per cent,’ it said.

 

Source: Business Times 14 Dec 07

TAKING STOCK: Regional markets make hasty retreat as Fed cut disappoints

REGIONAL investors were as disappointed yesterday as their United States counterparts over the size of the latest US interest rate cut.

Bourses in Asia fell across the board following an overnight tumble on Wall Street, where key benchmarks fell over 2 per cent.

Investors were unhappy that the Federal Reserve trimmed interest rates only by a quarter point. Some were pinning their hopes on a bolder half-point cut.

This, coupled with a lack of direction from the Fed’s statement, failed to inspire much confidence in Asian markets. Fears of a possible US recession left investors with little reason to cheer.

Taking their cue from Wall Street, most Asian bourses sank into the red and never saw the light of day. Hong Kong’s Hang Seng Index led the region’s fall with a 2.41 per cent decline. Only South Korea’s Kospi Index closed in positive territory.

Joining the sea of red was the local benchmark, the Straits Times Index (STI). Panic sparked a sell-off right after the opening bell, wiping all of Tuesday gains.

The index slumped 79.3 points within a minute, in what a dealer described as ‘an overreaction and irrational move’.

‘It’s still better to have somewhat of a cut than none at all,’ said the dealer. ‘The Fed made a mistake by not sending out any signals if it was open to more rate cuts, so now the market’s fumbling to find its feet.’

Bargain-hunting in the afternoon saw the STI recover slightly before some profit-taking towards the end of the trading day. It closed 1.11 per cent lower at 3,549.25.

Westcomb Securities head of research Goh Mou Lih said: ‘The sell-off was more of an immediate reaction to Wall Street and within expectations.’

The magnitude of the sell-off could have been much larger if the local market had priced in expectations of a bigger cut to the extent that Wall Street did, he added.

Banking stocks, touted to be the main beneficiaries of a US rate cut, took a beating.

DBS Group Holdings lost 30 cents to $21.40, while United Overseas Bank fell 40 cents to $20.10.

Electronics maker Venture Corp slipped on concerns of a slumping US economy. Singapore Airlines also fell after crude oil prices climbed, while SingTel and SembCorp Industries remained unscathed.

Short-term overhang pressure among second-liners and small caps could also manifest in the coming one to two sessions, according to a DBS Vickers report.

Assuming there will be no major bombshells, Mr Goh expects the market to recover.

‘There shouldn’t be any more substantial drops in the stock market,’ he said, adding that he expected a fourth straight rate cut at the Fed’s meeting next month.

Expect volatility to linger on, however, especially with the low trading volume, say analysts. Overall turnover remained a thin 1.45 billion units worth $1.73 billion.

 

Source: The Straits Times 13 Dec 07

INSIDE MARKETS: Sharp rise in sales, buy figures take a plunge

BUYING activity fell while sales by directors and substantial shareholders rose last week based on filings on the Singapore Exchange in the first week of December. A total of 50 firms recorded 143 purchases versus 18 companies with 56 disposals. The buy figures were down from the previous week’s 61 firms and 180 acquisitions while the sales were sharply up from 12 companies and 33 disposals.

On the funds side, the buying was flat for the fourth straight week while sales activity rose. A total of 13 asset managers posted 47 acquisitions which were consistent with the previous week’s 13 fund managers and 44 trades. On the sales side, nine institutions recorded 45 disposals which were nearly double the previous week’s five asset managers and 24 sales. The buyback activity among listed firms also fell with only 11 companies that posted 41 repurchases worth $11.3 million last week. The figures were sharply down from the previous week’s 17 firms, 67 trades, and buybacks worth $19.5 million.

There were several significant trades in the local market last week. On the buying side, Aegis Portfolio Managers resumed buying shares of Broadway Industrial Group at a higher price. While Aegis was buying on the way up, T Rowe Price Associates raised its stake in China New Town Development Company to 5.1 per cent after the stock fell by 20 per cent. Tiedemann Global Emerging Markets also bought shares of Lian Beng Group after the counter fell by 8 per cent. There was also price support in UMS Holdings as its CEO recorded more acquisitions at a lower price. On the sales side, a director of Hsu Fu Chi International recorded a huge disposal after the stock rebounded by 13 per cent. The disposals were significant as they were the first trade by a director of the company since listing.

Broadway Industrial Group

Aegis Portfolio Managers resumed buying shares of foam-moulded interior protective packaging products manufacturer Broadway Industrial Group at higher than its purchase prices in March. The fund manager bought 500,000 shares on Dec 5 at an estimated price of $1.12 each, which increased its deemed holdings to 15.5 million shares, or 7.5 per cent, of the issued capital. The group previously acquired eight million shares from March 14 to 28 at 69 cents to 84 cents each. Aegis Portfolio Managers became a substantial shareholder in September 2004 following the purchase of an initial 7.5 million shares, or 5.1 per cent, at 28 cents each. The stock closed at $1.11 on Friday.

China New Town Development Company

T Rowe Price Associates reported the first corporate shareholder trade in mainland new town projects developer China New Town Development Company since the stock was listed on Nov 14. The group reported an initial filing on Dec 3 of 7.1 million shares at 64 cents each, which increased its deemed holdings by 11 per cent to 71.7 million shares, or 5.1 per cent. The initial filing was made after the stock fell by 20 per cent from the trading debut price of 80 cents. The counter closed slightly higher from T Rowe Price’s initial filing price to 67.5 cents on Friday.

Lian Beng Group

Tiedemann Global Emerging Markets resumed buying shares of building construction and civil engineering firm Lian Beng Group after the stock fell by 8 per cent from its purchase price last month.

The group purchased 3.5 million shares on Dec 3 at an estimated price of 67 cents each, which increased its direct holdings by 11 per cent to 36.6 million shares, or 7.4 per cent. The asset manager previously acquired seven million shares on Nov 1 at what was then the stock’s record high price of 72.5 cents each.

Tiedemann reported an initial filing on Oct 4 of 12.4 million shares at 54 cents each, which raised its interest by 90 per cent to 5.3 per cent. Overall, the group’s stake is up by 10.5 million shares, or 40 per cent, since that initial filing in October. The stock has rebounded sharply from Tiedemann’s last purchase price to 76.5 cents on Friday.

UMS Holdings

CEO Andy Luong resumed buying shares of contract equipment manufacturer UMS Holdings at lower than his purchase price in March. Mr Luong acquired 600,000 shares on Nov 29 at 36 cents each, which boosted his direct stake to 104.6 million shares, or 25.5 per cent. He previously acquired 3.6 million shares on March 2 at 45 cents each. The chairman’s trades since March were made on the back of the sharp decline in the share price since mid-July from 75 cents. Prior to the purchases this year, the chairman acquired 600,000 shares in December 2005 at 39 cents each and 972,000 shares in April 2005 at an average of 46.6 cents each. The recent acquisitions were made three weeks after the company announced its 3Q results.

UMS Holdings posted an 84 per cent drop in net profit to $2.048 million for the 3 months to Sept 30, 2007. Earnings for the first nine months fell by 54 per cent to $10.387 million. The company also bought back shares earlier this year with 9.6 million shares purchased from March to August at 44 cents to 58 cents each or an average of 50 cents each. The group previously acquired 7.1 million shares from June to October 2006 at an average of 44 cents each. The counter closed at 37.5 cents on Friday.

Hsu Fu Chi International

Director Hsu Pu recorded the first trade by a director of mainland confectionery firm Hsu Fu Chi International since the stock was listed in December 2006 with 10 million shares sold on Dec 4 at $1.20 each. The sale reduced his direct holdings by 9 per cent to 97.2 million shares or 12.2 per cent. The disposal was made after the stock rebounded by 13 per cent from $1.06 on Nov 28.

Investors should note that UOB Asset Management ceased to be a substantial shareholder in August following the sale of 2.8 million shares at an estimated price of $1.11 each, which lowered its stake to 4.8 per cent. The group previously reported an initial filing in June of 2.1 million shares at $1.20 each, which raised its interest to 5.2 per cent. Hsu Fu Chi International announced its 1Q results in October with net profit up by 64.4 per cent to RMB 41.1 million for the three months to Sept 30, 2007. The stock closed at $1.18 on Friday.

The writer is managing director, Asia Insider Limite

US sub-prime bailouts help stocks but STI runs into headwinds

IT HAS been bailout week as far as stock markets were concerned but judging by the performance of the past two days, scepticism abounds.

First, it was Fed officials dropping blatant hints about cutting interest rates at their Dec 11 meeting, then came the Bush administration’s mortgage-freeze offer to ease the sub-prime pressure.

It looks like everyone is pulling out the stops to try and make sure there’s no 2008 recession which, if it does occur, would be disastrous given that it’s an election year.

Even though many experts believe lower interest rates and the Bush bailout package are only temporary band-aids for a gaping housing wound, the short-term response last week was a large bounce in the major indices led by those on Wall Street.

The outcome here was that the Straits Times Index managed to rise 36 points or one per cent over the five days to 3,557.95.

But looking at the aggregate performance over the week doesn’t tell the whole story – on Thursday, the index reversed a 55-point rise to finish a nett 7 points down, a pattern that was repeated yesterday when it first shot up by 60-odd points only to collapse to a nett gain of just 5.4 points.

SingTel and the banks were the main index drivers throughout the week, displaying heightened volatility as the days passed. For SingTel there were no fresh broking reports to justify the vast swings. However, for the banks, several ‘overweight’ calls were issued, including those from Kim Eng, DBS-Vickers, Credit Suisse and BNP Paribas.

Most of these were written after the latest loan figures were issued. Using varying valuation methodologies, analysts still believe the banks to be undervalued, though upside from current levels appears to be between 10 and 20 per cent.

In the second line there was continued play on oil palm/commodity stocks such as Golden Agri, Indoffod Agri, Wilmar and Olam, supposedly because of rising oil prices. Also in focus was the construction sector, mainly featuring Lian Beng and Koh Brothers, while penny stocks such as E-Nets, Jade Technologies and Armada enjoyed some respite from the pressure they sustained throughout November.

In its weekly roundup, AMP Capital Investors said it expects equities to move higher into the year-end, thanks to the prospects of more US interest rate cuts and positive seasonal forces. ‘December has been the strongest month of the year on average over the last 20 years so . . . January is also a strong month.’

However, the fund manager said the next six months will be volatile because of US-led uncertainty.

US investment bank Morgan Stanley said in a Dec 6 currency report that the odds of a US recession are now about one in two.

‘As we expected, and despite the Fed cut, credit market conditions have deteriorated considerably and equity market performance has taken a dive. Accordingly, our preferred model implies a risk of US recession of 48 per cent in the coming 12 months,’ said MS.

In a Dec 3 US Economics report, Morgan Stanley said it believes an earnings recession has already begun, judging by Q3 reported profits. It said the market has not priced this in yet and thus poses a downside risk.

‘Earnings disappointments likely will drag equities lower,’ it said.

 

Source: Business Times 8 Dec 07

Bull market still has room to run

Contrarian analysis points to further gains in the near term following the recent stockmarket turmoil

DON’T be too upset by the stock market’s recent decline. It may have been painful, but it’s probably just a stumble by a bull market that still has room to run.

That, at least, is the message that comes from contrarian analysis of investor sentiment – an approach to market timing that relies on the propensity of the average investor to get the market’s near-term direction dead wrong most of the time.

When stocks are really about to decline, for example, and the profitable course of action would be to sell some of the stock in a portfolio and hold cash, the typical investor tends to remain stubbornly optimistic, treating the decline as a buying opportunity.

On the other hand, when the stock market is experiencing a mere correction, and the optimal response would be to load up on stocks, investors generally believe that the decline is just the beginning of something far worse.

It is difficult to measure the sentiment of all investors accurately, so practitioners of contrarian analysis often focus on the opinions of a group of people whose views are broadly representative of investors as a whole, and whose moods are easily quantified.

Investment newsletter editors meet these conditions nicely. Research conducted by the Hulbert Financial Digest over the last two decades shows that the stock market generally has fallen when newsletter editors have jumped on the bullish bandwagon, and the market has risen when the newsletters have been most bleak.

Investment newsletters have been quite gloomy lately, reacting to stock market weakness by hastily moving to cash. From a contrarian point of view, this is a strong bullish indicator. It certainly does not fit the model of what has typically happened before the onset of a bear market. In those episodes, newsletters have typically been bullish.

Consider the average recommended exposure to the stock market among the short-term market timing newsletters tracked by the Hulbert Financial Digest. By Monday, that average had fallen by 63 percentage points since the Standard & Poor’s 500-stock index hit its high in early October, from 50 per cent then to minus 13 per cent early this week.

This meant that the editor of the average short-term market timing newsletter was recommending that his clients allocate 13 per cent of their equity portfolios to actually shorting the stock market – an aggressive bet that the market will go down. By Thursday’s close, that average had climbed back into slightly positive territory at 8 percent. Even with that bounce, however, the average newsletter was extremely pessimistic.

To put the newsletters’ retreat into an historical perspective, consider how they reacted in the weeks after the S&P 500 hit its top in March 2000. At the time, of course, no one could have known for sure that the Internet bubble was bursting and that the decline beginning that month would last for more than two-and-a-half years and lead to a halving in the average share price.

What is clear is that the short-term market-timing newsletters, on average, were not particularly concerned about the prospects for the market. They did not use that decline to reduce the recommended equity exposure of their portfolios. On the contrary, they considered it a buying opportunity. During the first three months after that market top, the newsletters actually increased their average recommended exposure to stocks.

In contrast to the happy-go-lucky attitude that prevailed then, the majority of newsletter editors this time around have fallen over themselves to jump off the bullish bandwagon. Their behaviour bodes well for the stock market’s near-term direction, since in the past they have regularly got it wrong. To bet that stocks are about to enter a bear market, you would need to bet that these Wrong-Way Corrigans will get it right this time. Based on past performance, that’s not very likely.

It is worth noting that contrarian analysis is helpful only for timing the markets’ shorter-term gyrations. Over periods of one year or longer, for example, it sheds little light.

In suggesting that the final top of the recent bull market has not yet been reached, therefore, contrarian analysis does not hazard a guess as to when that top will arrive or how much higher the stock market will be then compared with today. But it does suggest that stocks’ path of least resistance over the next few months will be up.

Contrarians are fond of saying that bull markets like to climb a wall of worry. It would appear that for now, that wall is very much intact.

Mark Hulbert is editor of The Hulbert Financial Digest, a service of MarketWatch

 

Source: NYT (Business Times 5 Dec 07)

MAS WARNING: Credit squeeze, US slump could hit banks

A SHARP slowdown in the United States and an increased aversion to risk in the part of investors spooked by the sub-prime fallout could hurt the profitability of local banks, the Monetary Authority of Singapore (MAS) said yesterday.

Volatile financial markets may lead to trading losses, markdowns in collateralised debt obligation assets and lower fee income, said the central bank. Local banks have reported limited exposure to the US sub-prime problems, but their share prices have still been hit.

Despite the upheaval in global financial markets, Singapore’s economy has remained sound. Full-year gross domestic product growth is expected to be closer to the upper end of a 7.5 per cent to 8 per cent range.

‘The vulnerabilities in the international financial system exposed by the recent turbulence have heightened the risks to the region’s growth outlook,’ the MAS said in its Financial Stability Review.

The US economy could well experience a sharp slowdown due to the sub-prime crisis, in addition to the ongoing correction in the housing sector and soaring oil prices, it said.

‘Slower US growth would affect Asia, given the region’s high dependence on exports,’ the MAS said.

A significant challenge for Asia remains the management of strong capital inflows, as these have posed risks like asset price inflation and volatile exchange rates, it said.

 

Source: The Straits Times 4 Dec 07

TAKING STOCK: Market ends flat as it awaits US rate cue

LOST: One stock market, last seen striding confidently towards the 3,600- point milestone but now believed to be wandering in the wilderness, awaiting direction from a Dr Bernanke in the United States.

The Singapore bourse certainly did not know where it was going yesterday after an early rally – the Straits Times Index (STI) was up 49.48 points at one point – petered out into a barely perceptible rise of 0.29 point to 3,521.56.

The market probably took its cue from the European market, which tanked after the opening bell, said a dealer.

Bargain-hunting and the usual bout of nerves played their part in Singapore, although interest was lukewarm anyway with only 1.46 billion shares worth $2.23 billion changing hands.

Regional markets did not fare much better – Hong Kong’s Hang Seng Index managing a tiny gain, while South Korea’s Kospi, Taiwan’s Taiex and the Shanghai Composite lost some ground.

Investors had hoped for a better showing after last Friday’s positive Wall Street close and hints from Federal Reserve chairman Ben Bernanke that interest rates would be cut this month.

But uncertainty trumps expectations in this market, and buyers kept their powder dry, although the Singapore Exchange was a bright spot, rising 60 cents, or 4.26 per cent, to $14.70.

DBS Group Holdings led financial stocks higher, up 30 cents, or 1.49 per cent, at $20.40, on healthy loans growth in October. United Overseas Bank was up 10 cents, or 0.5 per cent, at $19.90, but OCBC Bank fell five cents, or 0.6 per cent, to $8.45.

The weak market sentiment was nowhere more evident than in the dismal welcome Hyflux Water Trust received at its trading debut yesterday. The trust, which holds 13 water treatment plants in China, ended at a seven-cent discount to its listing price of 78 cents on a volume of 23.44 million.

Parkway Holdings lost 12 cents, or 3.16 per cent, to $3.68, after a Citigroup report lowered its target price to $3.74 from $3.85, citing rich valuations for the stock.

STX Pan Ocean rose for a third day, gaining four cents to $3.18, after hitting as much as $3.36 earlier. The firm expects dry-bulk shipping rates to peak next year because of a shortage of ships.

The UOB Sesdaq Index, which tracks smaller-cap stocks, mirrored the STI’s performance, edging up 0.94 point, or 0.45 per cent, to 210.32.

Market experts sounded a cautious note, citing a hazy outlook. ‘The direction is still unclear. Investors are going to have to be very selective in buying,’ said one dealer.

 

Source: The Straits Times 4 Dec 07

Market to stay volatile in weeks ahead: OCBC

Sub-prime fallout still not over; defensive stocks recommended

INVESTORS feeling dizzy over the recent market swings may have to face another 6-10 weeks of market volatility, till the actual impact of the US sub-prime fallout becomes clearer.

But in the medium to longer term, domestic and regional fundamentals could come into play again and lend support, Carmen Lee, head of research at OCBC Investment Research said yesterday.

‘In the short-term, the volatility in the market will likely persist for the next six weeks to another 10 weeks because this sub- prime thing has not really blown over and that there could possibly be more coming up,’ she said.

The equities market went through a month of volatile trading in November on renewed concerns over credit woes arising from fresh concerns over the US sub-prime mortgage problem and high oil prices.

‘I don’t think that the worst of the sub-prime problem is over. It’s probably going to be worst next quarter,’ said Selena Ling, head of treasury research & strategy at OCBC Bank.

‘So far, we have seen from all the news about Goldman Sachs, Merrill Lynch, Morgan Stanley, Citigroup and the like is that they have announced (writedowns of) about US$75 billion for the third and fourth quarter, so there’s probably another half to go that we will see upcoming in the next one or two quarters,’ Ms Ling said.

Last month, trading volume tapered off by 33 per cent month-on-month and 21 per cent of market value was wiped off from a month ago.

Year-to-date, the Straits Times Index is up 12.9 per cent and the small-cap index up 43.6 per cent, down from their high of +31 per cent and +115 per cent respectively.

Another reason for players to hold back their purchases is the typical lull with the holiday season as many fund managers go on leave. But come January next year when broking houses start to look for fresh trading ideas, the equities market could be looking better, Ms Lee said.

By the end of this year, the STI is expected to be hovering around the 3,300-3,500 level. Yesterday, it closed up 43.05 points or 1.24 per cent at 3,521.27 on increased hopes that the Federal Reserve would cut interest rates to spur the US economy.

Speaking to reporters at a market wrap-up yesterday, Ms Lee said that with cautiousness seeping in, she would only recommend buying into selected key sectors, such as oil and gas, banks, defensive stocks like SPH, ST Engineering and SIA, listed trusts and consumer-related China plays.

‘Even if oil prices come down to US$70-80 a barrel, (marine) order books will still remain very good. In the last few years for the orders that came in, oil prices were hovering around US$40-70 a barrel,’ she said.

As she spoke, New York’s main contract, light sweet crude for January delivery, was above US$90 in Asian trading hours yesterday. ‘Even at US$70, we were seeing significant orders coming through. When the market sees a 20-30 per cent correction in oil price, it’s not going to affect the oil and gas industry in Singapore.’

The under-investment in offshore equipment, rigs and vessels as well as the need for renewal of older rigs also mean continuous investment in this market.

Valuation of banking stocks has become more attractive following the recent correction and the counters will continue to benefit from the robust wealth and fund management activities, strong loans growth and the construction boom, Ms Lee said.

Similarly for China stocks listed here, valuations remain compelling compared to their peers listed in China and Hong Kong.

 

Source: Business Times 1 Dec 07

How much should you invest in a stock?

By TEH HOOI LING

SENIOR CORRESPONDENT

THE science of numbers has developed quite a bit since June 1955, when a new quiz show called The $64,000 Question made its debut on American television. The show was a hit. It captured as much as 85 per cent of the viewing audience and spawned dozens of copycat shows.

There was even betting on which contestants would win. But the problem was the show was produced in New York and aired live on the East Coast of the US. The telecast, however, was delayed by three hours on the West Coast. A gambler took advantage of the time difference by finding out by phone who the winners were, and then placing his bets before the West Coast airing.

John Kelly, a physicist at Bell Labs, heard about the scam on the news. After some pondering, he was convinced that a gambler with ‘inside information’ could use some of the equations developed by his colleague – Claude Shannon – to achieve the highest return on his capital. Mr Shannon, who created information theory after having realised that computers could express numbers, words, pictures, audio and video as strings of digital 0s and 1s, had developed formulas to deal with the signal noise of long-distance telephone transmission. Mr Kelly saw that the equations could be applied to the problem of a gambler who has inside information, say, about a horse race, and who is trying to determine his optimum bet size.

A gambler gets a tip on a race’s outcome. He could bet everything he’s got on the horse that’s supposed to win. But if the gambler adopts this approach, he will lose everything should the information turn out to be wrong. Alternatively, he could play it safe and bet a minimal amount on each tip. This squanders the considerable advantage the inside tips supply.

In Kelly’s analysis, the smart gambler should be interested in ‘compound return’ on capital. That is, to optimise the long-term growth rate of one’s capital, the gambler – the theory also applies to investors – should vary the wager as a proportion to his overall capital depending on the probability of bet being a winning one, and on the payout of the winning bet.

The Kelly formula or Kelly criterion has become a popular money-management formula for investors, hedge fund managers and economists.

Uncertain events

As the saying goes, the only certainties in life are death and taxes. For everything else, we form some kind of expectations of the outcome based on our experience, or what have been documented by others.

In finance, the expected value is used to account for the uncertain outcome of, say, a project or an investment.

Project A, has 30 per cent chance of making a profit of 20 per cent, 40 per cent of a profit of 12 per cent and 30 per cent of making a loss of 15 per cent. So the expected return is 6.3 per cent (30%x20% + 40% x12% + 30% x -15%).

If there are numerous investment opportunities with that kind of probabilistic outcome, then over a long period of time, the investor will earn an average of 6.3 per cent return per investment, as indicated by the expected return.

However, some investments or gambles are such that there is a one in a million chance of getting a $2.5 million payoff for a $1 bet. But for the other 999,999 times, you lose 100 per cent of your wager.

The expected return is a good 150 per cent. But if one were to bet a significant sum of one’s wealth on this kind of gamble, it is almost a certainty that one would be bankrupted before the big payoff comes along.

According to Kelly’s formula, two numbers should decide how much capital one should allocate to bet on an uncertain event: the probability of the bet being a winning one, and the payout. The formula is this: (Probability of bet being a winning one x (expected rate of return +2) -1) / (expected rate of return + 1).

So if you think that an investment has a 51 per cent chance of returning 20 per cent, then according to the formula, you should put 10 per cent of your capital in that investment. But if the probability of the investment yielding 20 per cent drops to 45 per cent or less, then you should not make any bet at all.

Meanwhile, a stock with half a chance of returning 30 per cent, the wager size should be 11.5 per cent of your portfolio.

This method forces an investor to seriously and thoroughly analyse the potential of a stock. And when he or she comes across a stock whose potential they think is severely unappreciated by the market, then they should have the conviction to commit a sizeable bet on it.

The prerequisite for this kind of approach is that the investor must have deep understanding of a stock and the industry it operates in, and have knowledge of how companies are valued by the market.

In a way, the world’s most successful investor, Warren Buffett, also subscribes to this strategy. He advocates focus investing, and to bet big on high probability events.

There have been studies done that, using Kelly’s formula one can minimise the expected time to reach a fixed fortune.

From the table, it appears that the probability of a favourable outcome carries a much bigger weight in determining how much one should put into an investment.

Disadvantages

The Kelly formula was developed to solve similar problems in gambling where the outcome is either win or lose. And it assumes a 100 per cent loss when the outcome is unfavourable. In the stock market, one rarely lose 100 per cent of one’s investment in a single trade.

Also, a financial investor cannot completely rely on the number suggested by the Kelly formula as it does not take into consideration the possibility of a few available investment options.

In gambling, using Kelly’s formula can produce a rather volatile result. There is a one-third chance of halving the bankroll before it is doubled. According to some literature, a popular alternative is to bet only half the amount suggested, which gives three-quarters of the investment return with much less volatility.

Where money accumulates at 9.06 per cent compound interest with full bets, it still accumulates at 7.5 per cent for half-bets.

And as mentioned, this kind of strategy is applicable to those who know their ways around the stock market. But even for experts, putting 30 per cent of one’s portfolio in a stock with a 60 per cent probability of a 35 per cent return seems rather big a bet. The numbers should at best be used as a rough guide.

And for those who don’t have the time or the inclination to carry out in-depth studies of stocks, a diversified approach is perhaps safer.

The writer is a CFA charterholder. She can be reached at hooiling@sph.com.sg

Source: Business Times 24 Nov 07

Top Stories for Front Page – Market sticks to singing the US sub-prime blues

STI loses 115 points for the week reinforced by rising oil price and weak US$

LOCAL stock market investors must by now have grown tired of hearing about the US sub-prime mortgage market, collateralised debt obligations (CDOs) and what the US Federal Reserve might or might not do on interest rates.

Unfortunately, like it or not, these have been the main drivers of stock prices for the past month and were again the prime determinants of direction this week.

There was, however, another fluctuating variable to contend with – rising oil price, which this week came within a hair’s breadth of crossing US$100 per barrel for the first time in history.

Combine all of the above with a sliding US dollar – which makes it less likely that the Fed will cut interest rates – and a downward revision by the Fed for its 2008 economic growth forecast and the ‘buy stocks’ story clearly lacks a certain gloss that it used to have.

As a result, the Straits Times Index came under heavy pressure throughout the week, always appearing more likely to fall at any one time than rise.

Despite a short-covering bounce of 13.01 points yesterday to 3,325.89, the index for the week lost 115 points or 3.3 per cent.

Traders have been deserting stocks in large numbers, leaving house traders and proprietary desks to provide most of the daily volume. Yesterday’s session was one of the quietest in recent months with turnover of 1.4 billion units worth $1.53 billion, down from Thursday’s $2 billion.

Wall Street’s Thursday closure for Thanksgiving robbed the market of some direction, resulting in prices trading within narrow bands. As a result, warrants turnover was also down to 565 million units worth $146 million compared with $220 million on Thursday.

Shipping/shipyard stocks have been among the worst hit and volatile, although the same counters were the market’s best performers in October.

STX Pan Ocean, for example, yesterday plunged to $2.60 before recovering to close a nett 3 cents firmer at $2.91, while Cosco Corp, which only a few weeks ago traded above $8, closed yesterday at $5.90.

The fall in blue chips in the meantime has been led by the banks, Singapore Exchange and SingTel. Interest in penny stocks has dwindled, replaced by punting of structured warrants while new listings over the past two weeks have mainly failed to perform.

In assessing the current situation, AMP Capital Investors said ‘while the correction in shares may still have a bit more to run, it is likely we will soon get a decent rebound on the back of improved valuations, pessimism having reached an extreme, the prospect for further Fed rate cuts and positive seasonal conditions around year end’.

AMP added that ‘US economic data was weak and while the minutes from the Fed’s October meeting indicated that its last interest rate cut was a close call, the huge asset writedowns at US banks and the renewed deterioration in credit markets this month mean that the Fed will be forced to cut rates again, with the next move likely to be next month’.

The US Federal Reserve next meets on Dec 11 and investors are hoping for another interest rate cut.

 

Source: Business Times 24 Nov 07

Reception for IPOs cooling as market sentiment dives

Poor debuts by recent listings fail to dampen plans by at least five firms to go public soon

THE investing public’s appetite for new listings has turned sour amid the current stock-market turmoil.

But the recent rocky reception for several initial public offerings (IPOs) has not deterred several more firms from making plans to list soon.

Out of seven new listings over the past three weeks, only two issues – those of China telco Sinotel Technologies and Cacola Furniture – are still trading above their offer prices.

The other five, including big offerings such as Lippo-Mapletree Indonesia Retail Trust and China New Town Development, quickly tanked.

Investors who had believed the IPOs were sure bets for quick riches were left licking their wounds.

Still, the current dip in sentiment is unlike the IPO drought in September, when firms delayed their listing plans altogether. This time, a steady stream of IPO hopefuls is seeking public comment by displaying their preliminary prospectuses on the Monetary Authority of Singapore’s Opera website.

Two firms are poised to list on the Singapore Exchange (SGX). Dynamic Colours, which makes compounded resins and packaging materials, debuts on the mainboard today, while ChungHong, a printed circuit board assembly service provider, starts trading next week.

A check with Opera shows there are at least five more firms planning to launch IPOs soon. These include well known names such as curry-puff maker Old Chang Kee and China shipbuilder JES International.

Two business trusts – Hyflux Water Trust and Altitude Aircraft Leasing Trust – are slated to go public too.

This is despite a rapidly weakening risk appetite. The Straits Times Index has fallen by a staggering 493 points, or 13 per cent, in just three weeks – losing two months worth of gains.

Some traders have expressed dismay at the speed at which some recent IPOs have slipped from grace, as their share prices plunged after listing.

‘It is simply incredible. In October, new listings like Marco Polo Marine and China Oilfield were still registering strong double-digit percentage gains. Then came the great bear market for IPOs in November,’ said a local brokerage remisier, Mr Alan Koh.

This should highlight to retail investors the importance of reading an IPO aspirant’s prospectus before they subscribe to its shares.

China New Town, which fell 25.3 per cent from its 83-cent issue price to 62 cents in one week, was hurt by fears it might face delays getting approval from Beijing for a 1.17 billion yuan (S$228.5 million) project.

‘The company had prominently highlighted this concern as a risk factor; yet, few investors paid attention until it was listed,’ said the dealer.

Similarly, those who had read the Lippo-Mapletree Indonesia Retail Trust document carefully would have noticed it was offering 20 million units for public subscription.

While this was a mere fraction of the 645.5 million shares placed out to institutions, the allocation was far bigger than the usual two to three million shares offered to retail IPO investors.

This would have spared punters, who applied for more than one million shares, the anguish of getting a higher-than-expected allocation of 733,000 shares – and losing a staggering $87,960 per person, as the stock dived 15 per cent on its Monday debut.

But Ms Wong Bee Eng, the chief executive of boutique corporate finance firm Provenance Capital, said a listed firm’s lacklustre debut should not be seen as a gauge of future performance.

‘There is a lot of time and effort involved in getting a company listed. Unless market sentiment is so poor that an issue manager is unable to place out all the shares, a company will still go ahead with its listing plan, even if the initial reception may not turn out to be warm.’

Still going ahead

A check with the Monetary Authority of Singapore’s website shows there are at least five more companies planning to launch IPOs soon, including well-known names such as curry-puff maker Old Chang Kee and China shipbuilder JES International.

Two business trusts – Hyflux Water Trust and Altitude Aircraft Leasing Trust – are slated to go public too.

The current dip in sentiment is unlike the IPO drought in September, when companies delayed their listing plans altogether.

This time, a steady stream of IPO hopefuls is seeking public comment by displaying their preliminary prospectuses on the MAS’ Opera website.

Also, two firms are poised to list on the SGX: Dynamic Colours debuts on the mainboard today while ChungHong starts trading next week.

 

Source: The Straits Times 23 Nov 07

TAKING STOCK – Bourses buckle across Asia on US, oil worries

ST Index falls 91 points, marking its fourth slump in five sessions

REGIONAL bourses including Singapore suffered a rout yesterday in the face of fresh worries about a slowdown in the United States and record crude oil prices.

The Straits Times Index (STI) plunged 91.07 points, or 2.65 per cent, to end at 3,347.20 – its fourth slide in five sessions.

About 1.83 billion shares worth $2.18 billion were traded, with gainers trailing way behind losers by 176 to 677.

Said CIMB-GK research head Song Seng Wun: ‘It doesn’t take much to knock the wind out of the market’s sails at the moment.

‘Today, it was a continuation of US recession worries, sub-prime fears and high oil prices.’

Earlier, the Federal Reserve slashed its US growth forecast for next year to between 1.8 per cent and 2.5 per cent, down from the 2.5 per cent to 2.75 per cent range forecast in June.

More bad news battered the markets as crude oil continued its charge towards the psychologically significant US$100 mark, hitting a peak of US$99.29 during intra-day trade due to a weakening greenback.

Market players also pointed to Japan’s Nikkei index, saying its early dive had set the scene for a bearish regional trading session.

Said a Singapore dealer: ‘The Nikkei slid quite heavily in late morning trading, which affected regional sentiment.

‘Here, we saw the herd mentality at work, which sparked a selldown.’

The Nikkei dipped 2.46 per cent to 14,387.66 points, while bloodletting on Hong Kong’s Hang Seng Index sent it down by 1,153.02 points or 4.15 per cent to 26,618.19.

Here in Singapore, traders’ fears that Tuesday’s modest recovery was just a ‘dead cat bounce’ – a mild recovery before another fall – were realised.

Singapore Exchange shares led the STI’s decline, as they dived 70 cents to $12.40. That alone accounted for a 10.8-point fall in the index. Dealers said hedge funds were largely responsible for this selldown.

SingTel shares continued their southward spiral as they fell another six cents to $3.72. Investors are concerned about the fallout from an unfavourable ruling by Indonesia’s competition watchdog, but some analysts feel such fears might be overdone.

A Credit Suisse report noted: ‘Concerns over the political and regulatory risk are unlikely to affect short-term or possibly even long-term forecasts. Thus, a further correction could signal a buying opportunity.’

Bank stocks also took a hit, with United Overseas Bank dropping 60 cents to $19. DBS Group Holdings fell 40 cents to $19.20, while OCBC Bank slipped 15 cents to $8.25.

There was no bright debut for Z-Obee Holdings, which managed only 28.5 cents – below its issue price of 34 cents.

Given the volatile times and cautious mood, market experts urge investors to switch from speculative stocks to those with a proven track record and a low price-earnings ratio.

Mr Song added: ‘There are still buying opportunities, despite the uncertain environment. Blue chips, defensive stocks and resource sector counters still continue to be attractive.’

 

Source: The Straits Times 22 Nov 07

INSIDE MARKETS – Directors and shareholders active; buyback activity surges

THE corporate shareholder activity surged last week with huge numbers posted by directors, substantial shareholders, and listed companies, based on filings on the Singapore Exchange from Nov 12 to 16. The increase in the trading coincided with the 4.4 per cent drop in the Straits Times Index (STI) last week to 3,440.96. Directors and substantial shareholders were very active last week with 47 firms that recorded 152 purchases versus 23 companies with 72 disposals. The number of purchases and sales were sharply up from the previous week’s four-day totals of 88 acquisitions and 56 disposals, respectively.

Although the overall trading was up, there was a significant drop in the number of institutional shareholders that reported trades last week. A paltry eight fund managers posted 32 purchases and six asset managers did 48 sales last week. The number of institutions were down from the previous week’s four-day totals of 11 buyers and 11 sellers. The buying among fund managers was particularly low, as the number of purchases last week was sharply lower than the previous week’s 52 acquisitions.

On the buybacks side, a total of 17 listed firms recorded a whopping 65 repurchases worth $48 million.

The figures were sharply up from the previous week’s nine companies, 32 transactions, and $32 million.

The trades last week boosted the buyback totals this month to 19 firms, 105 trades, and $87 million. The figures are already higher than the 14 companies, 45 transactions, and $18 million in October, and there are still 10 trading days remaining in November. The surge in the buybacks this month is not surprising as the STI has fallen by 11.2 per cent from the record high of 3,875.77 on Oct 11.

The surge in the buybacks this month following the steep fall in the market from the record high in October is similar to heavy buyback activity in August, after the market fell by 14.6 per cent from what was then the record high of 3,665.13 in July. The sharp correction prompted 27 firms to record a whopping 210 repurchases worth $208 million in August, which were significantly more than the four companies, 83 trades, and $53 million in July.

Four listed firms repurchased shares for the first time last week. Three of the firms – the Lexicon Group, Chip Eng Seng Corporation, and DBS Group Holdings – bought back following the steep fall in their share prices. The exception was Magnecomp International as the group recorded its first buybacks after the stock rebounded by 17 per cent. Aside from those four firms, investors should also watch out for Wing Tai Holdings, as the group resumed buying back after the counter fell by 31 per cent.

Lexicon Group

Niche magazine publisher Lexicon Group bought back shares for the first time since listing in July 1998, with 1.7 million shares purchased last Thursday and Friday at seven cents each. The acquisitions were made after the stock fell by 33 per cent from 10.5 cents on Sept 12. The repurchases were made after the group announced its interim results last Wednesday.

The Lexicon Group posted a loss after tax of $3.51 million for the six months to Sept 30, 2007, versus a loss of $34.98 million in the same period last year. The stock closed flat from the group’s buyback price at seven cents on Friday.

Chip Eng Seng Corporation

Construction firm Chip Eng Seng Corporation bought back shares for the first time since listing in November 1999 with 2.3 million shares purchased last Thursday at 60 cents each. The buyback was made on the back of the 31 per cent drop in the share price since Oct 5, from 87 cents.

The group’s buyback was made after founder and executive chairman Lim Tiam Seng’s purchase last month. Mr Lim picked up 100,000 shares on Oct 1 at 79 cents each, which boosted his deemed holdings to 83.5 million shares or 12.5 per cent of the issued capital. He previously acquired 500,000 shares on Feb 21 at 40 cents each. Chip Eng Seng announced its interim results in August with net profit up by 859.9 per cent to $19.38 million for the six months to June 30, 2007. The counter closed sharply higher from the company’s buyback price at 67.5 cents on Friday.

DBS Group Holdings

Investment holding and banking & financing firm DBS Group Holdings has bought back shares for the first time since buybacks were implemented by the Singapore Exchange in June 1999, with 900,000 shares purchased from last Monday to Friday at an average of $19.76 each. The initial buybacks were made after the stock fell by 12 per cent this month from $22.40.

Also positive is director John Alan Ross with 5,000 shares purchased last Thursday at $20.18 each, which increased his direct holdings by 33 per cent to 20,000 shares. He also acquired 5,000 shares on Aug 23 at $20.50 each. Mr Ross previously acquired an initial 10,000 shares from April 2003 to March 2005 at $8.75 to $15.30 each.

Fellow director Kwa Chong Seng also bought shares in August with 50,000 shares purchased at $19.00 each, which increased his deemed stake by 54 per cent to 142,000 shares. He previously acquired 50,000 shares in February 2005 at $15.40 each. The stock closed at $19.50 on Friday.

Magnecomp International

Suspension assemblies manufacturer Magnecomp International has bought back shares for the first time since listing in January 1998, with 286,000 shares purchased from last Monday to Wednesday at an average of 90 cents each. The trades were hefty as they accounted for 36 per cent of the stock’s trading volume. The initial buybacks were surprising as they were made after the stock rebounded by 17 per cent from 77.5 cents on Oct 22.

The acquisitions were also made after the group announced its Q3 results on Nov 9. Magnecomp posted a net profit of $7.52 million for the three months to Sept 30, 2007, versus a loss of $4.45 million in the same period last year. Earnings in the first nine months fell by 24.1 per cent to $22.79 million.

There were also semi-bullish signals from executive non-independent director and chief executive officer Steven Glenn Campbell this month. The CEO acquired 625,000 shares last Tuesday via exercise of options at 57 cents each, which increased his direct holdings by 63 per cent – to 1.63 million shares or 0.7 per cent of the issued capital. He refrained from taking profits despite the stock trading sharply higher from his exercise price on that day at 89 cents.

The fact that he did not take any profits, however, was not unusual as he also did not sell any of the one million shares that he acquired via options from May 2004 to April this year at an average of 16.4 cents each.

The stock closed slightly higher from Magnecomp’s buyback price at 93.5 cents on Friday.

Wing Tai Holdings

Property developer Wing Tai Holdings recorded its first buyback since December 2002 with 437,000 shares purchased last Friday at $2.66 each. The rare buyback was made on the back of the 31 per cent drop in the share price since October from $3.86.

Although the recent trade was prompted by the steep fall in the share price, the group’s buyback price was sharply higher than its previous purchase prices, based on the 11.9 million shares that the company acquired from August 2000 to December 2002 at $1.29 to $0.51 each.

The stock closed slightly higher from the group’s buyback price at $2.73 on Friday.

The writer is Managing Director, Asia Insider Limited

 

Source: Business Times 19 Nov 07

Even a monkey can get 24% with this investment formula

Investors could beat the S&P 500 just by imitating Warren Buffett’s trades

(NEW YORK) Buying whatever billionaire Warren Buffett bought, often months after his share purchases, delivered twice the return of the Standard & Poor’s 500 Index during the past three decades.

Investors would have earned an annual return of 24.6 per cent by buying the same stocks as Mr Buffett after he disclosed his holdings in regulatory filings, sometimes four months later, according to a soon-to-be-released study by Gerald Martin of American University in Washington and John Puthenpurackal of the University of Nevada, Las Vegas.

The S&P 500 rose 12.8 per cent a year in the same period.

‘A monkey would have beaten the pants off the S&P 500 by following Warren’s buying and selling,’ said Mohnish Pabrai, who manages US$600 million at Pabrai Investment Funds in Irvine, California.

Mr Pabrai and a friend paid US$650,100 this year in an annual charity auction to lunch with the 77-year-old Buffett.

Mr Buffett’s stock picks outperformed his Omaha, Nebraska-based Berkshire Hathaway Inc from 2002 to 2006 when Berkshire shares advanced at a yearly rate of 7.8 per cent.

By comparison, Berkshire holding USG Corp, the biggest maker of gypsum wallboard in North America, increased about 1,140 per cent and PetroChina Co, China’s largest oil producer, soared eight-fold.

Mr Buffett built Berkshire Hathaway during the past four decades into a US$200 billion company with businesses ranging from ice cream and bricks to insurance and corporate jet leasing.

Berkshire had US$77.9 billion invested in stocks at the end of September, according to a filing with the US Securities and Exchange Commission.

The company’s shares closed on Thursday at US$135,300, the highest price on the New York Stock Exchange.

Berkshire disclosed a new stake in CarMax Inc, the biggest US used-car dealer, in a regulatory filing on Nov 14, sending shares of the Richmond, Virginia-based company 7.6 per cent higher on Thursday.

Berkshire held 14 million shares as of Sept 30, according to the quarterly filing.

Mr Martin said he and Mr Puthenpurackal initiated their study because they wanted to know whether it was better to purchase the stocks that Mr Buffett was buying or invest in Berkshire.

The market-beating returns on copycat investing are based on buying and selling at the end of the month following disclosure over 31 years.

‘Over the past five years, people haven’t been attributing enough of the value Buffett adds to Berkshire,’ Mr Martin said. ‘They’re missing his managerial expertise and how that makes his business grow.’

Mr Buffett’s biggest successes include Washington Post Co. Berkshire invested US$11 million in 1973, attracted by the newspaper’s management team. He also decided the company was in a business with high barriers to would-be competitors. Berkshire’s stake was worth US$1.3 billion at the end of 2006.

Pasadena, California- based Wesco Financial Corp, which has insurance and furniture rental businesses, returned about 200 times the investment over 31 years, according to the study.

The researchers included dividends in calculating gains of stocks and indexes.

Mr Buffett bought US$488 million of PetroChina stock after reading the Beijing-based company’s annual report and concluding the company was worth more than three times its market value given rising oil prices and Chinese consumption.

Berkshire started selling shares in the third quarter and said last month that it made about US$3.5 billion. The stake was disclosed in 2003.

TXU Corp, the Texas power company purchased this year by a buyout group led by Kohlberg Kravis Roberts & Co, more than tripled in the time that Mr Buffett held the shares.

 

Source: Bloomberg (Business Times 17 Nov 07)

TAKING STOCK – STI falls on US problems, weak yen; China New Town sinks

SHARE prices tumbled across Asia, as deepening credit woes in the United States and renewed weakness of the greenback against the yen prompted traders to liquidate positions before the weekend.

Yet, for all the regional bloodletting, local investors took some solace that the fallout in Singapore was not as severe as in other markets.

The Straits Times Index (STI) fell 36.63 points, or 1.05 per cent, to 3,440.96, after plunging by as much as 71 points at one stage.

Other markets did not get off as easily, though. Hong Kong’s Hang Seng Index was down 3.95 per cent, hurt by concerns that China might again raise interest rates, while Tokyo’s Nikkei 225 Index lost 1.6 per cent due to fears a US slowdown might hurt the Japanese economy.

The key concern here was the striking drop in investor interest in equities as prices swung down. Overall, market volume fell to just 1.82 billion shares worth $2.11 billion.

‘Investors are moving to the sidelines and taking a wait-and-see attitude, given the uncertainties caused by the mortgage crisis in the United States,’ said a dealer.

While that was the big picture, there was an equally compelling drama going on among China plays.

Jittery traders dumped recently-listed China New Town Development on concerns its project in China probably did not receive the authorities’ blessing.

China New Town shed 12.1 per cent to 69 cents on a hefty volume of 79.6 million shares. It has now lost 16.8 per cent since it listed on Wednesday.

A China New Town spokesman said it was not the company’s policy ‘to comment on specific share price performance and market speculations’.

One dealer said investor confidence was shaken by a belated realisation that a risk factor disclosed in China New Town’s prospectus might cast a serious pall on its business prospects.

By listing here, China New Town is now regarded on the mainland as a foreign firm. This means it must get the approval of China’s Commerce Ministry for any investment that exceeds US$100 million (S$144.8 million) – a rule that applies to a 1.17 billion yuan (S$228 million) project mentioned in its prospectus.

The firm had been caught in limbo, as the Shanghai branch of the Commerce Ministry did not send its proposal to Beijing after approving it.

‘As the transfer is an internal government procedure, we are not in a position to seek clarification or confirmation,’ it said.

The plunge in China New Town rippled across other China plays, with recent losers continuing their declines.

 

Source: The Straits Times 17 Nov 07

It’s paying off for copycats of Warren Buffett

NEW YORK – BUYING whatever billionaire investment guru Warren Buffett bought, even months after his share purchases, delivered twice the returns of the Standard & Poor’s (S&P) 500 Index during the past three decades.

Investors would have earned an annual return of 24.6 per cent by buying the same stocks as Mr Buffett after he disclosed his holdings in regulatory filings, sometimes four months later, according to a soon-to-be released study by Professor Gerald Martin of American University in Washington and Professor John Puthenpurackal of the University of Nevada.

The S&P 500 rose 12.8 per cent a year in the same period.

‘A monkey would have beaten the pants off the S&P 500 by following Warren’s buying and selling,’ said Mr Mohnish Pabrai of Pabrai Investment Funds. Mr Pabrai and a friend paid US$650,100 (S$941,000) this year in an annual charity auction to lunch with the 77-year-old Mr Buffett.

Mr Buffett’s stock picks outperformed shares of his company, Berkshire Hathaway, from 2002 to last year when Berkshire shares advanced at a yearly rate of 7.8 per cent.

By comparison, Berkshire’s holdings in USG, the biggest maker of gypsum wallboard in North America, increased by about 1,140 per cent, and in PetroChina, China’s largest oil producer, soared eightfold.

Prof Martin said he and Prof Puthenpurackal initiated their study because they wanted to know whether it was better to purchase the stocks that Mr Buffett was buying or invest in Berkshire. The market-beating returns on copycat investing are based on buying and selling at the end of the month following disclosure over 31 years.

‘Over the past five years, people haven’t been attributing enough of the value Buffett adds to Berkshire,’ Prof Martin said. ‘They’re missing his managerial expertise and how that makes his business grow.’

‘We don’t go in and out of the market,’ said Mr Buffett, explaining his investment strategy. ‘I simply look at individual businesses and try to figure out where they’re likely to be in 5 or 10 or 20 years from now.’

 

Source: BLOOMBERG NEWS (The Straits Times 17 Nov 07)

Rosy figures but forex losses, write-downs cloud horizon

Overall profits rise a third to $7.2b despite hiccups at some companies

THE profit numbers certainly look good but confidence has been shaken with investors left with more questions than answers.

 As of last night, the profits of 258 Singapore-listed companies with third quarters ending on Sept 30 totalled $7.21 billion. This is 32 per cent up on the $5.46 billion made in the same period last year.

But huge write-downs by foreign banks – and more modest ones locally – linked to the United States subprime mortgage sector and foreign exchange losses by local rig builders have put nerves on edge.

 Witness the schizophrenic stock market alternating between record highs and gloomy dips.

Underlining much of the jitters is the fear that more firms, particularly in the offshore and marine sectors, could face similar forex losses that have already claimed SembCorp Marine (SembMarine) and Labroy Marine.

 

SembMarine rocked the market, after it revealed that losses from unauthorised forex transactions by its group finance director had amounted to US$303 million (S$438.2 million).

 Labroy also reported an unrealised loss of $206.5 million, after it sold euros for US dollars earlier this year to hedge against exposure to the European currency. Investors are now asking if there will be more forex losses among offshore and marine firms. Market watchers are not betting against it, given the greenback’s continued weakness, which could force

more companies to disclose their positions.

 Analysts estimate that about 60 per cent of Singapore’s corporate order books are denominated in US dollars. ‘There are those who may be suffering more from exchange rate losses after translation, because the Singdollar strengthened. They receive in US dollars and they report in Singdollars,’ said CIMB-GK research head Song Seng Wun.

The chief investment officer of Fortis Private Banking Singapore, Mr Lim Kok Boon, said the losses at SembMarine, which caught the market by surprise, have served as a reality check.‘People are a little more cautious going into the final quarter of the year, especially when  forex movements in the second half of this year have been so volatile,’ he said.

 

Singapore banks – the traditional top earners – will also come under scrutiny in the next few months, with analysts not ruling out more write-downs on their portfolio of investments exposed to US sub-prime problems.

 DBS Group Holdings set aside $70 million last quarter, United Overseas Bank (UOB) made provisions of $55 million and OCBC Bank set aside $221 million to cover the fallout from risky debt.

‘There could be more provisions, but again it will be very similar to the third quarter at worst,’ said Daiwa Institute of Research analyst David Lum.

Mr Najeeb Jarhom, senior vice-president of research at AmFraser Securities, said DBS and UOB should not have to make ’significantly more of such provisions’ as the sub-prime crisis could fade away towards the middle of next year.

 Unlike interim earnings, the full-year figures will be subject to careful scrutiny by external auditors. ‘I suppose they will perhaps take a more conservative interpretation of valuations,’ Mr Song said. While banks might be most vulnerable to damage from the US mortgage mess, analysts say property developers also face much uncertainty, following the end of the deferred payment scheme for buying uncompleted private properties.

‘We’ve got the latest cooldown measure by the Government and to me, it’s not certain that prices would continue to steam ahead like they did for 21/2 quarters,’ Mr Lum said.

So do not expect the stock market to be smooth sailing, say observers.

 

The head of OCBC Investment Research, Ms Carmen Lee, said: ‘We expect market volatility in the short term to remain.’

LESS OPTIMISM‘People are a little more cautious going into the final quarter, especially when forex movements in the second half of this year have been so volatile.’MR LIM of Fortis, on the fourth-quarter outlook Source: The Straits Times 16 Nov 07

Tactical asset allocation models cut risks

ARJUNA MAHENDRAN examines the use of total return strategies as a way of riding out turbulent stock markets

THE stock market boom that started back in 2003 is expected to continue in the medium term. However, an analysis of longer-term market cycles shows that equity investors must brace themselves for more volatility in the short term.

Historically, bull markets have been spread over several decades. Examples of this are the sustained boom that followed the US Civil War and lasted until the beginning of the 20th century, the period after World War II to the end of the 1960s, as well as the phase from the beginning of the 1980s until the Internet bubble burst in 2000. These boom phases were all driven by fundamental innovations such as the railway, electricity, automobiles, aviation, and modern telecommunications.

By contrast, bear markets – when equity prices tumble as they did in 2000-2003 – tend to last two to three years, and result in cumulative losses of between 40 per cent and 80 per cent. They historically turn into a new bull phase with relatively small and mild corrections in the first four to six years, the most recent of these periods probably being from 2003 to mid-2007. The second phase of a longlasting bull market usually sees a correction of 15-20 per cent before the boom continues.

The current economic and societal changes clearly indicate the continuation of the bull market. New technologies (digital communication, nanotechnology), the rapid industrialisation of emerging markets such as China, and demographic changes (urbanisation in Asia, ageing populations in many industrialised countries) provide favourable conditions for growth. However, concerns about dwindling energy resources, geopolitical tensions and environmental problems mean that it will not all be smooth sailing.

Investment strategies must, therefore, also factor in potential crises. In the current environment, the question is whether investors should adopt a passive strategy. Too much short-term switching in a portfolio will eat into returns, but a purely passive strategy when prices are falling could also lead to (book) losses of between 40 per cent and 80 per cent over several years.

Between 1926 and 2006, it sometimes took more than 20 years to earn a higher annualised return on Swiss equities than on Swiss bonds. The figures for the US tell a similar story. In the long run, equity investors are the most successful, but at the same time are exposed to considerable fluctuations in value. Investors with a strong stomach and the courage to buy in weak market phases can achieve handsome returns.

But the loss risk that comes from buying near the end of a boom phase should not be underestimated. The markets are prone to exaggeration: One of the best-known examples is the equity and property bubble in Japan at the end of the 1980s when the Imperial Palace in Tokyo was estimated to be worth as much as the whole of California. Or the technology and Internet bubble in 2000 which saw breathtaking leaps in the market capitalisation of companies that often did not turn a profit and in some cases did not even report any turnover.

Our analyses show that simple indicators such as seasonality (sell in May and go away), momentum, central bank monetary policy, and interest-rate structures on the capital markets can be a useful source of investment tips. A combination of these factors has led to higher returns with a lower downside risk.

These results suggest that sophisticated tactical asset allocation models can offer attractive returns while at the same time substantially reducing the loss risk, otherwise known as total return strategies.

Total return, or absolute return, strategies have two objectives: to achieve a minimum return, often equal to the money market return plus 2-3 per cent; and at the same time to minimise the loss risk. Most of these strategies aim to generate a positive return over a 12-month period.

Total return strategies draw on a dynamic investment approach and diversification to reach their objectives. Demand for these strategies tends to increase when the markets become volatile. Relative return strategies, by contrast, track their performance against a benchmark. This approach means that fund managers can beat the benchmark despite making net losses for their clients, for example, if the fund loses 12 per cent but the benchmark index falls 20 per cent.

The situation is reversed if the total return strategy achieves 10 per cent while the equity market gains 20 per cent in a given year. Investors must be aware that it is not only the returns that vary; the risks are also different.

In practice, total return and relative return strategies are not mutually exclusive. Many clients want active risk monitoring for part of their investments, but at the same time are mindful of the returns achieved in relation to traditional investment forms such as equities and bonds.

Arjuna Mahendran is chief economist and strategist, Asia-Pacific, Credit Suisse Private Banking

 

Source: Business Times 14 Nov 07

MONEY MATTERS – Never react to market chatter

Investors tempted to flee the US stock market, given the bad news coming out of America, might do well to reconsider

THERE has been no dearth of sensational headlines relating to the financial world in the media over the past few weeks. Oil prices are fast approaching US$100 per barrel. Financial institutions are taking accounting charges for sub-prime write-downs. CEOs have stepped down. The US Federal Reserve has lowered interest rates to ease credit in a slowing economy. Unemployment rates are down and inflation is an on-going worry. Minerals and metals, especially gold, are trading at new highs. The US dollar is sliding fast. Global stock markets have been very volatile.

How should a Singapore investor respond to all of these issues? Let’s examine the fundamentals of the US economy, and the US stock market and assess how macro economics affect the value of the US dollar and investor behaviour.

The US economy

Our prime minister was recently asked about the possibility of a recession in the US. He said ‘perhaps’. But will a recession in the US affect Singapore? He replied ‘most definitely’.

The total decoupling of the US economy from the rest of the world has not materialised and global economies are intertwined in terms of economic cycles.

The arguments for the outlook of the US economy go something like this. The probability of a full-blown recession is less than 50 per cent, based on broad consensus. US home prices will probably decline further and we have not seen the end of the sub-prime mortgage mess.

Containing inflationary pressures in the US will be a continuing challenge for the Fed as it lowers interest rates to avoid a hard landing. Lower interest rates translate into lower exchange rates for the US dollar. This anticipated decline in the US dollar will make American exports more competitive and improve the earnings of some US companies.

The US trade deficit will improve in the near term and may check the fall of the dollar.

If the US real economy maintains such a course, the Asian story will go on. This means that Singapore investors should strike a balance by staying invested in global securities for diversification and risk management of their investment portfolios.

There is no reason to dump US securities within a diversified portfolio based on concerns about the possible slow growth of the US economy in the near term.

The US stock market

The valuation of US shares will be of interest to investors. The forward price earnings (PE) ratio of the S&P 500 is now at 15.7 times compared to the pre-bubble 60 times in 2000. In fact, we should turn our attention to exposure in emerging market equities.

Equities in China, India and other emerging markets have appreciated at a much faster clip than those of the developed markets in the last two years due to strong GDP growth. The sensible course of action for an investor is to rebalance a portfolio that has a heavy allocation in emerging markets to a more broadly diversified one because the likelihood of repeat performances in the near term is hard to predict.

Human behaviour is such that not only is the exposure to emerging markets, including Asian stocks, preserved but there may be a tendency to chase performance with fresh capital infusion into Singapore and Asian shares just because there is negative news from some American companies.

Going back to US shares, on average, 25-50 per cent of sales and earnings of US-listed companies come from abroad. This is good news for the global investor.

One can argue that the weak US dollar will contribute to higher earnings for American companies with positive impact from foreign currency translation in the financials. So whether the US economy goes into a recession or not in the near term, some large-cap US equities will continue to deliver growth from sales to the rest of the world in the long term.

Nestle is an example of a global player whose country of listing is not relevant when compared to the company’s sources of revenues.

Even if the US stock market experiences volatility in the near term, there is no case to avoid quality shares listed in the American stock exchanges for a long-term investor.

The US dollar

The Monetary Authority of Singapore has decided to accelerate the appreciation of the Sing dollar versus a managed basket of currencies. This policy is aimed at tackling inflation in our domestic economy. The outcome is a manifestation of the weakening US dollar.

The point is, the Sing dollar is not the only currency that is strengthening. Our currency is moving in tandem with the euro, yen and other regional currencies (see Chart C). But there is no escaping the US dollar for a global investor. How else can you buy into Berkshire Hathaway and Microsoft or Coke and Pepsi?

Procter & Gamble (P&G) owns Pringles, Braun, Gillette, Tampax, Max Factor and Duracell. The only way you can be a shareholder of the company that owns these global brands is to buy P&G shares denominated in US dollars. A global equity portfolio will include companies like P&G.

Whether the direct shares, private equity or unit trusts are denominated in the US dollar, Sing dollar or Australian dollar, it makes little difference in the long term as long as the underlying securities represent profitable companies around the world. It does not make sense to own only shares in companies with strong currencies compared to the US dollar.

Conclusion

Timing the market is next to impossible. Adopting the correct time horizon for specific investment objectives is, however, essential.

Staying invested in the market for the long term is the only way to achieve long-term goals such as retirement funding. The more frequently investors evaluate their returns, the more likely they are to make inappropriate shortterm decisions because myopic loss-aversion causes such investors to treat the long-term as a series of short-terms.

Leading behavioural finance researcher Hersch Shefrin explains this framing concept in his book Beyond Greed and Fear.

So should we be concerned about the US dollar or something far more important?

Going back to basics: review your goals, decide how much is enough in S$ medium- to long-term returns, get the asset allocation right, insist on quality underlying securities without undue concern about the currency of denomination and assess if overall risks for total investment assets are appropriate to your investment time horizon.

Old-fashioned dollar cost averaging will cover market and currency fluctuations in the medium and long term.

Never react to market chatter. Stay invested. Once the framework is in place, allow the strategy a chance to work.

Roy A Varghese is Director, Financial Planning Practice, at ipac Singapore. The views expressed are his own. He can be reached at roy.varghese@ipac.com.sg

 

Source: Business Times 14 Nov 07

Fears of bigger sub-prime losses spook markets

Asian stocks take a beating, with Singapore’s STI sliding a hefty 2.5%

(SINGAPORE) Stock markets around the region were again mauled yesterday in a widely expected retreat after share indices in the United States ended sharply lower on Friday.

The sell-offs on Wall Street last week and those around Asia yesterday were triggered by fears that banks and other financial institutions are likely to suffer much larger losses than earlier expected from the turmoil that began in the US sub-prime mortgage market.

Shares in companies outside the financial sector were also hit, particularly those that depend heavily on export sales, as investors feared that the rising number of home repossessions and mortgage loans gone bad in the US housing market is spreading pain to consumers there who may spend less.

Worries that the US could be headed for an economic recession – never far from investors’ thoughts since late July when the financial market upheaval began – seem to have resurfaced with new intensity.

Some market observers have suggested that the US Federal Reserve’s ability to stave off a recession through further interest rate cuts may be hampered by rising inflationary pressures – a fear that has been stoked in the past week by higher oil prices and a fast-weakening US dollar.

But the broad consensus – for now – seems to be that the US economy is likely to see slower but still positive growth rather than fall into recession, said economist David Cohen at Action Economics. ‘It doesn’t appear that the US is going off a cliff.’

Around the region, major share indices fell sharply yesterday. In Singapore, the Straits Times Index finished 2.5 per cent lower, while in Hong Kong, the Hang Seng Index fell 3.9 per cent. In Japan, the Nikkei 225 index was down 2.5 per cent, while the two main indices in mainland China ended 2.4-2.5 per cent lower.

The gyrations in the market are likely to last at least until early next year when companies report their earnings results for the current quarter, said Philip Lee, JPMorgan’s chief executive of investment banking in South-east Asia. ‘A lot of it is sentiment-driven. People want to see how the fourth-quarter results come out.’

The results, which would indicate the extent of the impact from the recent spike in oil prices and other factors, would be ‘a good harbinger of things to come’, he said.

Meanwhile, investment banking deals are still being done in China and India, he said. ‘People who can do deals are still doing them. Fundamentally, a lot of companies are still doing very well in this part of the world.’

But last week’s slide in the US dollar, which has weakened considerably against the euro and major Asian currencies since August, has also prompted fresh worries over demand for Asian exports destined for the US.

CIMB economist Song Seng Wun said there was ‘quite a lot of fear on the street’ of a US economic recession, but Singapore’s economy was robust enough to withstand a hiccup, though not a protracted downturn. ‘We do have some slack in domestic consumption which is still resilient enough to cushion us in the near term.’

Citigroup’s US research team is still forecasting a ’soft landing’ for the American economy, said economist Chua Hak Bin in a report yesterday.

But he warned that the evidence so far suggests that Singapore and other Asian economies are still vulnerable to a sharp downturn in US economic growth, although less so than in the past. ‘Arguments about decoupling is premature and probably 10 years too early. Asia or emerging markets will not be able to escape the effects of a fullblown US recession.’

Singapore’s prospects in 2008 ‘will hinge critically on the extent of the slowdown in US economic activity next year’, he said.

Still, ‘the current US slowdown is largely housing and construction-led, which has less of an impact on Asian and Singapore exports,’ he added.

Minister Mentor Lee Kuan Yew said on Sunday that Singapore’s economy was ‘doing fine’, but warned that ‘there are dangerous market signals’ – higher oil prices among them.’

 

Source: Business Times 13 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

WARRANT WATCH – Turbulent market puts spotlight on STI contracts

THE choppy market conditions and the recent correction in the Singapore bourse have drawn investors’ attention to warrants of the Straits Times Index (STI).

The STI has been plagued by soaring crude oil prices, a weaker US dollar and lingering fears about the American sub-prime problem.

These factors combined to lower the STI by 73.34 points as it ended at 3,599.67 last Friday.

‘Although the domestic economy is robust, investors are wary that the external factors may eventually affect the economy if they take a turn for the worse,’ said Mr Ooi Lid Seng, Societe Generale’s (SG’s) vice-president of structured products for Asia, excluding Japan.

He singled out two contracts offered by the French bank.

Those who are bullish about the index can consider an SG call warrant expiring on Jan 30 that pays out if the index tops 3,800 points.

That contract was one of the more actively traded warrants last Friday. It dipped nine cents to 41 cents, with 10.8 million units done.

In contrast, those with a negative view can consider an SG put warrant, also expiring on Jan 30, that pays investors if the index dips below 3,400.

That warrant surged 7.5 cents to end at 41.5 cents last Friday, with 1.2 million units exchanging hands.

The most active STI contract last Friday was an SG put warrant with a strike level of 3,700, which lapses on Dec 27.

That warrant saw a volume of 18.3 million units as it gained five cents to close at 34.5 cents.

Mr Ooi said the technical outlook of the STI is slightly negative.

He added: ‘It is now trading at around the psychological 3,600 mark, which is a major support level.

‘If it can stay above this level, the index may attempt to break above its 50-day moving average at 3,665.

However, should the STI weaken further, the next major support would be at 3,500.’

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 12 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

Property shares take a beating

Developers with inventory in prime districts may face pricing pressure

PROPERTY analysts were still busy yesterday predicting how the market will be affected by the end of the deferred payment scheme (DPS) as property shares received their expected drubbing when trading opened.

A report by OCBC Investment Research forecast tough times for the residential sector – but not everyone was gloomy.

The OCBC researchers said: ‘The significance of the current government move is that it is targeting at the demand side of the equation while previous measures (since end-2006) were mainly supply side . . . Demand-side measures historically tend to have severe repercussions on demand and hence pricing.

‘We thus see the latest action (and subsequent action if speculation continues) to be negative on the residential sector.’

A seasoned property consultant said: ‘The withdrawal of DPS will affect speculators, who have been focusing mainly on high-end homes but who have also filtered into mid-market projects as seen in One North Residences and The Rochester. However, even genuine home buyers and investors whose budgets are stretched by the rapid price appreciation will be affected. Sales volumes will come off.’

CIMB-GK Research said: ‘We believe developers with inventory in the prime districts could face pricing pressure as punters retreat. Developers are also likely to bear the brunt of greater financial prudence exercised by genuine home buyers as they no longer have the luxury of time to build up funds for repayment.’

The government’s announcement on Friday of the immediate withdrawal of the DPS means an end to the system in which private property buyers could buy units in uncompleted developments with just a 10 or 20 per cent downpayment, with the payment for the rest of the purchase price in some cases postponed until the completion of the project.

CIMB said in its research note yesterday: ‘We believe this move is aimed at discouraging speculative activity and is also a preventive measure to keep mass-market price escalations in check.’

There will be no new DPS developments available, although developers which have already obtained approval to offer the scheme for a project may continue to do so.

One development that seemed to be benefiting over the weekend from its approval for DPS was United Industrial Corporation’s (UIC) Park Natura, a five-storey freehold condo in the Toh Tuck area near the Bukit Batok Nature Reserve. The condo has an average price of about $1,000 per square foot. UIC is said to have sold more than 60 units over the weekend in the project, which has 192 units in total.

The developer is offering a partial deferred payment scheme where buyers pay an initial 10 per cent, with progress payments needed only after one year.

On the stock market yesterday morning, the Singapore Properties Equity Index fell as much as 2.1 per cent from Friday’s close to 1,545.16 points. It later recovered to end at 1,557.52 points – just 1.3 per cent lower than Friday’s finish.

City Developments lost 50 cents to close at $15.80, followed by SC Global Developments which eased 35 cents to finish at $5.50. Singapore Land lost 25 cents, closing at $9.85.

‘Purer developers with sizeable residential inventories are likely to be the most affected,’ CIMB said.

‘Stocks under our coverage with revalued net asset values that are particularly sensitive to asset price changes include Allgreen, Bukit Sembawang, City Developments, Ho Bee and UOL. We estimate that every 10 per cent change in residential prices will result in 5-10 per cent changes in stock valuations for these companies.

‘The sector is currently under review . . . we expect to lower our residential selling price assumptions by 10-15 per cent in the upcoming results season in view of mounting uncertainties in the property market,’ CIMB said.

Citigroup said that the DPS withdrawal has ‘probably removed the champagne from the party’ since property prices have been fuelled to some extent by the availability of deferred payments, which account for more than 70 per cent for some projects.

‘Sentiment will likely weaken in the short term, particularly in the luxury segment. Longer term, fundamentals, including strong economic growth, immigration and low interest rates will likely be supportive of property prices,’ the report said.

But other analysts, like JP Morgan’s Chris Gee, said that he was recommending investors to be underweight on the sector even before Friday’s announcement.

‘Pricing power is shifting very firmly away from developers because they now have more products to sell,’ he said.

‘But they’re not just competing among themselves for buyers but also with specu-vestors who’ve bought properties since 2005 and who can offer buyers properties that will be physically completed sooner than those that will be launched by developers in the near future.’

 

Source: Business Times 30 Oct 07

Q4 distributable income for Suntec Reit up 22%

SUNTEC Reit has reported fourth-quarter income available for distribution of $30.4 million, an increase of 22.2 per cent from $24.8 million a year ago.

For the same July 1-Sept 30 period, Suntec Reit recorded gross revenue of $51.1 million, an increase of 13.7 per cent year-on-year. Net property income was up 12 per cent up at $36.6 million while distribution per unit (DPU) was 2.122 cents, up 11.3 per cent.

The Reit’s stake in Suntec City Mall and Office Towers contributes 87.4 per cent of its net property income (NPI) and it reported that Suntec office leases were secured at higher rental rates of between $11 and $13 per square foot (psf) per month, and the committed office occupancy at Suntec City is at 99.8 per cent.

Suntec Reit also reported that the committed retail passing rent at Suntec City Mall hit a new high of $10.46 psf per month.

The Reit, which also owns Park Mall and Chijmes, reported that the passing rents there rose to $6.60 psf per month and $10.68 psf per month respectively.

Suntec Reit also recognised a revaluation surplus of $677.5 million for the quarter after independent valuations of its porfolio was valued at $4.57 billion (as at Sept 30).

On a full-year basis (Oct 1, 2006 to Sept 30, 2007), income available for distribution was $115.4 million, up 21.6 per cent from $94.9 million in the corresponding period a year ago. Net property income was up 11.8 per cent at $140.6 million and DPU was up 11.8 per cent at 8.15 cents.

Based on the closing price of $1.84 on Oct 26, Suntec Reit’s distribution yield was 4.4 per cent, up 11.8 per cent compared to the previous year.

Yeo See Kiat, CEO of Reit manager ARA Trust Management said: ‘On the acquisition front, we have entered into an agreement to acquire one-third interest in One Raffles Quay which will be completed shortly.’

Suntec Reit’s other income revenue from A&P, pushcarts and kiosks for FY07 grew 10.2 per cent year-onyear, surpassing the $6 million mark.

For its current office portfolio, 26.8 per cent of leases are expected to expire next year, with 42.6 per cent expiring the following year.

For its retail portfolio, 30.4 per cent of the leases are expected to expire next year, with 23.4 per cent expiring the following year.

Suntec Reit ended the trading day yesterday at $1.84 per share, unchanged.

 

Source: Business Times 30 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

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

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

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

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

PLAY OF THE WEEK – CDL attracts heavy buying after clinching iconic site

CLINCHING the historic Beach Road military camp site helped ignite fresh buying interest in property giant City Developments (CDL).

The site, which cost the CDL-led consortium $1.69 billion, is just a stone’s throw from the upcoming Marina Bay Sands integrated resort and the Formula One street circuit.

Observers believe the acquisition will enhance CDL’s already high-quality portfolio, which includes top-notch commercial buildings and condos like Republic Plaza and The Sail@Marina Bay.

CDL yesterday surged 50 cents to $15.40 on a heavy volume of 5.8 million shares. It hit an intra-day high of $15.60. Its total gain for the week was 40 cents.

Kim Eng Research analyst Wilson Liew said the iconic Beach Road site is slated to include premium offices, two luxury hotels, exclusive residences and retail space with a total gross floor area of 1.58 million sq ft.

‘Assuming a breakdown of 40 per cent for office use, 30 per cent for hotel use, 15 per cent for residential use and 15 per cent for retail use, we estimate the total development cost at around $2.6 billion, should add 25 cents per share to revalued net asset value (RNAV),’ he said.

Mr Liew raised his target price for CDL to $18, based on a 20 per cent premium to his RNAV of $15.66.

The heavy buying of CDL shares also reflected investors’ conviction that demand would stay buoyant in the red-hot residential market.

On Thursday, BNP Paribas noted that developers had maintained their selling prices ‘and have no intention of lowering them at this juncture’.

This was despite a slowdown in property sales last month, which could have been due to buyers here also taking a ‘wait-and-see’ attitude, as the United States mortgage crisis deepened.

On the secondary resale market, the wide disparity between sellers’ asking prices and buyers’ offer prices is narrowing, suggesting that demand in the property market is sustainable.

‘Singapore developers are currently trading at around 6 per cent to 37 per cent below the peak share price prior to the market correction in late July, which presents an attractive discount, especially as property market fundamentals have not changed much over the period.’

BNP Paribas also expects developers with a big exposure to the Singapore mass market, such as CDL, to benefit from opportunities for collective sales still available on the city’s fringes and in suburban areas where land is still affordable.

 

Source: The Straits Times 15 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

WARRANT WATCH – Investors load up on property contracts

THE turmoil which has engulfed financial markets globally has hardly dented investor enthusiasm in Singapore’s red-hot property market.

The swift recovery of property giants such as City Developments (CDL) and CapitaLand after a region-wide selloff two weeks ago suggests that the Singapore equities market has decoupled itself from the volatility on Wall Street.

Yesterday, covered warrants on property developers were among the most actively traded contracts on the Singapore Exchange.

These included a call warrant issued by Deutsche Bank on CapitaLand which closed 0.5 cent lower at 21.5 cents on a volume of 8.15 million units, and a contract issued by Macquarie Bank on CDL which ended one cent down at 14 cents, with 6.67 million units traded.

Interest in these warrants was spurred by the $1.69 billion winning bid by CDL and partners for a plum commercial site at the old Beach Road military camp.

‘This hotly-contested bid is a strong testimony of the keen interest in the property market by foreign developers and the big boys here,’ said a dealer.

Deutsche Bank vice-president Sandra Lee expects warrants on property counters to remain popular with investors. These include a Deutsche Bank call warrant on CapitaLand which requires its holder to use five warrants after paying a strike price of $7.80 for conversion into one share.

 

Source: The Straits Times 12 Sept 07

Company directors snap up shares after market correction

They see good value and investors consider support to be positive sign

PANIC was the last thing on the minds of many company founders and directors when Singapore share prices slumped in spectacular fashion just over a week ago.

Instead, they have leapt into the fray, buying up their own stock at bargain-basement prices since the Aug 17 market nosedive – which followed weeks of volatility.

Companies have also seen a buying opportunity and are weighing in to buy back their shares on the open market.

The Straits Times Index plunged as much as 190 points on Aug 17 and many directors and companies instantly saw good value.

They were emboldened by the fact that many firms had just turned in creditable second-quarter financial results, indicating that corporate fundamentals were sound.

On average, Singapore-listed firms posted a 39 per cent rise in first-half net profits.

One buyer was one of Singapore’s richest men, Mr Zhong Sheng Jian, chief executive of China real estate developer Yanlord Land. He bought 987,000 shares on Aug 16 at an average price of $2.57 and another one million shares at $2.65 a day later.

Even though he shelled out a hefty $5.2 million over two days, these prices are a far cry from the high of $3.68 per share seen just last month.

Market watchers say insiders sometimes buy in during tough times to inspire confidence in a counter.

Mr Kevin Scully, managing director of boutique corporate finance firm NRA Capital, said: ‘Sometimes, this buying is a show of support for the company. It is a good sign because investors want to see support.’

Another bargain-hunter was luxury property developer SC Global chairman and chief executive Simon Cheong, whose wife bought 100,000 shares on Aug 17 at $4.755 apiece, well below the record $6.75 seen last month.

Other key shareholders in the market during this recent turmoil include Yellow Pages director Stanley Tan, who has just emerged from a boardroom battle. He bought 200,000 shares at $1.197 apiece on Monday, another 350,000 units at $1.196 on Tuesday and yet another 200,000 shares on Wednesday at $1.19. The counter has not closed below $1.20 since last November.

Sino-Environment’s chairman and chief executive, Mr Sun Jiangrong, also showed support for his firm, buying 900,000 shares at $2.44 on Tuesday. In April, the waste- treatment firm’s shares hit a peak of $3.78.

Company directors were also in the action. Mr Sam Goi bought 500,000 shares in Super Coffeemix Manufacturing at 75 cents each on Aug 17.

But the swift rebound in the market on Monday also allowed some directors to make a pretty penny.

A director of a Cosco Corp subsidiary, Mr Lee Fook Choy, picked up 500,000 shares at a low of $3.882 on Aug 17 – after they slumped from the $5.65 record late last month. He then sold the shares on Tuesday at $4.60, making a tidy $360,000.

For companies which have a share buyback programme, the current market weakness presents good buying opportunities.

NRA Capital’s Mr Scully added that for firms with a performance share scheme, ‘companies may buy back the shares to allocate to employees later as part of their performance bonus scheme’.

Over the last few days, many companies have been in the market. StarHub bought nearly two million shares at prices ranging from $2.78 to $2.90 since last Friday.

Also since Aug 17, United Overseas Bank has bought back 2.1 million shares at prices as low as $18.80. These have risen as high as $21.50.

 

Source: The Straits Times 25 Aug 07