Friday, July 16, 2010

10 Reasons for Bullish Long Term View on China

The 19th and 20th century belonged to the UK and America respectively. Ten years into the 21st century, I am very confident this century will belong to Asia, in particular China if it plays its cards well. So far it has.

Saturday, July 10, 2010

China Mega Trends

China will by key to world growth in the next 10 to 20 years.

Contrary to popular views, a moderate wage rise for Chinese workers will be positive for long term economic growth for China and the world economy.

Exchange Rates

Wednesday, June 16, 2010

European recession next year 'almost inevitable': Soros

Business Times - 16 Jun 2010
LONDON - Europe faces almost inevitable recession next year and years of stagnation as policymakers' response to the euro zone crisis causes a downward spiral, billionaire investor George Soros said on Tuesday.

Flaws built into the euro from the start had become acute, Soros told a seminar, warning that the euro crisis could have the potential to destroy the 27-nation European Union.

The euro's lack of a correction mechanism or of a provision for countries to leave it could be a fatal weakness, he said.

Germany had imposed its criteria on how a 750 billion euro (US$1 trillion) euro zone rescue mechanism should be used and was imposing its own standards - a trade surplus and a high savings rate - on the rest of Europe, Mr Soros said.

'But you can't be a creditor country, a surplus country, without somebody being in deficit,' he said.

'That's the real danger of the present situation - that by imposing fiscal discipline at a time of insufficient demand and a weak banking system, by wanting to have a balanced budget you are actually ... setting in motion a downward spiral,' he said.

Germany would do relatively well because the decline in the euro had boosted its economy, he told the seminar on the euro zone crisis organised by two thinktanks, the European Council on Foreign Relations and the Centre for European Reform.

'Germany is going to smell like roses but (the rest of) Europe is going to be pushed into a downward spiral, stagnation lasting many years and possibly worse than that,' he said.

'In other words, I think a recession next year is almost inevitable given the current policies,' Mr Soros said, later clarifying that he meant a recession in Europe as a whole.

Warns of social unrest
'If there is no exit, (it) is liable to give rise to social unrest and, if you follow the line, social unrest can give rise to demand for law and order and (sow the) seeds of what happened in the inter-war period,' he said.

Political will to forge a common fiscal policy in Europe was absent and since Europe was liable to move backwards if it did not advance, 'the crisis of the euro could actually have the potential of destroying the European Union,' he said.

European banks had bought large amounts of the sovereign bonds of weaker euro zone countries for a tiny interest rate differential, Mr Soros said.

'That's one of the reasons why the banks are so over-leveraged and why the German and the French banks own Spanish bonds,' he said.

'Now ... they have a loss on their balance sheets which is not recognised and it reduces the credibility of those banks so the banking system is in serious trouble,' he said.

'The commercial paper market, for instance, in America is now refusing to lend to European banks so there is even a funding crisis and the ECB (European Central Bank) has to step in and the banks are unwilling to lend to each other,' he said. -- REUTERS

Thursday, April 29, 2010

Responsible planning for retirement

Business Times - 28 Apr 2010


An asset solution should not purely maximise returns but should be relevant for all investment climates and have the highest probability of meeting retirement liabilities, with due consideration given to liquidity and inflation


INDIVIDUALS are becoming increasingly responsible for the outcome of their retirement solutions, as the world moves away from Defined Benefit towards Defined Contribution schemes. It is essential that individuals are equipped with the adequate tools to make appropriate decisions when constructing retirement solutions, to ensure that they maximise the probability of delivering a sufficient and stable income.

As we have always emphasised, simply recommending 100 per cent equities for an individual with more than 10 years to retirement is not a responsible solution. Attention needs to be given to the potential range of outcomes this asset mix can deliver - some favourable or, as the past 10 years have shown, some very poor. A more responsible approach needs to be taken to make sure that the solution can perform in all market environments - not just an equity bull run.

A useful starting point is to consider the liabilities that the individual will encounter in retirement. There will be significant variation between individuals, depending on the expected lifestyle. But the basic exercise requires making assumptions on potential future payments for discretionary and non-discretionary items. Cash flows for needs such as housing, food, clothing, health, transport, entertainment and travel can all be estimated and, from the aggregate sum, an assumption can be made about the individual's expected liabilities for each year after retirement.

This can be a cumbersome exercise. A quick look through the plethora of 'retirement calculators' available on the Web shows the short cut commonly used is to simply consider future liabilities as a percentage of current income. This is a fairly neat solution to a complex problem, based on the logic that an individual's current salary is a good representation of the amount required to meet living expenses.

However, the key point to then recognise is that the present cost of these payments will not be representative of the real cost. It is not reasonable to expect a movie ticket in 2030 to cost the same as a movie ticket in 2010. Any assessment of future liabilities needs to consider inflation.

Once the expected liabilities are determined, the next step is to establish the appropriate asset mix that maximises the probability of meeting these liabilities. It is worth remembering that this is the money that an individual will live on in retirement, so the level of risk taken in the asset mix should consider the implications of significant under-performance relative to the expected liabilities.

A prominent US academic recently advocated placing 100 per cent of assets in inflation-linked bonds. This solution has virtually no risk as the bonds are government guaranteed with an implicit link to keep pace with inflation. It is difficult to argue against the logic - but the unfortunate reality is that for the majority of individuals, this solution will not deliver sufficient funds in retirement. This is simply because most people do not have enough current capital, or ongoing contributions, to invest in low-risk - and subsequently low-return - assets to generate enough funds to meet retirement liabilities. Most people need to take some level of risk, with the expectation of capital growth helping to offset the deficit.

So here is the rub: How do we get enough returns to generate sufficient funds to meet retirement liabilities - without taking so much risk that the whole solution blows up and leaves the retiree substantially under-funded? Financial advice in the past may simply have been to load up on equities. Hopefully, we have moved on from there. The more innovative approach that is evolving is to supplement a core holding of sovereign and inflation-linked bonds with a diversified basket of risky assets that may include equities, credit, property and commodities. The goal is to create an asset solution with the highest probability of meeting the liabilities, with due consideration given to liquidity and inflation.

A simplified example is laid out in Table 1 below. Take a 45-year-old individual currently earning $60,000 a year, with the expectation of 2 per cent annual salary increases until the retirement age of 68. This will result in a terminal salary of around $91,000 at retirement. The individual has chosen to contribute 10 per cent of his salary each year and feels he will need 60 per cent of his terminal salary to meet his expected liabilities after retirement (which will increase by an assumed inflation rate of 3 per cent). The other fortunate input for this individual is that he already has $100,000 invested in his retirement account.

The following solution assumes an investment return of 6 per cent in the growth phase (before retirement) and 4 per cent in the drawdown phase (after retirement). In the past, retirement solutions sought to take significantly more risk in the growth phase (possibly recommending 100 per cent equities) without sufficient analysis of the potential shortfalls that this may produce in the drawdown phase. Solutions now are more risk-conscious in the growth phase, mindful of protecting an investor's capital to allow compounding to work its magic and provide sufficient funds for the drawdown phase.

As Table 1 shows, this solution will fund the individual into his 80th year. The important question now to be answered is: What is the appropriate asset mix to deliver the return assumptions for the growth and drawdown phases? There is generally a consensus on the drawdown phase, where individuals are recommended to invest in liquid and low-risk assets - like annuities - to protect the capital that they have accrued. The contention is generally centred on the correct mix for the growth phase.

Table 2 shows the analysis for a Singapore dollar-based investor. Based on some fairly conservative assumptions, this portfolio is expected to deliver a 6 per cent return each year with significantly lower risk than equities. This increases the probability of generating sufficient funds to satisfy the liabilities expected, giving the individual greater certainty in being able to meet his retirement needs.

This analysis is based on a hypothetical example and should not be construed as financial advice. But it seeks to demonstrate the evolution of constructing an asset mix for retirement that maximises the potential of achieving the expected liabilities rather than purely maximising return without due consideration to the impact of under-performing the liabilities.

As an industry, the responsibility lies with financial advisory practitioners to provide sound advice to individuals, with an increasing level of choice when it comes to their retirement solutions. The advice needs to be relevant for all investment climates, with due consideration given to inflation, to ensure that the investment strategy of the individual has the highest probability of meeting its objective - a sufficient and stable income for retirement.

The writer is Asia-Pacific head of multi asset, Schroder Investment Management

Saturday, February 20, 2010

The hunt for yields

Business Times - 20 Feb 2010

Here's a selection of regional stocks that appear promising in terms of dividend payouts

ONE of the questions I'm asked most often is: which good stocks provide decent dividend yields? Today, I've decided to do a stock screening to see which names I come up with. I ranked stocks based on their dividend yields. And then, to make sure these yields have more certainty of being sustained, I weeded out those with a market capitalisation of less than $100 million and those deemed by StarMine (the provider of the data) to have low earnings quality - whose earnings can swing wildly. I carried out the screening process in four markets - Singapore, Hong Kong, Japan and Taiwan. Here's what I found:

Taiwan has the most companies with a market cap of at least $100 million that pay dividends of 6 per cent or more. Many are technology-related companies. There are also some from the marine sector, in machinery manufacturing and real estate development. The median market cap of these companies is $218 million.

I came up with the same number of companies from Singapore and Hong Kong - 16 from each market. Among Singapore stocks, Datapulse appears to be the highest dividend-paying stock that has been able to sustain its payout, at least in the past few years. Its yield this year, should it be able to sustain last year's magnitude of distribution, is 10.9 per cent. Meanwhile, its operating margin is healthy at 21.8 per cent and its pre-tax return on assets is 14.9 per cent.

Big-cap stocks - with market cap of $1 billion and above - that made our list include StarHub, M1, SingPost, Venture Corp and Thai Beverage. StarHub's yield, based on last year's payout, is 8.7 per cent. M1's yield would work out to 6.4 per cent, and SingPost's at 6 per cent. Venture Corp and Thai Beverage would each have a yield of 5.6 per cent. The median market cap of these 16 stocks is $181 million.

As for Hong Kong, the companies represented are more mixed. There are construction and engineering firms, textile and apparel producers, a commercial bank and a specialty retailer. The yields range from 5.6 to 10.9 per cent. The median market cap is $331 million.

In Japan, the Tokyo Stock Exchange had the lowest number of stocks that met our criteria. The median market cap of these companies is $224 million.

So there you have it - a shortlist of some stocks which potentially can sustain their dividend payouts, based on data from StarMine. You, of course, have to study them yourself and decide if any of them are good buys. Good luck!

Wednesday, September 9, 2009

Oracle of Omaha bounces back

Business Times - 09 Sep 2009

Despite losing an estimated US$25b in 2008, few people on or off Wall St have capitalised on this crisis as deftly as Warren Buffett

(NEW YORK) Warren E Buffett has two cardinal rules of investing. Rule No 1: Never lose money. Rule No 2: Never forget Rule No 1.

Well, a lot of old rules got trashed when the financial crisis struck - even for the Oracle of Omaha.

At 79, Buffett is coming off the worst year of his long, storied career. On paper, he personally lost an estimated US$25 billion in the financial panic of 2008, enough to cost him his title as the world's richest man. (His friend and sometime bridge partner, Bill Gates, holds that honour, according to Forbes.)

And yet, few people on or off Wall Street have capitalised on this crisis as deftly as Buffett. After counselling Washington to rescue the nation's financial industry and publicly urging Americans to buy stocks as the markets reeled, in he swooped.

Buffett positioned himself to profit from the market mayhem - as well as all those taxpayer-financed bailouts - and thus secure his legacy as one of the greatest investors of all time.

When so many others were running scared last autumn, Buffett invested billions in Goldman Sachs - and got a far better deal than Washington. He then staked billions more on General Electric.

While taxpayers never bailed out Buffett, they did bail out some of his stock picks. Goldman, American Express, Bank of America, Wells Fargo, US Bancorp - all of them got public bailouts that ultimately benefited private shareholders like Buffett.

If Buffett picked well - and, so far, it looks as if he did - his payoff could be enormous. But now, only a year after the crisis struck, he seems to be worrying that the broader stock market might falter again.

After boldly buying when so many were selling assets, his conglomerate, Berkshire Hathaway, is pulling back, buying fewer stocks while investing in corporate and government debt. And Buffett is warning that the economy, though on the mend, remains deeply troubled.

'We are not out of problems yet,' Buffett said last week in an interview, in which he reflected on the lessons of the last 12 months.

'We have got to get the sputtering economy back so it is functioning as it should be.'

Still, Buffett hardly sounded shellshocked in the wake of what he once called the financial equivalent of Pearl Harbor. (An estimated net worth of US$37 billion would be a balm to anyone's psyche.)

'It has been an incredibly interesting period in the last year and a half. Just the drama,' Buffett said. 'Watching the movie has been fun, and occasionally participating has been fun too, though not in what it has done to people's lives.'

Investors big and small hang on Buffett's pronouncements, and with good reason: if you had invested US$1,000 in the stock of Berkshire in 1965, you would have amassed millions of dollars by 2007.

Despite that formidable record, the financial crisis dealt him a stinging blow. While he has not changed his value-oriented approach to investing - he says he likes to buy quality merchandise, whether socks or stocks, at bargain prices - Buffettologists wonder what will define the final chapters of his celebrated career.

In doubt, too, is the future of a post-Buffett Berkshire. The sprawling company, whose primary business is insurance, lost about a fifth of its market value during the last year, roughly as much as the broader stock market.

While Berkshire remains a corporate bastion, it lost US$1.53 billion during the first quarter, then its top-flight credit rating. It returned to profit during Q2.

Time is short. While he has no immediate plans to retire, Buffett is believed to be grooming several possible successors, notably David L Sokol, chairman of MidAmerican Energy Holdings at Berkshire and also chairman of NetJets, the private jet company owned by Berkshire.

After searching in vain for good investments during the bull market years, Buffett used last year's rout to make investments that could sow the seeds of future profits.

Justin Fuller, author of the blog Buffettologist and a partner at Midway Capital Research and Management, said the events of the last year, while painful for many, provided Buffett with the opportunity he had been waiting for.

'He put a ton of capital to work,' Fuller said. 'The crisis gave him the ability to put one last and lasting impression on Berkshire Hathaway.'

For the moment, Buffett seems to be retrenching a bit. Like so many people, he was blindsided by the blowup in the housing market and the recession that followed, which hammered his holdings of financial and consumer-related companies.

He readily concedes he made his share of mistakes. Among his blunders: investing in an energy company around the time oil prices peaked, and in two Irish banks even as that country's financial system trembled.

Buffett declined to predict the short-run course of the stock market. But corporate data from Berkshire shows his company was selling more stocks than it was buying by the end of Q2, according to Bloomberg News.

Its spending on stocks fell to the lowest level in more than five years, although the company is still deftly picking up shares in some companies and buying corporate and government debt.

Among the stocks Buffett has been selling lately is Moody's, the granddaddy of the much-maligned credit ratings industry. Berkshire, Moody's largest shareholder, said last week that it had reduced its stake by 2 per cent\. \-- NYT

Wednesday, September 2, 2009

Who will succeed in the coming super-cycle?

Business Times - 01 Sep 2009

Shift of economic power to the East will create huge opportunities for emerging economies


A PROFOUND change is under way in the world economy. The balance of economic and financial power is shifting from the West to the East.

This shift could usher in a super-cycle of strong, sustained growth for those economies best-positioned to succeed. The successful countries will be those with financial clout or natural resources, or with the ability to adapt and change with the times.

The current crisis, triggered by a systemic failure of the financial system in the West and by an imbalanced world economy, is a sign of this global shift.

Savings flowed 'uphill' from regions running current account surpluses, such as the Middle East and Asia, to deficit countries such as the United States, Spain and the UK.

Some blame the savers, not just the borrowers. This is harsh. The countries that provided the savings to fuel the global boom were not the problem, but are part of the solution. The 1944 Bretton Woods agreement, which has driven thinking since, placed no obligations on savers to correct global imbalances.

The onus was put on countries with deficits to take corrective action. This has to change. A more balanced global economy is needed. The West should spend less and save more, while the Middle East and Asia should do the reverse.

Achieving this will take years, and the implications are huge. The West will become relatively poorer. Money and savings will flow eastwards as multinationals and pension funds invest in markets with higher growth and rising incomes.

Asia will need to change its growth model and boost domestic demand. At this year's Asian Development Bank meeting in Bali, there was a determination to put steps in motion to achieve this, with a focus on social safety nets to discourage saving for a rainy day.

Asia also needs to deepen and broaden its capital markets to allow firms to raise funds, invest and generate jobs. Over the next decade, Asia needs 750 million extra jobs for its young, growing population.

Achieving this would create a huge market for the West to sell into, but at the price of greater global competition. In recent years, the pace and scale of change on the ground in economies as diverse as Brazil, Vietnam and China have been profound.

Furthermore, the catch-up potential of these and others, such as India and Indonesia, is huge. Despite the crisis, the recent infrastructure boom seen in the Middle East continues, particularly in Saudi Arabia and Qatar.

As a result, emerging countries are accounting for an increasing share of global growth. Although the change is widespread, it is China and India that naturally attract attention.

China is still a poor country with huge imbalances, yet its rise over the last three decades has been phenomenal. Now, China is heading into a new development phase, building its infrastructure to compete at every level.

China's US$586 billion stimulus package over this year and next is supplemented by two profound measures - one aimed at building a social safety net and the other at helping farmers to buy consumer goods.

As a result, this year alone the increase in Chinese consumer spending may make up for more than half the shortfall in US consumption. China's growth is forcing others to step up a gear, too.

India's general election this summer saw the government re-elected with a larger majority that could usher in a period of reform, boosting investment and innovation. With 600 million people aged under 25, the potential for India, if it gets this right, is huge.

There are serious implications for commodities, trade and financial flows. Already China accounts for one-third of global demand for metals, and this is rising. India could follow suit, not just in metals, but in food as well.

The outcome will be higher commodity prices, increased investment in countries rich in resources and in water, and a growing need for technological solutions. Regional trade flows are already shifting, with more bilateral deals, rising intra-Asian trade, and greater flows of commodities, goods and investment between Asia and the Middle East, Africa and Latin America.

This will continue, and as it does, it will spell problems for the US dollar. There is a slow-burning fuse underneath the US dollar. A decade ago, Asian central banks held one-third of global currency reserves, and this has now risen to two-thirds, the bulk in US dollars.

Although this has been called the 'dollar trap', the reality is that countries do not want to sell the US dollar actively. Instead, passive diversification is under way. As reserves build, fewer are put into the US dollar.

Brazil and China recently discussed paying for each other's trade in their own currencies, not in US dollars, as is the norm. As trade flows change, we expect more countries to manage their exchange rates against baskets of currencies with which they trade.

The shift of economic power from the West to the East will create profound challenges for many economies, not least the US. It will create huge opportunities for emerging economies, especially those which can position themselves to benefit from the new reality.

Regardless of the winners and losers, this shift is inevitable, and it is crucial to correcting the imbalances in the global economy.

The writer is chief economist and group head of global research at Standard Chartered Bank