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!