BEARS & BULL

10 Reasons for Bullish Long Term View on China

2010-07-16T07:35:00.000+08:00

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.

China Mega Trends

2010-07-10T16:33:00.004+08:00

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

Wages
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

European recession next year 'almost inevitable': Soros

2010-06-16T19:31:00.002+08:00

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

Responsible planning for retirement

2010-04-29T19:34:00.007+08:00

Business Times - 28 Apr 2010

MONEY MATTERS

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

By AL CLARK

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

The hunt for yields

2010-02-20T21:44:00.003+08:00

Business Times - 20 Feb 2010

Here's a selection of regional stocks that appear promising in terms of dividend payouts
By TEH HOOI LING SENIOR CORRESPONDENT

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!

Oracle of Omaha bounces back

2009-09-09T20:34:00.000+08:00

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

Who will succeed in the coming super-cycle?

2009-09-02T19:27:00.001+08:00

Business Times - 01 Sep 2009

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

By GERARD LYONS

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

Jamie Oliver to open Italian restaurant chain in Asia

2009-09-02T19:23:00.001+08:00

Business Times - 26 Aug 2009

(HONG KONG) Celebrity chef Jamie Oliver is planning to launch 30 Italian family-style restaurants in Asia, with the first one set to open its doors to his gastronomic followers in Hong Kong early next year.

The move marks the first step in taking his chain Jamie's Italian - which now has five eateries in England - outside his hometown, to a region which takes pride in its rich diversity of international cuisine and where the economy is picking up faster than anywhere else in the world.

'Why Asia? Of all the markets, it has by far the fastest-growing economy,' said Edward Pinshow, president of Tranic Franchising, which formed a venture with Jamie's Italian International for the Asia expansion. 'The Chinese have become extremely fond of Italian food. In Japan, Jamie's become a household name,' he said yesterday.

Mr Pinshow told AFP that the first stage of the expansion was to open six restaurants in Hong Kong and Singapore, for which he is now raising about US$200 million.

They plan to roll out another 24 eateries in other parts of the region over the next five years, with China, Japan, Taiwan and Korea among the most likely candidates for location.

Mr Pinshow said they are now working hard to get their first restaurant - a 5,000 sq ft, 180-seat venue in Hong Kong - ready for opening in the second quarter of next year.

He said the menu would offer a full-course meal with antipasti, main dish, dessert, plus a glass of Italian wine, for an average of HK$300 (S$55.70) per head\. \-- AFP

Hedge your equities portfolio

2009-09-02T19:21:00.001+08:00

Business Times - 26 Aug 2009

The six-month stock rally looks likely to continue but the risks have risen sharply along with prices, writes LIM SAY BOON

INVESTORS who have yet to hedge their equities positions - something that is always important to do for long-term portfolios - should look into this pretty quickly. On balance, the stock rally of the past six months should continue. But the risks have risen sharply along with prices.

The recent 20 per cent correction in stock prices on the Shanghai stock exchange might not have marked the end of the rally. But it is a warning shot. More than that, it was probably also a glimpse into the future - at how the cyclical rebound in the equities markets could end.

This has not been a high-quality rally. The underlying recovery in the global economy has been driven by inventory restocking and government fiscal and monetary stimulus. Meanwhile, the markets for risky assets - stocks, corporate debt, and commodities - have been helped along by a huge amount of liquidity sitting on the sidelines, in bank deposits and money market funds. The 'frightened money' appears to have started re-entering the market, with bets in favour of government intervention trumping deflation (see Chart 1).

But what happens after the 'mechanical' business of inventory restocking runs its course? The US consumer has been weakened by a one-third decline in the average home price and frightened by employment approaching 10 per cent. There must be serious questions over the ability of the US consumer to sustain the economic recovery beyond inventory restocking.

And even more importantly, as the panic of the past two weeks over Chinese stocks has shown, this is a monetary stimulus-dependent rally. On speculation that the Chinese government might start pulling back money supply and credit growth, the Shanghai stock market collapsed. This is not surprising given the correlation between money supply growth and the performance of the Shanghai Composite Index (see Chart 2).

But this is not just a Chinese market phenomenon. Monetary stimulus - cheap money and plenty of it - has been crucial in sustaining the 'wassail on Wall Street' (and elsewhere). The markets understand this. So they are closely scrutinising almost every word from central bankers around the world for hints of imminent 'exit'.

Events of the past 12 months have been tagged 'the Great Recession meets the Great Government Intervention'. On many measures, the 'Great Government Intervention' has prevailed. The global economy is already in recovery. Economies from Germany to Japan to Singapore are out of recession. The US is likely to be confirmed in coming months as having emerged from recession in Q3 2009.

Asset price performance

Going forward, three factors will be crucial to the future of the ongoing recovery in risky asset prices. The first relates to the strength of the cyclical rebound in the global economy. The second is about growth drivers beyond inventory restocking. And the third relates to the eventual unwinding of government stimulus.

There is a serious risk of disappointment in the strength of the economic rebound in coming months. To date, the economic data has been weighted in favour of performances beating market consensus. The equities bulls appear to be betting on the continuation of better-than-expected data.

That is, they are counting on a sharp rebound following the deep decline of the past 18 months. They are betting on the mechanical process of recovery from sharp inventory destocking, further supported by aggressive government stimulus.

However, recoveries from recessions associated with financial crises have tended to be weaker than those from simple 'cyclical recessions'.

Meanwhile, in the US, unemployment is approaching 10 per cent, house prices are down by an average of around 33 per cent, and the US household savings rate had surged from almost zero savings to around 6.2 per cent of disposable income at its recent high (before pulling back more recently to 4.6 per cent). If this marks a 'new frugality' among US consumers, the global economy is going to struggle to find new drivers for growth.

And if governments start withdrawing fiscal and monetary stimulus while the world is still fumbling around for a new growth paradigm, that would almost certainly trigger a sharp correction in the rally in stocks, corporate bonds, commodities, and commodity currencies. At this stage of the recovery, the stimulus is the party 'punchbowl'. Take that away and the party ends.

On balance, central bankers are likely to be very circumspect about withdrawing stimulus. In the US, looking back some 40 years, the Federal Reserve has never raised its policy rate until the decline in the unemployment rate has been unambiguously entrenched.

That has meant a lag of months, even a year, after the peaking of unemployment. In China, there has been a tendency by the Chinese government over recent cycles to pull in money supply growth only during peaks or close to peaks of industrial production and export growth.

Currently, US unemployment has only just shown very early signs of peaking. Meanwhile, in China, exports are still in deep year-on-year contraction. And with prices in deflation, there is little incentive at this stage for the Chinese government to reverse course on monetary policy.

So money is likely to continue to be plentiful and cheap. Low interest rates are likely to continue forcing investors into the risky asset markets in search of higher returns. And late-comers to the rally could push the markets into an overshoot of fundamentals.

For example, the Shanghai Composite prior to the recent correction was trading at 3.8 times book value. And even with the correction, it is still trading at around 3.6 times book. Eventually, when earnings growth kicks back in, the focus will turn to price-earnings valuations and high returns on equity will eventually justify the high price-to-book valuations. But this has not happened yet - hence the 'overshoot' of fundamentals.

Prices for risky assets are likely to push higher, notwithstanding all the unresolved fundamental problems. But the easy money has been made. Prepare for a rougher ride from here. Volatility - measured by the S&P 500 volatility index VIX - recently hit a low of around 23 per cent. It is still trading around 25 per cent, a far cry from its crisis peak of 90 per cent. Volatility is cheap. Investors should consider buying a proxy for VIX (see Chart 3).

The less aggressive investor might want to start taking profits off the table while continuing to ride this liquidity rally. They might put those profits into VIX to hedge their equities portfolios. They might also want to consider low correlation plays such as gold.

Lim Say Boon is the chief investment strategist for Standard Chartered Group Wealth Management and Standard Chartered Private Bank

Should shareholders own companies?

2009-09-02T19:15:00.001+08:00

Business Times - 02 Sep 2009

BREAKINGVIEWS.COM

By EDWARD HADAS

SHAREHOLDERS own companies. That is what the law says, but when it comes to big listed corporations, most of these owners don't take much care over their property. Lord Myners, the UK City minister, is the latest to complain about this cavalier approach.

Mr Myners' previous suggestions for reform - selling votes, and offering extra votes to long-term holders - don't address the main problem: Most shareholders these days can't or won't think like owners. But his latest proposal - to have more non-voting shares for apathetic investors - is a sensible acknowledgement of the reality that most equity investors make bad owners.

Small private investors generally don't know enough about business and finance. The professional portfolio investor looks only a year or two ahead, and the constant struggle to outperform peers leaves almost no time to worry about individual holdings. Pure traders rarely look more than a few weeks ahead. Even activist investors are often just looking for a quick turn.

Ideally, equity investors might somehow be prodded to take a more active and long-term interest in management. But it is hard to see how that can happen without draconian changes in capital markets: Ending the cult of relative performance and imposing multi-year minimum holding periods.

But something less radical could work even better. Why not admit that absentee equity investors of large publicly traded companies shouldn't generally be treated as owners in the first place? That seems to be the thinking underpinning Mr Myners' idea that many shareholders could choose to disenfranchise themselves by investing in B-shares.

The attribution of ownership to common shares is something of a historical accident. It can still work well for small companies run by their controlling shareholders. But for big companies, common shares are best seen as one of many types of capital. Bondholders and lending banks provide other types of financial capital. Workers bring human capital. Governments and communities offer social capital. There is no good reason to give equity holders absolute priority over all the other capital providers, in the broad sense of the term.

The responsibilities of ownership are best handed to management. Top managers often say that 'shareholder value' is their only or their ultimate concern. That may be true in some theoretical sense - especially if they are talking about shareholder value a generation or two from now. But in practice, the managers spend most of their time trying to serve and balance the needs and desires of many constituencies.

Shareholders are certainly one of them, and should be more important than, say, former workers. But equity investors typically focus on strong quarterly earnings and pleasing patter. Those are usually less important than such other management - or rather ownership - responsibilities as big investment decisions, keeping key workers on board, meeting environmental regulations and ensuring that there is enough cash to keep up with debt payments.

Managers overall do a good job in working for all capital providers. They are certainly better placed to run companies day-to-day and quarter-to-quarter than any outsiders, including the so-called owners. Even when it comes to company-shaping decisions - major investments, acquisitions or being acquired - managers are better placed than anyone else.

As long as markets are liquid, most shareholders will prefer to sell than to try to change companies. That's probably a sensible use of their time, since it's hard to believe these outsiders could add much value to corporate decision-making, even if they tried.

If you want someone to oversee the managers, it should not be the shareholders but the board of directors. Board members aren't generally as short-term in their thinking as the shareholders who usually rubber-stamp their election. A well-chosen board can offer managers outside perspective, relevant experience and even ethical guidance. True, few boards are good at standing up to domineering chief executives. But that's the nature of collaborative enterprises. No system of corporate governance will ever be perfect.

Mr Myners' notion of creating voting and non-voting shares could help address one of the main weaknesses of the current system: That it is too hard to change incompetent boards. If only half the shares carried votes and the prices of voting and non-voting shares were not much different, it would take roughly half as much money to influence corporate direction. That lower threshold could reduce complacency.

In any case, corporate reformers should leave indifferent shareholders alone. For anyone who is serious about improving the oversight of companies - and protecting the long-term interests of shareholders - the board of directors should be the first port of call.

A comfortable, not lavish, retirement

2009-09-02T19:13:00.001+08:00

Business Times - 02 Sep 2009

Surviving retirement without a big pension that never runs out isn't easy, but it's possible with sensible tweaking along the way

By RON LIEBER

WHEN you retire, you'll probably want to visit your grandchildren more than once each year. Perhaps you'll aim to give money each month to charity or your religious congregation.

The amount you have saved will clearly matter a great deal in whether you can do these things. But so will your portfolio withdrawal rate - the percentage of your assets that you take out each year to pay your expenses. You want it to be high enough to afford fun and generosity but low enough that you have little risk of running out of money.

Until a few years ago, the standard advice was that 4 or 4.5 per cent was about the best you could do. So if you had US$500,000 in savings, 4 per cent would give you about US$20,000 in your first year of retirement to augment Social Security and any other income. Then, you could give yourself a raise each year based on inflation. At 3 per cent inflation, you'd end up with US$20,600 in the second year of retirement and so on from there.

More recently, however, several studies have suggested that withdrawing 5 or even 6 per cent was possible - and still prudent. Retirees rejoiced.

And then the stock market fell to pieces. In the wake of the carnage, people who hope to retire anytime soon will probably be starting with a kitty smaller than they had expected just a few years ago. So an extra percentage point on the withdrawal rate matters even more than it might have in 2007. It could be the difference between travelling to see family or not, or it could determine when you get to retire in the first place.

But could it also lead you on a path towards ruin? This week, I went back to two of the researchers who had come up with the more generous formulas to see whether they're sticking by them. Not only are they staying the course, but one is telling his clients that they can take out as much as 6 per cent of their money during the next year. How can they justify something like this after the year we've just had?

Setting a rate

Here's one big reason to be suspicious about applying that same 4.5 per cent withdrawal rate to all people, no matter when they retire: Should a person who had the bad luck to retire in March 2009, at the stock market's recent bottom, spend 4.5 per cent of, say, US$350,000, or could they spend a bit more? After all, people who retired a year or two earlier with the same portfolio, before the bulk of the stock market's decline, might have started with 4.5 per cent of US$550,000 (and taken inflation-adjusted raises each year from that initial amount until they died).

It didn't seem right to Michael E Kitces, a financial planner and director of research at Pinnacle Advisory Group in Columbia, Maryland. He said he was uncomfortable with all the decisions made based on 'the day you happen to come into my office and the balance on that day'. In fact, he started looking into this before the market collapsed, and his research ended up suiting the conditions of the last year perfectly. He tried to figure out whether one could estimate how much better or worse stockmarket returns might be in the years after big declines - and whether the answer might allow for a more generous initial withdrawal rate.

What he concluded was that the overall market's price-earnings ratio - taking the current price for the Standard & Poor's 500-stock index divided by the average inflation-adjusted earnings for the past 10 years before the date of withdrawal - was predictive enough to produce guidelines. Then he came up with the following suggestions for a portfolio of 60 per cent stocks and 40 per cent bonds meant to last through 30 years of retirement.

If the ratio was above 20, indicating that stocks were overvalued, then a 4.5 per cent withdrawal rate was prudent given that the stock market was likely to fall. But if it was between 12 and 20 (the historical median is roughly 15.5), a 5 per cent rate was safe, tested against every historical period for which data was available. And if it was under 12 - a level it almost got to earlier this year - a rate of 5.5 per cent would work.

The most recent figure was 17.67, which suggests a 5 per cent withdrawal rate for current retirees. It had been above 20 until last October.

Mr Kitces gets his ratios from a set of data that Yale professor Robert Shiller creates and stores on Yale's website, at http:bit.ly/3gexz.

Making adjustments

Jonathan Guyton, a financial planner with Cornerstone Wealth Advisors in Edina, Minnesota, looked at the 4.5 per cent baseline and asked a different question: Couldn't it be a whole lot higher if a client was willing to forgo the annual inflation raise when conditions called for a bit of thrift? And if so, under what conditions would that happen - and would people be willing to, in effect, cut their own retirement paycheck?

It didn't take Mr Guyton long to find out. Two studies he worked on in 2004 and 2006 led him to the following conclusions about a portfolio meant to last 40 years: Using Mr Kitces' research to establish a baseline initial withdrawal rate of up to 5.5 per cent (or 5 per cent given valuations at the moment), the initial withdrawal rate could rise another whole percentage point, to 6.5 per cent, if at least 65 per cent of the money was in a variety of stocks, as long as the owner followed a few rules.

First, if the portfolio lost money in any given year, there would be no raise at all for inflation. And if the size of the withdrawal, in dollars, in any year amounted to an actual percentage rate of the remaining portfolio that was at least 20 per cent more than the initial withdrawal rate, retirees would have to take a 10 per cent cut in their annual allowance that year. Then, the increase for inflation would build on that new base the following year.

While Mr Guyton also put a 'prosperity' rule into place that allowed for a 10 per cent increase in particularly good years, 2008 tested his 'capital preservation' rule first. So he cut his clients' withdrawals by 10 per cent.

How did they take it? 'Many of them said, 'really, that's all?' ' he recalled. 'Keep in mind how dire things seemed.' Others blanched, noting that they had played by the rules and didn't cause the financial crisis. But they came around when Mr Guyton gave them a good talking to. 'For us to maintain the same degree of long-term financial security for you that you said you wanted, this is what you need to do,' he told them. 'It's a system. And the great thing about a policy is that it leaves no doubt about what you are supposed to do.' Another cut of 10 per cent might severely hurt their purchasing power, but the stock market's performance since March suggests that it won't be necessary in the coming months.

The real world

The actual execution of these strategies requires a bit more work.

You need to figure out what stocks and bonds should make up your investments in the first place, for instance, and how best to minimise taxes when you sell each year.

All this together seems complicated enough to suggest to a cynic that it's just a ruse to keep a client coming back each year for costly check-ups. That said, surviving retirement without a big pension that never runs out isn't easy, and paying a bit of money each year in exchange for help in prudently raising your withdrawal rate by 20 per cent does not strike me as completely insane.

Retirees also have to wonder whether the market will behave in the future as it has in the past. Or whether retirees can realistically stick to a strict budget.

'Even if you tell me that spending fluctuates a bit here and there, we still have to start somewhere,' said Mr Kitces. 'What on earth is your alternative? Are you not going to give any spending recommendations whatsoever?'

Mr Guyton solves this issue for clients who can afford it by carving out a separate discretionary fund. Retirees can spend that money on anything, but once it's gone, it's gone - unless they manage to replenish it out of their regular annual withdrawal.

There are still plenty of retirees and advisers who will balk at what appears to be outsize aggressiveness, whatever the studies indicate. To them, Mr Guyton suggests an entirely different consideration.

'The only problem is you run out of money? I don't buy that,' he said. 'For a lot of people who lock in on a 4 per cent figure, it's a formula for regret. They get 15 years in and look back at all of the things they didn't do. And now their health is gone.' - NYT

Navigating the global credit crisis

2009-09-02T19:10:00.000+08:00

Business Times - 02 Sep 2009

MONEY MATTERS

Coming months are likely to show not only recovery but, in the case of US, accelerating recovery investors have been hoping for

By NORMAN VILLAMIN

INVESTORS can learn a lot from history. Looking back at the first quarter of 2009, many investors, fretting about the woeful state of the global economy, failed to focus on the things that matter - valuation and the rapid acceleration of global policy momentum. As it turned out, the combination of these factors created the backdrop for the sharp rally in global equities over the past six months.

Looking forward now from the heights that global equity prices have achieved, it is understandable that investors are getting increasingly wary. Admittedly, the valuation case has weakened with the rallies to date. But global policy effectiveness has not waned. Rather, it has begun to shift from the Chinese-led successes of the first half of 2009 to a broader, global story, with US policy achievements, in particular, emerging recently. This leaves the prospect, we believe, for another leg in the global rally in equities that began in March 2009.

Continued momentum in US economic and earnings data in coming weeks, underpinned by US policy momentum of the second quarter, is expected to drive this leg of the rally. Year-to-date, economic recovery momentum has been key to identifying relative outperformers globally. With emerging markets recovering from the 'Great Recession' more quickly than developed markets, economic momentum reflected in data releases has been a focus of market attention in the current rally. Recall, early in the year, news of the US and Chinese economic policy changes that helped set the stage for a bottoming in global markets. With Chinese stimulus coming sooner and more aggressively, unsurprisingly, the MSCI China rose 35 per cent in the first half of 2009, compared with a meagre 5 per cent for MSCI World.

With Chinese policy now stabilising, as Beijing tries to contain rapid year-to-date loan growth, US growth momentum is beginning to benefit from Washington's stimulus efforts of the late-first quarter of 2009. Their effectiveness was most recently seen in the July 2009 expansion of the Institute of Supply Management's New Orders Index, which historically has provided a three to six-month lead to turns in the US economy. Indeed, the most recent reading suggests that investors' concerns about job growth in the United States may begin to be addressed in coming months (see chart), providing further economic support to the earnings drivers that may emerge come October this year.

Looking a bit further ahead, the US third-quarter earnings season likewise looks set to provide support to the market in coming weeks. Indeed, during the rally since March, the US earnings season - the first six weeks of each quarter - was a key driver for market performance. Recall, as the first-quarter earnings season got under way in April, world equities, represented by MSCI World, rallied 18 per cent before stalling in mid-May as the earnings season came to a close. Similarly, as the second-quarter earnings season got under way in July 2009, world equities rallied another 12 per cent up to mid-August, as the season came to a close again. In total, on a compounded basis, the earnings-season rallies accounted for almost two-thirds of the 52 per cent rise in global equities up to Aug 21. With another earnings season quickly coming upon us in October, Tobias Levkovich, Citi's US equity strategist, notes that upward revisions to earnings expectations could continue into the northern autumn, potentially providing a catalyst for the next leg of the rally we have seen since March.

The resumption of US economic growth momentum and positive prospects for US earnings surprises in the third quarter suggest he global economic recovery is starting to transition from one with China as the sole driver to a more balanced US-China model. Indeed, since mid-year, this transition in policy and data has resulted in US equities outperforming their Chinese counterparts, with MSCI US rising 11.5 per cent up to Aug 21, exceeding the 5.7 per cent increase in MSCI China over the same period.

Therefore, although we can appreciate the caution investors are expressing, given that valuations are no longer cheap, expected news flow leads us to believe that caution will not be rewarded by the markets in the coming months. Rather, we encourage investors to manage their risk by managing their exposure within global equities. We expect that Asian equities, even after a near-50 per cent rally year-to-date, as indicated by MSCI Asia ex-Japan, may participate in this next leg. However, unlike the first half of 2009, where they trumped the flattish 5 per cent performance of global equities, we don't believe that they will necessarily lead regional performances as they did in the first semester.

Rather, investors who ignored US equities early in the year may wish to reconsider opportunities provided by this market. However, they should keep in mind that while recovery looks entrenched, the US recovery is expected to come in sub-trend, with GDP growth in the recovery phase falling short of previous cycle peaks. With this in mind, investors may seek to focus on opportunities that continue to under-price even the modest economic recovery we expect.

In this regard, we see opportunities in US and global energy services companies. While global crude prices have rallied from near-production cost at the beginning of the year to above US$70 a barrel recently, Citi analysts are still able to identify stocks where down-cycle price-to-book value multiples remain in place. As a result, even though global book valuations are expected to recover at only a moderate pace, the prospect for price-to-book value multiple expansion leaves an attractive risk-reward outlook for investors looking ahead.

Despite our optimism through to year-end, we must admit that the global recovery story must be strengthened further to sustain the rally into the new year. China, already grappling with rapid loan growth, must moderate its aggressive easing policy of early-2009 and structurally, continue to build its domestic consumer base. As for the US, it needs to transition its economy from a stimulus-led recovery back to a private sector-driven demand story.

On balance, though, while there are certainly concerns on the horizon, news flow over the coming months is expected to show not only recovery but, in the case of the US, accelerating recovery that investors have been hoping for, leaving the balance of risk and reward through year-end still pointed in favour of the reward camp, and creating an opportunity for investors to broaden out their focus from first-half leader emerging markets to include opportunities presented by US markets as well.

The writer is head of investment analysis & advice, wealth management, Asia-Pacific, Citi

Interpreting the Crisis

2009-08-26T08:04:00.002+08:00

Business Times, 26 Aug 2009

The events of last September and October exhibited some features of a classic panic

This is the second and final part of an excerpt of the speech by US Federal Reserve chairman Ben Bernanke at the Federal Reserve Bank of Kansas City's Annual Economic Symposium at Jackson Hole, Wyoming on Aug 21.

HOW should we interpret the extraordinary events of the past year, particularly the sharp intensification of the financial crisis in September and October? Certainly, fundamentals played a critical role in triggering those events. As I noted earlier, the economy was already in recession, and it had weakened further over the summer. The continuing dramatic decline in house prices and rising rates of foreclosure raised serious concerns about the values of mortgage-related assets, and thus about large potential losses at financial institutions. More broadly, investors remained distrustful of virtually all forms of private credit, especially structured credit products and other complex or opaque instruments.

At the same time, however, the events of September and October also exhibited some features of a classic panic, of the type described by (British economist and journalist Walter) Bagehot and many others.

A panic is a generalised run by providers of short-term funding to a set of financial institutions, possibly resulting in the failure of one or more of those institutions. The historically most familiar type of panic, which involves runs on banks by retail depositors, has been made largely obsolete by deposit insurance or guarantees and the associated government supervision of banks.

But a panic is possible in any situation in which longer-term, illiquid assets are financed by short-term, liquid liabilities, and in which suppliers of short-term funding either lose confidence in the borrower or become worried that other short-term lenders may lose confidence.

Although, in a certain sense, a panic may be collectively irrational, it may be entirely rational at the individual level, as each market participant has a strong incentive to be among the first to the exit.

Panics arose in multiple contexts last year. For example, many financial institutions, notably including the independent investment banks, financed a portion of their assets through short-term repo agreements. In repo agreements, the asset being financed serves as collateral for the loan, and the maximum amount of the loan is the current assessed value of the collateral less a haircut.

In a crisis, haircuts typically rise as short-term lenders attempt to protect themselves from possible declines in asset prices. But this individually rational behaviour can set off a run-like dynamic: As high haircuts make financing portfolios more difficult, some borrowers may have no option but to sell assets into illiquid markets. These forced sales drive down asset prices, increase volatility, and weaken the financial positions of all holders of similar assets, which in turn increases the risks borne by repo lenders and thus the haircuts they demand.

This unstable dynamic was apparent around the time of the near- failure of Bear Stearns in March 2008, and haircuts rose particularly sharply during the worsening of the crisis in mid-September.

As we saw last fall, when a vicious funding spiral of this sort is at work, falling asset prices and the collapse of lender confidence may create financial contagion, even between firms without significant counterparty relationships. In such an environment, the line between insolvency and illiquidity may be quite blurry.

Panic-like phenomena

Panic-like phenomena occurred in other contexts as well. Structured investment vehicles and other asset-backed programmes that relied heavily on the commercial paper market began to have difficulty rolling over their short-term funding very early in the crisis, forcing them to look to bank sponsors for liquidity or to sell assets.

Following the Lehman collapse, panic gripped the money market mutual funds and the commercial paper market, as I have discussed. More generally, during the crisis, runs of uninsured creditors have created severe funding problems for a number of financial firms. In some cases, runs by creditors were augmented by other types of 'runs' - for example, by prime brokerage customers of investment banks concerned about the funds they held in margin accounts. Overall, the role played by panic helps to explain the remarkably sharp and sudden intensification of the financial crisis last fall, its rapid global spread, and the fact that the abrupt deterioration in financial conditions was largely unforecasted by standard market indicators.

The view that the financial crisis had elements of a classic panic, particularly during its most intense phases, has helped to motivate a number of the Federal Reserve's policy actions.

Mr Bagehot instructed central banks - the only institutions that have the power to increase the aggregate liquidity in the system - to respond to panics by lending freely against sound collateral.

Following that advice, from the beginning of the crisis, the Fed (like other central banks) has provided large amounts of short-term liquidity to financial institutions. As I have discussed, it also provided backstop liquidity support for money market mutual funds and the commercial paper market, and added significant liquidity to the system through purchases of longer-term securities.

To be sure, the provision of liquidity alone can by no means solve the problems of credit risk and credit losses; but it can reduce liquidity premiums, help restore the confidence of investors, and thus promote stability. It is noteworthy that the use of Fed liquidity facilities has declined sharply since the beginning of the year - a clear market signal that liquidity pressures are easing and market conditions are normalising.

What does this perspective on the crisis imply for future policies and regulatory reforms? We have seen during the past two years that the complex interrelationships among credit, market, and funding risks of key players in financial markets can have far-reaching implications, particularly during a general crisis of confidence.

In particular, the experience has underscored that liquidity risk management is as essential as capital adequacy and credit and market risk management, particularly during times of intense financial stress. Both the Basel Committee on Banking Supervision and the US bank regulatory agencies have recently issued guidelines for strengthening liquidity risk management at financial institutions. Among other objectives, liquidity guidelines must take into account the risks that inadequate liquidity planning by major financial firms pose for the broader financial system, and they must ensure that these firms do not become excessively reliant on liquidity support from the central bank.

But liquidity risk management at the level of the firm, no matter how carefully done, can never fully protect against systemic events. In a sufficiently severe panic, funding problems will almost certainly arise and are likely to spread in unexpected ways. Only central banks are well positioned to offset the ensuing sharp decline in liquidity and credit provision by the private sector. They must be prepared to do so.

Systemwide approach

The role of liquidity in systemic events provides yet another reason why, in the future, a more systemwide or macroprudential approach to regulation is needed. The hallmark of a macroprudential approach is its emphasis on the interdependencies among firms and markets that have the potential to undermine the stability of the financial system, including the linkages that arise through short-term funding markets and other counterparty relationships, such as over-the-counter derivatives contracts. A comprehensive regulatory approach must examine those interdependencies as well as the financial conditions of individual firms in isolation.

Since we last met here, the world has been through the most severe financial crisis since the Great Depression. The crisis in turn sparked a deep global recession, from which we are only now beginning to emerge.

As severe as the economic impact has been, however, the outcome could have been decidedly worse. Unlike in the 1930s, when policy was largely passive and political divisions made international economic and financial cooperation difficult, during the past year, monetary, fiscal and financial policies around the world have been aggressive and complementary.

Without these speedy and forceful actions, last October's panic would likely have continued to intensify, more major financial firms would have failed, and the entire global financial system would have been at serious risk. We cannot know for sure what the economic effects of these events would have been, but what we know about the effects of financial crises suggests that the resulting global downturn could have been extraordinarily deep and protracted.

Although we have avoided the worst, difficult challenges still lie ahead. We must work together to build on the gains already made to secure a sustained economic recovery, as well as to build a new financial regulatory framework that will reflect the lessons of this crisis and prevent a recurrence of the events of the past two years.

I hope and expect that, when we meet here a year from now, we will be able to claim substantial progress towards both those objectives.

When the pursuit of prosperity crosses borders

2009-08-26T08:01:00.001+08:00

Business Times - 26 Aug 2009

THERE will be no end to people pursuing two main things: wealth and prosperity. These are pursued by Singapore too. One of Singapore main achievements is economic.

The socio-economic status of the city state with a population of almost four million is on par with that of the world's richest countries. Following its separation from Malaysia that saddened Lee Kuan Yew, the country nursed the ambition of becoming a manufacturing hub, and subsequently became a centre for the service sector.

Processing of permits, service and prowess in attracting investors and tourists largely guide them in their every policy and action. Education is promoted - in fact, subsidies are granted to churn out intelligent and skilled citizens. Nationalism and self-defence are other aspects that get enhanced too, including national service and campaigns aimed at inculcating national pride. It has among the most sophisticated weapons in the region. Singapore is one of the respected countries that could not be ignored in terms of military might.

Like it or not, Singapore is in fact one of the countries that Indonesia depends on while Indonesians enjoy visiting it. Indonesians make up the largest number of international visitors to Singapore. When they make trips to various parts of the world, most Indonesians fly Singapore Airlines.

Singapore is also the transit point for imports, exports and other socioeconomic activities. It is also the business capital and hub for the region which includes Indonesia.

The problem that crops up is that Singapore's comprehensive and clear policy attaches importance to its own interest. This is only logical, and all countries do likewise. No matter how harsh the criticism and strong the hatred towards Singapore, it enjoys sovereignty.

However, if its policy overlaps with another country's, problems at times break out. Apart from Malaysia, Indonesia becomes the 'victim' here.

Singapore's arguments are also strong with its anticipatory, visionary and tactical policy, if not to say rather 'cunning'. Which country is not tactical or, say, 'cunning' when it concerns international relations?

In this context of being cunning, Indonesia needs to understand, and do the same. However, Indonesia is clearly way behind and loses out here.

This may be noticed, for instance, when Indonesia wishes to get its corrupt citizens 'hiding' in Singapore extradited. To conclude an extradition treaty, Singapore wants it to be complemented with a Defence Cooperation Agreement (DCA) which essentially allows it to conduct military training in Indonesian territory with a relatively free hand.

It is here that problems arise, because it involves sovereignty. In other words, the extradition treaty must be complemented with the DCA. The oddity lies with the Indonesian side. And, after a process that was not made known to the public, the extradition treaty and DCA were inked in Bali.

Subsequently, there were protests in parliament that declined to ratify the agreements. What did Singapore have to say? 'After the agreements were signed, came the objections. In fact, after the signing, we partied and even had karaoke,' said Singapore Foreign Minister George Yeo.

Blame game

The agreements stalled, with Singapore putting the 'blame' more on Indonesia. However, Singapore Prime Minister Lee Hsien Loong said: 'Singapore made a new proposal for the agreements to be restored.' However, Singapore insists on treating the extradition treaty and DCA as a package. 'However, Indonesia chose to stand firm to this issue,' said Mr Lee.

Apparently, the ball is now in Indonesia's court. And the question is how could Indonesia be unaware of what was happening? How could Indonesia, or at least a handful of people, go through a process that ended with the extradition treaty and DCA? Does the old position still surface, ie whatever the government does is bound to have been approved by the People's Representative Council (DPR)? In drawing up the extradition treaty, which was most probably based on international law, must a certain degree of Indonesia's territorial 'sovereignty' be sacrificed?

The conclusion is: We are not ready and do not understand Singapore's tactical and comprehensive strategy.

The above editorial was published in Indonesia's Kompas on Aug 14

Looking back at the Crisis

2009-08-25T09:40:00.003+08:00

Business Times, 25 Aug 2009

Bernanke reflects on the events of the past year, the challenges they posed, the measures taken, and the lessons learnt

This is the first part of an excerpt of the speech by US Federal Reserve chairman Ben Bernanke at the Federal Reserve Bank of Kansas City's Annual Economic Symposium at Jackson Hole, Wyoming on Aug 21. The second and final part will appear tomorrow.

BY THE standards of recent decades, the economic environment at the time of this symposium one year ago was quite challenging. A year after the onset of the current crisis in August 2007, financial markets remained stressed, the economy was slowing, and inflation - driven by a global commodity boom - had risen significantly. What we could not fully appreciate when we last gathered here was that the economic and policy environment was about to become vastly more difficult.

One very clear lesson of the past year - no surprise, of course, to any student of economic history, but worth noting nonetheless - is that a full-blown financial crisis can exact an enormous toll in both human and economic terms. A second lesson - once again, familiar to economic historians - is that financial disruptions do not respect borders. The crisis has been global, with no major country having been immune.

History is full of examples in which the policy responses to financial crises have been slow and inadequate, often resulting ultimately in greater economic damage and increased fiscal costs. In this episode, by contrast, policymakers in the United States and around the globe responded with speed and force to arrest a rapidly deteriorating and dangerous situation. Looking forward, we must urgently address structural weaknesses in the financial system, in particular in the regulatory framework, to ensure that the enormous costs of the past two years will not be borne again.

September-October 2008: The crisis intensifies

When we met last year, financial markets and the economy were continuing to suffer the effects of the ongoing crisis. We know now that the National Bureau of Economic Research has determined December 2007 as the beginning of the recession. The US unemployment rate had risen to 53/4 per cent by July, about one percentage point above its level at the beginning of the crisis, and household spending was weakening.

Ongoing declines in residential construction and house prices and rising mortgage defaults and foreclosures continued to weigh on the US economy, and forecasts of prospective credit losses at financial institutions both here and abroad continued to increase. Indeed, one of the nation's largest thrift institutions, IndyMac, had recently collapsed under the weight of distressed mortgages, and investors continued to harbour doubts about the condition of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, despite the approval by the Congress of open-ended support for the two firms.

Notwithstanding these significant concerns, however, there was little to suggest that market participants saw the financial situation as about to take a sharp turn for the worse. For example, although indicators of default risk such as interest rate spreads and quotes on credit default swaps remained well above historical norms, most such measures had declined from earlier peaks, in some cases by substantial amounts.

And in early September, when the target for the federal funds rate was 2 per cent, investors appeared to see little chance that the federal funds rate would be below 13/4 per cent six months later. That is, this time last year, market participants evidently believed it improbable that significant additional monetary policy stimulus would be needed in the United States.

Nevertheless, shortly after our last convocation, the financial crisis intensified dramatically. Despite the steps that had been taken to support Fannie Mae and Freddie Mac, their condition continued to worsen. In early September, the companies' regulator placed both into conservatorship, and the Treasury used its recently enacted authority to provide the firms with massive financial support.

Shortly thereafter, several additional large US financial firms also came under heavy pressure from creditors, counterparties, and customers. The Federal Reserve has consistently maintained the view that the disorderly failure of one or more systemically important institutions in the context of a broader financial crisis could have extremely adverse consequences for both the financial system and the economy. We have therefore spared no effort, within our legal authorities and in appropriate cooperation with other agencies, to avert such a failure.

The case of the investment bank Lehman Brothers proved exceptionally difficult, however. Concerted government attempts to find a buyer for the company or to develop an industry solution proved unavailing, and the company's available collateral fell well short of the amount needed to secure a Federal Reserve loan of sufficient size to meet its funding needs. As the Federal Reserve cannot make an unsecured loan, and as the government as a whole lacked appropriate resolution authority or the ability to inject capital, the firm's failure was, unfortunately, unavoidable. The Federal Reserve and the Treasury were compelled to focus instead on mitigating the fallout from the failure, for example, by taking measures to stabilise the triparty repurchase (repo) market.

In contrast, in the case of the insurance company American International Group (AIG), the Federal Reserve judged that the company's financial and business assets were adequate to secure an US$85 billion line of credit, enough to avert its imminent failure. Because AIG was counterparty to many of the world's largest financial firms, a significant borrower in the commercial paper market and other public debt markets, and a provider of insurance products to tens of millions of customers, its abrupt collapse likely would have intensified the crisis substantially further, at a time when the US authorities had not yet obtained the necessary fiscal resources to deal with a massive systemic event.

The failure of Lehman Brothers and the near-failure of AIG were dramatic but hardly isolated events. Many prominent firms struggled to survive as confidence plummeted. The investment bank Merrill Lynch, under pressure in the wake of Lehman's failure, agreed to be acquired by Bank of America; the major thrift institution Washington Mutual was resolved by the Federal Deposit Insurance Corporation (FDIC) in an assisted transaction; and the large commercial bank Wachovia, after experiencing severe liquidity outflows, agreed to be sold. The two largest remaining free-standing investment banks, Morgan Stanley and Goldman Sachs, were stabilised when the Federal Reserve approved, on an emergency basis, their applications to become bank holding companies.

Nor were the extraordinary pressures on financial firms during September and early October confined to the United States: For example, on Sept 18, the UK mortgage lender HBOS, with assets of more than US$1 trillion, was forced to merge with Lloyds TSB. On Sept 29, the governments of Belgium, Luxembourg, and the Netherlands effectively nationalised Fortis, a banking and insurance firm that had assets of around US$1 trillion.

The same day, German authorities provided assistance to Hypo Real Estate, a large commercial real estate lender, and the British government nationalised another mortgage lender, Bradford and Bingley. On the next day, Sept 30, the governments of Belgium, France, and Luxembourg injected capital into Dexia, a bank with assets of more than US$700 billion, and the Irish government guaranteed the deposits and most other liabilities of six large Irish financial institutions.

Soon thereafter, the Icelandic government, lacking the resources to rescue the three largest banks in that country, put them into receivership and requested assistance from the International Monetary Fund (IMF) and from other Nordic governments. In mid-October, the Swiss government announced a rescue package of capital and asset guarantees for UBS, one of the world's largest banks. The growing pressures were not limited to banks with significant exposure to US or UK real estate or to securitised assets. For example, unsubstantiated rumours circulated in late September that some large Swedish banks were having trouble rolling over wholesale deposits, and on Oct 13, the Swedish government announced measures to guarantee bank debt and to inject capital into banks.

The rapidly worsening crisis soon spread beyond financial institutions into the money and capital markets more generally. As a result of losses on Lehman's commercial paper, a prominent money market mutual fund announced on Sept 16 that it had 'broken the buck' - that is, its net asset value had fallen below US$1 per share. Over the subsequent several weeks, investors withdrew more than US$400 billion from so-called prime money funds.

Conditions in short-term funding markets, including the interbank market and the commercial paper market, deteriorated sharply. Equity prices fell precipitously, and credit risk spreads jumped. The crisis also began to affect countries that had thus far escaped its worst effects. Notably, financial markets in emerging market economies were whipsawed as a flight from risk-led capital inflows to those countries to swing abruptly to outflows.

The policy response

Authorities in the United States and around the globe moved quickly to respond to this new phase of the crisis. The financial system of the United States gives a much greater role to financial markets and to non-bank financial institutions than is the case in most other nations, which rely primarily on banks. Thus, in the United States, a wider variety of policy measures was needed than in some other nations. In the United States, the Federal Reserve established new liquidity facilities with the goal of restoring basic functioning in various critical markets. Together, these steps helped stem the massive outflows from the money market mutual funds and stabilise the commercial paper market.

During this period, foreign commercial banks were a source of heavy demand for US dollar funding, thereby putting additional strain on global bank funding markets, including US markets, and further squeezing credit availability in the United States.

To address this problem, the Federal Reserve expanded the temporary swap lines that had been established earlier with the European Central Bank (ECB) and the Swiss National Bank, and established new temporary swap lines with seven other central banks in September and five more in late October, including four in emerging market economies. In further coordinated action, on Oct 8, the Federal Reserve and five other major central banks simultaneously cut their policy rates by 50 basis points.

The failure of Lehman Brothers demonstrated that liquidity provision by the Federal Reserve would not be sufficient to stop the crisis; substantial fiscal resources were necessary. On Oct 3, on the recommendation of the administration and with the strong support of the Federal Reserve, Congress approved the creation of the Troubled Asset Relief Program, or TARP, with a maximum authorisation of US$700 billion to support the stabilisation of the US financial system.

Markets remained highly volatile and pressure on financial institutions intense through the first weeks of October. On Oct 10, in what would prove to be a watershed in the global policy response, the Group of Seven (G-7) finance ministers and central bank governors, meeting in Washington, committed in a joint statement to work together to stabilise the global financial system. In particular, they agreed to prevent the failure of systemically important financial institutions; to ensure that financial institutions had adequate access to funding and capital, including public capital if necessary; and to put in place deposit insurance and other guarantees to restore the confidence of depositors.

In the following days, many countries around the world announced comprehensive rescue plans for their banking systems that built on the G-7 principles. To stabilise funding, during October, more than 20 countries expanded their deposit insurance programmes, and many also guaranteed non-deposit liabilities of banks. In addition, amid mounting concerns about the solvency of the global banking system, by the end of October, more than a dozen countries had announced plans to inject public capital into banks, and several announced plans to purchase or guarantee bank assets.

This strong and unprecedented international policy response proved broadly effective. Critically, it averted the imminent collapse of the global financial system, an outcome that seemed all too possible to the finance ministers and central bankers that gathered in Washington on Oct 10. However, although the intensity of the crisis moderated and the risk of systemic collapse declined in the wake of the policy response, financial conditions remained highly stressed.

For example, although short-term funding spreads in global markets began to turn down in October, they remained elevated into this year. And, although generalised pressures on financial institutions subsided somewhat, government actions to prevent the disorderly failures of individual, systemically significant institutions continued to be necessary. In the United States, support packages were announced for Citigroup in November and Bank of America in January. Broadly similar support packages were also announced for some large European institutions, including firms in the United Kingdom and the Netherlands.

Although concerted policy actions avoided much worse outcomes, the financial shocks of September and October nevertheless severely damaged the global economy - starkly illustrating the potential effects of financial stress on real economic activity. In the fourth quarter of 2008 and the first quarter of this year, global economic activity recorded its weakest performance in decades.

In the United States, real GDP plummeted at nearly a 6 per cent average annual pace over those two quarters - an even sharper decline than had occurred in the 1981-82 recession. Economic activity contracted even more precipitously in many foreign economies, with real GDP dropping at double-digit annual rates in some cases. The crisis affected economic activity not only by pushing down asset prices and tightening credit conditions, but also by shattering household and business confidence around the world.

In response to these developments, the Federal Reserve expended the remaining ammunition in the traditional arsenal of monetary policy, bringing the federal funds rate down, in steps, to a target range of zero to 25 basis points by mid-December of last year. It also took several measures to further supplement its traditional arsenal. In particular, on Nov 25, the Fed announced that it would purchase up to US$100 billion of debt issued by the housing-related GSEs and up to US$500 billion of agency-guaranteed mortgage-backed securities, programmes that were expanded substantially and augmented by a programme of purchases of Treasury securities in March.

The goal of these purchases was to provide additional support to private credit markets, particularly the mortgage market. Also, on Nov 25, the Fed announced the creation of the Term Asset-Backed Securities Loan Facility (TALF). This facility aims to improve the availability and affordability of credit for households and small businesses, and to help facilitate the financing and refinancing of commercial real estate properties.

The TALF has shown early success in reducing risk spreads and stimulating new securitisation activity for assets included in the programme. Foreign central banks also cut policy rates to very low levels and implemented unconventional monetary measures.

On Feb 10, Treasury Secretary Geithner and the heads of the federal banking agencies unveiled the outlines of a new strategy for ensuring that banking institutions could continue to provide credit to households and businesses during the financial crisis. A central component of that strategy was the exercise that came to be known as the bank stress test.

Under this initiative, the banking regulatory agencies undertook a forward-looking, simultaneous evaluation of the capital positions of 19 of the largest bank holding companies in the United States, with the Treasury committing to provide public capital as needed. The goal of this supervisory assessment was to ensure that the equity capital held by these firms was sufficient - in both quantity and quality - to allow those institutions to withstand a worse-than-expected macroeconomic environment over the subsequent two years and yet remain healthy and capable of lending to creditworthy borrowers.

This exercise, unprecedented in scale and scope, was led by the Federal Reserve in cooperation with the Office of the Comptroller of the Currency and the FDIC. Importantly, the agencies' report made public considerable information on the projected losses and revenues of the 19 firms, allowing private analysts to judge for themselves the credibility of the exercise. Financial market participants responded favourably to the announcement of the results, and many of the tested banks were subsequently able to tap public capital markets.

Overall, the policy actions implemented in recent months have helped stabilise a number of key financial markets, both in the United States and abroad. Short-term funding markets are functioning more normally, corporate bond issuance has been strong, and activity in some previously moribund securitisation markets has picked up. Stock prices have partially recovered, and US mortgage rates have declined markedly since last fall.

Critically, fears of financial collapse have receded substantially. After contracting sharply over the past year, economic activity appears to be levelling out, both in the United States and abroad, and the prospects for a return to growth in the near term appear good.

Notwithstanding this noteworthy progress, critical challenges remain: Strains persist in many financial markets across the globe, financial institutions face significant additional losses, and many businesses and households continue to experience considerable difficulty gaining access to credit. Because of these and other factors, the economic recovery is likely to be relatively slow at first, with unemployment declining only gradually from high levels.

Super-rich hit a sobering wall

2009-08-25T09:39:00.003+08:00

Business Times, 24 Aug 2009

FOCUS: WEALTH GAP

A 30-year period in which affluent Americans became both wealthier and more numerous may be ending, analysts say

THE rich have been getting richer for so long that the trend has come to seem almost permanent. They began to pull away from everyone else in the 1970s. By 2006, income was more concentrated at the top than it had been since the late 1920s.

The recent news about resurgent Wall Street pay has seemed to suggest that not even the Great Recession could reverse the rise in income inequality.

But economists say - and data is beginning to show - that a significant change may in fact be under way. The rich, as a group, are no longer getting richer. Over the last two years, they have become poorer. And many may not return to their old levels of wealth and income anytime soon.

For every investment banker whose pay has recovered to its pre-recession levels, there are several who have lost their jobs - as well as many wealthy investors who have lost millions. As a result, economists and other analysts say, a 30-year period in which the super-rich became both wealthier and more numerous may be ending.

The relative struggles of the rich may elicit little sympathy from less-well-off families who are dealing with the effects of the worst recession in a generation. But the change does raise several broader economic questions. Among them is whether harder times for the rich will ultimately benefit the middle class and the poor, given that the huge recent increase in top incomes coincided with slow income growth for almost every other group. In blunter terms, the question is whether the better metaphor for the economy is a rising tide that can lift all boats - or a zero-sum game.

Just how much poorer the rich will become remains unclear. It will be determined by, among other things, whether the stock market continues its recent rally and what new laws Congress passes in the wake of the financial crisis. At the very least, though, the rich seem unlikely to return to the trajectory they were on.

Last year, the number of Americans with a net worth of at least US$30 million dropped 24 per cent, according to CapGemini and Merrill Lynch Wealth Management. Monthly income from stock dividends, which is concentrated among the affluent, has fallen more than 20 per cent since last summer - the biggest such decline since the government began keeping records in 1959.

Bill Gates, Warren Buffett, the heirs to the Wal-Mart Stores fortune and the founders of Google each lost billions last year, according to Forbes magazine. In one stark example, John McAfee, an entrepreneur who founded the antivirus software company that bears his name, is now worth about US$4 million, from a peak of more than US$100 million. Mr McAfee will soon auction off his last big property because he needs cash to pay his bills after having been caught off guard by the simultaneous crash in real estate and stocks. 'I had no clue,' he said, 'that there would be this tandem collapse.'

Some of the clearest signs of the reversal of fortunes can be found in data on spending by the wealthy. An index that tracks the price of art, the Mei Moses index, has dropped 32 per cent in the last six months. The New York Yankees failed to sell many of the most expensive tickets in their new stadium and had to drop the price. In one ZIP code in Vail, Colorado, only five houses sold for more than US$2 million in the first half of this year, down from 34 in the first half of 2007, according to MDA Dataquick. In Bronxville, an affluent New York suburb, the decline was to two, from 17, according to Coldwell Banker Residential Brokerage.

'We had a period of roughly 50 years, from 1929 to 1979, when the income distribution tended to flatten,' said Neal Soss, the chief economist at Credit Suisse. 'Since the early 1980s, incomes have tended to get less equal. And I think we've entered a phase now where society will move to a more equal distribution.'
Few economists expect the country to return to the relatively flat income distribution of the 1950s and 1960s; indeed, they say that inequality is likely to remain significantly greater than it was for most of the 20th century. The Obama administration has not proposed completely rewriting the rules for Wall Street or raising the top income-tax rate to anywhere near 70 per cent, its level as recently as 1980. Market forces that have increased inequality, like globalisation, are also not going away.

No swift recovery

But economists say that the rich will probably not recover their losses immediately, as they did in the wake of the dotcom crash earlier this decade. That quick recovery came courtesy of a new bubble in stocks, which in 2007 were more expensive by some measures than they had been at any other point save the bull markets of the 1920s or 1990s. This time, analysts say, Wall Street seems unlikely to return soon to the extreme levels of borrowing that made such a bubble possible.

Any major shift in the financial status of the rich could have big implications. A drop in their income and wealth would complicate life for elite universities, museums and other institutions that received lavish donations in recent decades. Governments - federal and state - could struggle too because they rely heavily on the taxes paid by the affluent.

Perhaps the broadest question is what a hit to the wealthy would mean for the middle class and the poor. The best-known data on the rich comes from an analysis of Internal Revenue Service (IRS) returns by Thomas Piketty and Emmanuel Saez, two economists. Their work shows that in the late 1970s, the cutoff to qualify for the highest-earning 1/10,000th of households was roughly US$2 million, in inflation-adjusted, pretax terms; by 2007, it had jumped to US$11.5 million.

The gains for the merely affluent were also big, if not quite huge. The cutoff to be in the top one per cent doubled since the late 1970s, to roughly US$400,000.
By contrast, pay at the median - which was about US$50,000 in 2007 - rose less than 20 per cent, Census data shows. Near the bottom of the income distribution, the increase was about 12 per cent.

Some economists believe that the contrasting trends are unrelated. If anything, these economists say, any problems the wealthy have will trickle down, in the form of less charitable giving and less consumer spending. Over the last century, the worst years for the rich were the early 1930s, the heart of the Great Depression.

Other economists say the recent explosion of incomes at the top did hurt everyone else, by concentrating economic and political power among a relatively small group.

'I think incredibly high incomes can have a pernicious effect on the polity and the economy,' said Lawrence Katz, a Harvard economist.

Much of the growth of high-end incomes stemmed from market forces, like technological innovation, Mr Katz said. But a significant amount also stemmed from the wealthy's newfound ability to win favourable government contracts, low tax rates and weak financial regulation, he added.

The IRS has not yet released its data for 2008 or 2009. But Mr Saez, a professor at the University of California, Berkeley, said he believed that the rich had become poorer. Asked to speculate where the cutoff for the top 1/10,000th of households was now, he said from US$6 million to US$8 million. For the number to return to US$11 million quickly, he said, would probably require a large financial bubble.

The US economy experienced two such bubbles in recent years - one in stocks, the other in real estate - and both helped the rich become richer.

Mr McAfee, whose tattoos and tinted hair suggest an independent streak, is an extreme but telling example. For two decades, at almost every step of his career, he figured out a way to make more money.

In the late 1980s, he founded McAfee Associates, the antivirus software company. It gave away its software, unlike its rivals, but charged fees to those who wanted any kind of technical support. That decision helped make it a huge success.

The company went public in 1992, in the early years of one of biggest stockmarket booms in history.

But Mr McAfee is, by his own description, an atypical businessman - easily bored and given to serial obsessions. As a young man, he travelled through Mexico, India and Nepal and, more recently, he wrote a book called Into the Heart of Truth: The Spirit of Relational Yoga. Two years after McAfee Associates went public, he was bored again.

So he sold his remaining stake, bringing his gains to about US$100 million. In the coming years, he started new projects and made more investments. Almost inevitably, they paid off.

Closely tied to stock market

'History told me that you just keep working, and it is easy to make more money,' he said, sitting in the kitchen of his adobe house in the southwest corner of New Mexico. With low tax rates, he added, the rich could keep much of what they made.

One of the starkest patterns in the data on inequality is the extent to which the incomes of the very rich are tied to the stock market. They have risen most rapidly during the biggest bull markets: in the 1920s and the 20 years starting in 1987.

'We are coming from an abnormal period where a tremendous amount of wealth was created largely by selling assets back and forth,' said Mohamed A El-Erian, chief executive of Pimco, one of the country's largest bond traders, and the former manager of Harvard's endowment.

Some of this wealth was based on real economic gains, like those from the computer revolution. But much of it was not, Mr El-Erian said. 'You had wealth creation that could not be tied to the underlying economy,' he added, 'and the benefits were very skewed: they went to the assets of the rich. It was financial engineering.'

But if the rich have done well in bubbles, they have taken enormous hits to their wealth during busts. A recent study by two Northwestern University economists found that the incomes of the affluent tend to fall more, in percentage terms, in recessions than the incomes of the middle class.

The incomes of the very affluent - the top 1/10,000th - fall the most.

Over the last several years, Mr McAfee began to put a large chunk of his fortune into real estate, often in remote locations. He bought the house in New Mexico as a playground for himself and fellow aerotrekkers, people who fly unlicensed, open-cockpit planes. On a 63.5 hectare spread, he built a general store, a 35-seat movie theatre and a cafe, and he bought vintage cars for his visitors to use.

He continued to invest in financial markets, sometimes borrowing money to increase the potential returns. He typically chose his investments based on suggestions from his financial advisers. One of their recommendations was to put millions of dollars into bonds tied to Lehman Brothers.

For a while, Mr McAfee's good run, like that of many of the American wealthy, seemed to continue. In the wake of the dotcom crash, stocks started rising again, while house prices just continued to rise.

Outside's Go magazine and National Geographic Adventure ran articles on his New Mexico property, leading him to believe that 'this was the hottest property on the planet', he said.

But then things began to change. In 2007, Mr McAfee sold a 10,000 square foot home in Colorado with a view of Pike's Peak. He had spent US$25 million to buy the property and build the house; he received US$5.7 million for it. When Lehman collapsed last fall, its bonds became virtually worthless. Mr McAfee's stock investments cost him millions more.

One day, he realised, as he said, 'whoa, my cash is gone', His remaining net worth of about US$4 million makes him vastly wealthier than most Americans, of course. But he has nonetheless found himself needing cash and desperately trying to reduce his monthly expenses.

He has sold a 10-passenger Cessna jet and flies coach. This week, his oceanfront estate on 216 ha in Hawaii sold for US$1.5 million, with only a handful of bidders at the auction. He plans to spend much of his time in Belize, in part because of more favourable taxes there.

Next week, his New Mexico property will be the subject of a no-floor auction, meaning that Mr McAfee has promised to accept the top bid, no matter how low it is.

'I am trying to face up to the reality here that the auction may bring next to nothing,' he said.

In the past, when his stock investments did poorly, he sold real estate and replenished his cash; this time, that has not been an option.

The possibility that the stock market will quickly recover from its collapse, as it did earlier this decade, is perhaps the biggest uncertainty about the financial condition of the wealthy. Since March, the Standard & Poor's 500-stock index has risen 49 per cent.

Yet Wall Street still has a long way to go before reaching its previous peaks. The S&P 500 remains 35 per cent below its 2007 high.

Aggregate compensation for the financial sector fell 14 per cent from 2007 to 2008, according to the Securities Industry and Financial Markets Association - far less than profits or revenue fell, but a decline nonetheless.

'The difference this time,' predicted Byron R Wein, a former chief investment strategist at Morgan Stanley, who started working on Wall Street in 1965, 'is that the high water mark that people reached in 2007 is not going to be exceeded for a very long time.'

Without a financial bubble, there will simply be less money available for Wall Street to pay itself or for corporate chief executives to pay themselves. Some companies - like Goldman Sachs and JPMorgan Chase, which face less competition now and have been helped by the government's attempts to prop up credit markets - will still hand out enormous paychecks. Overall, though, there will be fewer such checks, analysts say. Roger Freeman, an analyst at Barclays Capital, said he thought that overall Wall Street compensation would, at most, increase moderately over the next couple of years.

Beyond the stock market, government policy may have the biggest effect on top incomes. Mr Katz, the Harvard economist, argues that without policy changes, top incomes may indeed approach their old highs in the coming years. Historically, government policy, like the New Deal, has had more lasting effects on the rich than financial busts, he said.

One looming policy issue today is what steps Congress and the administration will take to re-regulate financial markets.

A second issue is taxes. In the three decades after World War II, when the incomes of the rich grew more slowly than those of the middle class, the top marginal rate ranged from 70 to 91 per cent. Mr Piketty, one of the economists who analysed the IRS data, argues that these high rates did not affect merely post-tax income. They also helped hold down the pretax incomes of the wealthy, he says, by giving them less incentive to make many millions of dollars.

Raising tax rates

Since 1980, tax rates on the affluent have fallen more than rates on any other group; this year, the top marginal rate is 35 per cent.

President Barack Obama has proposed raising it to 39 per cent and has said he would consider a surtax on families making more than US$1 million a year, which could push the top rate above 40 per cent.

What any policy changes will mean for the non-wealthy remains unclear. There have certainly been periods when the rich, the middle class and the poor all have done well (like the late 1990s), as well as periods when all have done poorly (like last year). For much of the 1950s, '60s and '70s, both the middle class and the wealthy received raises that outpaced inflation.

Yet there is also a reason to think that the incomes of the wealthy could potentially have a bigger impact on others than in the past: as a share of the economy, they are vastly larger than they once were.

In 2007, the top 1/10,000th of households took home 6 per cent of the nation's income, up from 0.9 per cent in 1977. It was the highest such level since at least 1913, the first year for which the IRS has data.

The top one percent of earners took home 23.5 per cent of income, up from 9 per cent three decades earlier. -- NYT

Dark Pools Fire Back at Call for Ban

2009-08-13T20:04:00.003+08:00

NEW YORK – Dark-pool operators are firing back at the chief executive of Nasdaq OMX Group Inc., arguing that banning their platforms would make buying and selling stocks more expensive for all investors.

This week Nasdaq CEO Bob Greifeld called for regulators to end all forms of "dark liquidity," ratcheting up the dialogue around the role of alternative- trading systems and off-exchange liquidity in U.S. cash markets.

Dark pools, a fast-growing form of alternative trading, are electronic-trading venues where money managers trade large blocks of shares anonymously.

Several dark-pool executives told Dow Jones Newswires that Mr. Greifeld's far-reaching proposal would have calamitous effects for retail and institutional traders.

"Undisplayed liquidity adds to execution quality," said Bob Gasser, chief executive of Investment Technology Group Inc., which is credited with creating the first of the modern-day dark pools roughly 20 years ago. "You can come up with all kinds of anecdotes, but the simple fact is, on behalf of all investors, dark liquidity adds to execution."

Other alternative-trading system executives called Mr. Greifeld's stance on the issue opportunistic given lawmakers' recent focus on related issues, and suggested that Nasdaq OMX is acting defensively after losing market share to non-displayed trading venues.

Several dark pool officials also noted that both Nasdaq OMX and NYSE Euronext, which has also been losing market share, maintain non-displayed liquidity pools.

As dark pools have grown -- accounting for more than 7% of all trades in June, according to Rosenblatt Securities -- the SEC has made it clear it is evaluating these alternative trading systems, indicating more regulation is likely.

In interviews with nearly a dozen dark-pool executives, none objected to the SEC's initiative. Dark-pool administrators are willing to provide more transparency and standardize volume reporting, with most even demanding it.

But Mr. Greifeld's letter this week went a step further, calling for the elimination of "market structure policies that do not contribute to public price formation and market transparency." The Nasdaq OMX chief tied dark pools to the issue of flash order types, a trading practice in which stock trades, after being checked against an exchange's order book, are sent to a select group of participants before being routed to other exchanges for filling.

Critics allege this gives such participants, sometimes including those that use dark pools, an unfair information advantage. Sen. Charles Schumer (D., N.Y.), last week told the SEC in a letter he will move to limit flash orders if the commission doesn't.

Nasdaq OMX adopted the practice with a nod toward competitive pressure from rivals BATS Exchange and Direct Edge, which have their own versions of flash orders. However, BATS and Nasdaq OMX have both voiced support for banning the practice in recent days.

The issue for dark pools is more complex. Unlike flash orders, retail investors use dark pools and benefit from them, proponents say.

Mutual funds, for example, receive cash from individuals, endowments, pensions and others, and then go to the market with one large pool of money. If they revealed a massive order to the displayed market, it would drive prices higher and make it more costly to invest.

Also, day traders with accounts through market providers such as E*Trade Financial Corp. or TD Ameritrade Holding Corp. go through brokers to find the national best bid and offer, or NBBO, which is often in dark pools. Operators of the platforms said Mr. Greifeld's comments overlook factors such as these.

"I understand when there's a duopoly, you want to maintain that, because it's a good business model," said Seth Merrin, founder and CEO of Liquidnet, among the largest independent dark pools. "But it's really detrimental to all the people who invest in pension funds or mutual funds, and people who manage institutional order flow."

The rise of dark pools

2009-08-13T20:00:00.002+08:00

Attack of the clones

Jul 2nd 2009
From The Economist print edition

New trading venues offer a challenge to conventional exchanges

THERE is more than a hint of science fiction in the new jargon of finance. Systemic councils are being formed all over the place. America has appointed a “special master” to look at pay practices in bailed-out firms. And in the world of exchanges, “dark pools” are rising fast.

Dark pools are trading venues that match buyers and sellers anonymously. By concealing their identity, as well as the number of shares bought or sold, dark pools help institutional investors avoid price movements as the wider market reacts to their trades.

Most dark pools are operated by electronic exchanges and broker-dealers. As conventional exchanges increasingly handle small, frequently traded orders, dark pools have become the preferred venue for large “block” transactions. In America more than 40 dark pools are in operation, accounting for an estimated 9% of traded equities. The EU’s introduction of the Markets in Financial Instruments Directive (MiFID), a framework for financial services that provides for off-exchange trading, is sparking similar growth in Europe (see chart). On June 29th BATS Europe, an upstart electronic exchange with American roots, announced plans to offer dark-pool trading from next month.

The swell of dark pools raises questions for investors, regulators and exchanges. For investors, too many new trading venues may cause liquidity to fragment. Turquoise, a European dark-pool operator owned by a consortium of investment banks, will launch an aggregator on July 20th to scour the dark pools of nine broker-dealers including Citibank, Deutsche Bank and Merrill Lynch in an attempt to offer investors better pricing and a higher rate of matching trades. The market will also do its bit. Although dark pools have captured a significant chunk of equity-trading volumes, many are still struggling to turn a profit. “I have no doubt there will be downward pressure on the total number of dark pools,” says Marcus Hooper of Pipeline, another operator, who reckons consolidation will go furthest in Europe.

Regulators voice two contrasting concerns. One is that some dark pools give off signals, or indicators of interest, about positions that others can exploit. Backers say the pools are designed to reduce the ability of investors to front-run large orders. The other is that they hamper price discovery. Mary Schapiro, the chairman of the Securities and Exchange Commission, has expressed concern about their opacity. Immediate disclosure of orders, after they have been executed, is the obvious answer.

Conventional exchanges are already struggling with lower trading volumes and a meagre flow of public share offerings, both side-effects of the recession. They can ill afford to lose more business to dark pools. Some incumbents are taking the fight directly to the upstarts: the London Stock Exchange, one of the world’s oldest bourses, announced on June 29th that it had received regulatory approval for the launch of Baikal, its own pan-European dark pool. Yoda would approve.

Exchange-backed dark pool in the offing by 2010

2009-08-13T19:57:00.002+08:00

Business Times - 13 Aug 2009

SGX ties up with Chi-X to cross block trades in region for the big boys

By CHEW XIANG

(SINGAPORE) The Singapore Exchange (SGX) has joined hands with Chi-X to set up the region's first exchange-backed dark pool by mid-2010. The 50-50 joint venture will anonymously cross block trades of Singapore, Hong Kong, Japan and Australia-listed stocks for big funds and institutional investors.

Trades will be cleared through a pan-Asian central counterparty to be appointed, Chi-X and SGX said at a joint press conference yesterday. New York- headquartered Chi-X provides electronic trading platforms worldwide and a subsidiary will supply the technology for the planned dark pool.

'We expect and hope that it will improve overall trading liquidity here,' said Gan Seow Ann, senior executive vice-president and head of markets at SGX. The planned venture could be the fourth exchange-led dark pool set up, after NYSE Euronext's SmartPool, Nasdaq OMX's Neuro Dark and the London Stock Exchange's Baikal.

Incoming SGX CEO Magnus Bocker is now serving out his contract as president of Nasdaq OMX and is 'aware' of the Chi-X deal, said Mr Gan.

Dark pools, as the name suggests, provide a way to discreetly match large-volume orders without moving the market - making possible trades that previously would not have been crossed.

But they still rely on traditional exchanges for reference prices and there is concern, especially in Europe and the US, that markets will fragment as more trades take place in such anonymous venues, eroding the price discovery function of primary exchanges.

The joint venture between SGX and Chi-X is seen as a pre-emptive move. SGX's planned dark pool will act as an 'aggregator' linking broker-led dark pools as well as traditional brokerages, said Chi-X Global chairman Tony Mackay.

Two dark pools - Liquidnet, which focuses on buy-side clients, and CLSA-backed BlocSec - are already active in Singapore, and brokerages such as UBS are keen to introduce internal dark pools here as well. Dark pools already in Asia include those run by Goldman Sachs, Credit Suisse, UBS, Investment Technology Group and Instinet, which is Chi-X's parent company.

An exchange-backed dark pool would 'legitimise what we've been trying to do here to build up the market', said Greg Henry, head of Liquidnet in Singapore.

The pan-Asian dark pool will also complement Chi-X's efforts to introduce its alternative exchange systems throughout Asia, said Mr Mackay. These are essentially high-speed, low- cost electronic exchanges that in Europe have captured 15 per cent of trading in equities listed there, according to a June report from Aite Group. Chi-X is a market leader in such multilateral trading facilities there.

Chi-X was keen on setting up a similar alternative exchange in Singapore, according to a BT report last November. It has also applied, along with Liquidnet and AXE-ECN, a unit of the New Zealand Stock Exchange, to set up alternative exchanges in Australia. But the applications there have stalled as the Australian government has yet to grant market licences.

Such an exchange if approved in Singapore would have competed directly with SGX for trading fees but the two parties appear to have agreed to work together instead. Negotiations began at the start of the year, said John Lowrey, CEO of Chi-X Global.

Mr Lowrey said an exchange-backed dark pool would give it the size and the neutrality required to aggregate liquidity, and would also not hurt price discovery. 'I don't see dark pools dominating in terms of price formation,' he said yesterday.

Some fear that dark pools would also create an unequal playing field for investors but Chew Sutat, executive vice-president and head of market development at SGX, said the dark pool would not marginalise small investors. They could still access the primary market and should also benefit from increased liquidity in the system, he said.

The planned dark pool will apply for a recognised market operator licence here, Mr Lowrey said, and will get the necessary regulatory approvals in Australia, Hong Kong and Japan. 'Our experience has shown that users are looking for independent, genuinely neutral dark pools,' he said.

An elite investment gets its day in the sun

2009-08-13T19:55:00.003+08:00

Business Times - 13 Aug 2009

Sales of Good Class Bungalows gather steam, with some predicting healthy price rise

By KALPANA RASHIWALA

(SINGAPORE) The Good Class Bungalow (GCB) market has sprung to life with high-net-worth individuals stepping up their purchases.

July was an especially action-filled month which saw about 20 GCB transactions worth a total of more than $300 million. To put this in perspective, the entire first quarter of this year saw GCB deals worth only $27.5 million.

The action picked up in April, when $56 million worth of GCBs were transacted. It gathered pace in May and June, each month seeing deals amounting to around $188 million. In July, the market went ballistic.

So far this year, around 50 GCB deals have been transacted, according to caveats data compiled by property consultants and information on the latest transactions obtained by BT.

The year-to-date tally of over $800 million is healthy, considering that the whole of last year saw just 51 deals worth $830 million.

GCB agents expect the sales flow to continue in coming months. CB Richard Ellis's director, luxury homes, Douglas Wong said: 'It's likely that a total of 60-65 GCBs will be sold in the whole of 2009 - more than the 51 GCBs sold in 2008. The total quantum is likely to be around $1.1 billion to $1.2 billion, about 35-45 per cent higher than the quantum of $830 million in 2008.'

Savills Singapore director of investment sales & prestige homes Steven Ming says that 'although we do not expect the spike in GCB sales that was seen in May to July to be sustained, we do expect to still see healthy buying activity continue for the rest of the year'. He expects 60-70 transactions for the whole of 2009.

Apart from the general feeling that the worst of the financial crisis is over, he cites the low mortgage and deposit rates as reasons for the GCB market revival.

Agreeing, Newsman Realty managing director KH Tan notes that high-net- worth individuals prefer GCB investments to letting their cash idle in banks. They are also wary of investing in financial products following the Lehman debacle, he said.

'Another group of GCB buyers are foreigners who have become Singapore PRs and PRs who have become citizens,' adds Mr Tan, who recently brokered the $38 million sale of a Cluny Park bungalow.

BT understands the property was sold by former Kim Eng Securities managing director Douglas Ooi to a buyer who also picked up No 3 Cluny Hill earlier this year.

'When the IRs (integrated resorts) are ready, even more rich people from overseas will come to Singapore and become citizens. Some would be interested to invest in the GCB market,' said Mr Tan.

Typically, one has to be a Singapore citizen before one can own a GCB. However, PRs are known to have been given permission by the government on a case-by-case basis to buy small GCBs with land areas of about 15,000 sq ft, depending on their contribution to Singapore, according to Mr Tan.

Major GCB deals in recent months include a site at Dalvey Road said to have been sold by a certain Thomas Chan Ho Lam, for $27.01 million. Interestingly, a person with the same name is also understood to have bought a bungalow at Belmont Road for $30.5 million last month from Ong Kok Thai, managing director of Vanguard Interiors and the Peranakan Place Group.

Meanwhile, GuocoLand chairman Sat Pal Khattar is believed to be the seller of a bungalow at Rochalie Drive, which fetched $18.32 million. BreadTalk founder and chairman George Quek is reported to have sold his 2 Swettenham Road bungalow for $29.2 million to developer Simon Cheong.

The GCB market peaked in 2006 with $1.23 billion of transactions involving 119 deals. The following year saw 87 deals for a total $1.15 billion, according to CBRE figures. In the first seven months of this year, 47 deals totalling $710 million took place, CBRE said.

However, BT has learnt there are about six other transactions not yet captured in caveats, located in places like Belmont and Leedon roads, Maryland Drive and Astrid Hill. If these were to be included, the year-to-date tally would cross $800 million.

GCBs are the creme de la creme of Singapore's housing market, with stringent planning requirements.

There are only about 2,400 such bungalows in Singapore's 39 gazetted GCB Areas.

Mr Tan estimates GCB prices could increase about 20 per cent on average over the next 12 months.

Says Savills' Mr Ming: 'GCBs, being limited in availability, are a highly sought-after investment among the well heeled. As more rich are created, demand for these exclusive bungalows will gradually outstrip available supply for sale.'

Oil be not proud

2009-08-12T21:33:00.003+08:00

(An abridged version of this essay appeared in the Business Times of 4 October 2008)

Looking beyond the current financial crisis, the future is bright and breezy as solar and wind energy will spell the end of oil's importance.

By JOSEPH CHONG

CEO, New Independent

In the Sunday Times of 6 July 2008 (oil was trading at about US$140 a barrel then), I predicted that the price will fall to US$50 in ten years. Since then we have moved half way there. The price of crude oil rose by 50% in 7 months and fell by 35% in 6 weeks. Until today, many policy makers insist that it is because of supply and demand and speculation played only a minor role. Did demand rise or supply fall by 50% in 7 months? Clearly not.

Published data shows that, physical demand and supply are approximately in balance at around 86 million barrels per day. Indeed, demand worldwide has been decelerating since the beginning of the year. For example, US demand has fallen by about 4% yoy in June to about 20.4 million barrels a day. On the other hand, available spare capacity in the oil producing nations have been thin – perhaps 1.5 million barrels per day. To aggravate matters, demand and supply for crude oil is inelastic in the near term. Most cars can only run on petrol and it takes 5 to 10 years to bring new field discoveries into production. Thus, no matter what the price, consumers and businesses have to pay up until they cannot.

Why then should prices continue to rise when crude oil demand is falling? I believe this is because of the demand from financial investors such as hedge and pension funds and, more mundanely, ETF holders. If spare capacity is plentiful, the impact of financial investors would not be significant. However, if spare capacity is small, financial demand of just the equivalent of 1 million barrels/day could drive prices skyward. This would be equivalent to an investment inflow of about US$50 billion per annum or about 3 months of China’s trade surplus or about 1.5% of the US$3 trillion in Sovereign Wealth Funds i.e. US$50 billion is thus a fairly small sum. It is even smaller if one remembers that oil futures are bought on margin.

I also suspect that both buyers and sellers of oil have been hoarding. As a producer of crude oil, I would delay bringing my product onto the market if prices are rising at the rate of 10% per month if my finances are in good shape.

There was also a huge divergence between the price of oil and the performance of oil stocks such as BP, ExxonMobil etc., which underperformed the price of crude oil by some 55% in the first six months of 2008. Exxon Mobil, based on a present value analysis, was being valued as if crude oil will trade at an average of US$80/barrel over the long term. The reason for this is clear. Buy US$50 billion of the public oil companies and the needle hardly moves. Throw US$50 billion into oil futures creates a quake because it is a relatively small market. The financial speculators know this.

Another anomaly is the huge premium over the marginal cost of production. The most expensive marginal barrel of oil is estimated to be around US$60 -70 a barrel. Being a commodity, that should be the sustainable price. Indeed, coal, which is many times more plentiful than crude oil, could apparently be converted into crude oil at around US$40 a barrel. Being replaced by another fossil fuel, however, is not the crude oil killer. It is renewable energy.

Renewable energy sources, together with the re-tooling of our energy supply infrastructure, will spell the end of oil’s importance. It will come sooner than many think. A view shared by the perpetually pessimistic “Economist “in its June 21st edition. It is not a pipe-dream such as aiming to go the moon in 1960. Most of the technologies are already commercially viable – it is a question of how fast mankind can re-tool.

The most promising alternatives are wind and (thin-film) solar energy – our nuclear fusion reactor in the sky. The earth absorbs 400 times more energy from the sun than all of mankind’s energy needs. Investments in solar energy are growing at 200% per annum. Indeed thin-film solar using nano-tailored ink as the energy absorbing medium is analogous to one of nature’s more potent processes – photosynthesis. Yes, plants get most of their energy needs from sunlight - not crude oil. Apparently, the leaders in this new technology are able to generate electricity as cheaply as coal if the cost of pollution is factored in.

Even as we get excited about solar energy today, the developments in the laboratory are even more exciting. Scientists have now developed material that could absorb infra-red radiation (heat) and convert it to electricity. The potential here is mine boggling e.g. air conditioners as we know them may be obsolete in future.

Although renewables are relatively small suppliers of energy currently, their rapid growth and huge potential will erode demand for oil at the margin as their share of total supply grows. For example the US could generate the equivalent of 6 million barrels per day of oil in its “wind belt” running north-south from Texas to the Canadian border. If the oil market were oversupplied by 6 million barrels today, the price of crude oil would plunge fairly quickly to US$50.

This rapid growth in alternative energy is happening not only in the developed world. China is now the world’s second largest wind turbine market after the US and the central government has set clear goals for the exploitation of wind and solar energy. Renewable energy makes even more sense for China given that China requires about 80% more energy than the US for every GDP dollar generated.

Unlike a coal plant that takes 5 years to build or a nuclear one which takes 10 years, and would be useless if only half completed, a solar or wind generator takes less than a year to build and could generate electricity even if half finished.

However, can land scarce Singapore be energy independent? Just like our water supply, there is good possibility that careful planning and technology will make this a possibility to a certain extent. Every HDB block is a potential solar generator not only for the residents but could sell surplus electricity to the grid. Another possibility for Singapore is to float the solar generators over our numerous reservoirs or along our sheltered coastlines. This is what small Denmark, which gets 20% of its electricity from wind energy, has done. It has installed some of its wind turbines offshore. Indeed, the world’s largest wind turbine maker is a Danish company, Vestas Wind Systems.

On a more global scale, the commercialization of alternative renewable energy has tremendous implications for mankind. Especially, the rural third world where the main hurdle to development has always been affordable electricity. Cheap solar has the potential to make irrigation, mechanization, sanitation and communication assessable for these people. It has the potential to reverse the trend towards urban overpopulation and squalor.

Indeed, we see this happening to rural communities in the US. Sweetwater in Texas has seen a major rejuvenation in jobs and population after the installation of a major wind farm. Ironically, farmers in Texas earn more leasing their land for wind turbine use than from farming. Texan farmers get $3000 per acre from wind compared to $150 per acre from corn. Wind farming is the most profitable cash crop.

In many ways, this renewable energy revolution will dwarf the internet in its potential to improve the lot of mankind. Looking beyond the current financial crisis, the future is indeed bright and breezy.

Harnessing the ETF revolution

2009-08-12T21:29:00.002+08:00

Business Times - 24 Jun 2009

MONEY MATTERS

Exchange-traded funds now straddle virtually all asset classes and have become a global phenomenon

By JOSEPH CHONG

GLOBAL equity markets are roughly unchanged year to date. But this statistical calm masks a roller-coaster ride. Stocks fell 30 per cent until the second week of March - before rebounding 40 per cent. It was fear on a grand scale.

During this mayhem, we predicted in our column 'The paradox of thrift, and other thoughts' (BT, Feb 7, 2009) that things would soon sort themselves out.

Looking at big-picture data, we predicted that equities and hard assets such as precious metals and property would do well. So far, so good with our predictions.

Looking at forward indicators, most developed economies will be out of recession in the second half of 2009. This includes even Europe.

However, this recovery will be different from previous ones. The global economic landscape has changed markedly. Investors now need to scrutinise Chinese retail spending and PMI data as closely as they watch figures out of the United States. Ten years ago, few cared what the Chinese consumer spent.

Amid on-going fundamental shifts in the global economy, the money management industry is undergoing significant changes. And one factor behind the changing complexion of the wealth management business is the exchange-traded fund (ETF). Essentially, ETFs are open-end index funds that are listed and traded on exchanges - like stocks.

From the first humble listing in the US in 1993, ETFs now straddle virtually all asset classes - long and short - and have become a global phenomenon. There are currently more than 1,600 ETFs worldwide, with almost US$660 billion in assets. Twenty-five per cent of all trades on the New York Stock Exchange are driven by ETFs.

ETFs are also the choice instrument for macro bets by hedge fund managers. For example, when hedge fund manager John Paulson, the billionaire who made a fortune shorting the US sub-prime market, wanted to bet on gold recently, he did it through an ETF.

During the savage bear market of 2008, ETFs experienced net inflows, while unit trusts experienced net outflows. Indeed, most traditional unit trust managers see ETFs as one of the biggest threats to their business. Just as mutual funds did to bank deposits, ETFs are disintermediating traditional mutual funds as more investors chose to do away with the cost of active stock-picking work. Indeed, the ETF business is one of the main reasons Blackrock coughed up US$13 billion to buy Barclays Global Investors.

And on an infinitely more humble scale, that is why we soft-launched a new portfolio management service on June 1 to harness the global ETF revolution.

Utilising more than 1,000 ETFs traded on 22 exchanges around the world through one consolidated Internet account, we are providing clients with the flexibility to invest long and short in equities, fixed income, commodities and currencies globally. The goal is to achieve absolute returns regardless of market direction.

ETFs allow us to go long and short efficiently, while automatically achieving diversification and avoiding single-stock risks. But while avoiding single-stock risks, the investor can pursue targeted sectors as opportune.

Investment theory and practice show we can eliminate specific risk of individual securities by diversifying broadly, thus only having exposure to market risk - that is, the ups and downs of the market in general. Market risk cannot be diversified away in a long-only portfolio, unlike one that can go short.

Given the expected uneven nature of the recovery and eventual policy tightening by central banks around the world, the flexibility to go short is expected to be very useful.

The following is an example of a long-short strategy from the recent past. At the beginning of 2008, the outlook was poor for the US but benign for the rest of the world. Reflecting this, the US dollar was weak but US exports were growing because the rest of the world was still prosperous. Overall equity valuations in the rest of the world were not expensive.

One would, therefore, expect equities ex-US to outperform US equities, but US government bonds to do well. A typical strategy congruent with this outlook would be to invest in a global equity ETF but short (or eliminate) the US exposure by investing in an inverse US equity ETF.

Exposure to US government bonds would be through a US Treasury ETF with a maturity of around five years, which would be relatively stable. Therefore, the strategy would have been translated into three ETFs:

· iShares S&P Global 100 Index (IOO) - 45 per cent of portfolio.

· Short S&P500 ProShares (SH) - 25 per cent of portfolio.

· iShares Barclays 3-7 Year Treasury Bond (IEI) - 30 per cent of portfolio.

Such a construction would position the portfolio for upside but provide protection on the downside. Despite the most horrendous year for global equities since the 1930s, this simple three-ETF portfolio would have lost only 1.8 per cent at the end of 2008.

Our new portfolio management service built around ETFs gives individuals the flexibility to invest like a hedge fund but at low cost and with real-time transparency.

It gives investors the scope of large institutions - without the need for massive portfolios and outlays. The advent of the Internet technology and the richness of ETF choices have made this possible. Investors and advisers tend to look at events through the lens of their mandate and available instrument choices. Hence, long-only mandates result in a bias to interpret events on the upside, unlike a strategy that can go both long and short - one that is indifferent to market direction.

Psychologically, this has important consequences for portfolio performance. The changing world suddenly looks less frightening when one can make money whether markets are up or down.

It's just a business cycle as usual

2009-08-12T20:27:00.001+08:00

Business Times - 12 Aug 2009

MONEY MATTERS

Pushing break-even points down will ensure profits, which will lead to re-investment and re-hiring - and thus growth

By JOSEPH CHONG

I AM gratefully astonished by the very positive response to our last BT contribution of June 24, 2009 - 'Harnessing the ETF revolution'. Searching on Google with the key phrase 'ETF revolution' two days after publication, I was surprised that of 85,000-plus articles listed, 'Harnessing the ETF revolution' was number one, besting similar pieces from far larger media houses such as FOX Business. It remained that way, until the piece was archived a week later. Readers, who wish to access the article can still do so at www.ni.com.sg. Perhaps the marketing experts at SPH may have some thoughts about monetising such articles, instead of archiving them?

Apropos revolutions, the good recent second-quarter announcements from global bellwether companies such as Intel, Apple, ABB and Honda were treated like revolutions in the business media. It is not a revolution - it is the business cycle at work.

We had a financial crisis that precipitated a deep recession. Companies globally reacted swiftly, throttling production and shedding excess inventory, production capacity and excess labour and benefits, thus pushing revenue break-even points down. At micro-level, we saw this in our general insurance business, as companies cut back coverage and benefits. Labour, which is in excess now, has little bargaining power.

Pushing break-even points down is the needed pain for the economy. This will ensure profits, even in a weak revenue environment. Profitability will eventually lead to re-investment and re-hiring - and thus growth. No revolution here, just the business cycle.

Profit announcements have shown other key traits besides cost cuts - better revenue estimates in the second half and margin expansion. This bottom-up perspective is congruent with the macro view that we have had for some time. We knew that revenue would be better going forward from the PMI sub-indices for new orders from the major economies, led by China.

From the macro perspective, we expected margins to improve because of the divergence in CPI and PPI around the world. The PPI, producer price index or a measure of input costs for businesses, has been falling far faster than the CPI, consumer price index or a measure of what businesses charge consumers, in most major economies. When PPI lags CPI, it is normally good news for businesses and the equity markets as it generally signals improving margins.

The accompanying chart shows the trend of CPI less PPI over the past 20 years for the US. Readers will notice that periods when CPI less PPI was positive have correlated with improving corporate margins and healthy equity markets.

We are now entering a sweet spot in the business cycle for equity markets - expanding margins and revenues. Corporate profit growth is back. Throw excess liquidity (M3 minus nominal GDP growth) into the cocktail and that's a recipe for very strong equity markets, as we had predicted in our contrarian call in BT of April 8, 2009 ('No, the recovery isn't a mirage any more'). Readers who want to access the article can still do so on www.ni.com.sg. Indeed, the Shanghai stock market's 90 per cent climb from the bottom could be a precursor for developed markets.

The improving demand picture and corporate profits are also correlated to the performance of the Singapore residential property market. When we stuck our neck out with our bullish contrarian call in BT on Dec 10, 2008 ('A city of two tales') amid widespread fear, we had an internal forecast of 25 per cent upside in 12 months. It looks as if we may have been too conservative.

Even without the expected additional demand generated by the integrated resorts in 2010, annual average take-up has been around 8,100 units since 1995. With the recovering global economy, we should at least see this number in 2010. Unfortunately - or fortunately, if you are an investor - there will be only 5,500 completions in 2010. This shortfall will push the rental vacancy rate down.

I estimate that this will fall from the current 5.9 per cent to below 4.9 per cent. The last time this happened, in early 2007, rents and capital values surged. Unlike in 2006, the cushion of surplus HDB flats is probably no longer there. I say probably because HDB, unlike URA, has yet to publish data on the inventory of unsold flats.

It looks like quite a party for the residential property market in the next 12 months, barring an external shock or government action. It is strange that when the Straits Times Index jumps 80 per cent in five months, no one screams speculation. However, when the residential property market prices begin to turn around (according to most recent URA data), many are calling for a change to the rules and the guillotine for 'speculators' while demanding 'affordable' prices.

What signal are we sending to those brave investors who take risk and prop the market (and banking system) in the despair of the first quarter of this year, when even the government was issuing statements full of gloom? In future, we may find no buyers at any price when things turn down because we acquire a reputation as rule changers. Curb 'speculation' with care. Otherwise, we may regret what we wish for.

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

Beijing fails to capitalise on success at Olympics

2009-08-12T20:26:00.002+08:00

Business Times - 12 Aug 2009

By FRANK CHING

A YEAR after the Beijing Olympics, China is showing greater confidence and its international standing is rising, largely as a result of the global financial crisis, which has showcased its economic success at a time when the United States is seen as being in decline.

After the International Olympics Committee voted in July 2001 to give China the right to stage the 2008 Summer Games, many people overseas hoped that its human rights situation would improve, while within the country it was commonly believed that China's prestige would grow.

Hope for human rights progress was based on pledges made by Chinese officials. For example, Liu Jingmin, vice- president of the Beijing 2008 bid committee, had said that 'by allowing Beijing to host the Games you will help the development of human rights'. In the end, very little, if any, progress was made.

Beijing also promised that the international media would be completely free to report. This was one area where there was movement. Liberalised rules were put in place from the beginning of 2007 to Oct 17, 2008, whereby foreign journalists were no longer required to get government approval to conduct interviews across the country. After the Olympics ended, China announced that these rules would continue to apply. To date, that is the one tangible improvement in human rights. Even so, the Foreign Correspondents' Club of China, while acknowledging that the relaxed rules have made travel within the country easier for correspondents, also reported that 'intimidating of sources and domestic staff mar this progress towards internationally accepted reporting conditions'. Journalists said such intimidation is 'a trend that threatens progress towards greater openness'.

Actually, the 12 months since the Olympics have been marked by heightened repression, with human rights lawyers being especially targeted for harsh treatment. They have been kidnapped, beaten up and even disbarred. There are now signs that the government is turning its attention to non-governmental organisations.

Last month, the Open Constitution Initiative, or Gongmeng, a group that offered legal assistance, was shut down, ostensibly for tax evasion. The group had released a report on Tibet in May that challenged the official position on the 2008 protests in Lhasa.

At about the same time, the office of the Beijing Yirenping Centre, which is dedicated to promoting the interests of health-disadvantaged groups, such as carriers of the Hepatitis B virus, was raided. Copies of its newsletter opposing discrimination were confiscated. There is now fear of a crackdown on NGOs not only in Beijing but across the country.

Many people think that this crackdown is due to the current politically sensitive period, with the approach of the 60th anniversary of the founding of the People's Republic on Oct 1. However, it is not at all clear that there will be any easing after that date.

As for China's international prestige, there is little evidence of an Olympics-related rise. A BBC World Service poll released in February, six months after the Olympics, showed that public views of China had slipped considerably. Whereas in 2008 those polled leaned towards saying China had a positive influence in the world, the 2009 survey showed positive ratings had fallen from 44 per cent to 39 per cent, while 40 per cent felt that China's influence was negative.

The Pew Global Attitudes survey this year, released last month, did indicate that China's image has improved, but only slightly. This is likely to reflect the impact of the financial crisis more than that of the Olympics.

American public opinion of China has grown more positive, with 50 per cent of Americans rating China favourably, compared with 39 per cent in 2008 and 42 per cent in 2007.

But in Western Europe, the improvement was much less. True, in Britain, favourable views rose from 47 per cent in 2008 to 52 per cent this year. However, views remained mostly negative elsewhere. There were slight improvements in France and Spain, with positive views rising from about 30 per cent to 40 per cent. In Germany, however, opinions remained negative, with only 29 per cent holding a positive view. It is only in Africa that the attitude towards China is overwhelmingly positive.

The two issues - human rights and China's international standing - are clearly related. If China had made use of the Olympics to improve its human rights record, as it had promised, there is no doubt that its prestige today would be much higher, even without a financial crisis. Beijing dazzled the world at the Olympics, especially with its spectacular opening ceremonies. What a pity China did not capitalise more on such a wonderful opportunity.

The writer is a Hong Kong-based journalist and commentator

Causeway expansion rejected

2009-08-12T20:23:00.000+08:00

Business Times - 12 Aug 2009

(JOHOR BARU) The Johor Baru Umno Youth division has opposed a Singapore proposal to expand the Johor Causeway as it will not solve the pollution problem in the Johor Straits.

Its chief, Khalid Mohamad, said that the proposal to expand the 85-year-old Johor Causeway by Singapore Prime Minister Lee Hsien Loong should be rejected as it was not based on mutual benefit.

'The expansion of the Johor Causeway will only prolong the water pollution problem in the Johor Straits. It will not address the problem,' he said.

He said that the proposal to expand the Johor Causeway was made in the interest of one party and would not solve the many problems faced by Johor and Malaysia.

He added that Johor Baru city folk wanted to see free flow of water from the East and West of the Johor Straits\. \-- Bernama

Lawyers may stop holding conveyancing monies

2009-08-12T20:20:00.001+08:00

Business Times - 12 Aug 2009

Govt suggests that such funds be held by Law Academy or banks

By JAMIE LEE

LAWYERS may soon be prohibited from holding conveyancing monies if a new proposal by the Ministry of Law goes through.

This follows the infamous case of lawyer David Rasif running off with some $10 million of his clients' money in 2006, as well as a string of recent cases in which lawyers absconded with clients' conveyancing money.

Aimed at preventing lawyers from holding large sums of cash for their clients, the new move is unlikely to dampen business in this area of legal work, market watchers said.

Conveyancing money refers to money used as part of transactions for housing purchases. This includes stamp duty payment and option deposits.

A seller receives an option deposit - typically amounting to 4 or 9 per cent of the purchase price which a buyer pays - once the option to purchase is exercised.

In a public consultation paper released yesterday, the ministry has suggested having the Singapore Academy of Law as the main entity appointed to hold conveyancing money.

The option deposit can also be held by entities approved and appointed by the Ministry of Law.

The three local banks have also been engaged to look into offering services in this area.

'We have been in discussions with the Ministry of Law on the possibility of providing the service to hold the option deposit,' said Chow Theng Kai, head of cash management, group transaction banking, at OCBC Bank.

Lawyer Gan Hiang Chye from Rajah & Tann LLP told BT that this move would not take away any business.

'The law firm will still be doing the administrative work for the client,' he said, noting that the clients can use a cashier's order to be paid to the respective parties, but this can be deposited by the law firm.

'The legwork is still being done by the law firm for the client. The client just has to make one small visit to the bank to buy the cashier's order.'

He added that the recent cases of lawyers absconding with clients' money has 'diminished' the profession.

The proposed changes come after Chief Justice Chan Sek Keong expressed concern last year that such criminal conduct of lawyers harms not only the reputation of the legal profession, but also the victims who could not get full compensation.

This is despite tightening the Solicitors' Accounts rules in July 2007, such that no sum exceeding $5,000 can be drawn unless two lawyers okay it.

With the amendment, a lawyer also could not receive or hold conveyancing monies unless he had at least two signatories to his client account.

A review committee chaired by Justice VK Rajah was then set up to look into making changes to the conveyancing system.

The central recommendation to prohibit lawyers from receiving such monies was made in the committee's report.

The Chief Justice agreed with the recommendation and forwarded this to the Ministry of Law.

The proposed changes are likely to be implemented at the end of the year.

Clearing the air on 'algo' trading

2009-08-12T19:47:00.001+08:00

Business Times - 12 Aug 2009

Hock Lock Siew

By R SIVANITHY

THE first thing to note about high-speed computerised trading, whether it applies to trading in stocks or derivatives, is that it's been around for more than 20 years, so it's not a new phenomenon. The second is that its development probably parallels the evolution of financial markets and so its pervasiveness in today's markets is inevitable and unavoidable.

The biggest thing however, is that high-speed trading, program trading or 'algo' (short for algorithmic) trading as it's sometimes known, has been getting a bit of a bad rap lately, though this is probably due more to misinformation than anything else. This doesn't mean the activity is entirely kosher or doesn't warrant attention from regulators or policymakers; however, there is evidence to suggest that present fears may be a tad overblown.

When the US stock market crashed 20 per cent on Oct 19, 1987, a lot of fingers were pointed at program trading as one possible culprit. However, extensive studies at the time failed to establish a convincing connection between algo trading and the crash, especially when it was found that the largest falls occurred when programs were not operating.

In addition, several other markets that did not have program trading actually crashed by more than the US. As a result, other than introducing 'circuit breakers' to slow or halt large moves in the major indices, regulators did not act to rein in high-speed trading.

Fast forward 22 years and the debate over whether algo trading should be regulated was revived a couple of weeks ago when a US senator raised the need for legislation to prohibit 'flash' trading. It's important to note that the call was made specifically for one type of algo trading, but somehow or other subsequent media reporting roped in the entire gamut of high-speed techniques as also possibly requiring regulatory scrutiny.

Flash trading (which incidentally, is a technique not found in the local market and is expressly prohibited here) is simply high-speed front-running. It involves delaying order routing to the best quoted prices by a few milliseconds to let some parties view those orders first. These parties can then buy (or sell) ahead of the actual order execution. Since this is blatantly wrong, few would object to the need for some form of official control to stop this practice.

However, as noted earlier, all other types of algo trading have now been flagged as 'bad' or in need of some form of official intervention. For example, algos usually slice up large orders into smaller blocks, mainly to preserve anonymity and prevent detection by other algos. In the US, for example, although high-speed computerised trading has sparked exponential volume growth in the past few years - as it probably has in the Singapore market - average trade size has dropped sharply, and according to a recent paper, the average trade size at the end of 2008 was only 300 shares.

This in turn has led institutions who need to move large blocks quickly to search out alternative venues, known popularly as 'dark pools' where prices may be better and transactions quicker. Since retail players don't have access to these venues, it is sometimes argued that the playing field is thus not level, especially since dark pools are off-exchange and so present an opaque face to the outside world.

The dark pool story is complicated and the issues numerous. However, if we were to keep the discussion as simple as possible, it's worth noting that if algo trading leads to the proliferation of dark pools and this in turn robs some liquidity from established exchanges while offering benefits to large players, it is then incumbent on the affected exchanges to compete by improving efficiency and offering customers better service.

Over time, this should lead to everyone benefiting - spreads should narrow, transaction costs should fall and price discovery must logically become more efficient.

Of course this presupposes that regulators and exchanges can find a way to live in harmony or complement the dark pool movement.

In Singapore, it is clear that the exchange is very aware of this and is closely watching developments in the high-speed trading and dark pool arenas. The starting point, however, appears correct - except for flash trading, most other forms of algo/program trading are probably okay since they enhance liquidity, market sophistication and market efficiency. As such, only a light regulatory touch would probably suffice.

China can't replace US as growth driver: trade ministry

2009-08-12T19:43:00.000+08:00

Business Times - 12 Aug 2009

(SINGAPORE) It is unlikely that China's domestic demand can replace the US' private consumption as a driver of global or regional economic growth any time soon, Singapore's Ministry of Trade and Industry (MTI) says.

'US private consumption could be the linchpin for sustainable global recovery, if it is not weighed down by job insecurity, falling personal income and tight credit conditions,' MTI's Second Permanent Secretary Ravi Menon said at yesterday's quarterly economic survey press briefing.

'There will be some spillover from China's own recovery, which has been going on handsomely and above expectations. But, much of that recovery has been domestically driven. And, the impact on the rest of Asia is more limited than you would see from an increase in US private consumption expenditure,' Mr Menon added.

Some economists have in recent months put forth the opposing view, which is that China's demand shall increasingly be an engine of growth for the region.

For instance, DBS economist David Carbon has on several occasions voiced his view that it is China's domestic demand which will be the key driver of Asia's recovery.

'China is the driving force behind the collapse in Asian exports, not the US, either directly or indirectly,' Mr Carbon wrote in a June 11 report. Consequently, it is China which will be the driving force behind Asia's rebound, the same report had said.

Bernanke should be reappointed to Fed: Krugman

2009-08-11T21:22:00.001+08:00

Business Times - 11 Aug 2009

(KUALA LUMPUR) Ben S Bernanke deserves another term as US Federal Reserve chairman based on his success in battling the financial crisis, said Princeton University economist Paul Krugman, a winner of the Nobel Prize.

'He's earned the right to a second term,' Prof Krugman, 56, said yesterday in an interview in Kuala Lumpur. 'He turned the Fed into the financial intermediary of last resort. When the banking system failed to deliver capital where it was needed, he put the Fed into the markets.'

Debate over the fate of Mr Bernanke, 55, is intensifying as he nears the end of his four-year term as chairman on Jan 31. While Prof Krugman and economist Nouriel Roubini have voiced support for the former Princeton economist, others including Anna Schwartz have said that a lack of transparency exacerbated the financial crisis.

'I think Bernanke has done a really good job,' Prof Krugman said. 'He failed to see this coming and he was behind the curve in early phases. But he's been really very good in the sense that it's really very hard to see how anyone could have done more to stem this crisis.'

As his terms draws to a close, Mr Bernanke has written in the Wall Street Journal and appeared on television to defend the unprecedented actions he took during the financial crisis.

'In a financial crisis, if you let the big firms collapse in a disorderly way, it will bring down the whole system,' Mr Bernanke said last month at a meeting in Kansas City, Missouri. 'I was not going to be the Federal Reserve chairman who presided over the second Great Depression.'

Under Mr Bernanke's stewardship, the Fed cut the benchmark lending rate to as low as zero and expanded credit to the economy by US$1.1 trillion over the past year.

Joseph Stiglitz, a Columbia University economics professor and another Nobel Prize-winning economist, said last week that he expects a 'very slow recovery' and that a replacement for Mr Bernanke should be considered.

'There are lots of potholes in the road,' Prof Stiglitz said in an interview. 'There are problems in commercial real estate. We know that there will be more foreclosures in the mortgage market' and 'we know we don't know the state of the banks.'

Prof Roubini and Dr Schwartz squared off in the New York Times last month over Mr Bernanke's fate. Prof Roubini, who predicted the credit crisis, voiced support for the central banker, while Dr Schwartz, co-author with Milton Friedman of a history of US monetary policy, wrote that the chairman should be replaced because of policy missteps and a failure to clearly articulate the bank's goals\. \-- Bloomberg

Impact of China's 'second rise'

2009-08-11T21:20:00.002+08:00

Business Times - 11 Aug 2009

There're three possible scenarios for global economy and all will have considerable outcomes for South Asia

By SHAHID JAVED BURKI

THERE is now a consensus among policy analysts all over the world that China is well on its way to becoming a global economic powerhouse. Even if it does not become the world's largest economy in three to four decades - as some believe that it might - it will certainly be the second largest behind the United States.

The fact that the country's economy has begun to recover at a faster pace than was expected in the spring of 2009 is a testimony to its strength. At that time, the global economy was in a deep recession and the Chinese dependence on markets in developed countries was expected to hurt it badly. However, that does not seem to have happened. The World Bank has now forecast China's growth rate at 7.2 per cent in 2009.

This is a long way down from the 11.9 per cent in 2007 but it is still remarkable, given the sluggishness in other parts of the world. China is likely to achieve this impressive rate of growth in spite of a fall in the rate of real export growth from 20 per cent in 2007 to 8 per cent in 2008 and to a forecast of minus 10 per cent in 2009.

According to one assessment: 'China may have accounted for as much as two percentage points of annualised growth in inflation-adjusted world output in the second quarter of 2009.' This was possible since the country is no longer as dependent on exports for growth as was believed before the present crisis hit the globe.

It may lead the emerging economies towards 'decoupling', a concept according to which these economies are no longer linked with the world's rich nations but move in tandem with them.

China's rapid recovery from the setback caused to its economy by the deep recession in the West, in particular the US, its largest trading partner, is owed to two facts - the aggressive response by the state to the decline in the rate of economic growth, and the rapid, but still not fully understood, restructuring of its economy.

In 2008, Beijing moved decisively to prevent a sharp decline in the gross domestic product (GDP) by injecting large sums of public funds into the economy. A stimulus package of four trillion yuan (S$843 billion) was launched largely to further develop physical infrastructure - roads, railways, airports, ports, bridges and tunnels. The money would flow from the federal budget to the state-owned agencies responsible for building and maintaining the infrastructure.

It would be spent quickly by bringing forward the projects that were already included in the current five-year plan or at the planning stages. Beijing's main concern was with rising unemployment. Some 20 million workers - mostly migrants from the countryside - were laid off by the industries in the private sector that depended almost entirely on exports to the West.

Under the Chinese system of human resource management, the unemployed workers were required to return to their villages. The Chinese were fearful that this return would make the countryside restive. Given the country's history, Beijing is always alert to the possibility of 'peasant rebellions'.

One consequence of this large stimulus to the economy would be a significant increase in the share of the public sector in the Chinese economic system. This would reverse the trend of the last two decades when the authorities encouraged the state sector to shrink in size in the expectation that people who lost their jobs in the state-owned enterprises would find employment in the rapidly expanding private sector.

This approach differed markedly from the one adopted by the countries that once made up the Soviet Union and those in Eastern Europe as they switched their ideologies. Communist Europe adopted capitalism by following the 'big bang' approach. The Chinese, ever pragmatic, opted for the gradualist approach.

One consequence of the way the Chinese have handled the current economic downturn was the interruption of the process of transferring workers from the public to the private sectors of the economy by creating space for them in the state sector. Another unintended outcome of this would be the strengthening of the state's role in the economy, which would be used to handle the opportunities created and problems posed by its unique urbanisation experience.

China's urban future will be shaped by the highly dense development all along the country's east coast, from Dalian in the north-east to Guangzhou in the south-east. Within the next few decades, we will probably see 500 million people living in this narrow strip of land with a combined income of US$10 trillion and a per capita income of US$20,000 in today's dollars.

What would turn into a ribbon of the national economy could later become multinational as the strip extends itself north to Korea and south to Vietnam and other countries in South-east Asia. With this development will come a massive structural change in the Chinese economy.

It will not be possible for the country to maintain land-intensive economic activities. Agriculture will become a smaller part of the economy as will the part of the manufacturing sector that needs a great deal of space. In a relatively new sub-discipline of economics - economic geography - focus has begun to be placed on the impact of density and distance on economic structures.

Some of the hypotheses being developed by those who have begun to practise this discipline will be tested in China, one of which is that with high density, distance also begins to matter. This would mean China's increased reliance on the countries that have the physical space to conduct the activities that would be expensive and difficult in China, and that are physically close to it. This should bring South Asia economically closer to China.

Global system

How will this new China affect the global economy and its political system? It is possible to contemplate three possible futures for the global economy and how these might shape the international economic and political systems. All three will have considerable outcomes for South Asia and less obviously for Singapore.

We can argue that the world is moving away from unipolarism when the US was the undisputed leader, and going towards bipolarism. That this may happen has led to some talk about the G7 or G8 being replaced by the G2 - the United States and China. This would mean slowing the move towards the creation of a multilateral system that receives direction from a much broader grouping than the G7 or G8.

In this context, the role played by the G20 was seen to expand. This group includes, in addition to the G8, the 12 largest emerging economies from all parts of the world. It has met twice since November 2008 and was supposed to come up with a new structure for managing the global economy. This would have led to the development of a new form of multilateralism.

This has not occurred and may not happen for the simple reason that the G20 was being built on top of a system that had an unstable foundation. The focus remained on the US and Western Europe. The latter, in particular - and for the reasons that will be later mentioned briefly - is no longer the most vibrant part of the global economy.

There may not, after all, be such a widening of influence and reshaping of the global economy as was believed would be the case only a few months ago. The G2 may emerge as the most important player in the new system. The slow move towards multipolarism may be pre-empted by the continuing strength of the economy of the US and what I have called the 'second rise of China'.

That this may be happening was demonstrated by the inaugural session of the Strategic and Economic Dialogue between Washington and Beijing held in Washington in the closing days of July 2009. Both sides fielded large delegations and the discussions covered a large number of issues of interest to both countries.

In his opening address, US President Barack Obama said that the US-China relationship will 'shape the 21st century'. With that, he launched the G2 without giving it that name. It can also be argued that what we are seeing is the emergence of a multipolar world. Such global configuration will reshape not only the global economy but also the international political system.

Systems with many poles are inherently less stable compared to those dominated by one or two powers, as was the case in the post-World War II period. We could see a global system with as many as seven centres of economic activity - the US, Japan, China, India, Brazil, South Africa and the European Union (EU).

The first six of these will try and create their own spheres of influence, while the EU is still in a formative phase with a considerable dispersal of power among the nation states that belong to it. For as long as it does not find a way of working as one entity able to pull its weight in unison, it will not be able to create much of an impression on other parts of the world.

Europe and Japan are also two parts of the post-industrial world that have as yet to find a way out of the demographic cul-de-sac in which they find themselves today. Declining population and an aversion to compensate it through immigration will inevitably produce less economic dynamism. India may not be able to match China's economic success any time soon.

The remaining six economic centres could, if circumstances permit, create their own spheres with a greater prospect of clashes than is likely in a bipolar world. These clashes will occur in the areas where the different spheres come into contact. The most likely places where this may occur are in Central Asia, South Asia and the Middle East.

Not only will this result in competition for geographic space - which was the reason in the past for clashes between centres of power - there will, in addition, be economic reasons for conflict. In a global system increasingly short of scarce resources vital for sustaining development, there will be immense competition for energy and water and possibly some minerals vital for development.

Three tiers

A third scenario is also possible. If the US and China become the two dominant powers, the global system will have three and not two tiers - the two global powers, four or five regional powers and the rest. In the former case, each major power will seek to circumscribe the other by creating economic and political alliances close to the other power.

This will create some tension of the type that characterised the 'Cold War' period in which the US and the Soviet Union challenged each other. The US then built a chain of alliances around the Soviet Union and China - this was when it regarded China as an extension of the Soviet Union - while Moscow tried to recruit Cuba and a number of small Central American states as partners.

Moscow also encouraged a number of developing countries to remain unaligned. The Non-Aligned Movement in which India played the role of leader had a consequence of limiting the reach of the US. However, America and China may not confront each other the way America and the Soviet Union did during the Cold War.

This is for two reasons, of which the first was that the US and China are economically much more dependent on each other than the Soviet Union and the US ever were. China needs the US' markets and technology, while the US requires Chinese surplus capital.

Furthermore, neither China nor the US has expansionary territorial ambitions. That was not the case with the Soviet Union, which was constantly trying to expand its sphere of influence, if need be by the use of military force.

This was what it did when it invaded Afghanistan in 1979. A G2 system, therefore, may be more stable.

The current thinking in the US emanating from a number of policy institutions on both coasts of the country sees the coming global arrangement from the bipolar perspective, in part because such a system is familiar to the policymakers as well as policy analysts.

This is one reason the administration of president George W Bush paid so much attention to cultivating a new relationship with India. There is a simple idea behind this.

Developing India as a counterweight to China will further the US' interests, particularly in Asia. It is difficult at such a fluid period in the world history to predict with some confidence as to which of these three directions the global system will go. That said, a somewhat higher probability can be attached to the third of these three scenarios. Nonetheless, it would be useful to study all three with greater analytical depth.

The author is a visiting senior research fellow at the Institute of South Asian Studies, an autonomous research institute at the National University of Singapore. He is a former vice-president of the World Bank and former finance minister of Pakistan

IBM sees big opportunity in water management IT

2009-08-08T19:48:00.002+08:00

Business Times - 08 Aug 2009

DETROIT - IBM is pushing ahead into providing technology services to manage water, a market US$10 billion market that the company sees growing quickly.

'This to me is an area that's really going to explode in the next three to five years,' said Sharon Nunes, who heads IBM's Big Green Innovations initiative. 'People see it as a gap. The water market is transforming.'

Big Green Innovations, a play on IBM's nickname Big Blue, is part of IBM's so-called 'smarter planet' initiative that aims to apply information technology to efficiently manage electrical grids, transportation systems and other infrastructure.

'We are actually looking at three different markets - industrial sector, for example food and beverage companies ..., local and municipal governments, water utilities,' said Sharon Nunes.

Her group looks at business opportunities in sectors such as water, carbon management, solar technology and desalination.

'We are in discussions with a lot of food and beverage companies and some of the industrial processing companies,' Ms Nunes said, referring to new water management contracts.

IBM is also in talks with 'a lot of utilities,' she added but declined to give details.

Government stimulus in the water sector China and the United States, estimated at around US$10 billion to US$15 billion, will help establish the market for water management, Ms Nunes said.

Governments, investors and human rights activists all see managing fresh water as key challenge in the coming decade.

Billions of people already lack access to clean water and development and climate change are expected to disrupt the supply of fresh water even more.

IBM estimates leaks account for up to 60 per cent of water supplied, costing water utilities worldwide US$14 billion every year.

Managing water resources would include monitoring rivers, water reservoirs and pipes. IBM also provides systems for managing water infrastructure, such as levee oversight and flood control, Ms Nunes said.

The technology company, whose products range from servers and software to consulting services, currently has a commercial deal underway with the Beacon Institute for Rivers and Estuaries in New York to build a monitoring and forecasting network for the Hudson River.

Also, IBM is working with researchers to monitor wave conditions and pollution levels in Galway Bay, Ireland, and is putting together smart water meters in Malta in cooperation with the utilities there.

The company's flood management and control system is getting a lot of attention from flood-prone countries in Asia.

'We are seeing some initial inquiries from a lot of smaller Asian countries,' Ms Nunes said. 'In areas where there is government stimulus packages, there's been a lot of outreach from some of the companies to IBM.' -- REUTERS

THE GLOBAL FINANCIAL CRISIS – IMPLICATIONS FOR ASIA

2009-08-08T09:28:00.003+08:00

SPEECH BY DR TONY TAN KENG YAM, DEPUTY CHAIRMAN AND EXECUTIVE DIRECTOR, GOVERNMENT OF SINGAPORE INVESTMENT CORPORATION AT THE ANNUAL DINNER OF THE ECONOMIC SOCIETY OF SINGAPORE HELD ON THURSDAY, 6 AUGUST 2009 AT 8.00PM AT SWISSOTEL SINGAPORE

1. I would first like to thank the organisers for inviting me to speak at this year’s Economic Society of Singapore Dinner which is being held in conjunction with the Singapore Economic Review Conference. Well over 200 papers will be presented at the Conference, attesting to the breadth and richness of the discussions that took place today and will take place over the coming two days.

2. In 2008, the world went through an economic and financial crisis which was the most severe that we have faced in the last fifty years. What I will do in my speech this evening is first to provide an update on the crisis. I will then proceed to talk about the economic and financial outlook going forward and end with some thoughts on the implications and challenges the crisis poses for Asia.

Update on Crisis

3. First : An update on the crisis. There are signs that the global economy is stabilising after the shock late last year. The massive policy support provided by governments and central banks is beginning to work through the world’s economies. Confidence is returning and fears of a meltdown in global financial markets and banks have receded. The reaction to the stress tests of major US banks indicate that the markets believe that these banks, with the support of the US government, will be able to weather the economic storm and earn their way out of future prospective losses. This prognosis is far from certain but the markets have chosen to give the banks the benefit of the doubt. Reflecting this, one closely watched measure of confidence, the Treasury Euro Dollar (TED) spread, has recently declined to pre-Lehman levels. The normalisation in credit flows in turn is supporting the recovery in global industrial production.

4. The global growth recovery is being led by economies that are not leveraged and have room for large policy stimulus like China, Japan, India, and other Asian countries. So despite historic falls in real GDP growth in some countries over late last year and early this year – and therefore dismal growth rates for 2009 – the worst seems to be behind us in Asia. Asian Economies are now expected to see continued improvement through 2010.

5. The US and other major developed economies are also expected to register positive growth later this year. This may be augmented near term by inventory adjustment and pent up demand from extremely depressed spending and output levels. However, sustained OECD growth in 2010 and beyond has less visibility and is likely to be weak given de-leveraging headwinds in the key consumer, financial, and housing sectors that were at the center of this Great Crisis.

Global Economic Outlook

6. So, the good news is that we appear to have avoided a global depression. The global economy seems to be stabilising and is expected to recover, although slowly. Beyond this cyclical recovery, however, my sense is that the global economic and financial environment has changed in three important ways.

7. First, the developed world is likely to experience lower growth in the coming years. De-leveraging, de-risking, re-regulation and, on the margin, even some de-globalization are disrupting markets and dampening economies and could reverse some of the progress due to past liberalization, globalization, and reforms. At the same time, aging populations will increasingly be a drag on growth in the developed economies.

8. The bulk of the globalised banking system consisting of major banks in the US and key parts of Europe are likely to remain capital impaired and subject to greater regulation. In the US, the banking sector is being supported by massive policy intervention and will likely be stable enough to support sub-par growth of 1-2%. However, it may not be strong enough to support credit needed for a sustained robust growth significantly above 2%. This is likely also true for UK and parts of Europe with banking and real estate sector problems.

9. US household consumption is unlikely to be robust as spending is being undermined by weaker income prospects, high unemployment, falling house prices and the need for higher savings rate to maintain long run consumption and repay debt. Household de-leveraging is likely to take a number of years, keeping overall recovery muted. As if these headwinds were not enough, re-regulation, higher taxation, government intervention and the pressing need for medium term fiscal consolidation will also constrain growth in the developed world.

10. In particular, the unprecedentedly large peace-time increase in public debt for many OECD countries from around 50% to over 100% of GDP could eventually put significant upward pressure on real interest rate over the next 3-5 years, potentially crowding out private investment and dampening growth and risk asset valuations.

11. The severe impact of this crisis on employment, household wealth, and public finances also raises difficult political and policy challenges in the West, especially in the US and UK. In the short-term, how governments deal with the continuing crisis will be of the utmost importance. As the troubled US and Japanese recoveries in the 1930s and 1990s demonstrated, policy errors could dramatically change the global economic and financial outlook for the worse.

12. Longer-term, the already difficult trade-offs between populist measures and economic efficiency will become more acute. It will require considerable skill by policy makers to assuage widespread concerns over job security, income inequality, healthcare, retirement, and environmental issues while maintaining a dynamic and open economy.

13. The second major change in the global economic environment is increased risk of both deflation and inflation, reversing a three decade decline in inflation and growth volatility and hence macroeconomic uncertainty. The golden age for asset markets that some have called “the great moderation” looks to have ended.

14. Given the weak economic recovery, excess capacity and high unemployment are expected to keep inflation under control over the next few years. Indeed, deflation remains a significant near term risk given extremely weak labour markets and downward wage pressure. With prolonged stagnation in employment and income growth, a vicious self re-enforcing downward spiral could easily develop.

15. However, once the recovery is in train, risks are ironically tilted towards higher inflation. Reversing unprecedented quantitative easing will be challenging. Given high unemployment and the risk of stalling a nascent recovery, central banks may be tempted to accommodate higher inflation. Governments may also be tempted to deal with higher fiscal deficits and debt accumulated during the crisis via higher inflation.

16. The global supply of commodities and labour could turn less friendly towards low inflation. Continued growth and urbanization in huge emerging economies will put pressure on food and energy prices, natural resources, and the environment. In addition, the slowing pace of global labour supply expansion will increase inflationary headwinds. This is because towards the end of the next decade, the pace of industrialisation will eventually slowdown in China, while the capacity for other large emerging markets, such as India, to replace China’s contribution to global labour supply remains uncertain. At the same time, developed countries will start to see significant declines in their working-age populations.

17. The third major change in the global economic environment is the increasing importance of the emerging economies, anchored by China and India. Emerging economies should continue to grow relatively robustly notwithstanding OECD weakness. Emerging economies are expected to account for more than half of the world’s GDP growth over the next decade. In 2000, for instance, emerging markets accounted for 20% of global growth, but over the coming decade this is expected to rise to about 60%.

18. Emerging economies are likely to displace the G-7 as the world’s largest economies over the next 10-15 years, even if per capita incomes will still lag behind the developed economies. This relative outperformance will be driven by

(i) larger savings and domestic demand potential,
(ii) relatively healthy public and private sector balance
sheets,
(iii) policy flexibility, and
(iv) room for significant productivity catch-up.

The current Great Crisis has markedly accelerated such trends.

19. Medium-term prospects for China and India are positive, even as they face difficult structural challenges going forward. For China, this would include successfully rebalancing its growth drivers, dealing with resource constraints, meeting the aspirations of an increasingly richer population, and reforming a tightly controlled monetary, financial, and exchange rate system.

20. With its fiscal and ideological constraints, India is somewhat behind China in terms of urbanization and economic liberalization but faster progress may be possible with the recently elected government. In addition, at the regional level, some states have been markedly more progressive while the rise of a larger middle class may reduce pressures for more populist politics and increase pressure for economic reforms.

21. Beyond China and India, prospects vary across Asia. Countries that are more dependent on exports and capital inflows, have less healthy balance sheets, and have significant structural impediments such as political uncertainty will fare less well. By contrast, economies with large potential internal markets and which are also more complementary to China and India will benefit. These would include the Greater China and Indochina regions, and Indonesia.

22. But the shift in economic power to the emerging world will also likely increase geopolitical risks. For one, the emerging economies, especially the BRICs will become key global powers and increasingly demand more say on world affairs. An awkward transition is likely to occur: In terms of military power the US is likely to be dominant for decades to come, and will be called upon to carry out most of the heavy lifting in global trouble spots. However, the US would still be heavily dependent on foreign countries including key emerging geopolitical rivals, to finance its large public debt.

23. Conflicts could also arise over natural resources. Severe demand supply imbalances could lead to greater and more intense competition among nations for resources such as energy, arable land, and useful commodities. This could lead to higher commodity prices, or conflict, or both.

24. The future economic environment is thus fraught with higher macroeconomic, policy, and geopolitical risks. Growth is likely to be lower for a number of years given significant de-leveraging. Deflation risks are high in the near term with inflation risks rising in the longer term. The unprecedented peace-time increase in public debt in the developed countries especially the US and the UK will likely lead to significantly higher real interest rates which could dampen long-term growth. Global growth will recover, but will be skewed towards the emerging countries. The continued rise of emerging markets is positive but will bring increased geopolitical and inflationary risks.

Implications for Asia

25. What does this imply for Asia?

26. The first important implication is that, particularly for countries with large populations like China and India, Asia’s economic growth model will be re-oriented from depending largely on exports to a more balanced model that is dependent as much on domestic consumption as on export growth. Such rebalancing would be helpful in two ways. First, as growth in the developed world - hitherto underpinned by the US consumer - is expected to remain weak over the next few years, stronger domestic demand may help mitigate some of that weakness. Second, in so far as some of this rebalancing would be done through increased domestic investment, it could help improve productivity and an economy’s productive capacity. A more balanced growth could also help reduce income inequality by improving wage prospects for labour.

27. A strategy that mainly relies on cheap factors of production – labour and other inputs – is not likely to work as well going forward, especially outside excess labour economies like China, India, Indochina and Indonesia. Instead, the rest of Asia will need to look at its own institutions and markets to drive a more sustainable and higher quality growth via strong productivity improvements. In this economic environment, the winners will be those countries that can evolve to be among the world’s leading innovators and designers, rather than countries whose factory floors are buffeted by the volatility of structural change and intensifying competition from large labour surplus economies. Innovation driven economies require supply side nimbleness and strengths: investment in human capital (ie education, healthcare, and research) hard and soft infrastructure including competitive domestic markets; and an environment that will attract and retain talent, as well as foster creativity and entrepreneurship. Such an environment will not be compatible with low cost, production oriented strategies.

28. Rebalancing growth drivers will not be an easy process. China illustrates, on a large scale, the positive aspects of this adjustment as well as some of the difficulties. At one level, China is now drawing on its vast savings to help mitigate the impact of the decline in external demand. Some aspects of its fiscal stimulus such as public infrastructure investment will encourage and strengthen domestic growth. At the same time, short-term concerns over unemployment mean some measures - export rebates, for example - are slowing down adjustments that need to take place for rebalancing to occur. The Chinese authorities are walking a fine line between restructuring the economy for longer-term sustainability and attempts to mitigate short-term pain. It may be that some slowdown in growth is unavoidable in the short-term.

29. China also needs to, over time, bring about a better balance between consumption and investment in GDP. The decline in consumption as a share of GDP makes China vulnerable to external shocks. At the same time, growth has become reliant on investment and on markets to absorb excess supply. This cannot be sustained over the long term. Developing consumption will require more difficult and substantive medium to long term reforms that increase household wage income as a share of GDP and at the same time reduce corporate and household savings. This could include allowing more competition in service industries, recalibrating performance measurement for local officials to include employment and not just GDP growth, and improvements in social safety nets.

30. Understandably much of the focus has been on the negative aspects of this adjustment but I am optimistic that Asia will come out of this crisis in a stronger position. Asia’s fundamentals are generally sound, policy-makers have lots of flexibility, and the population is hard-working and educated. There will be bumps along the way, perhaps a few crises, but if we learn the right lessons from history, especially those of the recent Great Crisis, we can re-tool and re-orientate ourselves so Asia’s development is more balanced and therefore more sustainable.

31. This brings me to the second important implication for Asia arising from the economic crisis. Asian financial institutions and markets have been given tremendous opportunities over the next decade. The globalised Western banking system, hampered by capital constraints and re-regulation, will likely not be able to intermediate the massive capital demand needed to finance Asian growth. This leaves the playing field unusually open for Asian financial institutions and markets, particularly for the next 3-5 years.

32. Fortunately, Asian banks generally came into this crisis much healthier than their global counterparts given the experience of the Asian Crisis in the 1990s. Capital, liquidity, and nonperforming assets were at healthy levels while exposures to toxic assets were limited. Asian household, business and government sectors are relatively un-leveraged with excess debt. In order to take advantage of this opportunity, however, Asian banks and capital markets will need to develop quickly to step into the breach.

33. In this context, the coming redesign of the global financial regulatory architecture will be a major and difficult exercise with its share of opportunities and risks. First, a lack of coordination in regulatory architecture and practice, together with the rising global unemployment in coming years, may lead to regional trading and financial blocs or at worst, a retreat to protectionism and nationalism. Second, the swing of the political and policy pendulum towards greater regulation may end up with overregulation which stifles financial sector efficiency, productive financial innovation and helpful market discipline. Regulatory and development authorities in the financial sector in Asia need to cooperate as never before with each other and with financial institutions to develop regional capital markets.

34. The third important implication for Asia arising from the global financial crisis relates to the issues policy-makers will face as low global interest rates combined with ample liquidity could give rise to volatile capital flows and asset bubbles across Asia. Across the region, we are already beginning to see significant rises in equity and some real estate prices on the back of domestic reflationary policies and some capital inflows. Low global interest rates combined with easy domestic monetary policies could lead to higher speculative asset prices. Like in the early 1990s, managing large capital inflows and prospective bubbles given managed exchange rates will be a major task for policy-makers.

Risks and Challenges

35. The greatest risk to the outlook for Asia is a global economic and financial environment that does not stabilize and recover by 2010. Downside risks remain high, despite signs of stabilization. If the US economy turns out to be worse than expected, requirements for banks’ capital will be higher and the US administration might need to go back to Congress to ask for additional funding.

36. A second risk is that US consumption fundamentals have deteriorated. Nominal incomes are contracting and the savings rate is rising. Income and spending are being supported now by tax rebates, benefits and transfer payments but it is not clear how sustainable these would be. Hence, weak demand and deflation risk are still significant problems. Sustained deflation could cause private consumption and investment to contract further due to higher real interest rates and real debt burdens. The US could relapse into recession and losses and capital needs escalate again.

37. A third risk is protectionism. In developed countries, chronically higher unemployment and a more receptive political leadership will increase pressures to protect domestic industries from Asian exporters. Policies such as subsidies to protect ailing industries could contravene world trade rules, potentially heightening trade tensions. But protectionism is not just a developed country phenomenon: several developing countries are using import restrictions to mitigate the impact of slowing global demand and weaker current account balances. Clearly there is a danger - probably highest if there is no recovery next year - that protectionism could rise dramatically.

38. A major challenge going forward is the uncertainty raised by the apparent failure of Western or American models which, at the extreme, put financial markets above other sectors of the economy. Will there be a structural change in how savings are mobilized and allocated in the West? Will the state guided models of the East do better? It will take time before we will know the answers to these questions but the balance between private and public sector as the prime economic driver is shifting towards the latter, likely in significant and long-lasting ways.

Conclusion

39. To sum up, Asia has experienced a dramatic slowdown but Asia’s fundamentals are strong. As the global economy stabilises, Asian economic growth will recover. China and India will do relatively better but cannot be the drivers for the world economy in the short-term. But over time, China’s and India’s growth will anchor both the region and a global economy that is likely to see more balanced and sustainable growth. The greatest risk to the region is a failure of policies in the developed world and a return to isolationism or protectionism. More generally, however, there are serious unanswered questions on the role of markets and the state, including the appropriate level of regulation and state intervention. In this environment, Asian banks and capital markets will face both a tremendous challenge and opportunity to intermediate huge regional savings to meet massive capital demand from Asian growth and the integration of major Asian emerging economies into the modern global economy.

RBS economist is a bear in the china shop

2009-08-07T18:41:00.001+08:00

Business Times - 07 Aug 2009

By ARTHUR SIM

(SINGAPORE) China bulls should turn the page now. Ben Simpfendorfer, chief China economist at the Royal Bank of Scotland, is 'more bearish than most' on the China story. In fact, he believes it is more 'a story about excess capacity'.

As such, he also believes that there is a chance that the Chinese economy could suffer a 'double-dip' in 2010.

He is not too impressed by the second quarter's 8 per cent GDP growth either, and estimates that about half of that can be attributed to the government's two trillion yuan (S$420 billion) stimulus package, which focused on public infrastructure spending.

China may be the largest manufacturer in the world but its factories 'are suffering a sharp fall' in global demand that is not being substituted by local demand.

'Exports are not a big driver of growth because they rely on a lot of imported components and parts,' Mr Simpfendorfer said. 'What is driving growth is the construction of export factories and the purchase of equipment to manufacture export goods. And this is very weak because factories are running below potential.'

The Chinese government could, of course, introduce a second stimulus plan to maintain growth at the current level. But Mr Simpfendorfer, who has lived in Hong Kong for 10 years and speaks Mandarin, said: 'The chance of a second stimulus plan is not high enough to make a significant change in my forecast.'

And while he believes investment in public infrastructure projects and a recent increase in private residential investment could support growth over the next two years, there will be an 'imbalance'.

He also questions the wisdom of simply targeting a percentage rate of growth, because if growth does slow, 'the temptation is to say, OK, we need more stimulus when the question (the government) should be asking is why growth is slowing'.

He wonders whether China is ready for a structural shift in global demand. 'If foreign consumers do not spend as much as before, China will need to respond - it needs to say some of these factories will never open again,' he said. 'When you talk to SMEs, anecdotally, a lot are really struggling, but this does not get captured by official figures because they are small and private.'

But Mr Simpfendorfer qualifies that while he believes growth in China may slow, 'it won't contract'. 'Maybe it slows to 6 per cent. Relatively it's still pretty good,' he said.

But the days of double digit growth are probably over and the sooner China and rest of of the world realises this, the better, it seems.

China may be the factory of the world, but he reckons that China should move out of manufacturing.

'When I say China should move out of manufacturing, what I am saying is that the east needs to produce less manufactured goods and more service goods.'

He hopes that this will result in better pay, working conditions and ultimately help drive private consumption too.

And it would also be good for the rest of the world. 'China's exports to the Middle East have now replaced the US,' he said. 'But this has led to job losses as a result, which is bad for social stability. If China does re-balance (its economy), some of the manufacturing would leave and go to Syria, for instance.

'If Syria were to capture just one per cent of the increase in China trade with Europe over the past five years, each year could add half a percentage point to its GDP growth.'

However this plays out, Mr Simpfendorfer said: 'I think the whole story about China propping up the global economy is false. The irony is that as the world's largest manufacturer, China produces most of what it needs. What it imports are raw materials to produce manufactured goods, and countries like Malaysia and Indonesia may benefit. For countries like Singapore, Thailand and Korea, the benefits aren't huge.'

Need to reassess market optimism

2009-08-04T21:23:00.004+08:00

Business Times - 04 Aug 2009

WHILE the market rallies over the past few weeks have certainly lifted sentiment, it may now be time for a serious reality check. If anything, the main headlines of the previous week added up to just one word: caution.

The growing confidence in the market, and indeed generally, was driven by several factors. For one thing, there was the feeling that the economic decline has bottomed out and that job losses would not be as severe as feared. Second, asset prices are seen to be undervalued and due for a rebound. And corporate earnings so far have also not been as bad as some had expected.

But there was enough evidence last week to suggest that such optimism should be reassessed. New figures released by the Ministry of Manpower showed that 5,500 people were retrenched or had their contracts terminated prematurely in the three months ending June. This is less than half the 12,760 redundancies recorded in the first quarter. That is good news. But it may be less rosy in coming months. Labour chief Lim Swee Say revealed that a number of unionised companies, mostly from the manufacturing sector, have plans to retrench more than 1,500 employees in the coming October-December period, due to falling global demand and high operating costs. This led the ministry to warn of a W-shaped economic recovery, in which the recent improvements are followed by a second dip.

If the economic and jobs situation is less certain than it appears, then the present buoyant mood in the asset markets should be questioned. And this is what Minister for National Development Mah Bow Tan did last Wednesday, when he warned that there are signs of speculation in the property market, and that the government will act if it overheats - despite the insistence of property market players that this is little speculative activity still. The uncertain jobs outlook, however, necessitated the caution - the rebound in asset markets is simply out of step with an economic situation that remains highly fluid. And although corporate earnings have not shocked so far, companies clearly aren't out of the woods yet. Last week, blue-chip Singapore Airlines posted a loss of $307 million for the first quarter ended June 30, its first set of quarterly losses in six years, and warned that it could post its first full-year loss since it was formed in 1972.

On Friday, Great Eastern said it is making a one-time redemption offer to buy back structured investment products, which will negatively impact its Q3 2009 financial results by $250 million. This in turn may lead to a negative impact of $218 million on the earnings of its parent, OCBC Bank, in the third quarter. Singapore corporates clearly still face a painful period of unwinding from the financial crisis. Yet, stockmarket values hit a 12-month high in July. Not surprisingly, a DMG Research technical report yesterday described the overbought condition of the benchmark Straits Times Index as 'a worrying phenomenon'. The amber lights are flashing everywhere, and they should be heeded.

Stockpiling by China a risk for commodities: Roubini

2009-08-04T21:23:00.003+08:00

Business Times - 04 Aug 2009

(KALGOORLIE, Australia) China may have overstocked on commodities, risking a slowdown in buying and a correction in prices in the second half of this year, top economist Nouriel Roubini said yesterday, also reiterating that the global recession would continue until year-end.

Mr Roubini, a New York University professor and one of the few economists who predicted the magnitude of the financial crisis, said he expected most commodity prices to continue a gradual recovery in step with rising general economic growth.

'The recession will continue to the end of the year,' Mr Roubini said at the Diggers and Dealers mining conference in Western Australia. But he added: 'As the global economy moves towards growth as opposed to a recession, you are going to see further increases in commodity prices, especially next year.' Still, he warned there was still a risk of a second slump.

'In the short term there has been a massive stockpiling of commodities by China,' he noted. 'My concern is that China might have accumulated an inventory of commodities that is probably excessive to the growth of their own economy.'

China went on a buying spree after the global collapse in demand for oil, metals and other industrial staples, bulking up its domestic government inventories and snatching up overseas assets from Australia to Africa to Canada to safeguard growth.

China's refined copper imports, at 1.8 million tonnes in the first half, were up 160 per cent on the same period a year earlier, while primary aluminium imports rose a stunning 16-fold. Chinese buying has helped drive up both Shanghai and London Metal Exchange prices this year, by around 80 per cent on both LME and Shanghai copper and 75 per cent on LME lead, 40 per cent on zinc and nearly 20 per cent on aluminium.

As a result, there is a risk commodities prices will slump again as China now slows its buying spree. 'The risk in the second half of this year is that the rate of accumulation in China must slow down - one of the factors that a downside correction in commodity prices, however modest, may occur,' Mr Roubini added\. \-- Reuters

Investing in future, embracing change

2009-08-04T21:20:00.001+08:00

Business Times - 04 Aug 2009

SPH TURNS 25

SPH has in 25 years become one of the largest, most profitable media companies in the region. CHEW XIANG traces its roots

'THE not so bright go into political science and sociology. When they cannot get a good job, they go on to journalism.' That comment, made by then-prime minister Lee Kuan Yew at an election rally in August 1972, summed up the challenges facing the press 40 years ago - general disdain coupled with little recognition and poor prospects for journalists.

They 'felt they hardly belonged to the company', according to 'Dateline Singapore', Mary Turnbull's history of The Straits Times. Journalists were even obliged to buy their own typewriters, albeit with company loans. In September 1966, 60 reporters, sub-editors, photographers and artists went on strike; there was another in 1971 and an unofficial 'go-slow' protest by printers in September 1976. That wasn't the last industrial action - more than a hundred journalists protested against the merger that formed Singapore Press Holdings 25 years ago.

It was a less than auspicious start for a company formed in July 1984 through the merger of Singapore News and Publications Ltd (SNPL), Straits Times Press and Times Publishing to form Singapore Press Holdings. SNPL, as it was known, was formed just two years earlier, in April 1982 through the merger of two Chinese newspapers - the Nanyang Siang Pau and Sin Chew Jit Poh - to form Lianhe Zaobao. It also published the Singapore Monitor, an English language broadsheet.

But business realities forced the Singapore Monitor to close just two years later and SNPL was merged with Straits Times Press. The logic was to cooperate to avoid battling for scarce resources; there was official fear at the time that the Chinese newspapers would not survive on their own and needed the financial backing of the larger English publishers.

For some years the merged group was still unwieldy and inefficient. In the years post-merger it was taking in over $700 million a year in revenue, but profits were just above 10 per cent.

Three years later, Lien Ying Chow, then chairman, was able to report to shareholders that 'SPH was formed in 1984 to avoid duplicating capital and operating costs and to realise long term economies of scale. I am pleased to note that these objectives have largely been met.' But, as Lim Kim San, who was appointed executive chairman in 1988, noted, the company's disparate roots were still holding it back. SPH was 'a carriage drawn by five different horses going in different directions ... I've never come across an organisation that is so loosely run without a policy,' he said.

Mr Lim was a former politician, but he was also an astute businessman. The publishing arm Times Publishing was quickly de-merged by March the following year. He started focusing on the bottom line and insisted journalists should be more cost-conscious. He also focused on editorial quality and 'proved generous with editorial salaries', Ms Turnbull wrote. 'Editorial excellence is a sine qua non for a good publisher, therefore upgrading of editorial content and quality is an ongoing process,' he said in 1988.

While sales halved after the de-merger, profit margins more than doubled, despite troubles brewing in the Middle East. In 1990, the first full year post-demerger, profits went up almost 30 per cent, and with Mr Lim still at the helm continued their meteoric increase until the Asian financial crisis in 1997. By then, sales had almost doubled from 1989; profits were three-and-a-half times as much. That year, the company, for the first time, distributed over $100 million in ordinary dividends.

From the mid-90s onwards, the company turned its attention - and considerable firepower - to new media opportunities: broadcasting, Internet and television. SPH took substantial stakes in Singapore Cable Vision, a cable TV operator, Cyberway, an Internet service provider, and telco MobileOne. Its property arm also bought, in 1996, what would prove a shrewd investment - stakes in Paragon and Promenade, two prime shopping malls along the busy Orchard stretch. Both were subsequently amalgamated and redeveloped into Paragon which now provides regular and substantial contributions to the company's bottom line.

The company's broadcast arm, SPH MediaWorks, didn't fare as well. It chalked up losses of $44.5 million in 2004 and was finally merged with rival MediaCorp. In return, SPH would own 40 per cent of Today, a rival free newspaper. 'The continuing losses, especially from the TV operation, were not sustainable. SPH believes rationalisation is in the best interest of the company, as it would immediately stem the losses and enhance shareholder value, while allowing the company to hold significant stakes in the TV and free newspaper businesses,' said Alan Chan, who had been appointed CEO in 2002.

Meanwhile, Mr Lim was able to look back on his time at the helm with great satisfaction. When he took over in 1988, shareholders' funds totalled just over $343.1 million and the group yielded net profits of $73.7 million, he noted. As at Aug 31, 2002, shareholders' funds have risen six-and-a-half times to $2.2 billion, and profits up four-fold to $307.4 million. 'I have thoroughly enjoyed my years with SPH. It has not always been smooth sailing. But the overall results have been satisfying,' he said in his final message as chairman.

By 2004, Mr Chan was able to report 'a year of achievements'. The company returned nearly $1.1 billion in cash in late June 2004, following a 5-for-1 share split and a major capital reduction exercise, and achieved record profits of $546 million on sales of just under $1 billion - net margin was a phenomenal 56 per cent, at a time when most newspaper companies were struggling with plunging circulations and advertising revenue.

In 2007, the company ventured into property development and made an instant success - Sky@eleven, a luxury condominium built on the site of the former Times Industrial building, was sold out within hours of launch, and continues to contribute substantial profits to the company's bottom line.

The company's present chairman Dr Tony Tan said SPH is now a 'multi-media organisation with different media platforms ranging from print, online, outdoor to broadcast.' And its non-media businesses range from properties to search engines to events management, he said, even while, 'for our traditional print products, we have constantly revamped and rejuvenated them to reflect the latest trends and be relevant to our readers' ever changing needs.'

While profits have eased in the recession of the past year or so, the company continues to power ahead. It has continued its investments in online media and is also part of the consortium which won the bid to build Singapore's 'next generation' national broadband network.

And the battle for talent is still ongoing but the company is now fighting it from a position of strength. 'We are in search of talents with a passion to establish a long-term career in the media business,' said Mr Chan in a recent interview. 'To achieve this, SPH has in place a comprehensive career package that is competitive with the rest of the market, both within and outside of the media industry.' He pointed out that the company was this year recognised at the Singapore HR Awards in July.

What's next for South-east Asia's largest media company? 'We have every intention to continue to excel in our core media business and other adjacent businesses. We intend to do as well for our online media as we did for our print and publications,' said Mr Tan. The focus now is to invest in the future and embrace changes as they come, he said.

Mr Chan said that even while most newspaper companies are facing falling profits and readership, the SPH group of newspapers should still prosper. 'I always tell people that our flagship newspapers are the most cost effective news filter in Singapore. For less than a dollar a day, one can get access to the latest happenings and the most trusted opinions on affairs of the world,' he said.

SPH has in 25 years become one of the largest, most profitable media companies in the region; its products are read daily by millions; it has become a national institution. And all those worries expressed so trenchantly over 30 years ago? Attitudes now have shifted considerably. Chinese premier Wen Jiabao is reportedly a 'faithful' reader of the Lianhe Zaobao. And closer to home, 'if you read something in The Straits Times or on (ChannelnewsAsia), you must know that it's real,' said Prime Minister Lee Hsien Loong in 2006. 'Inform, educate, entertain but play a constructive role in a new way in Singapore.'

The beginnings of a global banking centre

2009-08-04T21:17:00.001+08:00

Business Times - 04 Aug 2009

Singapore's evolution into a financial centre started way before it gained independence 44 years ago. JAMIE LEE speaks to three banks that have been in Singapore for more than a century

STANDARD Chartered Bank, known then as The Chartered Bank, was set up in Singapore in 1859, or 150 years ago.

The Chartered Bank not only financed the rapidly developing rubber and tin industries, it facilitated trade with China by dealing in the foreign exchange business with the Chinese. The bank was also authorised to issue bank notes until the end of the 19th century.

The bank's first branch was on Prince Street before it moved to Battery Road. The original classical styled building was designed by Swan & Maclaren, the oldest architectural firm in Singapore that also designed the famed Raffles Hotel and the Victoria Theatre and Concert Hall.

Business was disrupted by World War II when the Japanese seized control of the bank buildings.

When Singapore was liberated, the bank's staff returned to intact buildings emptied of equipment and furniture. So for a while, staff worked while sitting on the floor.

Also tapping the rubber industries was Citigroup. The bank - which started out as the City Bank of New York to serve a group of New York merchants - arrived in Singapore in 1902 as part of its expansion from America into parts of Asia and the United Kingdom.

Known then as the International Banking Corporation, the first American bank to be set up here was focused on trade finance. From its first branch at 1 Prince Street, the bank dealt especially with tin and rubber exports from Malaya.

Another legacy bank is Dutch institution ABN AMRO, which will mark its 151 years in Singapore this year.

Formerly known as NTS (the Netherlands Trading Society), the bank was started as a commercial enterprise to revive the Dutch trade in the region, following the opening of its first unit in Batavia, modern day's Jakarta, in 1826.

For a monthly rent of about $80, NTS ran its first office near Chulia Street on Boat Quay.

In 1865, the office moved to Collyer Quay and to the building's second floor, joining plenty of offices that were relegated up the stairs.

With plenty of stores occupying the ground floor to make up the shophouse trade - a point of nostalgia for many Singaporeans today - many offices were pushed one floor up.

Through its evolution into a full-fledged bank, NTS moved away from Collyer Quay, returned, before moving again to Cecil Street, at the corner of d'Almeida Street, in 1902.

The move was linked to NTS's heritage as a Netherlands bank. The site was known then as the 'Dutch Corner'. Other Dutch outfits that settled there included KLM, Philips, the Dutch Consulate General, and Nationale Handelsbank.

With Singapore's rapid development that earned it a reputation for using upgrading as a political carrot, the Dutch corner was lost as the site had to be vacated to make way for extensive renovations of the Singapore harbour.

In 1991, NTS - by then known as Algemene Bank Nederland (ABN Bank) - married Amro Bank to give birth to today's ABN Amro.

ABN Amro went through yet another merger in 2007, when the Royal Bank of Scotland (RBS) bought it as part of a consortium, putting most of its Singapore operations under RBS today.

With a keen eye on the new wealth created from Singapore's economic success, all three banks began tapping the consumer market - a move that was cemented after they were awarded the Qualifying Full Banking licence in 1999.

This allowed banks to expand beyond corporate banking into retail banking, jostling into the privileged space that was once the prerogative of the local banks. These banks' automated teller machines (ATMs) started sprouting across the island, while Singaporeans and residents here were presented with more choices from these foreign players.

Banks also began targeting the rich with wealth management services, such as preferred banking and concierge services for their top-tier customers.

Singapore will continue to be an important financial centre as banks expect more growth from business in the city-state, thanks to the country's efficiency and strong infrastructure.

'We plan to continue to invest in building Singapore into a key business and operational hub for RBS, supporting our chosen clients in the region in their investment banking, trade finance and cash management needs,' said Muhammad Aurangzeb, RBS country executive Singapore.

The rising influence of Asia will present a unique opportunity for the financial industry of Singapore, said chief executive of Standard Chartered Lim Cheng Teck.

'Customer profile is likely to broaden, not only in sophistication, but also in terms of geographical coverage,' said Mr Lim.

Citibank CEO Jonathan Larsen also expects Singapore to take advantage of the wealth accumulation in the economies of China, India and South-east Asia.

But the financial crisis had thrown the spotlight on the financial institutions - which, in the US, have been largely blamed for not watching their high leverage levels and for selling products to investors that were not as safe as claimed.

Products such as the Lehman Brothers' minibonds have since soured after the collapse of the investment bank, leaving many retail investors with nothing from their investments.

With recent guidelines outlined on fair dealing, financial institutions are now held to a higher set of standard aimed at protecting the interests of retail investors, said Mr Larsen.

'With more positive news on the global and domestic economic front, there has been an improvement in investor sentiment and return of risk appetite. Nonetheless, investor expectations have changed: investors are increasingly mindful of how they invest their money and are seeking a clearer understanding of investment products they buy,' he added.

Standard Chartered's Mr Lim noted: 'Following the recent crisis, financial regulators around the world are looking to enhance their financial regulatory systems.

'How these developments will play out for Singapore remains to be seen but the outlook for Singapore as a leading financial hub in the region remains strong. Financial institutions in Singapore are in good shape and well capitalised, and therefore well prepared for such challenges.'

Looking forward to another 50 years

2009-08-04T21:16:00.002+08:00

Business Times - 04 Aug 2009

After 50 years in the fashion retailing business and having undergone a few economic downturns, FJ Benjamin has learnt what it takes to survive, reports ARTHUR SIM

CHANGES in the business environment are inevitable. The ability to adapt to these changes quickly, however, will determine if a business has staying power.

And FJ Benjamin (FJB) is a Singapore company that has been around a while.

'After 50 years, we've learnt to take business cycles in our stride. We put in place policies and practices that will keep us nimble so that we can adjust swiftly to changes in our external environment. This principle of staying fleet-footed and fit for all cycles applies to all functions across our business,' says Nash Benjamin, CEO of FJB.

In some ways, this is a lesson that FJB has had to learn through experience gleaned since the very early days when it was just a small start-up to the lean years after the fashion retailer was listed on the Singapore stock exchange.

One early experience with downturns in business cycles occurred not in Singapore but in Los Angeles, where FJB ventured in the 1980s.

By this time, its Lanvin boutique in Singapore had been open for about seven years and proved to be successful. When FJB was invited to open a Lanvin store in Beverly Hills, it jumped at the opportunity to become a global player.

But the opening of the store was badly timed with the US entering a recession. Mr Benjamin remembers the US retail market as being 'all about mark-downs, cost-cutting and discounting'. After about three years, having 'lost a lot of money', FJB cut its losses and closed the store.

In Singapore, business was also affected by the recession of the mid-1980s. Sensing the severity of the slowdown, FJB founder Frank Benjamin quickly cut back on stocks and told buyers to cut back their purchases by about 20-25 per cent. Some lines had to be suspended when manufacturers refused to lower import prices and in other instances, there was no option but to lower prices in order to stay competitive.

While this took a toll on company profits, FJB survived - but only to face an even more severe recession.

For Mr Benjamin, the 1997 Asian financial crisis was marked by 'simultaneous occurrence of situations that hit us like the perfect storm'.

Having decided to expand regionally, he remembers how the devaluation of regional currencies caused FJB debts to soar overnight, 'driving up our already high gearing while sales were falling as consumers across Asia cut back on spending'.

'I remember that during that period, all of us worked like we'd never worked before. We spent most of our time managing banks and keeping lines of credit open - it was a battle for survival. We were looking for the light at the end of a very long tunnel and it was indeed a harrowing experience that I don't wish upon any entrepreneur,' he adds.

During its bleakest moments, Mr Benjamin thought FJB may even fold. 'We thought we were looking into the abyss,' he recalls. Much of his time was spent travelling to many territories to close operations while at the same time managing the business and bankers.

Learning experience

But the 1997 Asian financial crisis was a learning experience too. 'We learnt lessons they don't teach you at Harvard Business School,' says Mr Benjamin.

'The crisis taught us never to put our business in a position where sudden, unexpected external events can threaten our future. We learnt to be conservative and to pay more attention to risk management. We learnt to be prudent in our capital management and to keep our gearing low, not to rely inordinately on short-term credit or to be overly invested in assets that we do not need for our core business.'

As a result of the crisis, FJB sold its headquarters at Orange Grove Road and started to build up its business in low-cost countries and scale back on high cost markets such as Australia, Taiwan and Hong Kong.

In some ways, the 1997 Asia financial crisis has prepared FJB for the current economic downturn. 'Having gone into this recession with low gearing has made a big difference, in that we can focus on managing the business rather than managing our bankers. This naturally gives us an edge and our battle now is really one of market share and not survival,' adds Mr Benjamin.

Expansion is still fundamental to the growth of any business.

'In our retail business, scale has many advantages, among which is the greater purchasing power we enjoy from our principals and the improved leverage we have over landlords. We believe the recession will throw up opportunities that may help to create synergies for our existing portfolio and ultimately value for our shareholders,' reveals Mr Benjamin.

But asked if a business has to be big to survive today, Mr Benjamin says: 'No, a business does not have to be big to survive the recession. It has to be well managed.'

'We need to understand our consumers' needs and be able to deliver what they are looking for, This means having strong leadership and key management who have their fingers on the pulse,' he explains.

How FJB will adapt to a change of management will also ultimately have to be tested if the company is to be around for another 50 years.

And the task is likely to fall on the shoulders of the next generation of Benjamins.

Already, Douglas Benjamin, the son of the FJB founder, has charted new frontiers for growth with the creation of Raoul, a new fashion brand.

With Douglas Benjamin as its creative director, FJB hopes to develop the Raoul brand and intellectual property rights and take it global with the company currently in the process of opening a showroom in New York.

Of course, with these expansion plans is the implicit understanding that the retail industry is itself changing and the distribution rights of any brand - including those currently held by FJB such as Guess, Gap and Celine - belong to no one but the principals (a lesson learnt when FJB lost its lucrative Gucci licence in the 1990s).

Change, however, is inevitable and as Mr Benjamin knows, sometimes capricious too.

'It is not easy to create (Raoul) from scratch but if your concept is well thought out and you continue building without departing from your core values, with a bit of luck you can be successful,' he says.

Almost two centuries old and thriving

2009-08-04T21:15:00.002+08:00

Business Times - 04 Aug 2009

Boustead Singapore celebrated its 180th year of existence last year and continues to make record profits, reports VEN SREENIVASAN

WHY do some companies struggle to survive, while others thrive, well over a century after they were established?

It is a question which has preoccupied many management gurus over the years.

And it is a question which was raised again last year as mainboard-listed Boustead Singapore celebrated its 180th year of existence.

Technically, Boustead - which was founded by Englishman Edward Boustead in 1828 - is Singapore's second oldest company, after Guthrie GTS. But Guthrie vanished for several years in the mid-1980s when Malaysian tycoon Tan Koon Swan bought it, then absorbed it into the stable of Malaysian-listed Gamuda. Mr Tan's troubles during the Pan Electric debacle of the mid-1980s forced him to divest Guthrie later, and the company was reincarnated as Guthrie GTS.

So technicalities aside, Boustead today remains the only Singapore-based company which can boast an unbroken lineage of almost two centuries.

Boustead's chairman and group CEO, Wong Fong Fui, cites adaptability. 'Business cycles have been getting shorter and tighter, and a company's survivability depends largely on its ability to adapt to the changes thrown up by these cycles,' he says.

Boustead itself went through numerous economic and business cycles, and world events like the Great Depression, World War ll, and survived numerous political changes in its markets.

When Mr Wong bought up Boustead Singapore in 1996 from Jack Chia-MPH, serious questions were raised about the business sensibilities of a man known at the time as a turnaround artist. This was because Mr Wong paid $85 million for a company whose net worth at the time was just $27 million. And Bousteadco was earning $1 million on a turnover of $60 million.

It was not exactly a characteristic investment coming from a businessman with a 40-year track record and one who had helped to successfully set up a privately owned national airline in Myanmar (which was subsequently taken over by the junta) and transformed mainboard-listed breadmaker QAF into a pan-Asian brand name.

Raw gem

But as Mr Wong put it, although Boustead was struggling, it was still a raw gem. 'This was a company with a great history and pedigree,' he said. 'It was all about how it could be restructured to adapt to the new marketplace.'

Mr Wong quickly set about transforming the company, building up its capabilities in design, engineering, resource management technology and specialist construction.

According to Mr Wong, the survival of his company has been due to its ability to adapt to the new realities after each upheaval: 'A company that succeeds does not simply accept its fate when it hits a very thick wall. Instead, it finds not one but several ways around the wall.'

Indeed, in his book, The Living Company, management guru Arie de Geus, who has studied companies and their survivability over 30 years, argues that successful surviving companies exhibited four key factors.

First is a sensitivity to their operating environment which enables them to learn and adapt quickly to changes occurring around them. The second factor is cohesion and identity. This defines a company's ability to create a strong sense of identity and persona for itself which is essential for survival amid challenges. Thirdly, longevity is also dependent on the company's ability to tolerate decentralisation of control and diversification, and yet maintain strong and cohesive relationships within and outside of itself.

Fourthly, companies which survive tend to be those which are financially conservative. They are frugal and do not risk capital gratuitously. By keeping their proverbial gunpowder dry, they are well equipped to pursue new options and opportunities, and also attract third party financiers.

But Mr Wong adds one more point: technology.

'The role of technology is also critical,' he says. 'The technology that propels you forward now can become an albatross around your neck a decade later. You have to adapt to new technology. Be a master of technology, not a slave to it. The only businesses where you don't have to worry about the impact of changing technology is in the art of fine wine-making. But we are not all wine-makers.'

In May this year, Boustead posted its seventh successive year of record revenue and profit. Besides earnings of $60.1 million on revenue of $516.6 million the company also unveiled a strong order book of almost $600 million, some $150 million in cash and matched its previous year's dividend payout.

This orderbook has continued growing since, with the latest being contracts totalling $27 million from the global oil & gas industries.

Keeping to his mantra of constant change and adaptability, Mr Wong said that his company was starting to change some parts of its business model - yet again.

'The new economic fundamentals, where commodity prices are rising and resources are increasingly scarce, throws up as many opportunities as challenges,' he said. 'We see a shift in economic wealth from the resource hungry West to the resource rich East. And these latter markets are places where we already have a good presence. We have the financial and technological resources and the management expertise to capitalise on the emerging opportunities and extract value for shareholders.'

Like Mr de Geus, Mr Wong is a believer in the theory of corporate evolution for survival. 'There are times when you have to let go of your past glories,' he explained. 'It is the same with companies. A highly successful product or service today may not be successful tomorrow. A stubborn company will try its best to hold onto those products and services even when they are irrelevant. The companies that enjoy longevity do things differently. They evolve. They create a different business and adapt to the prevailing times. Remember, change is the only constant. And in today's context, change produces not only a great deal of opportunities but helps us to survive.'

And a critical factor in all of this is its people, he added. 'It is essential to keep an open mind. If people within a company keep an open mind, they make themselves more adaptable to the diverse situations they will face. An open mind also allows them to bounce ideas off each other and to absorb the ideas that have good potential and which could make a real difference in the survival of the company.'

The secret to corporate longevity

2009-08-04T21:13:00.001+08:00

Business Times - 04 Aug 2009

Some companies in Singapore are more than a century old. What are the odds of surviving that long? VEN SREENIVASAN reports

SINGAPORE has a dozen companies more than 100 years old. Set up in colonial times by British traders and entrepreneurs, most, such as Guthrie and Boustead, started life in the trading and transport sector.

Others, like law firm Rodyk & Davidson, were set up to service these new players sprouting up in the British colonies. Some, for example, Eu Yan Sang, have stuck to their original business, but modernised along the way. Others, like Singapore Press Holdings have constantly reinvented themselves to not just survive, but thrive.

Despite their age and significantly different businesses, most of these century-old corporations are Asian multi-nationals that now enjoy double-digit growth.

This is particularly remarkable given the odds against companies in small economies surviving. According to Arie de Geus, an organisational science expert and a 38-year veteran of Royal Dutch Shell - and the author of the award winning book 'The Living Company' - the average life expectancy of a Fortune 500 or equivalent multi-national is between 40 and 50 years.

In fact, a third of the companies on the 1970 Fortune 500 list had vanished by 1983 - acquired, merged, broken up or bankrupt.

Average life span

A study 12 years ago by Ellen de Rooij of Stratix Group in Amsterdam showed the average life span of all companies, regardless of size, in Japan and much of Europe was a mere 12.5 years.

So why do some companies thrive for so long, while others barely survive a decade? Mr de Geus attributes endemic failure to excessive focus on profits and the bottom line rather than the human community that makes up the organisation.

'The dichotomy between profits and longevity is false,' he says. His logic is straightforward: 'Capital is no longer king. Rather, the survival of companies is becoming increasingly dependent on the skills, capabilities and knowledge of their people.'

The corollary of this is that knowledge is tomorrow's capital. And learning means being prepared to accept continuous change.

The debate about what the key elements for survival and longevity are will continue. But what seems increasingly clear - especially over the past year, when long-established names such as Lehman Brothers and others disappeared - is that corporate longevity is not a natural state of being.

The technology and techniques that enable a company to stay ahead of the competition can quickly become outdated or irrelevant in fast-changing circumstance. And business cycles are getting shorter, tighter and more brutal.

Most older firms have had to evolve to keep pace with the times.

Singapore Press Holdings is a classic study of a company which has reinvented itself constantly over the last 25 years. The media group continues to grow from strength to strength even as others - from New York to London to Sydney and Hong Kong - struggle. SPH's chairman Dr Tony Tan attributes this to its ability to move beyond its traditional print products, while at the same time constantly revamp, rejuvenate and adapt them to reflect the latest trends and remain relevant.

'SPH has grown and developed from a newspaper company to a multi-media organisation with different media platforms ranging from print, online, outdoor to broadcast,' he said. 'We also have diversified into non-media businesses like properties, search engines and directories, and events management. Today, we are indeed South-east Asia's leading media organisation, engaging minds and enriching lives across multiple languages and platforms.'

According to Leslie Hannah, a business historian at the University of Tokyo, the average 'half-life' of big companies - that is, the time taken to die by half of the world's firms top 100 by market capitalisation in any given year - was 75 years during the 20th century. For small companies, studies suggest a half-life in single figures. Corporate infant mortality is especially high, with the first year being the hardest.

To sum up, few companies can expect to survive beyond half a century. How then, have a few 'elderly' firms defied this trend? For many, luck has played a huge part. But for most, it is adaptability to changing business conditions and cycles.

'There are times when you have to let go of your past glory,' says Boustead's chairman and group CEO Wong Fong Fui, who transformed the 181-year-old company into a specialist infrastructure and engineering player.

'It is the same with companies,' he says. 'A highly successful product or service today may not be successful tomorrow. A stubborn company will try its best to hold on to products and services, even when they are irrelevant. Companies that enjoy longevity do things differently. They evolve. They create a different business and adapt to prevailing times.'

This point is echoed by Jim Collins, co-author of 'Built to Last: Successful Habits of Visionary Companies'. Survivors, he says, are very good at following a set of unchanging principles on one hand, while on the other, separating what they do and how they do it from 'who they are'. Over the years, a firm must hold its fundamentals dear - yet constantly change.

So the common thread among long-term corporate survivors is their adaptability and evolution, not their products or services. And the ability to adapt depends on the ability of a company's 'community' to identify and seek new strengths and niches for its survival and growth.

This issue of renewal is critical for family-run companies. John Davis, of Harvard Business School, says that by the end of every generation, family firms need to have built a reservoir of trust, pride and money 'so the next generation has enough of them to maintain the momentum of the business and the spirit of the family'.

Succession planning is a huge test, says Boustead's Mr Wong. 'No matter how capable the current leadership is or what they have accomplished, if they do not plan for succession to a future generation of capable leaders, decades of hard work and prosperity can unravel in a matter of years in the hands of the next generation.'

The bottom line is: to survive, corporation must have the will power to change. For this, it has to have a 'community' of employees able and willing to embrace change - and a culture, at the top level, that is conducive to change.

Companies as old as Boustead, 130-year Eu Yan Sang and 25-year-old SPH seem to have found the formula.

As Mr Wong puts it: 'To enjoy longevity, a company requires leaders and people who possess a high level of AQ - adversity quotient - apart from IQ, EQ and FQ. Essentially, this refers to people's ability to manage adversity and if possible, to turn it into opportunity.'

Global leader in serviced residence industry

2009-08-04T21:11:00.001+08:00

Business Times - 04 Aug 2009

Ascott plans to expand its presence through management contracts and selective investments in the Asia-Pacific, Europe and the Gulf region, reports UMA SHANKARI

HOMEGROWN serviced residence firm The Ascott Group has come a long way since it was set up 25 years ago. In 1984, Ascott pioneered the serviced residence concept with one property each in Singapore (The Ascott Singapore) and France (Citadines La Defense). But over the past 25 years, Ascott has grown to be the world's largest serviced residence owner-operator, with 25,000 units in 66 cities in 22 countries. Ascott currently has 190 properties in the Asia-Pacific, Europe and the Gulf region.

But growth did not come without a lot of hard work and strategising. The company has three brands under its umbrella - Ascott, Somerset and Citadines - and all three have contributed to the company's growth. Ascott, in fact, acquired Citadines, an established brand of serviced residences in Europe, in 2004 to expand its global footprint to offer travellers more choices.Ã‚Â The acquisition added over 5,000 apartment units to its portfolio and extended its presence to 18 cities across Belgium, France, Germany, Spain and the UK. The acquisition enabled Ascott to build itself into a global business with greater economies of scale.

Now, the three brands offer distinct products, allowing the company to target different kinds of customers as it grows. Ascott also established the world's first pan-Asian serviced residence real restate investment trust, Ascott Residence Trust, in 2006, which allowed it to grow using a different platform.Ã‚Â By taking over ownership of stable yielding assets, Ascott Reit frees up the capital from these stable yielding assets.Ã‚Â This capital allows Ascott to continue to acquire, develop, incubate and grow its portfolio of serviced residence assets. When these assets achieve stable yield, Ascott can then consider them for divestment to Ascott Reit or other third parties. Today, Ascott Reit's portfolio comprises 3,644 apartment units in 38 properties, located in 11 cities across seven countries - Australia, China, Indonesia, Japan, Philippines, Singapore and Vietnam.

Ascott now has formidable economies of scale to draw from. 'Our global presence gives us economies of scale and cross-selling opportunities across different regions and properties,' says LimÃ‚Â Ming Yan, chief executive of Ascott, who is also the deputy chairman of the CapitaLand China executive committee.Ã‚Â

Ascott is a unit of CapitaLand, Singapore's largest property group by market capitalisation. As with its parent company, which has expanded its geographic presence significantly over the past few years, Ascott has pushed out into new markets whenever the right opportunities arose. The company moved into the Gulf region and India in 2006. It also expanded its presence in Australia with the first Citadines property in the country recently.

And with CapitaLand's move to take Ascott private in 2008, the expansion looks set to continue. The successful privatisation, Ascott hopes, will accelerate the company's growth in key markets by tapping CapitaLand's more established network, real estate development and financial services capabilities.

'Prior to privatisation, we had many shareholders. Now Ascott has the focus and support from one strong shareholder, CapitaLand, which will further enhance Ascott's position as a global leader in the serviced residence industry,' says Mr Lim.

Looking ahead, Ascott plans to expand its presence through management contracts and selective investments in the Asia-Pacific, Europe and the Gulf region, both in existing cities where it already owns properties and in new markets where the company sees potential demand.

'For example, China will continue to grow and we see attractive long-term business opportunities as demand for quality, international-class accommodation grows,' says Mr Lim. 'Although we are already the largest international serviced residence operator in China with more than 5,000 serviced residence units in 26 properties across 12 cities, we will continue to grow our presence in the first and second-tier cities in China.'Ã‚Â

Ascott would also like to strengthen its presence in key gateway cities in western Europe, in countries such as the UK, France and Germany, where it already has properties, to achieve greater economies of scale.Ã‚Â In addition, it has started venturing into new, emerging markets in other parts of Europe, such as Georgia and Kazakhstan where the serviced residence sector is largely untapped. 'We plan to open our first property in Georgia by the end of this year and our first one in Kazakhstan in the second half of 2010,' adds Mr Lim.

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Key milestones

Pioneered the Asia-Pacific's first international class serviced residence property, The Ascott Singapore, in 1984. The Citadines brand also started operations in Europe in the same year with the opening of its first apart'hotel in France, Citadines La Defense.

Expanded global footprint to offer travellers more choices with the full acquisition of Citadines, an established brand of serviced residences in Europe in 2004.

Established the world's first pan-Asian serviced residence real restate investment trust, Ascott Residence Trust, in 2006.

Expanded to the Gulf region and India in 2006.

Expanded presence in Australia with the first Citadines in the country, Citadines Melbourne on Bourke.

Successful privatisation of Ascott in 2008, which aimed to strengthen the company's leadership position and accelerate its growth in key markets by tapping CapitaLand's more established network, real estate development and financial services capabilities.

Ascott transformed a national heritage building into its flagship serviced residence property in Singapore (Ascott Singapore Raffles Place) in 2008.

Ascott launched the Citadines brand in Singapore and Japan in 2009 with the opening of Citadines Singapore Mount Sophia and Citadines Tokyo Shinjuku.

Ascott celebrates 25 successful years as the top international serviced residence owner-operator with special promotions, unprecedented rewards for customers and over 25 community initiatives worldwide.

A multi-media group with diversified interests

2009-08-04T21:07:00.001+08:00

Business Times - 04 Aug 2009

SPH TURNS 25

ST poses questions to SPH chairmanTony Tan and CEO Alan Chan

How well has SPH progressed since its inception 25 years ago?

Tony Tan (TT): SPH has grown and developed from a newspaper company to a multi-media organisation with different media platforms ranging from print, online, outdoor to broadcast. We also have diversified into non-media businesses like properties, search engines and directories, and events management.

For our traditional print products, we have constantly revamped and rejuvenated them to reflect the latest trends and be relevant to our readers' ever changing needs.

Today, we are indeed South-east Asia's leading media organisation, engaging minds and enriching lives across multiple languages and platforms.

What is SPH's biggest challenge today?

TT: Changing media consumption habits, the population's language proficiencies and preferences, and technological advances are just some of the factors affecting the survival and success of a media company like SPH.

This means that our editorial teams need to know their audiences very well and have a very good feel of the ground in order to ensure that their products meet the needs and expectations of their readers. They must continuously deliver credible content reflecting their professionalism.

Our advertising sales teams need to constantly stay on top of the latest marketing trends so that they can help clients achieve a campaign that will maximise results. They are consciously moving towards an integrated marketing approach to achieve the best marketing mix for their clients with SPH's wide spectrum of advertising platforms.

Our business is closely tied to Singapore's economy. The challenge to all staff is to conserve resources in these hard times, and to emerge stronger when the economy recovers.

Diversification has been a part of SPH's business strategy in recent years to reposition itself for the ever-expanding interactive world. What other potential areas of investments do you think SPH can consider down the road?

TT: As a multimedia company, we focus primarily on expanding our portfolio of media on all possible platforms.

We are also interested in relevant or adjacent businesses that can complement and synergise well with our existing products. Our recent acquisitions of ShareInvestor.com and the Straits Times Press are good examples.

Other than that, SPH will also be on the lookout for strategic alliances such as our involvement in the OpenNet consortium which will provide passive fibre grid services for Singapore's Next Generation National Broadband Network. I would say that anything is possible as long as it makes good business sense, and we have the management expertise.

What other plans are on the horizon in this area?

TT: We have every intention to continue to excel in our core media business and other adjacent businesses. We intend to do as well for our online media as we did for our print and publications.

We are investing in the future and embracing changes as they come. This is why we have invested in a lot of innovations and will continue to do so. Our printing and production facilities are among the most advanced in the region, and we revamp our products every now and then to stay updated and refreshed.

Sound investments in new businesses and the latest innovations, as well as continual improvement of our products, will put us in good stead for the future.

Our corporate mission statement is: Inform, Educate, Entertain. After 25 years, SPH's new tagline is: Engaging Minds, Enriching Lives. Has there been a shift in focus or are both the mission statement and new tagline still relevant today?

Alan Chan (AC): Our mission statement to Inform, Educate and Entertain still remains at the heart of what SPH sets out to achieve.

Beyond that, we aspire to connect with our stakeholders across multiple languages and platforms. This is spelt out in our new brand essence and tagline - Engaging Minds, Enriching Lives. This corporate philosophy reminds us to go the extra mile to make ourselves relevant in the lives of every Singaporean.

What changes do you foresee in the next 10 years in the newspaper industry in Singapore? What is your vision for SPH?

AC: Traditional media like newspapers still have a vital role in modern society. The key is to update and refresh ourselves and continuously deliver credible and differentiated content. With the information explosion, people will need to find a trusted source of information that will differentiate it from the noisy new media. I always tell people that our flagship newspapers are the most cost effective news filter in Singapore. For less than a dollar a day, one can get access to the latest happenings and the most trusted opinions on affairs of the world.

SPH has been leveraging on our trusted content, advertiser relationships and financial resources to invest in a variety of new media and businesses. A lot of our new media products would in time gain acceptance and popularity.

How successful has been our diversification into new media and other areas and do you think we can do more or have we achieved what we set out to do?

AC: In the fast-changing world of technological advances, SPH manages to hold its own with a suite of new media products which caters to the diverse needs of various users.

Our news portals, including straitstimes.com and zaobao.com are constantly being expanded and improved on and Singaporeans see the value in them. Other sites such as STOMP, ST Razor TV and omy.sg have all resonated with netizens and are drawing large followings. Statistics from Hitwise and Nielsen etc show that they are growing healthily.

Our marketing portals include the most popular online marketplace, ST701 and Rednano, Singapore's first local search and directory engine. ST701 has consistently led the pack in most professional surveys and polls. Rednano has accumulated for itself several international accolades within the industry for its innovation in the short time since it was launched.

We recognise that there is much more that can be achieved and we are set on reaching greater heights in new media. We take a long term view in our resources invested in new media, and it's an on-going learning process. The fact that we are already beginning to see success in some areas will spur us on to improve on our new media products to strengthen their positions in the market.

What plans have been put in place to attract talent and what kind of talent is being sought?

AC: We are in search of talents with a passion to establish a long-term career in the media business. To achieve this, SPH has in place a comprehensive career package that is competitive with the rest of the market, both within and outside of the media industry.

As a testament to our commitment and efforts towards recruiting and retaining talents, SPH was awarded the Leading HR Practices in Talent Management, Retention & Succession Planning Award by the Singapore Human Resources Institute (SHRI) at the Singapore HR Awards in July this year. We also received a Special Mention in Compensation & Rewards Management.

We also believe that increasingly, employees want to work for a company with a heart. SPH has an excellent Corporate Social Responsibility (CSR) programme that covers a diverse spectrum of causes, including the arts, education, charity, community, sports and conservation. For our efforts, we have received several CSR awards over the years, ranging from Distinguished Patron of the Arts (NAC), Patron of Heritage (National Heritage Board), Corporate Gold (ComChest) and the most recent HR Advocate Award for Corporate Social Responsibility (CSR) at the Singapore HR Awards.

Grande Dame

2009-08-01T19:20:00.000+08:00

Business Times - 01 Aug 2009

From humble beginnings as a teacher, Jennie Chua rose to become doyen of the hospitality industry, yet remains remarkably grounded. By Vikram Khanna

JENNIE Chua is, it seems, everywhere. She is concurrently president and CEO of the Ascott Group; Singapore's non-resident ambassador to the Slovak Republic; chairman of the Community Chest of Singapore, the Council for Tourism, Alexandra Hospital and the Singapore Film Commission; chairman of the Raffles Hotel, and deputy chairman of the Workforce Development Agency.

She is also a member of the Temasek Advisory Board of Temasek Holdings and of the Pro-Enterprise Panel. In all, she holds 21 directorships. On May 18, she became chairman of the Singapore International Chamber of Commerce, the first woman to hold the post in the chamber's 172 year history. And that's just a partial list.

64-year-old Ms Chua also likes to dance and do tai chi. Bubbling with energy and good humour, renowned for her vivid storytelling laced with sometimes startling candour, she is one of Singapore's great raconteurs, who could have made a career as a mistress of ceremonies - another role has she willingly and frequently played, and with aplomb.

As it turned out, Ms Chua spent most of her working life in the hospitality industry, rising, most famously, to become, as people said, the grande dame of the Raffles Hotel - general manager and CEO - from 1991 to 2007.

Ms Chua tells me about her life over tea and cakes, in one of the Ascott Group's well-appointed service apartment suites in Raffles Place.

Her beginnings were humble, as a junior teacher in St Margaret's secondary school in the 1960s.

'I had to leave university because my family was so poor that I had to go out and work,' she says. 'And the only job that was available to me was teaching. I would go to the teacher's training college at Patterson Hill in the mornings, Mondays Wednesdays and Fridays, and would teach in the afternoons.'

After marrying in 1968, she accompanied her husband Goh Kian Chee (the son of Singapore's then Finance Minister Goh Keng Swee) to Cornell University in the United States.

'I wanted to finish my tertiary education. So I got myself enrolled in Cornell's School of Hotel Administration.

'Why Hotel Administration? Cornell was very good for engineering, but I'm not right brained. It was also good for agriculture, but that had no application in Singapore. However it had a hotel school which was highly regarded.

'We're talking about 1968. Singapore was starting to build the Shangri-la Hotel and the Mandarin. So I knew I could find a job.'

Upon returning to Singapore in 1971, Ms Chua joined the Mandarin Hotel as a trainee. 'I was paid $650 a month, after hard bargaining,' she recalls. 'They wanted to pay me $400, but I said no. But $650 was big money then.'

After spending three years at the Mandarin, Ms Chua taught at the Asian Institute of Tourism in the Philippines for a year and then returned to spend the next 11 years with the Singapore Tourism Board as director of the newly-created Singapore Convention Bureau. When she started, Singapore was not a player in the convention business. But by the time she finished, it was among the world's top 10.

In the mid-1980s, Ms Chua decided to return to the private sector. Raffles City was completed and the Westin group, which managed the hotels there, invited Ms Chua to head up its sales and marketing, which she did for three years.

'And then, I crossed the road, literally,' she said. 'Why did Jennie cross the road? Because the Raffles Hotel was there.'

She was the first Singaporean general manager of the Raffles, subsequently becoming its CEO. (She was instrumental in starting the Raffles Conversation series - the idea of doing in-depth interviews with illustrious personalities at the Raffles; she hatched the idea back in 1992, together with the then-editor of The Business Times, Patrick Daniel.)

Hotelier of the Year

On her clock, the Raffles Hotel won accolade after accolade and came to be hailed as an icon of the industry. Ms Chua herself was named Hotelier of the Year in 1999, by TravelAsia magazine.

'Of course, I never kidded myself that it was true,' she says. 'It so happened that I was the general manager of the Raffles. People pay attention to the Raffles, and therefore, pay attention to you. If I had been the general manager of ABC Hotel with the same capabilities and even financial success, I would not have been voted the best hotelier, because people wouldn't even have known about me.

'So, famous hotels around the world - the Savoy in London, the Oriental in Bangkok or the Imperial in Tokyo - they make you, you don't make them.

'Yes, you have to be basically competent and have good support, and you have to know how to do marketing and all that. But it would be terrible hubris on my part if I were to say to myself: 'Wow, I'm really the best hotelier in the world'.'

'But hoteliers tend to be undervalued,' she continues. 'People look at a hotelier and say, oh, the guy looks quite nice. A number of times people would come up to me to sincerely pay me a compliment. They would say, 'Jennie, you're such a great general manager'. And then, they would add: 'your PR is so good' - as if that's all it takes.'

'People sometimes don't appreciate that it takes a bit more than good PR or standing in the lobby with a white carnation in your buttonhole. Managing a big hotel is like managing a little city. You need to understand the fundamentals of business - it doesn't just happen; there is a business model that you need to develop and to perpetuate. You need to have financial acumen. You also need to know a little about engineering - not that you need to fix the chiller when it breaks down, but you need to know how it works; you need to work with engineers and understand what they're saying. You definitely need to know about food and beverage, and about marketing.

'And Raffles Hotel had about 800 staff. Raffles City had 2,000 staff. So although of course you have professional help, you have to be a team builder. You have to make people function as a team, and on a daily basis, not occasionally. You've got to supervise people from different backgrounds, different education levels. And you have to be able to handle guests who come from all over the world.'

Moreover, as the hotel industry has evolved and gone more global, the profile of the typical general manager has changed, Ms Chua points out. '40 years ago, general managers were people who had risen from the ranks, mainly from the food and beverage side - that's why a lot of GMs are very good food and beverage people. Some also came from the sales and marketing side, because a room is not just a room, you have to know how to market it and you have to know about concepts - spas, shops and so on, so the marketing element is very important. Then a few years ago, you started to see more people who were financially savvy becoming GMs. Because the hotel business became more complex. An individual hotel can be a mom and pop business. But now we're talking about hotel companies spread across the world, brands, investment and divestment, private equity interests in hotels. So, now it's important at the top level to understand the financial side and the legal side.'

Despite being immersed in the high life for so much of her career, Ms Chua was mindful of remaining grounded. 'You have to keep your sense of balance, because the hotel world can be very artificial,' she explains. 'You are surrounded by chandeliers, crystal, starched napkins, Persian carpets, antiques. The guests come in usually well dressed. So you need to say to yourself, yes, this is where I work, and I enjoy my work. But when I go home to my 3-room apartment, and I eat off melamine plates maybe, and my husband is in a pair of shorts and my children are bawling - that is my real world. You have to be able to adjust and calibrate your life. Otherwise you lose your sense of reality. It is a challenge. And I can say that marriages in the hotel industry have this burden. But people who join the industry now are more aware of these dangers, and more prepared for them.'

In August 2007, Ms Chua went back to CapitaLand, the former parent company of the Raffles Hotel (which was sold to the private equity firm Colony Capital in 2005). She took charge of its subsidiary the Ascott group and as from Aug 1, she became CapitaLand's chief corporate officer.

I ask Ms Chua how she manages to juggle her 21 directorships and other appointments with her regular job - not to mention her chairmanship of the SICC.

She makes it sound easy: 'Those (directorships) are not really jobs, they are board responsibilities,' she says. 'And I'm fortunate that the professionals who run those organisations are very good. There isn't any organisation which I have to revamp. Another thing is, I don't accept a board position or a chairmanship if I don't think I'm going to enjoy it.

'And I do have time. I'm divorced, so don't have a husband and don't need to spend time mollycoddling him; I have a companion, but he mollycoddles me! I don't play golf, which can take up two afternoons a week. My children are grown, and as for grandchildren, well, you play with them, and when you're tired you say, now please go home.'

'On the whole, I have to say I've had a wonderful life,' says Ms Chua.

'Maybe I was born optimistic. When the glass is half full, I see it as three quarters full. Yet, I think I'm practical, I know what's real, and I don't dwell on regrets. I want to move on, and I feel that when I move on, things will be alright.'

'I've had many challenges, both career-wise and personal. But I don't have sleepless nights. Sometimes at 11pm, I know I have a problem to deal with, but I don't dwell on it. I can go to sleep.

'Like last night, at 10.30,' she jokes, 'I was wondering what I should say to you in this interview, but then I fell asleep.'

Beware computer traded funds

2009-08-01T19:14:00.000+08:00

Business Times - 01 Aug 2009

Individual investors should have tight stop-loss orders to limit risk as the 'big boys' hold sway with high frequency trading

By NEIL BEHRMANN
LONDON CORRESPONDENT

THERE is a good reason why the expression 'Bull markets must climb a Wall of Worry' is a trader cliche.

The latest scare is High Frequency Trading (HFT) when quant hedge funds, investment bank proprietary traders and Exchange Traded Fund (ETF) managers buy and sell baskets of stocks, using sophisticated computer hardware and software.

Their trades are carried out electronically, milliseconds ahead of the institutional and individual investors.

What should ordinary investors do? Should they flee the markets and leave it to the high-frequency machines, which make gains or incur losses on fractional price changes?

Alternatively, should they ignore the invariably illogical daily moves and seek opportunities taking a medium- or long- term view?

Before answering that question, individual punters should understand the nature of the High Frequency Trading beast. By buying or selling ahead of institutions and the individual punter, the HFT programs push prices up or down.

Joseph Saluzzi, head of institutional trading at US broker Themis, fears that these trades are currently generating more than 60 per cent of Wall Street's market volumes.

They push the markets up, invariably in the final hour before Wall Street closes, or turn tail and push it down. The results of their actions have an impact on Asian and other markets around the globe as they slavishly follow US markets. HFT programs are also raising trading costs for others as they get the best prices first.

Mr Saluzzi frets that in the current upward market trend, the computer programs have been pushing equities higher and higher without fundamental economic reasons.

They follow a variety of technical signals such as moving averages and momentum. This explains why the market has gone up day by day since early July. The computer signals say that since markets bottomed out in March, a bull trend is in force, so they automatically gauge trading ranges and buy en masse.

Mr Saluzzi worries that some unexpected international or market event could change HFT signals and cause them to dump stocks. Their selling could swamp the markets. Wall Street would slump, leading to a crash in Asia and Europe.

This is precisely what happened in October 2007, when after a boom there was a sudden sickening stockmarket slump. Investment banks were offering 'portfolio insurance' to institutions by selling stock index derivatives to institutions via program trades.

During the summer of 1987, the market sailed along merrily, but by September began to flatten out. Then suddenly, mid- October, prices crashed 30 per cent on Wall Street and London as programs went into sell mode. This caused chaos in other markets around the globe.

Then, similar to recent events, some pessimists compared the October 1987 crash with October 1929 and predicted a 1930s-style depression. They were hopelessly wrong. Instead, stock markets revived swiftly and 1988 proved to be an outstanding year to buy stocks for a bull market that lasted until the beginning of the new millennium.

The focus on High Frequency Trading also brings us back to the awful events of October and November last year and, after a brief rally, another horrid downturn in February and March. To be sure, the automated program traders played no small part during the severe slide in the 2008 to 2009 bear market.

Not surprisingly, Mr Saluzzi believes that regulators and stock exchanges should introduce trading limits similar to actions post-1987. This would give markets breathing space. Since the authorities are examining a variety of ways to counter another systematic financial crash, such moves are likely.

With the knowledge of High Frequency Trading and general market and macro- economic and geopolitical risks, where does that leave the average individual investor? For a start, the odds have worsened against day traders who are in and out of shares and play the derivatives markets and make spread bets.

These people are playing a dangerous game and, at most, individual investors should invest a tiny percentage of their portfolio and have tight stop-loss orders to limit risk.

The medium- and long-term investor has to take a view and could use wide stop losses - say, around 10-15 per cent - for protection. Many are tagging along and are purchasing Mutual Funds and much cheaper Exchange Traded Funds (ETFs) that spread risks. Indeed, such is their popularity that there are now some 1,700 ETFs with total assets of around US$800 billion.

Some wealthy investors are entrusting their money to hedge funds. Others are finding the gaps between the giant electronic machines, hedge funds and institutional crowd. They are seeking and finding value gems that have been pushed down for no logical reason and are selling overvalued stocks.

These investors, provided they are not greedy, have proved to be the most successful over the long term. That precept is unlikely to change now.

Innovation: the strategic differentiator

2009-07-31T21:43:00.000+08:00

Business Times - 31 Jul 2009

GLOBAL CONFERENCE ON SERVICE EXCELLENCE

By TEH SHI NING

BENCHMARKING and innovation are 'two sides of a coin', says Ho Kwon Ping, executive chairman of premium resorts operator Banyan Tree Holdings.

Discussing service innovation at the Global Conference for Service Excellence, Mr Ho gave illustrations from his experience running Banyan Tree, as well as his previous experience as a director of Singapore Airlines (SIA).

'Benchmarking is very useful, it gives you a tangible way to compare yourself with competitors. But there is a clear limitation. It tells you where you are and what you can be, but only through innovation, can you get beyond that. Benchmarking alone will not give you that competitive edge,' Mr Ho said.

One simple lesson from his time at SIA, has been that 'service excellence as defined by customers, can be very different from our own perceptions.'

For instance, when SIA benchmarked key touchpoints of the customer service it offers against the industry, they found that what they thought were 'signature touchpoints' were no longer unique to SIA - competitors had quickly caught on to offering Dom Perignon too.

Instead, customers valued little things such as flight attendants putting newspapers away and folding blankets each time a passenger left his seat. 'These were minor things, but reflected a consistent service attitude which was not as easily copied,' Mr Ho said.

After benchmarking, comes innovation, 'the strategic differentiator'. At SIA, a team was formed with individuals representing themselves and reporting directly to the CEO. This team eventually created what Mr Ho called a 'game-changing product' - its new business class seat.

Mr Ho said: 'Structured innovation is very important, you don't just get eureka moments from people. But, you've got to make sure the outcome is protected from all the other varied interests in the company.'

The other keynote speaker, marketing professor Ronald Rust, of the Robert H Smith School of Business, University of Maryland, also identified innovative trends related to service-centred marketing in his talk.

'Information technology definitely drives the service revolution and customer-centricity,' he said. But the next wave is having products themselves adapt and change for customers over time, what he terms 'adaptive personalisation'.

As an example, he elaborated on 'My Mobile Music', a system which generates playlists based on customers' listening behaviour, using an algorithm which learns tastes better over time. A study he did on this system, showed it exceeding benchmarks significantly.

Ultimately, Mr Ho said: 'Service excellence comes from people doing their work consistently with pride in quality, and pride in that bond between themselves and customers. And this, can only come from a society's and a company's values.'

This provided much fodder for the ensuing discussion: Is Singapore a society that promotes that sort of pride in excellent service? How can Singapore move beyond viewing service as mere servility?

Customer service here is highly efficient, Mr Ho said. But, the attitudes behind that service still stem from a culture lacking in respect for those who serve. One of the things he realised from Banyan Tree was that 'it wasn't the silverware, it wasn't the luxury, because from the feedback we got, what people really appreciated was service from people who really like doing what they're doing'.

For now, Singaporean society does not have the same quality of appreciation and respect that the Japanese, for instance, do towards vocational and artisanal work, Mr Ho said.

Asia needn't follow Europe, US: Bocker

2009-07-31T21:40:00.000+08:00

Business Times - 31 Jul 2009

By JAMIE LEE

(SINGAPORE) Asia may not see the same level of consolidation as European bourses, said Singapore Exchange's (SGX) newly appointed chief executive Magnus Bocker yesterday.

The outgoing president of the world's largest exchange Nasdaq OMX said that, contrary to the West, Asian bourses have various regulatory structures and growth phases.

'The developments we've seen in Europe and to some extent in the US, I don't think we'll see them mimicked in the same way in Asia,' said Mr Bocker, who crafted the acquisition of several exchanges in the Baltic states and engineered the US$3.7 billion merger between OMX and Nasdaq in 2008.

'Just as the (Asian) market is without M&A, it has a lot of growth prospects. From that perspective, M&A isn't the highest priority,' added Mr Bocker, who was speaking to the local press for the first time.

The strategy of attracting foreign listings, including Chinese companies, is unlikely to change, he said.

He added that New York, London and Singapore have succeeded in riding the trend of Chinese companies listing abroad.

'Why shift that (strategy) if that's one of the strengths?' he said. He declined to comment about the S-chips that have reported dodgy accounts.

SGX chairman JY Pillay said at the start of the press conference: 'It may well be that our strategy requires modification but Magnus is not entering a broken organisation that requires a complete overhaul.'

Mr Bocker said that there was a lot of potential in developing high-frequency trading in Singapore.

He declined to comment on the potential conflict of interest in SGX being both a regulator and a listed stock exchange but said that, in general, any division of roles should be thought through carefully.

Mr Bocker - who was selected through a head-hunting firm after a near-six- month search - said he was initially reluctant to join SGX as his family enjoyed being in New York.

'It wasn't love at first sight,' said Mr Bocker, who will be working in Asia for the first time.

But his three sons, who last visited in May, were 'charmed' by Singapore, while he was drawn to the good food here.

'It was my oldest son who was the last trigger,' said Mr Bocker. 'He said: 'You always persuade me to take the challenge. So, of course, you'll take this one.' '

The avid runner has already eased into Singapore. After arriving at around 5am on Wednesday, Mr Bocker went for a jog two hours later around Botanic Gardens before showing up for work at 9am.

'We're going house and school hunting tomorrow,' he said.

Mr Bocker takes over from Hsieh Fu Hua on Dec 1. Mr Hsieh, who led SGX for around six years, declined to reveal any plans after he steps down but said returning to corporate finance firm PrimePartners is a possibility.

A bubble that's a gleam in specuvestors' eyes

2009-07-31T21:38:00.000+08:00

Business Times - 31 Jul 2009

Mah Bow Tan's caution aimed at averting pain later, property market watchers say

By EMILYN YAP

(SINGAPORE) Better to suck out the froth now than to burst the bubble later - that was what market watchers saw as the government's intention in warning against rash property purchases.

National Development Minister Mah Bow Tan said on Wednesday that there are signs of speculation in the property market, and the government will act if it overheats. He also urged home seekers to buy only within their means.

On the surface, the message may seem puzzling. By most accounts, speculators from the boom years - those who 'flipped' their freshly bought units in the subsale market for a quick profit - have yet to make a huge comeback. Price increases have surfaced only at some projects, while several others still registered price falls.

At CapitaLand's results briefing yesterday, group president and CEO Liew Mun Leong also observed that home demand is 'healthy', supported partly by home seekers whose estates were sold en bloc.

But dig deeper and the cause for concern becomes more apparent. Some industry watchers acknowledge that a group of 'specuvestors' is emerging. These are buyers who are prepared to keep and lease out their properties over the longer term, but are also open to selling them for capital gains if the opportunity comes along.

Although Singapore's economy is shrinking, several factors are working in specuvestors' favour. Notably, interest rates on bank loans are low, and more small apartments going for less than $1 million have become available. Many of them are also lucky enough to still have jobs, and some could have made a killing from the recent stockmarket rally.

These investors, together with genuine homebuyers, have raised market activity to a level that authorities feel is out-of-sync with weak economic fundamentals. The fear? That some would not be able to repay their loans if they lost their jobs, or if banks raised mortgage rates in the future.

'I have seen sufficient cases in my Meet-the-People sessions, where people have over-committed and now find themselves in difficulty,' Mr Mah recounted on Wednesday.

CIMB economist Song Seng Wun said in a note on Wednesday that Singapore's Q2 09 jobless rate is expected to cross 5 per cent. The unemployment rate for Singaporeans and permanent residents rose to 4.8 per cent in Q1.

Falling rentals would also test buyers' ability to support home loans, said Chesterton Suntec International's research and consultancy director Colin Tan.

So to several industry watchers, the government is sounding a note of caution, just in case. As a developer told BT: 'What if the green shoots turn brown?' The formation of a bubble - particularly on shaky ground - would require overt intervention and the consequences are unlikely to be pretty.

Take a look back at 1996, when the government introduced a surprise anti-speculation package to curb sharp spikes in private home prices. Tighter credit, a tax on gains and higher stamp duty caused sentiment to sink and transaction volumes to plunge. This is history that most would not want to see repeat itself.

The key is whether the government's words will help calm the buying frenzy at this stage. Here, views are mixed.

Some people may cool off, said Wheelock Properties (Singapore) CEO David Lawrence. 'I think (Mr Mah is) more focusing on the greedy people who overgeared, took on too many liabilities, and he's just saying 'be careful' . . . I think that's a reasonable message to the market.'

But some also think the buying will continue as long as money from savings, banks or stockmarket winnings is around. A developer also suggested that a few people might bring forward their purchases in anticipation of anti-speculation measures coming on. 'Singaporeans are a bit 'gan cheong' (panicky),' he joked.

At Optima, where people started queuing days before the showflat was due to open, developer TID has conducted a ballot for the 120 units planned for release. All units have been tentatively accounted for with prices starting from $790 per square foot. TID is a tie-up between Hong Leong Group and Mitsui Fudosan. A Hong Leong spokesman said that the balloting process helps to sieve out genuine buyers and the crowds have thinned. BT understands that there were already plans to conduct a ballot when a queue first formed, before Mr Mah spoke to the press on Wednesday.

Market sources also say that around 80 units have been sold at Centro Residences, out of around 110 released.

Helping pros hit goals

2009-07-31T21:34:00.000+08:00

Business Times - 31 Jul 2009

Life coaching industry is growing as an increasing number of professionals look to executive coaches for guidance amid job losses due to recession, reports MELISSA LWEE

TORN between an outstanding job offer that wasn't quite his thing and the possibility of a dream job on the horizon, investment banker David Lloyd's first instinct was to ask what his closest friends thought.

But little did he expect that the answers - from 10 friends who were professionals in their own right - would be split right down the middle.

'Half of them told me it would be crazy not to take the job given the economic climate,' he recalls. 'And the other half told me they simply could not see me taking up and enjoying the job that was on offer.'

Caught between a rock and a hard place, Mr Lloyd decided to seek professional help in the form of a life coach, or executive coach as they are sometimes known.

'What I needed was someone to sit down with me, go through my own analysis of the situation and help me make a decision,' says Mr Lloyd, who hired Katherine Warner from Triple E! Coaching to help him with his problem.

'What she did in my two-hour session was to help me clarify my thinking. Good coaches don't give you the answer. But by asking the right questions, they help coax you into making your own decision.

'After speaking to Katherine, I realised that although I had no job offer from my dream job yet, my instincts were telling me that my chances of getting it in the near future were high, and so I held out. True enough, I just started work last week at my dream job,' he declares.

Having had a positive taste of the benefits that a coach can bring to his life, Mr Lloyd is now looking to re-hire Ms Warner to prepare him for the possibility of becoming the head of the firm. He believes that she can help him improve the skills that are necessary to give him the best possible chance of winning that top position.

Mr Lloyd belongs to a growing number of professionals who are looking to life coaches for guidance, especially in the advent of the global credit crunch.

Self-help

'There's definitely been a lot more interest in the industry since the economic crisis,' observes Ms Warner.

'We're looking at an increase in the number of clients who have been made redundant and don't know how to proceed; or working professionals who are starting to question whether they are in the right job or career path, particularly if they are fearful of their own waning job prospects or job security.'

Agrees life coach Wendy Chua, founder of Wand Inspiration. 'What the economic crisis did for some of them is to trigger questions such as 'Is making money the only thing in life? Am I happy in my job, life, relationship? How can I create more balance?' Some of them may feel so stressed that they look for coaching to manage their expectations and find solutions.'

Motivational speaker and corporate trainer Zaibun Siraj similarly remarks that there has been a resurgence in interest with regard to the self-help industry. But he points out that this interest is not just from individuals, but also from corporations looking to improve the quality of their staff.

'Many companies now face the problem of having staff who are stressed out and unhappy thanks to these tough times. They are now seeking help from professionals like us because they understand that unhappy workers make unproductive staff,' he says.

On the flip side, life coaching is also being applied for those who are already motivated - in being groomed for higher posts. Kenny Toh, founder of The Coaching Academy, notes that there's a marked interest now in corporations which are looking at life or executive coaches to help them groom their high flyers.

But what exactly do life coaches do and how do they help you?

Industry players explain that life coaching is a methodology that directs or trains a person with the aim of achieving a particular goal or acquiring a particular skill. It's usually applied in the career or professional sense.

'We help our clients gain clarity - to understand and acknowledge the problems that they have,' explains Ms Warner. 'Our job is to show them that it is their responsibility to take the appropriate steps towards making positive changes in their lives. We guide them from there but we never tell them what to do.'

Ms Chua adds that she seeks to understand the client's goals, obstacles and strengths, support them to take actions that would effectively overcome their challenges and reach their goals.

Jean-Robert Strele, a former head of a US start-up company in Singapore, hired Ms Chua late last year when he was feeling frustrated with his previous job.

'In my last job, I was facing communication problems with the head office in America. They wanted me to move back there but I wasn't keen. However, I did not want to face up to it. I simply thought I'll cross that bridge when I come to it,' he recalls.

'What Wendy helped me to do was to properly analyse and understand the situation so much so that I was prepared for their request before it actually came my way and I knew how to deal with it. Imagine being able to see the light prior to it being switched on. A large part of Wendy's coaching helped me to do that.'

One industry source, who declined to be named, pointed out however that it's good to look for an organisation that puts you in touch with several coaches rather than just one. She chose a specific leadership development course back in 2000 because it made several coaches available to her in the course of her programme, each specialist in his own field.

'So that was excellent because it's not like one coach can help you with everything,' she notes, who says she had access to specialists who coached on work relationships and even on health issues. 'Life is all-encompassing, it's not just about your career,' she adds.

The more cynical among us would view life coaching as a load of hullabaloo, but could it be the next incarnation of the motivational training or personal development industry?

According to a spokesman from the International Coach Federation (ICF) - the leading global coaching certification body - coaching in general is certainly more recognised today as compared to a decade or even five years ago. In Singapore, there are 120 IFC members to date, up from 66 three years ago.

Greater acceptance

One possible reason for the rise in numbers is greater acceptance for the industry, as Ms Chua points out.

'Before, very few had heard of life coaching or even coaching. Hurdles include stigma that clients may face from others, thinking their lives must be so messed up they need a life coach,' she says.

'Nevertheless, the self-aware clients just ignore this and know they are seeking coaching to make their good lives great.

'Also, organisations are now asking me to train their managers and leaders in coaching skills so that they in turn can coach their teams to better work and life performance. This shows that coaching is now embraced by forward-thinking businesses who see that employees with more positive attitudes towards life will bring more benefit to the workplace,' adds Ms Chua whose clients include organisations such as RBS Coutts and Merrill Lynch Global Services.

Coach Dave Rogers and author of the book Awesome Coaching reveals that he can make anything from 70 to 120 per cent of what he previously made as a bond trader in Hong Kong. He has had clients all over the world including the 2007 Miss Thailand Jenjira Kertprasop and big corporations such as Citibank and Deutsche Bank.

He goes on to add that 90 per cent of the money in the industry is made by the top 10 per cent of the coaches.

'One of the biggest jokes in the industry is that a lot of coaches try to be coaches without having hired their own coach or coaches before. They think that just because they've got a coaching qualification that will make them a good coach but that is not the case,' he says.

'The reason why I can coach people better than others is because I keep on learning. I recently came back from 10 days of learning from 10 great coaches in Alaska.'

Ultimately, it could be passion that sustains the normal life coach. The Coaching Academy's Mr Toh reveals that most life coaches are in it more for the job satisfaction rather than the money.

'Unless your clients are really extremely rich people who think nothing of paying you 10 per cent of the millions of dollars that you have helped them earn, chances are, even with five or 10 clients at one time, life coaching alone cannot be sustained as a full career, not to mention the fact that when you first come out as a life coach, if you're not an entrepreneur by nature, that's it,' he warns.

'The reality is that most life coaches are in the business because they like working with people and the fulfilment that they get from making a positive impact on someone's life.

'In fact, it makes more economic sense teaching people how to coach rather than to coach someone, which is why the best way, I think, is to have a good balance of both cultivating coaches and coaching individuals.'

Inspiring others

The inspiration to inspire is certainly what's driven Guillaume Levy-Lambert to go into coaching. After 13 years as a banker and 10 years heading advertising giant Publicis in the Asia-Pacific, Mr Levy-Lambert, who was recently made a French Knight in the National Order of Merit, decided he wanted to use his own life experiences to inspire others who are stuck at the crossroads of their lives.

He thus started Tyna at the beginning of this year, which he describes as a talent management company.

'When I made those decisions to jump from banking to advertising and then from advertising to what I do now, I did not find them difficult decisions to make,' he says. 'But I do know that these are decisions that a lot of people find difficult to make and I want to share my experiences with them to help inspire them to be able to do the same thing.'

From coaches to the coached, the times are certainly trying enough for those who need help to ask for it, and those who can help to offer it.

Why China is still a buy

2009-07-31T21:32:00.000+08:00

Business Times - 31 Jul 2009

By WU ZHIJIAN

THE Chinese equity and property markets have recently been on a roll. The Shanghai A-share market has gone up almost 100 per cent since the beginning of the year, and gained an impressive 17 per cent in the last two weeks.

Housing prices in some cities such as Shanghai, Beijing and Guangzhou have also soared. There is a buying frenzy. It was reported, for instance, that more than 1,000 people queued overnight to compete for about 300 units of a development in Nanjing, pushing the selling price up almost 90 per cent in a single day.

There are a few explanations for China's asset boom. One is simply liquidity. China's economy seems to be bouncing back since the government announced its 4 trillion yuan (S$846 billion) stimulus plan last year - the biggest in the world.

Broad money, M2 and bank lending in China have been increasing at a pace of about 30 per cent year-on- year, which is more than double the pace of the US. The liquidity provided by the banks was not supposed to go into the stock or property markets, but some of it has done so.

There is thus some concern that the asset market rally is not well supported by fundamentals.

The question, however, is whether China's equity and property markets are still a buy. There are at least three reasons to take a positive view.

Firstly, the Chinese government is unlikely to slow down the quantitative easing before the end of the year. The 4 trillion yuan stimulus plan was initiated only in Q1; it will take at least 4-6 quarters to fully take effect. In fact, the Chinese government has expressed concern in public that the current rebound might only be temporary and there are still considerable risks that the economy could turn down again.

The government has repeatedly confirmed its main target of sustaining a growth rate of 8 per cent in 2009. With such a challenging objective, it is unlikely that the government will let up in its stimulus anytime soon.

Secondly, the asset markets, especially the property market in China, are supported by the actions of local governments. GDP growth plays a critical role in assessing the performance of local governments and therefore there is a vested interest among the provincial and city-level officials to ensure a well supported property market.

In fact, in some of the cities, the real estate sector accounts for more than 35 per cent of the local economy

Thirdly, there is a possibility that the US economy might recover later this year. Timing the US recovery is a tough call, on which economists differ. If the US economy does improve, however, there is a good chance that China's export machine will revive, which will further support its asset market.

Currently, this is not on the cards. But next year could see the revival of China's exports and further increases in asset prices.

Of course, all the above factors do not rule out the fundamental weakness of the Chinese economy in the long run. Any asset bubble fuelled by a liquidity boom, after all, will burst at some point. However, for the next six months at least, China will continue to offer interesting investment opportunities.

The writer is a commentator on China. He runs the website www.chinatells.com

Toxic Equity Trading Order Flow on Wall Street - The Real Force Behind the Explosion in Volume and Volatility

2009-07-30T20:41:00.002+08:00

By Sal L. Arnuk and Joseph Saluzzi
A Themis Trading LLC White Paper

INTRODUCTION

Retail and institutional investors have been stunned at recent stock market volatility. The general thinking is that everything is related to the global financial crisis, starting, for the most part, in August 2007, when the Volatility Index, or VIX, started to climb. We believe, however, that there are more fundamental reasons behind the explosion in trading volume and the speed at which stock prices and indexes are changing. It has to do with the way electronic trading, the new for-profit exchanges and ECNs, the NYSE Hybrid and the SEC’s Regulation NMS have all come together in unexpected ways, starting, coincidently, in late summer of 2007.

This has resulted in the proliferation of a new generation of very profitable, high-speed, computerized trading firms and methods that are causing retail and institutional investors to chase artificial prices. These high frequency traders make tiny amounts of money per share, on a huge volume of small trades, taking advantage of the fact that all listed stocks are now available for electronic trading, thanks to Reg NMS and the NYSE Hybrid. Now that it has become so profitable, according to Traders Magazine, more such firms are starting up, funded by hedge funds and private equity (only $10 million to $100 million is needed), and the exchanges and ECNs are courting their business.

This paper will explain how these traders – namely liquidity rebate traders, predatory algorithmic traders, automated market makers, and program traders – are exploiting the new market dynamics and negatively affecting real investors. We conclude with suggestions on what can be done to mitigate or reduce these effects.

To illustrate most situations, we will use a hypothetical institutional order to buy 10,000 shares of a stock at $20.00 that has been input into algorithmic trading systems, which most buy side traders use. Algorithmic or “algo” trading systems chop up big orders into hundreds of smaller ones that are fed into the market as the orders are filled or in line with the volume of the stock in question. Typically, such orders are easy to spot as they commonly show that the trader has 100 or 500 shares to sell or buy.

LIQUIDITY REBATE TRADERS

To attract volume, all market centers (the exchanges and the ECNs) now offer rebates of about ¼ penny a share to broker dealers who post orders. It can be a buy or sell order, as long as it is offering to do something on the exchange or ECN in question. If the order is filled, the market center pays the broker dealer a rebate and charges a larger amount to the broker dealer who took liquidity away from the market. This has led to trading strategies solely designed to obtain the liquidity rebate.

In this case, our institutional investor is willing to buy shares in a price range of $20.00 to $20.05. The algo gets hit, and buys 100 shares at $20.00. Next, it shows it wants to buy 500 shares. It gets hit on that, and buys 500 more shares. Based on that information, a rebate trading computer program can spot the institution as having an algo order. Then, the rebate trading computer goes ahead of the algo by a penny, placing a bid to buy 100 shares at $20.01. Whoever had been selling to the institutional investor at $20.00 is likely to sell to the rebate trading computer at $20.01. That happens, and the rebate trading computer is now long 100 shares at $20.01 and has collected a rebate of ¼ penny a share. Then, the computer immediately turns around and offers to sell its 100 shares at $20.01. Chances are that the institutional algo will take them.

The rebate trading computer makes no money on the shares, but collects another ¼ penny for making the second offer. Net, net, the rebate trading computer makes a ½ penny per share, and has caused the institutional investor to pay a penny higher per share.

PREDATORY ALGOS

More than half of all institutional algo orders are “pegged” to the National Best Bid or Offer (NBBO). The problem is, if one trader jumps ahead of another in price, it can cause a second trader to go along side of the first one. Very quickly, every algo trading order in a given stock is following each other up or down (or down and up), creating huge, whip like price movements on relatively little volume.

This has led to the development of predatory algo trading strategies. These strategies are designed to cause institutional algo orders to buy or sell shares at prices higher or lower than where the stock had been trading, creating a situation where the predatory algo can lock in a profit from the artificial increase or decrease in the price.

To illustrate, let’s use an institutional algo order pegged to the NBBO with discretion to pay up to $20.01. First, the predatory algo uses methods similar to the liquidity rebate trader to spot this as an institutional algo order. Next, with a bid of $20.01, the predatory algo goes on the attack. The institutional algo immediately goes to $20.01. Then, the predatory algo goes $20.02, and the institutional algo follows. In similar fashion, the predatory algo runs up the institutional algo to its $20.10 limit. At that point, the predatory algo sells the stock short at $20.10 to the institutional algo, knowing it is highly likely that the price of the stock will fall. When it does, the predatory algo covers.

This is how a stock can move 10 or 15 cents on a handful of 100 or 500 share trades.

AUTOMATED MARKET MAKERS

Automated market maker (AMM) firms run trading programs that ostensibly provide liquidity to the NYSE, NASDAQ and ECNs. AMMs are supposed to function like computerized specialists or market makers, stepping in to provide inside buy and sells, to make it easier for retail and institutional investors to trade.

AMMs, however, often work counter to real investors. AMMs have the ability to “ping” stocks to identify reserve book orders. In pinging, an AMM issues an order ultra fast, and if nothing happens, it cancels it. But if it is successful, the AMM learns a tremendous amount of hidden information that it can use to its advantage.

To show how this works, this time our institutional trader has input discretion into the algo to buy shares up to $20.03, but nobody in the outside world knows that. First, the AMM spots the institution as an algo order. Next, the AMM starts to ping the algo. The AMM offers 100 shares at $20.05. Nothing happens, and it immediately cancels. It offers $20.04. Nothing happens, and it immediately cancels.

Then it offers $20.03 – and the institutional algo buys. Now, the AMM knows it has found a reserve book buyer willing to pay up to $20.03. The AMM quickly goes back to a penny above the institution’s original $20.00 bid, buys more shares at $20.01 before the institutional algo can, and then sell those shares to the institution at $20.03.

PROGRAM TRADERS

Program traders buy or sell small quantities of a large number of stocks at the same time, to trigger NBBO or discretionary algo orders, so as to quickly juice a market already moving up or down into a major drop or spike up.

Because so many algo orders are pegged and are being pushed around by other high frequency traders, program traders are like a fuse. When they light it, that’s when things get really going. This is especially so in volatile markets when things are very shaky and people are very nervous like they are now. Keep in mind that many algo orders must achieve a percentage of volume that matches the market in the stock. So if the program traders can increase the volume on an individual stock just enough, they will trigger even more algo buying or selling.

Program traders profit by having an option on the market. Their objective is to push that option into the money by a greater amount than what they used to get the market moving.

MARKET CENTER INDUCEMENTS FOR HIGH FREQUENCY TRADERS

Most high frequency trading strategies are effective because they can take advantage of three major inducements offered by the market centers and not typically accessible to retail or institutional investors.

1. Rebate traders trade for free. Because they are considered to be adding liquidity, exchanges and ECNs cover their commission costs and exchange fees. This makes it worthwhile for rebate traders to buy and sell shares at the same price, in order to generate their ¼ penny per share liquidity rebate on each trade. Exchanges and ECNs view the order maker as a loss leader in order to attract the order taker. In addition, the more volume at different prices, even if that means moving back and forth a penny, the more money the market center makes from tape revenue. Tape revenue is generated by exchanges and ECNs from the sale of data to third party vendors, such as Bloomberg for professional investors, and Yahoo for retail investors.

2. Automated market makers co-locate their servers in the NASDAQ or the NYSE building, right next to the exchanges’ servers. AMMs already have faster servers than most institutional and retail investors. But because they are co-located, their servers can react even faster. That’s how AMMs are can issue IOC orders – immediate or cancel – sometimes known as “cancel and replace.” They issue the order immediately, and if nothing is there, it is canceled. And that’s how AMMs get the trades faster than any other investor, even though AMMs are offering the same price. AMMs pay large fees to the exchanges to co-locate, but it obviously has a decent return on investment. According to Traders Magazine, the number of firms that co-locate at NASDAQ has doubled over the last year.

3. People often wonder whether it is fair or legal for program traders to move the market the way they do. Everybody forgets, however, that in October 2007, just a little more than a year ago, the NYSE very publicly removed curbs that shut down program trading if the market moved more than 2% in any direction. The NYSE said it was making the change because “it does not appear that the approach to market volatility envisioned by the use of these ‘collars’ is as meaningful today as when the Rule was formalized in the late 1980s.” On a more commercial level, the NYSE had been at a competitive disadvantage because other market centers that didn’t have curbs were getting the program trading business.

What Is The Effect of All This Toxic Trading?

1. Volume has exploded, particularly in NYSE stocks. But you can’t look at NYSE volume on the NYSE. The NYSE only executes 25% of the volume in NYSE stocks. You’ve got to look at NYSE listed shares across all market centers, such as ECNs, like the NYSE’s own ARCA, or dark pools, like LiquidNet. Traders Magazine estimates high frequency traders may account for more than half the volume on all U.S. market centers.

2. The number of quote changes has exploded. The reason is high frequency traders searching for hidden liquidity. Some estimates are that these traders enter anywhere from several hundred to one million orders for every 100 trades they actually execute. This has significantly raised the bar for all firms on Wall Street to invest in the computers, storage and routing to handle all the message traffic.

3. NYSE specialists no longer provide price stability. With the advent NYSE Hybrid, specialist market share has dropped from 80% to 25%. With specialists out of the way, the floodgates have been opened to high frequency traders who find it easier to make money with more liquid listed shares.

4. Volatility has skyrocketed. The markets’ average daily price swing year to date is about 4% versus 1% last year. According to recent findings by Goldman Sachs, spreads on S&P 500 stocks have doubled in October 2008 as compared to earlier in the year. Spreads in Russell 2000 stocks have tripled and quoted depth has been cut in half.

5. High frequency trading strategies have become a stealth tax on retail and institutional investors. While stock prices will probably go where they would have gone anyway, toxic trading takes money from real investors and gives it to the high frequency trader who has the best computer. The exchanges, ECNs and high frequency traders are slowly bleeding investors, causing their transaction costs to rise, and the investors don’t even know it.

WHAT CAN BE DONE?

Forget about short sale restrictions. From a regulatory point of view, we believe two simple, but powerful rules would help to eliminate much of the problem.

1. Make orders valid for at least one second. That will eliminate the pinging. High frequency traders will expose themselves. One second would destroy their ability to immediately cancel it if nothing is there.

2. Reinstate the 2% curb on program trading. When the market is down 3% or 4%, that’s when the program traders can really juice it. The SEC, however, has to institute the curb across the board so no market center has an advantage over another.

With these two rules, at least half the volume of the exchanges and ECNs might go away. The market centers, however, will surely fight it because they don’t want to lose the trading volume and the resultant tape revenue.

Until then, what can investors do?

While there’s little action that retail investors can take, we urge institutional investors to not “walk away from the machine” after they have entered an algo order.

Algo and other electronic trading systems have lulled many institutional traders into a false sense of security. These traders like the electronics because they can enter orders directly and they don’t have to bother with sell-side brokers. The trades are cheaper, at 1-2 cents per share versus 4-5 cents. And the performance seems adequate, in that the trades get done in line with standard metrics, such as the VWAP (the volume weighted average price). These traders, however, may not realize that the VWAP itself might have been 1 to 3 cents per share higher or lower because of toxic order flow. So in the end, institutions might be really paying 5 cents per share or more for their trades.

We also recommend that institutions use algo systems only for the most liquid of stocks. Anything less must be worked, the same as in the “old days.” Institutions need to re-learn how to “watch the tape” and take advantage of, or work around, high frequency traders.

Achieving best execution has never been more challenging.

Sal L. Arnuk and Joseph Saluzzi are co-heads of equity trading and co-founders, along with Paul S. Zajac, of Themis Trading LLC (www.themistrading.com), an institutional agency broker. For more information, call 973-665-9600

Buy Asian stocks on dips: Merrill, Barclays

2009-07-30T19:56:00.001+08:00

Business Times - 30 Jul 2009

Equities ex-Japan are up 49% from March, markets look fairly valued

By GENEVIEVE CUA

INVESTMENT strategists from two banks are calling on investors to buy Asian equities on dips as valuations are no longer cheap.

Stephen Corry of Merrill Lynch Global Wealth Management, who has been talking to clients in the region on his second-half outlook, says that the group's preference is for Asian equities and emerging markets.

'We'd rather participate on a pull-back,' he says. 'For Asia ex-Japan, our strategist believes Asia is pricing in a very sharp cyclical recovery - an ISM (Institute of Supply Management) close to 60. It's currently at 45. So there's not much room for error. We'd rather buy at lower levels, although we continue to believe there will be capital flows.'

The ISM index is an indicator of the health of the US manufacturing sector and economy.

Barclays Wealth Asia strategist Manpreet Gill says: 'We continue to believe that Asia remains the most dynamic region. Right now, (markets) are riding on the momentum of earnings upgrades. When that fizzles out, where do we go? There are compelling reasons to use market weakness to add to exposure.'

Asia ex-Japan equities have risen about 49 per cent since March and 17 per cent year-to-date, and markets look fairly valued. 'It is timely for investors who have no significant exposure to Asian markets to add some,' Mr Gill says. 'Those who entered these markets early should consider taking profits and trimming positions back to a modest overweight allocation. Above all, investors should start being more selective with respect to countries, industries and companies.'

Barclays sees the most scope for further outperformance in China, India, Singapore, Hong Kong and Thailand.

Mr Gill does not expect inflation to pose a significant threat, but inflation expectations may be an issue. Barclays Wealth has an overweight on inflation-linked bonds and is scaling back allocations to global treasuries.

Merrill's Mr Corry suggests that any equity market correction may well be 'short and small in magnitude'. This is because, based on Merrill's monthly survey of asset allocators in July, allocations to equity are at a 'very small overweight' compared with a large overweight in 2007. This was whittled down to a 'huge' underweight at the beginning of 2008.

The survey found that asset allocators' cash levels rose in July from 4.2 per cent to 4.7 per cent. Globally, high net worth individuals are holding an average of 21 per cent in cash in portfolios, which is significantly higher than three years ago, he says.

'Cash generates minimal returns. Our chief strategist in New York estimates that if you put money in three-month Treasury bills, it will take you 360 years to double your money. Retail clients should reduce cash levels and put them in equities. Equities love an economic recovery.'

The recovery, Mr Gill says, is likely to be slow and fragile. But companies may well show stronger margins and earnings in the second half, as data indicates that new orders are exceeding inventory.

Mr Corry expects a range-bound market and tells clients to go for a 'best of breed' approach, as stock picking is expected to rise to the fore. 'There are attractive opportunities,' he says. 'Last year was a year for macro strategies. This year is for micro strategies. The good news last year was that it didn't matter if you bought good or bad stocks as there was no differentiation.

'This year, the good news is now that we've seen normalisation and lower VIX, we're starting to see inter-sector correlations decline and differentiation in stock performance. If you buy good stocks with good fundamentals, you should do pretty well.'

VIX measures market expectations of volatility based on the S&P 500.

China receives assurance US will cut record budget deficit

2009-07-30T19:53:00.000+08:00

Business Times - 30 Jul 2009

Beijing concerned over value of its Treasury securities

(WASHINGTON) China sought and received assurances from the Obama administration that the US would reduce its budget deficit once an economic recovery was under way, a senior Chinese official said on Tuesday at the end of two days of high-level talks between the countries.

'Attention should be given to the fiscal deficit,' said Finance Minister Xie Xuren. He said Treasury Secretary Timothy Geithner had assured the Chinese that once the economy rebounded, the deficit would gradually come down from its current record levels.

Mr Geithner confirmed that, saying, 'As we put in place conditions for a durable recovery led by private demand, we will bring our fiscal position down to a more sustainable level over time.'

For China, the rising US deficit is a concern because it could weaken the dollar and put at risk China's vast holdings of Treasury securities and other dollar-based assets. China holds an estimated US$1.5 trillion in such securities, making it the US' largest foreign creditor.

The unusual exchange between US and Chinese officials, in consecutive news conferences at the conclusion of the so-called Strategic and Economic Dialogue, underscored a subtle shift in power between China and the United States, one in which the Chinese are showing a new assertiveness as they seek to protect their huge investment.

The two-day talks, co-chaired by Treasury Secretary Timothy Geithner and Secretary of State Hillary Rodham Clinton, produced little in the way of substantive agreements.

Instead, officials from both countries outlined common concerns that they said they would continue to address: the trade imbalance, financial regulatory reform, protectionism and climate change. They also said they would work to reform the governance of the International Monetary Fund and the World Bank to better reflect China's status as the world's third largest economy.

President Barack Obama's decision to combine the longstanding economic dialogue between the countries with a strategic one meant that while finance officials tried to get their economic policies in line, diplomats were doing the same, especially on the North Korean nuclear programme.

China's Vice-Foreign Minister, Wang Guangya, was unusually strong in condemning North Korea for conducting a nuclear test in May, and said Beijing would 'seriously and faithfully implement' a series of sanctions enacted by the UN Security Council.

His bluntness was striking; even two years ago, China was circumspect about publicly criticizing North Korea.

But Mr Wang was not specific about what steps China had taken to crack down on financial transactions, or to inspect North Korean cargo transshipped through China's ports, and he talked about coming up with a new series of incentives for the North to return to negotiations.

In closing statements, Mr Geithner called cooperation between the United States and China 'vital not only to the well-being of our two nations but also the health of the global economy.' Mr Geithner assembled a team of senior US economic officials for the meetings, including Federal Reserve chairman Ben Bernanke and White House economic adviser Lawrence Summers, in part to reassure the Chinese about the safety of their US investments.

Separately, officials from China and the United States signed a memorandum of understanding reaffirming their commitment to cooperation on climate change without agreeing to specific emissions targets.

The agreement was yet another step in slow-moving negotiations seen as vital to the effort to produce a global pact on greenhouse gases. -- NYT, LAT-WP

IBM to pay US$1.2b for biz intelligence software firm

2009-07-30T19:50:00.001+08:00

Business Times - 30 Jul 2009

(NEW YORK) IBM took a big step to expand its fast-growing stable of data-analysis offerings by agreeing on Tuesday to pay US$1.2 billion to buy SPSS Inc, a Chicago-based maker of software used in statistical analysis and predictive modelling.

Major technology companies have made a flurry of such purchases in recent years, grabbing suppliers of software that helps businesses and governments organise and analyse data to make better decisions. The industry segment is broadly known as business intelligence software.

In the last couple of years, IBM, Oracle, SAP and Microsoft have collectively spent more than US$15 billion buying makers of such software.

In the recession, corporate spending on technology in general is being trimmed. But business intelligence software, analysts say, stands out as an exception because it is seen as a tool to help identify cost-cutting opportunities and emerging market trends.

The IBM bid for SPSS, analysts say, could well touch off a second wave of acquisitions in the business intelligence sector. SPSS, they say, specialises in predictive analytics, a tool that typically works with a business-intelligence software engine. In late 2007, IBM bought Cognos, which became its business-intelligence software foundation, for US$4.9 billion.

Predictive analytics technology plumbs information in corporate and government databases, and increasingly data on the Web or data streams from sensors on things as diverse as food shipments to cell phones.

The software can help look for developing trends in markets or patterns of behaviour\. \-- NYT

KL's 4-D thrust rooted in sound economics

2009-07-30T19:49:00.001+08:00

Business Times - 30 Jul 2009

LAST week, Malaysian number forecast operator Multi-Purpose Holdings told the stock exchange that its subsidiary Magnum Corporation had received government approval for a new four-digit (4-D) game that would incorporate a jackpot element. This follows Kuala Lumpur's decision last October to award all three Malaysian 4D gaming companies - Berjaya Sports Toto, Magnum and Tanjong plc - 10 more special draws a year. Each draw typically adds about RM20 million (S$8.2 million) to total sales.

Such decisions demonstrate Prime Minister Najib Razak's unusual pragmatism. He doubles as finance minister and thus oversees the gaming sector and such decisions leave Mr Najib vulnerable to attack from the opposition Islamic party which could easily accuse the government of being unIslamic. Even so, the decision to allow more draws is rooted in sound economics. For one thing, it will further reduce the share of the illegal gambling market. No one really knows how large the market is. Even the gaming companies think it could be anywhere from one to 15 times the legal market which, in 2008, was valued at around RM8 billion. That is why Kuala Lumpur has always resisted raising gaming taxes. It would only result in illegal gambling stealing market share from their registered, and taxpaying, rivals. So allowing a jackpot element in forecast draws frustrates the underground industry, for their operators cannot match those kinds of payouts. It is in the government's interest to reduce illegal gambling for the simple reason that it will derive more revenue as a result. Last year, gaming companies, excluding casino operator Genting, paid the government over RM1.5 billion in taxes.

Allowing more draws will also eat away at the underground's share while directly boosting federal government revenue. Last year's 10 new draws were estimated to have added RM130 million to the Treasury; a trickle, to be sure, but useful nevertheless. Revenue is what lies at the heart of the matter. Kuala Lumpur remains mired in an economic downturn that could potentially cost it thousands of jobs. To mitigate the effects, it's embarked on a RM67 billion fiscal stimulus package that's yet to produce tangible results. On the other side of the balance sheet is a yawning budget deficit that could rise to close to 8-10 per cent of gross domestic product. The country is being squeezed between falling exports and sharply declining investment. To tackle the latter, Mr Najib has announced a series of liberalisation measures in the services sector and banking.

More recently, he relaxed affirmative action policy guidelines in the equities and property markets. It is too early to say if the measures will work but sticking to the old ways just to remain politically popular will not make Malaysia's economy grow and that can be politically self-defeating in the long run. Sometimes, it pays to be practical, like allowing more lottery draws to boost the country's revenues.

What good are central bankers when assets inflate?

2009-07-30T19:47:00.001+08:00

Business Times - 30 Jul 2009

By ANTHONY ROWLEY
TOKYO CORRESPONDENT

PITY poor central bankers as they agonise over when to withdraw the monetary stimulus they have injected to keep their recession-scuppered economies afloat. Or should we despise them for the generally abysmal job that they do in steering these economies between the Scylla of inflation and the Charybdis of deflation? I personally take the latter view. To me, the typical central banker is like a firefighter who congratulates himself on damping down a little, local blaze while a massive forest fire roars at his back and is ignored until it threatens to consume everything in its path. At that point, our panicked firefighter pumps in 'liquidity', which is like fuel that can spark a further conflagration at some point.

The localised fire is inflation in what we know as the 'general price level' - prices of goods and services. Central bankers have always trained their blinkered vision on these. The forest fire is inflation in the price of stocks, property and other such things, which central bankers long ignored or claimed was none of their business. Yet in creating a huge 'wealth effect', asset inflation drives consumption, output and investment to heights that threaten the fabric of society with overheating and hyper-inflation.

Only at that point do central bankers intervene with crude monetary tools to stop the blaze, unless (as with the sub-prime mortgage crisis) a financial collapse saves them the trouble.

Monetary policy, like economics, is a 'dismal science' which has not caught up with the modern world. I was reminded of this grim fact while attending a conference in Tokyo this week where experts debated the role that monetary policy played in getting us into our current mess and what, if anything, it can do to get us out of it again.

No one wants to defend investment bankers or the grasping and amoral way in which they enriched themselves from the securitisation boom; they are truly a 'sub-prime' breed. But it must be acknowledged that investment bankers could not have made so much hay if central bankers had not kept the sunlight of easy money shining for so long.

Alan Greenspan's name is invoked nowadays not as the Great Helmsman of the US Federal Reserve but as the man who claimed that a central banker's job is to clean up after asset conflagrations rather than trying to prevent them. He pumped liquidity after the collapse of America's IT bubble but was not there to clean up after this fuelled the sub-prime crisis.

I wrote about this subject a decade ago here in this column when I recalled asking Stanley Fischer, former deputy head of the IMF and subsequently a central banker himself, to recommend some literature on asset inflation. To my surprise, he replied there was virtually none then. I was even more astonished this week to learn this is still a virtually unexplored area.

The IMF has produced one or two papers on the subject and the Bank for International Settlements is beavering away on research now. But generally central bankers seem still to be in the dark about how to prevent runaway inflation in asset prices - let alone how to exit from the consequences of dousing it with huge liquidity injections.

The best that people like Hans Genberg of the Hong Kong Monetary Authority could do at the Tokyo conference (organised by the Asian Development Bank Institute) was to talk of the need for central bankers to 'lean against the wind' by restricting credit once they sniff the smell of asset price inflation. That's a bit like spitting into the wind created by a forest fire.

These issues are far from being merely of academic importance. Leading central banks have flooded their economies with financial liquidity (admittedly much of it under political pressure from panicked governments once the Great Recession set in) to an extent where it threatens to produce a Great Inflation once economic recovery sets in.

Nowhere is this fear more pronounced than in China where bank lending has run riot, with official approval, while stock and property prices are soaring - apparently out of control. Yiping Huang, a professor at Beijing University, appealed to the Tokyo conference for advice on how to deal with this. He received little of use.

In an age when super-computers can plot a voyage to Mars or prove the existence of sub-atomic particles, it seems odd that central banks cannot say when asset inflation threatens and produce sophisticated strategies to deal with it. It is even more odd that financial regulators cannot keep up with developments in financial technology that can threaten systemic collapse. Perhaps we do not pay them enough or provide them with the tools to be more effective. Or maybe it is just that central bankers are arrogant in assuming that their wisdom should not be challenged by ordinary mortals.

Fiscal policy can sometimes be as misguided as monetary policy but at least it is in the hands of elected representatives. Central bankers should be called to account.

Building Temasek as a sustainable institution

2009-07-30T19:45:00.001+08:00

Its goal is to build a robust framework to maintain discipline and deliver long term value

The following is a speech given by Ho Ching, executive director and CEO of Temasek Holdings, at an Institute of Policy Studies Corporate Associates Lunch yesterday.

TEMASEK celebrated its 35th anniversary on 25th June this year. We celebrated with an orange T-shirt staff dinner at the Orchid Country Club.

Five years ago, when Temasek turned 30 years old, I was privileged to share some thoughts at an IPS lunch. Today, I am privileged to have the opportunity again to provide some perspectives on our journey to build a sustainable institution as we move forward.

Institutionalising discipline

Temasek is a long-term investor. As I had outlined five years ago, this means we will act to enhance long-term value, and will not divest for divestment's sake.

We don't intend to raid the larder, nor sell the family jewels, for short-term gains. We will jealously guard our interests, and will invest; rationalise, consolidate or divest where it makes sense, and where we can achieve clear sustainable value.

Our goal was to build a robust framework to maintain discipline and deliver value over the long term as a sustainable institution.

As one of our founding leaders, Mr S Rajaratnam said in 1966: 'We must learn to do things today with tomorrow very clearly in our minds.'

It has been an intense journey. There was no path, we walked to make the path for ourselves.

We unfolded and refined our investment strategy in public view, even while we were simultaneously transforming our portfolio and upgrading our core engine of people, systems and processes.

In October of 2004, we published our first Temasek Review. As an exempt private company, we were not required to do so.

Our core purpose was not transparency per se, but to instil the discipline, the professionalism and the open willingness to be tested and measured.

Such an annual review would serve more than one purpose. It provides a public marker of our performance, whether good or bad. Today, the market is generally aware that we have had an annual return of about 18 per cent a year since inception. Our year-to-year volatilities are visible.

In our Temasek Review last year, we reported an annual Value-at-Risk of almost $40 billion last March.

This meant a 16 per cent probability for our portfolio value (on a marked-to-market basis) to drop more than $40 billion by March this year. Indeed, it had turned out to be so, and more.

Our Temasek Review was also meant to introduce us to our friends and potential partners; as well as to our portfolio companies, and other interested parties or stakeholders in the market.

Our first Temasek Review marked the beginning of a new phase in Temasek's journey to engage and be engaged with the wider community.

Shortly after, we obtained our credit ratings with two leading international credit rating agencies. These have been based on full confidential disclosure.

We have continued to be credit rated ever since. This establishes a public marker of our financial position and credit risks. Our strategic actions and commercial choices would be bounded by this clear bright tripwire or public OB marker.

Any move to shift our credit risk stance would require deep and deliberate debate within our Board and senior management.

Our credit ratings were followed by an international 10-year US$ bond in September 2005.

The bond spreads are a real-time live indicator of our credit risks, much like the role of a singing canary in a coal mine. This was also a deliberate move to create a new group of sophisticated stakeholders for ourselves.

As I have just highlighted, we have today established three sets of public markers; our annual Temasek Review, our credit ratings, and our bond spreads.

They are like the 18th hole in a long game of golf, our credit ratings the tripwires or OB markers, and our bond spreads the singing canary - they signpost the no-go zones and outline the broad perimeter of our playing field.

These are but one strategic facet of our commitment to build not just for this generation, but to lay the foundations for a robust and disciplined institution for the future.

In the same vein, we have applied the highest practical standards of governance upon ourselves, no different from our expectations of our portfolio companies.

One example, as we had explained in 2004, was the process of CEO evaluation and succession planning.

We believe it is crucial for any board to continually review its CEO succession options. To this end, we have put in place an annual CEO succession review with our Board. This provides the Board with a full view of its options for all contingencies. The first such review for our Board was in early 2005, after we had done our preliminary work in 2004.

Thereafter, our Board has been engaged annually to review potential successors for various time frames; from an immediate interim need, to longer horizons where we deliberately add promising individuals in their 30s for us to track or bring on board over time. We include our internal management as well as external candidates on our list, Singaporeans as well as non-Singaporeans, promising leaders from Temasek-linked companies (TLCs) and non-TLCs.

(TLC: Traditionally used as a term to describe the Singapore companies in the Temasek portfolio in which Temasek has a substantial shareholding.)

It is through this process that we identified Chip Goodyear as an excellent potential successor.

The strength of the Temasek team and the confidence of the Board played a part in our decision to invite Chip to be the next CEO for Temasek.

It is unfortunate that both the Board and Chip recently came to the amicable and mutual conclusion that it was best not to proceed with the CEO transition. This does not mean, however, that we should stop this discipline of succession review. We will continue to do so, regardless of who takes the helm as CEO at Temasek. This is part and parcel of our institutional discipline and board governance to build for the long term.

Apart from CEO succession, we have also worked to improve our other systems and processes.

To enable us to operate efficiently, effectively and responsively to the market, we are mindful of the continual need to keep our systems and processes updated and well-honed. This we have been doing, and will continue to do.

However, one over-riding priority is to expose, train, build up and empower all our staff, young and not so young, experienced and new alike. This interest in giving our people the maximum opportunity to learn and grow, to stretch and test them, professionally and individually, is underpinned by our firm belief that our people, equipped with the right values, are the core foundation for Temasek over the long term. Where it made sense, we were sometimes prepared to sacrifice opportunities when we were not ready to take certain risks. But when it comes to developing our team, we are almost always prepared to sacrifice some efficiency or effectiveness to maximise training and learning opportunities for our staff, both individually and as a team. We are prepared to take the short-term inefficiency pains for long-term people gains.

Growing with Asia

I have just outlined how we have built a framework for good governance and discipline, and shared our trade-offs against the goal of developing people. Meanwhile, we also saw an evolving investment strategy.

To understand our opportunities, we stood back and asked ourselves what the key ingredients of our success have been since the founding of Temasek. We had two important success factors: first, the people with the passion, commitment and capability to think long term and deliver; and second, the success of Singapore itself. With Singapore's success, companies like Singapore Airlines, SingTel and PSA (PSA International is a global port operator) have both benefited from as well as contributed to Singapore's success as a business hub and an economy.

It is not a surprise that many of our portfolio companies have outgrown Singapore. Singapore Airlines could not have succeeded by flying between Seletar and Changi. Beyond Singapore, we were confident that the transformation of Asia was going to be an exciting story which also adds to Singapore's own growth potential. The Asia story would also significantly multiply the opportunities that we and our TLCs have had in growing with Singapore. Asia, including Singapore, was where we wanted to be.

Thus, we decided to shift our portfolio stance from about 85 per cent exposure to Singapore and the OECD economies. We articulated our Asia interest in the shape of a re-balanced portfolio transformation, with one third underlying exposure (this includes the underlying exposure of our immediate holdings by assets. For example, a company like SingTel or SingPower would not just be a Singapore exposure but would also have significant exposure to Australia) to Singapore, one third to the OECD economies, and a new one third share for the rest of Asia. This is a doubling of our previous exposure to Asia in our portfolio.

This projected portfolio shift was not a target cast in stone, but a broad sketch of our risk appetite. We felt comfortable to dial up our risk exposure by moving into the then emerging Asia, because we already had a stable and low risk portfolio, particularly in our Singapore blue chips. At the same time, we were also signalling our confidence in the long-term prospects of Asia. We saw four main engines of growth for ourselves in Asia - from India and South Asia, to Asean, from Singapore, to China and North Asia.

As a result of Asia's strength over the last few years, we ended up with a 40 per cent exposure to the rest of Asia, while our OECD exposure, largely in Australia, shrank to about 20 per cent over the last two years. We mulled over this resultant balance.

We remained very comfortable with Asia. We understand that growth will not be a straight line trajectory. We can expect bumps along the way, but the longer term potential remains strong. By longer term, we mean 20, 30 years. As Asia continues on its development curve, it will also de-risk. We had also planned to add new exposures such as Latin America, Africa, Middle East and Russia. This saw us opening new offices in Mexico City and Sao Paulo, Brazil, last year, after more than a year of analyses and study.

After two years of introspection, our conclusion was to maintain our 40:30:20:10 portfolio mix. My friends joked that this sounds like a football formation. I explained that it signals our continued focus on Singapore at 30 per cent with the rest of Asia at 40 per cent, giving us an overall exposure to Asia, including Singapore, of 70 per cent or more. OECD exposure would be around 20 per cent, plus up to 10 per cent exposure to new geographies such as Latin America, Africa and others.

Building an owner mindset

Even as we maintain focus on Asia and add new geographic exposures, we remain obsessed about building our institution for the long term. A critical element is an owner mindset in our culture. How do we nurture a 'think-owner, act-owner' DNA in Temasek?

Apart from culture and values, we embarked on developing a compensation framework geared towards a strong alignment with long-term shareholder value. Compensation philosophy and frameworks are complex subjects which can be emotional. There are no perfect solutions. The trade-off is how to weigh short-term competitive pressures from the market versus the long-term goal we have set for Temasek. Ideally, all our employees would 'think owner, act owner', and work as one team. To support this ideal, we lean heavily towards having a well-balanced compensation structure which would reinforce a one-team culture, and an incentive philosophy which puts the institution before self, emphasises long-term over short-term, and aligns employee interests with that of the shareholder.

Our compensation framework has two dimensions. One dimension is time. This covers short, medium and long-term pay-out horizons. The other dimension is the different levels of difficulty to earn out the incentives. One key principle is for our employees to share in the institution's performance, both for positive and negative results. We share gains and pains alongside our shareholder. This is in essence having an owner's approach to our business and operations.

For senior management, the bulk of their incentives are deferred between three and 12 years. Some of these deferred components are subject to market risks, and rise and fall with Temasek's total shareholder returns. The remaining components are subject to a 'no-floor claw-back' - these deferred components could potentially be totally wiped out if and when we deliver well below our cost of capital target. This 'clawback' feature is tied to the principle of rewarding only for sustainable performance.

This return above the risk-adjusted cost of capital is what we call Wealth Added, which we report in our Temasek Review.

Returns above the cost of capital target means we have gains to share with our staff. Returns below our risk adjusted cost of capital hurdle means we have negative bonuses to be distributed. It is a tough challenge to share negative bonuses when we fail to deliver at least a return to match our cost of capital. It is even tougher to deliver a positive Wealth Added every year.

While we are certainly not happy with the negative Wealth Added in March last year, as well as March this year, this has enabled us to test our compensation framework through at least one very difficult market cycle. As an example, most of us understand the idea of sharing profits or gains, but how do we share a negative bonus in an equitable and fair way among our staff? Even though we had delivered almost 7 per cent of positive total shareholder return as at March 31 last year, this meant a negative Wealth Added. A share of this negative Wealth Added meant a negative bonus pool. This in turn was allocated among our staff. And so, from CEO to office attendants, all our staff were allocated negative bonuses last year, and will be allocated more negative bonuses this year once we have approved our audited financials.

Our experience over the down-cycle also enabled us to rethink and refine some of our incentive elements. These refinements strengthen the core concept of ensuring that there is, on balance, a strong element of alignment with sustainable long-term shareholder value. In effect, our incentive system is designed to support that owner mindset among our staff.

Expanding stakeholder base

Last but not least, I would like to touch on one more element of institution building - to build a broad stakeholder base for the institution.

While the Minister for Finance (Incorporated) is our formal shareholder, we recognise that the ultimate shareholders of Temasek are the past, present and future generations of Singapore. As Temasek continues to engage and invest in Asia, we also recognise the wider community in Asia as part of our stakeholder base. Temasek succeeds because of friends and supporters all over the world. It is in our long-term interest to contribute steadily to a prospering Asia, a vibrant Singapore and a peaceful world.

It is in this context that we had set up Temasek Foundation and Temasek Cares to add substance to our engagement with the wider community. The business of community engagement is very different from managing money and making investments. Our expertise is not in community engagement per se, though we have a strong culture of staff volunteerism. (From 20-plus years old to 50-plus years old, our staff climbed Kilimanjaro to raise funds for Make-a-Wish foundation for terminally ill children, and swam to raise funds for the Muscular Dystrophy Association in recent months.)

We have been very privileged to have the support of independent, capable and experienced community and business leaders from Singapore and from all over Asia to help evaluate and drive these engagements within Singapore and across Asia.

We set up Temasek Trust two years ago. Governed by a highly distinguished Board of Trustees, the Trust looks after the donated funds. For every year of positive Wealth Added since 2003, we had committed to set aside a portion for the community. Funding for Temasek Trust comes from these provisions for the community.

In turn, the Trustees will determine how and when they will distribute funds to the various approved non-profit units to fulfil their various mandates to serve the community. The Temasek Trust and our various non-profit philanthropic organisations re-affirm our commitment as a corporate citizen to support the continued progress and success of Asia and her people.

More than that, we have created one more group of stakeholders who would be tracking the performance of Temasek closely, benefiting both from Temasek's success and contributing to the larger community by sharing that success.

Over the longer term, we are exploring the feasibility of creating one more group of stakeholders. We can do this by inviting the public to co-invest with Temasek. We hope to start this by first piloting the relevant structures and rules of engagement with Temasek and other sophisticated co-investors.

It is important to test this over at least one market cycle during the next five to eight years. If this pilot is successful, we may then consider a co-investment platform for retail investors in perhaps eight to ten years' time.

This will add to our stakeholder base - from shareholder and bondholders, to the boards and employees of Temasek and our portfolio companies, from Temasek Trust and the non-profit units to our co-investors. A broad base of stakeholders will be part of our ecology for discipline and performance in the decades ahead.

Redefining our Charter

This year is the 35th anniversary for Temasek. In 2002, we launched our inaugural Temasek Charter. It is a living document that outlines our relationships with our shareholder, portfolio companies, the community and other stakeholders. Our 2002 Charter helped to provide some compass points as we embarked on our journey into Asia.

As we evolved, we had also been reviewing our Charter in close consultation with our shareholder over the last four years. This year, in conjunction with our 35th anniversary celebrations, we will be releasing our updated Charter. This Charter will remain a living document. It frames our engagement with our stakeholders, and guides us in our continued journey with Asia and beyond.

To conclude: as we gear up for the next phase of our development, we will continue to focus on our core purpose of delivering sustainable long-term value. We continue to anticipate opportunities, not just within Asia, but also in Latin America and elsewhere too.

As an investor with the flexibility of a long or short horizon, Temasek is focused on the end goal of creating and maximising long-term shareholder value as an active investor and shareholder of successful enterprises.

The Temasek journey will not always be smooth. As we sail in choppy waters, we may need to take shelter if we see dark clouds coming. We may need to wait for the storm to pass before we continue our journey. Because of the changing winds and shifting currents, we may have to adjust our sails and tack off-course for a while.

Meanwhile, we need to keep our ship in good order and sea worthy at all times. From time to time, we may even have to jettison some load, repair some damage or cut some riggings to keep our ship and crew safe. But we aim to bring everyone home safe, and will maintain discipline for a safe journey.

As an institution, we build not just for ourselves, but for our shared future with the wider community and also for our next generation, in Singapore, in Asia and around the world. This will guide us and the institution that we in Temasek are working to build in the years ahead.

Should high-speed trading be regulated?

2009-07-29T21:51:00.002+08:00

Business Times - 29 Jul 2009

Hock Lock Siew

By R SIVANITHY

WHEN a US federal prosecutor was framing charges against an ex-Goldman Sachs employee for stealing some of the broker's secret computer codes earlier this month, the prosecutor said that in the wrong hands these codes could 'manipulate markets in unfair ways'.

Coming from someone with regulatory powers, this can't be good for public relations because if you think about it, the corollary is that in the right hands, the codes can lead to manipulation in fair ways.

No doubt the statement was inadvertent, a simple Freudian slip. But it has nonetheless raised the profile of high-speed computer trading in markets everywhere - and with it, issues regarding fairness as far as small traders are concerned.

The most important question as far as the public is concerned is this: should high-speed/frequency computer trading be regulated?

The answer depends on who you ask. Brokers and institutions who use these tools and spend millions developing faster and more sophisticated computers would of course say no, and for all we know, the same might apply to profit-driven exchanges because enhanced liquidity and volatility mean increased profits. What's more, the numbers can be huge - recent US reports say that high-frequency computer trading has been instrumental in pushing average daily volume on the New York Stock Exchange 164 per cent up since 2005.

But in the US at least, there is a growing lobby against lightning-fast trading on the grounds that it is unfair and possibly to the detriment of investors as a whole. And if the lobby grows, then regulation might well be forthcoming.

For example, US Senator Charles Schumer, chairman of the Senate rules and administration committee, this week asked the Securities and Exchange Commission to prohibit a technique known as 'flash orders' that gives big players an unfair advantage over small investors because it allows some of these big players the chance to peek at large orders a few milliseconds before the rest of the market, thus enabling front-running.

In this sub-category then, high-speed trading is nothing more than high-speed front-running (note that we're speaking of milliseconds here).

There are, however, several other sub-categories which US institutional agency broker Themis Trading described recently as 'toxic' for markets in a recent white paper (Toxic Equity Trading Order Flow on Wall Street - the real force behind the explosion in volume and volatility).

In it, the authors describe various high-speed computerised approaches to making money that are clearly not available to small investors.

For example, Automated Market Makers (AMMs) ostensibly run trading programs that provide liquidity to exchanges by supplying constant 'buy' and 'sell' quotes. But AMMs also have the ability to 'ping' stocks to identify reserve book orders. In pinging, the AMM issues an order ultra fast and, if nothing happens, cancels it. But if the order is filled, it learns valuable hidden information that it can exploit, such as the maximum amount that another algorithm is prepared to pay for an order. Once this can be determined via high-speed trial and error entry and withdrawal of orders, the AMM can then profit by buying lower and selling to the buyer at the buyer's maximum price.

In addition, there's program trading, liquidity rebate trading (a strategy to capitalise on rebates offered by exchanges in return for providing liquidity) and predatory algorithmic trading, which are other high-speed techniques that basically place retail players at a disadvantage and, as the writers conclude, impose a 'stealth tax on retail and institutional investors' because 'toxic trading of this sort takes money away from real investors and gives it to the high-frequency trader who has the best computer'.

Themis concludes that 'exchanges, ECNs (electronic communications networks) and high frequency traders are slowly bleeding investors, causing their transaction costs to rise - and investors don't even know it'.

How to curb the spread of such techniques and perhaps help level the playing field? One suggested means is to make all orders valid for at least one second, which would eliminate pinging and force high-frequency traders to expose themselves. Another is to impose a 2 per cent limit on program trading. With these two curbs in place, it is estimated that half the volume on exchanges will disappear.

You'd have to wonder though - will for-profit exchanges really take the steps needed to level the playing field if it could lead to reduced volume and, by extension, profits?

Teach them money management skills when they're young

2009-07-29T21:50:00.001+08:00

Business Times - 29 Jul 2009

By PAUL SULLIVAN

THIS is the summer of reviling the rich. The financiers at Goldman Sachs got a populist drubbing after the bank reported record quarterly earnings and analysts began predicting average bonuses of US$700,000 an employee at the firm this year. Now, Congress is debating whether high earners should be hit with a surtax to pay for health care reform. In states like New York and California, that could mean that top earners are paying more than 50 per cent of their income in taxes.

But the rich and the not-so-rich do have something in common this summer: worrying about their children's financial future. This may come as a shock to those middle-class Americans who imagine wealthy parents sunning themselves by their infinity pools, confident that their children, having been given every opportunity, are on their way to productive lives.

In truth, the image is fairly rare at this point. What is more common among the wealthy is their fear that the lives their children have known, and the futures they expected, may be gone.

'The notion that you're entitled to goodies has to be dispelled,' said Fredda Herz Brown, a partner at Relative Solutions, a consultant who works with family businesses. 'They really do think life is going to continue as it has. But most of them are not getting jobs, no matter what their parents do.' While the wealthy are in a better position to help their children financially, having money doesn't guarantee that their child will be responsible and productive.

So that leads to the question: How can parents help children with a healthy sense of entitlement adjust to the new economic reality?

Emotional reassurance: The first thought that pops into many parents' heads when they worry about their children is bailing them out. But the best thing many parents can do, particularly those with children who are not asking for money, is to set the right example.

While children may be idle this summer, many parents are out of work, too, and casting about for ways to pay the bills. If they mope around, their children are going to pick that up. If, on the other hand, they discussed what has happened over the last year, their children will be better equipped to make their own financial decisions.

'The patriarch can say, 'This is the risk I took, this is how I felt, these are the lessons here',' said Evan Roth, founding partner of BBR Partners, an adviser to ultra-high net worth clients. 'It's, 'Look at how I'm handling this - I'm teaching you a valuable a lesson here'.' That lesson is often the need to work hard if you want to earn money. Ms Herz Brown tells the story of a financial services client who got used to flying on private planes. When his role at work was reduced, he started spending less time on jets and more time at home with his teenagers.

'He had a sense that too much came to them,' she said. 'It came from a basic belief that what he had created for his kids was this sense that everything comes to you.' So he made them look for summer jobs. And when they couldn't find any, he made them take odd jobs to earn money. He also gave them a budget for school clothes and other incidentals and made it clear that if they budgeted poorly, they were not getting more money.

The point was that he recognised he was enabling his children's sense of entitlement, she said. While his children will probably never want for money, he realised his actions had been just as indulgent as a parent who gives in to his child's every request for fast food.

Financial planning: There are, of course, many reasons to give money to your children. A popular one during the bull market was estate planning - the more you could pass on while you were alive, the less subject to estate tax later.

One of the most popular structures during the bull market was a grantor retained annuity trust. This arcane-sounding trust was predicated on assets going up. The idea was that parents could put an asset they thought would appreciate into the trust for a set period of time, usually two to 10 years. At the end of that period, their child would get the appreciated value tax-free, less a small interest payment paid to their parents.

Now that most asset values have gone down, these trusts look as if they have failed. But there is a chance to salvage them. The grantor can swap out the original asset for one of equal value without penalty and start another trust with the original asset, if he believes it unfairly lost value.

Rich Kohan, partner at PricewaterhouseCoopers Private Company Services practice, said people who set up the trusts should take advantage of the opportunity. 'If the asset has dropped in value, it's likely not to leave anything for the benefit of children,' he said.

Then there are trusts set up for reasons other than tax savings. Joan Crain, senior director of wealth management strategies at Bank of New York Mellon, said she had seen an increase in older clients setting up trusts for their adult children.

'Their children are in their late 30s to 50s, and they're not good stewards with money,' she said. 'Parents want to protect them from creditors but also ex-spouses, even if the children are happily married or not married.' Money put in trust is doled out to the beneficiaries and kept away from creditors, but it is not shielded from estate taxes. That people are employing this strategy, though, should be a stark lesson to parents: Teach money management skills to your children when they are young.

Practical support: In tough times, parents may need to set aside their estate plan and bail out their child. One way parents or grandparents can help without seeming intrusive is to cover all medical and education costs for their children and grandchildren. If they pay the hospital or school directly, they can transfer the money without incurring gift tax.

Separately, if a husband and wife pool their annual gift exclusions, they can give up to US$52,000 a year to a child and his spouse to help make up for a lost job.

'Parents worry it's humiliating,' Ms Roth said. 'But paying their mortgage is not a direct handout. It's the same thing, but if you don't see it, it doesn't affect them as much.' On the positive side, this may be the right time to finance a child's entrepreneurial idea.

'The consensus is the fortunes of tomorrow are going to be made today in this downturn,' said Mary Duke, head of private wealth solutions for the Americas at HSBC Private Bank.

The key is not to give your child a handout. Ms Duke suggests setting up a board of advisers to look over the plan and provide assistance with framing and carrying out the idea. This takes the child's request out of the realm of asking Mom and Dad for money and into the arena of an actual business plan.

'It's important kids understand budgeting,' she said. 'Everyone is more focused on living within their reduced means.' If a parent can instill that discipline in a child, then the rest may just fall into place\. \-- NYT

Don't hate us for being so smart

2009-07-29T21:49:00.001+08:00

Business Times - 29 Jul 2009

Hey, some people have it; some people don't. Is it Goldman Sachs' fault that the rest of America doesn't?

By MICHAEL LEWIS

FROM the moment I left Yale and started working for Goldman Sachs, I've felt uneasy interacting with those who don't.

It's not that I think less of Goldman outsiders than I did while I remained among you. It's just that I feel your envy, and know that nothing I can do or say will ever persuade you that I am no more than human.

Thus, like many of my colleagues, I have adopted a strategy of never leaving Goldman Sachs, apart from a few brief, spasmodic attempts to make what you outsiders call 'love' or 'the beast with two backs'. Goldman recognises how important it is for its people to replicate themselves. We bill no performance fees for the service.

Today, the sheer volume of irresponsible media commentary has forced us to reconsider our public relations strategy. With every uptick in our share price, it's grown clearer that we who are inside Goldman Sachs must open a dialogue with you who are not. Not for our benefit, but for yours.

America stands at a crossroads, and Goldman Sachs now owns both of them. In choosing which road to take, ordinary Americans must not be distracted by unproductive resentment towards the toll-takers. To that end, we at Goldman Sachs would like to dispel several false and insidious rumours.

Rumour No 1: 'Goldman Sachs controls the US government.' Every time we hear the phrase 'the United States of Goldman Sachs', we shake our heads in wonder. Every ninth-grader knows that the US government consists of three branches. Goldman owns just one of these outright; the second, we simply rent; and the third, we have no interest in at all. (Note there isn't a single former Goldman employee on the Supreme Court.)

What small interest we maintain in the US government is, we feel, in the public interest. Our current financial crisis has its roots in a single easily identifiable source: the envy others felt toward Goldman Sachs.

The bozos at Merrill Lynch, the dimwits at Citigroup, the nimrods at Lehman Brothers, the louts at Bear Stearns, even that momentarily useful lunatic Joe Cassano at AIG - all of these people took risks that no non-Goldman person should ever take, in a pathetic attempt to replicate Goldman's financial returns.

For too long, we have allowed others to emulate us. Now we are working productively with Treasury Secretary Tim Geithner and Congress to ensure that we alone are allowed to take the sort of risks that might destroy the financial system.

Rumour No 2: 'When the US government bailed out AIG, and paid off its gambling debts, it saved not AIG but Goldman Sachs.' The charge isn't merely insulting but ignorant. Less responsible journalists continue to bring up the US$12.9 billion we received from AIG, as if that was some kind of big deal to us. But as our CFO David Viniar explained back in March, we were hedged. Our profits from AIG 'rounded to zero'. People who don't work at Goldman Sachs, of course, find this implausible: How could US$12.9 billion round to zero? Easy, but you just need to understand the mathematics.

Let's assume AIG transferred US$12,880,560,250.34 of taxpayer money to Goldman Sachs. A Goldman outsider, asked to round this number, might call it US$12,880,560,250.00. That's not how we look at it; at Goldman we always round to the nearest US$50 billion, so anything less than US$50 billion rounds to zero.

Think of it that way and you can see that US$12,880,560,250.34 isn't even close to not rounding to zero.

Rumour No 3: 'As the US government will eat the losses if Goldman Sachs goes bust, Goldman Sachs shouldn't be allowed to keep making these massive financial bets.

At the very least, the US$11.4 billion Goldman Sachs already has set aside for employees in 2009 - US$386,429 a head, just for the first six months - is unfair, as the US taxpayer has borne so much of the risk of the wagers that generated the profits.

Really, we don't know where to begin with this one. It is wrong-headed in so many different ways!

Let's begin with the idea that the taxpayer is running a bigger risk than we are. The billions he stands to lose are trivial; after all, they round to zero.

The real risk, when you think about it even for a minute, is the risk we take ourselves: that Goldman will cease to exist and we will cease to be Goldman employees. To flirt with such tragedy we obviously need to be paid.

Cue balls

Rumour No 4: 'Goldman employees all look alike.' Several recent newspaper photos have revealed that a surprising number of Goldman Sachs workers are white, male and bald. That non-Goldman people glance at such photos and think 'Holy crap! They even look alike!' just shows how deeply anti-Goldman bigotry runs in American life.

We at Goldman represent unique clusters of DNA; if we bear some faint surface resemblance to one another, and to creatures from the 24th century, it is only because our superior powers of reasoning lead us to hold in our minds exactly the same thoughts, at exactly the same time.

A shared disinterest in growing hair, for instance, isn't a coincidence of nature but an expression of healthy like-mindedness.

'The world is a pool table,' our naked-headed CEO likes to tell us. 'And all the people in it are either stripes or solids. You alone are the cue balls.'

Rumour No 5: Goldman Sachs is 'a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money'.

Those words are, of course, taken from a recent issue of Rolling Stone magazine and they are transparently false.

For starters, the vampire squid doesn't feed on human flesh. Ergo, no vampire squid would ever wrap itself around the face of humanity, except by accident. And nothing that happens at Goldman Sachs - nothing that Goldman Sachs thinks, nothing that Goldman Sachs feels, nothing that Goldman Sachs does - ever happens by accident. -- Bloomberg

The author is a columnist for Bloomberg News and the author of 'Liar's Poker', 'Moneyball' and 'The Blind Side', soon to be a major motion picture. The opinions expressed are his own.

Blame credit woes on Wall Street, not Main Street banks

2009-07-29T21:45:00.000+08:00

Business Times - 29 Jul 2009

By ROBERT G WILMERS

OVER the past three decades, there has been a sea change in the way that credit is extended in America, creating the problems - and the need for reforms - that we face today.

At the heart of the financial crisis lie the complex, opaque derivative securities created not by traditional Main Street banks but by Wall Street, and with the passive complicity of regulators.

Wall Street created, originated and sold an alphabet soup of derivative securities, and it was such synthetic instruments - not traditional mortgage loans, small-business loans or other standard lending originated by banks - that unleashed a flood of credit, created a vast excess of housing, weakened the capital structure of the banking industry and undermined popular confidence in banks.

In previous generations, home buyers obtained mortgages and other loans from local, or Main Street, banks, which typically held those loans until they were fully repaid - and therefore had an interest in making loans that borrowers could afford.

But then Wall Street started slicing, dicing and packaging mortgages into bundles that served as the basis for bonds sold in the securities markets. Traditional bank deposits were no longer the primary funding source for credit. Instead, loans were being financed by the capital markets and packaged and sold by Wall Street. Mortgages were originated by one firm, packaged by another, sold by a third and serviced by yet another - but none of them worried about whether the mortgages would be repaid, because they didn't hold the loans on their books.

Securitised debt grew nearly 50-fold from 1980 to 2000 - compared with a mere 3.7-fold increase for bank loans. In 1998, traditional bank lending was surpassed by securitised debt for the first time. By the end of 2007, Wall Street accounted for two-thirds of all private US debt. This growing market for synthetic mortgage-backed securities inundated the country with credit that, combined with historically low interest rates and exotic new mortgage products, fuelled the housing bubble and turned our financial markets into a virtual casino. In the collapse that followed, billions of dollars' worth of mortgage-backed securities were written off.

But the public continues to think of banks as the primary source of credit - and to blame banks for the credit crunch.

Public officials contribute to the confusion by criticising banks - while allowing Wall Street to operate this 'shadow banking industry', which exists outside the standards for safety and soundness that apply to banks and without obligation to make clear the extent of such firms' debt, leverage, capital or reserves.

Many Wall Street firms played significant and contributory roles in the evolution of this crisis. Wall Street's most prominent investment bank, Goldman Sachs, historically the industry leader, was at the forefront of the creation, origination and sales of derivative securities - and also spent US$40.6 million on lobbying and campaign contributions from 1998 to 2008.

In 2008 alone, Goldman spent US$8.97 million in this way - almost 11 per cent more than the Financial Services Roundtable, a trade organisation that represents 150 top financial institutions.

The conversion of this investment bank into a giant hedge fund went unchecked by legislators and regulators, despite constituting a radical change to our financial system. And it has received billions upon billions in taxpayer bailout funding to keep it alive.

By contrast, consider how regulators treat Main Street banks compared with the way they deal with this highly connected investment bank: When M&T Bank applied for regulatory approval to acquire a modest-size bank in Utica, New York, it took 10 weeks and a promise to divest three branches before permission was granted. When this Wall Street investment house decided to seek a commercial bank charter in the midst of the financial storm, permission was granted in less than a week.

By obtaining this charter, Goldman Sachs received access to the Federal Reserve Discount Window and the Federal Deposit Insurance Corp, which has long been funded by dues from thousands of community-based banks across the United States - and which has since guaranteed US$28 billion of the investment bank's debt securities.

That's equal to 10 per cent of all funds guaranteed under the government's Temporary Liquidity Guarantee Program.

The same could be said of many other large financial firms that are also big spenders in Washington. The 10 largest recipients of federal Troubled Assets Relief Program funds - including two Wall Street investment banks and three other, non-bank institutions that participated - spent US$82.4 million on lobbying and campaign contributions in 2008 and US$523.6 million over the past 10 years.

This sort of behaviour is simply wrong. Corporate leaders have an obligation to set the right tone - a moral tone - lest public confidence in our private enterprise system erode.

Also, we must restore the balance of regulatory oversight between commercial banks and other parts of the financial services industry.

We should do so not only to be fair to banks but because the nation's ailments won't be cured unless solutions are directed at the entire financial system, not just one-third of it. -- LATWP

The writer is chairman and chief executive of M&T Bank, one of the 20 largest US bank holding companies

A life well scripted

2009-07-28T21:38:00.003+08:00

Business Times - 25 Jul 2009

Make your mark, and pay it forward. Those are the words that David Puttnam lives by. The film maker, educationist, and active citizen tells why he so fervently believes in making the world a better place. By Jaime Ee

DAVID Puttnam: The Movie is not likely to be playing at a cinema near you anytime soon. Which is a pity, given the illustrious - or perhaps he might prefer 'useful' - life of the Oscar-winning film producer who built his career making movies about men, well, just like him.

That's not an egoistic statement. Ego isn't something you associate with Sir or Lord Puttnam - take your pick, he's both - who has more titles than a boy scout has badges but still shows up at The China Club for yet another press interview with as much grace and enthusiasm as if it were his first.

Whether he planned it or not, his life would make a perfect screenplay - a man who wants to make a difference in the world and isn't afraid to fight for what he thinks is right even if his detractors think he's an overzealous idealist and try not to sit beside him at dinner parties.

His is the kind of character you see in most of his movies - the one who believes in the power of the human spirit, dogged in his pursuit of justice, unwavering (or blindly stubborn) in the face of insurmountable hurdles. Cue Chariots of Fire - men in baggy shorts in a race for integrity and honour; The Killing Fields - the triumph of friendship between two men despite the atrocities of war; Memphis Belle - a group of fighter pilots who need each other to carry out a life-or-death mission ... it goes on.

That's why he does what he does - since he left the film industry in 1997, he's been a major player in the environmental movement, worked as an adviser to the Department of Education to overhaul the UK's teaching system, champions children's rights as president of Unicef UK, advises the Labour government as a peer in the British House of Lords, and even acts as a consultant to Singapore's Media Development Authority while lending his name to the LaSalle-SIA College of the Arts' Puttnam School of Film.

Why? Because of something his father told him when he was seven years old during a walk in the park.

'My father was very special because he had been away fighting in the war and I didn't meet him until I was five years old,' he explains. 'It's quite strange, meeting your father for the first time. But I became besotted with him. We were in the park and we came to this tree which had someone's initials carved in it. I asked my father what it was and he said, 'For people, it's very important to make their mark to prove that they've been in the world, to just literally say, I was here.' '

And so he did, whether it was winning Best Picture Oscar for Chariots or working tirelessly since 1982 to make the term 'corporate social responsibility' a buzz word.

But a good part of making your mark on the world is also about protecting it, and it's something Lord Puttnam is seriously worried about. He tosses up an old Greek nugget - he is, after all, a natural storyteller - about the glory days of Athens when every 12-year-old boy had to swear an oath to leave his city 'better, more beautiful and more prosperous' than he found it.

'I'm very involved in the issues of global warming and climate change because I'm very fearful of what my grandchildren are going to encounter. I think it is hugely incumbent on my generation to set things up as best we can to make sure that their lives, which may not be as full as ours - my grandchildren will not live lives like I've lived, they will lead much more constrained lives - are as okay as possible for them.

'I'm a member of a generation with massive responsibilities because I'm the generation that's caused most of these problems.'

You say 'idealist', he says 'you're too busy making money and you can't be bothered about such things'. From experience, 'most people who say 'oh you're slightly idealistic' are actually saying, 'I am not prepared to get as involved in the issues of the world as you are'.'

Idealism, though, has a habit of going out of style.

He already had an inkling of it in the '90s as he saw the film industry moving away from the strong narratives he was used to making to 'product-oriented' blockbusters or exploitation films. A strong advocate against violence in movies, he says: 'My idea of making a movie is very simple: human beings are capable of remarkable things, and the more you remind them of it, the more likely they will be so. On the other hand, human beings are also capable of being sadistic and unpleasant and doing dreadful things. The more you desensitise them to the dreadful things they do, the more those things seem to be acceptable.

'I've had a very rewarding career because I've sat in cinemas watching people watching Chariots of Fire and I know they feel better about themselves. Watching them watch The Killing Fields, I know they know more about the world. Why wouldn't you want to do that? Why would you be so stupid as to want to exploit people's fears and hatreds?'

For a few hundred million bucks more at the box office, that's why. Which was why he knew that it was time to go.

'I'm 68 years old, filmmaking is a young person's game,' he says. But more so, 'I made a decision that I was not going to grow old in the film industry. I saw what it did to people, I saw it wasn't an industry that respected old age very well, I didn't want to be shuffling up and down Wardour Street with an old script under my arm, hoping someone would want it. I decided I would be out of there in my 50s.'

It was almost prescient, the way he made his exit. It took just one phone call. It was 1997, just after the elections when the Labour Party veteran received a call from an aide of then Prime Minister Tony Blair to ask him to be a peer in the House of Lords. 'I said you're too late, I've just joined the Department of Education, and he said, 'Don't worry, we'll work around that'. So in one day, I left the film industry, joined the education department and became a peer.'

Given his vast experience in politics, he says the recent parliamentary expenses scandal involving MPs was an accident waiting to happen. 'I chaired a committee doing a report for parliament in 2005 and I predicted exactly what was going to happen, and ironically the very person who killed the report has now had to step down (Michael Martin, speaker of the House of Commons).'

It's this reason why he's full of praise for the Singapore government's policy of paying MPs and ministers well from the very beginning. 'It's the same reason UK judges are paid well so that they will not be corrupt. It's a well paid job, you have no excuse to take money. But, they didn't make the same decision about MPs. What they did was pay MPs badly but gave them ridiculous opportunities to fill their coffers in other ways. If they were paid properly this would never have happened. It's the system that created the problem.

'Say you're an MP and you have lifestyle requirements like private school for your kids. How do you pay for it? You hire your wife to be your secretary - it's wrong but it's a way of drawing more money into the family so maybe it's the wife's salary that pays the school fees. So you're immediately on a cycle of not massive corruption but ways of compensating for the fact that you are paid badly.'

Expounding further on the topic of pay for politicians, he says: 'The question of political courage requires that you tell the public, you may not like this but we're going to have fewer, but better paid MPs. They've known for years that there are too many MPs - what they should have done years ago is to (limit to) 500 MPs and give them proper support. As I said in my report, good democracies are expensive - a cut-price democracy is a charge on the electorate, whereas a well-paid executive is an investment, not a cost.'

But no, he rules out any possibility of him becoming a minister and trying to change the system. 'Interestingly enough, when I got into the House of Lords, the assumption was that over a period of time I would become a minister. But I realised quite quickly that that was a really shitty job. I had a great job at the education department, I was a special adviser to the Labour government and I had a lot more freedom than a minister could ever have.'

Reaching out

And, with his closetful of titles, he has the kind of clout that he needs to push his own make-the-world-a-better-place agenda. 'Titles don't interest me very much - but they're like brands that can help. For example, as president of Unicef, I can talk to our Secretary of State for Overseas Development. In a sense he has to see me - if I was David Puttnam he would say, 'I'll see you next year.'

' As Chancellor of the Open University, the Secretary of State of Education has to see me. As for being a peer, if I write a letter to the minister he has to answer within seven days, that's the law. If I was Sir David Puttnam, I could have written and he doesn't have to reply at all.'

His concerns for today's youth are what drive him to constantly reach out to them, to turn them into responsible citizens. Despite being 'cynical enough to know you can't change people,' he was heartened by a letter he received recently from a York University student who was inspired to start a non-partisan political association after Lord Puttnam gave a talk four years ago about active citizenry at a school where he was a sixth form student.

'He invited me to speak to his association so since I happened to be speaking at York, I said OK. I expected to be speaking to 12 students but 300 showed up. We had a great time talking about climate change, responsibility of young people and so on. But the point was that, as a result of talking to a sixth form class in Bristol - four years later I'm talking to 300 kids at York who in turn are the core of a student movement involved in citizenship programmes.

'So if each time I speak, keep pushing out the message, maybe two or three people will listen and then they talk to other people. Then you wake up one day and there are 1,000 people out there who think, say, 'I don't want to be an exploitation filmmaker - I know I can make a living that way but I want my films to mean something'.' And in turn, want their lives to mean something. That, says Lord Puttnam, 'is the only role I've got left'.

He isn't too bothered about growing old, although he does concede that travelling does get harder these days. 'My friend Lord (David) Attenborough who's not well at the moment, we had dinner just before Christmas and he arrived, quite tired and he said to me, 'Putters' - he calls me Putters - 'don't grow old, dear, it's shit'. I said 'well, hang on, the alternative doesn't sound very attractive'.'

These days, he tries to spend more time at his seaside home in Baltimore, Ireland, where he and his wife Patricia and their children have lived for the past 20 years. On what was originally a farm, the avid gardener planted 8,000 trees which have since grown into a complete wood. He's looking to spend more time there and is checking out the latest video conferencing equipment that will let him give lectures interactively while 'reducing my carbon footprint'.

He says the most important lesson he's learned about life comes from his father. 'Towards the end of his life he said, 'If I drop dead tomorrow, I've no regrets - I've had a really great life. And don't you or your sister ever have any sadness, have a great life.'

'I feel the same way. In the last years or months or even minutes of my life, I want to feel OK about myself and my relationship to the world. And I do.'