Bank Savings Account Rates have dropped to 0.16%! (26 Aug 2009)

Had a really busy weekend, was down at the InvestFair booth on both Saturday and Sunday and I got to speak with some of you. But let’s talk about savings account rates.

Did you know that the average bank savings deposit rates in Singapore are now just 0.16% in July? I generally don’t keep much money in my savings account, but it was only when I pulled out the historical data from the MAS website did I realise that they had fallen by so much. At the start of 2003, average bank savings rate stood at 0.44%. While that’s not very high either, but to fall to 0.16%! So, that means that keeping $10,000 in the average bank savings account for an entire year would net just … $16.

The rates are so low we might as well treat it as essentially zero. When I pulled the data on fixed deposits from the MAS website, the results were not much better. Average 12 month bank fixed deposit rates stood at merely 0.53% in July! At the start of 2003, it stood at 1.3%. Savings accounts are more liquid than fixed deposits. The interest rate may change daily, is calculated daily, and you can put in and take money out all the time with no penalties. For 12 month fixed deposits, there is an inherent understanding that you have to keep it there for 12 months. If you withdraw your deposit before it matures, there will be penalties like lost interest which you would not earn. That’s why fixed deposit rates have to be higher than savings account rates. But at just 0.53%? Even the cash fund, whose daily yield you seen on our banner every day shows a yield of 0.482% as at 25 Aug 09. That is only slightly lower than 0.53% and it gives daily liquidity! This means that you can put in and take out money without penalty every day.

There is really a very significant penalty right now for being safe. Because fixed deposits and savings accounts are “safe”, investors keep large sums of money in them. However, given the extremely low interest rates right now, they are simply not being adequately rewarded for keeping money with the banks and being safe. Banks, in the aftermath of the US subprime financial crisis, became very conservative with their lending, you read about how many people couldn’t buy cars because the banks would not grant them a car loan. Similarly, housing loan were reduced to just 70% of the total loan for some cases because banks did not want to take as much loan exposure.

At the same time, investors fearful of the market crash pulled a lot of money out of stock markets, investments, and kept them all in cash since last year September. Many are still in cash even till this day. As a result, the banks are flush with cash and do not need your deposits. This is shown most clearly by the low interest rates being given to depositors. If the banks really wanted your money, they would be willing to give you a higher rate, but they don’t! They have so much cash they can’t loan out of it all out anyway. So they hardly need more.

As investors, we need to recognize that our money can be put to better use. Even if we still want to keep them in low risk, safer investments, there are certainly alternatives which can give better than the 0.16% from savings accounts. As mentioned previously, the cash fund gives 0.48% right now, with similar liquidity. There are low risk funds like DBS Enhanced Income which would give a higher yield than that. The next step up in yield would be Singapore bond funds. SGS bonds also can be considered. There is no law that insists that you have to hold a 15 year SGS bond to maturity. Although I would caution that holding a very long maturity bond carries the risk that if interest rate moves up, the value of the SGS bond will drop. Fundsupermart has a list of the SGS bonds and their current yield to maturity on the website.

What does this also mean for equities? Historically, when interest rates are at such low levels, assets like property and equities benefit. Equities (stock) can trade at higher than normal valuations simply because the alternative of holding cash or being in fixed income gives such lousy returns. Similarly, because interest rates are low, property loans are also giving low rates, and again since the return from being in cash is so negligible, there is greater interest in putting the money into property instead. This effect is compounded if the market starts to trend upwards, confidence comes back to the market, and more and more people start to shift money from cash into investments like stocks, unit trusts and property.

So, please review the money you have in fixed deposits and savings accounts and check on the rates you are receiving for them. Banks love to roll over fixed deposits automatically when they mature and at their current levels which are very low. Even if you still want to keep them in safe investments, there are alternatives out there which are also very low risk, yet gives a better return than what savings accounts is giving.

Just Added to my Portfolio, and about China (19 Aug 2009)

Just invested another $10,000 distributed into the following 3 funds.

a) Legg Mason SEA Special Situations - $4,000
b) Aberdeen Pacific Equity - $4,500
c) ING RF Emerging Market Debt HC - $1,500

The China A share markets (Shenzhen and Shanghai index) has been going through a slump. They were down around 20% from their highs this year as of Wednesday 19 August 2009. It speaks volumes about China’s importance now that most Asian markets also followed China and fell on Wednesday.

I think its more sentiment driven rather than fundamentals. The China A share market itself has been going through a bull phase that started since October last year. In comparison, most Asian markets only started to rally and recover in March 2009 this year. There is an important difference between the China A share market and the Chinese economy. The Chinese economy is improving, without a doubt, just as the rest of the world is also starting to pick itself up from a recession. And the ability of China’s economy to continue to grow would have a significant impact on the rest of Asia especially since US’s recovery is likely to be relatively slow.

The Chinese stock market on the other hand, is a mainly closed market which only mainland Chinese can participate in. In this current 20% slump, some investors in China may get their fingers burnt, but much of it would be largely contained within China’s boundaries.

This is why the rest of Asia, though going through a certain correction now, is not going into a market crash the way the China A share market is going through right now. For me, personally, I believe the trend for Asian markets over the next 1 to 2 years will be up and we are far from the top of the market yet. So, any corrections within the market would be a good time to buy in on the cheap. Hence, I have just put in $10,000 more into my portfolio.

The stronger the fear in the market, the keener I get to buy more. And over the last few days, the fear has become significantly stronger. Will this be the exact bottom during this particular correction? I wouldn’t know, nor am I really aiming for that. I just think that it has fallen enough such that I want to add more.

P.S. As always, stay diversified even as you invest. Even as I add to my holdings, I am putting a small percentage into a bond fund.

Don’t Market Time the Short Term (18 Aug 2009)

The market volatility since last week should be fair warning to all investors. Don’t try and market time short term and expect to come away very successful. Since last week, here are some things you could focus on which would have all given you very short term calls. The Federal Reserve was having their FOMC meeting, good news expected (no interest rate hikes). An expected National Day rally. But on Monday, after the National Day Speech, instead, because the China market crashed almost 6% on Monday and Asian markets reeled, the Singapore market was down over 80 points. After that, some investors thinking this was the end of the rally would have ran for the hills. Yet, on Tuesday, despite going through a roller coaster ride during the day, most Asian markets ended positive with the STI index up 21.74 points.

This all goes to show that daily fluctuations are so notoriously difficult to pin point its almost futile to try. I know there are certain chartists and day traders who literally try and trade intra day even. These people must have a really hard time relaxing as their emotions go up and down every day based on how markets are performing.

Let’s take a look at some numbers from the year 2007 for example.

Out of 250 trading days in 2007, a hundred and thirty five of them were positive trading days. So, based on a daily basis, there was only a 54% chance of getting a positive trading day in 2007. This is almost like flipping a coin and calling heads or tails. And this was in a year where the index was up 16.6% by year end! This shows the futility of trying to time the market in the super short term. You might as well flip a coin where the odds are concerned.

All investors want to get in at the extreme bottom of the market and get out at the very top. In practice though, its very difficult to get it exactly right. Broad trends might be foreseeable within reason, but short term daily trends are so hard to predict that its almost like reading tea leaves. Was there any fundamental reason why the Singapore STI index had to crash over 80 points on Monday? Not really. Latest Non-oil domestic numbers for July in Singapore was good. NODX rose 6.1% month on month and had been steadily improving the last few months. Was it all because the China A share market crashed?

Yet, we need to be clear as well. The China economy is actually improving, not declining, as the local China share market seems to suggest. Its 2nd quarter GDP increased to almost 8%. The key difference for China is that because that market had run up a lot already, valuations wise, it may have prompted the correction it is currently facing. The Shenzhen index is currently trading at 30X PE for the year 2009, while the Shanghai index is currently trading at 23.4X PE for the year 2009. These are high compared to the rest of Asia though they are average compared to the 5 year historical average of these two markets. The China A share market is a closed one, so it has always traditionally traded at a high valuation.

Nevertheless, profit taking can be expected and corrections are healthy. The last thing I want, would be for everyone to agree that the only direction that markets can go is up. That would actually be more dangerous than the current state of uncertainty where every single day fall is met by calls that it is time to run for the hills. There will be a time when most of the recovery has been priced in, and when this rally has run its course, but I personally think we are not there yet. So, I will be looking to add a bit more to my holdings as well in the next one to two weeks.

In the meantime, take heart. The global economy is gradually picking itself up. But the entire process will take time and volatility can be expected in the meantime. I think daily volatility is such that it is not worth the added stress and uncertainty of trying to market time in the short term.

On the Federal Reserve (13 Aug 2009)

The Federal Reserve just concluded its FOMC meeting and said that data “suggest that economic activity is leveling out”. So, they are feeling more positive as well and confident that the worst is over for the US economy. The Fed’s comments led to a wall street rally that has extended to Asian markets today. And even though the Shanghai and Shenzhen stock markets continue to be weak, the rest of Asia has taken their cue from the US instead.

This is expected as US is still going to remain the main export market for Asia for some time to come. Other good news from the Fed includes that they said they would keep interest rates “exceptionally low” for an “extended period”. This means that while they think the worst is over, they are in no hurry to rush to raise interest rates yet and risk the economy tumbling back into recession again. This is good because the US is likely to experience a slow recovery so, it will need all the help it can get.

They also said they would stop their bond buying by October. While all this didn’t bode well for US treasuries and US government bonds in general, it’s a net positive for equity markets as well. The reason being that this bond buying exercise was done to shore up confidence at a time when credit markets were frozen. Now that confidence has largely come back at least to an extent where credit markets were working again, then there was no need to keep on buying back more bonds anymore. So, the fact that they do not see the need to continue to take more such extreme measures also mean that financial and credit markets have stabalised and are back to normal now.

But don’t put too much focus on just the Fed’s comments though. Ultimately, it may only result in a short term rise in markets only. For markets to continue to rally, earnings, and economic growth need to come back. Because these take time, we are likely to continue to see a fair amount of market volatility in the next few weeks and months as the bulls and the bears play tug of war.

I am confident the bulls will win out in the end, because time is on our side. But investors need to be patient and not get sidetracked too easily. There will be days or even weeks when markets go into corrections. At this point in time, such periods are still good entry points rather than cause for alarm. The reported earnings for companies this earnings season are in general surprising many analysts on the upside. And many of these companies will continue to surprise over the next 6 to 12 months.

We often underestimate the ability of people to bounce back from adversity. Just because a person is out of a job doesn’t mean they will roll over and just die. They retrain themselves and find a new job. Life goes on. I believe in this human spirit to never give up. This, together with governments having learnt the lessons of the 1st great depression will ensure that we not only come out of the current recession, but that we forge ahead to new heights as well.

Still Early Days for Current Bull Run (11 Aug 2009)

There is currently a tug of war between China and US. The China Shenzhen and Shanghai stock markets fell last week, and these led the Asian markets to follow. There was a certain amount of profit taking as well since many Asian markets had run up quite a bit in the previous 3 weeks. This as despite the fact that in the US, data is getting more positive. Job losses were less than expected, and most analysts are coming out to say that the worst is over for the US.

So, which market will investors choose to take their cue from in the coming weeks? My answer would be that the US market would still be the more important one to look at in the end. While China is certainly on the up and coming, the China A share market is ultimately still a closed one. Only local investors can trade on that market. The US market on the other had, has fund managers and investors all over the world participating in it, and at this point in time, US is still the larger and more important export market to Asia than China.

US GDP numbers that have just come out show that it contracted only 1% in the second quarter. This was better than expected and shows clearly that the US economy is turning the corner. The US economy is likely to turn positive in the 3rd quarter. Company earnings have also been better than expectations in general. In the US, More than two thirds of the US companies have announced 2Q earnings, and 75% of them have beaten consensus estimates.

There will certainly be profit taking along the way and markets will remain volatile. But the current trend where both economic numbers continue to get more positive, and earnings of companies surprise on the upside will continue over the next  to 12 months. And that should be what we should be focusing on at this time. (Singapore actual 2Q GDP just came out and it proved to be even better than previous estimates. 2nd quarter GDP was up 20.7%).

I can’t forecast when we will have a negative week, or when some profit taking will set in, nor will I try to. Because my investment style has never been to look at the shorter term fluctuations of markets. To me, at this point in time, the full recovery story has not been played out yet or factored in. And that would give us further upside to Asian markets yet. This means that if there are corrections at this point, I would add to them if I had additional monies to do so. (I am almost fully invested already at this point).

For me, it is too son to consider things like taking profit, or getting out of markets because I feel that the upward trend of markets has not ended. This bull run will continue, though it will not move up in a straight line. Two years later, when we look back at this period, I believe we will realise that August was still early stages of the bull run yet.

Happy Birthday Singapore! (6th Aug 2009)

Posting this in advance because its happening over the upcoming weekend. It is Singapore’s 44th Birthday and the nation has come a long way. I am un-ashamed to say that I am proud of what we have achieved, and how this small island in the middle of South East Asia continues to thrive.

I was born in KK hospital (as were most babies of my time), grow up here, found a job here, found the love of my life (my wife) here, and am now a proud father of two kids. So, all of my life, I have called no other country home. And while there has always been that odd compliant here and there, I can honestly say that even now, I would prefer to be in no other place.

I have come across others which have wanted to emigrate overseas, or had such complaints it seems like they hate being here. But to me, I have always felt that to these people, its because the grass is always greener on the other side.

From a financial perspective (since this is ultimately an investment blog!), Singapore is actually a very good place to grow your wealth. Taxes here are very low and it is possible to save. (In fact, Singaporeans are one of the world’s biggest savers). Furthermore, there is no capital gains tax with regards to gains from investments from stocks or unit trusts. Even property gains are tax free, unless you are deemed a trader.

The good government, hardworking population and our unique geographical position has also meant that Singapore has thrived as an economy, hence giving lots of job opportunities to the people and enriching the properties of its owners over the decades. Hence, although we are not the US, nor some other large resource rich country that has great social welfare benefits given to its citizens, we nevertheless still thrive and have a standard of living that most countries would envy.

Happiness is often relative though. Although many Singaporeans are relatively well off, there is always a tendency to compare. And once we compared, there will always be someone who is more successful, earns more money, drives a bigger car, or lives in a bigger house.

I try not to compare and focus on what I do have, which is health, friends, and family. I am sure there was lots of people who are richer, just as there are some who are poorer, but I do not care. I pursue wealth not because I want to be the richest person around, but because I want the kind of freedom it would allow me to enjoy. And in the meantime, I try not to forget about the things which are most important – like kinship and friends.

So, while I do not want to be poor simply because I don’t want to have to be stuck forever working just to get by. I have no wish to be a slave of money. And I am just thankful that the country Singapore, where I was born in, has given me the environment and opportunities where I can pursue my dreams and be happy. With the two integrated resorts coming up, the transforming or our reservoirs and rivers, more parks, and the more developments in Marina Bay and others, Singapore will be an even more beautiful nice place to live in the years to come. So, once in a while, stop and smell the roses. You might be amazed at this country we live in which I call home. Happy Birthday Singapore!