On Singapore and commodities

A bit more of a Singapore focus. Now that the general elections are over, we have various economic data and news coming, all of which point that Singapore’s growth this year is likely to stay relatively robust. For starters, Singapore’s domestic wholesale trade increased by a seasonally adjusted 10.3% in the first quarter compared to the 4th quarter.

Singapore’s economy as measured by gross domestic product (GDP) grew 8.3% in the 1st quarter this year compared to the 1st quarter of last year. The strong performance was better than expected and comes off 2010, where in itself, Singapore’s economy grew by a record 14.5%. On a quarter on quarter basis, the Singapore economy grew by a huge 22.5%. The ministry of trade and industry has now revised our official 2011 growth forecast from 4 to 6%, to a range of 5 to 7%. I personally expect it to be revised up further again as we go along.

The two integrated resorts have had a strong positive impact on tourism and with the higher number of tourists, this has increased spending in Singapore. The gradual recovery in the global economy has also helped our export oriented industries and thus, the manufacturing sector has led the way for growth in the first quarter, surging by a massive 75.4% quarter on quarter. We remain quite positive on Technology this year as consumer demand has been very robust and will allow the sector to continue to grow strongly even after the inventory restocking has been completed.

The commodities market in recent weeks have suffered a rather large hit, and some investors are exiting this sector. Increasingly, I believe there is some rotational play as investors run from one asset class to another in search of returns and yield. It can be rather dangerous to play follow the herd, and I would not recommend doing such rotational play. It is generally very hard to predict accurately why and when a sector might come into favor or fall out of favor. Certain asset classes like equities and bonds are so called “evergreen” so they will always have a place, and they are large enough such that such hot money stampeding in and out will not cause as big a swing in prices as compared to commodities. I personally feel that the huge volatility in commodities have been driven not by fundamentals or demand swings but more by this speculative hot money flowing in and out of the sector.

I am actually a bit relieved that there is a correction in commodity prices now. This is because it will take some pressure off the rising inflation experienced by many Asian countries in this part of the region. More than anything else, I feel that overly high commodity prices, driven up not by demand, but more by speculators will impede and pull back Asia’s economic growth.

Markets are gradually swinging back into an uptrend again, though there continue to be hiccups now and then. The latest include the focus on IMF’s chief, which was charged with sexual assault. Ultimately, such news are short term noise which will not affect market fundamentals. What is happening is that many companies continue to report strong earnings. The overall mood now is still very much one of cautiousness, which is why I still believe the best is yet to come. Many markets, including Asian ones, as well as Europe and the US should not be seeing such low valuations based on the strong earnings which companies are reporting. Investor sentiment can and will change, and my portfolio is already well positioned to catch that uptrend when it comes!

One of our Competitors has closed down

Ordinarily, you would think that being the general manager at Fundsupermart, I should be celebrating that one of our online competitors have closed down. I am not. Its actually a sad event. Finatiq was one of the earliest distributors online along with us. They were a few months earlier than us. I remember the excitement when we both started out in the industry with the slogan that our sales charge was half that of the industry norm (which was 5% at that time).

It has been more than ten years already, within the blink of an eye. I believe we have had a big impact on the unit trust industry, and we have brought sales charges of the entire industry down over the years as well. But they are now ceasing as a business. Truth to be said, none of the unit trust distributors are earning big bucks. If we were, I don’t believe Finatiq would have had to close down. In fact, the traditional online unit trust distributor business model has and needs to change because it is unsustainable in the long term.

There are only two platforms in Singapore – iFAST Financial and Navigator. Fundsupermart belongs to iFAST Financial, and Dollardex belongs to Navigator. Navigator, if you look at their financial statements, have been losing money every single year since 2004, with the exception of 2007, which was a huge bull run year. And they have been losing money in the tune of millions, not thousands.

We have been slowing bleeding each other, as we aggressively cut sales charge over the years. It started at 2.5%, but look at where we are now - there are fund promotions where we are giving 0% sales charge on funds. Investors have been huge beneficiaries, and they are happy. But again, everything is a business. There are directors and shareholders to answer to. How do you justify a business if it is losing money every other year?

I did not wish for Finatiq to close down. In fact, my first purchase of a unit trust was through Finatiq! It was only after I joined Fundsupermart that I made all my unit trust investments through Fundsupermart. I am sad that they have closed down. This industry has been a cutthroat one.

People complain about inflation over the years, about how a bowl of Mee used to cost $3, and it now cost $4.50, even $5. The case has worked in reverse for unit trusts. 5% sales charge became 2.5% when online distributers entered the fray, then it has now halved again to 1.25%, and the trend is that it will go even lower. So, while everything from rent, to electricity, to people’s salaries have gone up, sales charges keep on coming down. This is akin to the bowl of mee costing $3, coming down to $1.50, then $0.75, and still going lower!

And has the product changed? It has actually improved! There are much more funds now investing into all sorts of asset classes. There is free switching. There are more online tools. More articles, more webcasts, more research, and even an iPhone app! All these have made unit trust investing much better than it was in the past. But all these have been done while sales charges have now shrunk to a fraction of what they were originally. This is as if that bowl of mee has not only seen its prices drop from $3 to less than a dollar, but along the way, you got free entertainment, better ingredients and a host of other benefits on that same bowl of mee. Where can I find a bowl of mee like that for less than a dollar these days?

I don’t know what the remaining competitors are going to do going forward, but I see that such a business model in an environment of ever-decreasing sales charges has to change. Unless there is some sugar daddy out there happy to keep on pouring millions of dollars of good money into this venture, otherwise, at some point they will ask, “When is the business going to be profitable? When will the bleeding stop?”

And every business, no matter how big it grows, cannot run away from that fundamental fact, that in the long-term it has to be profitable or it will perish. How do you be profitable if all your costs (rental, salaries, maintenance etc) keep on going up, but your profit margin keeps on shrinking? It took us 5 years to become profitable after we started, if we had started with a sales charge of 1.25%, would it have taken us 10 years? How many shareholders are willing to put up with a company that has to lose money for ten years before it starts to become profitable?

For now, the online distributors have been content to keep on lowering sales charge in an ever downward-spiraling price war. But such a business model is unsustainable in the long-term and has to change. We were already forced to change our business model because we recognised the trend in this business and where it was leading us.

Eventually, our competitors will be forced to change their business models as well. Not unless they have some sugar daddy supporting them, and if they do, I would love to have his number!