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!

Added In 8k More To Portfolio

Election fever is upon us! It’s exciting times for many of us, it’s the first time we have got to vote. Even for me, a true blue Singaporean that is past 35 years old, I think I have ever only voted once in my entire life previously only, and it was so long ago I hardly remember it. However, exciting as the upcoming elections are, markets still march on!

I just added a further $8,000 into my portfolio. A large proportion will go into a short duration bond fund since my plans to move at the end of the year remains unchanged. It looks like my new home will be finished sometime in July or August, and so, renovations (which is what I am saving up for) can start after.

This time round though, I am adding a new short duration bond fund, which is the new Aberdeen Asian Local Currency Short Duration Bond Fund. (It’s quite a mouthful to say!). It is being sold at 0% sales charge right now on Fundsupermart, and on top of that, Aberdeen is throwing in an additional 10 basis points wroth of units. This means that on my initial investment, I am already up 0.1% (and incidentally, 0.1% is what a savings account would give me after putting my money there for an entire year!).

Also, the Singapore dollar has been one of the strongest currencies in Asia so far this year, and that has probably not helped returns in bonds outside of Singapore, but this will not always be true. It’s simply not possible for the Sing dollar to year in, year out be the best performing currency here (won’t it easy to be a currency trader if that was so!). So, I believe the currency disadvantage which bond funds investing outside of Singapore bonds experienced would eventually even out. In fact, given that the Sing dollar is so strong now, it’s a good time to pick up investments which are non-Sing denominated.

I am adding my money into Europe this time round though, to even things out. I have too much in Asia already, and the last few additions into the portfolio has mostly been all within Asia equities (besides adding to DBS EIF). Europe is interesting because despite all the ongoing problems associated with its debt crisis (Portugal was the latest country to have to approach the EU and IMF for a bailout), the Euro has been strengthening this year so far. And despite all the negative news and hand wringing you see regarding Europe, Europe equity funds have actually been on the rise (Europe including UK equity funds on average are up 8.37% year to date, and the FSMI Europe index is up 4% over the last 3 months).

Let’s not forget again that despite the many troubles in Europe, some of the major powerhouse Europe countries like Germany are in a similar situation to Asia countries in the sense that they are actually growing so fast that they are starting to worry about inflation.

So, I will be adding my $8,000 as follows:

Aberdeen Asian Local Currency Short Duration Bond Fund - $6,000
Parvest Equity Europe Alpha EUR - $2,000

S&P’s Warning will not Halt the Bull

One of the biggest news this week ending 24th April was the credit agency Standard and Poors coming out to warn that there was a one third chance that America’s vaulted AAA credit rating might get toned down a notch over the net two years. The huge amount of debts chalked up by the government and the wrangling between the two parties which almost resulted in the budget not getting passed caused them to put forth this negative outlook.

But since it was just that, a warning, and they didn’t actually lower US’s credit rating. Markets only got rocked for all of one day, after which investors realized that nothing has really changed. Also, good news from the housing starts front, and Apple’s sterling earnings results drove markets right back up again.

US wasn’t wrong to spend the amount of money they did on those stimulus packages. It is showing dividends now with the US economy now back on track. While its true that every country needs to be financially prudent, when a country’s economy is in trouble and needs a boost, it’s the wrong time to worry about fiscal prudence. Look at the European PIG countries. Greece is facing as much as a lost decade of zero growth as the harsh measures aimed at balancing their budget was implemented almost overnight as a condition for them accepting a bailout. US is fortunate in that it is not in such a dire situation, nor will it have to worry about it. The USD remains the main dominant trading currency and China is unable to find any other entity or country which it can sell the 700 billion in US treasuries it holds. That means that US is the only country which can be print money, issue tons of debt, all to bring its economy back on track of recovery.

The long term consequences are that the USD will fall, but at this point in time, America doesn’t care about that. If anything, it makes their exports cheaper. There will also be a continued move of monies into Asia searching for yield, as investors factor in the relative fiscal strength of the Asian countries compared to Europe and US. Thus, Standard and Poors warning is just that – only a warning. It is unlikely that they would actually lower America’s credit rating. Even if they did, it would be something which all bond holders and investors have already known for a while by now, that US would never have warranted a AAA credit rating if not for its unique economic, military and financial importance globally.

Over the next one to two years though, I believe it will still be earnings that will drive stock markets. Already, as seen in the past few weeks, many of the issues like inflation, China interest rate hikes, oil prices, middle east unrest, Europe financial crisis, potential US economy weakness has all been seen to be well factored into markets already. And despite it all, corporate earnings have continued to grow. The latest, from Apple, showed that US companies, contrary to what people think, are actually racking in ever more money. Apple reported that earning almost doubled in their latest quarter. Needless to say, the stock price went up, and helped to drive the tech sector as well.

Technology is seeing a resurgence and I believe there will be a rethink. The iphone, the ipad, facebook and social networks are changing the game again, just like how the internet, the pager, the handphone, and the notebook first changed our habits and brought about the technology boom which peaked in 1999. These changes are far reaching and I believe they will drive the technology sector in a big way over the next 2 to 3 years.

I continue to like the Technology sector and my view on US and Asia hasn’t changed (even if Standard and Poors is now more negative). There was some profit taking in the previous week, which can only be expected after the strong surge in the aftermath of Japan’s triple disasters. But markets are well back on track now, and I strongly believe that the uptrend we will see this year remains intact. There is still time, we are still only at the start of this phase of bull run. But it will be a bull run, and by year end, I think we will be surprised by the extent of the market’s surge by then.

The Wonders of Technology

The iPhone has changed the habits of my household. Even though only my wife and I each have one, it has become a key consumer product which my entire family uses. At work, it’s a phone, and on MRTs, we use it to serve the net, load up useful applications (or just game apps as well). It’s a lot easier to open up an app on a crowded MRT than it is to take a book or newspaper out and start reading. In fact, given the very heavy crowds I face during the morning rush hour and on return trips as well (The East West line is always packed), I often feel very embarrassed pulling out a book to read because I am afraid it will take up much needed “body” space in the press of bodies. Opening up a phone app on the other hand takes up far less space.

Once we reach home, we are swarmed by our two kids, and at this stage, they are old enough to play with some of the kids apps. So, nowadays, they are so excited to see us, and the first thing my son does when he sees us, is to ask for our iPhone…sigh. Even my mum in law likes the mahjong app which is on it as well, so we got an iPad (so that the screen is bigger), and she plays with that as well.

So, the iPhones are used so much that they have to be charged every day. And we continue to find new and interesting apps to use, or to play with. I now secretly double check the FSM app for the valuations and earnings growth of the various markets before I go on any TV interview so that I get the latest up to date values.

I think these new technologies sometimes bring people’s distances further though, if you allow yourself to get too caught up. Sometimes, my wife and I will be standing right next to each other, taking the MRT home, and we are both looking at our iPhones. Or we want to spend some time with our kids but they want to play with our iPhones instead!

In office as well, colleagues are so surprised when they find out I don’t have MSN, because they are so used to using that to communicate as well. Its just that for me, I want think human interaction is still the best, so if someone is only a few steps away, I would rather walk that few steps and talk to that person face to face than send MSN messages through the computer.

Technology is a great enabler, and I have no doubt that smart phones (including the iPhone) are changing our habits as we speak. So, Fundsupermart has to evolve with the times as well. It’s an exiting time for all of us, where we live in a great era where technologies can move so fast that gadgets and habits can change several times within a lifetime. The pager has already gone extinct, and who knows if the laptop is on its way out (with the iPad and similar gadgets) taking its place. The handphone has become much much more than just a phone now as well.

The same goes for companies and for people as well. Everyone has to keep on moving forward. To stand still is to risk being left behind.

A Signal that the Bull Market is here

One would have thought that last week would have been a terrible week for stock markets. We had China raising interest rates for the 4th time since last October, ECB also jumped into the act, raising interest rates by 0.25%, Portugal had to go to the EU and IMF requesting to be bailed out, and to top it off, long suffering Japan experienced a 7.1 scale earthquake “aftershock”. However, Asian markets, including the STI index has been going from strength to strength this week, and almost all markets are higher on Friday close compared to where they started out on Monday (including the Japan Nikkei 225 index!).

What is happening? The key thing is that many of these news have all been factored into markets already. The first time something unexpected happens, it hits markets, people worry about it, and markets react. But the second time, the third time something similar happens, markets will hardly react to it because they worried about it so much previously the first time already. And often, the concern was overdone. The first time China hikes rates, markets feared on whether its economy would stumble into a halt. Now, 4 rate hikes later, and with the China economy still showing strength, China markets no longer react when a rate hike is announced.

Similarly, the first time the European financial crisis took hold, there was a substantial dip in global markets. When the second country went to the EU and IMF for money, there was a reaction too, because it seemed to affirm worries that this might spread. But by the time we come to Portugal requiring a bailout, markets have long moved past this because the previous round, they were worrying whether all the PIG countries and even Spain would require a bailout, so this news is now having little impact on stock markets here.

Japan’s 7.1 scale aftershock last week also did not stop markets from their upward move. It was far milder than the scale 9 quake, but it drove workers temporarily from the stricken nuclear power plant. Nevertheless, even the Japan market itself also ended the week higher.

I believe we are going into bull territory now. When you have so much negative news happening in one week, and yet it fails to faze investors, that means that most of these bad news are already priced in already. So, if that’s the case, it would take something totally new, unforeseen to cause further negative reaction. Otherwise, if more news going forward is still on things like China tightening, bailouts in Europe, or the Japan nuclear power plant, then these are not going to prevent markets from their upward trend going forward.

But there will not be a trigger or event for a bull run. There never is. Things like improving earnings, a recovering US economy and Asia continuing to power ahead in growth are not one off events. They don’t happen over one or two days, nor are they dramatic in any way. So, if you are looking for an obvious event driven signal that the bull market has arrived, you won’t be able to find one. But for me, the past week of market resilience, and strength despite so much negative news happening in the week is that signal to me that a bull market is up ahead. By this time, I am already fully invested. I look forward to how markets will turn out in the coming months with great interest and anticipation.

Markets are Rebounding

Markets have started to rebound from the prior two weeks when the triple disasters in Japan were very much in the limelight. Actually, its not that overnight, there is no more danger of a radiation leak from that stricken nuclear reactor in Japan. Its just that after two weeks of worrying over the aftermath, waiting to see what happens, investors have come to the realization that while Japan continues to grapple with that nuclear power plant, life still goes on.

The key thing is that other parts of the world, and indeed, even other parts of Japan doesn’t come to a standstill just because there is a possibility of nuclear radiation spreading from the confines of the Japan power plant. People are still buying cars, electronics, going on holidays (even if they give Japan a miss for now), and going to work. Even in Tokyo, life goes on, though the rationing of power has admittedly affected some of the bustle there.

We are now seeing a rebound in markets as people reconsider the impact of what has happened in Japan. While admittedly it’s a tragedy, they are realizing that outside of Japan, any financial and economic impact is surprisingly minimal. Some areas or industries might even see additional business. Take for example Singapore tourism arrivals. The February tourist arrivals rose 15.4% to hit a record high of 990,000 (source Singapore tourism board). And the tourism board is expecting 12 to 13 million tourism arrivals in 2011. Did they come out with a revised down figure now in the aftermath of the Japan quake? No, they didn’t because if you are planning to visit Singapore, what happens hundreds of kilometers in a Japan power plant is hardly going to change your mind. In fact, some people who planned to visit Japan, may decide to visit somewhere else instead, and its possible they consider Singapore as well.

I think the outflows from Asia to the US, and the triple disaster in Japan has resulted in a previously overly bearish mood amongst investors in Asia. From a global standpoint, Asia has actually gotten more attractive, because valuations are still cheap, the growth remains high, and now one of our biggest export markets US is also picking up steam in its recovery.

For the Singapore STI index, I believe 3,600 is still within reach for end of this year and we haven’t changed our forecast for it to hit 4000 points by end of next year. Too bullish? Let’s wait and see. I think many Asian markets will surprise investors with their strength this year.