A few days ago, I blogged that were three scenarios for the developed world. Growth — buy equities; inflation — buy property and commodities; and recession — buy government bonds.
Thinking about it again, there is a fourth scenario: stagnation. There will be shallow recoveries and recessions in quick succession.
In that scenario, one should be looking at buying equities for their dividend yields, and the corporate bonds of super blue chips.
Depending on where the developed world heads, equities, commodities and property, or government bonds could be the investment.
There are three scenarios for the developed world (remember the BRIC and Indonesia etc still are dependent on the developed world to drive their economies). It can
— grow out of its debt burden,
— inflate the debt away, or
— fall back into recession, marked by the occasional default.
Each of those outcomes leads to a different portfolio.
Renewed growth would favour equities, but at the moment, this looks too hard to achieve. An attempt to inflate would be good for commodities and property but would be disastrous for government bonds. Selected equities might do well: those that can pass on the cost rises to customers. Those bonds would do best if the developed world goes into a recession.
Hope this explains the extreme volatility of markets.
Looks like MAS is right to focus on weakening S$ Double dip here we come.
So morgagors may face rising interest rates (interbank rates rise to attract S$ deposits) and a recession (no jobs). True rate rises may be moderate but it all depends on how prudent “homeowners” have been in their budgeting.
I hear that advertising and marketing people are being axed as of this morning.
Maybe as part of a campaign to make us “feel good”, the constructive, nation-building local media are highlighting that stockbrokers are telling their clients that property stocks are trading at a discount to their net asset valuation (where once they traded at premiums) or way below their usual discount net asset valuation.
Hence there are gd buys around.
But there is the fine print that the MSM don’t report or don’t highlight. The brokers point out that they are assuming a slowdown in the economy, not a global recession. Neither they nor MSM highlight that investors are assuming the worst, a global recession, and hence are pricing the stocks at recession values i.e. investors do not believe the values brokers are pricing the assets at because they think the brokers are optimistic.
So if you believe that the world economy is only experiencing a slow-down, go ahead and buy the recommended property stocks. But if you are afraid of a recession, sit tight. The discounts will bet bigger
S-Reits are the flavour of the moment. Witness this gushing report.
“The current yield gap between S-Reits and the 10-year government bond is attractive to us at 5.1 percentage points versus 0.8 percentage point during the 2007 boom, and an average of 3.4 percentage points over the past seven years,” said Royal Bank of Scotland analysts in a report last week.
The report put S-Reits yields for 2011 and 2012 at 6.7 per cent and 7.1 per cent respectively. The high yields now being provided by S-Reits are well supported by a stable rental outlook, low interest costs and acquisitive growth potential, the RBS analysts said.
RBS has an ‘overweight’ call on the S-Reit sector.
As reported earlier https://atans1.wordpress.com/2011/08/21/cimb-on-reits/, CIMB is “neutral” on developers as a whole but “overweight” on S-Reits.
So what can go wrong? Nomura Singapore said that one of the current concerns of investors in the Reits space is the potential risk of recapitalisation if asset values were to fall significantly. In simple English, investors are afraid of rights issues if the gearing of Reits goes sky high if property values supporting the loans collapse. This happened in late 2008.
Even if property values don’t collapse, Reits could face banks refusing to renew their credit facilities, and asking for their money back if the banks face a liquidity crunch. This too happened in late 2008.
MM was quoted in late 2009 as saying, “If the country is going to go down, then economy will go down, people’s incomes will be down, unemployment will be up, then property values will go down.”
He was wrong because we had a recession, but property prices rose . Specifically in a recession year, prices of HDB resale flats rose by 8.2%.
Mah Bow Tan should boast of what must be first for public housing in any country, “We ensure public housing prices go up even in a recession.”
And adding, “So when economy does 15%, of course, HDB rices will fly. Only the daft will expect HDB prices to stabilise or go down.”
“Vote PAP. Public housing values will always go up,” he should say.
BT published a long piece that could serve as a primer on how to invest in Reits. Reit Primer.
Two complaints abt piece.
One is that it doesn’t talk abt buying Reits that trade at big discounts to latest reported RNAV. True there may be gd reasons why some Reits trade way below RNAV. But savvy investors can make $ buying Reits that they think shld not trade way below RNAV and holding them until they trade above or juz below RNAV, while getting good payouts while waiting. Useful Reit table for yields and RNAVs.
Those who bot Ascendas India Trust (trumpets pls) when it was trading way below its RNAV have made gd capital gains. I should have sold out but the yield is pretty decent. And India is now hot and RNAV could rise.
The other complaint abt the piece is that Reits can use the low interest environment to refinance their debts at lower rates and for longer tenures. Analysts from DBS and OCBC are saying this is happening.
BTW, high-yielding Reits courtesy of ST scan0004. Declaration of interest: I own units in three of them. (Update on ^ January 2010: Now own four of them.)
Update on 4 January 2010
Must read — a summary of Soro’s piece (many yrs ago) on the danger of buying a Reit trading above RNAV (and attraction).
Did you know that when the government sells state land to property developers, the money flows into the reserves (which are managed by our SWFs) and not into the Consolidated Fund like other government income? This is uniquely S’porean. Other countries credit land sales to income. The government’s rationale is that as state land is an asset, sale proceeds should not be credited to income but to capital (reserves). Makes sense, but that’s not how other governments account for land sales: even HK, and no-one can say that HK is badly run or profligate.
So when HDB “buys” land from the government it is adding to the reserves. As it and government claim that the price an apartment is sold does not reflect this price, they claim HDB makes a loss. But whatever it is (I leave it to others to dispute this claim), the reserves are increased.
So in addition to the surpluses (generated by thriftiness or meanness according to who is talking) and (indirectly via a circuitous route) our CPF monies https://atans1.wordpress.com/2010/11/02/how-we-fund-our-swfs/, sales of state land also contribute to the reserves that GIC, Temasek and the central bank manage.
There was one financial year ending March 2008 ( I think), where the government injected abt S$10 billion into Temasek. This sum was more or less equal to the amount that the government took in property sales for that year. Easy come, easy go as in the following yr Temasek could have lost as much as US$4.6bn (in 2009 March this would have been S$7bn) on Merrill Lynch. And there was the much smaller loss on Barclays (800m sterling?, then worth abt 1.7bn S$). Err not much change left over from injection: only S$1.3bn, “peanuts” as Mrs GCT might have put it, except she didn’t.
So this combination of surpluses, CPF money (indirectly via a circuitous route), and state land sale proceeds, have resulted in our SWFs having 179.5% more in assets than S’pore’s 2009 estimated GDP.
The Norwegian’s much larger fund (US$471bn) is only 23% more than Norway’s GDP. Abu Dhabi’s fund (at US$627bn) is 627% of its GDP. For those interested, I used FT’s US$248bn for GIC and US$133bn for Temasek. As to GDP numbers, I used CIA Fact Book as reference. (BTW, I’ve not taken into account the amt of foreign reserves that MAS manages because I could be double counting if I do. For the record, MAS says its reserves as at end 2009 are US$188bn).
So we got plenty of $ to make housing more affordable*. And there is no need to change constitution, or cut other expenditure. Juz change the accounting rules on land sales.
BTW, I am working with an illustrator so that it is easier to visualise the connections between CPF, surpluses, Consolidated Fund etc https://atans1.wordpress.com/2010/11/02/how-we-fund-our-swfs/ . Hope to post something one of these days. [Update on 4 December, the cartoon]
*Even after taking away our public debts; 8th in the world at 113.10% of GDP. [Update at 10.30 am]
This could have implications here if they start buying into new condominium launches here.
It seems they buy new properties, and then leave them unoccupied, eschewing rental income. Why?
The explanation, according to a Tsinghua University economist, Patrick Chovanec – corroborated by locals – is that Chinese people regard apartments as they would cars: brand new is good and top price; used is bad and lower price.
Apparently, the moment someone moves into a property, its price falls, because it’s no longer pristine.
So property investors have little desire or incentive to rent out their properties, because to do so would be to cut the re-sale value. Better to keep them empty in the hope that a rising market will deliver capital gains.
Which means there’s nowhere to live for those who have only the means to rent rather than buy – and large (but unquantified) numbers of homes are empty. The BBC’s Robert Preston
http://www.bbc.co.uk/blogs/thereporters/robertpeston/2010/11/china_boom_or_bust_2.html
If they buy into new condo launches and leave the apartments empty, there will be a shortage of rental apartments. Mah Bow Tan will have to write more articles.
Well property counters are off, HDB prices softening. Forget abt market finding their own level. It’s all abt govmin policies.
So waz this talk of market forces?
As Siew Kum Hong blogged a moon ago: By mixing up the public policy goals of providing affordable accommodation and helping citizens plan for their retirement, the Government has ended up achieving neither, with public housing becoming increasing unaffordable and many retirees being asset-rich and cash-poor.
The point that I ultimately want to make, is that the “leave it to the market” message is deceptive when the bearer of the message is able to manipulate the market. Markets do not exist in vacuums, but are instead influenced by government regulations and policies. So when the Government declines to intervene or to change the underlying rules, it is really a conscious political decision to maintain the status quo.
His totful rant in full http://siewkumhong.blogspot.com/2010/04/market-as-deus-ex-machina-or-scapegoat.html
Plenty of ranting and raving on socio-political blogs blaming everything on the PAP for the rise in HDB flats. I’m sure the slowdown in the building of flats, coupled with the faster flow of FTs had something to do with the present price rises.
But a more important factor must be the willingness of the banks to lend. As BT reported last Saturday
BANK lending rose in March for the fifth straight month, as the economic outlook and business sentiment continued to improve, encouraging businesses and consumers to borrow and banks to lend.
Total Singapore-dollar bank lending here rose 0.5 per cent, or $1.54 billion, in March to $286.3 billion at the end of the month, driven by improvements in both business and consumer lending, the latest estimates from the Monetary Authority of Singapore show.
Compared to a year ago, bank lending was up 5.8 per cent, the fastest expansion since April last year.
The latest business expectations surveys published yesterday showed that firms in both the services and manufacturing sectors expect the business environment to improve further in the six months to end-September, compared to the previous half year. Within financial services, banks and finance companies were the most positive on the business outlook …
Consumer loans, which have grown steadily throughout the financial crisis and economic downturn, mainly due to housing loans, expanded another 0.8 per cent, or some $1 billion, in March to $131.2 billion.
Housing and bridging loans, were again the driving force for the growth, rising 1.4 per cent, or $1.3 billion, over the month to $95 billion at the end of March…
Overall, for the first three months of the year, bank lending grew 1.8 per cent, or $5 billion. Though smaller than the 2 per cent expansion in the fourth quarter of last year, the slower pace of growth in overall loans masks a recovery in loans to businesses, which expanded one per cent over the quarter, even as the growth in consumer loans slowed…
With renewed competition among the banks, particularly in the Singapore home loans segment, the banks’ net interest margins – which measure how profitable their lending activities are after deducting funding costs – are likely to have been squeezed in the first few months of the year, analysts said this week. That means the banks would need to increase the volume of loans they make, to keep their net interest income from falling.
So banks will continue to lend for housing and the rants will continue. And when the banks stop lending, and prices fall, the rants will be abt govmin allowing the value of HDB flats to fall, conveniently forgetting that flats are now easier for young couples to buy. Just like now the ranters conveniently do not mention that the escalating prices means older S’poreans can cash out and downgrade, or move on to other countries.
But don’t spare yr tears for the PAP: by making property prices the benchmark on how well they are doing for S’poreans, they are riding a mad beast that they cannot control. Either way they lose. Dr Goh Keng Swee and his dream team would have told them not to be sold stupid
Morgan Stanley doesn’t seem to think so. In a recent report it wrote:
Speculative activity seems low compared with previous cycles, with sub-sales at only 13% of total sales vs. 18% in previous up-cycles. Foreign demand has so far been dominated by Indonesian,Malaysian, mainland Chinese and Indian buyers, and a return of more broad-based foreign demand could see prices spike higher. Most important, the en bloc market could return by 2011, as developers’ landbanks start to run down.
JC: Well, always with these things, we’re often early and it appears we’re early here too. But the good news for office building bubbles is that they’re pretty tangible. So when you see the apartments stop selling, when you stop seeing foundations being laid, and holes in the ground, when you see the cranes not going up anymore, buildings being half-complete – that’ll tell you you’re at the end.
Connected post
Robert Schiller (the man who called the dotcom bust and the recent US housing crisis spot on) argues in the US context that homeownership is not as beneficial to a country as it many thinks it is — the American belief that homeownership encourages pride and good citizenship and, ultimately, preservation of liberty. These attitudes are enduring.
He cites Switzerland: Switzerland, for example, is a country with strong patriotism, a fighting spirit of national defense, a commitment to freedom and tolerance, and a low crime rate. Yet its homeownership rate is just 34.6 percent, versus 66.2 percent for the United States, according to the two countries’ 2000 censuses.
Time for the government to rethink its homeownership policy?
Swiss national identity doesn’t depend on homeownership. Instead, Riccarda Torriani, a historian at the Swiss Federal Department of Foreign Affairs, links the country’s sense of identity to such things as its system of direct democracy, which enforces popular participation in government; the idea that its citizens are frontier people (living in or near the rugged Alps); and a history of collective courage in defense of freedom, even when outnumbered.
Update on 27th March 2010
Been asked what has this post to be with value investing or being cynical.
Answer: Question periodically the underlying assumptions of any piece of “conventional wisdom”. Juz because a genius like MM thinks that something is correct,doesn’t mean that the underlying circumstances may have changed since he made the initial decision. Take the “Stop at two policy”. Circumstances changed, and the policy shld have reversed earlier.
Reading this, I think I can understand the thinking of CapitaLand and other China property bulls. “Everyone agrees China is in the middle of a spectacular real estate boom. The question is whether it is in the middle of a rapidly growing real estate bubble.”
There’s serious money to be made in the short-term.
And a very reputable economist and China watcher, Nicholas R. Lardy at the Peterson Institute for International Economics in Washington, say the housing boom is being propelled by a huge urbanization push that is creating premium-priced houses. He is not the only economist to say this. And CapLand said this yesterday.
So if China is a core market, you really don’t have a choice. You got to double, triple yr bets, and pray hard that you get out in time.
Relevant posts
https://atans1.wordpress.com/2010/02/03/capland-what-price-the-mega-china-deal/
https://atans1.wordpress.com/2010/02/08/tlcs-in-china-groupthink-or-mastermind-at-work/
I read in the media yesterday that Credit Suisse analysts are saying that China’s property stocks, trading at the cheapest level among Asian peers, may be “worth another look”. Today reports that they “have underperformed the MSCI China Index by almost 30 per cent since July and are trading at a 7-per-cent discount relative to the region based on a model that values companies’ net assets and return on equity,” quoting Credit Suisse.
As CapitaLand’s 11% fall from its January highs can be attributed to its mega China deal coming just before China tightened its credit policies; since the US$2.2bn deal giving it seven sites located in Shanghai, Kunshan and Tianjin, takes the group’s Chinese portfolio to 36% of assets from 28%; and since it wants to increase its China exposure to 45% of assets: Shouldn’t CapitaLand be on the buy list of China- property bulls?
No, I’m not a member or covert supporter of Dr Chee’s SDP, always looking to run-down S’pore.
I try to be a “special situations” investor: looking for situations where the conventional wisdom is wrong. At present, the conventional wisdom on China is “Short-term bear, long-term bull”. So CapitaLand is punished by the market for their US$2.2 billion deal while, the seller, OOIL’s share price is stable in a weak market.
But CapitaLand and DBS already big in China, want to be bigger: and KepLand are rumoured to be thinking of doing a big( S$186 million) property deal. Temasek have big direct investments too. They are big investors in several private equity funds and have big holdings in two Chinese banks: 4% of Bank of China and 6% of China Construction Bank*.
They are going against the consensus view that the least one can do is to be cautious in China.
If the listed TLCs get China right, they could be 20-baggers. Hence my interest in whether they are right. As for Temasek getting it right, Temasek, as its CEO says, belongs to us S’poreans.
——————————————————
Additional tots — 15 Feb 2010
But what are the odds of them getting it right?
Adam Smith (the economist. not the great US financial commentator of the 80s) wrote, “the chance of gain is by every man more or less overvalued”.
This more or less explains why great investors (defined here to include traders) like Buffett, Soros, Paul Johnson, Jim Rogers, Peter Lynch, Anthony Bolton and the old Kuwait Investment Office are so rare. They are better at judging the odds of getting things right.
And why the smart people in Temasek and GIC make mistakes. They are just like the other ordinary smart people managing money in SWFs, endowments, collective funds, pension funds, insurance companies and other institutional investors.
And why the smart people in CapLand and KepLand could be wrong. They could be like the smart managers in Time Warner that decided to merge Time Warner with AOL, or the managers at Sembcorp when they decided to go into property and Delifrance.
———————————————
Incidentally, a BBC Online article examines what is driving the Chinese property market:
Demand for housing
Louis Kuijs, an economist at the World Bank in Beijing, says China still needed more houses, despite several years of fast-paced building, “In a rapidly growing country like China that still has a low stock of housing, there is a fundamental demand for new homes.”
Developers looking for sites
“In Beijing the search is still on for new sites for development.”
People still buying hses as an investment
One man says he has accepted an offer to relocate. He already has two apartments in Beijing and he is going to use the compensation to buy a third.
CapLand (and KeplLand?) could be right abt China.
*’We work really closely with Sasac, the state-owned enterprise regulator in China, and there are literally trillions and trillions of renminbi of frankly defaulting loans already in China that no one is doing anything about,’
Neil McDonald, a Hong Kong-based business restructuring and insolvency partner with Lovells LLP, said at an Asia-Pacific Loan Market Association conference last week. ‘At some point, there’s going to be a reckoning for that.’ — quote from BT.
The ace, veteran journalist from MediaCorp’s freesheet praises CapitaLand for the US$2.2 billion ($3.09 billion) purchase of Orient Overseas Development Ltd’s (OODL’s) assets comprising seven sites totalling 1.48 million square metres in Shanghai, Kunshan and Tianjin. OODL is the Chinese property arm of HK-listed OOIL, controlled by the family of former Hong Kong chief executive Tung Chee Hwa.
We are told of why it is a gd deal despite the subsequent curbs on property speculation by Chinese authorities (“a blessing in disguise”) and how CapLand’s CEO won a high stakes poker game by refusing to bid higher.
Gee wiz, the CEO sounds like some super hero in action.
The problem with this analysis is the share price of CapLand, down 13% from its high when the deal was announced and close to its October lows in last year. Meanwhile OODL’s parent is trading a lot higher than its October 2009 price, and the fall in HK, has affected it slightly.
Conclusion: mkt thinks CapLand got its timing wrong https://atans1.wordpress.com/2010/01/21/capland-but-is-he-lucky/
And trumpets pls https://atans1.wordpress.com/2010/01/19/capland-getting-it-very-right-or-very-wrong/
On a more serious note, the ace journalist had to concede that ” despite CapitaLand’s connections in China, it doesn’t wield the same clout as the Tung family in that country … The Orient land bank was acquired over some time, noted a China property source. He pointed out that on its own, CapitaLand wouldn’t probably have been able to accumulate this prime parcel on its own.”
Waz this? I tot we had MM Lee, the adviser to Chinese leaders? And didn’t S’pore Inc pay a treasure in Suzchou etc to be an “old friend of China”? Or is all these nothing but spin from our MSM? Or the fantasy of the S’pore government?
Napoleon had many good officers. So when he was appointing generals, he asked, “But is he lucky?”. He knew the importance of chance in his success and at his last battle, Waterloo, his luck ran out. But as one of the generals who defeated him said, “It was a near-run thing”.
The question buyers of CapLand on Tuesday should be asking is whether the mgt of CapitaLand are lucky? Two days after anncing a US$2.2bn China property deal, https://atans1.wordpress.com/2010/01/19/capland-getting-it-very-right-or-very-wrong/the Chinese authorities ordered a serious of credit tightening measures including ordering some commercial banks to stop lending for the rest of January. Global equity markets fell.
CapLand mgt could be lucky. Markets have a habit of shrugging off China fears. Remember the recent falls and recoveries?
But for the moment the seller’s mgt must be considered “lucky”.
CapitaLand is obviously not a bear on China.
CapitaLand has done a deal in China spending more than the S$2.7bn (US$1.9bn) it raised in November through an IPO of CapitaMalls Asia, its shopping centres subsidiary. (I had tot then lowering China exposure was the unstatedreason for the IPO.)
It bought for US$2.2bn seven sites located in Shanghai, Kunshan and Tianjin, taking the group’s Chinese portfolio to 36% of assets from 28%. It wants to increase its China exposure from 28% of assets to 45%. Hong Kong’s Orient Overseas International shipping group was the seller.
Funnily, this at a time when even the Chinese government is talking of a property bubble in China what with residential prices in the 70 main cities accelerated in November to the fastest pace in 18 months.
“Qi Ji, China’s vice-minister of housing and urban-rural development, has told the Financial Times that house prices have reached levels that were “obviously too high”, particularly in large coastal cities,” reports the FT.
Yes, yes: I know CapitaLand is into commercial space, offices and malls (Apartments are tagged on on the top). But recent US experience shows that the damage in the residential sector can affect the commercial sector.
Note that China super bull, Jim Rogers, is avoiding recommending property to investors: in 2008 he was negative about Chinese property.
Hedgies, make a bet that CapitaLand is wrong?
“You often find when your property is being sold that the agent tells you that the property is a mediocre one, but if you are on the buyer side, it’s suddenly the world’s best.”
Speaker was head of the Rey/Nouvion family office in Monaco, Laurent Nouvion, quoted in a recent Barclays Wealth report. Thanks to Today for this quote.
MM was quoted as saying, “If the country is going to go down, then economy will go down, people’s incomes will be down, unemployment will be up, then property values will go down.”
He is being modest. We have had a recession, but property prices have been on the rise . He should have said, “We ensure property prices go up even in a recession.” [In 2009, prices of resale flats rose by 8.2% and this in a recession :Addition on 29 Jan 2010]
A few months ago, a terrace house few doors away from my home was sold for $1.45m. The previous transaction along the row was a few years ago at $900,000. This had followed a transaction in 2000 0r 2001 at $950,000.
Well another house along the row is now on the market for $2m.
Thank you PAP.
Note the links were updated on 4 Jan 2010 for various reasons.
Thoughts of a Cynical Investor 