Year 2012 Holds a Lot of Promise for the Stock Markets

There are only a few more days left before we wave goodbye to a tumultuous year 2011 and cross over to year 2012, with much awaited hope and optimism. Indeed, there is much to hope for in the new year.

If history is anything to gauge from, I believe we are around six months away from a bull market. A typical bear market will last an average of about 9 - 18 months with an average 30% decline from its peak. From the highest point of 3313.61 on 9 Nov 2011 and currently standing at 2674.61 on 27 Dec 2011, we are slightly more than one year into the downtrend though the magnitude is only 19%. We believe the lowest STI can go should be at its support level of 2500 and not any lower. As a rule of thumb, the stock market is always forward-looking and usually move six months ahead of the economy. I firmly believe that those investors who are bold enough to buy into the low now will be rewarded handsomely later.

The rationale for optimism is not something airy-fairy. I believe the stock markets have taken into the worst-case scenario of a Eurozone recession and any bad news will be taken with good stride, notwithstanding a slight chance of another global crisis. Looking at some of the positive slew of data from U.S., I believe the economic superpower is in the course of a nice recovery into year 2012, alongside with China and other emerging countries. A Reuters' polls of economists shows that the U.S. will grow at a pace of 2.2% next year compared with zero growth in the Eurozone.

While China has been adversely affected by the plight of its largest trading partners, the European Union, we believe its huge internal consumption demand will still be the main driver of its GDP growth. I do not foresee any extreme measures undertaken by the Chinese government given the current investment climate and the declining property prices. On the other hand, though the depreciating rupee has caused some chaos this year, it is widely believed that India's central bank will ease their monetary policy to counter the slowdown in GDP growth. Lastly, Japan, another economic superpower, is also tipped to pick up in the fiscal year from April and should narrowly avoid a recession, according to a poll.

Moving forward into 2012, much is abounding in the stock market but it is only the fearless and the wise that will benefit. I wish all my readers a prosperous and blessed year of 'dragon'.

Noble Group Set to Benefit on Merger Talks

Chinese-controlled Yancoal Australia has approached Gloucester Coal to merge their neighbouring coal assets in a deal worth A$2 billion. This represents a hefty 42% premium of its current market capitalisation and will transform them into an A$8 billion coal giant. Both Yancoal and Gloucester have mines and projects in New South Wales and Queensland and we view the merger positively for them to create the scale of economies and synergy.

This is a shrewd move by Yancoal. Besides tapping into the strong demand in Asia, Yancoal is looking to take over Gloucester and use it as a backdoor route for listing in Australia. In this way, they save lot of time and resources and without having to bear the risk of issuing an IPO in this shaky environment.

Gloucester is 64 percent owned by Hong Kong-based Noble Group, which has a track record of buying junior miners, helping to fund projects, and then selling them out. We expect Noble Group, which already attempted to sell its stake in Gloucester to Macarthur Coal last year, to maximise the opportunity this time. Gloucester's shares have tumbled 42 percent this year to the current cap of A$1.4 billion, putting it in the 30 worst performing stocks among Australia's 200 biggest companies.

We believe Noble group can use the cash to acquire other undervalued miners, especially in this bearish environment where opportunities abound. Its Singapore-listed shares jumped 7 percent to S$1.195 on the prospects it would be able to sell its Gloucester stake for a profit before halted for trading. It is set to resume trading tomorrow.

GLP Strikes Again to Venture into Asset Management

Global Logistic Properties (GLP), an unit of the GIC Singapore, has formed a 50:50 JV with China Investment Corp to acquire a US$1.6bn logistics portfolio from LaSalle Investment Management, seeing strong demand for modern storage after the March earthquake. This is at an 8% discount to the portfolio’s latest appraised value.

GLP manages about $11.7 billion of facilities in Japan and China for customers including Amazon.com Inc. and Deutsche Post AG’s DHL International GmbH. The acquisition not only consolidates its market leadership in Japan but also provides a beachhead for the creation of an asset-management platform. GLP will become the asset manager of the portfolio with a new fee income stream by 3Q12. This transaction will boost the company’s revenue from fees generated from asset and property management.

We believe that the acquisition is a steal, given the cheap valuation in the Japanese property market and the recovering demand. The portfolio is 3% under-rented and hence presenting an avenue for organic growth. GLP’s balance sheet remains healthy with an estimated net gearing of a mere 0.4x. GLP is given a target price of $2.27 by one of the brokerage houses and is currently up 1.83% at $1.670.

Values Are Beginning to Show in the Chinese Market Too..

China's equities have hit their lowest level in nearly 33 months with gold and property companies leading the decline. This reflects both global and domestic concerns. At the global level, sentiment has been undermined by the escalating sovereign debt crisis in the Eurozone. In China, fears about inflation, rising interest rates, an overblown property market and non-performing loans in the banking sector have hit confidence.

The benchmark Shanghai Composite Index, which tracks both A and B shares touches 2206.52 briefly, its lowest level since it closed at 2223.73 on March 18, 2009, before trading at 2223.13 now. Most analysts expect the stock market to keep falling in the short term and to end this year near 2200.

We see that consumption growth is still the main driver in China with higher wages leading to more spending power. Consumer demand will become an increasingly important factor in the Chinese economy as the country moves away from a growth model based on exports. On a technical perspective, the index is poised for a rebound if it can close above 2200 level. Investors who want exposure to China can either buy H-shares, ETFs or unit trusts.

A Tale of Two Markets - Stock and Property

We believe that the introduction of the Additional Buyers' Stamp Duty (ABSD) had exacerbated the decline of the private property market in Singapore. Under this rule, foreigners are required to pay an additional 10 percent stamp duty when acquiring residential property. PRs who purchase second and subsequent homes and Singaporeans who buy third and subsequent homes have to pay an extra three percent stamp duty.

Though some investors thought that money could still be made in properties even with the slowing down of the global stock market, we believe otherwise. It is observed that the fate of these two markets is intertwined and it is just a matter of time before the property market will follow suit the stock market. We estimate that the property market might decline as early as first quarter next year, with a time lag of six months in between each other. This is due to the dissipating 'wealth effect', possible credit crunch and the uncertainty of the economy ahead. Moreover, as an open economy, Singapore is susceptible to the outflow of capital which is always in search of higher yield. We estimate that the property market will only recover at least six months to one year after the stock market has rebounded from its low.

We also believe that the ROEs of the property developers will be adversely affected and continue to underweight property sector, particularly City Development and Ho Bee with its concentrated portfolio. It is not advisable to bottom-fish now unless investors are prepared to wait.

Valuations Are Beginning to Look Attractive for Japanese Equities

TOPIX bounced back sharply after falling to a post-Lehman failure low of 701 on March 12, 2009 and rising two months later to 885 and three months later to 951. On November 24, 2011, TOPIX had fallen to 706, approaching its post-Lehman failure low and closed at 716 today. According to Citi’s Japanese Equity Strategist, Kenji Abe, valuations and corporate profits are looking attractive now and 2012 could well see another spectacular rebound for the Japanese market.  

Though he suggested that the rebound is likely to hinge on the ability of the euro zone nations to formulate an adequate response to the current crisis, we think there is some quick money to be made over these few months. Investors who wish to position themselves for the rebound in general can look at Schroder International Selection Fund Japanese Equity Alpha USD (http://www.fundsupermart.com/main/admin/buy/factsheet/factsheetSDIJEA.pdf). It has an alpha return of 9% over three years and invests primarily in undervalued equity (P/E of 12.2 versus 14.4 of benchmark). We believe investors will be handsomely rewarded if they can catch the bull at the right time.

Disclaimer: This is not an investment advice or recommendation. Investors should seek the advice of their financial adviser first before making any investments.

Can Unit Trusts Still Make Money for Investors?

A friend asked me recently whether it is still good to buy unit trusts given that the markets are in doldrums now. In turn, I asked him what he wants from his investment in unit trusts. As quoted in the novel 'Alice's Adventures in Wonderland' by Lewis Carroll, “If you don't know where you are going, any road will get you there.” To understand the features, risks and benefits of investing in unit trusts,refer: http://www.moneysense.gov.sg/resource/publications/guides_publications/MoneySENSE_UT_Guide.pdf.

Unit trusts are the best tools for diversification or even asset allocation when put together as a portfolio. It is one of the the most effective ways to gain exposure to the markets when they were to recover from this crisis. Remember March 2009 when the markets rebounded more than 50% from its low after the Great Financial Crisis (GFC)? I sure do. Investing in unit trust make sure you stay invested throughout and not miss the rally.

Again, my friend asked whether does it make sense to invest all his money at one go or in stages. With this current sentiment, if you have a sum of $100,000, you might want to do it in stages, say $20,000 a time. This would ensure that you have the ‘bullets’ to take opportunity of the market if it goes lower. Moreover, unit trusts allow us to participate in dollar cost averaging through the monthly regular saving plan. This allows investors to buy more units when the market is low and thus average out our buy-in prices.

Essentially, you pay a front-end load of 2%-5%, depending on the types of unit trusts, and the annual management fees. Just as you won't go to a plumber for diagnosis when you are sick, investing is best left to the professional fund managers. So if you insist an answer to the above question, it is an absolute 'yes' provided you use it appropriately.

How to Make Money In a Bear Market - Part II

I read with interest the article by Straits Times' Senior Correspondent, Mr. Goh Eng Yeow, on how to make the most out of the bear market now. Specifically, he urged readers to suspend the usual 'buy-and-hold' strategy, and instead adopt a more opportunistic approach to benefit from the wild price swing. On a practical note, investors should buy into blue-chip stocks when they are badly bruised and sell them off when the rebound comes.

I agree with his view, knowing that 'market timing' is one of the elements that will earn you 'alpha', which is the excess return over benchmark. The other elements being asset allocation and stock-picking skill. While you can earn excess returns through asset allocation by investing in ETF or unit trust as a portfolio, and read lot of research reports to minimise the error of picking the wrong stocks, it does require skills, experience and lots of courage to buy when the market is selling.

The way I see to mitigate risk and even make money now is through the use of options/derivatives (futures, CFDs), whether it’s a covered call to generate income or a protective put insuring a holding or pair trade. Investors should be aware that it’s no longer sufficient to hold just a balanced portfolio of 60% equities/40% bonds in this dynamic marketplace.

The reality is that clients should be empowered to do their own investing and not depend solely on their wealth managers. They should determine their risk tolerance and then choose the vehicles that fit that tolerance. Most of us have in the past been resigned to pay a manager to do just this but with the rise of these products -- derivatives, ETFs, powerful platforms and education etc. – everyone is empowered to manage and execute the plan that they have developed.

Make or Break for the Eurozone...and the World Economy

Just how bad will the European debt crisis pan out? According to economists from Citigroup, sovereign and banking crisis in the Eurozone will lead to a protracted recession. They forecast the real GDP for Eurozone to contract for 6 consecutive quarters and not get back to previous peak levels for many years to come. Specifically, they singled out non-European companies with significant revenue exposure to the region, such as Johnson Controls, Paccar, Nikon, HTC and Cochlear to be most adversely affected.

As the Continental European Banks are amongst the most leveraged in the world, further deleveraging may weigh on credit growth in Central and Eastern Europe which is most reliant on Euro Bank financing. However, US and UK Financials are believed to be able to benefit from the plight of their Euro peers. Euro exporters and Emerging Market equities will outperform as they benefit from a weaker currency and easier policy.

At this juncture of writing, European leaders are racing against time to come out with a more convincing deal to resolve the continent's debt crisis. With the fate of the members and their financial system so closely intertwined, the leaders are doing everything they can to stop the fiscal body and currency from tumbling. With so much at stake, we think it's just a matter of time an agreement will be reached, followed by a relief rally.

Singapore Property Developers & Investors Dealt Another Blow....

The Singapore government aims to take the heat off property market by introducing yet another tightening measure: additional buyers’ stamp duty (ABSD) in 8 Dec 2011. This is in addition to the Jan 11 cooling measures and is deemed harsher as it directly affects buyers’ investment margins and developers’ ability to price. The prices of luxury properties will correct at least 20% latest by next year, coinciding with the slowdown in global economy, while the demand for mass-market units shall remain steady

According to statistics, foreigners made up 19% of private home sales in 2H11 and 36% of new units sold YTD. A foreigner will now need to pay 13% more for a property while investors must be prepared to pay 6% more, with the introduction of ABSD. In addition, PRs buying their second and subsequent properties will have to pay an ABSD of 3% (6%), while Singaporeans buying their third and subsequent residential properties will also pay an ABSD of 3% (6%). First-time Singaporean private home buyers and buyers of HDB flats will not be affected.

Investors shall underweight property counters for the time being and continue to buy REITs for its dividends and defensive in nature. Meanwhile, CityDev is highlighted as the top underperform by most brokerage houses.

ComfortDelgro's New Fare Structure Impact Revenue Positively But Draws Flak from Commuters & CASE

ComfortDelgro has announced revisions to its taxi fare structure, which is set to kick in on December 2012 and coincide with the festive shopping. A surge in taxi service demand and rising costs were cited as the key drivers for the revision. The previous fare adjustment was in Dec 2007.

Specifically, flag down, distance and waiting time fares will rise 4-10%, with the flag down fare for Limousine taxis expected to jump 20% (to S$3.90). The morning and evening peak hours will be lengthened - e.g. the weekday morning peak period will start at 6am (vs current 7am) while the evening peak period will stretch from 6pm to midnight (vs current 5-8pm). The evening peak period and city area surcharges will be extended to Sundays and public holidays. Finally, current call booking fees will be lowered by 6-8% but advance booking fee will rise 54% to S$8 (vs current S$5.20). Limousine taxi booking fees will increase 13-25%.

ComfortDelgro is the first taxi operator to announce fare adjustments and it is likely that other taxi companies will follow suit, given that they are faced with the rising cost pressure too. As the leading operator in the industry (with a taxi fleet of 15k), the drop in revenue, if any, would be momentarily and short-lived.

We think that the revised fare revision will have a positive impact on ComfortDelgro’s bottom-line whereas any impact on the commuters will be dependent on their specific travel pattern. Given that this is a deregulated sector, any intervention from CASE will only moderate the increment.

More Downside To Singapore Developer Stocks - Morgan Stanley

For investors who are looking to buy into any property or property stocks might want to think twice now. According to Morgan Stanley, there is as much as 25% downside to Singapore developers' stocks, based on its view that residential prices will correct 20% over the next two years. They suggest that the property sector will only improve toward end of 2012.

The concerns over residential include slower GDP and population growth leading to supply imbalance, and has a bear case of a 40% drop in prices. It says developers are trading at around 20% discount to RNAV and still a far cry from its historical trough at around 60%.

They do not expect a draconian discount during this cycle as balance sheets are stronger, and bank system liquidity as well as end-user affordability is high. However, it says continued fears over global macro and downside risks to Singapore property prices could mean that the stocks could trade down to a 40% discount.

Though it is in our view that Singapore HDB and resale market should be quite resilient to any slowdown in economy, existing private home-owners should brace themselves for any fall in prices and rental income. Investors who want exposure to the sector can consider REIT which is defensive in nature and pays dividends regularly.

S&P threatens to Downgrade17 Eurozone Members - The Ultimatum

Patience for Standard & Poor's is wearing thin as it warned it may carry out an unprecedented mass downgrade of Eurozone countries, if EU leaders fail to deliver a convincing financial and political solutions on how to solve the region's debt crisis in a summit on Friday, according to Reuters.

It said ratings could be lowered by one notch for Austria, Belgium, Finland, Germany, the Netherlands and Luxembourg, and by up to two notches for the remaining nine placed under review, including currently AAA-rated France. Cyprus was already on downgrade watch and Greece already a 'junk' CC-rating.

President Nicolas Sarkozy and Chancellor Angela Merkel told reporters that their plan included automatic penalties for states that fail to keep deficits under control, and an early launch of a permanent bailout fund for euro states in distress. Whether this is good enough to resolve the crisis and restore investors’ confidence remains to be seen but any move of advancement are likely to bring cheer to all parties.

As the rating agency was widely criticised for their inertia during the Great Financial Crisis (GFC) in 2008, they would be adamant not to repeat the same mistake again by erring on the side of caution.

A Chinese Story: How China Plays Its Part in the European Crisis

Any hope that China will come as a white knight to the rescue of the European countries is dashed when Fu Ying, its Vice Foreign Minister, said that "China cannot use its US$3.2 trillion in foreign exchange reserves to save other countries". This is Beijing’s strongest rebuttal yet to the talk that they will bail out the European countries.

However, this crisis has provided a golden opportunity for the Chinese government to buy into any European quality names which is too good to miss. We believe that any bailout will come in the form of investment rather than purchase of bonds.

Despite the latest cut of its Required Reserve Requirement (RRR) by 50bps since 2008, the Chinese government reiterated that it is not their intention to loosen the property control but rather to help ease the liquidity problem in the economy. This signifies that China is still battling with its own set of problems, with high inflation and slowing economy their utmost concerns.

Bearing these in mind, Investors are therefore advised not to get carried away by the RRR rally and forget that the big global macro overhang remains, with the European crisis far from over.

Signs of Recession? Not in China...

The Hong Kong Stock Exchange is buzzing with activities while its European and U.S. counterparts see lacklustre performance due to a significant reduction in trading and listing activities. Haitong Securities, China's second-largest brokerage by total assets after Citic Securities, is selling 1.229 billion shares (worth US$1.67 billion IPO), with European private equity firm Warburg Pincus planning to take a cornerstone role.

Meanwhile, Chow Tai Fook Jewellery Group Ltd.'s up to US$2.8 billion Hong Kong IPO was also fully covered by Tuesday, a day after it started taking orders. The gold and diamond jewellery retailer, which has more than 1,500 shops mainly in China, counts George Soros, the retired infamous hedge fund manager, as its main buyer. He was said to have snapped up US$40 million worth of shares while Lee Shau Kee, chairman of Hong Kong property giant Henderson Land Development Co., had also bought HK$500 million (US$64 million) worth of shares.

Also taking orders is the up to US$2.28 billion Hong Kong-Shanghai IPO of New China Life Insurance Co. New China Life has already secured four cornerstone investors who have pledged to buy a total of US$780 million in the Hong Kong tranche: Singapore-listed insurer Great Eastern Holdings Ltd., Malaysia's sovereign wealth fund, Khazanah Nasional Bhd., hedge fund D.E. Shaw & Co., and Asian private-equity firm MBK Partners.

Apparently, the smart money is pointing to us the region to where we should put our money in the midst of this turbulence. While they see value and opportunities in the future, the retail investors are fixated on the current dire situation. It is no wonder that the rich can only get richer.

The Day When The Global Markets Throw A Party...

The U.S. market surged 4% and closed at their day highs while the Germany's DAX surged 5% and paced an advance across the Eurozone.

This came after a coordinated effort by European Central Banks, the Bank of Japan, the Bank of Canada, and the Federal Reserve to pledge liquidity to troubled banks by increasing swap lines that allow additional dollars to flow through to the banking system. Effectively, it is now cheaper for the EU to get liquidity because the Fed cut rates on dollars they lend to EU banks in exchange for their currency. Interestingly, this came a day after S&P's downgrade of the major financial institutions and for the time being, alleviated the fear of another round of credit crunch.

China, on the other hand, lowered the bank reserve requirement ratio by 50bps for the first time since 2008. Despite their battle for inflation and asset bubble, they are concerned that a downfall of the Europe, one of its major trading partners, will have a drag on its economy.

 

So the fact that banks around the globe now should have an easier time of tapping short-term funding in the credit markets is encouraging. But this might not be the long sought after magic bullet solution. If the issue is one of solvency and not of liquidity, we are merely kicking the proverbial debt can a little further down the road before we will have to pick it up one day.