Asset Returns in the Medium Term

I believe that 2015 will be a very important year for investors. Here are the reasons:  1. In the US, tapering will end on Oct 2014. Short term rates are likely to step up in 2015. SGD rates follow the US and many retail investors have been "suckered" into buying low yelding bonds on "perceived good quality". e.g. CapitaLand 3.8% for 10 years! Many retail clients will see paper losses for their bond portfolios.  2. In the EU, QE will begin in 2014 but could end in 2015 as the Eurozone finally recovers.   3. China's property bubble continues to deflate as more developers cut prices more aggressively.   4. Real estate in many cities where yields are as low as borrowing costs, e.g. Singapore shops, industrial and residential, could see more defaults. Shops are asking for 2 -3% gross yield, while borrowing costs are between 1.8 - 2.2% for commercials. Residential mortgages are between 1.3 - 1.8% for fixed and 1% - 1.1% for floating. Next year, mortgages could rise by 100 bps across the board and many weak holders will be forced to sell. After several rate hikes in the US, assets that depend on leverage, like real estate will start falling.  It is in 2016 where I see the inflexion point. All the bad investment habits, where retail mom and pops buy a 3.8% bond and leverage on 1% cost will see their positive spread disappear. We could see the global economy going back towards a recession in 2017...  If you wish to buy more properties anywhere in the world, you'd do well to wait till 2015.

The medium term investment return potential for major assets is still constrained | Shane Oliver

• Michael Yardney
• Michael Yardney's Commentary, Property Investment
• August 31, 2014

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In a recent economic commentary Dr Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital says the low investment yields from most major asset classes mean the medium term return outlook remains constrained.
Here’s what he had to say:

Most investment analysis and commentary is focused on the here and now and the implications for investment markets just a little bit ahead.
First, such return projections are a critical driver of the strategic asset allocation (SAA) to each asset class (shares, bonds, property, etc) within traditional diversified investment funds.
But getting a handle on the return potential for major asset classes over the medium term, ie the next five years or so, is of value from several perspectives.
Second, and more fundamentally, it gives a great guide to return potential between asset classes, which helps inform asset allocation generally.
For example we use medium term return projections as part of our Dynamic Asset Allocation process.
Finally, it can help provide a guide to what sort of returns investors can expect beyond the short term.
After a couple of years of double digit returns from shares and balanced growth superannuation funds there may be a temptation to assume we have now returned to a world of ongoing double digit returns.
But this could be mistaken if it’s not sustainable.
This note takes a look at the medium term return potential for major asset classes and what that means for investors.

Getting a handle on return potential

The first thing to note is that simply taking a long term average of historical returns for each asset class and using that as a guide may be use, but often offers little guide to their medium term outlook given the significant impact of starting point valuations (eg, if current yields are significantly lower than normal then this will constrain returns relative to any long term norm) and the broad economic environment.
Another approach may be to come up with a bunch of themes and start from there. But without a framework in which to place them this can simply lead to a muddle.
So our approach is to go back to basics, recognising firstly that the components of the return flowing from an asset are the yield (or income flow) it provides and capital growth and secondly that the starting point yield is key, ie, the higher the better.
Then apply themes around this where relevant.
We also prefer to avoid a reliance on forecasting and to keep the analysis as simple as possible.
Complicated adjustments can lead to compounding forecasting errors without any value in terms of the broad message.

• For equities, a simple model of current dividend yields plus trend nominal GDP growth (as a proxy for earnings and capital growth) does a good job of predicting medium term returns.
  This approach allows for current valuations (which are picked up via the yield) but avoids getting too complicated¹.
  The next chart shows this approach applied to US equities, where it can be seen to broadly track big secular swings in returns.

Source: Thomson Reuters, Global Financial Data, AMP Capital

• For property, we use current rental yields and likely trend inflation as a proxy for rental and capital growth.
• For unlisted infrastructure, we use current average yields and capital growth just ahead of inflation.
• For bonds, the best predictor of future medium term returns is the current five year bond yield. In other words capital growth is zero because if a five year bond is held to maturity its initial yield will be its return.

Medium term return projections

This framework results in the return projections shown in the next table. The second column shows each asset’s current income yield, the third their five year growth potential and the final column their total return potential.
Note that:

• We assume central banks meet their inflation targets over time, eg, 2.5% in Australia and 2% in the US.
• We allow for forward points in the return projections for global assets based around current market pricing – which adds 1.8% to the return from world equities (Australian interest rates above that in other advanced countries) but detracts 1.9% from emerging equities.
• The Australian cash rate is assumed to average 3.5% over the next five years. This is one asset where the current yield is of no value in assessing the asset’s medium term return potential because the maturity is so short.
  So we assume a medium term average. Normally, for cash this would be around a country’s medium term nominal growth rate, but we have made an allowance to adjust for higher than normal bank lending rate margins over the cash rate and higher debt to income ratios which have increased the interest sensitivity of households, and in turn pulled down the neutral cash rate.
• The Australian equity return adjusted for franking credits (that adds about 1.4% pa) is shown in brackets.

# Current dividend yield for shares, distribution/net rental yields for property and 5 year bond yield for bonds.
^ Includes forward points.
* With franking credits added in.
Source: AMP Capital

Thematics

Several themes have been reflected in these projections:

• Low inflation – while inflation worries abound reflecting the quantitative easing programs of the last few years, this is likely to be offset by continued global excess savings and spare capacity along with central banks being mandated to meet inflation targets.
• Aging populations – resulting in slower labour force growth than seen over the last twenty or so years and a demand for yield bearing assets with less focus on capital growth.
• Slower household debt accumulation – the surge in household debt growth seen in the decades prior to the GFC looks to have run its course with tougher bank lending standards and more cautious consumer attitudes.
• The commodity super cycle has turned down – on the back of slower growth in China and increased commodity supply. This will act as a constraint on growth for some emerging markets (eg South America) but benefits commodity user regions (such as Asia, Europe and Japan).
  It also means the terms of trade has gone from a tailwind for Australian growth and profits to a headwind. To allow for this we have reduced nominal capital growth potential by 0.5% pa for Australian shares.
• Technological innovation – with its intensified focus on labour saving (eg robotics, 3D printing) it is likely good for productivity and corporate margins but ambiguous for consumer spending.
• Reinvigorated advanced countries versus emerging markets – while the emerging world still has a higher growth potential (reflecting its lower starting point) it’s likely to be slower over the decade ahead than last decade reflecting a slowdown in economic reforms but at the same time the US, Europe and Japan appear to be reinvigorating themselves after a tough decade (or two in the case of Japan).
• A multi-polar world – the end of the cold war and the stabilising influence of the US as the dominant power helped drive globalisation and the peace dividend post 1990. Now China’s rise and Russia’s retreat are arguably resulting in a more difficult environment geo-politically.
• Backtracking on free markets in parts of the world – a greater scepticism of unfettered markets and increased focus on regulation post the GFC.

Most of these will likely have the effect of constraining returns.
But not universally so.
Technological innovation remains positive for profits and the renaissance in the US, Europe and Japan is very positive.

Observations

Several observations flow from these projections.

• While advanced countries may have exited a secular bear market, return potential is still constrained.
  The starting point for returns today is less favourable than when long term bull markets started in bonds and equities in 1982 (with much lower investment yields today) & the thematic backdrop is less favourable. Our medium term return projections imply a 7.7% pa return from a diversified mix of assets.
  This is well below the 11.9% pa return Australian super funds saw over the 1982-2007 period which was underpinned by the combination of high starting point investment yields and very favourable investment thematics with the shift from high to low inflation, deregulation, easy credit, globalisation, the peace dividend, the IT revolution, favourable demographics and finally for Australia a surge in commodity prices.
• Sovereign bonds offer low return potential – after a thirty year secular decline in bond yields the combination of very low yields and the risk they will rise resulting in capital loss implies low medium term return potential.
• Unlisted commercial property & infrastructure continue to come out well reflecting their relatively high yields – but don’t forget their illiquidity.
• Australian shares stack up well on the basis of yield, but it is hard to beat Asian ex-Japan shares for growth potential and traditional global shares offer improved prospects.

Implications for investors

There are several implications for investors:

• First, have reasonable return expectations. The world is in far better shape today than at any time since the GFC but don’t expect year after year of double digit returns.
• Second, asset allocation remains critical reflecting: the relatively constrained medium term return potential; a likely wide range in returns between major asset classes; continued bouts of volatility (eg as extreme monetary policy conditions in the US and elsewhere are eventually unwound); and as the correlation between bonds and equities remains low (in the absence of a common driver like falling inflation provided in the 1980s and 1990s).
• Third, there is still a case for a bias towards Australian shares, particularly for yield focused investors, but with traditional global shares looking a bit healthier after a long tough patch have a bit more offshore.
  Asian ex-Japan shares are preferred relative to emerging market shares generally.
• Fourth, focus on assets providing decent sustainable income as it provides confidence regarding returns.
  Commercial property, infrastructure, quality yield shares and investment grade credit stack up well here.

Why I Prefer Asian Local Currency High Yields

Published August 27, 2014

Upside in Asian bonds if US lifts rates

By

genevieve cua

 

         

Valuations speak volumes

INVESTORS in fixed income assets see potential rate hikes in the United States as a big bugbear. But Rajeev De Mello, Schroders head of Asian fixed income, see pockets of opportunity, particularly in the rate differentials that local currency Asian bonds offer over US Treasuries.

This reflects the fact that Asian economies are at differing points in their monetary policy cycle, relative to the US. When rate cuts were widespread in Western economies following the 2008 crisis, many in Asia actually raised rates.

My comments: Asia and Emerging Countries are actually experiencing yield curve inversions. In such cases it means they are likely to enter a monetary loosening cycle. This is very beneficial for bond prices, especially for local currencies.

"Now we are at a point where rate cuts are being instigated in parts of Asia, and this is where we believe value can be found. China was tightening until February this year, but the government has now started cutting rates. This loosening is positive for bonds, and we see similar opportunities in India and Indonesia."

Mr De Mello, whose unit manages US$8.5 billion in Asian fixed income, said that Asian yields are at an "interesting" level compared to the US.

"While US's 10-year (Treasuries) is at 2.4 per cent, India's 10-year bond is at 8.5 per cent, and Indonesia's at 8.3 per cent. That's a nice cushion even though investors have currency risks. In those countries that have hiked rates, bond yields are substantially higher than the US and that's a huge opportunity."

In the corporate bond space, there are also opportunities in the spread differential between Asian and US investment grade and high yield bonds. Investors have to weigh their investment horizon against the probability and expectation of a rate hike in the US. The widespread expectation is a rate hike in mid-2015, he added.

"We have to be realistic. The Fed will probably start hiking rates in a gradual fashion from the middle of next year. If the increase is in June or the third quarter, and investors are short term, they will have to be cautious about any bond linked to the US."

He said that markets appear to have priced in hikes of about 100 basis points, starting perhaps in June 2015, and another 100 basis points 12 months after that. To date, demand for income has remained strong, and corporate issues particularly in Asia have been snapped up. This has led, however, to a deterioration in quality.

"Issuers have become more fussy on the conditions and guarantees they are willing to give to buyers. Covenants have been loosened in high yield, and companies of lower rating have been able to come to market . . . Those themes accompany the advanced part of the cycle, although I wouldn't say it signals an end."

In screening for corporate issues, the firm scrutinises financial metrics, particularly cash flow and leverage. It seeks out companies where leverage ratios are healthy and expected to improve, and where management is focused on cash flow rather than just on earnings and earnings growth. It also monitors the impact of currency movements on a company's liabilities and ability to service debt.
One positive underpinning is that default rates in Asia are expected to remain low. "Default rates rise when growth slows and when central banks start to hike rates which causes slower growth or big currency movements. None of those are obvious now. So we're comfortable about default rates."

Does Religion Make The World A Better Place

Religion serves many purposes.

1) it gives believers a sense of comfort that there is something beyond life, that our loved ones may somehow go to a better place if they play by certain rules.

2) it gives some people moral compasses.

3) it gives others a sense of identity, just like a football club supporter. I'm not trivialising religion. All I'm saying is that in certain societies, belonging to a certain tribe, certain race, or supporting a certain football club gives them an identity. E.g. supporters of Man United believe in a certain set of values.

Religion causes a lot of problems as well:

1) When you start to believe without questioning. E.g. Allah / God says so in the scripture, so it must be true. If a certain verse commands you to kill a certain group of people, it must be right.

2) believers fail to use their common sense, or internal set of moral values to decide when to obey and when to question.

3) when it oppresses certain groups of people, e.g. genital mutilation of women, women not allowed to receive education, to drive, or non believers are excluded from certain rights, e.g. non Jews are not allowed housing in Israel.

4) Killing in the name of religion. The Crusades, Al Qaeda, ISIS, Israel vs Palestine.... I was shocked by the Syrian government using chemical weapons on the children. I was equally, if not more shocked to see ISIS beheading Christian children, and the Muslim world largely silent on this issue. For the record I also do not support the Israelis bombing civilian buildings. There has to be a peaceful two-state solution...

5) I see a lot of hatred on the internet, whereby people of certain religions judge others harshly, making sweeping, racist statements.... e.g. Americans have a problem with abortion, the Chinese are immoral and leave their parents in old folks home.

People who see the world as black and white are the most dangerous lot. Studies have shown that those who are fervent followers of certain religions tend to have lower IQ... It's as if there is no room for grey area, only a Holy Book or Teachings, where things are either BLACK or WHITE.

We already have a lot of threats to contend with: global warming that threatens a quarter of the world's population, machines replacing humans in the job market, racism, gender equality, to have to contend with the problems created by religion.



 

Why I Am Overweight In Properties

The reason I chose property investing after a foray into share investing is that the overall return-to-risk ratio was clearly better for me. I could access information about property markets that ordinary homeowners weren't even aware of. Since homeowners drive the market, I was ahead of them in terms of knowledge so I could outperform the average property growth rates.

On the other hand, the fund managers who drive the share market had access to information I couldn't obtain, so it was hard for me just to keep pace with the MSCI World Index. And of course there was always greater volatility and uncertainty in the stock market.

 

Is the Chinese Recovery Sustainable?

I often wonder what I shall be investing now... My current thoughts are as follows:

1. I would still be buying stocks through global dividend and balanced funds.

2. I would pick up high yields with good quality credits. I know it sounds contradictory but there are lots of good companies that did not get good ratings.

3. Between now until mid 2015, I will not be buying any more properties. Here are the reasons why:

a. The UK may hike rates in late 2014, the US from mid 2015.

b. China's real estate property bubble may unravel. I am very sure more non-state-owned developers will default, more developers will cut prices and Chinese banks will face stress.

c. because of (a) and (b), I will stand on the sidelines and digest my recent acquisitions until the rental cashflow is well above my mortgage rates.

d. I could see the decline in property prices accelerate in countries like Singapore where rate rises in 2015 is partnered by over supply.

Do read the article below and my comments.



China Home Glut May Worsen as Developers Avoid Price Drop

By Bloomberg News Aug 7, 2014 2:24 PM GMT+0800

 

Photographer: Peter Parks/AFP via Getty Images

The eastern Chinese city of Nanjing's construction of the Metro station on Oct. 29, 2013 Close

 

The biggest immediate risk facing China’s economy is about to get worse.

A reluctance among some developers to sell units at prices lower than they could fetch just months ago threatens to cause a swelling in unsold properties. The worsening glut would extend a slide in construction that’s already put a drag on the world’s second-largest economy, and counter policy makers’ efforts to stimulate the real-estate industry with loosened rules.

In Nanjing, eastern China, nine housing projects originally planned for sale in the first half of 2014 were held for later this year, consulting firm Everyday Network Co. says. The number of homes added to the market in July in 21 major cities dropped 25 percent from June, according to Centaline Group, parent of China’s biggest real-estate brokerage.

“The completed apartments will be in the marketplace sooner or later, and potential buyers will continue to expect prices to fall,” said Hua Changchun, China economist at Nomura Holdings Inc. in Hong Kong. “The property-market weakness hasn’t changed, despite the policy adjustments.”

July economic data due over the next week, starting with tomorrow’s trade numbers, will give a sense of how well growth is holding up after accelerating to 7.5 percent in the second quarter from a year earlier. The statistics bureau releases inflation figures Aug. 9, followed by industrial production, fixed-asset investment and retail sales on Aug. 13.

Photographer: Brent Lewin/Bloomberg

A man looks at a model of the Future City residential development displayed at a real estate kiosk in the central business district of Guangzhou, China. The floor space of unsold new apartments nationwide on June 30 surged 25 percent from a year earlier, government data show. Close

A man looks at a model of the Future City residential development displayed at a real... Read More

Credit Measure

The central bank reports lending and money-supply figures by the middle of August. China’s broadest measure of new credit rose in June to the highest level for the month since 2009, underscoring the role of debt in supporting expansion. Home-price data for cities are due from the statistics bureau on Aug. 18, after June prices fell from the previous month in 55 of 70 cities tracked by the government.

China’s home sales slumped 9.2 percent in the first half of this year from a year earlier, following a full-year 26.6 percent increase in 2013, while new-property construction plunged 16.4 percent. Developers are responding with sales delays and discounts as well as incentives including no-down-payment purchases and buyback guarantees.

Developers’ sales delays in the first half were “very widespread” because prospects were poor given weak demand and tight credit conditions, said Donald Yu, a Shenzhen-based analyst at Guotai Junan Securities Co. “Will the increased supply lead to declines in prices in the second half? That for sure will happen.”  (Me: If developers delay or cut their sale prices, their margins will decline. Because their holding costs could be over 15% per annum, some developers could go under. Already, the shadow banking system is being curbed. The source of precious liquidity is capped.

The victims could be retail clients who lapped up Chinese developer bonds. The Chinese banks and developers have been wisely pushing out debt to the retail investors, instead of keeping it within the banking system, risking instability if NPLs rise).

Unsold Homes

The inventory of unsold new homes in 20 large cities jumped to an average of more than 23 months of sales in June, according to Shenzhen World Union Properties Consultancy Inc. data compiled by Bloomberg News. The floor space of unsold new apartments nationwide on June 30 surged 25 percent from a year earlier, government data show.

(Me: when inventory falls below 6 months, e.g. the US, it is a BUY. Prices usually rise. When inventory rises above 12 months, it is a SELL. Prices usually fall. China's unsold inventory is well above 22 months).

“Should future demand for property be met increasingly from running down these inventories rather than from new supply, construction activity would also slow significantly,” Moody’s Investors Service said in a report last week.

Developers seeking to sell yet-to-be-completed homes in China must apply for local government approval first. In July, the companies gained permits to sell about 7 percent less housing space than they received in June, according to data on 40 cities compiled by Centaline.

On Sidelines

“Developers have been unable to build up adequate client interest as buyers are still waiting on the sidelines,” said Zhang Haiqing, Shanghai-based research director at Centaline. “They’re also worried that excessive price adjustments may reinforce the wait-and-see mood, and therefore they’re choosing to put out small amounts to test market demand.”

Developers are normally required to begin selling within two weeks of obtaining pre-sale permits, Zhang said.

The average new-home price in 100 cities tracked by SouFun Holdings Ltd., owner of a real-estate website, fell 0.8 percent in July from June, the third consecutive month of declines.

Twenty-eight Chinese cities have eased home-purchase curbs through Aug. 4, according to SouFun. The loosening hasn’t boosted sales, as mortgage restrictions from the central government remain in place and buyers are still hesitant, data provider China Real Estate Information Corp. said last week.
“All of these will be helpful in mitigating near-term pain, but the combined impact will be unlikely to reverse the downtrend,” Societe Generale SA economists, led by Yao Wei in Paris, wrote in a report yesterday. “Recent trends appear to indicate precisely how concerned local governments are about the current pace of deterioration of the property sector and how grim the outlook seems.”

‘Worst Times’

Construction is slowing and inventories of unsold homes will keep rising without an increase in sales, Standard Chartered Plc said in a report yesterday, citing its quarterly survey conducted in June and July of 30 developers, most of which are small and unlisted. “Our survey suggests that the worst times for China’s real-estate sector are still ahead,” economists Lan Shen and Stephen Green wrote.
Shimao Property Holdings Ltd. (813), a Hong Kong-based developer, delayed sales in the first half in cities with high inventories including Ningbo and Hangzhou due to weak demand and cut prices for some homes, said Tammy Tam, a spokeswoman.

The company also brought forward sales at higher prices in some cities including Nanjing, Tam said. The average price at Shimao’s Junwangshu project rose to 17,500 yuan ($2,850) per square meter in July, from 17,100 yuan in June, according to Sohu.com Inc.’s real estate portal.

Cash Flow

Some developers are deciding to offer only a portion of homes built instead of entire projects. In central Wuhan, developers since April have typically offered less than 70 percent of homes in projects with pre-sale approvals, while some companies in Shanghai are selling homes in small batches, according to Centaline.

The delays mean lower cash-flow for developers. Smaller ones face “massive” debt-repayment pressures, as cash and equivalents at 137 mainland China-listed real estate companies, excluding four of the largest, were sufficient to cover just 74 percent of their short-term liabilities in the first quarter, according to Shenzhen World Union. That’s less than half the average ratio of the other four, including China Vanke Co. (2202)

Greentown China Holdings Ltd. (3900), a developer based in the eastern city of Hangzhou, said this week that first-half profit probably fell more than 65 percent from a year earlier, due in part to “relatively lower gross profit margin” on property sales. Its shares have dropped 16 percent this week in Hong Kong and Moody’s lowered its outlook for the company’s credit rating to stable.

Stocks Gauge

A gauge of property stocks in the Shanghai Composite Index fell 0.6 percent at 2:12 p.m. local time, headed for the third straight daily decline.

“Property investment will remain the biggest macroeconomic risk in the second half,” even as a deceleration in investment is less severe than in the first half, said Zhu Haibin, chief China economist at JPMorgan Chase & Co. in Hong Kong. “It’s a quite natural response from property developers to delay sales and land purchases amid a weak market, and this may affect investment activity in the future.”

To contact Bloomberg News staff for this story: Zhang Dingmin in Beijing at dzhang14@bloomberg.net
To contact the editors responsible for this story: Andreea Papuc at apapuc1@bloomberg.net; Chris Anstey at canstey@bloomberg.net Scott Lanman, Iain McDonald

Stock Markets Around The World Correcting...

I read the bible every morning. I'm not really religious, but it serves as a reminder to me for the rest of the day not to do anything wrong, that will harm others.

Not being knowledgeable or giving the wrong advice in my job is to me a big sin. I must try to be on top of everything, to calm down and have a clear mind.

The correction of S&P500 that began mid last week was not a surprise. Here's why:

1. I've been harping about taking profit by end of May in this blog and to my clients.

2. I've sold half my European equity funds in May, also my First State Global Resources in June.

3. European indices actually began correcting in mid July, so there were signs of stresses in the markets already.

4. Valuations were slightly above average and there were no strong BUY signals anywhere except maybe for Chinese equities, Mining and Banks.

But I've made some interesting observations end of last week and I'll be calling clients directly about what to do.

The global recovery has not ended. Here is why:

1. IN the US it's just begun. Look at the unemployment rate falling to 6.2% from close to 10% in 2009. The real estate market is chuckling along.

2. In China, the second largest economy, it is steady. There is no recession, just a slowdown. The officials say it is 7.4%. Others suspect it is close to 4% judging from the electricity consumption growth. Perhaps the truth is in between. The Chinese economy is not going to crash. Sure, the corporates are over leveraged. There is a bubble in the property market in Tier 2 to 4 cities. But the households have very low debt. The banks are certainly in trouble with unreported NPLs but I think the could be bailed out by the Chinese government. Don't forget how cheap the HSCEI is. Dividend yields are record high and if you don't trust the audited profits or cash reported by listed companies in China, at least trust the record high dividends they pay out.

3. The largest economic bloc, the EU, is still in decline. The inflation rate is heading towards 0.5% from 0.7%. They could ease further. Unemployment in the Eurozone is still at around 11%. So for this huge bumbling economy, their recovery will be in 2015, not this year. So there's a lot to look forward to. Oh and be careful of their bank stocks. There could be more capital raising in future as bad loans are still unreported.

4. Japan, the 4th largest economy, is implementing its third arrow. It may not be successful. But at least you can be sure that Japan will pump prime their economy until it reaches 2% inflation target. By then, USDJPY could be 110 - 115, and the Nikkei could be 15% - 30% higher.

What will derail the global economy?

1. China. Unreported NPLs and shadow banking pulling out from leveraged firms may be the downfall. It could be in 2015, 16 or 17. I don't know when. Meanwhile, the stocks could rise.

2. Eurozone is  marriage that can never work. Soon Germany will become sick and tired of bailing out the lazy peripheral economies that a few northern countries could break away.

3. Politics. Israel - Palestinian war. Unrest in Syria, Iraq, Lybia.... North Korea. Russia and their clash with the west. Anything could trigger a nuclear war.

4. Climate change. This will accelerate and many millions will lose their lives. It won't happen in the distant future. It will happen within 5 years. Unless mankind unite and adopt permanently lower birthrate and lower economic growth. It will taken around one to ten million deaths from wars over water, food and resources to wake up the rest. Will it be too late? I don't know.

Meanwhile I will share with you an interesting article from Michael Yardney. Take care!

 

 

Insights from the most successful investors

• Michael Yardney
• Investment Psychology, Michael Yardney's Commentary
• August 4, 2014

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If you’re like me, you like reading motivational quotes. I’m particularly intrigued by those of successful investors.
Yahoo Finance recently ran a selection of these. Here they are…
George Soros: Good investing is boring
“If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.”
Howard Marks: Investing is about more than selecting the asset
“Smart investing doesn’t consist of buying good assets, but of buying assets well. This is a very, very important distinction that very, very few people understand.”
Jack Bogle: Losses are a reality of the market
“If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.”
 Bob Farrell: Don’t join the herd
“The public buys the most at the top and the least at the bottom.” And, “When all the experts and forecasts agree – something else is going to happen.”
Jeremy Grantham: Recognise your advantage over professionals
“By far the biggest problem for professionals in investing is dealing with career and business risk: protecting your own job as an agent.
The second curse of professional investing is over-management caused by the need to be seen to be busy, to be earning your keep.
The individual is far better-positioned to wait patiently for the right pitch while paying no regard to what others are doing, which is almost impossible for professionals.”
 John Templeton: Don’t forget about taxes
“For all long-term investors, there is only one objective – maximum total real return after taxes.”
Barton Biggs: There are no relationships or equations that always work
“Quantitatively based solutions and asset allocation equations invariably fail as they are designed to capture what would have worked in the previous cycle whereas the next one remains a riddle wrapped in an enigma.”
Benjamin Graham: Beware of forecasts
“It is absurd to think that the general public can ever make money out of market forecasts.”
Philip Fisher: Know the value of your investments
“The stock market is filled with individuals who know the price of everything, but the value of nothing.”
Warren Buffett: Be greedy when others are fearful
“Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.”
Ken Fisher: Keep history in mind

“You can’t develop a portfolio strategy around endless possibilities. You wouldn’t even get out of bed if you considered everything that could possibly happen….. you can use history as one tool for shaping reasonable probabilities.
Then, you look at the world of economic, sentiment and political drivers to determine what’s most likely to happen—while always knowing you can be and will be wrong a lot.”
Charles Ellis: Invest for the long run
“The average long-term experience in investing is never surprising, but the short term experience is always surprising. We now know to focus not on rate of return, but on the informed management of risk”
Isaac Newton: Markets are irrational
“I can calculate the movement of stars, but not the madness of men.”
Mark Twain: We can learn from the past
“History does not repeat itself but it does rhyme.”

Financial Assets vs Real Estate

I believe that a wealthy person should have  diversified portfolio of stocks, bonds, bond funds and balanced funds, also a real estate portfolio that spans worldwide.

Here are the reasons why you cannot put everything into one basket in Singapore:

1. Global warming. Food and water may be scarce in future. If Singapore's GDP repeatedly declines because most of our expats flee, and we have food rationing, I'm sure our property prices will drop a lot. Banks will not be able to recover the mortgages. You CANNOT stop loss a property. It takes 3 weeks to 3 years to sell a property.

2. War. The world goes through major wars every 50 years. For whatever reason, we could have one soon.... How do you sell your properties in Singapore after the first missile drops. Look at Tripoli, Bagdad. Do the inhabitants have time to sell their portfolio when the political situation suddenly deteriorates?

Tripoli at War Today

3. Even if you own properties in Australia and the UK, there is no guarantee that you have to right to reside in these countries. But I believe long after Singapore is gone, or if we go through very turbulent times, the UK, Australia, the US will still be around. Even China and India will still be around long after Singapore disappears into history.

Here are the reasons why financial investments can complement you:

1. Take a good balanced fund that pays 5% yield and leverage 1.5x. At 1.5% borrowing cost, you can achieve 12% IRR already, excluding capital gains.

2. You can't achieve this with the current rental market in Singapore.... The yield compression worldwide and taxes on rental will make it difficult or you to achieve any kind of decent cashflow.

3. Financial assets have no borders. You can transfer you unit trusts and bonds from a nominee based in Singapore to another nominee in Zurich. If your country is unstable, you can migrate easily without the baggages of your properties.

4. You can invest in financial assets and still have the freedom to pay off your car or credit card loans because borrowing against financial assets is secured lending which usually has a lower interest.

How Investing in a NYC Condo Compares Against Other Investments

My experience with property

I've often said that real estate is the ONLY investment asset class that can turn you from rags to riches. In 2006, I could not even muster enough money for the 20% down payment of a very old apartment worth SGD388k. I only needed to muster SGD80k including stamp duties. I had 60k of CPF but needed 20k of cash. I had to borrow from my dad the money.

In 2009, the property en bloc or SGD1.18m. My profit was around 800k, all these for a 80k down payment. Since then, I've diversified into stocks, bonds, funds and another nine real estate investments.

Real estate without leverage is meaningless. Singapore's property achieved only 6% per year in the last 20 years, 1994 - 2014. Including rental yield of 3.5%, it's close to 9.5% per annum. It's not much different from investing into the MSCI World, which achieved around 8% per year ex div. With div, probably MSCI World achieved 11.5%.

Real Estate Is Not Hands Off. It's a Business

Real estate is illiquid. It takes around 3 weeks to sell a property in hot markets, and up to 6 months in a cold market. You need to have patience.

Real estate has high turnaround costs. There is a lot of hassle because if it's overseas, you have to contend with lots of admin, from the property manager who may try to rip you off with fake repairs, to troublesome tenants who don't pay.

Power of Safe Leverage

What makes real estate superior to stocks is the leveraging effect. My return from my second property which went en bloc was over 1000 % IRR. Even if Singapore's property rise by 9% per year including rental yield, if I leverage just 2x or 67% LTV, at 3% borrowing cost, I will achieve 21% IRR. If a fund manager can achieve 21% IRR, he would have beaten 90% of his industry mates!!

Why can't you leverage on stocks, but you can for real estate, bonds and good balanced funds?

The problem with leveraging on stocks is the volatility! For most bear markets, stocks correct by 50%! In a bull run, stocks can still fall by 20%. If you are leveraged 2x, most likely you'd have been margin called in 1998, 2001, 2003, 2008, maybe even 2011! The MSCI World ha a volatility of around 25% - 30%

But property has several advantages.

1) it has no mark-to-market. The bank doesn't usually margin call you unless you cannot pay your monthly mortgage. Stocks are marked to market every minute and day!

2) Property is far less volatile. I dare say the volatility is just half of stocks, around 10 - 15% Risk adjusted return, property has a return of around 1x. For stocks, it's 0.4 (10% / 25%).

3) Bonds, bond funds, balanced funds have similar volatility characteristics of property.

a) Investment grade bonds have a volatility of 5 - 10% but return of 4%. So risk adjusted return around 0.8x.

b) HY bond funds have around 6% of return, but volatility of 10 - 20%. So risk adjusted return is around 0.6x.

c) Good bond funds have a volatility of 10 - 20%. Returns of around 7%. So risk adjusted return is around 0.7x.

d) Balanced funds have a volatility of 12 - 24%. Returns of around 9%. Risk adjusted return is around 0.75x.

Real estate has the highest risk adjusted return and hence most suitable for leveraged returns!

Threats to Real Estate Riches

I noticed that governments in the UK, Malaysia, HK, China and Singapore are starting to clamp down on residential real estate investments. It is a political hot potato so I can understand the actions. Housing affects everyone and governments cannot allow house price to rise beyond the reach of masses, and then collapse, bankrupting banks.

I believe that increasingly, real estate investors will have to venture into industrial, commercial, offices to make their gold. There are many risks of commercial real estate investments which I won't address here. But at least the governments worldwide will leave market forces a free hand.


http://online.wsj.com/articles/how-investing-in-a-nyc-condo-stacks-up-against-other-investments-1406239486

     

How Investing in a NYC Condo Stacks Up Against Other Investments

A look at how the commodities markets for hogs, crude oil, coffee and gold have performed when compared to returns on an investment in a New York City condo

                          

July 24, 2014 6:04 p.m. ET

When it comes to investing, some New York real estate is still producing solid returns—but hogs are just a hair behind.

Spread Sheet compared the 10-year performance of 100 of the best-known Manhattan condo buildings against the returns on some standard commodities—gold, crude oil, hogs and coffee. These are all traded on futures exchanges, in which people buy or sell the commodity for a specific price on a specific date in the future.

In terms of returns, gold topped the list with a compound annual growth rate of 12.91% over the past 10 years. West Texas Intermediate crude-oil futures came in second, rising 11.02% annually; coffee rose 9% over the 10-year period, and hog futures rose 5.34%.

By comparison, the S&P 500 stock-market index saw a 5.56% compound annual growth rate over the past 10 years.

Meanwhile, those who invested in Manhattan residential real estate 10 years ago have seen values rise 6.5% over that time period, which includes the real-estate market crash that began in 2008, according to according to Pete Culliney, director of research for listings website CityRealty. To track the returns, the company looked at condo-building sale prices starting in mid-2004 to determine each building's sale price a square foot of living space. The price was then averaged over 10 years to determine the compound annual growth rate.

Some of the properties that helped boost the returns include the sale of a $48 million duplex in 15 Central Park West, as well as a $15 million deal in the Time Warner Center. Other buildings on the list include One Madison and Residences at the Mandarin Oriental.

"The consistency of New York City real estate is something that is really hard to match," Mr. Culliney said.

Volatility can be a big concern with assets like oil and gold, which both saw larger returns, but pose considerably more risk due to political factors. Hogs have rivaled real estate in terms of dependability, but this year has been an exception, with futures jumping nearly 50% due to a deadly virus that has killed millions of piglets on U.S. hog farms.

Coffee can be a risky investment partly because of unpredictable price swings, said Sterling Smith, a futures specialist at Citigroup C -1.66% Citigroup Inc. C in Your Value Your Change Short position in Chicago. "This stuff is nuts—it moves like nothing else," he said.

When and for how long one invests in these types of assets can make a world of difference, says JR Stegmueller, president at consulting firm Fusion Trading Zone in Frankfort, Ill. "In commodities, 30 days is a lifetime," let alone 10 years, he said.

Write to Stefanos Chen at stefanos.chen@wsj.com