What to do with your asset allocation?

With the latest property cooling measures, another avenue for investing one's money is reduced. With the negative perception of Gold Investing (Genneva, Gold Guarantee e.t.c), less money will flow into those avenues. There is a possibility that equities could do well given that  it's one of the few remaining avenues where money could flow into, especially given the monthly money printing by the United States and the ultra low interest rates. As our name implies and having always given a consistent message since the inception of this blog, dividend yielding stocks is still the right way to go. As usual,if in doubt, keep a 50% cash and 50% Equity of dividend yielding stocks. How about Gold and non-dividend yielding stocks with a high beta that could see capital appreciation? I feel that investing is to buy into something that gives a return immediately and not based on the whims and fancy of the dynamic market which is so darn difficult to read and easily manipulated by some big fish, even if one is an excellent technical analyst. Buying Gold and non-dividend yielding stocks is more of gambling instead of investing in my dictionary.

A friend asked me what she should do with the money.

If one is putting funds aside for retirement:
A possible avenue to 'invest' could be dumping some cash into SRS to enjoy  an immediate risk-free guaranteed gain of a reduction in taxes based on one's income bracket and waiting for any Equity correction to use the SRS funds to snap up some dividend yielding stocks. But one can only dump about 12Kyearly due to the cap. Optimum age group to do this are for those above the age of 45 years old whose income bracket is generally higher, shorter lock-in period and the 12K yearly deposit from 45 years old could possibly attract no taxes at all when one is to stretch out their yearly withdrawal. Anyway, if you are 45 years old and above, you are probably greatly affected by the new property rules.

If one is putting funds aside for property investment while waiting for a major correction(happy waiting....):
A possible avenue to 'invest' could be dumping some cash into CPF OA to enjoy a risk-free 2.5% which can be used to pay for a property investment or possibly even snapping up some dividend-yielding stocks if a major correction should occur.

The above 2 options faces some restrictions so if one wants maximum flexibility, put in bank!

Options options options. Thats the beauty of life!

How interest rate affects perpertuals- Genting

A reader commented that interest rates were at the historical low and that the only way is up. That i totally agree. What i am unsure of is just when. When interest rate increases, price of bonds will go down, especially so for bonds without maturity, a..k.a perpertuals like Genting. Looking at the 12 month Sibor from 1987 - 2012, the highest it has reached is 7.75% and the lowest it ever reached is right now, 0.59%.

Genting perpetual was offered at $1 par value with 5.125% coupon at the time when the 12 month Sibor was about 0.59%. This implies that the market is willing to take on the risk of holding the perpetual with an additional interest rate spread of 4.535% ( 5.125%-0.59%) over the 12 month sibor.

Assuming the market expects this spread of 4.535% forever and we keep it as constant. ( Please note that this spread changes based on the market perception of Genting's risk. Obviously, MAS is causing some negative perception!) Below is the worst case price one can expect given the different 12 month sibor rates.

Yield = 4.535% + 12-month Sibor
Genting Perpetual Price = 5.125% divided by Yield

The questions now are:

When do you think interest rates will rise?

What other investment classes available to retail investors will not be affected by changes in interest rate?

Do you think property (which is leveraged by the way) will also be affected by interest rates or not?

How about equities(Shares)? Will it be affected by interest rate too?

If a severe market crash like Lehman occurs again, which will fall more, Genting Perp or shares in general?

I feel that investing is not only about the possbilities, but also the probabilities. Given the severity of the recession in Europe and the US, how high are the probability of them raising interest rates? Read the news and realise that many countries surrounding us have also been cutting interest rates, like Australia, India, Brazil,Morocco e.t.c. Sure inflation is a concern, but which is a bigger evil, unemployment or inflation?

I for one am preparing ( and hoping) for a Lehman-like crash. If it occurs, i am pretty sure that my Genting Perps will still fall but definitely not as much as shares.

Having said the above, a sharp rise in interest rates to 7.75% is still possible. Thats why keep it as a small percentage of your portfolio.

BTW, the issue i have with MAS is that there are many much more risky ,complicated and non-transparent investments out there compared with perpetuals! Regulate those first before regulating perpetuals! Come on!

Perpetual bonds should not be a cause for concern

I ,being a small fry, have an investment in Genting Perpetual 5.125% retail which i bought during IPO for diversification. It's only takes up about 5% of my investible assets, excluding property. Now that you know that i am vested,i want to say that i totally do not agree with MAS being alarmed by people buying perpetual bonds. By being alarmed and placing restrictions on these kind of investments, it will simply reduce investment alternatives and push retail investors into more exotic and more risky products.

I feel that for retail investors who do not know how to invest, perpetual bonds offer a relatively safe store of value, with Genting 5.125% matching inflation. The risk of perpetuals are as follows: Genting going bankkrupt being the worst case scenario or interest rate rising, making the price of Genting lower.

Let's look at the worst case scenario, Genting going bankrupt. Holding the perpetuals is still safer than holding the shares as pertpetual holders are paid first from the proceeds of any sale of Genting's assets.

Let's look at the risk of interest rate rising and the price of Genting getting lower. How low can it get? Can you forsee it dropping more than 20%? How about Genting Shares,can you forsee it dropping  more than 20%? In fact, the longer one holds Genting perpetuals, the less risky it becomes as it's accumulated coupons would have reduced the invested outlay by 5.125% every year, and raising by 6.125% in 2022. How much dividends does Genting Shares give?

When i, a small fry retail investor, bought the perpetuals, i did it to hold it to provide me an income after my retirement or sell it when QE3 is announced and funnel it into shares. It was crystal(Internally Flawlessly) clear to me that i can forget about any meaningful upside capital appreciation. The bullshit about it being a perpetual and the company never going to redeem it is irrelevant. I knew i could sell it in the open market to get back my principal, and true enough it was hovering at 1.012-1.011 in the open market, till MAS came up with restrictions and it fell to 1-1.002, still above IPO price.I also took into consideration Ben Bernake's (US Fed) comments about interest rates staying low till at least 2014 when i bought it. 

The announment above, was the last straw that broke the camels's back for me. SRS not being able to buy Genting Perp but allowed to buy shares?????????Huh! My gosh! The longer one holds the perpetual bonds, the safer it is and now SRS, which is for retirement purposes, is not allowed to be used to Genting Perp? Some people do need to wake up.

Having said that, perps is just for diversification. Bonds having maturity is better than perps. Keep perps or bonds to a small percentage of your assets as a store of value only. Market looks like its falling,look at volume and prepare for some firing at shares!

Increasingly Motivated Property Sellers

I was sent an Amortisation Tabe for Progressive Payment for a certain new development from a property agent. He is wasting his time as i told him politely i am not interested in property now as i expect it to go down. I am definitely not buying even after stamp duty rebates, furniture vouchers, special discount here and there, extended warranty and prices magically reducing by some weird way of calculation(hmm did i even hear a renovation rebate, valentines discount..) Setting ridiculously high asking prices and then reducing it is an old marketing trick.

However way i see it, i am increasingly more bearish on the property market. Let us look at the Amortisation Table sent by this agent who seems so persistant, i have to give it to him to at least read his emails.

The purchase price is $1,500,435 after all the discounts,30 years repayment, 80% loan with progressive payment till TOP. During the first few years before TOP, the buyer is charged at a 3-month Sibor (about 0.4319%).
During these first few years before TOP, the buyers have to pay as low as $444 monthly, increasing steadily every 4 months to $1816 monthly till TOP. After TOP, it immediately jumps to $3029.WOW!!. This will be a rude shock and bear in mind all these numbers are based on only 3 month Sibor,without addition of a board rate. It is not 1+3month sibor. The calculation is just based on 3 month sibor which is given to uncompleted properties.

From TOP+1 year to TOP+2 year, the interest rate is 1.75%.(Will it be so low!!This is after 2015!)The monthly repayment is $4430!Its slowly ballooning this cash drain!.

From TOP+2 year t TOP+3 year, the interest rate is 2%.The monthly repayment is now $4565.

From TOP+3 year to TOP+4 year, the interest is 2.5%, The monthly repayment is now $4831

From TOP+3 year to TOP+5 , the interest is 3%.(This is long term average rate i feel but it has spiked up to 6% before.) The monthly repayment is now $5097

From TOP+5 year onward, the interest rate is 3.5%. The monthly repayment is now $5244.

It will be interesting to see how things will unfold when the large supply of new properties start to TOP and there lies the huge jump in monthly repayment which will surely affect the psychology of the sellers. From $444 to $5244. In addition, if you are thinking of renting, think again.

Do not forget to add in the maintenance fees which averages about $250 - $400 per month for newer private apartments after they TOP, before sinking fund fees are even added subsequently.

Oil prices- a negative for property

Everyone knows that property has been propped up by low interest rates and excess cash liquidity in the world. If you haven't noticed yet, the finance sector in Singapore has been silently retrenching people since last November.These banks are mainly those europe ones due to the euro-zone crisis. I am not too sure if these banks are as flush with liquidity given the bad loans that need to be forgiven, Greece for now. maybe Spain next?( 500 singtel employees retrenched and given a new role in Huawei..hmm for how long?Nice spin.SIA offers pilots unpaid leave for up to 2 years...Whats happening?Good deal for SIA)

Some people may say, the Central banks can just pump somemore money into the system to shore up the liquidity of these banks. True....but with oil prices slowly creeping up and inflation becoming more pervasive and with the Iran tensions ongoing...are they able to keep on pumping money into the system? Oil prices determines how much room there is for liquidity which in turn determines how much support there is for property. No data, just reasoning. Too high oil prices can lead to social unrest i feel.

Having said that, my emotional decision for staying in the market with 50% invested has been rewarding with lending fees and dividends dripping in, in addition to some additional capital appreciation.

I am also pleasantly surprised that the district which i am eyeing for my property purchase has shown a massive amount of new listings BUT with ridiculous asking prices which will make Warren Buffet get a heart attack. I am comfortable with my house now...nay maybe i should just stay put for another 10 more years and utilize my cash somewhere else.

Cheers to the stock market. Tata