A Paradigm Shift - Innovate or Perish

Singapore's economy is at a turning point. Local businesses are facing challenges such as digital disruption, labour crunch and high operating costs. We are in danger of losing our relevance in a global economy which is undergoing a 'Third Industrial Revolution'. Latest economic data showed falling inflation and exports. Unemployment is rising as more workers are rendered redundant due to technological disruption and lower global demand. The traditional bellwethers of the STI - banks, property developers, rig-builders - are struggling as property sales remain sluggish and oil price is stubbornly depressed. All these talk on SMEs becoming more innovative is mostly paying lip service.

PM Lee speaking at National Rally 2016

Conventional wisdom dictates that a Singaporean resident must invest in property (usually eating up most of his savings), as if property investment is the sure-win method to financial nirvana. A word of caution. What works for our grandparents (pioneer generation) and parents (baby-boomers) might not work for us and the future generations. Moving forward, local residential property prices are unlikely to see exponential appreciation compared to the 80s and 90s. Those times are not returning.

You might be wondering......why so fearful, DK? In the worst-case scenario, the Singapore government can implement expansionary fiscal policies to 'juice up' the economy. That worked before. Unfortunately, our aging demographics meant that social spending will only escalate in the future, thus limiting the amount of support the government can provide. Besides, we simply could not afford to keep dipping into our national reserves.

Wait a minute! How about Temasek Holdings and GIC? Surely they can swoop in as white knights in their shiny armour to save the day! The hard truth is actually more years of expected lower returns from our SWFs.

Beware of Valuations When Buying Emerging Markets Bonds & Dividend Stocks

At the start of 2016, emerging markets (EM) were in turmoil as droves of investors withdrew funds in the wake of a long-awaited Fed rate hike in December 2015. Eight months later, funds are flowing back into EM yield assets at a frantic pace once again. Facing negative rates in Europe and Japan as well as near-zero rates in almost all developed nations, yield-hungry investors have no choice but to return to EM.

However, investors are not focusing on growth or cheap labour - the traditional twin attractions EM used to offer in spades. They are simply drawn in by the relatively attractive yield like moths to a flame. This could lead to a bubble in the EM bond and stock markets. Valuations of traditional income stocks like utilities and telcos are approaching bubble levels. This crowded trade will not end well once the Fed hike rates because funds will pull out of EM as fast as they were poured in.

In my opinion, it is never prudent to generate more yield at the expense of taking on more risks. Remember the taper tantrums in 2013?



Balance risk and income
DK

The World Has Gone Mad

France is a country seemingly under siege. A man drove a delivery truck through a crowd in Nice, France. A failed military coup in Turkey. Racial tensions came to a boil as the blacks sniped police officers in Dallas. Public Shootings in a German shopping mall. Donald Trump delivered his GOP convention speech like a war-time president, dark and angry. The South China Sea dispute remain contentious, straining ties between ASEAN and China.

Am I concerned about recent geopolitical developments? Sure, I am. But I am not letting these fears stop me from living my life. The world has always been a messy and even violent place (remember WWI & WWII?). I choose to believe in the goodness of humanity! Stay positive and spread the love around.

By the way, I totally enjoyed my recent trip to Washington DC. Bought a Hugo Boss bag! :)

Life is one huge stumble. Just make sure you stumble in the right direction.
DK

The Global Economy Is Turning Japanese

The desperate chase for yield is becoming dangerous, driving the valuations of dividend stocks (telcos, utilities & REITs) and bond prices to the sky. The main reason behind this 'new abnormal' is the world (especially developed nations) spiralling into a 'Japan-style' economic malaise. 

- Aging populations result in weak demand
- Weak demand leads to deflation
- Central banks maintain low and even negative rates for longer in order to stimulate growth and battle against powerful deflationary forces. Central banks in Switzerland, Sweden, Denmark, and Japan now all have negative interest rates!

I foresee solid blue-chip yield stocks to be selling at a premium for many years to come as the global population age even further. The thirst for income will only get ever more frantic.



Japan gave us a dress rehearsal of a bleak future
DK

First-World Problem - Take SCRIP Or Cash?

Applying for SCRIP has its advantages which benefit investors with certain objectives.

1) SCRIP allows an investor to build up his position in a long-term core counter without having to pay the fees and we all know fees significantly erode our returns over time. In the case of OCBC and Raffles Medical Group, the discounted pricing of their SCRIP make it even more worthwhile. Both companies have solid earnings & dividend growth and management are still pursuing sustainable growth. OCBC just completed a massive acquisition of Barclays' private wealth management business in Singapore and Hong Kong. Raffles Medical Group is building a new wing next to its flagship Raffles Hospital as well as an international hospital in Shanghai. If an investor wants to enjoy the fruits of these expansion plans, he should apply for their SCRIPs. On the other hand, if a struggling company such as Noble offer SCRIP, I would avoid it with ten-foot pole. Anyway, I would not be vested in Noble in the first place.....hahaha!

2) Since an investor apply for the SCRIP year after year over a long period, the compounding effect will multiply several times. For example, you receive 10 shares this year, this particular batch of 10 shares will reap you more shares next year, maybe 11 shares. Then, the 21 shares will reap you even more shares next year and this wealth-generation cycle keeps rolling on.

2) SCRIP is also more suitable for investors with substantial amounts of the counter. For example, if you only own 100 shares of OCBC, just take the dividends in cash. I would suggest applying for SCRIP when you have at least 2000 shares of OCBC as the returns will be more meaningful.

This week's fear-mongering headlines!

1) Italy's banks are burdened with a massive US$400 million worth of bad loans, which is highest in the EU by far. This hinders the banks' ability to provide credit to businesses, which in turn will affect the economy, leading to a vicious cycle. The Italian government could try to do a bailout but they are strapped for cash too. The Italian government debt level is the second highest in the EU after Greece. Furthermore, any attempt to carry out a bailout will likely run foul of certain EU central bank's regulations. Italy seems like the new weak link in the EU, bringing back the Grexit contagion fears. By the way, Greece is barely surviving too.

2) The systemically-critical Deutsche Bank never truly recovered from the 2009 financial crisis. Things are now in 'full-crisis' mode. Worse still, the recent Brexit will hit the bank hard. Deutsche Bank is the largest European bank in London and receives 19% of its revenues from the UK. Now the real question: what happens to Deutsche Bank’s derivative book, which has a notional value of €52 trillion, if the bank becomes insolvent? Financial Armageddon might be near......

3) With the sterling pound under severe pressure due to Brexit, three of the biggest commercial property funds in the UK have stopped redemptions. Investors are running towards the exit in herds. As more investors panic and do the same, the funds will have to sell more properties to meet the redemption demands. Usually the most-saleable and best properties will be sold first. This creates a vicious cycle as investors do not wish to be the ones still remaining in a fund which holds inferior properties in the end. This scenario brought back horrifying memories of how the 2008 GFC started. Dominoes started to fall when panicky investors started redemptions on two hedge funds from Bear Stearns.


This might become a regular thing on my blog seeing that there are always a few fear-mongering headlines from the mass media. Now I understand why people like Marc Faber are often pessimistic about the global economy. It can be rather fun in a morbid way. Ha!  >___<



Many of us are not living our dreams because we are living our fears
DK

Bravo, Britain. Nicely Done!

Don't rock the boat? What's the excitement in that! Despite bookies' odds favouring Bremain, the common British people made their voices heard around the world by making Brexit come true. Obviously, those bankers and executives of MNCs largely opposed Brexit as it will affect their fat bonuses. I guess the masses in Britain are frustrated of the status quo and being ruled by greedy corporate overlords.

When Singapore was separated from Malaysia, people doubt we could even survive. But we have proven those doubters wrong! We transformed from a third-world country to a developed nation within 5 decades. We built a strong and free nation with undying grit and wit from our pioneer generation. So, I have this message for the British youth - Your country will prevail. Do not use Brexit as an excuse for your problems. If Switzerland can prosper without being a member of the EU, you can do it too. Time to man up and show that famed bulldog spirit!

Kites rise highest against the wind, not with it.

Winston Churchill

Singtel Group - The SoftBank Corp of Singapore?

SoftBank Corp, one of the largest company in Japan, started as a traditional telecom in 1981. Over the years, SoftBank grew under the visionary leadership of Masayoshi Son through acquisitions and investing in start-ups. Gradually, it evolved from a boring 'old economy' telecom into a multinational internet company, with operations in mobile broadband, e-commerce, technology, media and marketing, finance services, robotics and other businesses. SoftBank successfully channelled resources from its core telecom business into new growth drivers. Example, it is one of the earliest investors in Alibaba and still remains the largest shareholder of the Chinese e-commerce giant.

Singtel can take a leaf out of SoftBank's playbook seeing that the impending 4th Telco is about to take a slice of its domestic pie. Singtel has been outperforming its two smaller local rivals this year, thanks to its vastly diversified earnings base. Core earnings from its overseas mobile associates such as Telkomsel, Advanced Info Service, Globe Telecom and Bharti Airtel increased 12% to $699 million. Singtel is also building ancillary services around its core business. For instance, Singtel re-launched its mobile payment app, Dash. Customers can use the app on their smartphones to pay for rides on trains & buses, ComfortDelgro & Prime taxis, and for purchases at merchants such as NTUC Fairprice, BreadTalk, Cheers, Food Republic, KFC, Pizza Hut & Watsons.

Another new revenue stream is coming from the cyber security division. The global cyber security market is growing at 9.8% a year. Hackers are becoming more sophisticated and daring as shown by recent cyber attacks on SWIFT, Sony Pictures Entertainment and Panama Papers data leak. For every lock, there's someone out there trying to pick it.

I was originally sceptical of SingTel's ambitious foray into the cyber security business in 2015, but watching the drama series 'Mr Robot' truly opened my eyes. This show is a masterpiece on the dangers of hacking. There is a huge shadowy world out there in cyberspace! Nerve Wrecking!

PwC estimates there are about 100 million cyber attacks every year, including data theft, leakage of intellectual property, corporate sabotage & denial-of-service attacks. That's 200 new cyber crimes committed every minute. The Singapore government wants to build a 'Smart Nation'. However, with greater use of connected devices like smartphones & tablets, comes greater vulnerability. Can a 'Smart Nation' be a 'Safe Nation' too? Will we be sufficiently protected from cyber terrorists? Singtel is poised to exploit opportunities in this rising and urgent demand for cyber security.

The pursuit of new growth engines requires substantial resources. This challenge could be solved soon. There are strong rumours of Singtel planning an IPO for NetLink Trust by 2H2017. If successful, the deal could raise as much as US$2 billion. Singtel will be armed with a huge warchest for pursuing new revenue streams as well as fight against the 4th Telco.

How to stay the course on your investing journey? Be less human......

Over the long run, patience is a virtue when it comes to investing. That's why financial advisors always advocate the benefits of starting young in one's investing journey. This will allow wealth to be accumulated and compounded over decades.

Unfortunately, humans are emotional beings and we tend to interact with one another more than ever before, thank to the widespread use of social media these days. As a result of high frequency trading, algorithm bots and easy access to international market news flow, fear and euphoria can perpetuate at an alarming speed around the world. Hasty decisions made in heat of the moment are rarely right.

Volatility is a fact of life. Investors tend to over-react in either direction. Therefore, we must perform thorough due diligence on our targeted companies and tune out the 'noises'. This will help us avoid making emotionally-driven decisions. With absolute clarity on our investment objectives, we reduce our chances of getting caught on the wrong side of an irreversible shift.

Warren Buffett and his trusted partner Charlie Munger do not panic despite the turbulent markets over numerous crisis because they know exactly what characteristics they want in a company before they decide to fire their 'elephant gun' and they stick to their investment principles come rain or shine. They do not take frequent pot shots indiscriminately with a gambler's mentality. Bershire Hathaway always go for big brands which enjoy a strong moat and protected by sustainable competitive advantage, stable cashflow and run by a competent management. Naturally, when these breed of companies become undervalued due to irrational short-term market forces, Warren Buffett will have the conviction to buy more instead of panic selling as he already understood them inside out. He know their fundamentals will remain robust. On the other hand, if you know the company so well, you will also divest with conviction once you see the fundamentals facing a terminal decline. Either way, there is no panic and fear involved. Just effective decision making.



Be a robot when making investment decisions
DK

My first cheque from Nuffnang! Time for Starbucks!

I received my first cheque from Nuffnang a few days ago. Yippee! Time to spend it on my weekly Starbucks indulgence..... >___<

Set meal from Starbucks. Cappuccino with buttermilk chicken & egg croissant. 

I know what you all are thinking. OMG! What happened to the frugal-minded DK? What have you done with him!?!?!? LOL.....Life is short, fragile and unpredictable as sadly shown by our finance minister collapsing in the middle of a meeting due to stroke. Sometimes, it is alright to slow down and smell the roses. Live a little. Pamper yourself. Spend more time with your loved ones and cherish those moments.



Get well soon, Mr Heng
DK

Want to take advantage of global aging? Focus on the rich elderly.....the baby-boomers

Humanity is aging. Fast. Over the next decade, the world is going to be hit by a tsunami of retiring baby-boomers. After that, another huge wave from Generation X is going to retire. This secular demographic trend cannot be stopped. There is no breaking point. There is no reversion to mean. There is simply no going back to a world of high birth rates anymore.

This group of future retirees has greater spending power than their predecessors. In my opinion, old people can be categorised into 2 groups - the recently-retired healthy elderly who are still active with more spare funds for lifestyle consumption and the extreme elderly (those in their 80s/90s) who spend most of their funds on healthcare or nursing services.

Higher demand for stable dividend-paying bluechips and bonds
Can you imagine a 70 year-old retiree sitting at the desk, his eyes glued to the computer screens as he stares at charts through his blurry eyes? I can't. And even if he happens to be an extremely healthy individual, does he want to spend his golden years and remaining time on Earth doing risky trades everyday? I doubt so. What he probably desire is a stable flow of passive income to fund a comfortable lifestyle and maintain a respectable quality of life. He no longer has the same voracious appetite and high tolerance for market risks and volatility. Most of his funds should be in income-producing assets like bonds, fixed deposits and dividend-paying bluechips. Right now, the younger generation of investors like us can take advantage of this future investment trend by getting into these dividend-paying bluechips early. Do not wait until you are in your 70s or 80s before making the switch.

A report posted on April 20 on the Singapore Exchange's My Gateway portal reveals that the STI offers the highest dividend yield in a study of 10 major stock indices across Asia. The 30-stock index yields 4.1% in dividends versus an average of 2.8% for the region. Hong Kong's Hang Seng Index is a close second with a dividend yield of 4%. Hong Kong is another rapidly aging country. 

Higher demand for air travel
Going on long overseas leisure trips seem to be a rising trend with the retirees in recent years. They are even posting pictures and videos on social media platforms. Who says grandparents cannot be cool? They love travelling with their spouses, family members or friends. Compared to their predecessors, baby-boomers prefer to pursue experiences rather than material possessions in retirement. This will potentially create traffic growth for aviation hubs like Changi Airport, thus generating more revenue for companies like SATS and SIA.

Higher demand for aged care services
Lastly, we move on to those extreme elderly who will increase the demand for nursing homes, clinics and hospitals. The rich baby-boomers can afford the premium prices at the private healthcare establishments such as Mount Elizabeth, Gleneagles and Raffles Hospital. As a result, companies like IHH, PLife REIT and Raffles Medical Group stand to benefit from an increasing demand for aged care services.


How will SG100 look like? Full of old people..... T__T

Singapore has run out of low-hanging fruits

The economic success of modern Singapore is largely built on cheap land, immigrant labour, rapid adoption of powerful technologies and highly-educated/skilled workforce. However, during the past 30 years, these low-hanging fruits have started to disappear. Now, we are plagued with dangerously-low birth rate, an aging & shrinking workforce, escalating business costs and a lack of economic growth drivers.

Fortunately, the Budget 2016 did address some of these problems by offering short and medium-term solutions. However, in terms of a more deep-rooted, comprehensive and long-term framework, we still need to wait for the newly-formed 'Committee on Future Economy' (CFE) to release their work by the end of 2016. The areas they will be working on are:

- corporate capabilities and innovation
- future growth industries and markets
- connectivity
- urban development and infrastructure
- jobs and skills

Why so much negativity!

The sharp drop in Nikkei, Hang Seng and European banks last week spooked investors all over the world. There have been whispers of 'Is this 2008 all over again?' Gold rocketed up to its peak in a year! Not only is everyone feeling 'risk off', it is 'fear on'!

As usual, we can always count on the good ol' financial journalists to tell us the possible reasons (CoCo bonds & Oil-producing countries' SWFs liquidating equities to raise funds). Thanks guys! Next time, why dun you be so kind to inform us BEFORE shit actually hit the fan? As if 'China hard landing' and 'Oil price plunge' are not sensational enough for headlines. *Roll eyes*......

In my opinion, we are no where near 2008 levels. It is business as usual for many industries, believe it or not. People are still getting on with their lives. There is a difference between being cautious and outright depressed.

For me, I am rather immune to all these headlines from wall street. I am still young, so I am more than happy to accumulate fundamentally-solid stocks at depressed prices for the long-term. The funny thing is, I see young investors (newbies) panicking when they should be the ones who could afford to chill as they have time on their side. Here's a tip to young beginner investors - you have lots of time to ride out the volatility.


Free yourself from negativity
DK

Is the world prepared for the next crisis?

In all the past global economic recessions, central banks would usually step in and stimulate/ prop up the economy with loose monetary policies. Governments would also implement certain fiscal policies and even extreme measures (bailout) to help businesses to survive a sharp downturn.

Ben Bernanke cut interest rates from more than 5% to 0% in the previous crisis and kept it that way over 7 years. The world also enjoyed 3 rounds of QE. Seeing the effectiveness of these 2 measures, major central banks in Europe and Asia follow suit. Everyone kept interest rates low and carried out their versions of QE since 2008. 

Unfortunately, since interest rates are already low, Janet Yellen has very little left to manoeuvre. The best she can do is to either postpone further hikes or maybe even cut it back down to 0%. Worst still, QE3 showed us that printing huge amounts of money loses its effectiveness the more times you do it. So, QE4 or QE5 would arguably harm the economy more than help it. As a result, central banks around the world have no more weapons left in their arsenal to fight a global recession.

But the all-powerful governments can surely save the day, I hear you say. Not really. Many governments have huge debts on their balance sheets. Some of their budget deficits are mind-boggling huge! They are already struggling to stay solvent (looking at you Greece!).  Many developed countries have their credit rating cut. Even USA had its 'AAA' rating cut in 2011! >___<

In conclusion, I think the world ill-equipped to handle the next crisis in a swift and effective manner. On the personal front, I hope everyone has been saving up that 'rainy day fund' because we might need it soon.


Always be prepared
DK