Sunday, March 29, 2009

The G20 conference 4 comments

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And so, after half a year of waiting, finally the G20 meeting convenes this coming week. Will it be another NATO (No Action Talk Only) meeting ie. an anticlimax yet again?

I tend to think that this will come to be seen as a key event in the annuals of financial history, because of a few factors: (1) it has been six months in the making, which gives various participants the time to think things over and lobby for support; (2) the economic collapses following the Lehman bankruptcy have confounded even the most pessimistic estimates, hence conferring the political impetus for drastic action; (3)long-standing economic imbalances have long been recognised and this is the best opportunity, amidst a crisis emanating from such imbalances, to "upside the downside" (to quote a famous saying from our of our most articulate local ministers).

I believe there will be a few key issues on the agenda as described below, together with the market implications:

(1) Coordination on fiscal spending by all countries. Related to this is the issue of protectionism. For example, countries like Singapore are dead scared of too much fiscal spending because of the fear that much of this money will leak overseas due to our high exposure to global trade. Even mighty Germany doesn't want to end up subsidising the exports of EU member countries. Without global coordination along the lines that each country pulls its own weight in fiscal stimulus such that countries will not end up accusing each other of benefiting from the other's fiscal stimulus, a classic prisoner's dilemma situation could develop where all parties, in trying to protect their own self-interests, end up all losers. If this coordination works, I would expect protectionism fears to ease and trade-related companies to benefit, particularly commodities (which are needed for infrastructure construction).

(2) Greater regulation of the global financial system. This is being championed by the Europeans (my suspicion is that they're pushing this as the top agenda item because they cannot afford to pay for massive fiscal spending like the Americans). Already we're seeing the imminent clampdowns on tax havens and bank secrecy. Most likely hedge funds, with their massive clout unsupervised by any agencies, will get the next round of scrutiny. Greater transparency of OTC markets involving all kinds of derivatives that have caused great uncertainty will be next. The implication: the financial industry will never be the same again. Therefore, rid your portfolios of all banks. The new index heavyweights will be utilities, back to the good old days. Another word of advice: Singapore should really beware of changes in this arena, because we have positioned ourselves so much for the financial industry, in particular wealth management, in recent years. Monumental changes in banking secrecy and tax haven laws will affect our fortunes greatly.

(3) Perhaps the most monumental changes will come in the currency arena. As mentioned, global imbalances triggered the current crisis. The key one is the huge US current deficit due to continuous importing of goods from exporting countries like China, which generate trade surpluses on the other end. This has been sustained by continuous funding of these deficits by the exporting countries, thus resulting in the ironic situation of poorer developing nations lending to a rich developed country in a gigantic parody of vendor financing. It has become clear that the US can no longer be the ultimate demand sink that it has been for the past two decades. Silvio Berlusconi talked of a new Bretton Woods several months back when this G20 meeting was being planned. I also think back to the 1985 Plaza Accord when the US dollar was devalued against the Japanese yen in order to reduce its current deficits and assist its economic recovery. It does look like adjustment of economic imbalances will begin and end with currency adjustments this time round again. I believe talk will centre around (1) a new reserve currency (with China and Russia now clucking about it); (2) new currency pegs that will assist in the rebalancing of global demand. The RMB will probably remain steady, but since it's currently still under capital control, there's no way things will develop too greatly for this currency.

The big gainer, in my view, will be gold. In Bretton Woods, it was used as a peg of value; once the system was "nixed" in 1971, gold was liberated and shot up to US$800/ounce. Now with currency displacements looming once more, we could again see interesting movements in real assets, in particular the original "reserve currency".

(4) Restructuring/recapitalisation of the World Bank and IMF. In recent years these two agencies have grown almost obsolete, mainly because of the stigma associated with accepting IMF assistance. But should SDR, or Special Drawing Rights, become an important reserve currency, these Keynesian brainchilds could once again enter the mainstream of global finance. They will also have to provide funds for an increasing number of emerging countries hit by the global crisis.

(5) The depth by which some countries have been hit by the economic crisis could become clear during the G20 meeting coverage. Striking examples would include countries in Eastern Europe, maybe even more developed nations like South Korea. Hence, one should look to exit positions in countries which one does not have much macroeconomic conviction on.

(1) Bretton Woods
(2) Plaza Accord



Saturday, February 28, 2009

Continued weakness in Singapore residential housing 2 comments

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I was thinking which of my blogs I should put this article in and decided that the Trendspotting one is the most appropriate although the article is not highlighting a trend to buy into; rather it is advising against buying into something. Besides, I haven't written in Trendspotting for some time already.

There has been pessimism over the property market since mid-2008, and justifiably in my view, given the potential looming supply of private homes coming onstream over 2009-10. However, recently there appears to be a wellspring of renewed optimism in the market, magnified through the press, over the successful launches of several mass-market developments, notably Caspian in Jurong East and Alexis in Alexandra. I also notice threads appearing online trumpeting the recovery of the housing market. And of course, you hear again the boss of one of our local big developers declaring his (perrenially) optimistic views about the property market during the company's results release.

In my opinion this is false optimism tinged with acute conflict of interest from the various parties involved. Let's get the overall feel of things:

1) One of the key failures in the current global market is liquidity shortage leading to tight credit across the board. The logical thing is to expect demand for big-ticket items that require loan financing to be in the first line of fire from a credit crunch. That is why auto companies across the world are seeing an unbelievable slump in demand over the last 2-3 months, especially when they are considered discretionary items as well. In the US, without government assistance (eg. loan restructuring), things would have been worse in their real estate industry. In Singapore, I have heard people claiming that low SIBOR rates (benchmarks for home loans) are evidence that liquidity is available and cheap. This is not true if firstly, the banks are more stringent in their screening process on who to lend to, and secondly if the premium over SIBOR (typically home loans are quoted at SIBOR + premium) are increased accordingly as SIBOR is reduced. I understand both are happening. Really..... if I were a banker, would I be lending like normal times, and at lower rates than normal to loan seekers now? Get real!

2) The supply-demand dynamics just doesn't look exciting. Why would anyone want to buy now why there is a large supply overhang. Let's look at some numbers from URA, the voice of reason (statistics don't lie):

Click on the picture to make it larger. Basically, the figure as of 4Q08 show that currently total available/completed private residential units number about 230,000-240,000 (mostly occupied of course). The supply in the pipeline is about 66,000, half of which are under construction and the other half being planned. Think about it: there is looming supply amounting to one-quarter of Singapore's existing private housing stock, the latter of which was built up over decades. That means massive demand has to come in to absorb this supply overhang, and that demand must amount to say, one-quarter of Singapore's mid-to-upper middle-class (that can afford condos). Are we expecting 25% increase in this population over say, 4-5 years? Of course, there're the cash-rich enblocers, but common sense tells me they can't amount to that many; besides they'll likely want to tighten belts too.

The only reason for people to buy in the face of such an obvious supply overhang, whether for personal dwelling or for investment purposes, will be if prices drop to a sufficiently attractive level..... which brings us to our third point.

3) Price levels are not that attractive. You only have to look at the URA Residential Price Index to make that conclusion:

Look at the purple line, for condominiums. It is the one that has risen at the second-highest pace from 2003. As at 4Q08, this particular index is still above 160, way above the base from 2003-05 at 110-120. Now, assuming price discounts in 1Q09 at ~10% from my understanding, that index would still be >140 as of now. Surely a good reference price point would at least be the base at 2003-05, if not lower (given the tepid outlook not to mention the supply overhang)? Things will only look reasonable, in this context, at another 20% discount from current prices, which brings the index to 2003-05 levels. And to bring strong demand in, you'd need to have distressed sales, which entails further discounts from there.

That is the picture for private residential property -- the liquidity situation, supply-demand dynamics and comparison to historical prices don't look good. It is really not so much about timing, but more about price point, especially for those who plan to buy them for personal dwelling. Note how the current wave of media optimism over properties has coincided with the imminent TOP of many developments. Some people have to get rid of their inventory quickly.

(1) URA website



Wednesday, July 23, 2008

The resurgence of Singapore retail 1 comments

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The subprime crisis and the many malicious tentacles extending from it (the chief one being inflation) have dominated (negative) global attention over the past year but I feel several themes have receded into the background as a result though they still remain compelling stories in their own right. One of them is the remaking of Singapore.

Make no mistake, this is one big story in the making. When you have record construction book orders for several years in a row that is driven by a single-minded governmental drive to reposition from manufacturing to services and consumption, it will generate a displacement effect that benefits certain sectors and affects others in a significant way. A likely beneficiary will be retail, as highlighted in my writeup at the start of 2008: Fundamental Trends to Watch for 2008.

Retail was huge in the 1980s and early 1990s, driven by Singapore's emerging status as a tourism and aviation hub amid the bustling tiger economies of Southeast Asia. They were also the years when infrastructure buildup was strong --- the key one being the MRT, and we had free-spending Japanese tourists as the main foreign spenders while locals' spending power grew prodigiously through a 20-30 year boom period. It was a multi-year secular theme and the hot stocks were retail, hotels, property and construction. It was an era when among the ten richest men was a retail tycoon (the boss of CK Tang).

The local retail industry has had moribund growth since then, affected by several developments: the Asian financial crisis that hit our neighbouring countries hard, miscellaneous crises (911, SARS) and recessions that affected domestic and tourist consumption, plus a shopped-out Singapore consumer that increasingly went overseas in search of cheaper goods given the advent of budget carriers.

While we constantly hear about the problems of retailers (high rent, strong competition), it is worth noting that on the demand side, the locals' spending power and their willingness to spend has never weakened. This is clear from continually rising incomes which now brings us above the median of developed world per capita incomes, and the success of well-placed suburban malls like Jurong Point, the malls at Tampines, and the recently-built Vivocity, which depend mainly on locals' spending. Suburban malls comprise about half of Singapore's retail space. Implict government targets to increase population to 6 million from the current 4.5 million, from both newbirths and immigration, bodes well for future demand at these malls.

Meanwhile, tourist arrivals have been growing steadily over the years and is set to undergo a quantum jump over the next 1-2 years as the two IRs at Sentosa and Marina are completed and as a more subtle multi-pronged approach is launched to attract tourists, including medical tourism, event-driven tourists (MICE and F1 Grand Prix) and enhancing Singapore's hub status (eg. Singapore Cruise Centre). The STB's target --- to triple tourism receipts to $30B and double tourist arrivals to 17M (set in 2005) --- would have implied >10% annual growth for the retail industry if it materialised.

In terms of retail space supply, there is approximately 7 sq ft of available retail space per capita in Singapore as at end 2007. This is similar to Malaysia's Klang Valley but only half of close competitor Hong Kong's ratio of about 16 sq ft per capita, suggesting there could be further growth before saturation. One of the observations that is unique about retail property (especially in the prime areas) is that supply generates demand, as a critical mass generates a reputation and a niche which attracts the fashion-conscious and the affluent who place variety above all other factors in importance (which is why I favour the prospects of retail property even as I am pessimistic about the rest). Driven by the strong growth potential in the Asia-Pacific that has emerged in recent years and their hunger for higher-end goods, Western retailers have increasingly expanded in this region to secure their beachheads and mindshare and Singapore is likely to benefit from this region-wide trend (it is often seen as a launching pad for further expansion). Islandwide retail space occupancy rate has consistently exceeded 90% over the last few years, and rental rates have grown strongly while still attracting takers. For a striking example, prime rental rates along Orchard Road have been in the region of $40-50 psf/month, and I just read that the new iON Orchard is quoting $80 psf/month without any problems attracting bidders. It suggests that there should not be an oversupply of retail space in the prime Orchard Road stretch even with the coming up of new malls like Orchard Central and Somerset Central.

The likely strong growth in tourism receipts would benefit some more than others. Retailers in the Central Region would benefit more compared to suburban malls, while luxury retailers would likely benefit more as well. It is worth noting that among the stronger retail segments according to the Department of Statistics have been wearing apparel and footwear, watches and jewellery, and department stores.

This is not a sure-win story. Retail could yet remain in the doldrums due to a global recession, though in such a scenario none would be spared. But in the more likely scenario --- a less serious slowdown, it is likely that consumers will scrimp on the bigger-ticket items which would require loans, such as property and cars (both of which are already seeing negative growth), while still continuing to spend on consumer goods which are more a function of their incomes/income growth (which should be steadier). Hence retail looks like a better play than other sectors (eg. property) in a "remaking of Singapore" theme.

There are several sub-sectors within the retail sector that look interesting. I have a Retail Sector Index where one can check out the component stocks. One could adopt a Peter Lynch approach by checking out crowd traffic at various malls to assess the popularity of various brand outlets. Personally, I feel that retail outlet outfitters (which benefit from new mall expansions), popular luxury label owners and mall owners (in an environment of floorspace pricing power) all look interesting.

Two things stand out for me, stock market-wise. Firstly, the retail sector has not really surfaced as a hot sector through the last few boom years (though miscellaneous retail stocks have done well), as indicated by the trend of my Retail Sector Index ---- a bullish sign. Secondly, there have been institutional and private investor interest in local retail stocks, as evidenced by recent takeover and privatisation deals --- Royal Sporting House and Robinsons (by Arabs), Sincere Watch, CK Tang (unsuccessful privatisation), Guthrie GTS (partial privatisation), Courts (ongoing) ..... what's next?

(1) Retail Outlook 2007- Opportunities and challenges ahead
(2) Property Report Asia Jul 2008: Singapore retail property highlights