Category Archives: DBS

Walking away from a corporate bond deal

I came across an article on the newspaper yesterday morning that Ezion Holdings will be having a meeting with bondholders this coming Monday to present a debt restructuring plan. It reminded me that corporate and perpetual bonds were selling like hot cakes 4-5 years ago offering coupons between 5-7%. I had a chance to meet a relationship manager of a bank who was offering Swiber bonds at 7% at that time. A quick and dirty at-the-back of envelope calculation showed that the annual coupons would be a whopping amount of $17,500. Compare it with a dividend-paying stock like DBS, the capital of $250,000 to pay for a bond would have bought about 16,000 DBS shares around that time when it was trading at $16 per share. This would translate to an annual dividend of only $9,600. It’s a stark difference of $7,900 and this would recur yearly till the bond matures. This big difference in the yield could have tilted the balance to attract many investors into buying bonds than to invest in equities. Even I was salivated after making the comparison, but my sanity got better of me. There were a few things that made me feel uncomfortable about corporate bonds.

1.       Corporate bonds were extremely illiquid. Certainly, when the bond coupon is high with a relatively short maturity period, potential bond-holders would want to keep them till maturity. My guess was that most of the potential bond-holders were former property owners who had sold off their properties and had parked the money in the bank. Perhaps illiquidity was not really an issue to them. After all, properties are also illiquid, and they may take months to sell off. Perhaps, many people have overlooked the fact that a property could hold value better than many other types of assets. Even when the price is no good at that time, there would always be a next opportunity to sell some time in future. However, when a company is in distress, the bond value can fall very fast once the bad news goes public. The maturity date may be a further inhibition because potential buyers could calculate the number of expected coupons to maturity. On the buyer side, my inference was that there were not likely many too. Corporate bonds are mainly opened to the high net worth individuals (HNWI) and are not marketed to the mass market. That gave me some inkling that during the times of need, the sellers may have to depress the price significantly in order to attract a buyer. It is unlike a unit trust, whereby there is always a ready counter-party such as an asset management company or the bank, to buy over the financial product at the net asset value. 

2.       The second thought I had was – if the coupon offered was so good, then why the banks were not taking the first bite on the cherries. In all likelihood, the banks have made loans to these companies to the hilt and that all the company’s assets have already been pledged. This meant that bondholders had no recourse when things go wrong. How much could a company cough out to pay bondholders when there were no unencumbered assets to sell? Even secured lenders like the banks could be affected when the pledged assets could only fetch a fraction of their book value during fire-sales.

3.       Then there was another mind-boggling question. Why was the company prepared to pay bondholders at 7% when the banks were paying depositors less than one percent for their deposits? Bond issuers are not charity organizations to dangle a 6% difference in interest just to attract investors to buy their bonds. They probably could have made do with 3-4%.     

4.       Next is a personal finance question. Most of the target customers were probably HNWI who had sold their properties and parked their deposits in the banks awaiting the next investing opportunity. Or perhaps, they are business owners who had earned enough and parked their money in the bank. For a person, who was not born with a silver spoon or made from property sales and have to work hard to earn every single dollar, it would be difficult to part with a quarter of a million just for a single investment. Frankly, we do not have many quarters-of-a-million to spare to make sufficient diversifications for our portfolio. This would end up with a lob-sided risk concentration. It is really not a way to create a defensive portfolio.

5.       When I inquired about the effect on the company if the oil price tumbled, I did not seem to get the comfort that the RM was able to answer me adequately. Of course, at that time, I did not expect the oil price to tank so fast and so drastically from more than $100 per barrel to less than $30 in about a year. It was a naïve question as a time-filler during the conversation, but in hindsight, should have been a pertinent question to ask.

All these thoughts made me think twice about investing in bonds. Given that I still need bonds to beef up my portfolio, I decided that perpetual bond was probably the way to go. While there is no maturity date for perpetual bonds, without the $250k requirement would help me able to apportion out the amount to buy several perpetual bonds or a mixture of perpetual bonds and stocks. After all, there were several perpetual bonds on offer around that time. Genting perpetual bond was one of them. The bonds were offered in two different tranches first to institutional investors and then to retail investors one month later.  The coupon rate of 5.125% may not be as attractive, but casino operation is a cash business and it should be less risky compared to an engineering project or service company which is purely dependent on the oil price and the up-stream oil payers.

 

It has been well and good now that things have fall in place. DBS shares price have appreciated by 25% since then. Also now that Genting has decided to redeem both the institutional perpetual bonds and retail perpetual bonds by September and October 2017 respectively.

On the other hand, many issues related to corporate bonds, especially those related to the offshore and marine sectors, have still not been resolved. To date, most of the bondholders were forced to take deep haircuts. When there is no money on the table, it is likely that all the bondholders and even shareholders may be forced to swallow some bitter pills. As I know, so far two companies namely, Nam Cheong and Ausgroup have proposed to convert the bonds to equities. Perhaps, Ezion would also do likewise in the coming meeting.       

 

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Striking the football with two legs, not one

Several days ago, The Straits Times published an article entitled “Singapore stocks pay best dividends across Asia”. Indeed it is true. Even with the current market run-up, many blue chips companies have been paying a nominal dividend of about 3-4% at today’s market price. Should one had bothered to explore further and bought into an undervalue stock some time ago, the return could have been much higher offering both capital gains and good dividends such that one would not even bother to sell them. A lot of these shares could even displace high-yield instruments like REITs and perpetual bonds that offer a yield of around 5%-6% on average. While REITs and perpetual bonds offer comparatively good yields for investors, they do not have much buffer in terms of liquidity. REITs, for example, have to distribute 90% of their income to avoid the corporate tax. When there is a credit crunch or when there is a need for funds, they either have to sell off the properties or to raise funds by issuing rights.

 

As pointed out in the last post, many investors got into stocks were partly because the interest offered by banks had been too low for too long. So, buying into REITs and perpetual bonds appeared to be no-brainer due to their high payout. Hopefully somewhere in the future, they are able to recover their investments through the dividends they received…..the higher the better. (See Figure 1) The setback is that when the interest rates start to perk up, these investments are likely to be beaten down more drastically. This could result in capital loss, thus offsetting the higher dividend payout.

  

Stocks tend to have more leeway when comes to dividend distribution. Usually the payout is in the region of around 35-60%, depending on the discretion of the directors. There is usually more room for paying out higher dividends when the company has no urgent need for funds. They could even tap into their cash hoard should there be a need for expansion. In fact, I was a little surprise that 15-18 months ago, many blue-chips counters at their lows against the declared dividends in the previous year. For example, DBS was trading between $13 and $15 per share, resulting in a dividend yield of more than 4% based on the declared dividend of $0.60 per share in the previous year. By the same token, OCBC was trading between $8 and $8.50 per share when the declared dividends in the previous few years had been $0.36 per share. The dividend yield would have been more than 4.2%. The gap between the blue-chips had been too close, and it would be either that blue-chip trading price to increase or REITs price to fall going forward. Today, the share price of DBS and OCBC is around $19 and $9.60, and still offering a relatively good yield of 3.15% and 3.75% respectively.

 

For both capital appreciation and dividends, I never forget about how this stock darling – Cerebos Pacific. It is a company that sells the Brands of Chicken. The stock is relatively illiquid with the main shareholder being the parent company Suntory Ltd. The free float was only 15%. (Note: it is important to note that holding illiquid stock is not necessary a good thing. If we wish to hold illiquid stock, our mindset should be to hold as long as it needs.) My purchase price averaged around $2.50 per share by 2003 after consolidation. The dividends had been 9 cents standard dividend and 16 cents special dividend. That went on for a total of 9 years from 2003 to 2012, providing a yield of 10% over an uninterrupted period of 9 years. The special dividend was given every year so much so that shareholders think that the 16 cents special dividend was considered to be a new normal. Needless to say, by the 6-7 years down the road, existing shareholders were collecting dividends and laughing all the way to the bank. At the same time, the share price has been creeping upwards. All these happened in the midst of the global financial crisis in 2008/2009 and also when the company was setting up a new plant in Thailand also around that time. By the time, Suntory took the company private, it had already paid out 9 nominal and 9 special dividends over the 9 years. That would have enough to cover 90% of the initial investment. The buyout price in 2012 was $6.60 per share, offering yet another 6-digit return with little money down. It was like a 10-year bond paying a coupon of 10% and paying the 260% of the capital invested. David Clark in the book “Warren Buffet and the interpretation of financial statements” would have called this equity-bond. It is a form of equity, but it works like a bond from investors’ perspective.

Happy investing!   

Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy. Analyses of some individual stocks can be found in bpwlc.usefedora.com. Registration is free.

The local banks – DBS, OCBC and UOB

The local banks have just released their financial results for the financial year 2016. All the three banks suffered a decrease in profit for FY 2016 compare with FY 2015. OCBC seemed to have it worst, while UOB did comparatively well. Before the results were released, it was widely expected that the banks would suffer a decrease in profit in view of the flagging economy, and most importantly their exposure to the offshore and marine industries that had turned sharply for the worst following the sharp decline in the crude oil price last year. For almost whole of last year 2016, we have seen several major defaults and major loan re-structuring exercises in this sector. Surely, in such a scenario, it would be a miracle if the banks can go through the year unscathed.

One interesting thing to note, however, is the impairment charges that the banks set aside in FY 2016. OCBC and DBS increased the impairment charges by 48.8% and 93.0% respectively, while UOB decreased it by 11.6%. One deduction, I can make is that UOB felt that it had already accounted for all the problem loans, and there was no longer a need to make further provisions. Meanwhile, OCBC and DBS were still making provisions for loans that might deteriorate in time to come. One possibility is that they are pre-empting the possibility of Ezra that can go in the path of Swiber or Swissco. Due to this significant impairment charge, the EPS of OCBC and DBS were marked down by 13.7% and 3.0%. The drop in the EPS of UOB is mainly due to the higher operating costs for the year, and is a different nature from the other two.

For the net interest margin (NIM), the fate is entirely different for all the three banks. OCBC’s NIM remains unchanged at 1.67%, UOB decreased from 1.77% to 1.71%, while DBS increased from 1.77% to an uninspiring 1.80%.

On the whole, the business risk for the banking sector has increased. Asset qualities were decreasing, and decreasing at a very fast rate. In the meantime, the share price for the banks has been on the uptrend for several months. All this translate to the fact that the ‘margin of safety’ continues to get thinner as the days passed.          

 To know more, register at on bpwlc.usefedora.com. Registration is free. Paid students who are attending the stocks review master program on 11th March 2017 are entitled free access for the online courses.  Passwords will be sent to your emails to enable your access to the modules.  Courses are other sectors are also available.      

 Brennen has been investing in the stock market for 27 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

What can we expect from the American election?

Now that the American election is over, and Donald Trump has been announced to be the president-elect. The inauguration is scheduled to be on 20 January 2017. As a biggest economy in the world, we can expect big event changes to have a bearing on the many smaller economies. Certainly, the promises made by Donald Trump during his campaigns would be closely followed, as they may become the new government policies during the term of the new president. Of course, one may argue that these may be promises, and they may not be fulfilled or at most partially fulfilled after looking at the cost-benefits of all these promises. After all, until the fate was sealed on last Thursday, Donald Trump had been an underdog in this neck-to-neck race with Hillary Clinton. To change the odds of winning this election, he might have to resort to populist promises to win votes.

 

However, as investors, we tend to make anticipations of the future to guide us in our buy or sell decisions. So the closest or best clues would be to go along the lines of his background as well as to rely on his promises during the campaigns. As it is, he has been a real estate magnate businessman with zero political back-ground, many would have expected that he would be especially focused on infrastructure developments. These constructions would likely to bring about inflation resulting in FED hiking up interest rates more aggressively. So in all likelihood, our bank interest rates would also perk up in time to come. As it is in the last few days, the local bank stocks such as DBS, OCBC and UOB were holding up relatively well while many local stocks were on a down-trend. In particular, DBS advanced $1.20 or about 8% in the last two days on Thursday and Friday. Conversely, the interest rates sensitive stocks such as bonds, REITs, property counters as well as many debt-laden companies were hit quite badly. Many emerging market currencies are also affected as funds are expected to repatriate back to US in search of higher interest rates. Thus many Asian currencies have also been on the downward trend. In fact, companies, especially the debt-laden ones that borrowed or purchased goods in US dollar are likely to be hardest hit. Consequently, many Indonesian company stock prices fell very hard. They purchased goods in US dollars and sold locally in rupiahs. Stocks like Jardine C&C, which held 50% of Astra shares, had already retreated about 10%. This situation is likely to continue as long as the spectre of interest rate hikes remains in the mind of investors.

 

The other significant factor mentioned in his presidential campaign was pro-American, pro-white policies that point toward protectionism. This means that many economies depending on US for trade will be also affected. These countries include Indonesia, China, Taiwan, Malaysia, South Korea, Philippines, Vietnam and even Singapore. Furthermore, with their respective currencies retreating against the US dollars, it is likely to make things very expensive for these countries. Certainly the respective stock markets are not going to be spared as well. The fear factor should likely continue to weigh on the Asian stock markets in the short term.

 

While the situation looks grim, it is only based on anticipation. The reality may not turn out to be this way after more detailed review of those promises. It could even be that the President may decide to soften his stance on free trades after his inauguration.

 

So, end of the day, it is still important to continue to stick to our long term-plan in building our stock portfolio. The fear factor may even present interesting opportunities for us to buy stocks that are beyond our reach during euphoria.      

Good luck!

Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Buy-and-hold strategy does not mean buy and don’t sell

For those who may not know, buy and hold strategy is a proven strategy and is used by long-term investors in hope to benefit from the capital appreciation of the component stocks in a portfolio. It is often associated with Warren Buffet (WB)’s style of investing, especially when he mentioned that the holding period for the Berkshire Hathaway portfolio is FOREVER. It is probably a sweeping statement, but many people had taken it to the extreme that when we buy a stock, we should not sell it. Of course, if we look at the ST index from its all-time high and compare it with today closing of 2869.74 as of 30 September 2016, one would have thought that by adopting the buy and hold strategy, one would have lost more than 25%. But does it really mean that buy-and hold strategy does not work anymore? Not quite. Otherwise, why would fund houses and insurance companies still continue to adopt such a strategy? Remember, these are big fund managers and when they hold a stock, they do not just own 2,000 shares. They probably own 200,000 shares or even 2,000,000 shares even if it means $20 per share. For the fact that they continue to use this strategy means that it is still relevant even with the advent of high-frequency trading computers. In my opinion, if it works for big funds, it should also work for individuals as well. And because big fund managers hold large quantity of stocks, we simply cannot expect them to empty their portfolio of, say 200,000 of OCBC in one day, and then buying it all back on another day on a short-term basis. In fact, most of the time, their portfolios do not change at all. In the way, they are practicing buy-and hold strategies. These fund managers have to think long-term in order to pay the clients and retirees, who are long-term stake-holders. The key here is to think long-term. (Sometimes, I am quite bemused by people who mentioned “Aiyo, must think long-term ah!”. Thinking long term does not mean that we do not sell a stock at all!)

 

Given the relevance of buy and hold strategies for large funds, can small retails players like us mimic the actions of these fund managers to make money? Certainly yes. The fact that we do not hold too many lots per stock, it is sometime easier for us to manoeuvre better than the fund managers.

 

Allow me to go back into my history. After falling and recovering from the bad experience in the Asian Financial Crisis (AFC). (Click here for the detailed history), my aim was to hold this great stock called DBS. On my record, I purchased 1000 shares at $14.80 in February 2004. (In fact, it was less than 10% below yesterday’s closing at $15.39 considering that they are more than 12 years apart.) My long term plan was to have at least 10,000 shares in 10 years. Based on this objective, my shortfall was 14,000 shares. The period between 2004 and 2007 was a fantastic time for stocks because the ST Index advanced all the way from below 2000 to its all-time high of 3,875.55 in October 2007. The global economy was doing so well that one very significant local political personnel was said to be saying “All the pistons are working at full force”, pointing to the perfect functioning of US, Europe and China. (Of course, we know in hindsight that Global Financial Crisis (GFC) came one year later and everything got imploded.) Needless to say, in between 2004 and 2007, if one were on the buy side and sold 1-2 months down the road, or simply buy and hold all the way, he should be able to make money. This is especially true for DBS, which is a good proxy to the stock market. Even though I have a long-term plan to continue to accumulate DBS in the long run, the speed of price advancement was so rapid that each time when I bought it, it became attractive to sell it off some months down the road. In fact, it was prudent to take money off the table because rapid advancements are very often met by rapid pull-backs. In such a situation, I could even say that I was trading, though not exactly short-term trading because each time my holding period was a few months. The share price of DBS in the period between 2004 and 2007 advanced from $14.80 when I bought it to a peak of $25.00. By the end of 2007, however, my shareholding in DBS did not increase at all because I had sold just as much as I had bought it. It was probably with some luck that the Global Financial Crisis (GFC) came along that I was able to pick up a lot more shares and subscribe more rights at $5.42. While I did lost some money on paper on the 1000 shares that I kept, it had been more than offset by the capital gains in the ‘trading’ that I made off from the DBS shares that I had bought and sold along the way. Furthermore, the GFC was probably a once in a lifetime chance to accumulate DBS. It came glistening right in front of my eyes. Such opportunities should not be missed at all cost. This was even truer for someone who had been bashed badly during the Asian Financial Crisis (AFC), and only to see opportunities slipped through the fingers from a low of 805 on the ST Index to more than 2000 within a matter of 15 months or so. (Click here to view my background).

 

Of course, one may argue why I did not even sell off my 1000 shares that I had been holding. The reason is simply that I am not GOD. (There is a Cantonese saying – 早知就没黑衣) I can’t predict the future. If I could predict the future, I would have even sold my 1000 shares and bought it back at the peak of the crisis. My long term plan, however, was clear that I needed to accumulate DBS shares in the long run, and the GFC provided me an opportunity to do so.

 

Then another opportunity came knocking again. After the GFC, DBS advanced again past $20 by late December 2014. Having come up from a relatively low base during the GFC, I managed to sell some shares at $18.50 in October 2014. At this share price, it would have translated to more than the market capitalisation of DBS before the GFC when it was at $25.00. (The reason was that DBS raised rights of 1-for-2 shares during the GFC.) I would have thought that the share price would not go beyond that point, but the general optimism pushed the share price further up to past $20. I sold again at $20.20 in December 2014. It finally reached $20.60 in early 2015. Of course, the crash in the oil price and a series of ‘scares’ in the last 18 months or so, made the share price of DBS came tumbling down again to less than $16, which now becomes a super strong resistance level. When it reached a level of around $13/$14, it allowed me to buy back those quantities and even more than I had sold.    

 

In a similar way, I have been reducing my SPH shares for the past 1-2 years because I felt that the fundamentals of SPH are weakening. It is not because of bad management or SPH was making wrong investments. In fact, I believe that the management has been quite good, peppering shareholders with good dividends. That was why the share price has been quite well-cushioned enabling me to sell a bulk of my stocks off at above $4.00, except for the last 2,000 shares which I sold recently.  The fact is that media and publishing business is under a huge threat from the internet, which is highly accessible locally. The threat is beyond their control and that is why the profit from the print business is dwindling. The only thing that probably helped them along is the SPH REIT, which probably had already hit a plateau. Of course, SPH is not sleeping and is on a look out for fantastic investments that may pop out along the way, but until today, it is still not there yet. Of course, when the price becomes attractive again, Perhaps, I may be back in again.  

So in summary, buy-and-hold does not mean buy and don’t sell. Sometime, it is prudent to sell and take money off the table even if the stock has not reached its full potential. Very often, there is a need for stocks to digest a bit before they can climb further. In fact, as it is DBS is now hovering for the past six months or so below $16. If I had not sold anything and stood only on the buy side from 2004 till now, I probably would have made only from my dividends and not too much from the capital gains. It is the long-term strategy and, of course, some luck that counts. It does not mean buy and don’t sell.

Good Luck!

 

Disclaimer – This post is not a recommendation or an advice to buy or sell the stocks mentioned here-in. These are past performances. They do not reflect future performances. 

 

Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Sell in May and go away strategy: Why not a contrarian view?

The old saying sell in May and go away strategy seemed to have taken its toll this year when STI was sharply sold down from 2960.78 on 21st April to 2730.8 on 6th May 2016, a drop of 230 points, representing about 5.8% decrease on the ST index. After that, there appeared to be an increase in volatility as the bull and the bear tussled to tip over each other. By the end of today, after approximately 3 weeks of trading or so, the ST index ended at 2791.06, a mere increase of 60 points from 6th May.

According to The Straits Times (ST, 30 May 2016), it happened four out of five times in the last five years. If that view still holds true, then would it not be interesting for us to take a contrarian view and buy into the market when we bade farewell to the last ship that left us. And, of course, if they do return going forward, we can slowly sell back to the market.

Slide28

Frankly, taking advantage of this apparently universal ‘market theory’, I was actually a net buyer in the month of May. After all, isn’t it important that to gain from stocks, we should either be ahead of the market or, if we are courageous enough, even to act against the market movement. Otherwise, we are just a market follower moving up and down with the market. When market tanks, we lose; and when the market roars, we win. That said, I bought back some of the stocks that I had sold in April such as Jardine C&C and IPC to pocket the difference and yet maintain my original exposure in these stocks. In other words, I ‘squared off’ my position.

Hopefully, I am well-positioned when there is a big buy to propel the market. There could, however, be a stumbling block this year as the spectre of higher interest rate can derail this strategy. Big investors and fund managers may not return any time soon as they go in search of better yield elsewhere especially when local economic outlook still looks uncertain. Should such an event happens, it would affect the market liquidity. Accordingly, we should expect the spread between lending and saving to widen, thereby benefiting the bank stocks. With the cash return from OSIM, following the privatization plan by its chairman and CEO, Mr Ron Sim, I had also increased my stake in the bank stocks. However, one has to be careful about over-exposures in bank stocks in an increasing interest rate environment as non-performance loans (NPL) will also increase as well. If the interest rate continues to perk up, it will come to a time when the deteriorating asset quality will overwhelm the benefits of higher interest margin.

Happy investing!

Disclaimer:

This article is not a recommendation or an advice to buy/sell the mentioned stocks. It is a sharing of his opinions with the readers.

Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Making sense out of this market

The interest in the stock market returned with a vengeance over the last 6 trading days. By Friday yesterday, it had ended at 2837, an increase of 234 points from the closing at 2603.40 on 25 February. This represented an increase of 9% on the ST index. Imagine if one were to continue to wait in hope that index tanked further, then he would have missed this rally. It may be the best rally for this year.  Thanks to this changing global sentiment, I managed to pick up some battered blue-chip stocks after the Chinese new year to add to my portfolio. This is in anticipation of additional liquidity that will come April and May when companies distribute out their year-end dividend.

The fact that stock markets all over the world were retreating in the last two months was that people were generally fearful about the world economy – the retreat of commodity prices, the collapse of crude oil prices and that the Chinese economy growth rate slowed to 6.9% was the worst in the last 25 years. Similarly, the European as well as the Japanese economies were only trudging along even with huge stimulation packages. Naturally there is a lot of pessimism over the local economy that led to a huge retreat in the ST index over the last two months in January and February.

As pointed in my book “Building Wealth Together Through Stocks”, markets tend to undershoot the pessimistic outlook (and of course it also tends to overshoot during massive optimism at the other extreme). Consequently, windows of opportunity will present themselves time and again. Take DBS for example. Six months ago, it was trading at around $20 per share, but it fell to $13 per share just recently, a drop of about 35%. In between, there were only two quarterly of reporting. Were the results that bad for the share to tank so much? I am not saying that DBS share cannot drop to $13 if it really did badly. What I am saying is that the market tends to anticipate too much before it really happens. And when things were not as bad or when there were some signs of good news, it would start to leap forward. That was exactly what I mentioned in my earlier post (Market rout: A test of our mental fortitude.) that the market is likely to roar with ferocity because the market had already dropped too much.

 

Let us examine the stock market index. About 20 years ago, if the ST Index were to reach 2500, we can safely say that it had reached its high. But today, if ST index 2600 level, it would be have been considered it as a historical low. There were only two occasions since global finance crisis in 2008/2009 that had hit below 2600, namely the euro-zone crisis in 2011 as well as after the collapse of oil prices recently. Again, it is of course possible that the ST index can go lower than 2600 and even 2500 and below, but it is important to note that stock indices represent the value of a sample of selected companies. As stock indices retreat, values of companies will emerge because market is “under-pricing” the value of companies more and more. Stock prices are driven by sentiments, and very often, the market may become so pessimistic that it starts to price themselves grossly below companies’ intrinsic value thus causing big price differences between stock values and stock prices. Consequently, when the sentiment changes, the bounce back becomes forceful. Now that this force had already pushed up the stock index significantly, perhaps the strength to push up the index further may start to weaken or even collapse going forward.

Invest carefully now.

Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Banks may be cheap now, but…

Cash is king. Yes, during financial turmoil like this when stock markets all over the world are sinking, having cash is the key. According to The Straits Times on 20 January 2016, just last year alone, about US$735 billion left emerging market. China accounted for $676 billion which formed the bulk of the outflow. Similarly, the fund inflow last year was about US$231 billion against US$1.2 billion per year from 2010 to 2014.

On the corporate front, banks are natural victims during times of liquidity crunch too. Most bank share prices have sunk more than 30% from their recent high when the ST index hit 3500. Right now, banks are trading near or below their book value (BV). Exactly, five months ago, I had written in my blog that there was always a possibility that banks might start to raise funds through rights issue if the turmoil persists. So far, none of the banks have raised alarm, but still it is possible if banks deem it fit to do so. After all, there were past precedence of fund raising activities during financial crises. For example, DBS raised S$4.2b in end 2008 through 1-2 rights issue. Similarly, OCBC and UOB raised $1 billion each through preference shares issue. In a similar way, during Asian financial crisis in 1998, DBS acquired the POSB. Looking ahead, it is still a possibility especially during such times when other banks or companies may fall into bad times. Such huge fund raising activities can come in handy for future acquisitions.

Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

If this stock market turmoil ends up in a liquidity crunch, do you know what the banks will do?

During the times when there is liquidity crunch, such as now when there is an impending interest rate hike in US or when there is a  stock market rout in the region, what is the most important thing for the banks? Yes, CASH at hand! When there is an extreme liquidity crunch, the banks will tend to play it safe. Whether or not they are going to use it, raising cash is the most important thing to do during such times.

Historically, there were many precedences. During 1998, when there was the Asian Financial Crisis, DBS bought POSB. It was the people’s bank with a huge amount of deposits. The main lending activities of POSB at that time was mainly in secured lending such as housing loans and the deposits at that time was huge.

In the recent global financial crisis in 2008, DBS raised S$4.2 billion through rights issue. Seven hundred and sixty (760) million rights were offered at $5.42c, a hefty discount of 45% from the last day trading price of $9.85. Each right was offered at 1:2 basis, meaning 1 right for every 2 shares owned.

In parallel OCBC went into offering preference shares at $100 per share in August 2008. To sweeten the deal, the dividend was offered at 5.1%, a rate way above bank’s interest rate even until today. OCBC raised $1 billion from that exercise. Following that move, UOB also followed suit with the same offering but at a slightly lower rate of 5.05%. UOB also raised about $1billion from the exercise.

In such times, when people are fearful and cashing out of the stock market, this appeared to be the best time for the banks to raise cash. After all, with bank interest rate at historical low couple with the stock market turmoil, many investors are looking to park their encashed money in safe instruments that offer sufficiently good returns. With the bank’s brand name and offering good dividend payout, it is possible for the banks to raise funds with relative ease.

What do the banks do with those money? Well, during market turmoils is one of the best opportunities for the banks. It is a question of survival of the fittest. Many so-called ‘fantastic companies’ will not be trading at historically fire-sale prices unless during such times. Remember that Astra, was one of the crown-jewel of the Indonesia companies before the 1998 Asian Financial Crisis. It was forced to sell its shares to Cycle and Carriage (C&C) before C&C was taken over by the Jardine group. If the shares of Astra had not been sold to C&C, Astra would not have been in existence or could have been disintegrated into smaller companies. Who knows Danamon Bank in Indonesia may be up for sale once again with better selling conditions. The last time, when the deal fell through was in 2013, when the Indonesian regulators allowed only to a maximum cap of 40%. DBS, on the other hand, was looking into acquiring 67.37% (for a price tag of $542.4m) which will ultimately trigger it to make a take-over offer of the bank.

Shareholders, in particular those who hold blue-chips, should maintain your liquidity now. You may be put in a situation to acquire rights or preference shares at a steep discount. Perhaps if you look at it in a long-term basis, it may not a bad deal. When the good times come back again, maybe you are rewarded with 500 DBS shares or 1000 OCBC shares as dividend in its yearly dividend distribution exercise.

(Brennen Pak has been a stock investor for more than 26 years. He is the Principal Trainer of BP Wealth Learning Centre LLP. He is the author of the book “Building Wealth Together Through Stocks.”) – The ebook version may be purchased via www.investingnote.com.

Market psychology – Are we at the market bottom?

Many people seemed to believe that the market is low now because we tend to anchor the stock price at where the stock price is at its maximum. Just a few months ago, it was 3500 on the STI and now we are at 3050. DBS, a good proxy for the local economy, was recently at its high around $21.50 a few months ago. Right now, it is trading at $18.70 and it appears sufficiently low  to buy. After all, the difference is a whopping $2.80 per share. But things have changed. The economic fallout in China and the falling currencies in ASEAN countries will shift the fundamentals leading to the steep fall the share price. Brace tight! The market has not bottom out yet. It should undershoot(1).

(1) See investing psychology on Building Wealth Together Through Stocks.

(Brennen Pak has been a stock investor for more than 26 years. He is the Principal Trainer of BP Wealth Learning Centre LLP. He is the author of the book “Building Wealth Together Through Stocks.”) – The ebook version may be purchased via www.investingnote.com.