Westpac Private Bank has seen 18 per cent of its Australia and New Zealand multi-currency home loans coming from Singapore in the past nine months, up by six percentage points over the same period last year.

They attribute the increase to poorer risk appetite after the recent global financial crisis.

Prices of private residential properties in Singapore have moved up significantly in the past few quarters.

Analysts said that has prompted investors to look elsewhere more specifically – Australia.

And cities like Melbourne, Perth and Sydney are popular among Singaporeans.

With some 8,000 Singaporeans studying in Australia currently, Westpac Private Bank said many parents are also considering buying real estate Down Under.

Sean Straton, head Premium Client Group, Westpac Banking, said: “Singaporeans have been looking for assistance in financing properties in Australia and New Zealand. And I think it just comes down to the heart of an asset class that Singaporeans feel comfortable with. And certainly after the crisis they feel that there’s some level of security.”

Market watcher Mortgage Choice said the median price for a property in Melbourne, is the highest, at almost S$530,000 while industry figures show that the median price of a private home in Singapore’s central region is S$1.66 million.

Islandwide, the median price of a private residential unit in the city state is S$1.12 million.

Although properties Down Under may seem more affordable, analysts warn that the Australia property market might be overheating.

A concern fuelled by potential influx of immigrants and investors, and a limited supply of homes.

Wong Sui Jau, GM, Fundsupermart, said: “Now there’re concerns that local Australians are being priced out of the property market. So because of that, there might be certain measures taken by the Australia government to at least make sure that at least the local Australians are not actually priced out of the property market by foreigners coming in.”

However, analysts noted that the recent interest rate hikes to some 4.5 per cent in Australia could help to soften demand.

Source: Channel News Asia, 7 Jul 2010

INVESTORS stayed away in droves yesterday as the market endured its quietest day in five trading sessions.

Lingering worries about the strength of the global recovery kept interest at a minimum, leaving the Straits Times Index flitting between positive and negative territory for most of the day.

It closed at 2,844.02 points, a marginal 0.17-point dip, while overall volumes fell to 976 million shares worth $890 million.

It was a rerun of last Monday when trading got off to a slow start and volumes dipped below the one-billion mark.

DMG and Partners Securities co-head of research Terence Wong said that fears over the world economy contributed to the low volumes.

Uncertain employment data from the United States last week and weak manufacturing figures from China have reignited fears of a global slowdown.

Mr Wong added: ‘For the rest of the week, we will see a trading lull. Volumes will still remain low as we head to the end of the World Cup. There’s a lack of trading ideas out there.’

Property counters and stocks with heavy real estate exposure ended mixed. Fraser & Neave lost nine cents to $5 and CapitaLand dipped one cent to $3.61, but Keppel Land rose two cents to $3.97 and City Developments rose four cents to $11.06.

Last week, official estimates showed that private home prices here rose a higher-than-expected 5.2 per cent in the second quarter, and are now higher than the 1996 peak.

‘With rising concerns over the strength of the US economic recovery, signs of a slowdown in China and the ongoing euro-zone debt crisis, buying sentiment could be dented in the near future,’ noted OCBC Investment Research, which has a ‘neutral’ rating on the property sector with a preference towards the residential segment.

‘Nevertheless, fundamentals of the residential property market remain sound,’ added OCBC.

A notable gainer was plantation firm Wilmar International, which put on 13 cents to $5.88. It said before markets opened that it has agreed to acquire Australian sugar and renewable energy firm Sucrogen for A$1.75 billion (S$2.1 billion).

‘We are positive about the acquisition as it allows Wilmar to leverage on Sucrogen’s management to expand the sugar business into fast-growing emerging markets by tapping on Wilmar’s strong distribution network,’ said CIMB in a note. CIMB maintained its ‘neutral’ call and target price of $6.50 on Wilmar.

China Animal Healthcare dipped half a cent to 31.5 cents. A fund controlled by the Blackstone Group is investing about US$45 million (S$63 million) in the mainland firm.

Building contractor CCM Group saw an upbeat trading debut. It rose throughout the day to close at 35.5 cents, up a whopping 78 per cent from its IPO price of 20 cents.

Stocks elsewhere in the region ended up mixed. The Nikkei-225 in Tokyo put on 0.7 per cent but Hong Kong’s Hang Seng Index slid 0.3 per cent. Shanghai shares fell 0.8 per cent to close at a 15-month low on fears of slowing growth and rising inflation.

Source: Straits Times, 6 Jul 2010

INVESTORS hoping that the second half will turn out a bit better than England’s on Sunday might find themselves out of luck, with more volatility warming up on the touchline.

Sure, market experts do not expect the disappointing performance to continue, but they fear the problems that have cropped up over the past six months may still flare up from time to time.

These could possibly come in the form of more panic over Europe’s debts, a crash in China’s over- heated economy, or the troubled United States economy slipping again into recession.

If there is a bright spot for investors here, it is the red-hot property market, where the huge gains made by HDB upgraders from selling their flats, combined with low mortgage rates, have helped to underpin the private residential market.

If the market’s report card was written now, it would show that the bulls and bears appear to have fought each other to a standstill, with the benchmark Straits Times Index (STI) registering an almost negligible 1 per cent loss since January.

But that does not do justice to the days of high drama and near panic that have occurred, starting with the STI gaining 4.2 per cent to hit a two-year high of 3,019.74 in April on the back of dazzling economic data from outperforming Asian economies such as China and Singapore.

The bourse then suffered a hangover, falling by up to 12.2 per cent at one point last month from its April high as investors succumbed to fears over Europe’s debt crisis.

Many investors fear that new problems will flare up in the second half while existing ones remain unresolved.

New complications on the horizon include the increasingly protectionist US Congress, which faces elections in November, and a faltering economy that has left millions of Americans jobless.

These new factors come on top of problems in the first half that refuse to go away – like questions over the ability of heavily indebted European countries such as Spain to service their debts.

Even China’s move last week towards a more flexible yuan exchange rate offered little more than temporary solace.

Investors fast turned cagey after the US Federal Reserve noted that financial conditions had become ‘less supportive of economic growth’.

Citigroup economists Kit Wei Zheng and Johanna Chua noted last week that investors’ confidence stayed spooked, even though the sovereign debt crisis in Europe seemed to have subsided.

‘Euro zone retail sales unexpectedly fell in April and in the United States, private employment and housing data disappointed in May,’ they said.

Even in Asia, which has provided a steady stream of positive economic data to cheer investors, the magnitude of positive surprises has been declining, they noted.

South Korea, Taiwan, China, Thailand and Singapore have all reported May trade data and most have surprised on the upside, with accelerating momentum.

But apart from Singapore and India, industrial production has eased for most Asian economies.

Not surprisingly, Asian fund managers have adopted a wait-and-see attitude, shifting more assets into cash, even as stock prices advance on thin volumes during the World Cup.

Citigroup’s fund-flow report yesterday said that net selling by Asian funds has continued since April.

‘Unlike two months ago, when sales were concentrated in Singapore and Malaysia, the selling in May took place mainly in markets that have been overweight by Asian funds like Hong Kong,’ it added.

But while fund managers stay on the sidelines, analysts expect HDB resale prices to stay firm, given the mismatch between demand and supply.

Citigroup said in its property report: ‘With capital gains from existing HDB flats at a seven-year high, coupled with low mortgage rates, we believe new sales are likely to remain strong in the mass market.’

While investors can fund property purchases with cheap loans, as mortgage rates sink to less than 2 per cent, they can get rental yields of around 4.25 per cent.

——————————————
GOOD YIELDS

‘With capital gains from existing HDB flats at a seven-year high, coupled with low mortgage rates, we believe new sales are likely to remain strong in the mass market.’

Citigroup’s property report

Source: Straits Times, 29 Jun 2010

INTEREST rates are falling but could they end up close to zero?

That was the startling situation posited in an analyst report last week – good news for mortgage holders but painful for those looking for some return on their bank deposits.

Thankfully, economists polled by The Straits Times say that the spectre of zero interest rates – seen most recently in Japan – is unlikely to occur in Singapore. But they warn rates will probably fall further this year to skirt the absolute baseline, before rising a little by year end.

The trend here is in stark contrast to the rest of Asia and Australia, where central banks are lifting rates, sometimes aggressively, to fight inflation.

Rates started falling here after the Monetary Authority of Singapore (MAS) decided last month to let the Singapore dollar rise against a basket of currencies.

The MAS had been intervening in the currency market up to that point to hold rates at the same level, and at the same time keep the Singdollar within its trading band.

Mr David Carbon, managing director for economic and currency research at DBS, has estimated that the MAS intervened to the tune of US$63 billion (S$86.9 billion), but it has now allowed the currency to appreciate and interest rates to adjust back to their actual levels.

The money market response to all this has been dramatic.

After hovering at 0.65 per cent for the past 14 months, the benchmark three-month Singapore Interbank Offer Rate (Sibor) fell 13 basis points to a new low of 0.52 per cent two weeks ago, before edging up slightly to 0.53 per cent. Sibor is the rate at which banks lend to each other and serves as a handy benchmark for all kinds of rates here, particularly mortgages.

Banks reacted to the falling Sibor by offering savings rates of a measly 0.1 to 0.2 per cent. Fixed deposits are marginally better at 0.4 to 0.6 per cent for a period of one to two years.

So a deposit of $10,000 for two years could earn you an annual interest of about $60: a few pizzas and a beer.

With such pitiful returns, investors have been looking elsewhere to put their cash. But mortgage holders are cheering as the falling Sibor means loans pinned to it have fallen as well, although some banks have raised the fixed amount that is added on to the base rate.

Others stuck in long-term mortgages are also looking to refinance for better rates, say financial planners.

‘Sibor can’t go to zero but it can take another step or two in that direction and seems likely to do so,’ says Mr Carbon, who forecasts Sibor to bottom out at 0.43 per cent by the end of next month, and to start rising slowly to 0.61 per cent by the end of the year.

Economic issues unfolding across the globe, particularly in the United States, and the way Singapore responds mean low rates will continue for a while.

Unlike most other countries, Singapore’s high dependence on exports and imports means the MAS controls monetary policy through its exchange rates. During high inflation, a stronger currency helps to make imports cheaper and so eases pressure from imported inflation.

Singapore’s policy also means it tracks the interest rate policy of its major trading partners, including the US where rates are at rock bottom – between zero and 0.25 per cent.

So rates here ‘are likely to remain depressed as long as US rates are low’, wrote economists at Standard Chartered in a report on April 29. They expect Sibor to drop further to 0.5 per cent by the end of the second quarter and stay there for the rest of the year.

The huge Europe bailout package and continued scepticism over that region’s ability to grow amid a burgeoning deficit has some analysts believing rate hikes in Asia may have to be delayed. But it may not derail a rise in the Federal Reserve’s rates as economic indicators continue to point to an improving situation in the US.

That is prompting economists to tip Sibor to recover near the end of the year.

Barclays Capital economist Leong Wai Ho believes it will rise a little to 0.6 per cent by then, while OCBC economist Selena Ling sees rates rising to 0.8 per cent.

Financial advisers suggest savers could invest in mutual funds and unit trusts that are relatively low risk and have given higher returns of 2 to 3 per cent.

More sophisticated investors might try short-term bond funds, said Fundsupermart general manager Wong Sui Jau. While bonds can be seen as risky, he noted that only once in the past eight years – 2008 – did bond funds produce negative returns: ‘Generally they are not volatile and are relatively low risk.’

Investors willing to take even more risk could try funds investing in Asia and emerging markets bonds.

‘Currency appreciation in those countries is likely to be on a par with the Singdollar appreciation and would give a decent amount of yield,’ Mr Wong said.

Source: Straits Times, 13 May 2010

Investment interest in Singapore from non-traditional locations such as the Middle East and Russia is on the rise, as companies seek a base from which to tap Asia’s growth.

There are now about 310 Middle East companies registered here, up from 260 in 2007. Russian companies have moved in at a faster pace, rising from 140 in 2007 to over 200, data from the Accounting and Corporate Regulatory Authority of Singapore (ACRA) shows.

‘Apart from the traditional catchments of the US, Europe and Japan, and the increasing importance of China and India, EDB is also seeing interest from new geographies such as the Middle East and Russia,’ said the Economic Development Board, the agency tasked with bringing in foreign investors.

Recently, several companies from these regions looking to gain from Asia’s fast-growing oil-and-gas-related industries have announced investments here.

These include Qatar- based Tasweeq’s new office, to be officially opened this week, and Russia’s Gazprom, which intends to ramp up trading of liquefied natural gas (LNG) in the region via its Singapore unit.

Oman Oil Company’s representative office here, set up last month to market aromatics and methanol feedstock in the region, may also grow into a full-fledged headquarters within the next three years.

Industry-specific opportunities are key to these developments but Singapore’s wider proposition as a ‘global business city’ is attracting those new to the Asian market too. ‘Companies from the Middle East and Russia are looking to tap into the Asian growth story, and Singapore can provide an excellent platform for them to do this,’ EDB said.

This trend of rising Middle East and Russian direct investments is a nascent one. Most fixed asset investment (FAI) in Singapore still hails from the US, Europe and Japan. Last year, these three regions accounted for $7.6 billion or 65 per cent of total committed FAI, EDB figures show.

The global economic crisis meant that these investments in facilities, equipment and machinery, fell from the $15.4 billion (85.6 per cent of total FAI) seen in 2008. But this was in the context of a 40 per cent drop in global flows in foreign direct investment reported by UNCTAD.

Available statistics track investments from places other than the US, Europe, Japan and Singapore, as a grouped sum. Including the activities of companies from China and India, this gauge of investments from non-traditional economies stood at $700 million last year, compared to $800 million the year before. This was 5.9 per cent of total FAI in 2009 compared to 4.4 per cent in 2008.

Economists could not say if Middle East and Russian investments in particular are likely to keep rising, but are certain that the resilience of growth in Asia will draw more investments to this region.

According to David Cohen of Action Economics, the diversification of sources of capital is a continuing process. ‘The fact is that the emerging economies are beginning to carry a bigger weight on the world stage,’ he said. ‘This is most dramatically so in the case of China, but likely also for the Middle East, and Russia as it recovers from its severe downturn last year.’

Other observers do note the growing number of newly globalised companies which are now using Singapore as a springboard into Asia.

Alexey Dakhnovskiy, senior counsellor, commercial, at the Russian embassy in Singapore, told BT that he knows of companies which previously conducted business directly in mainland China but are now choosing to work through Singapore partners.

‘Singapore companies are welcome in China and sometimes do not have the same problems Russian ones might face if we go in direct,’ he said.

While transparency and attractive tax rates are long-standing pull factors, Mr Dakhnovskiy added that ‘both big and medium-size companies are setting up offices here so as to grow their business in Southeast Asia, and some even throughout the Asia-Pacific region.’

The major Russian MNCs here – Gazprom, Russia’s second-largest oil producer Lukoil and its largest exporter of steel pipes TMK – all set up offices within the past five years.

Interest from Russian enterprises has been fuelled by initiatives such as the annual Russia-Singapore Business Forum and the Russian Business Incubator: Futurus, which aims to bring Russian technology and research to market in Singapore.

Momentum is likely to pick up, says Mr Dakhnovskiy, who knows of at least one other oil company which has its eyes on Singapore for its global expansion plans, and others that are considering a public listing here.

Zlata Sheve, a business consultant with law firm Thummel, Schutze & Partners LLP, which has assisted Russians investing in Singapore, says that large players aside, many smaller Russian start-ups have also sprung up here in the import-export trade and as investment companies.

Meanwhile, EDB says it has already been ‘stepping up efforts to engage businesses from these regions by making more visits to understand the companies better’.

Source: Business Times, 4 May 2010

‘There are a lot of articles coming out of Greece saying it might not be a US$40 billion to US$50 billion problem. By the time you roll in the unfunded liabilities, it might be US$150 billion, or US$300 billion, or maybe US$400 billion. Why not US$1 trillion, and make it unsolvable? Where does all this information come from?’ said Mr Dondero, who was in town to promote the investment thesis of his firm, which focuses on below-investment-grade corporate debt.

‘There is market manipulation that happens in the derivative and debt markets overall which is not illegal. But it is illegal in the equity market – you can’t buy positions in stocks or have short positions and then spread rumours or innuendoes.’

Mr Dondero wondered who came up with all these estimates, and what their incentives are.

‘The world has a vested interest in not ending,’ he said. For example, the unfunded pensions can be handled by delaying the retirement age. And people will take the ‘austerity sandwich’ when they absolutely have to, and that would be when ‘socialism hits the wall’, like when government employees’ pay cheques start to bounce, and middle-class housewives start to storm the supermarkets.

Mr Dondero and his partner Mark Okado founded Highland Capital in 1990. The Dallas-based company is today one of the largest managers of below-investment-grade credit. It has some 80 per cent of its assets in structured products, mainly collateralised loan obligations.

‘Distressed debts are a part of below-investment-grade debts. In the US, that segment is still very attractive. You can make a 15-20 per cent return there,’ said Mr Dondero. For example, MGM Studio’s debts are trading at 50 cents on the dollar. ‘There is a real chance to buy that asset attractively and reposition it.’

Paul Adkins, managing director of Highland Capital in Singapore, said now is an opportunity for Asian investors to pick up good assets in the US via distressed debts, turning the tables on the West when the US and European investors picked up key Asian assets on the cheap during the Asian crisis of 1997.

‘Today, we have loans trading at 50 cents on a dollar. The recovery rate historically for companies that go through bankruptcy is 70 cents on a dollar. It provides tremendous opportunities for investors to effectively buy the loans, go through the restructuring and conversion, and come out at the end of the restructuring owning those companies, having those assets, whether it is a film library, heavy machinery or power generation equipment,’ said Mr Adkins.

Back in 1997, Asian investors were selling their equities on the way down, cashing out and taking the losses, and then watched as the European and US investors swooped in and picked up key assets that recovered their value very quickly. ‘We are thinking the same opportunity exists on the other side, and we hope to translate this current distressed opportunity into effective returns for investors in the region in the next 2-3 years,’ he said.

Mr Dondero, however, conceded that bankruptcy proceedings in the US now take longer. Courts, he said, are unwilling to close down a company as long as it can keep jobs.

Another reason why Mr Dondero is on his Asian tour is to put across the message that investors are overly complacent with their renminbi deposits, which have gone off the chart. ‘They are assuming that these deposits will always appreciate and be convertible. Prudence would argue that if they have obligations in US dollars, they should keep a certain amount of investments or deposits in dollars.’

Mr Dondero’s other views include:

Real estate in the US will be a buying opportunity in a year’s time, only after the new tax policies have been announced. ‘You don’t know what your returns will be until you know what the new tax policies are.’

The yuan will appreciate by 3-5 per cent in June/July, and currencies of the rest of China’s Asian trading partners will rise in sympathy.

Highland is not a buyer of Greece at this moment, but then it does not dabble in sovereign debts.

Source: Business Times, 1 May 2010

We weren’t that far off with our estimates, given that there weren’t any surprises in the final three months of the year. I was just slightly luckier.

Over lunch, my friend reviewed the market predictions he made in early 2008. Back then, he said that he had short positions in the UK housing market and sterling.

Sterling has depreciated significantly vis-a-vis the Singapore dollar in the two years since. But my friend said that he is surprised that the UK property market has not fallen as much as he expected.

I suggested that perhaps because of cheaper sterling, a lot more foreigners are finding London properties “cheap” and see them as a good place to park spare cash. Indeed, within my circle of friends – we who are not especially rich – one has bought a London apartment and another is considering doing so.

Our lunch conversation then turned to gold. My friend’s theory is that there is almost a fixed gold supply. “Annual gold production increases are very small – and sometimes they fall. And this is what makes gold such a perfect yardstick to measure the value of another asset against.”

After lunch, my friend did some calculations and came back with this: It takes 245 ounces of gold to buy the average London house today. Back at gold’s last peak in 1980, it took just 50 ounces of gold to buy the average London house. Gold was expensive or houses were cheap then.

“This suggests that gold will be a better investment over the next five years than London property,” my friend said.

Well, the conversation set me thinking about the relative value of UK and London properties vis-a-vis Singapore properties, and their prices in terms of gold ounces.

So I downloaded some numbers and did some crunching. And here’s what I found. UK’s Nationwide Building Society has a database of representative UK house prices from the last quarter of 1952 to the first quarter of this year. During that period, a typical house in the UK went from £1,891 (S$4,016) to £162,887. That’s compounded annual growth of 8 per cent a year in sterling terms. But the price appreciation came in spurts. One of the steepest climbs was the 12 years between 1995 and end-2007. During that period, price appreciation was 11.3 per cent a year.

So how does the price trajectory of a UK house compare with a private residential property in Singapore? In Chart 1, I set the prices of UK properties and Singapore properties to a common base in Q1 1975. Here, you can see that in local currency terms, a typical UK house has appreciated at a faster rate than Singapore private residential properties. The annual compounded rate is 8.2 per cent for UK and 7.8 per cent for Singapore.

However, as mentioned, sterling has weakened against the Singapore dollar. Hence, in Sing-dollar terms, Singapore properties have been a better investment in the past 30 years. Between Q4 1980 until Q1 2010, Singapore properties appreciated 5.8 per cent a year, while in Sing-dollar terms, a typical UK house managed only 3.8 per cent a year. (Bloomberg’s exchange rate data between Singapore and sterling pound only goes as far back as 1980.)

Chart 3 shows the absolute price of a typical house in the UK and the median price of a 100 sq m condominium in Singapore in US dollars. Here, you can see that private housing prices in Singapore are significantly higher than in the UK, although I don’t know how big a typical house in UK is.

How about a London flat? How do Singapore condo prices compare with those of London flats? From Chart 4, you see that a 100 sq m condo in Singapore is still more expensive than a representative London flat. A typical London flat, according to Nationwide, was valued at US$321,000 at end-March this year. In Singapore, the median price of a 100 sq m condo is US$754,000. Again, the question is how big is a typical London flat.

And finally, the interesting bit. How many ounces of gold does it take to buy a condo in Singapore, a flat in London and a house in UK?

At current prices, it will cost 222 ounces to buy a typical UK house, 289 ounces to buy a representative London flat and 680 ounces to buy a 100 sq m Singapore condo.

Of course, these numbers have to be viewed in relation to their respective historical range.

From Chart 5, you can see that at its peak, between Q2 1996 and Q2 1997, Singapore condos cost more than 2,000 ounces of gold. The cheapest a Singapore condo has been, in gold terms, was in Q4 1980 at 166 ounces – the earliest available data point for this series.

From that perspective, the 680 ounces of gold required to buy a condo now may not be too excessive.

As for a UK house, the range – going as far back as 1970 – is between 84 ounces of gold in 1980 and 682 ounces in Q2 2004. For a London flat, from 1990 until now, the range is between 184 ounces in Q1 1996 and 919 ounces in Q4 2001.

So the 222 ounces required to buy a typical UK house, and the 289 ounces required to buy a London flat now – can, from this point of view, be considered cheap now, and arguably offering more value than Singapore properties.

But of course, the gold price is subject to investor sentiment and increasingly to the buying and selling of hedge funds, exchange-traded funds, central banks and so on. The gold price also fluctuates in response to the overall level of confidence in the monetary system and the economy. For example, the equity bear market of 1966 to 1982 coincided with a bull market in gold and gold-related investments. Meanwhile, the equity bull market of 1982 to 2000 coincided with a bear market in gold and gold-related investments. And the equity bear market that began in 2000 has, to date, coincided with a bull market in gold and gold-related investments.

But between 2003 and 2007 and for the whole of last year, both gold and equity prices rose sharply. Between 1970 and now, the gold price has risen by 8.9 per cent a year, while the S&P 500 has gained 6.5 per cent a year.

Gold today, of course, is at its all-time high levels. The expectation is that it will continue to go further. The continued rise in the gold price will make real estate look even cheaper in relative terms. Conversely, a decline in gold will make property prices look expensive in gold terms.

Whatever happens, we can be certain of one thing. In the long term, both gold and real estate are without doubt a better store of value than fiat money.

Source: Business Times, 10 Apr 2010

After all, some firms have started restoring pay cuts to employees and year-end bonuses have been paid.

With the mood improving, the urge to snap up that big-ticket item with cash or a loan is getting stronger.

Using cash is one thing, but excessive borrowing can lead to financial trouble.

‘Loans can help us to purchase high-value items or essentials that we do not have the savings or the full amount for at the moment – but it should be something we can afford in the long run,’ said GE Money Singapore’s president and chief executive, Mr Rahul Gupta.

And the same principle should apply, whether for a home loan, a car loan, a home renovation loan, one for education, or even one for a holiday.

‘Consumers need to ensure that loans taken are well within their means,’ said Mr Gupta.

Here are eight things to consider when taking out a loan:

1 A need or a want?

Before taking a loan, ask yourself if the item or service is meant to satisfy a need or a want.

Ms Tan Huey Min, assistant director at Credit Counselling Singapore, suggests that if it is a ‘want’ – not necessary and just for consumption – perhaps it would be better to save for it rather than to pay a ‘premium’ price (that is, the interest cost of borrowing). For instance, don’t borrow to pay for a vacation or a new kitchen appliance.

Take time to consider if there is an alternative to borrowing now or borrow a smaller amount instead. Better still, don’t buy it at all if it is unnecessary.

However, if the purchase is for investment purposes, then perhaps it is okay to get a loan. This could be for renovations that add value to your home, or enhancing your future income earning ability via training and education.

2 Interest cost of borrowing

Consumers should be aware of the type of interest rate that is stated in the loan agreement or marketing material.

And when considering loan options, compare like with like, said Mr Gupta.

Some loans use the annual percentage rate (APR), which reflects the actual interest cost of borrowing, while others refer to the simple interest rate. Shop around for the lowest APR.

The simple interest rate is calculated by applying a flat rate on the original principal amount for the entire loan tenure.

The APR is interest calculated based on the declining principal balance over the tenure of the loan.

As the borrower makes monthly repayments, the principal is reduced every month, so the interest payable on the principal also reduces each month.

Sometimes a loan comes with a zero per cent interest cost if it’s paid via a credit card. Make sure you pay off the debt before the interest starts to build up. If you miss a payment, you may be automatically bumped up to the highest annual interest rate of 24 per cent.

3 Current debt service ratio

Before taking the loan, calculate your debt service ratio. It is the percentage of your monthly income needed to service long-term liabilities.

It provides a useful guide to how much of your take-home pay – that is gross pay less 20 per cent employee CPF contribution and personal income taxes – is used to pay debts.

Debt payments are monthly expenses like mortgage, car loans, personal loans or even credit card debts. A healthy debt servicing ratio – debt divided by income – should be 35 per cent or less.

To put it another way, out of every $1,000 of after-tax and CPF income, you should spend $350 or less on debt repayments.

Ms Tan cautions that if the consumer already has a high amount of outstanding debt to service, it is best to pay down existing debt first before incurring more.

And even if your debt service ratio is less than 35 per cent, it is prudent to consider if you have surplus funds to take on another loan repayment after paying monthly living expenses.

Make sure you know your cash inflow and outflow before taking on another loan.

4 Loan tenure

It is worth considering the optimal loan tenure as it affects monthly repayments and interest paid.

Generally a longer loan tenure means smaller monthly repayments but a shorter loan tenure may lead to lower interest paid, says GE Money.

For example, Mr Mark Tan takes a $10,000 loan for a period of five years at an APR of 18per cent per annum (pa).

His monthly repayment is $254 so the total interest he will pay over the five-year loan tenure is $5,236, over and above the $10,000 loan amount.

If he takes a loan period of three years at an APR of 18 per cent pa, his monthly repayment will be $362 but the total interest paid over three years will be $3,015.

So to minimise the interest payable, a shorter loan tenure may be an option, but the repayments will be higher.

Some financial experts suggest you make the highest repayments you can manage so that you clear the debt in the shortest possible time.

When deciding on a loan tenure, consider your monthly commitments and take the appropriate loan tenure based on your monthly cash flow.

5 Early payment options

Not all loans allow customers to settle early, so read and understand the terms and conditions of the loan before signing up.

An early settlement fee is usually imposed if a loan is paid off early.

For example, if you redeem your GE Money personal loan before the full term expires, an early redemption fee of 3 per cent to 5 per cent of the outstanding amount at the time will apply.

Home loan customers are urged to look beyond interest rates and consider factors such as the lock-in period and penalty fees.

Another potential cost is the loan cancellation fee. An investor who buys a property on speculation and then applies for a loan might be hit with a cancellation fee if the property is sold before the loan is disbursed.

Cancellation fees can range between 0.75per cent and 1.5per cent of the loan amount, and can be quite substantial. For example, if the loan amount is $1million, the cancellation fee works out to $15,000.

6 Late payment fees

Most loans stipulate late payment fees. These are over and above the interest charged for late payment, so go through the terms and conditions of loan agreements thoroughly to ensure you understand them clearly.

Pay special attention to fees incurred for late payment.

For instance, credit cards typically charge a one-time administrative fee of $50 to $80 for late payment. This is besides the 24per cent interest charged on the sum that is rolled over.

So keep track of the payment dates and remember to pay before the due date. Try to have fewer loans or credit facilities and avoid having multiple sources of credit. In order not to incur interest and penalty fees, pay your outstanding credit in full.

7 Payment flexibility

Avoid defaulting on loan repayments as it will hurt your credit history. However, a typical loan tenure is for at least a year, and sometimes it is hard to predict what will happen so far into the future.

You might hit cash flow difficulties at some point, so it is worth looking for loans that offer some payment flexibility and provide rewards for prompt payment.

For example, Mr Gupta says that GE Money’s James personal loan, which caters to people earning $30,000 and above, offers several flexible payment options. They include allowing customers to defer two payments a year, paying only the interest component or paying higher or lower instalments at the start, or end of their loans.

Such features offer flexibility in managing your cash flow, particularly during unforeseen circumstances. GE Money customers are also rewarded for prompt payment by having part of their interest component, or their last instalment amount of the loan, waived.

For those who can’t meet their monthly payments, experts suggest that they approach their lender first for assistance to restructure a loan. Financial institutions will usually review such requests on a case by case basis. A responsible lender will work with its customers to provide a solution.

8 Other loan terms and conditions

Make sure you understand the key fees and charges stipulated by a loan agreement. This makes you aware of what to expect when a loan is taken and reduces any surprises after it has commenced.

If you are acting as a guarantor for a loan, be clear about the terms and conditions of the agreement, especially those related to your obligations as a guarantor.

Ms Tan says: ‘In the eyes of the creditor, the guarantor is the ’same’ as the borrower, meaning, both the borrower and the guarantor are jointly and severely liable for the loan.’

This means that even if you are willing to act as a guarantor, you should also consider your own ability to make repayments in case the principal borrower fails to repay.

She recalled a case in which a person (let’s call him John) became a guarantor for a stranger (Jim), who wanted to buy a car, in return for a fee.

When Jim defaulted on his car loan, the car financier pursued legal action against both people.

Jim could not repay and became a bankrupt. In the end, John assumed the balance of the loan, which was $30,000, after the car was sold and makes regular payment to avoid being made a bankrupt by the car financier.

Source: Sunday Times, 28 Feb 2010

THE depths of the financial crisis between 2008 and 2009 called into question a number of investment principles that have been accepted almost as truisms – until recently.

Are those principles simply fair weather crutches? That is, they work in a rising market but fail horribly in a bear market. Or worse, are they simply myths?

Here are some of them and what some analysts think.

Diversification

Not putting all of one’s eggs into a single asset is common sense. Portfolio construction typically works on the expectation that correlations among assets are stable based on historical trends. Assets are chosen for their low correlations with one another, so that not all should tank at the same time.

Between mid-2008 and the first quarter of 2009, however, the worst case scenario happened. The unravelling of the credit crisis triggered massive waves of selling and liquidity dried up. Correlations converged to one for almost all assets.

There were exceptions. US Treasuries proved to be the safest of safe havens, for instance. Gold also rallied, thanks to fears that the financial system was on the brink of collapse.

Diversification is still seen as a form of risk mitigation, and widely recommended by advisers. Perhaps the biggest lesson of the crisis, however, is that liquidity has been under-appreciated. Many portfolios were invested substantially in structured products that proved horribly illiquid, or worse, that actually unwound and caused heavy losses.

Says Christian Nolting, lead strategist (Asia-Pacific) for Deutsche Bank Private Wealth Management: ‘We see value in the asset allocation approach and have implemented the same in our private client portfolios. An appropriate distribution of wealth among different asset classes, with an individual strategy geared to the risk-return profile of the client – complemented periodically by dynamic and tactical decisions – is key for a sustainable and satisfying portfolio return.’

‘Time’ diversification

This principle says that the longer your horizon, the more equity risk you can take. In particular, it is common that presentations by banks and fund houses show long-term returns of an index, usually the S&P500, to justify this thinking.

Boston University professor Zvi Bodie believes that the fallacy of time diversification is perpetuated as part of the fund management industry drive to sell funds.

As he told an audience at the National University of Singapore recently, if stocks became safer in the long run, they would not carry a risk premium. An indication of how risky stocks are can be gleaned from the cost of protection, which rises as the time horizon lengthens. Conventional advice, he says, based on the mistaken principle of time diversification, leads to portfolios that are riskier than most consumers realise.

Buy and hold

This mode of investing in markets may truly be one of the biggest casualties of the bear market.

Almost all strategists now say that shifts in tactical asset allocation – that is, shifts around a long-term strategic mix of assets – have become more frequent since the crisis began. They expect 2010 to be no different, as uncertainties remain on the economic outlook and the manner and timing in which central banks will begin to withdraw the massive stimulus.

Financial advisers such as Providend and New Independent have launched portfolio services that actively allocate to exchange traded funds.

Such portfolio services are typically aimed at generating a positive absolute return. The rub, however, is that retail investors with modest sums may not have access to such advice, where the minimum capital for a portfolio can start from $100,000.

An absolute return objective is also not a panacea as a lot will depend on the fund manager or adviser’s skill and ability to time markets.

Schroders’ Asia-Pacific head of multi-assets, Al Clarke, says buy-and-hold is still a sensible strategy ‘as asset allocation is a difficult endeavour that requires time, technical understanding and discipline’.

‘An investor should construct an appropriate asset mix that will deliver the return and risk objectives they need for that investment . . . At Schroders, we believe we can add value through making sensible changes to the asset allocation based on value, cycle and liquidity.

‘What may not make sense is suggesting the best asset allocation to meet the investor’s objectives is 100 per cent equity and leaving this as ‘buy and hold’. This will lead to volatile outcomes and as history has demonstrated, can deliver sub-standard returns for prolonged periods of time.’

Balanced and target date retirement funds

These are marketed as core holdings in a retirement fund that investors can effectively buy and hold. While balanced funds are a staple in the CPF menu, there are not many target date funds here. The latter refer to those designed with a maturity that should coincide with your retirement. Assets are automatically rebalanced such that as the fund nears maturity, it should be invested in more conservative instruments.

In the US, target date funds, in particular, are under tough scrutiny as the market plunge in 2008 caused severe losses among funds that are near maturity. Bloomberg has reported that target date funds labelled 2000-2010 lost an average of 23 per cent last year, with some dropping as much as 41 per cent. The average 2050 fund declined 39 per cent in 2008, while the S&P500 fell 38 per cent.

Prof Bodie heaps particular scorn on target date funds as ’silly, counter productive and disingenuous’. Such funds, he says, do little to provide investors with a secure income in retirement.

The upshot of this is that retirement planning should start with a projection of one’s desired income in retirement, and then choosing assets that are likely to deliver and protect that income stream. This is how institutions with a stream of future liabilities invest. This approach would favour direct investments in bonds, in particular inflation indexed bonds. There are no inflation-linked bonds here. Many investors also sniff at Singapore government bonds whose yields are low. Corporate bonds are also not as easily accessible to retail investors, as they require minimum investments of at least $200,000.

Source: Business Times, 19 Dec 2009