2013 Mid-Year Sovereign Review and Outlook
Fed Exit Fears Adds to Challenges for Emerging Markets
Global Sovereign Credit Drivers
Eurozone Crisis Not Over: The intensity of the eurozone crisis continued to subside in H113, despite recession, record unemployment, uncertainty following Italian elections and the bail-out in Cyprus, which led to bank failure, capital controls and a domestic debt default (based on Fitch Ratings‟ distressed debt exchange criteria). Fitch’s long standing view is that a resolution of the crisis will require country-level fiscal and structural adjustment, greater progress towards a banking union and a broad-based economic recovery across the currency union.
Global Growth to Strengthen: We expect global growth to gradually pick up pace in H213 and 2014-2015 as the US gathers steam and the eurozone approaches a cyclical turning point. Our latest forecasts for world GDP growth are 2.4% in 2013, 3.1% in 2014% and 3.2% in 2015 (weighted at market exchange rates). However we have cut growth forecasts for many emerging markets (EM) owing to strains from spill-over from advanced countries and China, more difficult policy trade-offs, a declining impact from credit growth and structural bottlenecks.
Fed Exit Casts Shadow: The US Federal Reserve’s forward guidance on the timing of tapering quantitative easing (QE) and raising interest rates precipitated a broad market sell-off and increased volatility since the middle of May, even though the comments should not have been a great surprise and reflect more upbeat US growth prospects. Fitch does not expect the first rate hike until mid-2015, and only then if the US economic recovery is secure. Nonetheless, the uncertain process of the Fed’s exit is likely to generate periodic bouts of market volatility.
No Broad EM Crisis: EM bonds, currencies and equities were hit disproportionately hard by the market reappraisal of US monetary policy, despite prior concerns over excessive capital inflows and strong exchange rates. Fitch does not anticipate widespread EM credit distress owing to a secular improvement in credit fundamentals, which reduces risks from tighter global liquidity, higher interest rates and FX risk. However, the Fed move adds to worries over slowing EM growth, China’s financial stability, softer commodity prices and a series of political shocks.
Some EMs More Vulnerable: Prospective Fed tightening raises risks facing weaker EM, such as those with large external financing needs (current account deficits and maturing external debts) and low foreign reserves, high levels of leverage, vulnerable debt structures (foreign currency, short maturity and non-resident creditors), those that have seen strong inflows of hot money and bank credit growth, or have weak policy frameworks or credit fundamentals.
Sovereign Rating Actions and Outlook
Outlook Negative: Sovereign ratings are under pressure from the eurozone crisis, high public and private sector debt, weak banking sectors, a testing growth and policy environment and individual political and credit events. In H113 there were 13 notches of downgrades of Foreign- Currency ratings, compared with 10 notches of upgrades; as well as two sovereign defaults: Cyprus (Local-Currency rating) and Jamaica. The ratio of Negative Outlooks to Positive Outlooks is a bit under 3:1, signalling that further downgrades are likely.
EM Upward Trend Stalls: H113 saw six EM upgrades: Lithuania, Mexico, Thailand, Jamaica, Philippines and Uruguay - the latter two to investment grade. Three-quarters of the J.P.Morgan EMBI is now rated investment grade by Fitch, up from one-third in 2008. But there were downgrades for Egypt, Jamaica (by four notches) and South Africa, as well as China (Local Currency
GROWTH SHARES WITH LOW DIVIDENDS
Dividends provide investors with a secondary source of income and are an important component of long-term stock market returns. With that backdrop, it’s not hard to imagine why investors wouldn’t consider a share’s dividend yield as an important deciding factor when making an investing decision.
But, people invest primarily to grow their capital and purchasing power in the future. On that front, it’s important to see why it might not be ideal for an investor to forsake growth shares – shares of companies that are growing their businesses and profits quickly – completely. Let’s consider the following four shares as an example.
The first two shares are telecommunication operators Starhub (SGX: CC3) andSingTel (SGX: Z74). Both companies have had anaemic earnings growth of 3.7% and 0.4% per year respectively over their past five completed financial years.
But, they pay out a huge portion of their earnings as dividends, and so, are able to reward shareholders with a high dividend yield. Starhub’s currently yielding 4.8% while SingTel’s at 4.6%.
The next two shares are instant beverage manufacturer Super Group (SGX: S10) and healthcare services provider Raffles Medical Group (SGX: R01). Both companies have low dividend yields of 1.6% and 1.4% respectively, but can be considered as growth shares due to their fast-growing earnings.
Over their last five completed financial years, Super Group’s profits have logged an annual growth rate of 33.2% while RMG’s earnings increased by 15.9% per year.
If you’re an investor focused on yield, you’ll likely forsake Super Group and RMG for Starhub and Singtel, given the much higher yields of the latter-pair. That’s fair, if income generation in the short-term is of higher importance.
But here’s where you might be doing yourself a disservice if Super Group and Raffles Medical Group were dismissed because of their low yields.
Over the past two-and-a-half years, from the start of 2010 to 8 July 2013, Starhub and SingTel’s total returns – the sum of capital appreciation and dividend distributions – stand at 127% and 39% respectively. In comparison, the Straits Times Index (SGX: ^STI) appreciated by only 9% over the same time period, so both telcos had comprehensively beaten the market.
BUT THE TELCOS’ LEVEL OF OUTPERFORMANCE WAS OVERSHADOWED BY SUPER GROUP AND RMG’S TOTAL RETURNS OF 658% AND 138% RESPECTIVELY.
Despite the much stronger income-proposition that the latter pair represented on Jan 2010 – at that time, Starhub and Singtel had trailing dividend yields of 9.8% and 4.7% respectively, as compared to Super Group and RMG’s yields of 2.7% and 1.9% – it was the growth-pair that outperformed the market the most as their shares grew in price to reflect their underlying earnings growth.
FOOLISH BOTTOM LINE
While it’s important to consider the dividend yield of a share when making an investing decision, it might be even more important for investors to think about its expected total return. Otherwise, they might be doing themselves a disservice by unduly dismissing growth shares on the basis of a low dividend yield when it might be the one that holds the better promise of superior total returns.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing owns shares in Super Group.
It’s sad to see investors get burnt in the share market, get scarred and then forsake a great avenue to build long-term wealth. Thing is, investors can be clueless about the real reasons for their poor investment returns and blame the market, instead of trying to fix the root causes for their abject performances.
With knowledge of the reasons behind poor returns and how to improve their performance, perhaps there would be lesser sob-stories of investors losing fortunes or just plainly refusing to invest in the share market because of fear.
Common reasons for poor performance – hint, it’s you!
Research have found over-trading to be a common source of poor investing returns and it stems from OVERCONFIDENCE. Simply described, overconfidence is the mental trait of thinking we are better than we really are in whatever is the activity in question.
Translated into the share market, overconfidence manifests itself when we think can out-guess the market in terms of short-term movements resulting in us trading actively, TRYING TO CAPTURE EACH MINI-PEAK-AND-TROUH. Unfortunately, that just leaves active traders poorer, more often than not.
The disposition effect is also commonly cited as one of the main reasons for poor investing performance from investors. It stems from the tendency for humans to feel more psychological-pain when faced with a loss as compared to the psychological-delight that we feel when we have an equivalent unit of gain.
This causes investors to HANG ONTO LOSING SHARES WHILE SELLING OF WINNERS TOO QUICKLY. That’s – to put it simply – bad. The opportunity costs of hanging onto losing shares instead of transferring those funds to better opportunities can be immense.
We just have to take the experience of Singapore Airlines and Jardine Matheson Holdings as an example, as seen in the chart below. From Jan 2000 to 8 July 2013, SIA has registered a 47.7% decline. Compare that with JMH, which has increased by more than 1,324% and it’s easy to see what investors in SIA might have been missing out.
The use of JMH to compare against SIA might be seen as cherry-picking of data but it serves to exemplify the enormous opportunity costs that investors have to bear if they had clung onto SIA for the past 12-odd years instead of re-investing the money somewhere else.
Fortunately for investors, it seems that we do learn from experience. Research done by three economists on 19,847 German investors’ trading history over a period of 8 years suggests that investors do learn from their mistakes. They realised the folly of excessive trading and started to avoid it, leading to a lower portfolio turnover.
So what does this tell us? Besides saying that excessive trading can be harmful to our long-term wealth, the research also brings home the point of starting as early as possible.
The earlier we start, the more time we have to allow our experiences to accumulate to become better investors before we hit the generally accepted retirement age of 65. That’s just good simple advice. But equally important, is the fact that starting earlier gives compounding a chance to work its magic sooner.
Compounding is powerful, but it takes time
Let’s consider two investors, John and Jane. John is currently 25 years old, has just started investing, and would retire at 65 by which time he would stop investing. Jane is currently 35 years old, has just started investing, and would also retire at 65 and stop her investing too.
Both investors had invested in the Straits Times Index (SGX: ^STI), which has grown from 834 points at the start of 1988 to 3,179 on 9 July 2013, giving it a compounded annual return of 5.4% over the past 25-and-a-half years.
If we assume that the STI’s returns over the next 30 to 40 years would be similar to its past, then John would have gotten $8,200 when he’s 65 for every $1,000 that he has invested into the index now. On the other hand, Jane would only have $4,800, almost half of what John would have!
The difference in the ending amount is stark even though their investing time-line only had a 10 year difference. With compounding, it really pays to start early.
Foolish Bottom Line
Knowing what’s causing us to perform poorly when investing allows us to take charge and fix those problems. INVESTING IN THE SHARE MARKET IS A VALUABLE WAY TO BUILD LONG-TERM WALTH. We shouldn’t allow previous mistakes to deter us from it.
Dear Foolish readers,
Probably one of the biggest misconceptions about stock market investing is the need to continually do something to reap bigger rewards. There are lots of other stock market fallacies but portfolio-fiddling is quite high up on the list.
The urge to tinker might go some way to explain why some investors - but thankfully not all - believe they need to constantly stir the pot to get tastier returns. However in investing, less can be more.
According to the number crunchers at Singapore's Central Depository (CDP), retail investors, on average, held shares for around six months in 2007. That's it - 180 days - 4,320 hours. That is how long a typical Singapore investor who bought shares six years ago would have held onto them for.
A three-to-one bet
That doesn't strike me as being very long, at all. It can take me nearly that long to find the right shares for my portfolio. I don't think I am especially fussy. I just want to know everything I need to know about the companies I invest in. I'm not alone in my meticulousness, either. Charlie Munger once said: "Look for a horse with one chance in two of winning and which pays you three to one."
Those opportunities don't come around that often - they can be as rare as hen's teeth. But in the time that it might take me to find a suitable share, private investors in Singapore could have bought, held and already washed their hands of an investment.
Unfortunately, we don't know whether those investors made any money from their shares. Some might have. But others probably didn't hang around long enough to find out if they could have. The point is, a six-month holding period is barely enough time to qualify for (and collect) a dividend cheque.
Happily, things have improved from 2007. They haven't got much better, but at least they have moved a step in the right direction.
The CDP said that in 2011, local investors had held their shares for 17 months. That's 510 days. The CDP is still crunching the numbers for 2012. So, we might find out, before too long, the average holding period for shares last year.
Thing is, there were some moments in the stock market last year that could have made your hair stand on end. So, I am not holding my breath for any advance on 17 months. Nevertheless, I hope to be proved wrong.
In 2012, the Straits Times Index climbed from 2,646 points at the start of the year to 3,026 points three months later. Then it plunged 289 points to 2,737 points. A 10% drop could have tested the resolve of many � especially those with a nervous disposition or an anxious creditor.
But investors who threw in the towel would have missed out on the subsequent rally - a rise that took the benchmark index up to 3,107 points in October. By the end of the year, the Straits Times Index had risen to 3,167 points to register an annual gain of 20%.
In my view, even though investors held onto their shares for longer in 2011 compared to four years earlier, the average holding period of 510 days is still not very long. In fact, there are mammals that have longer gestation periods than that. So, in the time that it can take for a baby dolphin to be born, the typical Singapore investor will have bought a share, held it and subsequently sold it.
Forever is a long time
It would appear that patience no longer counts when investing in shares. It would also seem that a share is quickly tossed onto the scrapheap if it does not perform as expected. Worse still, even if a share does do well, it might still be given the old heave-ho because it has done its job - it has delivered a capital gain, though in some cases the gain might only be a small one.
I don't know about you, but my favourite holding period is forever, which is quite a long time. Warren Buffett once said that we should only buy something if we are perfectly happy to hold, even if the market should shut down for 10 years.
Admittedly, it takes commitment to buy shares that we are willing to own for the long term. But consider this: Let's say that someone, ten years ago, had told you that you could reap returns of 20% a year, every year, for ten years. But you had to sit on your hands and do nothing for a decade. Would you be prepared to commit to a ten-year holding period?
I don't know what your response would be. But I would definitely be looking around for the most comfortable chair in the room to sit on.
Shares like that do exist. In fact, eight Singapore blue chips have delivered total returns of more than 20% in the last decade. Another nine have delivered total returns of between 10% and 20%.
Come fry with me
In other words, more than half of our Straits Times Index companies have delivered returns that have handily trounced inflation over the last ten years. What's more, a total return of 10% would mean that an investments would have doubled in seven years. With return such as those, why on earth would anyone want to dip in and out of the market?
A taxi driver who picked me up outside Singapore Exchange probably provided me with the biggest clue. He told me that blue chips were boring. But in the same breath, he also lamented that he had lost a fortune "playing" the market with penny-share tips. The exact verb he used was "stir-fry". He stir-fried shares and got burnt.
Warren Buffett once said: "Time is the friend of the wonderful company, the enemy of the mediocre" . So, instead of punting, which is better suited on rivers, spend time looking for those outstanding businesses that you can invest in for the long term. They might appear mundane but there is nothing dreary about doubling your money in seven years or less.
Buy and hold is not dead. It is not even sleeping heavily. It is very much alive and kicking, provided you have bought shares that you are happy to hold, even if the market shuts and does not re-open for a decade. And as far as stir-frying is concerned, do that in the kitchen and not in the stock market.
On Thursday 25 July 2013, I will be joining Geoff Howie from Singapore Exchange at Tampines Regional Library for an evening focused on health, wealth and market happiness. There will also be an overview of the Health Care and Industrials sectors from Phillip Securities. The event starts at 6:30pm. We hope you can make it and we look forward to seeing you there.
To invest sucessfully we need patience. Many bankrupt celebrities, particularly the athletes, invested in very speculative schemes that didn't work out. Why someone making $10 million a year would take unnecessary risks is beyond me. But they do. Why? It is because of greed.
To make money - even a lot of money - you don't have to take on significant risk, as long as you're patient. What we need is able to overcome fear and invest in "Perpetual Dividendend Raisers" for long term irespectively of market conditions.
For example, someone who invests in Perpetual Dividend Raisers (companies that raise the dividend every year) can expect to average 12% annual returns over the long term. If you earn 12% per year, your money triples in 10 years and goes up nearly 10 times in 20 years.
In the survey, under the heading of “Main investment objectives and products for stable income streams”, it was highlighted that almost half (46%) of the respondents expect a yield of between 4% and 6% on their investments. Meanwhile, nearly a quarter (26%) expects a higher yield of between 6% and 8%. This group formed the bulk of the percentage.
Under the same heading, almost half (49%) of those surveyed invest in high-dividend stocks while two-fifths (44%) invest in real estate investment trusts (REITs). This made up 93% of the respondents.
This begs a question: Are investors expecting too much from their investments?
To answer that, I did a screen on the yields of the high-dividend stocks and REITs listed on the Singapore Exchange.
The top 30 highest yielding stocks in SGX had an average dividend yield of 10.7%. It beats the yield expected by most investors in the survey. However, do you have the stomach to invest in such stocks?
Taking the top spot was Gems TV Holdings Limited (SGX: AM3). It yields a salivating 36.5%. However, the dividend payments were spotty.
It didn’t pay dividends between 2008 and 2011 as it was loss-making but it did so last year, paying 0.95 cents per share. With the price at $0.026 at the time of writing, the yield translates to the above-mentioned figure.
It is also interesting to note that Gems TV is part of the SGX Watch-list. Stocks become part of the watch-list if the company has (1) pre-tax losses for the three most recently completed consecutive financial years and (2) an average daily market capitalisation of less than $40 million over the last 120 market days on which trading was not suspended or halted.
The lesson here is that we have to be wary of high-yielding stocks during normal market conditions. Most of the high-yielding stocks are not fundamentally strong to begin with. This is hardly surprising. When the stock price gets depressed due to the underlying business making losses, the dividend yield shoots up. Investing in such companies would prove to be futile.
The average yield of the Straits Times Index (SGX: ^STI) currently stands at 2.8% while the FTSE ST All-Share Index (SGX: ^FSTAS) yields 3%. This is much lower than the expectations of most of the investors surveyed.
Let’s look at the REITs now. The dividend yield of the 26-listed REITs stands at 5.5%, as measured by the FTSE Straits Times REIT Index (SGX: FSTAS8670).
The highest yielding REIT is Sabana REIT (SGX: M1GU) at 7.5%. Sabana is an industrial REIT with a gearing of 37.7%, which might explain the high yield.
Industrial REITs are cyclical in nature as they are closely correlated to the economy. Occupancy rates can also be volatile as it could depend on the vagaries of the economy. Also, the REIT may be hit hard when interest rates rise in the future. As such, a higher yield is demanded to compensate for the higher risk investors take on.
EVEN HIGHER EXPECTATION?
In a Straits Times report on 18 July 2013, Mr Geoff Lewis, JP Morgan Asset Management’s market strategist, was interviewed. He said that many investors seemed to be obsessed with the idea of investing in companies where they could get returns of 1,000% in half a year.
To that, he simply said, “Instead of chasing fool’s gold, they would do better by looking at steady sound companies with a strong track record.”
I cannot agree more with him. A thousand per cent return in six months will equate to a 3,500% return on an annualized basis. Such investments sound too good to be true. Even Warren Buffett only amassed 19.7% per annum for the past 47 years.
Steady sound companies with a strong track record have given decent returns as seen from here. It’s certainly not the 1,000% in half a year. 1,000% in ten years is satiating enough. Slow and steady does it.
FOOLISH BOTTOM LINE
When investing, we should always have realistic expectations. Expecting to invest in high-yielding stocks with strong business fundamentals, in a normal market condition, such as now, sounds far-fetched. Expecting a thousand per cent returns within half a year is even far off. But by curbing our expectations, we might actually do better.