Lee Su Shyan
The Straits Times Money Editor
The first quarter is behind us but taking stock isn't going to be easy. While the much-anticipated global meltdown mercifully failed to materialise, no one would really say that the worst is over. So deciding where to put your hard-earned cash remains a challenge.
What’s happened so far
Perhaps it’s best to note what hasn't happened, namely the collapse of the euro zone economy and a greater descent into recession in the United States.
Many experts feared the European Union (EU) would be in tatters with a chaotic Greek debt default. Its debts have been restructured in as orderly a fashion as could be expected and the EU is still holding together – just.
And the US economy did not tank as badly as initially feared. Growth has been feeble, but better than expected.
There is still ample liquidity in the market, helped by the US Federal Reserve keeping rates unchanged at least until 2014. The European Central Bank has also pumped in about one trillion euros (S$1.6 trillion) to keep credit flowing.
Funds kept flowing into Asia, propelling markets higher, including the Straits Times Index (STI), which rose around 14 per cent in the first quarter.
Possible roadblocks this year
Considering the worst-case scenario hasn’t happened, investors should be fairly relaxed but as usual, they tend to find things to fret about. Right now, they are focused on oil as one factor that could derail the recovery train.
Prices started to rise again with tensions in the Middle East. Since February, crude has shot up more than 10 per cent, although prices have eased recently. Higher oil prices eventually translate to higher consumer prices and higher inflation, which is why investors don’t like costlier crude.
But as Citi Investment Research points out, higher oil prices can also be positive in Asia. They tend to go hand in hand with higher growth as regional economies need more oil to propel expansion.
Another factor – one that the glass- is-half-full investors are seizing – is the faltering US jobs market. The March report released on April 6 fell short of expectations, stoking concerns that the recovery might be stalling.
Then, there is the euro zone crisis. After going to ground for a bit, it is rearing its ugly head again. This time, Spain caused investors sleepless nights after tepid interest was shown in a government bond auction earlier this month.
China is the big question mark. Is the economy slowing or not? On some counts, it seems as if the growth engine is heading for a soft landing. Inflation is still high but first-quarter gross domestic product notched up growth of 8.1 per cent, the slowest pace in three years. The concern is to avoid having a hard landing for China’s economy, as it could trigger widespread job losses and social unrest.
What this means for investors
Stocks and shares
Experts are giving a cautious thumbs up to the equity market, saying that current prices still make it affordable. Companies will release first-quarter earnings in the next few weeks and experts expect some moderate growth.
OCBC Investment Research likes the oil and gas sector for its steady stream of new orders. Rig builders Keppel Corp, Sembcorp Marine, Ezion Holdings and STX all landed big deals recently, so earnings will be healthy over the next couple of years.
Staying safe could just mean putting money in the STI stocks, the bluest of blue chips. Try local banks DBS, OCBC and United Overseas Bank. Property stocks are trading at lows because of fears of the cooling measures but valuations are undemanding and it may be worth taking another look.
For an even safer bet, every market expert worth his salt is recommending dividend stocks, as even if the share price falls, you still get a decent enough annual return.
For that reason, you can’t go too wrong with the real estate investment trusts (Reits), which generally distribute all that they earn.
Investors have many choices, ranging from those offering exposure to the Singapore consumer such CapitaMall Trust, to those betting on more tourists, like CDL Hospitality Trusts. Others offer exposure to the office market such as K-Reit Asia while Cambridge Industrial Trust, which invests in industrial buildings, can serve as a proxy for the general economy.
Aside from the Reits, other counters such as SingTel, ST Engineering, Fraser & Neave and Singapore Press Holdings are all known to give decent dividends.
Bonds – perpetual and otherwise
Financial advisers usually recommend that bonds form a part of your portfolio because of their stable return.
Bonds are usually issued with face value of say $100, and come with an annual coupon rate of around, say, 3 per cent or more. At some point, the company repays the $100, and you collect the interest over the previous years. The capital is not guaranteed but a company with an investment grade rating is unlikely to default.
Demand is so strong for bonds that the Singapore dollar bond market has seen issuance of about $9.18 billion in the year to March.
A bond open to retail investors issued by Singapore Airlines pays a 2.15 per cent coupon while a Fraser & Neave product pays 2.48 per cent.
A variant on these bonds is perpetual securities, also called perpetual bonds – the latest must-have investment. Perpetual security works on similar lines to bonds in that the instrument pays out a regular return. But one difference is that there is no definite time when a company will repay your capital. In that sense, it is closer to equity – something like a preference share – rather than a bond.
However you describe it, many cash-rich investors searching for a respectable yield are happy to park their money somewhere for a few years without touching it.
To get on the perpetual bond bandwagon, Genting Singapore last week issued a $500 million offering, paying 5.125 per cent. At a minimum investment of $5,000, it is likely to generate interest among retail investors.
The return on bonds, perpetual or otherwise, is not much lower than those generated by some stocks and Reits. These can often offer a dividend yield of around 5 per cent or more.
Of course, stocks are riskier than bonds although bond investing has its caveats too.
Aside from the risk of a company defaulting, you have to make sure you don’t need to touch your money soon. Don’t forget the macro risk of interest rates moving up – it makes your return relatively much less attractive compared with a bank deposit.
Gold and commodities
Gold has been in the doldrums lately but spiked this past week. Volatile stock markets have driven investors to gold for the usual safe-haven reasons.
Gold is at US$1,660 an ounce. But it is unlikely to fall too much, says Schroders. There is the unresolved euro crisis and unsustainable debt positions among the developed countries.
Growing wealth in China and India, the two biggest jewellery markets, should also give support.
However, the outlook for commodities is less bullish. A recent International Monetary Fund report says commodity prices are unlikely to see the same price growth spurt that they did in the past decade, partly due to the uncertain outlook of the global economy.
The bottom line
Other than expecting the unexpected, don’t be a greedy investor.
Go for investments that can give you a regular yield. Balance that by putting any further spare cash into some investments that can give you the extra oomph and that should go some way to letting you sleep soundly this year.
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