So I was calculating my net worth allocation for the FH Net Worth tracker recently. And I was really surprised by the amount of cash I was holding. In fact, my cash + bonds position was more than half my total investible assets.
Now this was an intentional move because I feel we are very late in the credit cycle, so I wanted to increase my cash position and position more defensively. But still, I was taken aback by how much cash I was sitting on uninvested.
So I had a serious look at the various asset classes in Singapore, to decide where to allocate the excess cash. And that was when I started getting worried.
Simply put, many asset classes in Singapore right now, are looking pretty fully valued, especially given the macro climate we have.
Macro Environment – Why so serious?
But first, let’s take a look at what’s so scary about this macro climate. There are a couple of points in particular to highlight:
Yield curve inversion – The US 3s10s curve has inverted. And if you take Morgan Stanley’s word for it, they find that if you add on the effect of Quantitative tightening, the yield curve actually inverted in late 2018, which means we could be looking at a US recession pretty soon. For beginner investors among us, a yield curve inversion happens when the short term interest rates are higher than longer term interest rates, and historically speaking, this usually results in a recession within 12 to 18 months. If we assume inversion in late 2018 according to Morgan Stanley, it means a late 2019/early 2020 recession is in play.
US China Trade war – The US China Trade war is getting really bad, really fast. All the developments around Huawei and rare-earth bans look particularly troubling. I still believe a deal will eventually be struck, but between now and then, there could be enough damage to global trade and investor sentiment that takes us into the next downturn.
US Mexico Trade war – And if China wasn’t enough, Trump literally just announced 5% tariffs on Mexican goods for as long as they fail to contain the issue of immigrants crossing into US. These tariffs come into effect in June, and can potentially rise to 25% if the issue is not resolved. Mexico is a huge trading partner for the US (most US companies manufacture in Mexico to reduce costs), and if this is carried out, it’s going to wreak havoc on the US supply chains.
End of Fed tightening cycle + falling US bond yields predicting rate hikes – As an investor, it’s actually not the Fed tightening cycle that you should be watching for, it’s the Fed cutting rates. The rate hike cycle is usually too early in the cycle to provide actionable trading signs. But when the Feds start pausing rate hikes, and starts talking about rate cuts (like they did the past week), that’s when it’s time to really start getting worried.
In fact if you look at the Fed futures market these days, it’s pretty much pricing in 2 rate cuts in 2019. That’s never a good thing.
Layoffs in Sequoia China, CNN, Ford – Sequoia recently announced that they could be cutting up to 20% of their investment staff in China. Sequoia is one of the biggest and most prestigious private equity players around, so when they start cutting 20% of their investment team in China, you know there are problems there. Couple this with reports of layoffs in companies from CNN to Ford, and it starts looking troubling.
Uber IPO – Let’s not mince words. The Uber IPO was a disaster. When you talk about having a $120 billion valuation, only to end up pricing your IPO at the bottom of the price range, having it drop 15% in a couple days of trading post IPO, let’s just say it wasn’t the best IPO ever. In fact Softbank just took up a $4 billion margin loan on their Uber stock to repay investors, which send a lot of conflicting signals to the market. An IPO is just about the only viable exit strategy for most Unicorns, so with IPO sentiment this jittery, it casts doubts over the success of any future IPO. WeWork anyone?
Rise in default rates in P2P lending in SEA – Ok this one is purely anecdotal. But I’ve noticed that the default rates in Peer to Peer lenders in South East Asia (Funding Societies etc) have been slowly inching up. If so, that’s not a good sign, because these SMEs are usually the first ones to fall in a downturn. I don’t have hard evidence to back this up, so if anyone out there does feel free to share in the comments below (or drop me an email)!
Now I guess some of you out there will just say I’m cherry-picking the bad news to support my argument. I get that. That’s a definite possibility, and it could really be that I’m so convinced the cycle is ending that I only see what I want to see.
But I just think when you look at the big picture (yield curve inversion, end of Fed tightening cycle), and you look at the details (layoffs, trade war, Uber IPO), it really does look a lot like we are very late in the credit cycle. Individually, I wouldn’t read much into the above, but put them all together and that’s a different story. Am I right or wrong on this? Please share your thoughts below!
So you take that macro outlook, and you look at where Singapore REITs are trading. And gosh, does it look like dreamland over here.
This is the 5 year chart of Mapletree Commercial Trust, which is now trading at a 4.8% yield and a 20% premium to book. Really?
I could pull up the charts and data for any other blue chip REIT (CapitaLand Mall Trust, CapitaLand Commercial Trust, Frasers Centerpoint Trust) and they’ll pretty much tell the same story.
What am I missing here? Why are people still buying REITs at these prices?
Singapore Dividend Stocks
Singapore Dividend stocks on the other hand, are interesting. The market has come down quite significantly for some of the blue chip dividend plays, especially those China related ones. The bank stocks have come down a fair bit too.
So I actually think there are opportunities here for a long term investor, who is prepared to average in right now and ride out the volatility.
Names that I like include Netlink, Singtel, CapitaLand, and the 3 local banks, but again, because I already have exposure to many of them, I’m slightly wary of adding too strongly to my position at this stage in the cycle.
Singapore Savings Bonds
I’ve set out the yields from the latest June bonds, against the January 2019 bonds below.
The 1 year yield has come down from 2.01% to 1.88%, and the 10 year from 2.45% to 2.13%. That’s a huge move in just 6 months.
Would I invest in Singapore Savings bonds at these kind of yields? Well, SSBs are basically the risk free rate for SGD assets, so it sets the benchmark for all other risk assets. So unfortunately, I’ll still invest in it if I had spare cash that I didn’t want to take any risk with. There’s just no alternative.
|Year from issue date||1||2||3||4||5||6||7||8||9||10|
|Average return per year, %*||1.88||1.88||1.88||1.92||1.96||1.99||2.02||2.06||2.09||2.13|
|YEAR FROM ISSUE DATE||1||2||3||4||5||6||7||8||9||10|
|Average p.a. return, %**||2.01||2.07||2.13||2.18||2.24||2.28||2.33||2.37||2.41||2.45|
Probably the most interesting asset class right now is residential property.
Just this week, news came out that Braddell View was trying (and failed) to sell the property in an en bloc tender, with a reserve price of $2.08 billion. I found this pretty interesting because here we are talking about the rapid deterioration in the global macro climate, and then these guys are trying to get a property developer to cough up $2.08 billion (excluding construction costs) to buy over their land. Really?
To put it mildly, it’s going to be hard to find a developer to be able to (and willing) to splash out this much liquidity in this macro climate, especially after the cooling measures imposed by the government last year.
But that’s also the thing about Singapore residential property, because it’s such a tightly controlled market (by the government), it’s actually less responsive to global macro factors than we would think. Add to that the fact that property is illiquid and usually takes 9 to 12 months to respond to what’s going on in the world, and you have a very unique asset class.
The ABSD charges imposed by the government last year (12% for second property) have done their job to take out the burgeoning exuberance in the residential market, but most sellers seem to have missed that memo. As a result you have a market where sellers still have high asking prices, and buyers, noticing the change in climate, are only prepared to pay a much lower price. Until one of them decides to change their mind, you’re just going to have a market with falling transaction volume, which is what we’re seeing.
Would I buy a property now? I think long term, because the government intervenes so strongly in the residential market, you’re going to have an asset class with a slow and gradual increase over time. So even though prices are still at a historical high, I think if you find one that you like, and you’re in the market for a new property do go for it. Even better if you’re a new buyer and can avoid the ABSD.
But don’t forget that because property is so unique, it’s really about find that one house that you love. If you do, it’s probably worth buying regardless of where the global macro is, because again, given how the government intervenes, I don’t think you’ll get sharp price movements either way for long periods.
Closing Thoughts: What did I do in the end?
Now the purpose of this article wasn’t to spread fear and uncertainty, so my sincere apologies if it did. It was really just to share my personal experience the past week of reviewing the general investment options available to Singaporean investors, and my thought process in deciding where I wanted to invest the cash.
So what did I do in the end? I took whatever cash I had left in my SRS account, and invested it into Netlink Trust. The non-SRS cash I had? I left it in DBS Multiplier to take advantage of their new S$100,000 limit.
I still think we are very late in the credit cycle, and we’re going to see more volatility in the coming months. And that’s why I continue to maintain an outsized cash position. But I could turn out to be completely wrong on this though, which is also why I haven’t sold any of my existing positions. If the market continues to keep going up, hey, I’m still well exposed to stocks and REITs.
I would absolutely love to hear your thoughts on my asset allocation strategy though. Is this what you’re doing as well? Or do you think it’s the stupidest thing you’ve ever heard? Share your thoughts in the comments section below! I respond personally to all comments!