The Thai Baht

The Thai baht ‘fickle’ minded policy swing is a classic example why we at The Panthenon Group do not invest nor trade in emerging currencies.

The risk is too high, given the illiquidity and more importantly, the lack of professional and expertise in the respective governments to manage the economy and currency.

It’s interesting how within a 24 hour period, the capital outflow penalty policy which attributes a 10% withholding tax on all capital outflows from Thailand was quickly abandoned.

In truth, the days of Thailand’s economic prosperity died when it decided to oust its PM, Thaksin Shinawatra.

The Weakening US Dollar?!

Tel Aviv reported former Federal Reserve Chairman, Alan Greenspan saying that he sees a weaker dollar for the next few years as the United States grapples with a balance of payments deficit.

Moreover, he noted that some countries in particular the oil producing countries with large US dollar reserves have begun to diversify into other currencies including Euro and Yen.

Respectfully speaking, Alan Greenspan has not always been right in his views. In this instance, we tend to disagree with his view.

The U.S. has been battling a balance of payments deficit for the past 4 years and also a domestic deficit for the past 8 years. Yet, it did not stop the US Dollar from powering against the Euro to a peak of $0.83 back in January 2002. Then losing total ground to the Euro when it hit bottom in January 2005 at $1.3580. Again, the US Dollar powered back to a high of $1.1640 in January 2006. As of yesterday, the EUR/USD is at $1.31.

Remember, all the above happened whilst the US was suffering deficits both in its external and domestic accounts. The single most important factor that explains the situation is ‘relativity in growth cycles’. Back in 2002, the U.S. economy was powering up after the dot.com bust in 2000 and coming out of the recession. In 2005, Europe who was the laggard, started turbo-charging and showed stronger growth rates relative to the U.S. In late 2005 and into 2006, it was all about the strength in the U.S. economy right up to the end of Q1, 2006, plus the 17 rate hikes which converted U.S. Dollar into a favorable ‘carry trade’.

The U.S. current account deficit becomes less of an issue when there is growth in the economy. In other words, the U.S. can grow out of its deficit like it did the last time around during the Clinton administration. Of course, this is not going to be the case in 2007.

What is more important is the fact that Bernanke appears to be doing an excellent job in creating the appropriate ‘soft landing’ in the U.S……….THIS IS VERY IMPORTANT. If the soft landing is successfully achieved then the revival of the U.S. economy in the latter half of 2007 is optimistic.

What does this all mean? The near-term prospects for the U.S. is weak, hence, the U.S. Dollar will face some weakness over the next 3 months. Thereafter, it’s going to be data dependent.

Yesterday’s Straits Times had an article about the weakening U.S. Dollar because of the slower growth and anemic housing and potential interest rate cuts. All this are known symptoms for a weaker currency……….nothing new.

Our Call; weaker US Dollar into the end of Q1, 2007, Q2 will be highly data dependent and we see US Dollar strength into Q4, 2007.

To Sell or Not to Sell

Thank you for your comments Thinking Man.

You asked if you have invested in Singapore equities at the start of the year, should you sell now or not?

Please allow us to share our perspective with you. You need to look at the following aspects: -

1. Benchmarking
2. Singapore Economy
3. Strategy

1. Benchmarking

Since you have invested in Singapore equities, then your natural benchmark index should be the Straits Times Index. Year to date, the Straits Times Index has posted a gain of 24%, hence, this is the benchmark in which you should evaluate your investments. Now, whether you have invested directly in Singapore equities or through unit trusts or mutual funds, you need to first evaluate how your investment has done, also how much value adding your broker, banker or financial advisor has done?

If your investments have performed less than 24%, then, you have not done well for this year. You would have been better off just buying ETF - Exchange Traded Funds or Index Options which usually track the performance of the Straits Times Index.

2. Singaopre Economy

Singapore will post a GDP growth of 8.3% to 8.5% for 2006 which is outstanding. However, with global growth slowing down next year, the forecast for Singapore is in the region of 5% to 5.5%. This is a potential marked slowdown.

What does this mean for us if we are invested in Singapore equities? Let's remember that equity prices is the present value of all discounted future cashflows/earnings. Therefore, if the future earnings prospects for Singapore corporates in 2007 is lesser than 2006, then, naturally, the price of Singapore equities will consolidate downwards next year.

Yes, there is a possibility that equity prices could continue to rise by another 10% through to March/April 2007, which is the reporting season for most Singapore corporates. The euphoria could run up to then.

3. Strategy

If you have been invested since the start of this year, we would strongly advice and encourage you to take some 'profit off the table' as they say. Keep half of your holdings to ride up the last 10% into Q1 2007.

When the market consolidates in Q2 2007, then, selectively start picking up equities again. We would also recommend diversifying into bonds and REITs for good yields and potential capital gains as interest rates fall in Q4.

Fixed Rate or Variable Rate?

Thank you Anonymous for your comment, we are happy that it has been helpful in your decision to stay out of the equities market for now.

You asked a question about whether you should take up a fixed rate housing loan package or a variable rate housing loan package?

Given that you possess a portfolio of investment properties, it is important to proactively manage this portfolio like you would any investment portfolio, regardless of what asset class it may be.

What is happening when we possess investment properties? Basically, there is a yield factor and there is also a potential capital appreciation factor. We need to managed both these factors.

From a yield factor, the ideal situation would be to try and achieve a 'positive' cashflow, that is, your rental income is more than your mortgage commitments. You may also wish to take into consideration property tax, maintenance and conservancy charges as well.

The interest rate environment has been rising steadily for the past 2 years. Interbank rates for 3 month money was only 1% p.a. 2 years ago, it has risen to the current level of 3.6%. Interbank rates and deposit rates is the base rate in which banks then begin to price up their mortgage loans, car loans and personal loans.

We believe that the global interest rate environment is near its peak. The U.S. has peaked and it is looking at cutting interest rates in 2007. Europe, Australia and New Zealand may have another rate hike and then hold steady before also cutting later in 2007. Asia is a far smaller and fragmented community and therefore, has to play a 'follow the leader' approach.

We believe that the government in Singapore will begin to cut rates in the latter half of 2007 in order to help stimulate a slowing economy and to keep Singapore in the forefront of the Asian pack.

Our advice to our clients and friends is to re-price or re-strucuture your loans on a variable rate housing loan package.

Why? As all of us know, housing loan package are usually tenored on a 5 year basis. Therefore, by locking in a variable rate package, you will enjoy the benefits of the lower interest rates through time. Also, most housing loan packages have a penalty clause that is applicable only for the first 2 years, thereafter, you can always re-structure or re-price again depending on market conditions.

Singapore Equities

It has been brought to my attention by many of my clients asking whether it is prudent to be investing in Singapore equities or 'blue-chip' shares now since the market is continuing its upward climb?

They have asked me to comment on it and I am for the first time using this blog site as a platform for us all to be able to share our thoughts and opinions on topics that are important to all of us.

The Singapore Straits Times on Wednesday, December 6th published a front page article saying that the Straits Time Index is about to hit a new record high at the 3,000 level. It also shared with the public that the euphoria could be explained by the following reasons or factors: -

1. Sharp drop in crude oil prices
2. Prospects of US interest rate cuts
3. Property shares on 'tipsters' sheets
4. Upcoming IR at Sentosa Island

We feel that the first two points are mute points. Oil prices can go up and down and for most developed countries the impact is similar. By itself it cannot explain the exuberance in the the Singapore equity market. Prospects of US interest rate cuts has no impact to Singapore this year, besides, the talk about interest rate cuts only started in Q4 of this year and hence, doesn't begin to explain the situation here in Singapore. The only impact to Singapore if the US were to being cutting interest rates next year, is that Singapore may potentially also cut rates which could uplift the Singapore economy then.

Points 3 and 4 suggests an element of 'speculation' which is rather dangerous because it is not founded on fundamentals. What it does mean is that when the 'cloud' on which unenlightened investors are standing on vaporises, guess what, the floor from under their feet will open up!

Singapore will close this year with a GDP of 8.3% and equity prices reflect the strong growth on better earnings by corporates. However, next year growth is expected to be about 5%, this means that future earnings discounted back to net present value will be lower, hence, equity prices will fall to reflect the weaker earnings.

We believe that the euphoria has another 10% worth of upside steam up to the reporting season for corporates which is in March/April 2007.

After that, watch equity prices begin to FALL.

Welcome

Thank you for visiting our blog that has been newly set up for the sole purpose of encouraging a free exchange of thoughts and ideas regarding the financial marketplace.

More importantly, it is a platform where we can share our thoughts, ideas and opinions on a more ready and proactive basis.

All of you are invited to participate in this forum. It is also meant to encourage a more spontaneous dialogue as what a blog site should be.

We will be posting more topics of interest on this blog shortly.

In the meantime, here is wishing one and all............happy trading and happy investing!!