It's been tumultous weeks for the U.S. finance industry that began with the packaging of mortgage-related assets.
To take stock, here's what happened so far:
* Lehman Brothers filed for bankruptcy
* Freddie Mac, Fannie Mae and AIG were rescued by the US Fed, making the Fed their largest equity holder
* Bank of America bought Merrill Lynch in an all-stock sale
* Morgan Stanley and Goldman Sachs are no longer investment banks, choosing now to be regulated by the US Fed.
This is driven by a need to borrow money from depositors as short-term LIBOR rates continue to remain high amidst the drying up of liquidity.
* WaMu (Washington Mutual) is the next bank to go belly up. JP Morgan bought their good assets and not their liabilities.
* Wachovia Bank is in early talks with Citigroup, Wells Fargo, and Banco Santander.
Is this the end?
No one really knows, but I think it is still early days. At the very least, confidence is shaken and you will start seeing US domestic consumption and GDP growth slowing, especially as domestic consumption forms the lion's share of GDP in the United States.
The market is jittery, and any rebounds in the past seem to be a result of bears covering their shorts. Regulators have since forbid naked short selling (i.e. selling a share without owning it first) and the market is range-bound with further downside potential.
Wall Street is waiting to see if the US Fed is able to convince Congress to agree to the proposed US$700 billion bailout plan. The nearing Presidential elections has made it seem like a political play, and no one is sure it is going to be a cure-all for the US economy. Critics were everywhere and have tugged the heartstrings of the population - namely why are US taxpayers, themselves in massive (housing mortgage) debts, be liable for additional debt while the banks' CEOs get to pocket the US$'millions they have earned over the years?
Another concern I have is, the US Government already have over US$9trillion in debt. Who is going to continue lending to them? And at what cost? It is likely the USD will continue depreciating against most currencies in the near future.
Ben Bernanke's comment on buying the distressed assets at close to hold-to-maturity value is also cause for worry as it could mean buying the assets at a premium over the mark-to-model values and might mean he could not deliver on the promise where US taxpayers are entitled to capital gains when the assets are held to maturity.
How about emerging markets in Asia?
For Singapore where I am based, I think there are both direct and indirect impacts. Direct impacts will be limited as our main trade flows are intra-ASEAN and inter-Asia. However, we will still be affected as we are a very open economy. Also, indirect impacts are harder to measure and lies unknown. Inter-Asia trade is likely to be negatively affected as US demand falters, thereby affecting demand from other Asia countries because the US continues to be major trading partners of many countries, especially that of China.
What's next?
The market is likely to await to see if Congress passes the Bill on the bailout plan, and it depends on which candidate wins the Presidential election and what steps he will take to steer the US economy back on track (or it could be further off). Unemployment figures are likely to rise as banks continue to retrench and it may start overflowing to other sectors of the economy, including manufacturing.
It is thus prudent to keep cash and maintain liquidity till we have more positive news ahead of us. As for my unrealised losses in mutual funds and equities that is reaching 15-20% of my initial value, I have decided to keep it there as I bought them for the longer-term and will relook at them early next year. I am guessing the economy picks up then when the financial turmoil is over (hopefully by end of this year).
Sunday, September 28, 2008
Sunday, September 14, 2008
Updates
It's been some time since I last updated.. I've since started work in the finance industry, and that has kept me rather busy.
Also, for STI to fall to the levels of 2,500-2,700 is a setback to my investments. That was the level last seen when I started investing, and after two years, I'm back to square one and nursing my losses. But my own stocks portfolio are in defensive sectors and I'm getting reasonable dividend yields :)
Of course the mutual funds I've invested are >30% down and I'll continue holding them for the next one year or so. I'm not sure if I'm caught in the mentality of "selling winners and holding on to losers", but I still believe in long-term fundamentals, even though oil prices falling below US$100 per barrel is an indication of slowing global demand.
Anyhow stay tuned as I start paying more attention to my investment portfolio again.
Also, for STI to fall to the levels of 2,500-2,700 is a setback to my investments. That was the level last seen when I started investing, and after two years, I'm back to square one and nursing my losses. But my own stocks portfolio are in defensive sectors and I'm getting reasonable dividend yields :)
Of course the mutual funds I've invested are >30% down and I'll continue holding them for the next one year or so. I'm not sure if I'm caught in the mentality of "selling winners and holding on to losers", but I still believe in long-term fundamentals, even though oil prices falling below US$100 per barrel is an indication of slowing global demand.
Anyhow stay tuned as I start paying more attention to my investment portfolio again.
Tuesday, June 3, 2008
The latest hype: OCBC 5.1% Preference Shares
OCBC has recently announced it is offering its Class B preference shares to its retail and institutional investors that pays a fixed dividend of 5.1% per annum. These preferred shares are non-convertible and non-cumulative and the fixed dividends are tax-exempt, payable semi-annually.
For the retail investor, the minimum subscription is 200 prefernce shares of S$20,000 and thereafter in multiples of 100 preference shares for $10,000. These shares are perpetual securities with no fixed redemption date, redeemable at the option of OCBC Bank five years from the issue date and on each dividend date thereafter. It carries an investment grade rating of A-/Aa3.
Things you should know before you invest:
* Non-convertible preference shares
This means the preferred shares are not convertible to equity. While this might be preferred by some (preference shares rank above equity in liquidation), it essentially treats this like a fixed-income security, but not a loan. A loan debt is like you lent $20,000 to OCBC and it pays you 5.1% p.a. in interest. However, capital is NOT guaranteed, so it should be compared to a fixed-income security such as a coupon bond.
* Non-cumulative preference shares
There are cumulative and non-cumulative preference shares available. Non-cumulative shares means if OCBC faces cash flow problems and decides not to declare dividends, these preference shareholders forfeit their dividends, i.e. no dividends for the year. This is another feature that makes it different from a plain-vanilla loan. However, one consolation is OCBC has to pay preference shareholders before their equity shareholders, and in previous years, OCBC has been regularly paying its shareholders. So the likelihood of this is small, although not zero.
* No capital guarantee
As mentioned, this is not a loan or fixed deposit (as many retail investors choose to see it). This cuts both ways because it also allows for capital appreciation as well. A look at OCBC's Class E 4.5% preference shares shows that prices are relatively stable and it is currently trading at 100.70.
Also, note that should OCBC run into bankruptcy, preferred shareholders are paid before common equity shareholders, but after taxes, employees and debtors.
* Liquidity
Shares are traded on SGX at 0.1 lots. For large lots, market impact costs might be incurred. It is possible that only 10 lots or 10,000 shares are traded daily. This makes it difficult to sell if you should need money urgently.
* Interest Rate Risk
These shares are redeemable after 5 years on each dividend date. The option to redeem lies with the bank; usually the bank will redeem if the current interest rate environment is falling or the level of interest rates is low so they could refinance at a lower rate. For the preferred shareholder, this means that they have to seek alternative investments as they have a lump sum of cash on hand upon redemption by OCBC. However interest rates are low and they might not be able to get good yields on the cash balances and are subject to the prevailing SIBOR rates.
* No voting rights
Voting rights are given to common equity shareholders. Preferred shareholders typically have no say in the business of the company and are not in a position to fire management/directors. This is another reason why preferred shares are likened to fixed income securities.
* Tax-exempt
The semi-annual dividends, like most other dividends and interest income, are not taxed. Dividend income received by common equity shareholders are already taxed at the company level.
Should I invest?
* Risk appetite
This varies from individual to individual. It depends largely on your risk appetite - if your risk appetite is low and you are risk averse, yet would like some exposure to OCBC, this could be a right investment for you. However, if you have medium to large risk appetites, you might want to choose OCBC equity because you have participation rights, i.e. in a good year, you might receive special dividends and could thus get >5.1% p.a. Also, OCBC equity are more liquid and more volatile than preference shares so capital appreciation (and loss) is much faster. On average, equities return ~10% p.a. over a ten-year period.
* Investment Horizon
If you need the money in a year's time, then you should not invest. You get 5.1% in dividends but after incurring transaction costs and opportunity costs, it is less than 5.1%. Thus, this is best for three-five year term horizon and beyond.
* Your existing portfolio
If you have cash lying idle in bank deposits, then yes you should consider this higher-yielding alternative. This is a higher rate than most fixed deposits and inter-bank rates (since the risk characteristics are different). However, if ALL you have is $20,000 to $40,000 I would advise against choosing this. You should have six months of expenses in liquid bank accounts for emergency funds use. And you should attempt to diversify whatever little you have instead of throwing all your net worth (your eggs) into OCBC preference shares (the only basket).
* Current status
If you are currently a retiree looking for stable income, this is a good addition to your portfolio. However, if you are in your early 20-30s, this can be part of your portfolio to diversify (it works like fixed income) if your portfolio or net worth is large enough. Otherwise, choose other (riskier) investment alternatives.
My thoughts
I applaud OCBC for providing retail investors with this option to invest in their Class B preference shares. They did take our feedback into account especially after DBS only offered their Tier 1 capital to institutional investors.
I might consider applying for the shares but I expect it to be over-subscribed. However I'm ambivalent about whether or not I receive the allotment since my existing equity portfolio has provided me with 9% return to date (7% trading gains + 2% dividend yields which I will update on another post) and my funds are still trading at a 10% unrealized loss. I am hesitant about liquidating my equities to invest in OCBC preference shares, or even my externally-managed funds as I hold a three to five-year horizon for them so I am holding on. Given the relative size of 1 lot of OCBC preference shares and its relative return, it is not attractive in my opinion.
NOTE: Please seek your financial advisor's advice about investing in these preference shares. I have brought up a few salient points for you to take note so you are aware of the questions to ask and you could decide if this is the best investment for you.
For more information on OCBC's previously-issued classes of preference shares, visit this website http://www.ocbc.com/global/investorrelations/Gco_Inv_PrefShareBond.shtm.
For the retail investor, the minimum subscription is 200 prefernce shares of S$20,000 and thereafter in multiples of 100 preference shares for $10,000. These shares are perpetual securities with no fixed redemption date, redeemable at the option of OCBC Bank five years from the issue date and on each dividend date thereafter. It carries an investment grade rating of A-/Aa3.
Things you should know before you invest:
* Non-convertible preference shares
This means the preferred shares are not convertible to equity. While this might be preferred by some (preference shares rank above equity in liquidation), it essentially treats this like a fixed-income security, but not a loan. A loan debt is like you lent $20,000 to OCBC and it pays you 5.1% p.a. in interest. However, capital is NOT guaranteed, so it should be compared to a fixed-income security such as a coupon bond.
* Non-cumulative preference shares
There are cumulative and non-cumulative preference shares available. Non-cumulative shares means if OCBC faces cash flow problems and decides not to declare dividends, these preference shareholders forfeit their dividends, i.e. no dividends for the year. This is another feature that makes it different from a plain-vanilla loan. However, one consolation is OCBC has to pay preference shareholders before their equity shareholders, and in previous years, OCBC has been regularly paying its shareholders. So the likelihood of this is small, although not zero.
* No capital guarantee
As mentioned, this is not a loan or fixed deposit (as many retail investors choose to see it). This cuts both ways because it also allows for capital appreciation as well. A look at OCBC's Class E 4.5% preference shares shows that prices are relatively stable and it is currently trading at 100.70.
Also, note that should OCBC run into bankruptcy, preferred shareholders are paid before common equity shareholders, but after taxes, employees and debtors.
* Liquidity
Shares are traded on SGX at 0.1 lots. For large lots, market impact costs might be incurred. It is possible that only 10 lots or 10,000 shares are traded daily. This makes it difficult to sell if you should need money urgently.
* Interest Rate Risk
These shares are redeemable after 5 years on each dividend date. The option to redeem lies with the bank; usually the bank will redeem if the current interest rate environment is falling or the level of interest rates is low so they could refinance at a lower rate. For the preferred shareholder, this means that they have to seek alternative investments as they have a lump sum of cash on hand upon redemption by OCBC. However interest rates are low and they might not be able to get good yields on the cash balances and are subject to the prevailing SIBOR rates.
* No voting rights
Voting rights are given to common equity shareholders. Preferred shareholders typically have no say in the business of the company and are not in a position to fire management/directors. This is another reason why preferred shares are likened to fixed income securities.
* Tax-exempt
The semi-annual dividends, like most other dividends and interest income, are not taxed. Dividend income received by common equity shareholders are already taxed at the company level.
Should I invest?
* Risk appetite
This varies from individual to individual. It depends largely on your risk appetite - if your risk appetite is low and you are risk averse, yet would like some exposure to OCBC, this could be a right investment for you. However, if you have medium to large risk appetites, you might want to choose OCBC equity because you have participation rights, i.e. in a good year, you might receive special dividends and could thus get >5.1% p.a. Also, OCBC equity are more liquid and more volatile than preference shares so capital appreciation (and loss) is much faster. On average, equities return ~10% p.a. over a ten-year period.
* Investment Horizon
If you need the money in a year's time, then you should not invest. You get 5.1% in dividends but after incurring transaction costs and opportunity costs, it is less than 5.1%. Thus, this is best for three-five year term horizon and beyond.
* Your existing portfolio
If you have cash lying idle in bank deposits, then yes you should consider this higher-yielding alternative. This is a higher rate than most fixed deposits and inter-bank rates (since the risk characteristics are different). However, if ALL you have is $20,000 to $40,000 I would advise against choosing this. You should have six months of expenses in liquid bank accounts for emergency funds use. And you should attempt to diversify whatever little you have instead of throwing all your net worth (your eggs) into OCBC preference shares (the only basket).
* Current status
If you are currently a retiree looking for stable income, this is a good addition to your portfolio. However, if you are in your early 20-30s, this can be part of your portfolio to diversify (it works like fixed income) if your portfolio or net worth is large enough. Otherwise, choose other (riskier) investment alternatives.
My thoughts
I applaud OCBC for providing retail investors with this option to invest in their Class B preference shares. They did take our feedback into account especially after DBS only offered their Tier 1 capital to institutional investors.
I might consider applying for the shares but I expect it to be over-subscribed. However I'm ambivalent about whether or not I receive the allotment since my existing equity portfolio has provided me with 9% return to date (7% trading gains + 2% dividend yields which I will update on another post) and my funds are still trading at a 10% unrealized loss. I am hesitant about liquidating my equities to invest in OCBC preference shares, or even my externally-managed funds as I hold a three to five-year horizon for them so I am holding on. Given the relative size of 1 lot of OCBC preference shares and its relative return, it is not attractive in my opinion.
NOTE: Please seek your financial advisor's advice about investing in these preference shares. I have brought up a few salient points for you to take note so you are aware of the questions to ask and you could decide if this is the best investment for you.
For more information on OCBC's previously-issued classes of preference shares, visit this website http://www.ocbc.com/global/investorrelations/Gco_Inv_PrefShareBond.shtm.
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