【本報訊】羊年臨近，年廿八，洗邋遢；有拍賣行負責人提醒巿民，若大掃除時在家中枱底暗角，發現一些五仙「神沙」要留意年份，隨時升值變「大牛」。本周末拍賣的「一九六四年香港五仙」拍賣底價五百元，「一九八○年香港一毫」底價四百元，「呢個只係大約巿價，經叫價分分鐘唔止呢個數。」
記者：蔡朗清

普藝拍賣行錢幣部主管梁達榮昨表示，錢幣收藏家競相追逐的香港輔幣主要是兩種，其中是一九八○年的一毫，如果是全新硬幣，現巿價高達逾千元，升值一萬倍；即使用過，只要硬幣整體表面沒有刮花，色澤光鮮，亦可賣得四至五百元。
一九八○年一毫是香港最後一款大面積的一毫硬幣，之後全部硬幣都變得輕巧細緻，所以變得值錢，「政府當年全面回收一九八○年一毫，巿面流通量唔多。即使係一九八○年前的一毫都唔值錢」。

無人知市面有幾多枚

梁達榮續稱，一九六四年香港五仙硬幣更值錢，拿去拍賣行保守估計可賣得八百元，升值逾萬倍；保存良好隨時拍得二千元，「點解一九六四年香港五仙咁值錢？其他年份唔值錢，因為其他硬幣都有發行量，惟獨一九六四年五仙無公佈發行量，到今天都係一個謎，巿面仲有幾多枚，冇人知。咁樣先值錢」。
他說，普藝本周末錢幣拍賣行各有一枚一九六四年香港五仙及一九八○年香港一毫拍賣，底價分別是五百元及四百元，「最後成交價幾多？好難估計」。
除硬幣外，當日亦有鈔票拍賣，其中一組二百張連編號的全新滙豐銀行拾圓，底價三千二百元，「係一九九二年鈔票，賣家當年喺銀行『唱』返嚟諗住封利是，點知擺係保險箱到𠵱家。值錢在於連號碼加上靚冧巴，頭三個號碼是888，有一張仲係888777。𠵱家已經無連號碼鈔票換」。
另一張拍品是一九八一年全新滙豐銀行一百元，編號555555 ZF，估值四千二百元。
梁達榮打趣說，巿民在大掃除找得有關輔幣等，不妨拿來拍賣行估價，「我哋會盡快幫賣家安排拍賣」。 

Integrated Shield Plans: To keep or not?

When MediShield Life starts later this year, it will provide everyone, both sick and healthy, with cradle-to-grave health insurance cover. There will no longer be any lifetime limits, and benefits and premiums will be higher than under the current MediShield. This has caused many people who are currently on the Integrated Shield Plans (IPs), which cover them for more than subsidised hospital care, to ask if they can drop these additional plans which have higher premiums, and simply rely on MediShield Life. Today, six in 10 people on MediShield have IPs. Some certainly should continue with their IPs while others would do better to downgrade to the basic MediShield Life. Senior Health Correspondent Salma Khalik gives some pointers to help you decide which route to take if you are currently on an IP.

There are five insurers - AIA, Aviva, Great Eastern, NTUC Income and Prudential - that offer three categories of Integrated Shield Plans or IPs: for treatment at private hospitals; public hospital A class; and public hospital B1 class.

Public hospital B2 and C class wards are heavily subsidised and can be covered by the basic MediShield Life.

UP TO the age of about 40 years, the premiums for IPs are relatively low, as younger people are less likely to require expensive hospital stays. This reason alone makes IPs worth considering, especially if you do not have company health cover.

Current premiums range from $78 to $383 a year, but will rise when MediShield Life starts as all IPs have to incorporate it. MediShield premiums are $50-$105 today but will rise to $130-$310 a year when it becomes MediShield Life. Those who do have good hospital coverage provided by their employer should look at considerations for older workers.

PREMIUMS start going up rather sharply from the age of 41 years as that's the age when people start getting chronic problems like blood pressure and high cholesterol levels which put them at higher risk of serious illness. That is also when the incidence of cancer and diabetes starts to climb.

IP premiums range from $631 to $1,667 a year. While these premiums might still appear pretty affordable as up to $800 can be paid with Medisave money and they are still drawing a salary, it is time for those who have hospital cover from their employer to ask themselves the following question: What class of ward am I likely to use after I retire?

This is because, for them, it is only after they retire and no longer have company health coverage that MediShield Life of IP becomes their main health insurance.

Remember that insurance, unless you also buy a rider, does not pay the whole hospital bill.

The deductible, or the initial amount the patient needs to pay, ranges from $1,500 to $3,500 depending on the ward class. There is also a 10 per cent co-insurance for the rest of the bill that the patient needs to pay for.

Many patients take stock only at the point of admission.

Today, 60-70 per cent of people with IPs pegged at private hospitals or public hospital A class ward choose a lower hospital class than their insurance entitles them to - which essentially means that they have chosen the wrong IP and have been paying higher premiums than they needed to for years.

Another thing to look at is not the premiums you are currently paying, but the amount you will need to pay a decade or two after retirement. One in three people aged 65 is expected to live beyond 90 years. Would you be able to afford those premiums then?

If the answer is no, then do you want to pay high premiums up till the point when you cannot afford them, or downgrade early and save on a lot of money in the coming years.

IF YOU have retired and need to be more careful with what you spend, you too should look 10-20 years down the road and see if the premiums are likely to remain affordable.

Remember that the premiums are also likely to rise as cost of health care goes up, so the premiums you will need to pay in future will be higher than what you see charged for older people today.

Now, the highest premiums for private hospital plans is more than $8,000 a year. It is about $5,000 a year for B1 plans. MediShield Life premiums for people 65 years and older will hold steady for at least five years at $815-$1,530 a year before subsidies.

IF YOU are already suffering from a serious long- term ailment and are already collecting from the insurance, you probably should carry on to ensure that your coverage is not reduced. This applies to people of all ages.

Another group that might want to hang on to their IPs are diabetics with a high potential for kidney failure. If you qualify for subsidised dialysis, MediShield Life is enough. If you don't, you will need dialysis at a private centre.

B1 and A class plans that say they cover dialysis "as charged" refer to public hospitals and institutions only, but there are currently no public institutions offering private dialysis.

DOWNGRADING from an IP to the basic MediShield is never a problem and can be done any time. But moving to a higher plan will depend on whether you have any pre-existing medical problems that will result in exclusions in your coverage. The older you get, the more difficult it will be to change to a higher plan.

IN THAT case, the best thing to do is to hang on to your current plan for one more year. When MediShield Life is launched, the IPs will revise their premiums. By early next year, the picture will be clearer and you can then decide on the best scheme for you and your family.

salma@sph.com.sg

www.facebook.com/ST.Salma

@STHealth

BT: Not just Some Retirement Scheme Beyond the tax carrot, think of the SRS as insurance against having no income

24 Nov 2014

Not just Some Retirement Scheme

Beyond the tax carrot, think of the SRS as insurance against having no income

By

Cai Haoxiang

'I HAVE finally set up my SRS account!" I texted some friends and colleagues excitedly after putting some money in the Supplementary Retirement Scheme (SRS), a little-known and widely misunderstood government savings and investment vehicle that gives attractive tax benefits.

Those I asked were financially savvy people in upper middle-income jobs earning an income which makes the scheme's tax savings worthwhile.

They could also use the money saved inside to invest in the stock market, which some already do.

But their replies weren't too encouraging.

"What's that?" was a standard response.

"This is a US thing?" said one.

"This is the one for your parents?" asked another.

"I don't have a DBS account," someone said.

"I need the money to buy a house," was another common reply.

After 13 years in existence and numerous articles about it online and in print, the SRS is still largely unknown among the general populace.

Even if people know that it is linked to retirement, they have very little idea how it works or how they can benefit from it.

This is a pity. Setting up the scheme takes just minutes if you have an Internet banking account, but the benefits can last a lifetime.

As long as you contribute to it before the end of every year, you will be eligible for tax savings for the following year of assessment - hence the timing of this column, before people go off for their year-end holidays.

The biggest misunderstanding of the scheme is that you cannot withdraw your SRS monies early.

You can actually withdraw anytime. But if you withdraw before the statutory retirement age from the time of your first contribution - currently age 62 - the full sum will be subject to income tax, and an additional 5 per cent penalty is imposed.

Thus people think the penalties are too onerous. Why lock up your money when so much is already locked up with the Central Provident Fund (CPF)?

But they are missing the point. The SRS can be used to buy stocks, funds, and even life annuities. It is, at first glance, a long-term savings and investment scheme with a tax bonus.

While money used to top-up CPF accounts can also give you a tax benefit, CPF monies are harder to get out than SRS monies.

For many income-earners, the benefits from tax deferment, especially from the tax exemption for half of monies withdrawn upon retirement age, should outweigh the disadvantages of the early withdrawal penalties. The scheme, explained in the other story, is especially powerful in Singapore where there are zero or low taxes on a substantial amount of annual income.

In fact, if you consider yourself a long-term investor with a time horizon of 20 to 30 years, the psychological deterrent of early withdrawal can actually work in your favour. You will not be as tempted to sell at the bottom and buy at the top. Your SRS portfolio might outperform your regular portfolio, simply because stocks are more likely to be left alone to generate dividends and grow.

The three local banks operate the SRS scheme. Right now, they are offering vouchers or cash incentives for people to sign up.

Sometimes, they will take the opportunity to persuade you to buy insurance or unit trust products with your SRS monies. Think carefully if they are suitable for you.

But if you buy stocks with them, the transaction charges are lower compared to most online brokerages. However, there are service fees of S$2 per counter per quarter. So it is not advisable to buy an excessive number of counters for your SRS portfolio.

Worst-case scenarios

What are the worst-case scenarios for someone using the SRS? There are a number that come to mind.

The first is where a worker suddenly needs the money before retirement but is still liable to pay taxes in the same bracket.

In that case, he will not only have to incur the 5 per cent early withdrawal penalty, but will also be taxed on the amount he withdraws. This means he has effectively made a 5 per cent "loss" on his decision to use the scheme.

The second is more unusual, but not beyond the realm of possibility. This is the "late bloomer" scenario where you may have hit retirement age, but still continue to work and earn far more than what you previously did when you first contributed to the SRS. At the same time, tax rates move up.

Suppose when you are 65, you are the director of several company boards, on top of a salaried position that gives you a substantial paycheck.

You are at the peak of your career. But at that time, increasing social welfare expenses, severe income inequality and a change in political sentiment force the government to raise marginal taxes on high-earners like you to, say, 40 per cent.

Suppose you have steadily put in S$12,750 a year from age 30, and the money compounds at 5 per cent a year. You will have S$1.15 million by the end of your 65th year.

If you need to withdraw the money in one lump sum, you will be taxed on half your money withdrawn. If your marginal tax rates are 40 per cent, your effective tax rates are 20 per cent. If you haven't spent too much time contributing to the SRS from the 20 per cent tax bracket, you will be worse off, even with the tax concession.

High-balance problems

This leads us to the third worst-case scenario. This is when you are wildly successful with your SRS investments even though you put in relatively little in the beginning.

If you make millions of dollars with your SRS monies, then you are effectively letting yourself be taxed heavily on the capital gains when you withdraw what you have made - as income. In that scenario, you would have been far better off investing outside of the SRS system, where there are no capital gains taxes.

This is the "implicit capital gains tax" problem that was hotly discussed when the scheme was first introduced. But the Ministry of Finance had pointed out then that investors are putting in pre-tax dollars with the scheme as opposed to after-tax dollars outside. And the 50 per cent concession on what is taxable upon retirement means most retirees are unlikely to pay any taxes, it said.

If you have a high balance, one possibility to save on taxes is to buy a lifetime annuity product to spread payments out. But you will still be effectively taxed on half the annuity's payouts every year.

Your SRS monies also form part of your estate upon death, with 50 per cent of the withdrawal subject to income tax. The withdrawal happens in one lump sum. This may not be the most tax-efficient estate planning vehicle.

There are other minor problems to watch out for.

For example, you might have already hit the maximum contribution cap for the year, and are fully invested in a company. But the company does a rights issue. In that event, you will have no choice but to sell your rights entitlements and suffer dilution, or sell some other investment to free up cash to subscribe to the rights.

The best-case scenario appears to be for a high-income earner to get the maximum tax benefit every year, and reach age 62 with around S$400,000 in his account. Assuming this high-income earner stops working immediately at age 62 with no further income, and assuming whatever is left does not grow further, he can enjoy S$40,000 a year tax free if he spreads out the withdrawals evenly over the maximum 10 years.

This explains why the SRS is more popular with those in their 40s and 50s. They are more likely to be in a situation where they reap substantial tax savings, while they are not too far away from the retirement age. So they are not likely to run the risk of having too much in their accounts.

SRS is insurance

Given these worst-case scenarios, it might be more helpful to think of the SRS as a form of disciplined saving, and as an insurance mechanism to guard against having no income.

After all, most people do not know if a job will still be waiting for them several decades from now.

Having some cash "locked up" in this fashion will help. You don't even need to invest the money, to be safe.

Should a person become physically or mentally handicapped, they will also be able to withdraw their SRS savings penalty-free with a 50 per cent tax concession, regardless of age.

Even before you turn 62, there might be years when you will not be earning any income. For example, you might want to quit your job to look after the kids. This can happen when you are in your 30s or 40s.

In that case, if you have made SRS contributions from a marginal tax rate bracket of 7 per cent or more, the 5 per cent early withdrawal penalty will still make the scheme worth it as long as you do not incur any other income tax from withdrawal. This is the case if you withdraw just S$20,000 a year.

If you have no income, and have been contributing from a tax bracket of 7 per cent a year, you can arguably benefit even by withdrawing up to S$45,000 a year - where you have an effective income tax rate of 2 per cent on top of the 5 per cent penalty.

The higher your income tax bracket when you contribute, the more you can withdraw and still benefit despite the 5 per cent penalty.

Ultimately, the SRS is not an easy scheme to understand. But there are reasons even beyond the attractive tax benefits for Singaporeans to consider having some money in it.

---

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BT: Share traders calling it a day as market volume dries up - 23 Oct 2014

Singapore has been hit especially hard because of the penny stock collapse that began in October 2013 and continues to weigh on small and mid-cap counters. PHOTO: BLOOMBERG
23 Oct5:50 AM
Singapore

Average net commission on the decline, slumping to about S$1,000 from around S$6,000 to S$8,000 a decade ago

KISHORE Rochey was a trading representative for 20 years before calling it quits in September this year. He said that the average net commission earned by his peers has been on the decline, with through-the-grapevine estimates falling from around S$6,000 to S$8,000 a decade ago to about S$1,000 when he left.

"It made no sense to stay around."

Mr Rochey's story is not unique. Market liquidity in Singapore is at a multi-year low, commissions are suffering and many in the industry are either looking for other sources of income or simply moving on.


While many in the industry acknowledge macroeconomic effects in the market, they also blame regulations that have raised the costs for speculative traders and cut spreads and commissions for trading representatives.

In response, Singapore Exchange (SGX) stressed that it cannot jeopardise long-term market quality for short-term liquidity droughts, and noted that it has taken several initiatives aimed at helping the industry.

The numbers do not paint a pretty picture. Market turnover fell 21 per cent in the financial year ended June 30, 2014, to S$286 billion, according to SGX. That is the lowest turnover since fiscal 2006, when the size of the total market was less than what it is worth today.

Looking at turnover as a proportion of market capitalisation, the average turnover velocity in FY2014 was just 40 per cent, compared to 71 per cent back in FY2007 (view infographic).

UOB-Kay Hian Holdings posted a 31.8 per cent decrease in first-half commission income this year, to S$113 million. DBS Group Holdings' brokerage income for the first half of 2014 fell 29 per cent to S$85 million. OCBC Bank matched DBS's decline, with brokerage income dropping to S$26 million.

An executive at a brokerage who deals with remisiers said that the number of trading representatives in Singapore has fallen to about 3,900 in 2013 from more than 4,300 in 2011.

Jimmy Ho, president of the Society of Remisiers of Singapore, remarked: "I quote one remisier who's been in the industry for over 40 years, and he said it's never been like this before."

Those who are still in the game are looking for other ways to make a buck.

Mr Rochey noted that some brokerages are encouraging their remisiers to help refer their clients to specialists of other products and asset classes such as contracts for difference and forex.

"But at the end of the day, when the commissions are so low . . . there's just not enough meat," Mr Rochey said.

A trader who has since moved to another part of the desk said that investors are also looking to overseas markets for more action. Emerging markets such as Thailand, for example, offer more inefficiencies that investors are better able to capture, he said.

"You have to look to where the money is," the trader said. "Thailand, Hong Kong, Indonesia, even the US, where the volatility is there. If you're talking about money flow, in South-east Asia, you don't have to look that far beyond Thailand and Indonesia."

Industry veterans cited a number of factors for the industry's current woes. The first, and most obvious, is that equity trading volumes across the world have not been great ever since the Global Financial Crisis.

"From 2009 until now, the market has gone out, so people don't have the courage to come in big time," Mr Rochey said. "You need a whole new breed of investors to come in and create the volume, who didn't experience the pain of 2008 and 2009. That will take a decade."

Singapore has been hit especially hard because of the penny stock collapse that began in October 2013 and continues to weigh on small and mid-cap counters.

But the industry said that regulations, some of which were in response to the penny meltdown, have made it hard for the market to recover from that hit.

The trading executive said that SGX's removal of its S$600 clearing-fee cap in June has crimped large-volume day trades.

"Now the clearing fee has no cap, so it's very expensive for them to trade," the executive said. "Low liquidity and volumes mean it's also hard for them to trade more, and the bid-ask size is smaller now, so for them to make money from day trading is very hard."

Mr Ho said that proposed rule changes such as the shortening of the settlement period to two days from three days and the requirement for brokerages to collect collateral will suppress the liquidity provided by contra trading. Contra trading refers to the practice of taking and unwinding positions without collateral within the settlement period.

"If you ask for margin, that's operating like a bank," Mr Ho said. "Any exchange doesn't operate this way, because any exchange must combine the speculative and fundamental elements. If you take out the speculative element, the market won't function."

But SGX is adamant that some of those rules being complained about actually improve market quality, and changing them to address what it views as a short-term liquidity downturn would be myopic.

"Yes, from an exchange perspective and from my perspective, I'd like to have higher turnover," chief executive Magnus Bocker said. "But the question is, I'm here to long-term service the investors, I'm here to protect the retail investors and the institutional investors, I'm here to protect the integrity of the market, I'm here to support that we can raise money for companies."

Mr Bocker also argued that although liquidity is thin at the moment, other aspects of the market, such as ease of capital raising for issuers and the costs for investors are still robust. Programmes that incentivise market makers and liquidity providers are also showing early success.

"If you go back and say it's not so good, I would say the three important functions of the equity market work well," Mr Bocker said.

Mr Rochey, who said that he now makes more as a private investor, felt that brokerages should also be more aggressive in incentivising volumes. Graduated takes of commissions, where a remisier's share of commissions is stepped up if the remisier's volume crosses a threshold, should be utilised more, he said.

"If the broking houses want to revive the industry . . . share more of the profit."

The trader said that the market situation is unlikely to improve for the rest of the year. "In two weeks' time, we're into the month of November, and for the European and US funds, this is fund closure time for them . . . The market will get quieter."*

Finding real value in beaten-down markets

Finding real value in beaten-down markets

Indeed, it is during bearish times like these that investors who believe in the value proposition come out hunting for bargains.

-ST Tue, Feb 10, 2009The Straits Times

By Lorna Tan

With stocks hitting new lows, the share market is like another Singapore sale but minus the crowds, given that only a few brave souls are putting their cash down.

While investors may have misgivings about the uncertain and volatile markets, the assets are just too cheap to ignore.

Valuations of many stocks are at attractive levels, so it is no wonder that financial experts are pointing to 'value' as a key theme for this year.

Indeed, it is during bearish times like these that investors who believe in the value proposition come out hunting for bargains.

What value investing is

Essentially, value investing means buying at good value and holding for the long term to reap capital appreciation and dividend yields. It is the investing style that made Mr Warren Buffett and his mentor, value-investing pioneer Benjamin Graham, kings of the share markets.

It contrasts with the strategy known as growth investing. This involves investing in companies deemed to have good growth potential, even if the share price appears expensive.

A growth stock is typically defined as a company whose earnings are expected to grow at an above-average rate compared with that of its industry peers or the overall market.

In value investing, buying something for less than its worth is a fundamental principle.

This was an important concept used by Mr Graham, who believed that investors should buy only firms that are selling lower than the value of their net current assets. That is, their value after deducting their liabilities.

Doing this ensures that even if one is wrong, there is a margin of safety. Your downside is protected to a certain extent if the stock price falls further.

For example, if your perceived value of stock A is $3, you may want to buy in only at around $2.70. This gives a margin of safety of 10 per cent to protect you from any fall.

Many investors have trouble deciding if a stock is cheap or expensive. There are several factors to consider to accurately determine a share's worth.

How to pick value stocks

First, never look at the stock price in isolation. To see how it is faring, it must be compared with other stocks in the same industry. You also need to know how the industry and overall market are performing.

For instance, if you are considering buying a property stock, do not sink your money in just because it seems cheap on the surface.

Compare it with other property stocks in the same region, say, the Asia-Pacific, or in the same business segment, such as residential mass-market developers.

If you are value investing, do not rely just on prices to determine how cheap or expensive a firm is. In the long term, price and intrinsic value are likely to be similar but this is not so in the short term, when prices usually reflect investor emotion.

So low prices do not necessarily mean low values. Instead, use an appropriate valuation measure to help determine the value.

A common measure for comparative purposes is the firm's earnings. In this case, buy stocks selling at a low multiple of their earnings - what the company has left after expenses are paid. It follows that a firm selling at a low earnings multiple is usually a better value pick than one with a high earnings multiple.

You should also compare the price-earnings multiple to that of its competitors in the same industry and also the broader indexes to determine if the company is a value buy.

Another common measure is a firm's price-to-book ratio, which is derived by dividing its share price by the book value of the firm. The book value provides an estimate of how much the firm would be worth if it had to be liquidated.

Investors should also check if a firm passes the following criteria: Does it have sound businesses with good earnings and revenue growth? Is it run by competent managers?

Be wary of 'value traps'

Some stocks and markets could turn out to be 'value traps'. This means that despite being attractively valued, they could still prove disappointing and remain cheap for a prolonged period.

This could happen when a particular market is suffering from political uncertainty, for example, or the company is facing depressed earnings without any prospects of a near-term turnaround.

This is the first of a three-part series on value investing brought to you by DWS Investments.
This article was first published in The Straits Times on February 08, 2009.

MONEY MATTERS 2009: A year of two halves

Business Times - 14 Jan 2009

MONEY MATTERS 2009: A year of two halves

Market volatility likely to persist, yet opportunities may surface in second half

By NORMAN VILLAMIN

AS unprecedented stress struck the core of the global financial system last year, it was clear to many observers that a worldwide recession was on the way. Citi analysts expect major industrial economies to contract well into 2009 as adjustments occur to raise the level of savings in these economies. And while the pace of contraction in global growth is expected to ease moving into the second half of the year, next year's expected economic recovery is forecast to be modest, with growth likely to remain below trends seen before the current crisis.

From a market perspective, this backdrop suggests investors should continue to expect 2008-style volatility in the early part of this year. Looking further ahead, though, downside risks to economic growth are expected to dissipate as global fiscal stimulus efforts gather speed and de-leveraging pressures ease. When this happens, the extreme valuations in equity and credit markets seen today should provide attractive opportunities for investors. For more tactically oriented investors, as we observed in our December column, a global recession does not preclude bear market rallies, even as markets continue on an underlying trend of decline. Such rallies, as seen in previous downturns, may be big, providing opportunities for more trading-oriented investors.

The Japanese experience of the 1990s has served us well so far in navigating the current crisis, and our experience with the latest global equity rally has been no different. During the 1990s when the Japanese market declined to below 1.5x book value, sizeable fiscal stimulus proposals tended to coincide with bear market rallies. On three occasions, prices rose as much as 45 per cent.

Likewise, after global equities fell to 1.2x book value in mid-November last year, and sizeable fiscal stimulus plans were announced around the same time, global markets rallied 25 per cent at their peaks last week. Fiscal stimulus proposals to date have come up relatively short of the stimulus delivered by Japan in the 1990s, which came up to 4-10 per cent of GDP. As a result, it is no surprise then that the recent rally was less robust.

Looking forward and with this sizeable rally behind us, investment returns are expected to shift from a focus on valuation and fiscal stimulus back towards the trends of economic contraction and earnings risk, as seen last September to October. Once again, drawing on Japan's experience in the 1990s, investors should find that, just as signs signalling the start of bear market rallies existed, a similar set of signs signalling their end existed. In particular, the Japanese bear market rallies of the 1990s tended to end near valuation peaks before the start of the valuation bubble years, or near 2.3x book value. Going back to the 1970s, Japanese equities tended to trade in a relatively stable range between 1.5x and 2.3x book value before they were dramatically re-rated during the Japanese asset bubble in the late-1980s. So, coincidentally or not, as the Japanese asset bubble burst, valuations proceeded to return to their pre-bubble valuation ranges of 1.5x to 2.3x book value. Putting the Japanese framework into the context of global equities, the equivalent pre-bubble range was about 1.0x to 1.6x book value. At last week's highs, global valuations, as measured through the MSCI World index, stood at near 1.5x to 1.6x book value, close to the high end of their pre-bubble range. This suggests that the supportive backdrop for a bear market rally, prospective fiscal stimulus notwithstanding, has eroded with the market rally.

For longer-term investors, Citi analysts believe further progress in the current downcycle is needed to create attractive opportunities to enter the accumulation phase for long-term equity exposure. In particular, moderation in expectations for global equity markets, such as 14 per cent year-on-year consensus earnings growth for global equities in 2010, is likely necessary before markets begin to bottom out in coming quarters.

Driving this troughing process, we anticipate, should be an easing of de-leveraging pressures in the global financial system. While large-scale capital raisings took place among global financials in the fourth quarter of 2008, to a large extent these fund-raisings have served only to stabilise balance sheets following losses earlier in the year. In 2009, we anticipate further capital-raisings and asset sales to drive the needed de-leveraging. Only as these catalysts emerge do we expect to see an increase in the historically extreme valuations and a sustained rally in equity and credit markets.

Norman Villamin is head of investment analysis & advice, global wealth management & global consumer group, Citi, Asia Pacific.

BT: Never too early for financial planning

Business Times - 02 Jun 2008

Never too early for financial planning

A survey of tertiary students has shown over three-quarters are clueless about investment options available. CHUA SI MIN, TOR SHI TING, WONG HAN YEE and KONG YOON KEE provide some pointers

IN THE MoneySENSE National Financial Literacy Survey 2005, almost all respondents indicated the importance of starting financial planning early. But the fact is, 17 per cent of them had not started. The survey also found that 17 per cent of respondents believed the best time to start financial planning is during school - yet only 9 per cent of them do so.

To find out why, we conducted a survey of tertiary students.

The 'save' choice

When it comes to planning their finances, most tertiary students can only think of the 'save' choice. Although 76 per cent of our survey sample do not invest, 78 per cent have a savings account. A majority of them put aside less than 10 per cent of their monthly allowance.

At an interest rate of 0.25 per cent, $1,000 in a savings account will turn into $1,002.50 at the end of the year. However, if inflation is at 5 per cent, it would reduce one's purchasing power as the savings interest rate is less than the rate of inflation.

Investing fares better, if one can find investments that offer returns higher than the inflation rate. Many students in the survey knew about the huge potential returns involved in investing, but a large majority do not invest. The two most common reasons for not investing are 'lack of financial knowledge' and 'lack of funds'.

In other words, tertiary students want investments that are affordable and easily manageable. Here are some options.

The Regular Savings Plan (RSP) and unit trusts

RSP allows you to invest a small amount of money, usually monthly, in a fund. The minimum monthly amount starts from as little as $100. There are a few RSP routes but the simplest would be through unit trusts. In a unit trust, your money is pooled with that of other investors and invested in a portfolio of different assets by a fund manager.

Among unit trusts, specialised funds and global equity funds typically manage higher returns at higher risk. Balanced funds carry moderate risk while bond funds and money market funds provide lower average returns at lower risk.

Investing in unit trusts reaps diversification benefits. By spreading your money among different investments, risk is reduced. On average, they provide higher long-term earnings than savings accounts or fixed deposits. Unit trusts can be redeemed any time without incurring penalties. They are managed by professional fund managers and are a good starting point for tertiary students lacking knowledge in direct investment.

Bonds: Singapore Government Securities (SGS)

SGS bonds are marketable debt instruments issued by the Singapore Government through the Monetary Authority of Singapore (MAS). They pay a fixed rate of interest every six months, and the principal is repaid on the maturity date. The minimum denomination is $1,000.

SGS bonds are safe investments as they are guaranteed by the government and investors can lock in a fixed interest rate - typically higher than savings interest rate - over longer periods. They can be sold easily prior to maturity, unlike fixed deposits. However, investors face a price risk if they sell prior to maturity.

Stocks

Share investors earn a return via capital appreciation/depreciation (from share price increases/falls) and dividend income (periodic payments by the company that are not fixed and can be zero).

Investors seeking high capital appreciation typically seek out profitable firms that pay low dividends, as these firms plough back earnings to expand the company rather than pay them out as dividends. These tend to be the riskier stocks. Investors desiring regular income tend to invest in lower- risk, higher dividend-paying stocks. The choice depends on one's objectives and risk appetite.

Stocks are considered riskier than bonds because their returns are more volatile. If you hold stock from a single company, your risk is not diversified. Successful stock investing requires intimate knowledge of the stocks one invests in.

Supplementary Retirement Scheme (SRS)

With the SRS, the government hopes to encourage Singaporeans to save more for their old age by means of voluntary contributions to their SRS accounts, which enjoy certain tax benefits.

Participants can contribute a varying amount to an SRS account (subject to a cap) at their own discretion. These contributions may be used to purchase various investment instruments. Each dollar of SRS contribution will reduce income chargeable to tax by a dollar. Investment gains will mostly accumulate tax-free in SRS. Tax will only be payable when you withdraw your savings from your SRS account. Furthermore, if you withdraw your savings upon retirement, only 50 per cent of the savings withdrawn will be subject to tax. You may also spread your withdrawals over a period of up to 10 years to meet your need for regular income. Spreading out your withdrawals will generally result in greater tax savings.

Take the initiative

According to our survey, the most important reason cited for not investing is lack of knowledge. But there are plenty of information sites - and even tutorials - to guide you step-by-step on how various investment tools work. If you are still clueless, MoneySENSE (www.moneysense.gov.sg) supported by MAS, is a credible site to browse. There are also many financial advisory firms with websites to educate you on the basics of investing and how to invest in unit trusts. Just make sure you do your research thoroughly before taking the plunge.

Chua Si Min, Tor Shi Ting and Wong Han Yee were final-year banking and finance students at the Nanyang Business School when they wrote this article. Dr Kong Yoon Kee is a lecturer at the school's banking & finance division.

BT: Freedom at 44

Business Times - 03 Mar 2008

Freedom at 44

Last week, we discussed how retiring young and rich can be an attainable goal if one plans early and invests wisely. Today, we run a personal letter from RONALD HEE, who shows it is possible to become financially free as a hardworking salaryman, without needing to rob a bank or be a corporate high-flier

To the graduating class of 2008:

YOU are entering a world of amazing possibilities - possibilities that people of my generation barely believed would be possible. The world is, quite literally, your oyster. You also enter a world fraught with challenges and dangers, and ever rising costs of everything.

In our day, the options were limited, but inflation remained low most of the time, and there was job security. I still have friends who are in the same company since they graduated 20 years ago. For you today, inflation is roughly twice the interest the banks are giving you. You will probably change jobs every two to three years. And you can be fired from any of them at any time. Or, any company you work for could downsize or close down just when you least expect it.

So, for middle-class working Joes like us, does it mean that just to survive, we will be chained to our desks until the day we die - if we're lucky and not get replaced or downsized? Is financial freedom at the tender age of 44 - for you, 20 years of earning - an impossible dream? It really boils down to one simple formula. Earn more than you spend; invest what you save.

The first thing, of course, is to find a good job. There will be many, here and around the world. But don't rely on your company or your boss to take care of you. You have to take care of yourself, regardless of the profession you choose. Assuming you are not in the lucky handful who will inherit a fortune or get a job that pays you in the six figures, or win the lottery, the career you choose is what makes your path to financial freedom possible. But you have to plan that path.

Let's first look at the cost side of the equation. Buy what you need and some of what you want and know the difference. Do you really need a 200-inch high-definition plasma TV, complete with state-of-the-art home theatre system? And how many hours per day are you going to enjoy that system? Instead of spending tens of thousands on something you will use for a few hours a week, consider instead how that money could work for you.

One thing that surprises me about the younger generation is your propensity to spend on credit. Why buy things you don't need, with money you don't have? To impress people you don't like? Here's a crazy idea: Have the bank pay you interest for your money, rather than you pay the bank interest for their money. Twenty-four per cent interest? That's approaching loan shark rates. Always, always, pay your credit card bills in full. Can't afford to pay? Simple solution. Spend less. Be low maintenance.

At some point, you'd probably want to buy a car. With an excellent MRT and bus system, and taxis when you need them, is it worth getting a car? Unless you have a real need - you're a salesman, you have a family to ferry around, your child is sick all the time, your mum is old, your girlfriend will leave you otherwise - the reality is that a car is simply not worth it. Over 10 years, a $50,000 car will cost you about $130,000, once you factor in petrol, road tax, repairs, car payments and interest on the payments, parking tickets, a few minor accidents... Again, it's better for that money to work for you. (See Table 1)

Like most people, your biggest purchase will probably be a home. For most of us, our first home will be a government flat. Whether you buy public or private, consider buying something that you can continue to pay for, for at least six months, should you be suddenly out of work. If you don't mind the loss of privacy, consider renting out any spare rooms. It's not impossible for your rental income to match your mortgage payments.

Now let's look at the income side. Your basic fallback is your CPF account. Let's assume that by age 44, you've worked 20 years. Assuming an average of $1,000 a month, you will accumulate $240,000, not including interest. Invest it if you wish, but the main use of CPF should be to pay for your home, so your cash outlay is minimised. In 20 years, with $240,000, you could quite easily pay off your flat. With your spouse also chipping in 50 per cent for the flat, you should have more than enough.

If you've managed your expenses right, it's quite possible to save an average of $1,000 a month. This, of course, gets easier as you grow older and earn more. Put some away into a savings account as your rainy day fund, eventually building up enough to keep you going for six months or more. Put the rest in the hands of a good financial planner. This is someone who should be able to give you an average return of at least 10 per cent a year. The miracle of compound interest will yield you $756,030 at the end of 20 years, more than three times what you put in! (See Table 2)

It's now 2028. Twenty years have passed and it's your 44th birthday. You are into your second or third home by now, or maybe even have a spare house, each time either breaking even or making a small profit. You have a healthy CPF balance that covers basic needs. You've taken care of some health risks by buying insurance policies when you were young and they were cheap. And your investment portfolio is chugging along very nicely, yielding around $70,000 a year, without depleting your capital, so it's sustainable for the long-term. $70,000 a year is equal to a tax-free monthly 'salary' of $5,800. Not too bad.

CPF + savings + especially your investments = financial freedom. Work part time. Start your own business. Do something else that pays a lot less but fulfils you more, such as church or charity work. Become a beach bum in Bali. Or travel round the world for six months. Financial freedom means the freedom to make these kinds of choices.

So, my young friends, my wish for you as you embark on the next stage of your life is that you will plan from the beginning to be financially free. May you have the discipline and luck to accomplish it!

Ronald Hee, 44, is a freelance writer, and just a little shy of financial freedom

BT: Retire young, retire rich

Business Times - 25 Feb 2008

Retire young, retire rich

JASON LOW shares some tips on how you can turn this dream into reality

ACCORDING to the annual world wealth report compiled by Merrill Lynch and the Capgemini Group last year, Singapore registered the fastest increase in the number of US-dollar millionaires in 2006. More than 11,000 people joined this wealthy club that year, raising the number of high net worth individuals to a total of 66,660.

With more and more people making it into the group of the wealthy, it appears that joining their ranks is no longer as unattainable as once thought. No wonder many young professionals and undergraduates here are dreaming of joining that select group sooner rather than later. If you are one of those with that goal in mind, it may be timely to start planning how to get there. After all, the earlier one starts, the higher the chances of getting there in time. Here are some tips culled from various sources.

Start saving now and let compound interest work your way

'Tip number one is you have to start saving immediately,' said James O'Shaughnessy, founder of O'Shaughnessy Funds and author of How to Retire Rich in an earlier CNN Money report. 'The younger you are when you start, the better chance of retiring in style.'

Easy as it seems, most people have trouble saving for the long term. 'Saving is often a vicious cycle for most people. They are only disciplined enough to save in the short term before blowing all their savings away in a big ticket item like a car,' said Alvin Chia, a private investor who turned financially free at the age of 27. 'It is important to live below your means and avoid splurging on unnecessary items if you want to achieve the retirement dream early.'

Both early savings and living below your means allow you to take full advantage of the power of compound interest. If you save $2,000 a year starting at the age of 20 until you are 30, you will still have more money than a person who saved the same amount between the ages of 30 and 60. Enough said.

Pay yourself first

Taken from David Bach, who shared the powerful concept of automated savings in his book, The Automatic Millionaire, the trick to this is to have money automatically channelled from your payroll and deposited into your savings account before you even have access to it.

Invest for the long term

Equities offer the best form of long-term growth among most classes of investments. From 1926 through 2004, stocks - using the S&P 500 index as a measure - have posted an average annual return of 10.4 per cent versus a mere 5.4 per cent for bonds, according to Ibbotson Associates.

Both Mr Chia and Laura Oh, a 26-year-old home tutor, have their investments mostly in equities as well. They both have achieved their financial freedom.

Interestingly, they are both long-term value investors who invest in undervalued companies that pay high dividend yields and use these dividends to re-invest again when the right opportunities strike. Miss Oh, for one, started paper trading at the age of 19. 'Starting to invest early and putting your money into the right class of investments definitely helps you grow your money faster than putting it in fixed deposits,' she said.

Have a detailed game plan and monitor your progress

Set realistic goals by projecting your retirement expenses based on your needs. 'Know how you want to live in retirement and be honest about it,' said Mr Chia. 'Then calculate how much savings you need to put aside a year to achieve your ultimate goal.' One rule of thumb is that you will need at least 70 per cent of your annual pre-retirement income to live comfortably.

Review your status at least every couple of years to make sure you are still advancing towards your goal.

Don't be discouraged by failures and remain focused

It is not uncommon to meet with obstacles along the way. Don't lose faith or be daunted by the goals that you set for yourself. Break that impossible goal into a million achievable bite-sized goals and conquer each one at a time. As Mr Chia recalled, he was relentless in the pursuit of his retirement dream and took small steps to build up his investment pool. He said: 'When I was 19, I worked as a security guard at night to make sure I was making money sleeping. My main duty was to open the gates for the staff every morning and in that process, I earned myself $1,400 extra a month just from sleeping.'

Find a mentor to guide you

Having a mentor to constantly give you personal advice on your financial state and the allocation of your investment portfolio is a major plus. Very often, your mentor should also be someone who shares the same life and investing philosophy as you. Only then can the mentorship be very successful.

What is your ideal retirement age? And what are you doing now to help you achieve that goal? Share with us in under 150 words by emailing your views to btnews@sph.com.sg, with 'YIF' in the subject heading. Selected responses will be published in next week's Young Investors' Forum.

BT: Lifelong Income scheme comes with array of choices

Business Times - 13 Feb 2008

Lifelong Income scheme comes with array of choices

Permutations reflect diverse situations of Singaporeans

By CHEN HUIFEN

(SINGAPORE) With 12 possible permutations that one can opt into, Singaporeans turning 55 years old in 2013 and after are set to face a mind-boggling array of options on their participation in the CPF-backed Lifelong Income (LI) scheme.

But the National Longevity Insurance committee, which came up with the recommendations for the scheme, said that the feature of letting members choose their own plans reflects the diverse situation of Singaporeans.

There will be six choices on when the payouts can begin, with the earliest start date set at the age of 65 and the latest at 90. Singaporeans on the scheme can also decide whether or not they want to leave any unused payouts to their beneficiaries upon death.

'It's administratively burdensome but it's something that we have to live with in order to trade off choices,' said committee member Zulkifli Baharudin, who is also managing director of Global Business Integrators Pte Ltd.

The LI scheme works by apportioning part of the cash balance of a Singaporean's Minimum Sum into what is called the Refundable Premium (RP). This happens at age 55. The rest will remain in his Retirement Account (RA).

Assuming that a Singaporean chooses to get his LI payout at 80, his RA will start paying him a monthly income from 65 until he reaches 80 years old. At this point, the RP kicks in to pay him the same monthly income until his death.

Should he choose the refund option upon death, his beneficiaries will get the balance in his RA, if any, and any remaining unpaid amounts from his RP. But if he opts for no refund, then his beneficiaries will only get the balance in his RA, if there is any, and none from his RP.

Premiums and payouts will vary in accordance with the age that members choose to kickstart their LI and whether they want a refund in the event of death. The earlier their LI starts, the more money they will receive each month, but they will also have to carve out a bigger portion of their Minimum Sum at 55 for the RP to fund the plan. Hence, less RA balance would go to their beneficiaries if they pass away before their LI begins.

Conversely, if they receive their LI later, say at 90, their RA portion is stretched to last longer and the premium for LI will be less. All other things being equal, there will be more RA left for beneficiaries upon their early demise.

At the extreme end of the spectrum, should a CPF member choose not to receive any refund and to start his LI at 65, all his Minimum Sum will go into the RP. This permutation will lead to the highest payout among all options, but there would be nothing for beneficiaries should death come before 65.

Once members decide on their choice of LI scheme at 55, they will not be able to change their minds. However, additional CPF contributions - either from property sales, continued employment or proceeds from the CPF Investment Scheme - after the age of 55 may be included in the LI to raise the payout sum.

To be implemented in 2013, the scheme will auto-include those who have at least $40,000 in Minimum Sum when they are 55 years old. Committee chairman Lim Pin said the threshold sum balances the need to have the maximum possible number of people on board, with a reasonable payout level. About 75 per cent of active CPF members in the first cohort of the scheme will have at least $40,000.

Older members and those with less than $40,000 are encouraged to opt into the scheme as well. The government is expected to facilitate this through incentives.

Actual premiums and payouts will be determined by an independent actuarial consultant and reviewed periodically to reflect changes in mortality rates, as well as the social and economic situation of Singapore.

'The caveat in all this is that the scheme is not cast in iron,' said Prof Lim. 'We are prepared to change and to modify if events show that we have to do so.'

BT: Income that stretches a lifetime, under new scheme

Business Times - 13 Feb 2008

Income that stretches a lifetime, under new scheme

Lifelong Income scheme to ensure Singaporeans have income as long as they live
By CHUANG PECK MING

(SINGAPORE) Singaporeans were yesterday given a detailed look at the scheme that could change the complexion of their retirement years. It comes with the promise that they will have a regular income, as long as they live.

For this, the annuity plan crafted by the National Longevity Insurance Committee will dovetail neatly with savings that members have in the CPF Minimum Sum scheme - their so-called Retirement Account.

On turning 65, a CPF member will first start getting a payout from his Retirement Account. Under the current scheme, this continues for 20 years. But now, at whatever age he chooses - and there is a host of options available - he can start receiving the same amount from the national Lifelong Income (LI) scheme. And this will continue for as long as he lives.

Related link:
Click here for NLIC's report

In fact, CPF members are likely to receive higher income from their Minimum Sum account without more top-ups, thanks to the extra one percentage point interest on the first $60,000 which CPF is offering and the benefit of pooling.

'The key point is (the LI scheme) will strengthen the CPF system to provide lifelong income,' the committee's chairman Lim Pin said yesterday when its report was made public.

In accepting the committee's recommendations on behalf of the government, Manpower Minister Ng Eng Hen said: 'The LI scheme will greatly enhance CPF savings for members. Under the old system, many would have depleted their savings after 20 years, with many more years to live. With the LI scheme, participants need not worry that they will outlive their CPF savings. They will receive an income for as long as they live.'

According to the committee, half of CPF members will outlive their CPF savings in the old system - and the number will rise as Singaporeans live longer.

In coming up with the LI scheme, the committee has taken in the views of a broad spectrum of Singaporeans - and addressed their main concerns. Its report says the scheme is fair and affordable; offers options and flexibility in meeting different needs and circumstances; provides a steady income for life; and will be run by a trusted administrator - the CPF Board.

The scheme also provides for refund of unused premiums (minus interest) upon early death - a 'first', according to Professor Lim, also the chairman of the National Wages Council. He said other annuity plans do not have such provisions.

CPF members may also opt for no refund in return for higher payouts. But they could lose all their money in the Minimum Sum if they die early, if they make this choice. This is particularly so if the members opt for their payouts to start at the age of 65, the payout age under the old Minimum Sum scheme. All their savings would have then been paid up in premiums to the LI fund, as premium payments start at age 55.

Members under the LI scheme could also opt for payouts at 70, 75, 80, 85 or 90, with 80 the default option. If they choose payouts beyond 65 with no refund, the portion of the Minimum Sum, or Retirement Account, still not paid up as premiums into the LI fund may return to their estate.

Where members opt for refund - and most are likely to do so - they will receive a higher income if they choose an early payout. The trade-off is they have to pay higher premiums and their refunds will be smaller than if they had opted for a later payout age.

The reverse is true if they opt for a later payout age. Actual payouts for individuals are proportional to their CPF balances in the Retirement Accounts.

The committee has ruled out inflation-indexed payouts because that would make the LI scheme expensive and require higher premiums to fund it.

'Taken together with the requirement to provide a reasonable minimum payout, it would mean that fewer members would be able to participate in the LI scheme,' its report explains.

The scheme, except for some exemptions, is compulsory and will come into effect in 2013. This means it will cover CPF members who are aged 50 and below this year. Older members will also be encouraged to join the LI scheme.

Some 35,000 CPF members will make up the first LI cohort, of which 60 per cent will have at least $67,000 in cash in their Retirement Accounts - or half of the full Minimum Sum - against a minimum requirement of $40,000 to join the scheme. They are expected to receive $600 a month for life.

The manpower minister noted that the LI scheme is 'correctly built on the foundations of self-provision and self-reliance which underpin our CPF system'. 'This is crucial to ensure the long-term sustainability of this scheme,' Dr Ng said.

The committee cautioned that operating the LI scheme involves significant mortality and investment risks over a very long time horizon. To ensure that it is financially sustainable over the long run, it said CPF 'must ensure at all times that assets can meet present and future liabilities'.

And 'premiums and payouts must be adjusted periodically to reflect actual mortality experience and investment returns'.

BT: What you need is an investment policy

Business Times - 06 Feb 2008

What you need is an investment policy

Defining your asset allocation is the first step and disciplined rebalancing is the next

By JANE BRYANT QUINN

DO you have a personal investment policy? If so, you knew how to behave these past four months. If not, you voyaged from 'should I sell?' to 'too late to sell now' to 'what stock market? I'm too busy playing Second Life'. When equities rise again, you'll claim that your strategy always has been to buy and hold.

Excuse me, but that's the dumb money. Lower prices for stocks are a chance to buy at, well, lower prices. They might drop even further. OK, that's another chance to buy. In the next up cycle, 2008 prices will look cheap.

The question is, how to execute a strategy like this, which requires you to ignore the protests that come from your gut. The answer is: Create an investment policy. When markets rise or dive, the policy tells you exactly what to do. Investment policies come in two parts.

First, an asset allocation. You decide what percentage of your money you will keep in stocks and how much in bonds. A simple example would be 60 per cent stocks, 40 per cent bonds. Within those broad categories, you create subsets - a certain percentage allocation to large and small US stocks, international stocks, emerging markets, Treasuries, high-yield bonds and so on.

The second part - the one most individuals ignore - is rebalancing. That means keeping your allocations at the levels you originally chose. If stocks go up by enough to make them worth 65 per cent of your portfolio, you're supposed to sell that surplus 5 per cent and put the proceeds into bonds. If the value of bonds goes up, you sell the surplus and invest it in stocks.

Years of research show that rebalancing adds value and reduces risk. You cash in some profits from the assets that went up and reinvest them in the assets that underperformed. When the market turns around, those underperforming assets will rise again. By rebalancing, you bought them cheap.

There's one big problem with individual investment policies. No one wants to sell stocks when they're going up. You let them become an ever larger portion of your portfolio. As a result, your so-called asset allocation plan is imaginary. You've put yourself into the hands of chance.

Take the recent stock market embarrassment. According to the formula, you should have trimmed your US stock allocation in late 2006 or early 2007. But you probably didn't pull the trigger. You were into your fifth year of higher prices and nothing in the news implied hard times. So you sat tight. Stocks topped in July. Today the Standard & Poor's 500 Index sells for less than it did in late 2006. Investors who failed to follow the formula gave up all of the intervening gains.

They also lost the money they'd have made by reinvesting in bonds. Stock investors hate bonds. They know that bonds only limp along. But guess what? Intermediate-term Treasuries returned a total of 10.3 per cent in 2007, according to Morningstar, compared with 5.8 per cent for the S&P 500. Over the past eight calendar years, Treasuries yielded 6.8 per cent compared with 1.7 per cent for the S&P 500.

Investment policies work but only if you follow though. Rebalance when any of your allocations falls 5 per cent out of line. Do it automatically, without second-guessing the discipline. If you're rebalancing now, you'd be buying the S&P and selling bonds. Investment policies give you a strategy - just what you need, in times like these\. \-- Bloomberg

BT: Lower ARF won't mean cheaper cars

Business Times - 01 Feb 2008

Lower ARF won't mean cheaper cars

Rise in COE premiums may offset tax cuts, say industry players
By VEN SREENIVASAN

(SINGAPORE) If you are holding out for lower car prices, now that the government has confirmed a 10 per cent reduction in Additional Registration Fees, you may be disappointed.
So say industry insiders, who point out that the impending cut-back in Certificates of Entitlement quotas could more than offset any savings to be had from lower registration taxes.
'Car prices will go up,' said Cheah Kim Teck, chief executive of Cycle & Carriage, which distributes Mercedes, Kia and Mitsubishi cars.

'What they (the government) haven't said is how drastically COEs will be cut,' he said. 'If you take the average OMV (Open Market Value) for a car at $20,000, a 10 per cent ARF reduction saves you only $2,000. But if the number of COEs is cut significantly, as we believe will be the case, you are talking about a potentially much greater jump in COE premium prices. Overall, the pain will be greater.'

All this comes after the government yesterday announced a slew of measures to reduce road congestion, including higher Electronic Road Pricing, lower vehicle ownership taxes and improvements in the public transport system.

Among the initiatives is a reduction in the ARF from the current 110 per cent of OMV to 100 per cent in March. Road taxes for vehicles will also be reduced by 15 per cent from July.

However, the number of new cars registered could be reduced as COE quotas are cut back over three years starting from 2009.

'The impact will depend on whether people hold back purchases,' said Say Kwee Neng, managing director of Vantage Automotive, which sells Peugeot, LandRover and Ford cars.

'On one hand, the reduction in COEs will raise premium prices. But on the other hand, demand could fall if people become more circumspect about purchasing big-ticket items in the current uncertain economic conditions. So it all depends on how these factors play out.'

The savings from ARF are also lower when they are spread over the life of the car, up until it is scrapped.

Currently, the Land Transport Authority pays a reducing percentage of the car's original OMV when the owner takes the car off the road permanently. This PARF ranges from 75 per cent of the original OMV for a car under five years old to 50 per cent for a car which is almost 10 years old.

Under the current system, a car with $10,000 OMV will attract an ARF of $11,000 (110 per cent). This means the owner will get a scrap value of $5,500 (50 per cent of original $11,000 ARF) when he scraps it in its 10th year.

But when ARF is reduced to 100 per cent of OMV in March, this ARF will be $10,000. But on reaching the 10th year, the scrap is $5,000 (again, 50 per cent of original ARF).

So the owner gets $500 less at scrap. And if this is factored into the original $1,000 he saved as a result of his ARF reduction, the net ARF savings work out to only 5 per cent .

So, the bottom line, say motor traders, is that the reduction in ARF is too minor to factor in buying decisions.

'All things being equal, the reduction in ARF should reduce the cost of buying the vehicle,' said Victor Tan, general manager of Champion Motors, which sells Suzuki vehicles. 'However whether the consumer ultimately benefits from this ARF reduction in terms of overall car price depends on the movement of the COE premiums, and when he scraps his car. Given that the government wants to cut the vehicle population on the road, the chances are that COE premiums will rise by a greater amount than the ARF reduction.'

He noted that a typical Category A vehicle (1600cc and smaller) would see a $1,200 to $1,600 reduction in ARF. But a $2,000 increase in COE premiums would wipe out this benefit.

Could buyers of larger cars benefit, then?

'Not likely,' said C&C's Mr Cheah. 'The reduction in the ARF for the Mercedes C200 would be about $3,500 lower. But if the COE premium goes up to $20,000, as was the case last year, from the $14,000 average now, you can say goodbye to your savings.'

Some motors traders pointed to what they saw as 'inconsistency' in the COE quota policy.
'They say there is overcrowding on the roads,' said Mr Say. 'But who was responsible for letting this happen in the first place? Why was the market flooded with COEs over the past two years? Yes, there is the replacement cycle, but surely one must be able to anticipate the results ahead, rather than make motorists suffer through this kind of feast and famine every few years.'

Traders said the fact that over 70 per cent of the cars on the road are under three years old further pointed to a sharp reduction in COE quotas.

BT: Beating inflation at its own game

Business Times - 30 Jan 2008

MONEY MATTERS

Beating inflation at its own game

Invest at least 15 per cent of your income, control your expenses and hold assets that act as hedges against general price increases

By BEN FOK

INFLATION is commonly taught in business classes as a situation where demand exceeds supply. For instance, office rents in Singapore have gone up because there is a lack of supply and an increase in demand. Students, though, might not be as concerned about inflation as their parents, who have to cope with rising bills.

Singaporeans today are feeling the impact of inflation on their standard of living. With oil prices breaching US$100 per barrel, it is likely that inflation will continue to rise. The high price of oil is behind the rising cost of transport, electricity bills and food.

As a financial adviser, I find that clients these days inevitably bring up the topic of inflation. After listening to their laments, my advice to them is, first, take a deep breath and relax. However high inflation may be today, this is not the 1970s.

Before we discuss what an individual can do to lessen the impact of inflation, let's look at it from the macroeconomic perspective. Central banks of Western countries, for example, the Bank of England and the US Federal Reserve, use interest rates as part of their monetary policy to control inflation. As inflation goes up, interest rates also rise to counter inflation. Borrowers may be stretched servicing loans as the interest rate rises. On the other hand, as base rates increase, the returns on savings should improve. Hence, people will borrow and spend less, and save more.

But Singapore's central bank, the Monetary Authority of Singapore (MAS), does not use interest rates to fight inflation; instead, it uses the strength of the Singapore dollar.

The reason is that Singapore is a small and open economy that imports most of its food and fuel. With a strong Singapore dollar, we pay less when importing goods from overseas. So, Singapore's monetary policy is to maintain an appropriate level for the Singapore dollar with reference to a trade-weighted basket of currencies.

Singapore's interest rates are determined by supply and demand. The MAS does not directly control the movement of interest rates as they are set by the financial institutions independently. That means that even if inflation is high, the savings rate does not necessarily move in tandem. That's why our savings rate remains low despite higher inflation.

Unfortunately, individuals have little control over inflation, which can creep up and diminish the value of savings over time.

But don't fret. If you think about it, you've probably already hedged some of the higher costs without even realising it. According to the online research house Global Property Guide, Singapore's residential market was the world's hottest in 2007. It rose 24.3 per cent after adjusting for inflation (2.66 per cent), ahead of bullish markets like Shanghai and Bulgaria.

The majority of Singaporean households own their homes so even if you don't consider your house an investment, it has helped to hedge your family against rising prices.

And while prices have gone up, earnings have also increased, in some cases, at a faster clip than inflation. If you happen to have skills that are in demand, you could command higher earnings. All this shows that the effects of inflation are being mitigated.

For lower income families and retirees, the government is offering help through the goods and services tax (GST) offset and other rebates. For essential items, NTUC FairPrice and other supermarkets are finding new sources of supply and offering house brands that can keep costs down.

But the best way to mitigate inflation is to have a proper investment strategy. Investing in quality, blue chip stocks has traditionally been the best long-term way to beat inflation. The only problem is that if inflation becomes a major impediment to economic growth, the stock market will most likely suffer too. One way to lessen that risk is to stick with big, blue chip companies which, by virtue of their size, have more pricing power than small companies. Moreover, because they have been beaten down and overlooked, large, blue chip stocks have the least room to fall should inflation threaten the equity market.

Another way is to consider investing in natural resources funds. While most people find it difficult to understand why gold prices have soared, it's easy to see why oil prices have shot up. Demand for oil is strong, and supplies are limited. The strength of the global economy, coupled with the difficulty in constructing new refineries, has led many market watchers to believe that energy prices will remain high for some time.

With a global boom in commodities, the staple ingredients of a modern economy, many experts see a fundamental shift in the market. For example, the price of wheat and soy beans rose 70 per cent in 2007, while prices of gold, silver, lead, uranium, cattle and cocoa are all at or near record levels. This is not a temporary situation, so any investment in this area will probably give you some hedge against inflation. All these strategies, however, call for proper asset allocation.
The chart shows how gold, mining, energy and commodities performed in the last year. All of them proved to be highly correlated. However, they are not as correlated to the stock market. Exposure to any of these sectors would have provided you with some form of protection against inflation.

But if you think that the above is too complicated, consider this basic strategy. First, save and invest at least 15 per cent of your annual income. Second, control your expenses in any way possible. Third, buy and hold assets that historically have been hedges against inflation. Lastly, understand that inflation is difficult to quantify, and that your personal experience will differ from others.

Ultimately, there is no substitute for awareness of the effects of inflation and being prepared to face it squarely. Individuals must also know the importance of inflation-beating assets and make them part of their overall portfolio.

Ben Fok is Chief Executive Officer, Grandtag Financial Consultancy (Singapore) Pte LtdHe can be reached at ben.fok@grandtag.com