Tuesday, March 24, 2020

Picking Up The Pieces

Since 24 February 2020 till now, both the S&P500 and the Straits Times Index (STI) had fell at least 25%. If you had looked them up graphically online from finance sites such as Yahoo Finance, Bloomberg, etc., it resembled a steep, almost vertical cliff face. The COVID-19 outbreak continued unabated across most parts of the world, causing panic, as well as a huge unprecedented and unplanned global social experiment in terms of lockdowns, social distancing and telecommuting. This sudden disruption and behavioural shift had caused several sectors and industries to an almost standstill, especially airline, tourism, hospitality, logistics, physical retail, etc. As we know the entire financial market and economy is made up of different sectors and industries which are interdependent on one another, a stop in a few will likely result in an overall slowdown, and with this the looming threat of a huge recession.

Portfolio wise, test subject Bob’s Bedokian Portfolio was down about 20% year-to-date (YTD) and our own Bedokian Portfolio was down by around 17% YTD. Viewing our (not Bob’s, as he would see it again sometime in end-June 2020) portfolio as a pie chart, not only had it grown smaller in size but also the respective asset class slices went out of their threshold percentages, thus as an active investor I would need to bring the portfolio back to its initial balance. Instead of what a majority of other market participants did as in selling their stake wholesale, we activated the surpluses on top of our emergency fund limits to pool into the cash component of the portfolio and began to “nibble” the ETFs and individual counters of the asset classes that were beaten down.

This was a time when I had used my “10-30 Rule”1 to determine the entry signal; I had so far carried out two series of purchases (particularly equities and REITs) for both the STI (2800 and 2500 levels) and S&P500 (2500 and 2300 levels). As I had injected funds into the portfolio, the cash portion had grown to about 8%, so the 10-30 would be based on this rather than the 5% example I gave in my eBook. Select counters that, based on your own analysis, would likely to emerge once this COVID-19 situation passed, and/or whose prices were battered down due to the general fear and for no obvious reason but were still fundamentally sound. If you are still unsure on which one(s) to get, then it would be better to go for index or asset class ETFs.

So how would the economy and the markets recover from this? My guesstimate would be a V-shaped recovery, if most of the following happenings occur (in no particular order): declining rate of infections and no/smaller second wave appearing; a standard treatment or vaccine is developed; easing of loan repayment schedules and lessening the credit crunch; assumed large amount of pent-up demand for sectors and industries that are currently unavailable or halted.

Stay calm, stay safe and stay invested.


1 – The Bedokian Portfolio, p119-120

Tuesday, March 10, 2020

If...

If you had just started investing, the huge fall of the Straits Times Index (STI) earlier on Monday may have spooked you. Surely, a 6% drop of the STI within a day was a horrible feeling, especially so for those who did not go through such sudden huge declines and/or got used to the boom times in recent years.

If you had disregarded your emotions and adhered to your investment principles and strategies, then whatever happened on Monday would be like a walk in the park for you. Knowing what to do next, whether in a bull or bear market, is a good sign of control and rationality.

If you had identified opportunities even when the sky was falling around you, this meant that you were able to see a silver lining amongst the doom and gloom. Prices of equities may be near your calculated valuations, so it is probably time to load them up on the cheap; not all in, though, maybe some nibbles.

If you had a diversified portfolio made up of different asset classes (e.g. The Bedokian Portfolio), your capital would be less affected than those which were in just one asset class (in this case, equities). The different correlation between the asset classes act as counterbalance to one another in different market and economic conditions, hence your losses would be mitigated.

If you are a passive investor, do not be mindful of such happenings. Instead, you should just rebalance your portfolio during your designated date and carry on with your everyday life. 

Stay calm, stay rational and stay invested.

Tuesday, February 25, 2020

All About Price: The 52-Week High/Low

This is part of my intermittent series on price, one of the most important and commonly encountered considerations in investing and trading. For this post, I will talk about one of the most used metric in determining a buy or sell call, the 52-Week High/Low (52WH/L).

I had used the 52WH/L as one of the indicators during my trading days. After I had identified a counter for trading, I would look at its 52WH/L price: if the current price was within the bottom 30% of the high/low range, then it was a buy opportunity. Similarly if the current price of my holding was within the top 30% of the high/low range, and if I was in-the-money, I would consider selling it.

Due to the emphasis of the 52WH/L by so many market participants, it had somewhat become an implicit resistance-support number in technical analysis terms, and the amount of trading volume will typically increase if the price approaches those two numbers.

Nevertheless, using the 52WH/L has its benefits and caveats. Let us have a look at some of them in a nutshell:

Some Benefits

#1 – Good for high price-to-book securities: Ever wanted to invest in a good company or REIT but it seems to be always on a high price-to-book ratio? Usually such securities are seldom near their book value, let alone being at it. The 52WH/L will give you, among other factors, an indicator to enter them at an appropriate price.

#2 – Applying multiple points of entry: If you are not comfortable at going in one shot on a new or existing share or REIT, you may apply a few price points along the 52WH/L. You can do it any way you want, like for example take the range between the high and low, and divide it into quartiles or quintiles, once per every week or month. Then you may contemplate going in once the price goes below a certain range, using a percentage of your deployable funds.

Some Caveats

#1 – Low can go lower: Investors and traders often overlook one of the main characteristics of price, which is if it is at a low, it can go lower. The 52-week is an arbitrary time period used in many investment and trading publications and websites, hence it formed some sort of a mental frame. Therefore it is suggested to look at the prices beyond 52 weeks, like maybe two or three years.

#2 – High can go higher: The opposite effect of caveat #1 can happen, too, regardless if there was a point in the past where a share/REIT price went higher than the current 52-week high, or it could be approaching an all-time high never seen before. Investors must look out for signs in the fundamentals (or for traders, momentum) that could point to a rise in price beyond the high limit, and then decide if the counter is to be kept or sold.

It is up to you whether to include the 52WH/L metric into your fundamental analysis. Past prices are not indicative of their future movements. Due diligence must still be practiced.


Check out the other posts in my All About Price series.



Sunday, February 2, 2020

The Coronavirus Outbreak: What To Do As An Investor

The coronavirus outbreak is, without a doubt, the most talked about topic on everyone’s lips now. We all have been inundated by the news and topics related to this microscopic threat: the number of cases in Singapore and various parts of the world; its asymptomatic trait that makes it even more undetectable; the difficulty in getting masks and sanitizers from retail outlets, and so on.

Whilst I encourage all to have good hygiene practices and carry out preventive measures for yourself and your loved ones, one constant is clear: life has to go on, even on the investment front. In this blog post, I shall share some of my views as well as strategies on navigating this period.

The Markets And Outbreaks

The markets traditionally have an inverse relationship with epidemics, and it is due to the common emotion of fear. Yes, fear of not only what an outbreak can do to you, but also what it will do to everything else. When there is an epidemic (especially those that has no known vaccine or cure) and almost everyone talks about it, the impact, real or imagined, is felt. Self-preservation takes over and most everyday activities will be slowed down or halted at the worst. With this, most industries and sectors will, like a domino effect, be affected and thus the perceived economic outlook is definitely not good.

To bring things to a comparison and a parallel, most of us tend to look back at the last instance of a similar scenario, and you guessed it, the SARS epidemic of 2003. Between the months of March and May, where it was considered a crucial period, the Straits Times Index went down to a low of almost -10% using 2003 year-to-date (YTD) reckoning. However, after that period, it recovered and finished off the year with +32.08% 2003 YTD (see Figure 1).


Fig. 1 – Straits Times Index, 2 Jan to 31 Dec 2003. Source: Yahoo Finance.

While it is good to see the past for lessons to be learnt and to glean some experience, the future is still a big unknown to us. This epidemic caused by the coronavirus, dubbed as the 2019 Novel Coronavirus (or the Wuhan Coronavirus based on its first occurrence in the Chinese city), was just slightly over a month, yet it had infected numbers far surpassed to that caused by SARS. As of the writing of this post, the World Health Organization had declared it a global health emergency and some countries are imposing or imposed travel restrictions. How all this will pan out eventually, we are not very sure.

But, there is bound to have an investment silver lining in situations like this. Let me share with you what they are and which investment strategies and thoughts to apply. Bear in mind that the following strategies are not mutually exclusive and you could combine them and/or their sub-points together. 

#1 Look At The Winners

Masks and sanitizers are in demand now, judging from the numerous “out of stock” notices displayed in pharmacies, supermarkets and hardware shops. Clearly, manufacturers that produce masks, sanitizers and even gloves are having a profit field day. Expanding this thought, it is deemed that the entire medical and healthcare sector and industry will stand out as winners. In our local Singapore Exchange, we had seen some counters in the abovementioned fields rising in price over the past few days.

Going after winners (companies, sectors, regions and asset classes alike) is a bit difficult, particularly at the point where they are about to take off. You need to have a really, really good foresight of what is coming, if not then you need to be an early mover to get in cheap before the others start to move in. Sometimes such a strategy can be seen as a trading one, where profits can be realized once a set price is reached.

Still, there is some plus points in looking at winners. If a proper fundamental analysis (FA) is conducted and the company shows some potential over a long period, then it is worthwhile to invest in it, even though its share price is rising at the moment. As long as the price is well below your derived value after FA, you may still consider going into the company.

#2 Look At The Losers

With travel restrictions and city-wide lockdowns, some business segments are bound to lose big. Transportation, retail (physical ones), hospitality, etc. are likely to take a big hit, for a lot of people would not want to risk being exposed. Given the fact that China is a substantial source of tourists to a number of countries, those destinations may feel a deep dent in tourism revenue.

This is a good time to look at companies with direct and indirect exposure to the sectors and industries highlighted in the previous paragraph. Using FA, it is prudent to sieve out those that can withstand this down period (maybe for at least a year or two) from the ones who are maybe on the brink of liquidity crisis. A strong free cash flow, adequate liquid assets and/or diversification of revenue streams are some of the points to look out for when analyzing a company.

On the asset class front, equities on the whole are dipping, so on a broad front it is good to initiate some small positions in index ETFs and carry out averaging down or up when necessary. It is up to you to decide on the points of entry based on the index numbers, like the example of my 10-30 rule in my ebook1.

#3 Look From The Sidelines

Sometimes doing nothing is considered as doing something. You may want to adopt a wait-and-see approach, as probably the influx of news and numbers may cloud one’s decision-making process and it is hard to have a good guesstimate on how things will go.

If you still want to do something, then you may want to adopt a passive index investing approach, where its proponents would just rebalance their portfolios at a set date and forget about it until the next cycle. You can create a new portfolio dedicated to passive investing or add in asset class ETFs and slowly transform your portfolio into a core-satellite one2, if you had not started yet.


Stay safe, stay healthy and stay invested.

1 – The Bedokian Portfolio, p119-120

2 – ibid, p122-123

Friday, January 31, 2020

Elite Commercial REIT Part 2

The prospectus for Elite Commercial REIT (the REIT) was registered with the Monetary Authority of Singapore’s OPERA site on 28 Jan 2020, along with the Product Highlights Sheet. Let us take a look on top of what we had covered previously here.

The Numbers And Figures

The offering price of the IPO is Sterling Pound (GBP) 0.68, or in Singapore Dollar (SGD) terms 1.21, based on the exchange rate of GBP 1 = SGD 1.7794. The yield (over the IPO price) is forecasted to be 7.1% for the year 2020 and projected to be 7.2% for the year 2021. 

The aggregate leverage (which I assume it to be gearing) as at the listing date will be approximately 33.6%. Most of the other figures remained the same as per my previous post for this REIT, such as the number of properties (97) and the weighted average lease expiry (8.6 years).

The application for the IPO had started on 28 Jan 2020, and will close at 4 Feb 2020, 12pm. The REIT will be listed on the Singapore Exchange on 6 Feb 2020, 2pm.

Calculating The Net Asset Value

Though there is no indication of the REIT’s net asset value (NAV) in the prospectus (or I could have missed it from among the 700-plus pages), we can calculate it based on the information provided, with some assumptions.

Asset = Liability + Shareholder Equity, therefore Shareholder Equity (or NAV) = Asset – Liability, and NAV per share = NAV / Number of shares (units) outstanding.

Hence, with the numbers from pages 61 and 66 of the prospectus, the NAV per unit is:

GBP 196,201,000 (unitholders’ fund as at 31 Aug 2019) / 334,933,000 (number of units issued and issuable by the end of 2020) = GBP 0.586.

Thus, the price-to-book value is at 0.68 / 0.586 = 1.16, meaning the IPO price is 16% above the rough NAV calculated.

The Tax Question

A big disclaimer from me: I am no tax expert. But there might be some tax implications with regards to the distribution of this REIT, positive and negative. Under the sensitivity analysis (page 124), it was indicated that should the corporate tax rate is reduced from 19% to 17% from 1 Apr 2020, the yield for the forecast year of 2020 and projection year of 2021 would be 7.2% and 7.3%, instead of 7.1% and 7.2% respectively. On the flip side, subject to the United Kingdom’s CIR / Anti-hybrid rules, the yield could be at 6.8% and 6.9% for the same said years of 2020 and 2021 respectively.

The Bedokian’s Second Take

My take from the previous post still stands. The big plus point for this REIT will be the high yield (between 6.8% to 7.2%), but this will be compromised by forex fluctuations which is directly related to the outcome of the U.K. economy after Brexit (officially tomorrow). With the IPO price being 16% above its rough NAV, it is overvalued somewhat. However, if you want to have a slice of a relatively stable British pie in your portfolio, then this would be a good start.

Thing is, only 5,734,300 units are open for the public offering, so even if you are interested, it may get a little difficult to be balloted more than 1,000 units, or you may get none at all.


Reference

Monetary Authority of Singapore. OPERA. Elite Commercial REIT Prospectus and Product Highlights Sheet. 28 Jan 2020. https://eservices.mas.gov.sg/opera/Public/CIS/ViewSchemeDetail.aspx?schemeID=500c7153fce646909d1eaf414599d9d8 (accessed 30 Jan 2020)

Thursday, January 23, 2020

Elite Commercial REIT

A new REIT is coming to town; Elite Commercial REIT (the REIT) had lodged its prospectus with the Monetary Authority of Singapore on Friday (17 Jan 2020) and it is likely going to be the first listing on the Singapore Exchange (SGX) for the year 2020. It is also the first Sterling Pound (GBP) denominated REIT on the SGX. Let us have a brief look on it.

Brief Overview

There is a total of 97 properties in the REIT, scattered across the entirety of Great Britain (England, Scotland and Wales), out of which 96 are freehold, and the remaining one is on leasehold up to the year (get this) 2255. Over 99% of the gross rental income comes from the government of the United Kingdom (U.K.), specifically from the Department of Work and Pensions (DWP), which is the largest public service department and it administers the State Pension and benefits for 20 million claimants and customers.

The majority of properties are well located in city centres, town centres and city suburbs, and all have close proximity to train stations, bus stops and other amenities such as supermarkets and schools. This is due to the DWP’s stringent requirements for its locations, as they need to serve the public. The leases are triple net, which in this case the repairs and insurance expenses are covered by the tenant. Rental escalations are every five years based on the U.K. Consumer Price Index, subject to an annual increase of 1% to 5%.

The weighted average lease expiry of the REIT is about 8.6 years, and the aggregate leverage (which I take it as the gearing) is about 32%. It provides a net property income yield of 7.1% based on forecast for the year 2020. Other information such as the IPO price, the number of units to be issued, the net asset value and the use of proceeds are not available from the prospectus as at the time of my writing of this blog post.

Risk Factors

The prospectus covered almost 30 pages of risk factors, which is fair considering that investors should know the risks involved in investing into this REIT. Short of a total collapse of the British government (which I think it is very, very low in probability), in my view, I would be concerned on three risk areas, specifically macroeconomic and geo-political, that are somewhat related to one another.

Forex Risk: Forex risk is unavoidable when investing in overseas assets. For the past 10 years the GBPSGD exchange rate had fluctuated between the 2.2x and 1.6x regions (see Figure 1). The big drop came during the Brexit vote back in June 2016, after which the exchange rate never recovered to the pre-Brexit vote levels…



Fig. 11

Brexit: Which leads me to the second area, and that is Brexit. The plunge of the GBPSGD exchange rate immediately after the Brexit vote was explained by the grave uncertainty felt on what would happen to the U.K. after it leaves the European Union. I believe this uncertainty had somewhat tapered off nowadays since the new government is adamant on a set date to break off, as compared to the previous one with lots of opposition to the exit terms (thus the see-saw of the exchange rate between 2016 and now). However, whether economically the U.K. would be better or worse off after that set date would be anybody’s guess. Still, there is another thing to consider…

Independence of Scotland: And yes, the independence of Scotland. The Scots are asking the U.K. government for a second independence referendum and should this go through (at the moment not likely from news reports), there is a high chance that they may break from the union. 20 of the REIT’s properties, or about 20.6%, are in Scotland, and with the break, there might be some changes in laws and regulations regarding the properties.

The Bedokian’s Take

One highlight of this REIT is that the prospectus had mentioned that the DWP is a “uniquely counter-cyclical occupier”, which meant that DWP services would increase in times of unemployment due to the increased number of claimants for its services. This shows that in good times or bad, the DWP as a government department (and policy) is here to stay, and this translates to constant rental income. Though there is tenant concentration risk, the lease for each property is separately negotiated.

The next point (which was brought up in other blogs) was the origins of the 97 properties: Elite Partners Capital (EPC), a subsidiary of Elite Partners Holdings Pte Ltd, one of the sponsors of the REIT, had acquired 97 properties (which is presumed to be the same 97 for this REIT) back in November 2018 for GBP 282.15 million2. Based on the prospectus, the properties are now worth about GBP 319 million. As EPC is a private equity firm, and as with all other private equity firms, one of the natural methods of realising the profits is to release their investments through IPO. 

Considering the above points, my take would be mixed: there is a lot of potential in the properties as they are very conveniently located. Should DWP vacates them, all or in part, it would attract the likes of small and medium businesses, but this meant that rentals may be impacted. Furthermore, the take-up rate of these spaces would depend on the future outlook of the U.K. macroeconomy as it affects commercial leases.

In the prospectus, it was stated that neither the REIT nor the REIT manager has a long established history, which in other words, the term “inexperienced” comes into mind. This is a typical “make-or-break” reason for investors, who would then decide on whether to give this REIT an opportunity to grow themselves (and the investors’ distributions) or to forego it. 

I shall see when more information is available from the prospectus.


Reference

Monetary Authority of Singapore. OPERA. Elite Commercial REIT Prospectus. 17 Jan 2020. https://eservices.mas.gov.sg/opera/Public/CIS/ViewSchemeDetail.aspx?schemeID=500c7153fce646909d1eaf414599d9d8 (accessed 23 Jan 2020)

1 – XE Currency Charts: GBP to SGD. 10 years. https://www.xe.com/currencycharts/?from=GBP&to=SGD&view=10Y (accessed 23 Jan 2020)

2 – Lai, Leila. Elite Partners Capital buys 97 freehold UK offices for £282.15m. The Business Times. 26 Nov 2018. https://www.businesstimes.com.sg/real-estate/elite-partners-capital-buys-97-freehold-uk-offices-for-£28215m (accessed 23 Jan 2020)

Wednesday, January 1, 2020

Asset Class Correlation 2019

Now that it is 2020, we shall look back at 2019 to see how the various asset classes had performed for the whole year, using data from the Portfolio Visualizer site and respective ETFs representing the various asset classes. I also added the iShares MSCI Singapore Capped ETF (EWS) to show how our local equities fair against the rest.

NameTickerVTIVNQBNDGLDCASHXEWSReturn
Vanguard Total Stock Market ETFVTI-0.38-0.390.02-0.050.8830.67%
Vanguard Real Estate ETFVNQ0.38-0.380.250.390.2528.87%
Vanguard Total Bond Market ETFBND-0.390.38-0.590.26-0.338.83%
SPDR Gold SharesGLD0.020.250.59--0.050.1617.86%
CashCASHX-0.050.390.26-0.05-0.002.12%
iShares MSCI Singapore Capped ETFEWS0.880.25-0.330.160.00-14.53%

Fig. 1 – Correlation results based on monthly returns for the period 1 Jan 2019 – 31 Dec 2019. For full data click here.

The table in Figure 1 showed that while all asset classes, as represented by their counters, had produced positive returns for 2019, there is still negative correlation existing between some of them, e.g. between equities and bonds (-0.39). This leads to the conclusion that although negative correlation between asset classes exist, it does not necessarily mean that some enjoy gains while others suffer losses.

So for 2020 (and the years beyond), stay diversified.