Sunday, September 29, 2019

Inside The Bedokian’s Portfolio: SPDR S&P 500 ETF & Berkshire Hathaway Class B

Inside The Bedokian’s Portfolio is an intermittent series where I will reveal what we have in our investment portfolio, one company/bond/REIT/ETF at a time. In each post I will briefly give an overview of the counter, why I had selected it and what possibly lies ahead in its future.

For this issue, I will introduce two securities from the United States (US) market: the SPDR S&P 500 ETF (ticker: SPY) and the Berkshire Hathaway Class B shares (ticker: BRK.B).

Overview

During my “transition period” between 2013 and 2014 when I switched from trading to investing, I had done some research into the US markets. The US economy then was, and still is, the largest economy in the world by Gross Domestic Product (GDP). I had identified four securities that were relatively basic for a beginning investor to enter the US, and two of them were SPY and BRK.B.

About SPY & BRK.B

SPY tracks the S&P 500, one of the major US indices used by traders and investors all over the world. I did not choose the other two popular ones, namely the Dow Jones and the Nasdaq, because the former has too little companies (only 30) while the latter is too heavily based on technology.

Although there are a number of ETFs tracking the S&P 500, SPY (by SPDR) has the largest total market capitalization (US$241.61 bn as at 20 Dec 20181) and a high trading volume, meaning it is liquid and easily tradable. While dividends from SPY are subjected to a 30% withholding tax by the US tax authorities, there is another London-listed S&P 500 ETF by Vanguard called VUSD, which the withholding tax is only 15% due to the US-Irish tax treaty. Either way, it’s your call on which to select.

Berkshire Hathaway, where the famous value investors Warren Buffett and Charlie Munger are at, has shareholdings in a number of listed companies, like Coca Cola, Apple, American Airlines and General Motors, to name a few. It also has subsidiaries in non-listed businesses such as food & beverage company Dairy Queen, insurance firm GEICO and chemicals provider Lubrizol.

Notice Berkshire Hathaway has two share classes, A (BRK.A) and B (BRK.B). As of market close on 27 Sep 2019, BRK.A was at US$311,450, while BRK.B was US$207.45, so the latter is (very) affordable for us retail investors.

Why SPY & BRK.B?

Simple, these two counters are, in my opinion, the representatives of the US equity markets. Both SPY and BRK.B contain individual counters such as Coca Cola, Apple and Wells Fargo, and SPY itself contains BRK.B as well. Though having similar holdings, their sector and company weightages are very different, and along with it their performances. Using the period 1997 – 2018 (BRK.B was created in June 1996) and comparing the two, BRK.B returned with a compound annual growth rate (CAGR) of 10.60% (before inflation) vis-a-vis SPY’s 7.61% (before inflation). Figure 1 below shows the comparison graphically.




Fig.1: Performance of SPY (blue) vs BRK.B (red) for the period 1997 – 2018. Inflation not factored in. For full data set click here.

And there is another glaring difference between the two; BRK.B does not distribute dividends, while SPY does. As a dividend investor, you may think that I would probably not consider BRK.B, but since I also advocate a little bit of growth, getting it fulfills that portion of our portfolio.

To sum it all up, I view both as major indicators of US equities, with BRK.B sitting as my growth counter, and SPY for dividends (though small) and also growth.

The Future

The US economy has been volatile for the past few years due to trade tensions, geo-political issues and that deemed incoming (but don’t know when) recession. Still, a lot of observers and analysts had said the S&P500 is currently overvalued (P/E ratio of 19.48 and P/B ratio of 3.3853 as at 27 Sep 20192) and it is not the right time to enter. All I can say is that we just chug along this journey and probably practice periodic purchases of SPY.

As for Berkshire Hathaway in general, both stalwarts Buffett and Munger are advanced in their ages, but there is no sign of them stepping down. The company was built based on their investment philosophies and strategies, so there will be some keyman risk should either one or both vacates. There is news that a couple of senior executives are taking over some of the business operations, and if they take over fully, expect some slight variations in their investment approaches from their predecessors. 

As these counters in the portfolio were bought at below current prices, I may consider averaging them up in future.

Disclosure

Bought SPY at: 

USD 207.00, Aug 2015
USD 203.85, Mar 2016
USD 205.40, May 2016
USD 255.50, Oct 2017

Bought BRK.B at:

USD 111.70 & USD 113.15, Feb 2014
USD 119.50, Mar 2014
USD 126.00, Aug 2014
USD 148.30, USD 147.50 & USD 145.28, Jan 2015
USD 147.30, Feb 2015
USD 164.00, Apr 2017



1 – Hernandez, Ben. 10 Biggest ETFs of 2018 By Total Market Capitalization. ETF Trends. 20 Dec 2018. https://www.etftrends.com/10-biggest-etfs-of-2018-by-total-aum/ (accessed 27 Sep 2019)

2 – Bloomberg. S&P500 Index. As at 27 Sep 2019. https://www.bloomberg.com/quote/SPX:IND (accessed 27 Sep 2019)

Sunday, September 22, 2019

Lendlease Global Commercial REIT: The Bedokian’s Take



Lendlease Corporation, part of the Australian-based Lendlease Group, is spinning off a REIT with two of its properties. Called the Lendlease Global Commercial REIT (the REIT), it will start off with 313@Somerset in Singapore and Sky Complex in Milan, Italy.

So let us take a rough look.

Quick numbers from the prospectus (with page number in brackets for reference):

  • Initial public offering (IPO) price: S$0.88 (p46)
  • Net Asset Value (NAV): S$0.8134 (p55)
  • Aggregate Leverage: 36.4% (p97-98)
  • Projected dividend yield: 5.8% (annualized) for 2020, 6.01% for 2021 (p57-58)
  • Weighted Average Lease Expiry (WALE): 4.9 years by Gross Rental Income (GRI), 10.4 years by leased Net Lettable Area (NLA) as at June 2019 (p8)
  • Committed Occupancy Rate: 99.9% as at 30 June 2019 (p8)


The Properties, Tenants And Rentals

The REIT will have two properties, namely the leasehold retail 313@Somerset which almost all of us are familiar with, and the freehold office Sky Complex situated 5km from the Milan city centre in a new district called Santa Giulia. As at 31 July 2019, 313@Somerset stood at 71.5% of the REIT portfolio’s appraised value, while Sky Complex took up the remaining 28.5%.

313@Somerset sits on top of Somerset MRT station in the Orchard Road shopping belt and has a mixed bag of retail shops and food & beverage outlets, with brands like Zara, Cotton On, Marche and Food Republic among them. As at 30 June 2019, 58.9% of the leases by NLA have an average rental escalation of 3% for FY2020 due to the rental step-up structures in place.

The entire Sky Complex is currently leased to Sky Italia, an Italian satellite TV platform and subsidiary of broadcaster Sky Limited, which in turn is under the Comcast Corporation. Sky Italia accounts for 28.9% of the REIT’s GRI, and the rental will increase annually based on the official Italian Consumer Price Index (CPI, a measure of inflation). The lease will be until 2032, with Sky Italia having the option to terminate it in 2026.

Some Highlighted Reviews

As a proponent of diversification, the concentration of a single tenant, albeit it is a reputable company, in the Italian property is a bit unsettling for me. Should Sky Italia exercises its option to terminate the lease in 2026, then it will be a headache to fill that void. However, Sky Italia also has the option to purchase the property should the REIT wants to sell (prospectus p69), so this may somewhat mitigates the risk mentioned if they decided to buy. Also, the sponsor by then would have purchased additional properties to reduce the concentration.

Speaking of the sponsor, its parent Lendlease Group is no stranger to huge construction projects and properties around the world. In Singapore, it has Paya Lebar Quarter, JEM and Parkway Parade under its belt. Globally, it has a foothold in various gateway cities such as New York, London and Beijing. So there is potential of quality property injections in the days to come.

And there is another piece of good news: The rental proceeds from Sky Complex are (so far) exempted from the Italian withholding tax and Singaporean income tax, according to this excerpt from the prospectus (p51):

In respect of the Milan Property:

(a) a ruling has been obtained from the Italian tax authority which confirms that distributions derived by Lendlease Global Commercial (IT) Pte. Ltd. (“IT SingCo”) from the Italy AIF qualify for withholding tax exemption in Italy; and

(b) IT SingCo has obtained a tax exemption from the Ministry of Finance (“MOF”) in respect of foreign distribution income derived from Italy AIF (“Specified Exempt Income”) (the “Tax Exemption”). Pursuant to the Tax Exemption, IT SingCo will be exempt from Singapore income tax on the Specified Exempt Income.

This means we should be getting the dividends from the Italy portion as "it is", though there may be some regulatory risks if rules change. Furthermore, if the sponsor decides to inject more properties from other countries, we may have to content with different sets of tax laws respectively.

The Bedokian’s Take

At S$0.88, it is about 8.2% above the initial book value of the properties, but I would view it as a premium for future expandability. Starting off small, investing in this REIT is like watching a plant grow and over time gaining more leaves and branches (assets) from the nutrients in the soil (sponsor).

With an aggregate leverage of 36.4% (which is a rough gearing gauge to me), there is still some headroom to go to the current 45%, more so if the allowable gearing limit goes up. Even then, we should expect the high possibility of rights issue, which is not necessarily a bad thing to go for if an investor feels the incoming assets are yield accretive.

The REIT’s yield is around five-plus to six percent for the next two years, and based on data from the Reitoracle (www.reitoracle.com) and Reitdata (www.reitdata.com) sites as at 21 Sep 2019, it belongs to the median range in yield amongst the S-REITs. Comparing to the REIT’s commercial peers (office and retail combo REITs) of similar balance and make-up, the yield is around that of currently Mapletree North Asia Commercial Trust’s and Starhill Global’s.

And finally my take for this REIT is (and as usual anti-climatic): it depends. This REIT has the potential of having a global (and geographically diversified) exposure, but along with it comes risks such as geographical (think recession in a country), regulatory (think taxes and land laws), tenant and of course the unescapable market. This is part and parcel of being an investor, so we have to live with and manage the risks in order to get returns.

The IPO is open for application on 25 Sep 2019 and closes on 30 Sep 2019, and the REIT will be listed on 2 Oct 2019, subject to changes if any.


Reference

Lendlease Global Commercial REIT Prospectus, lodged 16 Sep 2019, Monetary Authority of Singapore OPERA site – https://eservices.mas.gov.sg/opera/Public/CIS/ViewProsDetail.aspx?prosID=514fd34d0f3047ed8dea69cbe0e05a33


Sunday, September 15, 2019

The Bedokian’s Investment Philosophy: The 100th Blog Post Special

What is an investment philosophy? Essentially it is like a personal set of doctrines, strategies and methodologies on investment matters.

Everyone’s investment philosophy are unique, though some may just be a total replicate of others’, especially those of famous investors and traders. For mine it is a mixed bag from different sources, cobbled up during the period of 2013 – 2014 when I transitioned my portfolio into the first draft of the current form.

Since this is my 100th post in The Bedokian Portfolio blog, I will share some of my investment philosophy with you and I hope you can have some takeaways from here.

#1: Diversification & Rebalancing

The word “diversification” has been quoted countless times in my ebook, blog and conversations on investment. It is the underlying premise of my portfolio construction. 

Following Markowitz’s groundbreaking Modern Portfolio Theory, I can (more or less) set my preferred returns/risk balance by having a diversified portfolio. Diversification must start at a level where the various financial instruments have different correlation with one another, and there is no higher degree where the correlation can be affected. This means we look first at diversification on the asset class level, which is the highest, and then move downwards by region/country, sector and finally, company.

So why is diversification important? It is to manage risk, the other R-word that most investors do not pay much attention to, as compared to “returns”. The future is unknown, therefore we do not know what is coming next and that is the main risk. Having a diversified portfolio will, to a large extent, protect you from these unknowns, at the cost of lesser returns that I am willing to accept.

Rebalancing goes hand in hand with diversification, for it is the act of bringing the portfolio back to its original weightages periodically, or when the opportunity arises. The former is suitable for passive Bedokian Portfolio investors while the latter is good for active ones; either way, both are good.

#2: No Leverage

Leverage is the use of loans and borrowed funds, with accompanying interest costs, to further boost an investment portfolio size and net returns. This sounds good, but the flip side is if returns go negative, you will need to cover those borrowed funds, more so if the borrower imposes margin calls. Hence for our Bedokian Portfolio, I do not use leverage for the securities, just available cash and funds.

There are some who will beg to differ with me, stating that leveraging can be managed and the risks mitigated. I agree to this, if you know what you are doing. However, as mentioned in the previous section, the future is unknown and that is where the risks are. 

For the past year or so, we have seen the high volatility of the markets due to the trade situations. If you are not leveraged, you only need to worry about the markets, but if you are, you have another worry which is to manage your borrowed funds. This can be intimidating even to a seasoned investor, let alone an investment newbie.

No leverage.

#3: Investment Horizon Of At Least 10 Years

The investment timeframe of The Bedokian Portfolio should be at least 10 years. Unlike trading, whose timeframe can be just minutes, hours, days, weeks or months, investing takes a slower, accumulative path to wealth building. Sure, both investing and trading have profits or returns in mind, but while trading takes in smaller profits, investing is to gain larger returns through the use of time and the accompanying power of compounding.

An initial S$10,000 investment, with a 5% annual growth rate, will compound to about S$16,288 after 10 years. However, you do not just put in S$10,000 initially; you will want to add on periodically and see the amount grow even more. If you add S$1,000 annually into the equation above (at the beginning of each year), the S$10,000 will grow to around S$29,500 (before inflation). It is simple math, really, but Einstein reportedly quoted compounding as the “8th wonder of the world”.

Let us stretch compounding further to 15 and 20 years, using the same S$10,000 initial amount and the S$1,000 annual contribution setting. You get the end result of about S$43,500 for the 15-year and S$61,250 for the 20-year periods (before inflation).

While I acknowledge that there are boom and bust years, time will eventually smooth these bumps into a gradual upslope ride. Using US market statistics and place them in the balanced Bedokian Portfolio allocation (35% equities, 35% REITs, 20% bonds, 5% commodities and 5% cash) for the period of 1994 to 2018, a 25-year time span, the average 10-year rolling returns averaged at 8.26%. Even an all-equities portfolio in the same period got an average 10-year rolling returns of 6.97%, after going through the dot com bust in early 2000s and the Great Financial Crisis of 2008 – 20091.

#4: Different Investing Styles Can Work With One Another

The different styles of investing, such as dividend, index, value, growth, etc. actually come from different investment philosophies, and can be seen as mutually exclusive. If you had read my blog posts, however, I tend to adopt a mix of dividend, index, value and growth together. Instead of viewing them as mutually exclusive styles, I believe that they can complement with one another.

For example, dividend investing looks at the dividend yield, but I can also apply the principles of value investing in selecting a cheap company that gives good yields, too. Or I can use index ETFs to capitalise on growth sectors that I see as long-term trends.

Still, I must not forget The Bedokian Portfolio’s original mantra, and that is “passive income through dividend and index investing”. No doubt that I can use a myriad of investing styles for my portfolio, I must not deviate from the fact that the underlying style is that of dividend and index, with value and growth providing a secondary or minor add on to our Bedokian Portfolio.

For compounding and passive income purposes, dividend investing resonates well as they represent the actual realised returns of your portfolio, i.e. cash in hand. It also has the concept of percentage yield, which can be easily calculated, compared and possibly projected based on past numbers, to better manage your cash flow. If investing in individual securities proved too daunting, there is also the choice of using index ETFs to get market returns and yields, suitable for passive Bedokian Portfolio investors. Both dividend and index investing can be combined into a core-satellite approachin your Bedokian Portfolio.


1 – Portfolio Visualizer. Selected asset class used: Equities (US Stock Market); REITs (REITs); Bonds (Total US Bond Market); Commodities (Gold); Cash (Cash). Full results in this link

2 – The Bedokian Portfolio, p122-123

Sunday, August 25, 2019

A Wave Is Coming, But You Have Limited Ammo…

Does the post title sound ominous? If you are thinking of a zombie hoard coming at you but you only have six arrows left for your crossbow, then yes that is bad news indeed.

Well, that is really not the case.

The “wave” that I mention here is the market direction, and it is those extreme ones. Yup, sharp rises and falls, those types.

The “ammo” is the amount of funds that you are ready to deploy when the wave comes, which for almost all of us, is a limited resource.

And the whole context is about selecting the right counters with finite funds in a bull or bear market.

Got the gist? Great. Now let’s move on.

Looking At The Right Wave

Before jumping into which counter to get, we must get a grasp of what and where the wave is going to be. The big clue here is to look at how the various asset classes behave in a given situation.

Equities tanking? This implies that bonds, commodities and to a certain extent, REITs, may go up. Bonds falling? This shows that equities and REITs may be in vogue. Yields of all asset classes going down? Expect a commodities (gold) rush.

The key thing here is not to look at what is going or about to go up, but to look at what is coming down. That is where the actual wave is going to be.

When To Use The Ammo

Back to the zombie wave analogy, if you fire your arrow too early, chances are you may not hit any target since the zombies are still far away, and this will cost you precious ammo.

When prices are free falling, it is very tempting to go in at the first instance. The problem is, no one knows for sure how much the prices are going to fall, and if you commit too early, you may get buyer’s remorse.

There are a few ways to determine when to go in. My “10-30 rule”1is one of them with regards to equities. The other way is to look at the oft-used “52-week low”, which is the low price point of a counter for the said period, though you can extend this period longer. Another way is the so-called “reversion to the mean”, which is the price (or any other parameter such as NAV or P/E) is going back to the moving average point over a certain period, usually more than one year.

Though the markets are unpredictable and we do not know how low the prices will go, the methods mentioned above serves as guidelines to adhere to at least.

Sometimes when the wave suddenly receded (like a sudden market reversal, e.g. the surge after Christmas last year), then it is wise not to mount a pursuit, i.e. chasing after the markets. Just fall back and live to fight another day.

Where To Use The Ammo

Selecting which counter is always a headache, because there are so many choices available. This is when the shortlist (or wishlist)2comes in useful, where you have drawn up a number of counters and securities to go into. In this way, coupled with fresh information, you can just do a quick review before deciding, rather than doing a new fundamental analysis from the ground up, which may cost you some time.

Another easier way is to do an averaging down of your existing holdings that are still fundamentally sound, subjected to the guidelines stated in the previous section. 

Loading Up Additional Ammo

Feeling constrained with just six arrows? Why not pull out the arrows from zombies that were shot earlier and re-use them?

Whenever we think of funds, they are either sitting at the cash portion of your Bedokian or other investment portfolios, or drawn from other non-investment sources like your emergency funds. However, there is still another place to get your ammo from: your current holdings.

On an overall portfolio basis, you can find which counter(s) is overvalued, e.g. above NAV, higher price-to-earnings ratio, yield is being compressed, etc., be it from the same asset class or others. You can have the choice of divesting it and voila, new fresh funds are available for something else better.

Do Not Forget The Overall Picture

The last message for this post is not to lose the overall picture, and that is always keep in mind the diversified portfolio. It can be tempting to go all-out on a few bargain counters, but please do not create an imbalance to your asset allocation ratios or worse still, replace your entire portfolio with those bargains. Having a return-risk approach is still paramount, at least in my opinion. 


1 – The Bedokian Portfolio, p119-120

2 – ibid, p94-95

Friday, August 16, 2019

Inside The Bedokian’s Portfolio: iShares JP Morgan USD Asia Credit Bond Index ETF

Inside The Bedokian’s Portfolio is an intermittent series where I will reveal what we have in our investment portfolio, one company/bond/REIT/ETF at a time. In each post I will briefly give an overview of the counter, why I had selected it and what possibly lies ahead in its future.

For this issue, we shall talk about the iShares JP Morgan USD Asia Credit Bond Index ETF, or I just refer to it as the iShares Asia Credit Bond ETF.

Overview

The iShares Asia Credit Bond ETF is listed on the Singapore Exchange with two ticker symbols; N6M (in US dollars) and QL2 (in Singapore dollars). According to the iShares site, the ETF is made up of debt instruments issued by sovereigns, quasi-sovereigns and corporates in Asia, excluding Japan. 

Some brief information of the ETF as at 15 Aug 2019:

  • Credit Quality: Almost 77% of the debt instruments are investment grade (rating BBB and above).
  • Geography: About 67% are from Hong Kong, Indonesia, Philippines, India, China and South Korea.
  • Sector: Approximately 56% are from sovereign and government-owned entities.
  • Maturity: Around 77% have a maturity of between two and ten years.
  • Management fee: 0.3%.
  • Distribution frequency and currency: Quarterly, in USD.


Why iShares Asia Credit Bond ETF?

In May 2017, when Genting announced that they would be redeeming their 5.125% perpetuals (perps) later in that year, I had to look for a replacement that had the same if not similar yield to replace it in our Bedokian Portfolio. Incidentally, there is another iShares bond ETF (iShares Barclays USD Asia High Yield Bond Index ETF), having historical yields of about 6% when I reviewed it back in 2017. 

However, I had opted for the iShares Asia Credit Bond ETF instead, as it has a higher proportion of investment grade bonds, which suited my selection criteria, even though the yield was lower at about three to four plus percent. It was lower than the 5.125% I was getting from the Genting perps but the compromise was reduced risk.

Also, I had chosen the SGD denominated instead of the USD one for ease of personal administration, though the latter is more liquid than the former.

The Outlook For Asian Bonds

The ongoing trade war between the United States and China had brought some challenges to the global economy and financial markets. Furthermore, interest rates across most of the developed regions and countries are either low, at zero or at the negative area. Further mentions include the Hong Kong social situation, and the ongoing South Korea-Japan diplomatic and trade spats. 

All these would give Asian bonds a mixed outlook in the months to come, meaning some countries’/regions’ bonds would have a normal yield curve, while others may see a flattening or inverted yield curves, due to their macroeconomic policies and/or investor sentiment.

As this ETF is close to 7% of our Bedokian Portfolio, and with the availability (and consideration) of the Nikko AM SGD Investment Grade Corporate Bond ETF (launched in Aug 2018), I may keep the current holdings and stop adding positions for now.

Disclosure

Bought iShares Asia Credit Bond ETF at: 

SGD 14.80, July 2017
SGD 14.27, January 2018
SGD 13.78, May 2018


Reference



Friday, August 9, 2019

Tariffs And Currency Devaluation, In A Nutshell

If you are new to investing and just entered the financial markets, you may have heard of the terms ‘tariffs’ for a while now and most recently, ‘currency devaluation’. As if investing is a difficult animal to deal with, adding in all these macroeconomic mumbo-jumbo may have sent your head further spinning.

Well, like it or not, you will need to have some idea of what these terms mean in your fundamental analysis (at the Economic Conditions level according to The Bedokian Portfolio1), but to make things digestible for you, I will explain them in easy-to-understand analogies. Let us use a setting where there are only three countries in the world; Country A, Country B and Country C.

Tariffs

Country A and Country C both produce a widely used consumer product called gizmo. The cost of producing a gizmo in Country A was about (let’s be currency neutral here) $6, while in Country C the production cost was $3 each. Gizmo sellers in Country A, seeing the cheaper production cost in Country C, began to import gizmos from the latter. Even with (assumed) transportation costs of $1, the total cost of getting a gizmo from Country C was just $4, cheaper than the $6 produced at Country A itself. Gizmo manufacturers in Country C were happy since someone was buying from them, and gizmo sellers in Country A were happy, too, as their costs were down by $2 per gizmo.

Soon, gizmo manufacturers in Country A began to see their orders decline, and they cannot compete with Country C’s gizmo cost due to their own inherent production costs. As a result, many gizmo factories closed down and unemployment rose. The government of Country A then saw this unemployment as an issue and began to take steps in protecting their own gizmo production sector. They then imposed a 50% tariff on imported gizmos from Country C. With this tariff, the cost of a gizmo from Country C was the same as the ones from Country A (150% of $4 = $6), thus providing a so-called level playing field.

Such an act was seen as protectionist because the government of Country A wanted to protect its own gizmo manufacturers (and jobs). Also, consumers in Country A would have the opportunity cost of getting a lower priced gizmo due to the cheaper production cost in Country C.

It is not the end of the story yet. We shall now add in another character in the whole picture; Enter Country B, which had no tariffs imposed on by Country A. Enterprising middlemen in Country B would just buy the gizmo from Country C at $4 each (including $1 transportation), then sell them the Country A at $6 apiece (with transport), thus earning $1 per gizmo in the trade ($6 sell price - $4 cost - $1 transportation to Country A = $1). For gizmo sellers in Country A, now their cost is the same, regardless of where they got their gizmos.

Currency Devaluation

Let us use Country A and Country C again, this time we will assign a currency to each of them, namely A$ and C$ respectively, and an exchange rate of A$1 is to C$4. Assuming all things equal, Country C’s central bank decided to devalue their currency to A$1 is to C$5.

There could be a few reasons why a country would want to devalue its currency. One of the main reasons was to make its exports relatively cheaper. If a gizmo costs C$4 to manufacture in Country C, with the A$1:C$4 rate, an importer in Country A could get it at A$1 (sans transportation costs). But with the A$1:C$5 rate, the importer could get 1.25 gizmos for that same A$1. Multiply that on a large scale, it meant the importer could get 25% more gizmos for the same amount of A$ paid. So if Country B produced gizmos but at 1.1 gizmos per A$1, the importer at Country A would prefer to get it from Country C, thus Country B lost out its gizmo exporting business to Country C.

However, from the other side, it meant that imports from Country A into Country C were seen as more expensive. A A$1 gizmo imported from Country A would cost C$5 for Country C buyers instead of the pre-devaluation amount of C$4.

In The Real World

Hope the above analogies gave you a better understanding of tariffs and currency devaluation. Translating that knowledge into the real world, you could see how the countries that are involved in the trade war are using the above macroeconomic policies and tools.

Frankly, we do not know how this trade war will pan out, as both the United States and China are not showing signs of backing down for now. If this is going to be a protracted affair, then look out for the “middleman” regions/countries as highlighted in the last paragraph of the Tariffs section. Also, I had mentioned some other opportunities in my previous post here.

Reference

If you are interested to know more about economics, you can start off with Economics for Dummies (Flynn, Sean. 3rdedition. 2018. John Wiley & Sons. ISBN 978-1-119-47638-2) and Economics 101 (Mill, Alfred. 2016. Adams Media. ISBN 978-1-440-59340-6).

Happy National Day!


1 – The Bedokian Portfolio, p89-90