Going The Way Of The Dodo

As an investor, whether going for growth or dividends, we like to own companies that are near-monopolistic, or at least having a wide moat, as they are seen to be financially stable and strong given their steady or growing user base of their products and services. However, due to some poor management decisions and foresight, a great company may devolve into good, then bad, and then gone, either being bought over by someone (partially or fully) or doing business in some other fields. There are a few classic examples of these companies; the oft-reported stories would be Kodak and Nokia, where they had lost their dominance in their main products.

Picture generated by Meta AI

While it is easy to point out the causes of past declines due to hindsight, at present we do not know if a company and/or its product and/or service is facing obsolescence. While there are many potentials out there now, sometimes a change in management team, product or service range, or “white knight” investors, may save the situation.

The Bedokian’s View

As mentioned, it is not easy to identify such companies especially when things are still in a flux. The good thing is, except for companies that engage in financial fraud and/or suffering from a huge unmitigated public relations disaster, this decay generally would take several months to years to develop, so observant investors could see the writings on the wall and get the hint that it is time to say farewell.

The first thing an investor must know is not to fall in love with any counter, and not to harbour any hope given the known not-so-good circumstances surrounding the company. Love and hope, though good attributes in a personal sense, are not to be brought into investing, where staying objective and rationale is key.

Next up, we shall look at the numbers, in particular revenue and free cash flow. A profitable company would minimally have a slight growth in revenue and a not-so-volatile free cash flow. There are other metrics such as return on investment (ROI) and return on equity (ROE), but these are sector/industrial specific and cannot be applied in general. Though typically I tend to look at over two to three years, if the situation deteriorates faster than it should be, then I may set up an exit sooner.

As for how to tell whether the company is getting worse in a short time, I would look at what I call trends and fads (mentioned here). Though this method of mine is to look out for the next big (profitable) thing, it could be adapted for use in guesstimating negative outcomes.

The final word here is that, even after a thorough analysis conducted and yet you still feel queasy on a counter (that unexplainable “gut feel”), then prudently it is better to just let it go. Having a good sleep is good for your physical and mental health.

Macroeconomic Lessons To Learn From The Past Two Years

Due in part to the spike in demand and limited supply of products in the aftermath of COVID-19, and a host of other reasons such as geopolitical ones (e.g. Russian-Ukrainian conflict) and the long period of low interest rates which flushed the economy with cheap-loan capital, caused inflation to rear its ugly head. The subsequent accelerated rise of interest rates that was never seen before since the mid-2000s had brought an unprecedented economic environment in which most younger investors had not experienced before.

The past two years or so had provided useful insights and learning opportunities for us investors, and that is attributed to one macroeconomic policy: interest rates. What I would be sharing in the next few paragraphs are theoretical knowledge found in economics and finance textbooks, and most of the occurrences did happen, thus giving a sort of “classic textbook examples”.

Picture generated by Meta AI

Inflation And Interest Rates

When inflation is perceived to be happening, countries whose central banks can control interest rates (like the United States or U.S.) would raise them to bring inflation down. The rationale behind this is that when interest rates go up, the cost of borrowing would go up, and this slows down capital investments by companies as loans are getting expensive. Simultaneously, for consumers, higher rates meant higher returns from safe instruments such as short-term treasuries and bank deposits, which in turn encourages saving and less spending. All these cool down the economy and lower inflation.

For Singapore, instead of interest rates, our central bank (Monetary Authority of Singapore, MAS) used the exchange rate policy to manage the monetary policy. However, it is noted that our interest rates are very closely correlated with that of the U.S.’ in terms of direction and movement (see here and here for further explanations).

Effects On Asset Classes

Now that you got the gist from the previous paragraph, you could roughly tell what are the asset classes affected by high interest rates. Positively, as mentioned, are cash (in banks and money market funds) and short-term treasuries (less than two years). Negative ones include real estate investment trusts, or REITs (being leveraged investment vehicles, higher rates affect distributions to REIT unitholders), bonds (interest rates and bonds are inversely correlated) and lastly, commodities (which do not provide yield). For equities, though the cost of borrowing may affect the growth of companies, for some sectors such as finance (banks) and technology, as well as cash-rich companies, enjoyed some boom time.

True enough to a certain extent, we saw that REITs were hammered, a lot of people flocking to erstwhile boring treasury bills and fixed deposits, and gold was somehow muted throughout 2022 and 2023, to name a few.

Everything Is A Cycle

Good times do not last, and so are bad ones. All markets and economies go through a cycle, from bust to boom to bust to boom again. Now that the U.S. Federal Reserve had brought down rates, with more planned ahead, we could see treasury bill yields going down, REITs roaring back up, gold surging ahead, etc. The undulating nature of the market and economy, and the behaviours of the asset classes during these cycles, proved the importance of having a diversified portfolio with periodic rebalancing. With diversification and rebalancing, your investment portfolio can be protected from huge downswings and capital losses can be lessened. 

Ceteris Paribus

Last but not least, all economic scenarios and assumptions are accompanied by the term ceteris paribus, which translated from Latin is “all things being equal” (read here for more information). As we know, the economy is like a machine with many moving parts, working and affecting one another at the same time (read here for the economic machine analogy). Thus, even though we can observe “textbook examples” happening, sometimes it may not go according to theory, or even so, it might be other factors at play to give it a “textbook answer”.

Still, in my view, it is better to have some basic economic and financial knowledge to get a grasp of the complicated, yet simple, world of investing.

Frasers Centrepoint Trust: Good To Go?

Most real estate investment trusts (REITs) were having a field day with the not-so-unexpected cut of 50 basis points of interest rates. One REIT stood out as seen not benefiting from the rate cut, which is Frasers Centrepoint Trust (FCT).

 

Screenshot of FCT properties from presentation slides of FCT’s business updates for the Third Quarter ended 30 June 2024.

 

Looking at its price movement, it had seen a huge rise during the month of August, where the United States Federal Reserve (or Fed) had dropped a big hint on interest rate cuts. It reached a peak of SGD 2.41 just around a week before the Fed’s announcement, but after which, it went down to SGD 2.27 when the market week ended on 20 September.

There were people whom I know asking about what was happening, and I just shrugged (read here about why asking “what is happening” does not help much in the situation). From their third quarter financial highlights, the gearing level stood at 39.1% and their average cost of debt was 4.1%¹. This meant that the rate cut should benefit FCT given the not-so-high-but-high-enough gearing ratio and the cost of loan they were getting, so theoretically there are some justified push-up factors for its price instead of going opposite.

With the last known book value of SGD 2.26 as of 31 March 2024², at SGD 2.27 it represented a good bargain, since FCT was one of the stronger retail REITs known, and with 100% exposure in Singapore properties, thus could command a higher premium. This is a good example of a fundamentally sound counter that was somehow being dragged down for reasons, obvious or not, and for us this show of price weakness meant a good chance to average up our FCT holdings.

Disclosure

The Bedokian is vested in FCT.

Disclaimer

1 – Fraser Centrepoint Trust. Business updates for the Third Quarter ended 30 June 2024. 24 Jul 2024. https://fct.frasersproperty.com/newsroom/20240724_193109_J69U_7OBO7A3PF3O39XSV.1.pdf  (accessed 22 Sep 2024)

 

2 – Fraser Centrepoint Trust. Results Presentation for the First Half Financial Year 2024 ended 31 March 2024. 25 Apr 2024. https://fct.frasersproperty.com/newsroom/20240425_075534_J69U_VG71VYH4JFEHK0J8.3.pdf  (accessed 22 Sep 2024)

25 Or 50 Basis Points?

The investing and trading world will be waiting with bated breath this coming Wednesday and Thursday (17 and 18 September); the Federal Open Market Committee, better known as the Fed, is expecting to announce an interest rate cut for the first time in around three years. After the intent was made known by the Fed back in August, you could observe equities, real estate investment trusts (REITs) and even gold were rising in anticipation.

 

Picture generated by Meta AI

While the consensus among economists, analysts and retail investors were looking at a highly probable 25 basis points cut, there were some quarters that speculated a higher rate cut at 50 basis points. The reason for the latter is mainly on the viewpoint that the prolonged high interest rates are hurting the market more than it should, and this opinion is gaining traction. As of 13 September, the CME FedWatch had placed an equal probability (i.e., 50%) for a 25 and 50 basis point cuts; just the week before, the 50-basis point cut was given only a 30% chance¹.

 

Potential Reaction Of Markets 

Interest rates play a huge part in the performances of the various asset classes; equities, REITs, long term and corporate bonds, and gold are on the uptrend, while short term treasuries and cash are seeing a downside. From my observations and guesstimates, my conclusion is that the markets are currently pricing in a 25-basis points reduction. However, if 50 basis points is announced, the market volatility would be higher, whether is it upwards or downwards is depending on which asset class, sector / industry and companies that you are looking at. 

This means REITs may rise further, gold may yet reach another all-time high, banks may feel a slight downward pressure due to the deemed lower net interest income, the USD/SGD exchange rate may go down to the level not seen since late 2014, etc. Notice the word “may” used, because we do not really know how the markets will react, hence the word “potential” for this section heading.

For this round, I may adopt the following actions (not exhaustive):

• Change more USD and/or buy more USD denominated counters.
• Average up fundamentally sound equities and REITs that do not rise much vis-à-vis the general market rise. 
• Average up corporate bonds.
• Buy into banks if price weakness is shown

Whatever the interest rates, and macroeconomic conditions, good or bad, there is always an opportunity to invest in the markets.

 

Disclaimer

1 – FedWatch. CME Group. 13 Sep 2024. https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html (accessed 15 Sep 2024).

The Only Answerable Person On One’s Investment Is To Oneself

On top of financial news channels and websites, there are also hundreds, if not, thousands of, blogs, video channels and chat rooms/forums discussing about investment and trading in general. While most of these resources are informative, there are some which, put it mildly, trying hard to prove or disprove certain viewpoints. A healthy discussion/debate is constructive and learning points can be taken from them, but there exist participants where his/her convictions on certain opinions are so strong that he/she would commit most or all resources just to make a point.

Picture generated by Meta AI

Frankly, this “I will prove that I am right by (doing something)” existed way before the internet came about, or even newspapers and smoke signals. The propensity to prove correct one’s assumption/prediction is one of the basic human biases known as overconfidence. Amplified by the easy access to mass communication tools and means, it could also develop into stronger narcissistic tendencies, which includes the hyper-aversion to “loss of face”. 

These traits and behaviours in the world of investing/trading are a definite no-no; yet, despite these basics, there were those who fell into such traps. With social media and the deemed credibility that comes with it, the negative impact of having a wrong outcome is very great. This is why mistakes are usually either glossed over, or defended with more vigorous “convictions”, to maintain the presumed invincible aura. When we are investing or trading, we are doing it for ourselves. When we are showing it the world, we are sharing the tools and tips so that we can learn from one another.

Borrowing a famous saying about fooling someones and everyones all the time or sometimes, I had modified it to the following:

We can be always right some of the time.

We can be sometimes right all the time.

But we cannot be always right all the time.

Remember the title of this blog post.

Is It A Good Time To Buy REITs Now?

Yes, interest rates are (very likely) going to be lowered, judging from the message given by the United States Federal Reserve last week. Soon, financial news and blogosphere were filled with questions like the blog title above, or something similar. It is natural for investors to ask such a question as REITs, or real estate investment trusts, are a leveraged asset class, and a fall in interest rates meant that cost of loans would go down, which subsequently increases distributions.

Picture generated by Meta AI

To answer the question, I would dish out the same old answer which I love to dispense; it depends. Ideally, a good time to buy REITs would be when they were at their lowest and/or weakest. Using the iEdge S-REIT Leaders Index, during the past five years, the two weak points were sometime in March 2020 (COVID-19) and October 2023 (accelerated interest rate growth). Granted that these were hindsight views and true bottoms are very hard to catch, but with sound fundamental analysis implemented (REIT financials, environmental factors and economic conditions), plus a bit of price action model at play, chances are higher of getting at least around the deemed bottom of the moment.

If you did not catch the bottom, rest assured; if you had vested earlier in the REITs in your portfolio, now is a good time to average up, provided that the current prices ticked off your valuation checklist, and there is a great potential that your selected REIT prices will rise. If you had not, however, and/or not that good in analysing REITs, then perhaps you can start off with REIT ETFs (exchange traded funds), which currently there are five listed in the local Singapore Exchange. As the REIT ETFs are, to a certain extent, seen as representatives of the asset class, making periodic entries into them (monthly, quarterly, half-yearly or yearly) would at least give you exposure, thus for this method, “any time to buy REITs is a good time”.

Ethical Investing? It Depends On Whose

In recent years there was a spike in interest on ethical investing, which comes in different names and sub-forms such as sustainable investing, ESG (environmental, social and governance) investing, green investing, etc. Many institutions offered mutual funds and exchange traded funds (ETFs) focused on such investment principles, examples of which would be the iShares Global Clean Energy ETF (ticker: ICLN) and the Lion-OCBC Securities Singapore Low Carbon ETF (ticker: ESG.SI) in our Bedokian Portfolio.

Picture generated by Meta AI

Although there are set standards on what ethical investing is, based on quantifiable numbers such as ESG scores, or industries directly or indirectly related to the cause (like our ICLN for green energy and ESG.SI for low carbon), ethics overall is still very much open to interpretation and subjectivity. While there are general beliefs in what “ethical” means, like not investing into tobacco stocks as an illustration, it would be surprising to find out otherwise if one digs deep enough. An ex-colleague of mine refused to invest in real estate investment trusts (REITs), on the rationale that “bad landlords” increasing rents would contribute eventually to increasing prices and costs of living (it is his viewpoint, so please do not complain on me for this). Another anecdotal story (a friend of a friend) refrained from buying large cap stocks due to the “bad corporations” image (do not flame me for this, too).

As what some said, the best investments are the ones that could make you sleep well at night. Not only this adage applies to the financially healthy companies, but also those whose businesses benefit many, i.e., making money in a “cleaner” sense (quotes emphasized by me as this is subjective).

In the Bedokian’s opinion, if the investible assets and financial instruments are open and legal, it is up to the individual investor’s views and values on determining what ethical means to them.

 

Disclaimer