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.


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.


Bought iShares Asia Credit Bond ETF at: 

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


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.


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.


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