I may have sounded quite depressed in my recent posting. While Singapore's economy is running red hot, my postings are getting less optimistic each time.
If you compare the global economy to a patient's health, this patient was in intensive care unit back in 2008. After tons of blood infusion (i.e. stimulus packages), he is now out of danger but will still require life support system to ensure that his condition stays stable. While the whole world is rejoicing and celebrating his near miracle survival, the doctors and nurses are staying vigilant and are more apprehensive of his situation.
Then, after one year or so, his other organs (i.e. employment data, housing) start failing. Worse still, he starts developing other life threatening problem (i.e. euro crisis).
The global economy has not recovered yet. Will he be re-admitted back to intensive critical unit again? Only time will tell. And, that's the reason why we should stay vigilant and not be complacent.
Sunday, June 27, 2010
Monday, June 21, 2010
Chinese Yuan: Impact to us
Under pressure, China finally agreed to ease its exchange rate peg with US dollar. Personally, my view is that this is something that the Chinese central bank will have to do eventually, given that it faces the same 'impossible trinity' that MAS faced a short while ago to control the inflationary pressure. Under fixed exchange rate regime, it is ineffective to control inflationary pressure using interest rate. As discussed in my previous posting, there are already very obvious inflationary pressures in China today. Hence, like it or not, the changes in exchange rate control will have to come sooner or later. Easing the exchange rate peg will help to reduce the prices of imported goods.
Right after this announcement last weekend, the stock markets surged this morning. This is the same short-term effect that you saw in STI after MAS adjusted its exchange rate band recently. This can be easily explained because we would expect the other countries to benefit from this change or ease their exchange rates against US dollar, given that they do not need to hold their exchange rate further to keep their exports as competitive as the Chinese. Equity market should benefit from this.
In the long run, like what I have mentioned before, things will get more expensive because most of our goods esp. clothings and electronics come from China. It will not be easy for companies to relocate their factories to other countries with cheaper factors of productions. Factors like skilled labor force, factories and the necessary infrastructure will take years to build. Hence, we should be seeing inflationary pressure soon.
Right after this announcement last weekend, the stock markets surged this morning. This is the same short-term effect that you saw in STI after MAS adjusted its exchange rate band recently. This can be easily explained because we would expect the other countries to benefit from this change or ease their exchange rates against US dollar, given that they do not need to hold their exchange rate further to keep their exports as competitive as the Chinese. Equity market should benefit from this.
In the long run, like what I have mentioned before, things will get more expensive because most of our goods esp. clothings and electronics come from China. It will not be easy for companies to relocate their factories to other countries with cheaper factors of productions. Factors like skilled labor force, factories and the necessary infrastructure will take years to build. Hence, we should be seeing inflationary pressure soon.
Monday, June 7, 2010
Inflation is coming..
Like the market, the past few weeks for me have been hectic and busy. There were many moments of ups and downs. Anyway, like I have said in my last posting a few weeks back, we are close but not yet there (Greed index is around 29+ now and Fear index is about 36+). Patience is important. So much for the market.
A few months ago, I was talking about inflation if there were revaluation of China Yuan. Despite all the 'noises', the revaluation did not materialize. Unfortunately, this does not mean that inflation will go away. If you read the news these few days, you will realise that the people in China are asking for higher and higher wages. Of course, this is necessary because they are finding houses more expensive and other necessities less affordable. Everybody works for a living. If you feel that the dollar you receive today is worth less than a dollar tomorrow, you will ask for more pay. There is nothing wrong with this and it is part and parcel of wage inflation. However, if this is left uncontrolled, it will be disastrous. Being the 'factory of the world', this inflationay effect in China will soon be exported to the rest of the world.
And, if you think our exchange rate policy may be able to cushion us from the inflationary effects, think again. Our exchange rate is now around 1.41 after spiking up to 1.36 a couple of months back after the shift in the exchange rate band. Being a country that imports most of our domestic products, this could only mean that we will be seeing more inflationary effects soon.
A few months ago, I was talking about inflation if there were revaluation of China Yuan. Despite all the 'noises', the revaluation did not materialize. Unfortunately, this does not mean that inflation will go away. If you read the news these few days, you will realise that the people in China are asking for higher and higher wages. Of course, this is necessary because they are finding houses more expensive and other necessities less affordable. Everybody works for a living. If you feel that the dollar you receive today is worth less than a dollar tomorrow, you will ask for more pay. There is nothing wrong with this and it is part and parcel of wage inflation. However, if this is left uncontrolled, it will be disastrous. Being the 'factory of the world', this inflationay effect in China will soon be exported to the rest of the world.
And, if you think our exchange rate policy may be able to cushion us from the inflationary effects, think again. Our exchange rate is now around 1.41 after spiking up to 1.36 a couple of months back after the shift in the exchange rate band. Being a country that imports most of our domestic products, this could only mean that we will be seeing more inflationary effects soon.
Thursday, June 3, 2010
Investment: Bond Fund
Bonds are debt instruments. For example, if I need money from you, you can pass your money to me and I will give you a piece of paper saying that I owe you this amount of money. I may or may not pay you any interest amount. After a period of time, I will return the money to you hopefully if luck is on your side. In real life, things are more complicated and you cannot really get people to lend you money without convincing them that you can repay the principal amount in the future. In addition, you will need to pay them interest amount if you ever hope that they will part their money willingly with you. There are also other factors to consider including your credit rating, bond valuation, etc.
How do we invest in bonds? You can either get it through a broker (this usually involves $100k and above) or you can invest in treasury bills through banks or security firms. There is very little fee (if any) involved in these transactions. Treasury bills are safer in nature because they have shorter maturity and they are guaranteed by our government. Notwithstanding there are factors such as callability, duration and so on, most highly rated bonds are generally safer than stocks. However, no risk no gain. Bonds' return are very pathetic ranging from less than 0.5% for treasury bills onwards.
If you have been following the development in the European Union these days, you will know that bonds are still subjected to certain level of risks. The companies or countries selling you the bonds could go bust. If you are forced to liquidate the bonds during a crisis, you may even lose your principal sum.
With such low return and the fact that bond investment is not risk-free, does it make sense to invest in funds of bonds? Of course, not. Bond funds are basically mutual funds that invest in bonds and the fund managers earn a cut from the return. So, if the return of the bond fund is 5% (interest payment and capital gain) and you have to pay 3% for management and administrative fees, you will earn only 2% after deduction. In addition, you have to bear the risk of investing in these bonds.
Therefore, if you ever want to invest in bonds, try not to invest in bond funds because you will never get anywhere with it. And, if you really must invest in bonds to diversify your portfolio, the best strategy is to make direct investment within your limits.
Happy investing.
Disclaimer: The content in this blog contains purely my personal opinion and it is in no way a substitute for professional financial advice. You should seek advice from a professional financial advisor with any question regarding your financial matters.
How do we invest in bonds? You can either get it through a broker (this usually involves $100k and above) or you can invest in treasury bills through banks or security firms. There is very little fee (if any) involved in these transactions. Treasury bills are safer in nature because they have shorter maturity and they are guaranteed by our government. Notwithstanding there are factors such as callability, duration and so on, most highly rated bonds are generally safer than stocks. However, no risk no gain. Bonds' return are very pathetic ranging from less than 0.5% for treasury bills onwards.
If you have been following the development in the European Union these days, you will know that bonds are still subjected to certain level of risks. The companies or countries selling you the bonds could go bust. If you are forced to liquidate the bonds during a crisis, you may even lose your principal sum.
With such low return and the fact that bond investment is not risk-free, does it make sense to invest in funds of bonds? Of course, not. Bond funds are basically mutual funds that invest in bonds and the fund managers earn a cut from the return. So, if the return of the bond fund is 5% (interest payment and capital gain) and you have to pay 3% for management and administrative fees, you will earn only 2% after deduction. In addition, you have to bear the risk of investing in these bonds.
Therefore, if you ever want to invest in bonds, try not to invest in bond funds because you will never get anywhere with it. And, if you really must invest in bonds to diversify your portfolio, the best strategy is to make direct investment within your limits.
Happy investing.
Disclaimer: The content in this blog contains purely my personal opinion and it is in no way a substitute for professional financial advice. You should seek advice from a professional financial advisor with any question regarding your financial matters.
Subscribe to:
Posts (Atom)