Dec 29, 2008


Stock up ark carefully - for the next bull run

Opportunities abound as appetite for risks disappears

By Goh Eng Yeow

FEW investors will shed a tear as this year draws to a merciful close. For most, it has been one of unrelenting bad news as much of their wealth was wiped out by a global stock market meltdown.

It is also difficult to be cheerful about next year's prospects. Indeed, there are signs that it will be as awful as this year.

Until September, Singapore and the rest of Asia had escaped much of the financial carnage that had threatened to bring down American and European banks.

But now, the global credit crisis - billed as the financial tsunami of the century - has hit the region, striking fear into the very heart of Singapore's financial centre, with banks pulling back their lending.

In such grim times, biblical tales like Noah's Ark become almost inspirational. When Noah was building his ark, his neighbours laughed at him for making such a foolish move in bright sunshine.

Well, at least we know it will be raining hard in 2009 but it is still not too late to build an ark to preserve our financial security in the gathering financial storm.

For a start, investors should take another long, hard look at their investment portfolios and axe the shares that no longer fit with the hard times ahead - stocks offering a story but no dividends, for example. This will provide some hard cash to survive the lean months ahead.

They can also cut down on unnecessary expenses like overseas holidays, while drawing up a budget to ensure that precious cash flow is not squandered.

But the most important strategy is to think long term. This crisis will pass and after troubled waters recede, investors will have to consider their next move - what sort of investments to keep in the ark to ensure they do not miss the boat in the next bull market.

In the meantime, while the economic situation may be grim, it is nowhere as dire as some gloom-and-doom prophets have been predicting.

And opportunities abound as an appetite for risks disappears altogether.

Take bank preference shares. These are financial instruments that offer their holders a fixed dividend payout but no voting rights in the bank.

Fears - often irrational - that the issuers might default have pushed these instruments to price levels that defy common sense.

The preference shares issued by local banks, for example, have fallen 10 to 15 per cent below their par values.

But these discounts may be absurd given the banks' strong capital base, their prudent lending practices and the almost negligible probability that any one of them would fail.

And in a world threatened by falling prices and banks paying nearly nothing on deposits, they make an excellent safe harbour investment - offering dividend yields of 5.6 per cent to 6.3 per cent - while investors wait for the flood waters to recede.

Then there is the slumping property market, which has rattled many Singaporeans as their home is their key financial asset.

What has scared many investors was a lack of information on the number of condos sold under the deferred payment scheme (DPS), when a record 14,811 flats were sold last year at the peak of the property bull run.

If all those units had been bought under deferred payment, there would be genuine cause for concern that the market would face a serious over-supply crisis if their cash-strapped buyers were unable to complete their transactions.

So it was with some relief that developers, banks and investors greeted revelations two weeks ago that only 10,450 uncompleted homes were bought on deferred payments.

Even better was the news that only 4,560 units would be coming on-stream next year.

Sure, the DPS will continue to cast a pall over the rest of the property market but for the next 12 months, the worst- case scenario for defaults from DPS has been cut to 4,560 units.

In all likelihood, this means that the property market may turn the corner sooner rather than later, if there is no massive panic-selling of flats to further dampen prices, which have fallen back to January 2007 levels.

All factors considered, prudent investors are likely to enjoy the opportunity of a lifetime, stocking up their ark as the financial storm gathers in the months ahead.

There will be big money to be made, identifying companies that will defy market expectations that they will fail.

Bears and recessions do pass and bulls do eventually return. Happy New Year.

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