11 OCTOBER 2013
US Shutdown Temporary; Catastrophic Repercussions On Default
By Dr Chan Yan Chong
Last weekend, I was invited to Singapore for an investment seminar that was co-organised with Shares Investment. While I was there, I took the opportunity to go on a side trip to Malacca. It has been 20 years since I last visited Malacca. Malacca has basically not changed over these 20 years, except that there are more tourists than before, and most are from China. From the Tuas Checkpoint at the westernmost tip of Singapore, I crossed the causeway into Johor before hitting the highway. During the nearly three-hour drive, there were no signs of houses on either sides of the highway, only miles after miles of oil palm plantations.
Recently, many Singaporeans have become keen to invest in property in Malaysia. At the last investment seminar, many people asked me questions relating to this development. Seeing how the scenery along the way between Johor and Malacca had remained virtually unchanged for the past 20 years, it goes to show that economic development in Malaysia is just plodding along. In recent years, Singapore property prices have kept rising, while bank interest rates have remained low. This has caused many cash-rich people to cast about anxiously for something to invest in. So, many of Singapore’s property developers went across the straits on a development spree and then came back to market these projects in Singapore, thus attracting throngs of Singaporeans rushing in to invest. Twenty years ago, many Singaporeans also rushed in to invest in properties on the Indonesian island of Batam, and lost money.
One rule of investment is never to rush in with the crowd. We should always be wary of investments and equities that everyone is scrambling to buy. A small portion of these investors may be fleet-footed enough to have sold off during the feeding frenzy, and more people would rush in when they saw that these lucky few had made money. The tail-end of the crowd would then become the players who could not grab hold of a seat in the game of musical chairs, and this is the basic principle of all investments, wherever you go. However, droves of people would tend only to register the fact that those lucky few had made money, so they want to have a share in the pie, only to forget about risk.
Both political parties in the US are seriously slugging it out, and has caused parts of the Obama administration to close down temporarily. However, the consequential fall in the stock market was measured. In 1996, the US government shut down for a short time and the stock market went through a period of adjustment; the truth of the matter was, the bourse essentially rode on the situation to let off steam after hitting a new high. I reckon the current situation is a replay of that situation, since both parties would not last long in such a lose-lose tactic.
In my last article, I pointed out that after betting on whether the Fed would taper, the key speculators in Wall Street would turn their attention on the US debt ceiling debate. While Obama continued to spend money, the Republican-controlled House of Representatives tried very hard to put a cap on the amount of treasury bonds that the White House could issue. With each round of negotiation, the ceiling was raised a little. As the deadline for negotiations, 17 October draws near, this is the most hotly speculated topic on Wall Street now. If it turns out that the debt ceiling will not be raised, the US government is likely to default on maturing bonds. That would be the first time that the US could not pay off its debts since its founding, and its effect would be more far reaching than the previous year’s Euro debt crisis, which could see the greenback suffering a catastrophic lose of its clout. This is a scenario that Obama and the Republicans cannot afford to see, so we do not need to be overly concerned for now. The US stock market has already hit a record high, so it is normal to expect some corrections, only that it is now doing so under the excuse of the debt ceiling issue.
The outlook for the Singapore and Hong Kong stock market would depend on the direction of the Chinese stock market, which is growing in influence as the day goes by. The vast majority of new stocks listed in Hong Kong in recent years are H shares from China. Singapore also saw a similar increase in Chinese S-chip stocks. Even if we disregard the H shares or S-chip stocks, local listed companies are increasingly focusing their businesses in China.
As more and more Chinese companies are listed in Singapore, we are faced with shares which vary wildly in quality. Someone asked me how should he avoid those shares that would suddenly plunge or even be suspended from trading? My answer is: it is unavoidable, and you can only blame your luck if it happens to you. The only thing that you can and should do is to avoid placing your bets on second and third tier stocks that you are not familiar with. Personally, my holdings are primarily blue-chip stocks, and that is a discipline that long-term investors should keep to. Do not trust in the myth of a hole-in-one; investment diversification is still the most important and fundamental rule of the game.
Singapore Prime Minister Lee Hsien Loong announced at the National Day Rally on 18 August that he will ensure that families with a monthly household income of as low as $1,000 can afford a two-room Housing Development Board (HDB) flat. This caused a stir in Hong Kong’s media: Should Hong Kong follow in Singapore’s footstep? Can Hong Kong follow suite? At least just the housing policy? Hong Kong’s Chief Executive Leung Chun-ying came to Singapore just a few months ago to visit her public housing programme. Is Leung trying to learn something? Hong Kong property developer Lee Shau Kee said that in Hong Kong, construction cost alone starts at HK$3,000 per square foot. So, even if the land is free, a 500-square-foot two-room flat would cost HK$1.5 million. How then can a Hong Kong family with a monthly household income of HK$6,000 ($1,000) afford a HK$1.5 million apartment?
Singapore’s construction cost is certainly much lower than in Hong Kong. Singapore has an army of cheap foreign labour that totals nearly 1 million in number. These people come from the poorest parts of Asia, including Bangladesh, Burma and India. They do not enjoy the protection of a minimum wage, yet the HDB flats in Singapore are build by these foreign workers. The people of Hong Kong do not support the practice of importing cheap foreign labour, so how can they reduce construction costs? However, ever since Singapore’s ruling People’s Action Party attributed the drop in their votes to Singaporeans being unhappy with the Government’s foreign labour policy, the Singapore Government has also begun tightening its foreign labour policy. It would certainly raise the cost of doing business, which, in the long run, could be a hidden concern for the stock market.
Publish date: 11/10/13