Fergus Watch – Outlook 2012

Jan 02, 12 Fergus Watch – Outlook 2012

Some of you may know, I work in the financial industry, and I usually write emails to some people for their reading entertainment. Here’s one that I wrote a while back, on my outlook of 2012. Originally sent out 26 December 2011.

One of the things I wanted to do for this email was to amalgamate some of the views I have as well as others that I have discussed with. In a way, a snippet of things that happened this year, and what it means for the year ahead. That is, the outlook for 2012.

2011, the watershed year

2011 has definitely been a watershed year in more ways than one. We have the General Elections, we have Orchard Road floodings, we have MRTs breaking down dramatically, we have numerous dead bodies found in reservoirs, we have a new record price for properties, we have our 2 Integrated Resorts, numerous new shopping malls and numerous new office buildings in the CBD. We also have Lee Kuan Yew leaving active politics. In a way, 2011 is really extraordinary. How can so many things happen in the same year? Suay? Heng? Or is the world really ending in 2012?

Complacency is a downfall of the Singapore model?

Some of the viewpoints I have been hearing about is if the Singapore model is good to go for the next decade? In the last 10 years, the biggest issue in Singapore was.. no issue. We have taken a lot of things for granted. Things were meant to work. Jobs will be available as long as you studied to the best of your ability. We will always have housing, we will always have cheap transport, we will have accessibility to anything you want to buy. This has also affected the policy makers. Why fix things if there is nothing broken? Thus, I would say the last 5 years has been one of complacency. There has been some lack of foresight and planning. After all, you pay senior management primarily for their foresight..

An example is the building of public housing and public transport. The North South Expressway was mooted to expand the transportation infrastructure from the Northern regions of Singapore into the central regions. This was announced in 2008, but it will only be completed by 2020. I’m sure there was already 1-2 years of planning before 2008, so it takes about 14 years for something like that to bear fruit. Same for public housing and many policy based problems. Senior management are paid to foresee a problem 5- 10 years, even 15 years, down the road. Complacency has set in such that a lot of stop gap measures were taken rather than true foresight planning. I am quite optimistic at the current batch of PAP MPs though. However, it will take 10 years before we can see the effect.

Policy makers and senior management are not the only group that was affected. The younger generation today have a lower threshold for tenacity. If something was too hard to do, then just quit and try something else. After all, we’re not going to starve to death. A lot of people were also seeking the get rich quick dream. Wanting to retire by 40 years old is probably quite a common phrase. Then the trick question, if everybody retires at 40, who’s still working if nobody wants kids and nobody wants foreign workers? Consumerism has become a problem for the masses. People seem to have a higher tendency to spend rather than save. A person can be earning $3k a month, but he owns a car, and eats good meals every other day. After 3 years of working, he might not have much savings. iPhone is another amazing phenomena. Most teenagers I see are very willing to spend $1k on a hp, and $300 on a Korean girl band concert ticket. Hmm.

Another group that has been conditioned by complacency is the MNCs. A lot of Government Linked Corporations (GLCs) like DBS, Singtel, Comfortdelgro, KepCorp, Capitaland, SGX has been seeking regional/international growth at the expense of not investing in Singapore. Most GLCs had the policy that they intend to reduce their dependency on Singapore by acquiring foreign companies. The good thing was that if Singapore declines, these GLCs are able to bring revenues from abroad to support the local businesses. Case in point is Comfortdelgro. Their Singapore bus and train services operates at less than 10% profit margin, but because they are the world’s second largest public transport provider, they are able to keep providing the service in Singapore (for political reasons too of course). The bad thing is that some companies have focussed so much on being overseas, that they do not spend enough money to upgrade the existing infrastructure in Singapore. An example would probably be Singtel, since they are so focussed on expanding in Australia and India now.

Growth at all cost? Or at the cost of intangibles?

The main charactistic of Singapore is that we are an open nation. A place that welcomes foreign MNCs to come and set up HQ. A place that is attractive that foreign investors want to invest. A place that is safe, friendly, and progressive. Unfortunately, that makes Singapore a externally dependent economy and thus vulnerable to shocks. At this point, Singapore is still a very attractive place. People still want to come to Singapore to work, set up businesses and invest. However, the potential to slow down is increasing, since people can go set up shop in one of the emerging nations. Singapore had the ‘grow at all cost’ model. This is a good model for a developing nation, since it is very easy to grow. However, I feel that it is likely to slow down in the next decade.

There was a big disruption with the MRTs the last few weeks. and that made me think of something: Productivity in Singapore hasn’t really gone up over the last decade, and it was more of a function of efficiency, rather than innovation. In the earlier years, MRTs typically take 3-4 minutes to get from 1 station to another. However, they have been increasing speeds gradually, such that at 1 point, it takes around 2.5 minutes per station. Everybody was very happy at the faster travelling time. When they had to slow down the train recently, I realised the problem with pushing the limits like this was the need for higher maintenance cost and the additional vibration noise that we had to endure. That too, we have gone complacent and have taken for granted that it takes 30 minutes to get from raffles place to boon lay. When it becomes 40 minutes as with last time, we complain. One of the theories of economics is that for a stable economy to increase it’s GDP, there has to be technological advancement. We haven’t really seen technological advancement on a global level for quite a while, and probably not so in Singapore, since we are on par with the world and are already at the technological barrier.

The truth is, we have a high GDP per capita, but a low GDP per capita work hour.

My view is that in the next decade, more likely than not, we would see Singapore slowing down. More maintainence work, more capital expenditure, less efficiency, more work-life balance. All these will affect our GDP, and the attractiveness of Singapore. Optimistically, we need to see our productivity in terms of GDP per capita work hour go up, before our GDP can resume it’s upward trajectory.

Developing nations hot at our tails

At this point, Singapore is still pretty high on the value chain. Keppel Corp and Semb Marine are the world’s 2 largest rig builders. Globally, Korea and Singapore makes up a large portion of the drillships and jack up rig building markets. However, China is gaining expertise fast, and probably in the next decade, we might see Korea and Singapore losing market share if they are unable to move up technologically. The problem with being at the forefront of the technological barrier, is that it is easier for someone to catch up to you. Wage differential will also be a point of issue in the next few years. A China/Indian nationality masters level student is very willing to work in Singapore for the same pay as a Singapore nationality bachelor degree holder. Like what I mentioned about tenacity earlier, I have been visiting some HNW clients recently, and a lot of them are saying that the younger generation including their own kids nowadays just don’t have the ability to stay long in a job. Most of the time, they take the low unemployment rate for granted. If they don’t like a job after 3-6 months, they can quit and find a new job. If this mindset doesn’t change in the next few years, then we would probably see the foreigners succeeding in moving to middle management.

One of the most common advice I hear, and also give, is that Singaporeans should consider working overseas. Singaporean talent is still much sought after, and MNCs overseas do pay a premium for middle managers. I have friends working in India, Shanghai, Jarkarta, Hong Kong, USA, Australia, Netherlands, etc. Most of them are decently happy, but you do lose out on family ties and the ability to settle down in Singapore.

Value of work is less than the value of asset appreciation?

Since 5 years ago, I have been saying that investments is something that all of us must do. One of the main reason is that when we grow old, we don’t want to be working because we need to. We need our money to work for us, to provide us a cashflow so that we can work for leisure, rather than being forced to work. Investments, house rentals, business incomes are just some of the ways. As we move forward, I am seeing that investment income is becoming more and more dominant. For example, I have a 30 year old friend who bought and sold a house and made $500k profit. How many years must you work in order to save $500k? Also, I know a person who owns a investment property at marina bay sail. The rental income is $4k a month. And as mentioned quite a few months back, starhub at it’s low was $1.80 therabouts. At that time, the dividend yield was around 14%. Without including the capital gains you can get, that means if you invested $200k you would have gotten $30k of annual income every year tax free.

The value of work has truely dropped such that asset appreciation is really creating a more viable source of income. But don’t get me wrong, it’s not a Singapore only problem. It is a global issue, and there will probably be no solution. The rich people will tend to get richer. And there’s no reason why they will change the system otherwise. Thus, people with extra savings must look for ways to put their money to work. Personally, I am on a lookout for property opportunities, business ideas, and stocks investment ideas. Our jobs are just a source of income, and not a source of wealth.

Consider foreign unit trusts

In Singapore, most people either invests directly into Singapore stocks, or indirectly through Singapore unit trusts. The Prudential Singapore Managed Fund, Schroders Singapore Trust are the some of the 2 biggests fund by Assets in Singapore. This strategy has worked well in the last 30 years as Singapore was in a strong growth phase. Thus, there wasn’t really much reason for us to look overseas. However, I believe some of the emerging markets are coming up strong, and we would probably see an outperformance from them soon. Some of the countries I would consider is Thailand, Vietnam, Indonesia, China, and Emerging markets like Turkey and Brazil.

For those that still prefer local equities, consider companies expanding out of Singapore into the regional markets. We should avoid companies that are forced to look back into Singapore, such as the GLCs that are politically pressured to increase their capital expenditure here.

Uncertainty in the year ahead

I believe that globally, the year ahead would be quite an uncertain one. In a sense, it is probably a test of the systems in place for the last decades. UK used to be a superpower and they lost it. The global landscape had changed a lot since the 1900s when they were the superpower. The current superpower is the USA, and more likely than not, we would see that change in our lifetimes.

2012 would be an interesting year. My view is we would see an immediate bottoming around March-June 2012, and as per my previous emails, I am accumulating my warchest to unleash onto the markets.

A quick glance, I would generally see property prices falling, COEs with a high potential of rising if the taxi companies choose to do fleet renewal next year, and stock markets generally suffering on low volume. I do hope taxi companies don’t do fleet renewal and that COE would drop, but looking at the timeline, fleet renewal is more likely to happen in 2012. I do think 2012-2013 are good times to look to starting a business though.

Have a good 2012 ahead!

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