Investment & Wealth Mngmnt amid Turbulence & at Time of Extremes

Plenty of opportunities for investors amid turbulence	Business Times: Thu, Jul 26
I ONCE read a quote which I felt was good advice - not just for life in general but also in relation to investing in financial markets. "Life - or markets in this case - may not always be the party we hope for, but while we're here we might as well dance." This is true especially today, and despite the variable market performance in the first half of 2012, investment opportunities continue to emerge in turbulent times. Clients who have stayed the course on their long-term investment objectives and capitalised on the market volatility would undoubtedly have navigated better in terms of portfolio performance. In view of the continued heightened global economic uncertainty, the key investment focus remains defensive with a continued search for yield. Since the start of the year, fixed income has turned out to be the asset class of choice. Within the asset class, the outperforming segments have been high-yield bonds, emerging market debt and bank perpetuals - of particular note were Indonesian bonds which benefited from the country's investment rating upgrade. Private bank clients have also directly participated via fixed income funds. In the new issues market, we have also witnessed reasonable continued demand for Chinese property developer bonds, Indian bank debt and Singapore dollar-/offshore renminbi-denominated new issues. On the equity front, investors continue to favour companies with moderately geared balance sheets and solid cash flows that promise strong dividend yields. Specific focus has been on global blue-chip names, with exposure to sectors and geographies with strong relative growth prospects, especially those trading at historically attractive valuations. From the perspective of investors' risk profile, highly conservative investors continue to prefer investment grade senior bonds which remain an attractive alternative despite the low nominal yield level within the fixed income space. Conservative investors continue to take equity exposure through structured products offering capital protection although their preference is also for short tenors which has had a limiting effect on overall potential returns. Investors with a higher risk tolerance have sought enhanced returns through the selective use of leverage applied to investments providing a high relative yield, with many also comfortable adding a foreign currency overlay to further enhance returns. The uncertainty prevailing in the equity markets have meant that sophisticated investors, who are comfortable investing across all asset classes, have successfully focused more on foreign currency trading, precious metals and other commodities, such as oil, for opportunistic returns. What lies ahead? Capital markets are likely to remain volatile with potential downside in the next three to six months. Market pressure from the current European crisis is set to continue, given that a permanent resolution, one that requires greater European fiscal and financial integration, is unlikely to emerge any time soon. In the United States, while the private and corporate sectors remain in good shape, market volatility may rise in the second half of the year as we approach November's presidential elections. In Asia, while policy makers do have necessary tools and wiggle room to provide the necessary stimuli to avert any sustainable and sharp slowdown, it may not be completely shielded from the woes of the Western world. Therefore, as the current of uncertainty is unlikely to subside, investors will continue to seek less risky assets with high relative yields while cash returns remain low. Defensive instruments such as high dividend-yielding stocks, corporate bonds or developed government bonds will continue to be popular with investors. What's in store? In the second half of 2012, the Asian primary bond issuance market will remain buoyant as corporate issuers take advantage of the current low interest rates; potential issuance would come from Indonesian quasi-sovereigns, Chinese state-owned enterprises and the Indian banks. While the new issuance market remains attractive, valuation of both investment-grade and high-yield credits in secondary Asian fixed income appear fairly priced vis-à-vis their US counterparts in terms of credit spread, therefore limiting the scope for further outperformance. In the private debt markets, we believe there may be interesting opportunities for investors to deploy capital to distressed assets in Europe that are of value as distressed sellers emerge. To gain effective access to these, investors will need to consider close-ended fund offerings from specialist asset managers which will be coming to market. What's our stance? On tactical asset allocation, we maintain that clients should own a fully diversified portfolio across different asset classes. As investors climb the current wall of uncertainty, the outperformance of less-risky assets may continue for some time still. Thus, while it is imprudent to institute big bets across the different asset classes, the present volatile markets may present good opportunities to facilitate timely portfolio adjustments, at the margin, from time to time. On a strategic basis, we see value in global equity markets, albeit the current challenging outlook for economic and corporate growth. Investors with a longer investment time horizon and who can tolerate any short-term volatility will not be short of choices. Equities are trading at fairly attractive levels relative to history and to government bonds. In terms of an overall strategic asset allocation, our preferences are stocks, corporate bonds, developed market government bonds and cash, in declining order of attractiveness. For now, we continue to advise our clients to be cautious when selecting any fixed income investments - we continue to prefer investment-grade issues or senior bonds. For emerging market bonds, we recommend issues from quasi-governmental entities and higher quality investment-grade Chinese real-estate companies, and advise that investors be selective on any Indian issues, preferably looking only at those from higher-grade issuers. For perpetuals, clients may want to look at high coupons bonds with potential high step-ups. There will also be opportunities in the primary bond market to diversify one's portfolio, especially new issues in certain sectors that also offer valuation discount. In Asia, we have a higher conviction on the economies of China and Indonesia. We believe these economies are likely to be the main beneficiaries of the medium-term trends of increased consumption and infrastructure growth. Overall, we believe that the Asian growth story remains intact despite what the markets would like you to believe. As they tend to be leveraged plays on the global economy, once the dust of global growth uncertainty settles, these markets may resume their long-term market outperformance. The markets will remain volatile in the coming months with movements likely to be driven in the short -term more by news headlines than fundamentals. This will give rise to many investment opportunities and investors might do well to remember the words of renowned Chinese military general and strategist Sun Tzu. In his influential book The Art of War, he shares how the general who wins a battle makes many calculations in his temple before the battle is fought, while the general who loses a battle makes but few calculations beforehand. This same wisdom applies to all investors who will succeed through disciplined planning and by staying focused on high-quality names during this time of volatility. The writer is head of Global Research and Investments, Asia, Barclays Source: Business Times
Wealth management during a time of extremes	Business Times: Thu, Jul 26
RECORD low interest rates worldwide. The lowest yields on government bonds in living memory. High levels of volatility, ongoing counterparty risk, and renewed fears of systemic failure emanating from Europe. Investing in markets in recent years has been fraught with extremes and unknowns. As a result of this dislocation, the losses many experienced in 2008, and the fact that world equities delivered an annualised return between January 2000 and December 2011 of just +0.80 per cent, traditional investment wisdom and strategies that were considered inviolable for almost half a century have been rightly called into question. Buy and hold as an investment strategy. The merits of diversification. Normal distribution probability theory. The use of historic volatility as a measure of risk. The efficient market hypothesis. Long-term expected returns from equities. The past five to 10 years has challenged them all, and left investors feeling shell-shocked. This is why the lure of cash is so great. It's liquid and its perceived value does not fluctuate daily. Government bonds, particularly in the United States, have a similar appeal. They may not yield very much, but they are considered "safe". In such times it is essential to use the one guide that has consistently added value for investors over time - history. Looking back at what happened in the past gives insights into what could happen in the future. Doing so also helps us challenge the current investment obsession with cash and government bonds - and suggests that equities may soon rebound. Traditional investment theory suggests fixed income markets provide investors with income and low volatility, while preserving capital. We would, however, suggest that, fixed income, particularly government bonds, represents a much greater risk to capital than equities, both in nominal and real terms. First, nominal yields are at post-World War II lows for US treasuries, UK gilts, and German bunds. This is not surprising as interest rates are also at all-time lows. Still, this is not expected to last forever. At some point, the long-term effects of the post-2008 global monetary stimulus will appear as inflation. However, even at current inflation rates, long-dated government bonds in the US, the UK, and Germany are already priced to deliver negative real returns. Buying these bonds is betting on an extreme outcome - outright deflation or systemic risk. Second, many of the drivers of the 30-year bull market are starting to fall away. The advance in government bonds over the past 30 years was driven initially by developed market disinflation, spurred on by the Federal Reserve's drive to fight inflation, and accelerated by the globalisation of the manufacturing supply chain post-1980. Asian and emerging-market central banks contributed to this trend with currency policies that maintained export competitiveness. This resulted in large-scale selling of their currencies against those of major developed countries, with the proceeds used to buy the bonds of the latter. More recently, Western governments themselves have provided additional catalysts to the bond bull market. With the global financial system threatened in the wake of the 2008-09 financial crisis, the US, Japan, UK and (indirectly) eurozone central banks became large-scale buyers of bonds. However, we believe that key longer-term supports for bonds are falling away. Investors should not take for granted a continuation of post-1970s inflation-fighting by Western central banks. Instead, they should incorporate the risk of central banks allowing higher inflation rates into their investment strategies. Much like the policy shift in the 1970s that defeated inflation, we expect current central bank policies to result in rising inflation in coming decades. Just as falling inflation in the 1980s-90s was a boon to long-term bondholders, we see inflation over the coming decades to be their bane. Thus, investors in Asia face an environment where a strategy that has worked well in the past may not work well in the future. History may again provide a useful guide. It seems clear that equities have been in a structural bear market for the past 12 years. Using the 20th century as an example, bear markets have typically lasted around 15 years, some as short as eight, some as long as 20. Relative valuations for equities compared with bonds are at levels which have typically led to the former's outperformance. In many cases, yields that can be achieved through prudent equity security selection can be double that of the same issuer's corporate bond. Plus, the relative underperformance of equities versus bonds over the past 12 years are at extreme levels. Finally, backtesting has shown that although equities are, as a whole, not a strong hedge against inflation, certain sectors, namely utilities and telecoms, have provided a better hedge than others. In other words, an equity strategy biased towards high dividend, defensive names whose earnings may correlate with inflation could well serve investors better over the short and medium term than a heavily weighted fixed income strategy. In fact, it already has done. The Hang Seng Utilities Index, a sub-index of the Hang Seng, delivered an annualised return of +8.6 per cent for the five years between 2007 and 2011, as compared with +5.7 per cent for corporate bonds and +6.0 per cent for US government bonds. It is not just equities, however, that look attractive. Other asset classes, like gold, Reits (real estate investment trusts), and hedge funds, when used prudently, have and continue to add value. Many mistakenly assume that only one major asset class appreciated in 2008 - US government bonds. This is incorrect. Gold appreciated by +5.8 per cent in 2008, and has returned +21.1 per cent annualised from 2008 to 2012, dramatically outstripping bonds and equities. Strategic asset allocation and the use of multiple asset classes in portfolios can help investors navigate the current turbulence and achieve superior long-term real returns. The world may appear full of risks and the attraction of cash and bonds seems obvious. However, using history as a roadmap suggests that employing this strategy is itself full of risk. Conversely, a carefully selected equity-biased strategy, within the context of a multi-asset class portfolio, may well deliver superior real returns. The writer is head of Tailored Portfolio Services, Asia Coutts Source: Business Times
Wealth structuring is important	Business Times: Thu, Jul 26
ONE of the many interesting things about private banking is that there are great differences in client behaviour in different parts of the world. Of all the geographic regions, Asia is probably the one where private banking is most heavily weighted towards trading activity, whereas in the United States, credit has historically dominated banking business, with clients in Europe and the Middle East being more inclined to look at longer-term asset management. Of course, real estate remains a favourite asset class the world over. However, despite different investment behaviours, in some respects wealthy families are remarkably similar. Most are concerned about their children's well-being and education, and most hope that their wealth will be preserved and protected, for at least the next generation, if not longer. Never has this been more important. Wealth is threatened by a vast number of things today. Many countries around the world are suffering unrest or near-war conditions. How safe is the currency I am holding? How safe is my bank? The weakening of bank secrecy, and recent cases where information has been stolen from banks, threatens not only those who have failed to report their income for tax purposes, but also those who live in countries where the perception that you are wealthy can lead to physical dangers and kidnapping. Despite all this, the greatest destroyers of wealth are often those we don't usually think about. Divorce, illness, sudden death, freezing of accounts pending probate, family disputes, unexpected litigation, being cheated during old age, business failure, personal guarantees and claims for past tax can all be added to the everyday familiar investment wealth destroyers of volatile markets, over-leverage, and over-concentration. As the spotlight falls on offshore centres, it will differentiate between those who have merely hidden their wealth from those who have taken good advice and made legitimate plans to achieve their goals. The best time to prepare to avoid financial disasters is before they happen. Now would be good. And this is where it gets interesting, because it is time for you to look at your family and your life and think about what you really want. How much wealth would be good for your children? Would too much inheritance de-motivate them? (Refer to Bill Gates and Warren Buffett). Are the children equally capable? Do any of your family members have special needs? Do you wish your children's inheritance to be protected from their future spouses and possible divorce? Might they go and live in high-tax countries? Do you want your liabilities such as property loans to be left to your spouse after your lifetime? Do you wish to make a lasting legacy to a favourite charity? What will happen to your family business? Is it actually possible to pass your wealth equally to your heirs, if that is what you want? (Maybe some assets cannot be split.) How can your family values be passed on? ... There are many more such questions. Who can you go to for advice? Lawyers are a good start, but they tend to be expert in one jurisdiction. Many wealthy families today have family members and assets all over the world. It is common to find families touching four or five tax jurisdictions, and touching both common law and civil law countries (and, in some cases, syariah law countries, too) where inheritance rules work quite differently. Banks can be helpful because they can share the experiences and concerns of other families they have worked with. The experience of the person you speak to is of principal importance. Before you find the answers, the first step is to find someone who can help you ask yourself the right questions, and who can help you explore what your goals and wishes for your family really are. Once you have an outline plan, it will then be important to take professional tax and legal advice before executing your plan. So what does a plan look like? Most effective succession plans involve transferring ownership of assets during your lifetime to a holding entity such as a company, a trust, a foundation, an insurance policy, pension plan, or some combination. (It is, of course, vitally important to get the right structure for your particular circumstances.) The concept of ownership brings benefits but it also brings problems. If I am the owner of assets, those assets are exposed to my creditors, my personal taxation, and are frozen if I die or am unable to exercise control, or may be given by law to someone I would not have chosen. The essence of the succession plan will be to move legal ownership to a structure that can last a long time (maybe forever) but one which will still respect my wishes and give me some of the benefits of control that I had before. Essentially, the idea is to keep the benefits of ownership, but lose the problems of ownership. At DBS Private Bank, we regard wealth preservation and a robust succession structure as the heart of our client relationship. We are seeing increasing demand for our services from the Middle East and Europe. More and more clients are moving their wealth to Asia and dealing with what, until now, may have been unfamiliar tax and legal regimes. We encourage clients to start with a wealth structuring discussion which helps to create a lasting roadmap for the rest of their wealth management discussion. Whatever your current family situation, the thought process around succession is one which can be very helpful, and can bring great peace of mind. The most important thing is to start. About 40 per cent of wealthy families never do. The writer is head of International Clients and Wealth Structuring, DBS Private Bank Source: Business Times Central banks will have to 'push the string' further Business Times: Thu, Jul 26 THE recent rash of interest rate cuts by central banks in Europe, China and the United Kingdom suggest a degree of concern is setting in about the slower rate of economic growth in the second quarter of 2012. Despite this, stock markets around the world have been remarkably upbeat since mid-June 2012, perhaps anticipating another round of strong profit reports in the July 2012 reporting season for corporate earnings. We expect that global economic growth will resume a mild improvement in the third quarter of 2012 in line with similar seasonal recoveries in the preceding three years. A likely announcement of further quantitative easing by the United States Federal Reserve (QE3) later this year will also boost growth expectations. However, concerns about the political impasse in the US over resolution of the looming cuts to government borrowing and significantly higher taxes will prevent a sustained rebound in risk-asset markets. Eurozone leaders yet again pulled the regional growth outlook back from the abyss to place markets in a risk-on mode by late June 2012. Investors reacted positively to initial progress on creating a eurozone banking union. While this can be seen as a further step towards a more cohesive economic and monetary union and a critical condition for solving the current crisis, the more pressing hurdle will be getting countries to relinquish sovereignty over their banking systems and boosting the size of the European Stability Mechanism (ESM). These measures taken together break the "negative feedback loop" between the separate issues of European sovereign over-indebtedness and looming insolvency of the euro area banking system. Hence, we could see optimism returning to financial markets in July and August. We are, therefore, increasing our tactical asset allocation exposure to selected equities and high-yield bonds and reducing our holdings of defensive US treasuries. While economic data from the US and China will continue to be downbeat, we would "buy the dips" to acquire risk assets on cheap valuations. This strategy is predicated on expectations that the US and China central banks will announce strong monetary stimuli late in Q3 2012 which will fuel more risk-on sentiment in markets at the end of 2012. The good news from the US is that after several years of stagnation, the US housing sector is finally showing some signs of life. The slow pace of home construction in recent years has resulted in a very low inventory of new homes for sale. A modest upturn in new home sales since last summer has prompted home builders to gradually increase the construction of new single-family homes. We may be at the start of a slow but steady process whereby the wealth effects of recovering home prices encourage US consumers to spend more, which will ultimately lift the global economy. Also, the recent rapid fall in commodity prices will help to lift the purchasing power of consumers and restore confidence among firms. At the margin, it also provides some room for further policy easing should global growth sag more rapidly than expected. From a fundamental perspective, valuations are attractive, corporate earnings remain solid and technical indicators suggest that markets may be poised for the next "risk-on" phase for the next few months. What will have a bigger impact, though, in the next three to six months will be the implementation of large fiscal spending projects in major emerging markets. Brazil and China have targeted higher state spending in sectors as diverse as direct consumer spending subsidies on purchases of durable goods, healthcare and housing. China's economy will also respond more readily to further expected cuts in bank reserve ratios which are at historic high levels. Thus, we expect that the cyclical trough for the growth of China's economy will likely take place around mid-year, to be followed by a modest recovery taking growth back to over 8.5 per cent in H212 once fiscal and monetary stimuli start filtering through. Along with the People's Bank of China (PBOC), central banks in Brazil, Australia, India and Vietnam have announced rate cuts this year. These moves signal a start to more monetary accommodation by emerging market (EM) central banks in the months to come. This is likely to prove a significant departure from the tightening stance of monetary policy in these markets since 2010. The considerable impact these coordinated monetary easing moves will have on global growth is currently being under-estimated by markets, we think. Also at play are structural shifts in the flow of global savings which will boost growth in emerging markets, especially in the South-east Asian region. Consequent to the March 2011 tsunami, evidence has mounted of a surge in Japanese foreign direct investment into selected emerging markets in South-east Asia and Latin America. This factor has also lifted industrial growth across these regions in a manner similar to the last time Japanese firms looked offshore in the 1990s after the onshore Japan property and equity market commenced their decade-long decline. Expectations of further aggressive interest rate cuts in emerging markets should offer support to EM bonds and equities during the current risk-on phase in markets. Asian high-grade bonds offer good value compared to comparable high-grade bonds elsewhere. We continue to advocate a thematic approach for investing in equities, bonds, real estate and alternative investments with specific focus on: Asean high economic growth; US economic recovery in the property, consumer durables and shale-oil and gas sectors; Emerging market consumer spending; High-dividend equities and high-yield bonds; Wireless technology linked to social networking; Longer-term inflationary concerns linked to excess money creation. A final note on currencies: the standard pattern over the last three years has been for the major tradeable currencies to fluctuate in fairly wide, albeit, predictable, bands. The risk-on, risk-off pattern of market behaviour has been reflected in strength for the US dollar (along with the pegged Hong Kong dollar) and the Japan yen during periods of risk-off market sentiment, and vice versa during periods of risk-on. It is, therefore, intriguing that the risk-on sentiment in equity markets and high-yield emerging bond markets has not spilt over as yet into the euro and the pound sterling crosses. Nor have most Asian currencies strengthened against the greenback as much as the Australian dollar has in late June 2012. It would appear that euro and pound sterling weakness could be attributed to rate cuts by the respective euro area and UK central banks in July 2012, which were anticipated. We think the US dollar will eventually give up some of its gains later in August/September 2012 when the announcement of QE3 by the US Fed becomes likely. In Asia, on the other hand, there appears to be a conscious policy by most central banks to keep their currencies mildly under-valued against the greenback to stimulate exports to the important eurozone area and US markets. Even the governor of the PBOC has pointed out that he thinks the renminbi has reached "equilibrium" against the greenback and the renminbi has weakened slightly against the US dollar in recent months. It is, therefore, likely that the Australian dollar sticks out as the main beneficiary currency of risk-on. This is partly due to Australia's structural strengths of a highly competitive export mining sector and low debt-to-GDP ratio, along with a rapidly growing population from a low base. It also benefits from offering investors the highest yielding high-grade sovereign and corporate bonds anywhere. The writer is managing director and head of Investment Strategy for Asia, HSBC Private Bank Source: Business Time