Monday, February 23, 2015

The Year of Goat can Make or Break You!

Happy Lunar New Year! May the Lord my God bless you in this coming year.

Hi Guys, it has been a long while since I last posted. I have been so busy traveling for my new project! In fact, I have been doing at least a trip per week. My mileage has been through the roof. I apologize for the lack of updates but I feel that if I have nothing to opine then I should not say anything. Of course, I am writing this as I want to share with you what I think of the markets.

First a quick recap. As I had shared with you over the last couple of years, the Singapore's property market is more than adequately supplied and demand has waned due to restrictions of immigration policy. The government stepped in with several rounds of cooling measures and the latest measures really capped prices as lending has been effectively curbed.  All these factors have caused both prices and rental rates to drop. Prices in most districts have fallen by 20 plus per cent as I had predicted 2 years ago. The only reason why prices have not fallen more is because liquidity is still flush and holding costs are still low given the low interest rate environment. However, do not hold your breath for a recovery. In fact, we just might be headed for the perfect storm.

I have put off my earlier opinion of significant interest rate increases from the second half of this year to next year. This is because I did not see oil prices plunging by this extent in so short a period of time. Many do not seem to appreciate the impact of plunging oil prices. For the last few years, the Middle Eastern countries have had money gushing from the ground as Brent crude prices went from US$ 20 to as high as US$120. This transfer of wealth effectively eroded the oil importing nations GDP growth by at least a few percentage points. With oil at this level, inflation will be effectively curbed, taking the pressure from an already dovish Federal Reserve to raise rates. However, we are just kicking the can down the road as rates will have to go up to pay for the excesses of the last few years.

On the local front, the government will be announcing a super sweet budget as they are keen to placate the population in time for the next general elections. They are also banking on the SG 50 celebrations to create the feel good factor to ensure they stay in power. However, we also have a very pragmatic government who will reign in such goodies in following years ie from 2016 onwards. Many of you may not be aware but according to the Ministry of National Development, there are close to 200000 units of housing both public and private being completed from now till 2018. Thats 200,000 units of new housing for a total population of over 5 million. There will be massive indigestion, and if you do not want to be the last in the musical chairs.

What's my analysis? The perfect storm will be occurring in 2016, somewhere in the 3rd quarter and what we are seeing now is just the pre cursor. What you do now will set yourself up for heaven or hell in your latter years. Which segment will be hit you might ask? All is my answer. Many analysts thinks that landed and the higher end condos can weather the storm but I beg to differ. In the boom years, everyone who have done well and bought big homes are in the oil and gas, banking or real estate sectors. Well, for those who bought cheap or hung on from their ancestors estates and thus there is no leverage, there is no cause for worry. However, I am seeing more mortgagee auction sales of landed properties as those in these sectors reconsider their financial positions. The oil and gas sector issued hundreds of millions of unrated bonds to private banking high net worth clients. All of such individuals will be a little shaken after the Kaisa incident.

However, for the rest of the world, please focus on yields. I am glad I practice what I preach and divested my residential portfolio. Right now, I am focused on my commercial portfolio and holding on to real yield assets that can withstand at least a 200 basis points increase in interest rates.You might want to consider the same. Sorry to be a harbinger of good news or bad news, depending on how you take it. I feel that this is the shape of things to come.

Your Friend

Andy Ong