What If Property Prices Don't Rise

There is a place where property prices do not really rise, and the economy is a very strong juggernaut in the global sphere. GERMANY! Can you imagine your spending power, can you imagine how much more money and options you have. Let's look at the benefits, which the Germans have been enjoying:

a) you do not have to put 1/3 of your earnings towards a fixed asset, which may also prompt many to over speculate, over leverage - in terms of houses as a savings and appreciating asset to hold onto, one can easily put a lot more into EPF (maybe 30% of earnings)
b) we would save ourselves from property booms and busts
c) almost everybody with a job will find decent housing
d) you will not be tempted to buy more than one or two properties, which may better allocate your resources
e) boom bust property cycles favour those with capital to play the game, its the small fries that get killed every time things go bad, while the big guns gain a lot more in booms - thus creating more and more income disparity as we go on and on and on
f) isn't that a bit socialistic, yes it is, then are we being anti capitalism, I guess so ... not everything about about capitalism result in the greater good, here we have to consider things for the common good as well

And yes, we would have a more deflated property developers' market, and things like Iskandar or Cyberjaya may make the commercial aspects a bit hard, but its food for thought.


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When Americans travel abroad, the culture shocks tend to be unpleasant. Robert Locke’s experience was different.  In buying a charming if rundown house in the picturesque German town of Goerlitz, he was surprised – very pleasantly – to find city officials second-guessing the deal. The price he had agreed was too high, they said, and in short order they forced the seller to reduce it by nearly one-third. The officials had the seller’s number because he had previously promised  to renovate the property and had failed to follow through.

As Locke, a retired historian, points out, the Goerlitz authorities’ attitude is a striking illustration of how differently the German economy works. Rather than keep their noses out of the economy, German officials glory in influencing market outcomes. While the Goerlitz authorities are probably exceptional in the degree to which they micromanage house prices, a fundamental principle of German economics is to keep housing costs stable and affordable.

It is hard to quarrel with the results. On figures cited in 2012 by the British housing consultant Colin Wiles, one-bedroom apartments in Berlin were then selling for as little as $55,000, and four-bedroom detached houses in the Rhineland for just $80,000. Broadly equivalent properties in New York City and Silicon Valley were selling for as much as ten times higher.

Although conventional wisdom in the English-speaking world holds that bureaucratic intervention in prices makes for subpar outcomes, the fact is that the German economy is by any standards one of the world’s most successful. Just how successful is apparent in, for instance, international trade. At $238 billion in 2012, Germany’s current account surplus was the world’s largest. On a per-capita basis it was nearly 15 times China’s and was achieved while German workers were paid some of the world’s highest wages. Meanwhile German GDP growth has been among the highest of major economies in the last ten years and unemployment has been among the lowest.

On Wiles’s figures, German house prices in 2012 represented a 10 percent decrease in real terms compared to thirty years ago. That is a particularly astounding performance compared to the UK, where real prices rose by more than 230 percent in the same period. (Wiles’s commentaries can be read here and here.)

A key to the story is that German municipal authorities consistently increase housing supply by releasing land for development on a regular basis. The ultimate driver is a  central government policy of providing financial support to municipalities based on an up-to-date and accurate count of the number of residents in each area.

The German system moreover is deliberately structured to encourage renting rather than owning. Tenants enjoy strong rights and, provided they pay their rent, are virtually immune from eviction and even from significant rent increases.

Meanwhile demand for owner occupation is curbed by German regulation. German banks, for instance, are rarely permitted to lend more than 80 percent of the value of a property, thus a would-be home buyer first needs to accumulate a deposit of at least 20 percent. To cap it all,ownership of a home is subject to a serious consumption tax, while landlords are encouraged by favorable tax treatment to maximize the availability of rental properties.

How does all this contribute to Germany’s economic growth? Locke, a prominent critic of America’s latter-day enthusiasm for doctrinaire free-market solutions and a professor emeritus at the University of Hawaii, notes that a key outcome is that Germany’s managed housing market helps smooth the availability of labor. And by virtually eliminating  bubbles, the German system minimizes the sort of misallocation of resources that is more or less unavoidable in the Anglo-American boom-bust cycle. That cycle is exacerbated by tax incentives which encourage citizens to view home ownership as an investment, resulting in much hoarding and underutilization of space.

In the  German system moreover,  house-builders  rarely accumulate the huge large land banks that are such a dangerous distraction for U.S. house-builders like Pulte Homes, D. R. Horton, Lennar, and Toll Brothers. German house-builders just focus on building good-quality homes cheaply, secure in the knowledge that additional land will become available at reasonable cost when needed.

Locke is the co-author, with J.C. Spender, of Confronting Managerialism: How the Business Elite and Their Schools Threw Our Lives Out of Balance, a book I highly recommend.

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It’s not end of the world at the Fragile Five

Despite all the doom and gloom surrounding capital-hungry Fragile Five countries, real money managers have not abandoned the ship at all.

Aberdeen Asset Management has overweight equity positions in Indonesia, India, Turkey and Brazil — that’s already 4 of the five countries that have come under market pressure because of their funding deficits.  The fund is also positive on Thailand and the Philippines.

Devan Kaloo, head of global emerging markets at Aberdeen, says these economies have well-run companies that are well positioned to adjust and enjoy slightly higher return on equity (ROE) than their developed counterparts. He says:

The current shakeout is forcing companies to focus on margins and cut costs, which would bring benefits in the long term. Corporates are more profitable than DM… If you are brave, Turkey has some fabulously run companies.

Even in Russia — where the rouble is possibly the next target of fast money speculators — there are well-run corporates, such as retail chain Magnit.

In Russia there is the next generation of business leaders coming up. People are creating businesses. Magnit has parallels with Walmart, rather than Baron Rothschild.

It’s widely known that some emerging companies have good fundamentals and that they are cheap. But it’s the currency moves that can wipe out any capital gains. However, Kaloo has zero currency hedges on his portfolio. Why is that?

Capital gains make up for FX weaknesses. We’ve gone through the Russian crisis, Asian crisis, TMT crisis and Argentine crisis without hedges… yet we still delivered positive returns. (Betting on where currencies go) is a sure way to madness.

Daniel Wood, emerging debt portfolio manager at BNP Paribas Investment Partners, has gone long Turkish lira, a day after the Turkish central bank delivered a surprise interest rate hike, in part because it was getting too expensive to bet against the high-yielding currency.

More than 10 percent of his portfolio is in Turkish bonds.

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Turbulence or Nosedive?

We’ve all been there on that rocky plane ride…clammy hands, heart beating rapidly, teeth clenched, body frozen, while firmly bracing the armrests with both appendages. The sky outside is dark and the interior fuselage rattles incessantly until….whhhhhssssshhh. Another quick jerking moment of turbulence has once again sucked the air out of your lungs and the blood from your heart. The rational part of your brain tries to assure you that this is normal choppy weather and will shortly transition to calm blue skies. The irrational and emotional, part of our brains  (see Lizard Brain) tells us the treacherous plane ride is on the cusp of plummeting into a nosedive with passengers’ last gasps saved for blood curdling screams before the inevitable fireball crash.

Well, we’re now beginning to experience some small turbulence in the financial markets, and at the center of the storm is a collapsing Argentinean peso and a perceived slowing in China. In the case of Argentina, there has been a century-long history of financial defaults and mismanagement (see great Scott Grannis overview). Currently, the Argentinean government has been painted into a corner due to the depletion of its foreign currency reserves and financial mismanagement, as evidenced by an inflation rate hitting a whopping 25% rate.

On the other hand, China has created its own set of worries in investors’ minds.  The flash Markit/HSBC Purchasing Managers’ Index (PMI) dropped to a level of 49.6 in January from 50.50 in December, which has investors concerned of a market crash. Adding fuel to the fear fire, Chinese government officials and banks have been trying to reverse excesses encountered in the country’s risky shadow banking system. While the size of Argentina’s economy may not be a drop in the bucket, the ultimate direction of the Chinese economy, which is almost 20x’s the size of Argentina’s, should be much more important to global investors.

At the end of the day, most of these mini-panics or crises (turbulence) are healthy for the overall financial system, as they create discipline and will eventually change irresponsible government behaviors. While Argentinean and Chinese issues dominate today’s headlines, these matters are not a whole lot different than what we have read about Greece, Ireland, Italy, Spain, Portugal, Cyprus, Turkey, and other negligent countries. As I’ve stated before, money goes where it’s treated best, and the stock, bond, and currency vigilantes ensure that this is the case by selling the assets associated with deadbeat countries. Price declines eventually catch the attention of politicians (remember the TARP vote failure of 2008?).

Is This the Beginning of the Crash?!

What goes up, must come down…right? That is the pervading sentiment I continually bump into when I speak to people on the street. Strategist Ed Yardeni did a great job of visually capturing the last six years of the stock market (below), which highlights the most recent bear market and subsequent major corrections. Noticeably absent in 2013 is any major decline. So, while many investors have been bracing for a major crash over the last five years, that scenario hasn’t happened yet. The S&P chart shows we appear to be due for a more painful blue (or red) period of decline in the not-too-distant future, but that is not necessarily the case. One would need only to thumb through the history books from 1990-1997 to see that investors lived through massive gains while avoiding any -10% correction – stocks skyrocketed +233% in 2,553 days. I’m not calling for that scenario, but I am just pointing out we don’t necessarily always live through -10% corrections annually.  

Even though we’ve begun to experience some turbulence after flying high in 2013, one should not panic. You may be better off watching the end of the airline movie before putting your head in between your legs in preparation for a nosedive.

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Earnings Coma: Digesting the Gains

Over the last five years, the stock market has been an all-you-can-eat buffet of gains for investors.  It has been almost two years since the spring of 2012 when the Arab Spring and potential exit of Greece from the EU caused a -10% correction in the S&P 500 index (see Series of Unfortunate Events). Indigestion of this 10% variety is typically on the menu and ordered at least once per year. With stocks up about +50% over the last two years, performance has tasted sweet. But even binging on your favorite entrée or dessert will eventually lead to a food coma. At that bloated point, a digestion phase is required before another meal of gains can be consumed.

So far investors haven’t been compelled to expel their meals quite yet, but it’s clear to me the rate of appreciation is not sustainable over the long-term. Could the incredible returns continue in the short-run during 2014? Certainly. As I’ve written before, the masses remain skeptical of the recovery/rally and any definitive acceleration in economic growth could spark the powder-keg of skeptics to come join the party (see Here Comes the Dumb Money). If and when that happens, I will be gladly there to systematically ring the register of profits I’ve consumed, by locking in gains and reallocating to less loved areas (i.e., go on a stock diet).

Q4 Appetizers Here, Main Course Not Yet

The 4^th quarter earnings appetizers have been served, evidenced by the 50-odd S&P 500 corporations that have reported their financial results, and thus far some Tums may be needed to relieve some heartburn. Although about half of those companies reporting have beat Wall Street estimates, 37% of the group have missed expectations, according to Thomson Reuters. It’s still early in the earnings season, but as of now, the ratio of companies beating Wall Street forecasts is below historical averages.

We can put a little meat on the earnings bone by highlighting the disappointing profit warnings and lackluster results from bellwether companies like United Parcel Service (UPS), Intel Corp (INTC), General Electric (GE), CSX Corp (CSX), and Royal Dutch Shell (RDSA), to name a few. Is it time to panic and run for the restroom (or exits)? Probably not.  About 90% of the S&P 500 companies still need to give their Q4 profitability state of the union. What’s more, another reason to not throw in the white towel yet is the global economic environment looks significantly better in areas like Europe, China, and other emerging markets.

Worth remembering, the stock market is a discounting mechanism. The market pays much more attention to the future versus the past. So, even if the early earnings read doesn’t look so great now, the fact that the S&P 500 is down less than -1% off of its all-time, record highs may be an indication of better things ahead.

Recipe for a Pullback?

If earnings continue to drag on in a disappointing fashion, and political brinkmanship materializes surrounding the debt ceiling, it could easily be enough to spark some profit-taking in stocks. While Sidoxia is finding no shortage of opportunities, it has become apparent some speculative pockets of euphoria have developed. Areas like social media and biotech are ripe for corrections.

While the gains over the last few years have been tantalizing, investors must be reminded to not overindulge. Carefully selecting stocks to chew and digest is a better strategy than recklessly binging on everything in the buffet line. There are plenty of healthy areas of the market to choose from, so it’s important to be discriminating…or your portfolio could end up in a coma.

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The power of Tony Fernandes's brand

On a holiday, I was watching CNBC Europe yesterday and what CNBC had was a 15 minutes interview with Tony Fernandes. They were not just talking about Airasia and Airasia X as well as the challenges that his airlines are facing but also QPR.

What strikes me about the interview with Tony was that, unlike some other interviews, CNBC Europe was pre-empting viewers (for some 2 hours) that Tony was to be part of the show for the day which made me stayed on to watch. Like I said, it ended up as only a 15 minutes interview - maybe less even.

Now - let's think it over - Airasia is not even a part of Europe nowadays. It does not fly to Europe anymore. He is part owner of QPR and QPR is not even a Premier League team now. But what makes CNBC pre-empting its viewers for some 2 hours not letting us know at what time the interview was supposed to happen? Tony Fernandes is a big brand himself even in Europe.

One may or may not support Airasia - due to several things that it made to its consumers - like charging for almost anything, but as a Malaysian ain't we proud that we have someone like him?

How do we leverage on his brand? How does Malaysia support him rather fight him? We embraced lesser stars aren't we? - Jimmy Choo (whom does not own the Jimmy Choo brand anymore) and Michelle Yeoh and her husband (not a Malaysian), even.

I have been on local flights every week nowadays - and the thing that strikes me is that airfares price competition has gone to quite ridiculous stage. I like it, as it allows me to buy cheap flight tickets, but I also know that it probably will not last - got to enjoy it while I can.

While I know Airasia is one of the brands controlled by Malaysians and made it big by Malaysians is facing lots of challenges from the likes of Malindo and MAS - we know that the current situation will not last. We should not give in to Tony Fernandez and his group with a silver platter. He is a furious fighter. What Airasia has is scale, speed and sourcing. If Malaysia does not turn out well for Airasia, it has the ability to move beyond Malaysia. Not MAS.

But we are using taxpayers money (for MAS especially) to fight on something which you know MAS will lose without the support of government's money. Malindo is facing the same thing. I do not know who owns the 51% of Malindo (except that it is NADI - and who is behind NADI?) and I like the price competition but not the way it is fought.

We are just fighting a war which all will lose. Consumers win for now - but somehow or rather it is very short term. What we need is a major revamp in terms of cost structure for MAS, not giving extra privilege to Malindo whom is allowed landing in Subang but not Airasia. Not the way the war is fought currently.

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Surprise winner in frontier debt last year

Which was the best performer in emerging bond markets last year?  The sector had a pretty torrid year overall, with sovereign dollar bonds finishing 2013 almost 7 percent in the red. But there were exceptions.

The best returns were to be had – hold your breath — in little-watched Belize, a member of JPMorgan’s NEXGEM frontier debt index. Someone who bought Belize debt at the start of last year would have been in the money, with gains of 50 percent, though the returns were in fact down to the restructuring of Belize debt early last year.

Second on the list was Argentina, despite court wranglings over hold-out funds from the country’s 2002 default.

Just as frontier stocks  outstripped emerging stocks in 2013 (Bulgaria was top dog in that index), the NEXGEM index as a whole outperformed emerging debt, enjoying returns of 5 percent last year.  Interestingly, the top 10 also included Ecuador, Jamaica and Cote d’Ivoire, three other countries that have been in default in the recent past.  

According to JP Morgan analysts:

NEXGEM issuers are likely to continue to come to market, with 16 countries forecast to issue a total of $14.8 billion in 2014, which would be a 40 percent increase from 2013

Frontier markets broker Exotix has Pakistan, high on the returns list for last year, as one of its top five picks in a note out this week, after investors cheered democratic elections last year:

So far, so good for the new government, elected on a platform of improving the business environment. Economic reforms have a long way to go, and we see further upside for the bonds.

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Rights, warrants, buybacks, dividend 101

Seriously, what does one expect from stocks investments? Capital appreciation, dividends, excitement - win or lose, learning experience?

Investment is a serious game. Unless, you are into it as a replacement for your weekly casino frequency, one should study the behaviour of the management, owner, company besides their financials which is equally important.

In studying the company's management, one should look at the behavioral trend of the company with their financials, which is why how these companies do their capital repayment, dividends, rights, warrants are important.

Think of companies as like running a family's expenses - whenever you need money, you borrow or ask from other members of family maybe in the form of capital investment. If you have more than enough, you will give more to your siblings, parents. You do not take in more debt if you do not need them. You do not mislead your family members that you need more money when you do not need them in order for you to buy a bigger car or a bigger house.

Similarly, rights, warrants, dividends and even buybacks are the same conceptually.

Dividends - Dividends are important when the company feels that it has more than enough money to be used for a period say more than a year and it is willing to share with you, the shareholders the extras beyond its need for operations. If it does not have enough or feel that it needs to use the money for further expansion or in anticipation of future needs, it should not be ditching out more than it should. If you follow my blog, I am wary of companies that issues dividends and yet over the short term, requesting for more money through rights.

Of course dividend is important to most shareholders, as this is a gesture that the company is showing to its shareholders that it is willing to share its extra cashflows - which is why sometimes, dividend policy is useful.

Equally useful to the shareholders is share buybacks. The flipside of buybacks is only that when the management or controlling shareholder uses it for their advantage. It is when they uses the company's financial resources to buy the shares from the market but at the same time, selling their own shares. Buybacks are good when it is used as a tool to provide support for its share price especially during high volatility and even more so, when the prices of the shares are undervalued. One should not underestimate the confidence that the management can create towards its share price especially during high volatility by doing buybacks.

On the other side to sharing their additional funds through dividends or capital repayment, is rights issue. Rights issue is when the company is asking you for more money due to their needs. As a shareholder, we always entrust the controlling shareholders to manage the money carefully - which is why one would probably wonder why I am writing an article on a company which I do not intend to invest in anyway - on its rights issuance.

In my mind, that company does not need the fund - it uses it for its controlling shareholders benefits - which you, as shareholder or potential shareholder have to be careful of. You do not give money to one who will probably misuse your money. Worse still in that case, it is not beneficial to the shareholder to not pick up the rights and it is not beneficial either to pick up the rights as the money may not be used in the right manner. The shareholders of Bright are caught in between a rock and a hard place.

Almost all companies need to reinvest or do investment. Anyone who underinvest, may lose out in the future as competition will always take opportunity on any conservative companies that do not take the more aggressive or continuous investment approach. in this case, rights are not always wrong. On that note, quite a lot of companies - Gamuda, IJM, WCT etc.- that do rights in their early days would go on to be successful as they have acted upon the rights correctly and carefully and by sharing that piece of investment needs with their shareholders. We as shareholders, can only hope their decisions are the right one.

What about warrants? Warrant is an option to pick up more shares of the company in the future. As for the company, it is a way for the company to raise more funds in the future. Warrants should not be used as a tool for the controlling holders to cash out, as that action is almost like misleading the investors - many of whom may be ignorant. Worse still if one is to buy the warrants from the market, and they end up out of the money. The warrants are worthless.

And even if it is in the money, one should think twice of exercising the warrant as putting more money into the management that you do not trust, is something which you should not do.

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