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23-10-2011, 06:18 AM
The Straits Times
Oct 23, 2011
SMALL CHANGE
Save your savings
With inflation up and interest down, look for alternative places to park your money
By Goh Eng Yeow
These are tough times for savers.
With inflation running at well over 5 per cent, they will need to save more, not less, if they want to enjoy a comfortable retirement.
Yet, there are few incentives to save. This month, the three local banks halved the already paltry rates they pay out to depositors to a mere 0.05 per cent.
In other words, if you are a retiree with $100,000 in savings stashed away in the bank, you will be earning only $50 in interest a year - a sum that will hardly cover one day of your living expenses.
Meanwhile, you still have to worry about the corrosive effect of inflation. If inflation runs at the rate of 5 per cent, the real value of your $100,000 savings may be eroded to $95,000 after 12 months.
But if you try to take more risk on your nest-egg, you may end up with not just a disappointing return but possibly a devastating blow to your wealth if you bet on the wrong investment.
At a time when we are bombarded daily by gloomy headlines about the debt crises in Europe and the United States, as well as the possibility of another recession, searching for safe investment havens has never been more difficult.
Nevertheless, how you make your investment choices should depend on how you think the economic crises now brewing far beyond our shores will pan out.
Runaway inflation
One possibility is that the US and Europe will try to inflate their debts away by resorting to ever-larger doses of quantitative easing. In layman's terms, this is like printing money, as a country's central bank issues huge sums of freshly minted money to pay the debt issued by its government.
In doing so, the central bank effectively devalues the currency since there is much more of it in circulation. This sparks inflation, making it more costly to buy essential foodstuff and other necessities.
And when a gigantic economy such as the US indulged in quantitative easing - as it did in the past two years - the impact was felt across the globe. The value of the US dollar plummeted against currencies such as the Singdollar, while global inflation surged, as the prices of commodities such as gold and crude oil, which were valued in US dollars, escalated.
Against this backdrop of rising inflation, it is not surprising to find investors here turning to investments such as residential properties as a hedge against inflation.
Their reasoning is simple: In a small crowded island like Singapore where the land supply is limited, any rise in inflation will only cause property prices to go up too.
Coupled with the ultra-low interest rates charged by banks for home mortgages, it looks like a sure-win strategy for investors who bet on properties.
Financial collapse
But this sweet dream can easily turn into a nightmare if the European debt crisis spirals out of control, and indebted nations such as Greece refuse to service their loans, as they face widespread political unrest.
The big worry is that this may cause a big European lender to fail, as banks again freeze up their credit lines and stop lending to each other, as they did in the aftermath of the collapse of US investment bank Lehman Brothers three years ago.
In that case, all bets are off, with all assets from gold to real properties likely to plunge in value, as the world is hit by a severe credit crunch.
Fortunately, this is one scenario which may not materialise, since there is no reason to believe that European policy-makers will be so dumb as to allow it to happen.
Japan-style stagnation
But there is another scenario which investors, especially those bullish on the property market, will have to beware of - and that is Japan-style stagnation in the West.
Some traders believe that the US and Europe will somehow manage to muddle through their debt crises, but find themselves trapped in sluggish economic growth for several years after that.
This is entirely plausible, given the persistently high unemployment rate in the US despite all the efforts to bring it down, and the austerity which Europeans will have to live with to get their finances in shape.
But a Japan-style stagnation is like the kiss of death for the equities and property market. In the past 20 years, Japan's Nikkei-225 Index has plunged by 80 per cent in value, while Japanese property prices have fallen to one-tenth of their peak levels.
In such a scenario, it is best to hold on to your cash and invest in high-yielding bonds to protect yourself from falling asset values.
Recession talks overblown
Finally, there is the hope that Europe will be able to fix its debt crisis and that talks of a global recession are overblown.
Despite all the gloom and doom stalking the market, recent data, such as the US job numbers and the better-than-expected earnings reported by US lenders, indicates that the United States is not heading towards a severe recession.
Better still, China - the regional engine of growth - has shrugged off earlier fears of a hard landing, as it powered ahead with third-quarter economic growth of 9.1 per cent.
These positive tidings suggest that it may be time to start picking up badly battered blue chips whose values have fallen about 20 per cent in the past two months.
Currently, the benchmark Straits Times Index (STI) - at 2,694 - is trading at around the same level as it did when the new millennium kicked off 11 years ago. But its component stocks - which include DBS Group Holdings, OCBC Bank, United Overseas Bank and SingTel - are far bigger and stronger now.
It leaves us to conclude that as the STI falls back to its 2,600 landmark support, its component stocks are priced more cheaply than a decade ago, and therefore offer genuine good value for investors.
engyeow@sph.com.sg
Oct 23, 2011
SMALL CHANGE
Save your savings
With inflation up and interest down, look for alternative places to park your money
By Goh Eng Yeow
These are tough times for savers.
With inflation running at well over 5 per cent, they will need to save more, not less, if they want to enjoy a comfortable retirement.
Yet, there are few incentives to save. This month, the three local banks halved the already paltry rates they pay out to depositors to a mere 0.05 per cent.
In other words, if you are a retiree with $100,000 in savings stashed away in the bank, you will be earning only $50 in interest a year - a sum that will hardly cover one day of your living expenses.
Meanwhile, you still have to worry about the corrosive effect of inflation. If inflation runs at the rate of 5 per cent, the real value of your $100,000 savings may be eroded to $95,000 after 12 months.
But if you try to take more risk on your nest-egg, you may end up with not just a disappointing return but possibly a devastating blow to your wealth if you bet on the wrong investment.
At a time when we are bombarded daily by gloomy headlines about the debt crises in Europe and the United States, as well as the possibility of another recession, searching for safe investment havens has never been more difficult.
Nevertheless, how you make your investment choices should depend on how you think the economic crises now brewing far beyond our shores will pan out.
Runaway inflation
One possibility is that the US and Europe will try to inflate their debts away by resorting to ever-larger doses of quantitative easing. In layman's terms, this is like printing money, as a country's central bank issues huge sums of freshly minted money to pay the debt issued by its government.
In doing so, the central bank effectively devalues the currency since there is much more of it in circulation. This sparks inflation, making it more costly to buy essential foodstuff and other necessities.
And when a gigantic economy such as the US indulged in quantitative easing - as it did in the past two years - the impact was felt across the globe. The value of the US dollar plummeted against currencies such as the Singdollar, while global inflation surged, as the prices of commodities such as gold and crude oil, which were valued in US dollars, escalated.
Against this backdrop of rising inflation, it is not surprising to find investors here turning to investments such as residential properties as a hedge against inflation.
Their reasoning is simple: In a small crowded island like Singapore where the land supply is limited, any rise in inflation will only cause property prices to go up too.
Coupled with the ultra-low interest rates charged by banks for home mortgages, it looks like a sure-win strategy for investors who bet on properties.
Financial collapse
But this sweet dream can easily turn into a nightmare if the European debt crisis spirals out of control, and indebted nations such as Greece refuse to service their loans, as they face widespread political unrest.
The big worry is that this may cause a big European lender to fail, as banks again freeze up their credit lines and stop lending to each other, as they did in the aftermath of the collapse of US investment bank Lehman Brothers three years ago.
In that case, all bets are off, with all assets from gold to real properties likely to plunge in value, as the world is hit by a severe credit crunch.
Fortunately, this is one scenario which may not materialise, since there is no reason to believe that European policy-makers will be so dumb as to allow it to happen.
Japan-style stagnation
But there is another scenario which investors, especially those bullish on the property market, will have to beware of - and that is Japan-style stagnation in the West.
Some traders believe that the US and Europe will somehow manage to muddle through their debt crises, but find themselves trapped in sluggish economic growth for several years after that.
This is entirely plausible, given the persistently high unemployment rate in the US despite all the efforts to bring it down, and the austerity which Europeans will have to live with to get their finances in shape.
But a Japan-style stagnation is like the kiss of death for the equities and property market. In the past 20 years, Japan's Nikkei-225 Index has plunged by 80 per cent in value, while Japanese property prices have fallen to one-tenth of their peak levels.
In such a scenario, it is best to hold on to your cash and invest in high-yielding bonds to protect yourself from falling asset values.
Recession talks overblown
Finally, there is the hope that Europe will be able to fix its debt crisis and that talks of a global recession are overblown.
Despite all the gloom and doom stalking the market, recent data, such as the US job numbers and the better-than-expected earnings reported by US lenders, indicates that the United States is not heading towards a severe recession.
Better still, China - the regional engine of growth - has shrugged off earlier fears of a hard landing, as it powered ahead with third-quarter economic growth of 9.1 per cent.
These positive tidings suggest that it may be time to start picking up badly battered blue chips whose values have fallen about 20 per cent in the past two months.
Currently, the benchmark Straits Times Index (STI) - at 2,694 - is trading at around the same level as it did when the new millennium kicked off 11 years ago. But its component stocks - which include DBS Group Holdings, OCBC Bank, United Overseas Bank and SingTel - are far bigger and stronger now.
It leaves us to conclude that as the STI falls back to its 2,600 landmark support, its component stocks are priced more cheaply than a decade ago, and therefore offer genuine good value for investors.
engyeow@sph.com.sg
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/