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24-11-2010, 08:04 AM
An article by Carmen Lee.
Business Times - 24 Nov 2010
An eye on equities
Equities have proven to be one of the best asset classes over a long period of time.
By Carmen Lee
INTEREST in equities has remained strong in Asia since the start of the year with the Straits Times Index (STI) gaining some 10 per cent so far this year. At the current level of around 3,200 points, the index is just some 16 per cent shy of the recent high of 3,831 before the financial crisis in 2007 and up 120 per cent from the recent low of 1,455 during the trough of the financial crisis in March 2009.
Equities have proven to be one of the best asset classes over a long period of time. A look at the Dow Jones Industrial Average in the US, which has a significantly longer history, shows that it has risen by an average of 5 per cent a year since 1900. In Singapore, the STI has gained an average of 4 per cent a year in the past 10 years, despite the volatility of the financial crisis.
Recently, with the influx of liquidity into the market, partly from the quantitative easing in the US, equities have also benefited, although the bulk appears to have gone into emerging markets, as shown by the 143 per cent gain for the MSCI Emerging Market index since the low in March 2009 versus a gain of only 84 per cent for the MSCI World Index.
Interest rates have stayed low for a long while. The US Federal Reserve has kept its policy interest rate target at 0-0.25 per cent since December 2008 and indications are that rates are likely to remain low. A low interest rate environment tends to favour risky asset classes such as equities and property.
Besides the potential for capital gains, a decent dividend payout also makes equities an appealing investment.
In Singapore, the STI component stocks typically provide an annual dividend yield of about 3-3.5 per cent, higher than the interest earned on fixed deposits and savings accounts. Assuming a yearly capital gain of 4 per cent and an annual dividend payout of 3 per cent, this works out to a payout of some 7 per cent a year.
Before buying into equities, it is essential to understand one's investment criteria, timeframe and risk appetite. These factors will help one to better understand what type of products to invest in.
A conservative investor with a low appetite for risky investments should stick to buying blue-chip stocks with proven management and profitability records. These stocks tend to have less volatility and generally offer stable core earnings.
Stocks in the telecommunications sector are a good example. Apart from stable core earnings, most also offer very decent dividend yields. Such stocks are also generally known as defensive stocks, largely because when equity markets are in broad decline, the percentage falls in their share prices are smaller compared to the broader market due to the stability of the companies' core earnings.
Real estate investment trusts (Reits) have been in the Singapore market since 2002, starting with the listing of CapitaMall Trust. Today, there are 24 Reits listed here and more are likely to enter the market in the coming months. Reits are classified into several categories, including office, retail, industrial, healthcare and hospitality. The office Reits include Suntec Reit, CapitaCommercial Trust, K-Reit Asia and Frasers Commercial Trust.
There are more Reits in the industrial category, the biggest being Ascendas Reit and Mapletree Industrial Trust. The others are Mapletree Logistics Trust, Cambridge Industrial Trust, AIMS AMP Cap Industrial Reit, and Cache Logistics Trust.
The retail Reits include CapitaMall Trust, Starhill Global Reit, Frasers Centrepoint Trust and Suntec Reit.
Reits are currently offering distribution yields of about 3-9 per cent a year, with an average yield of 6.3 per cent. Retail Reits' yields are at an average of 6.2 per cent, while office Reits' average yield is around 5.1 per cent. Industrial Reits traditionally offer higher yields and the current average yield is about 7.1 per cent. Healthcare Reits offer about 6.2 per cent a year, while hospitality Reits are paying some 5.3 per cent.
Key prospects
Reits, with more assured yearly payouts than ordinary stocks, tend to also form part of the portfolio of an investor, as they provide stable recurrent income. (Reits must pay out at least 90 per cent of their distributable income to unitholders, in order to enjoy tax transparency - that is, to be exempted from paying corporate tax on the portion of income they distribute.)
While blue chips and Reits tend to form part of core stock holdings, sector- and stock-picking strategies are equally important for the selection of equities that aren't blue chips.
When selecting a sector, there are several key things to look out for. First, identify the key prospects and threats in the industry. If the prospects far outweigh the threats, then look at the individual companies within the industry. Look for companies with sustainable business models, that perform well not only during industry peaks, but preferably also manage to emerge relatively unscathed from the troughs. They should also have a good and committed management team with a low turnover of key managers.
Other crucial financial factors include a company's earnings trend and history, its dividend policy and the amount of debt it has. Some companies have a stipulated yearly dividend policy; others, especially high-growth or cash-strapped companies, tend to have no dividend policy.
High-growth companies tend to have limited or no dividend payout, as such companies are in the growth phase and they need to retain funds to expand their business. In addition, valuations for growth companies tend to be higher, as investors reward such firms by paying more for their shares in anticipation of increased earnings in future.
Recently, there has been a spate of takeovers or acquisitions related to the medical sector. This is deemed to be a high-growth sector, especially with the influx of medical tourists and Singapore's reputation for high-quality medical care. As such, valuations are high for this sector. The high-profile tussle for Parkway Holdings was one such example and the recent offer of $1.75 per share for Thomson Medical Centre - a premium of 62 per cent over its last-traded price - is another example.
As such, the other medical-related companies have also benefited from the spillover of positive sentiment and have similarly rallied. Mergers and acquisitions happen for various reasons. In the medical sector, the motivation is to gain entry into a high-growth sector. In the case of the ongoing high-profile merger between the Singapore Exchange and the Australian Securities Exchange, there are cost benefits for both entities, which have been operating in mature markets; the merger is a strategy to ward off competition from other bourses and to enjoy reduced operating costs.
Secondary listings
Secondary listings have also gained in popularity in recent months, especially in North Asian markets such as Hong Kong and Taiwan. Valuations vary across different markets and some companies, especially those with a presence in North Asia, that pursued a secondary listing there were able to tap new investors and funds in these markets, as well as increase their corporate presence there, allowing them to garner more orders.
Exchange-traded funds (ETFs) have also gained in popularity in this region. Some of the more frequently traded ETFs in the market include iShares MSCI India and StreetTracks STI.
These funds generally track indices such as the STI and MSCI. ETFs allow an investor to participate in the price movements of the underlying stocks of the respective indices. These are traded on the exchange like most listed equities, but offer access to a wide range of asset classes. Currently, the ETFs listed in Singapore are broadly classified under equities, commodities, fixed income and money market. The broadest range of ETFs is available under the equities category, and these are segregated into different countries, such as Brazil, China, Singapore and Malaysia. ETFs offer easy access to another market, especially if an investor wants to invest in that market, but is unfamiliar with which sectors or stocks to invest in.
The author is head of research at OCBC Investment Research
Business Times - 24 Nov 2010
An eye on equities
Equities have proven to be one of the best asset classes over a long period of time.
By Carmen Lee
INTEREST in equities has remained strong in Asia since the start of the year with the Straits Times Index (STI) gaining some 10 per cent so far this year. At the current level of around 3,200 points, the index is just some 16 per cent shy of the recent high of 3,831 before the financial crisis in 2007 and up 120 per cent from the recent low of 1,455 during the trough of the financial crisis in March 2009.
Equities have proven to be one of the best asset classes over a long period of time. A look at the Dow Jones Industrial Average in the US, which has a significantly longer history, shows that it has risen by an average of 5 per cent a year since 1900. In Singapore, the STI has gained an average of 4 per cent a year in the past 10 years, despite the volatility of the financial crisis.
Recently, with the influx of liquidity into the market, partly from the quantitative easing in the US, equities have also benefited, although the bulk appears to have gone into emerging markets, as shown by the 143 per cent gain for the MSCI Emerging Market index since the low in March 2009 versus a gain of only 84 per cent for the MSCI World Index.
Interest rates have stayed low for a long while. The US Federal Reserve has kept its policy interest rate target at 0-0.25 per cent since December 2008 and indications are that rates are likely to remain low. A low interest rate environment tends to favour risky asset classes such as equities and property.
Besides the potential for capital gains, a decent dividend payout also makes equities an appealing investment.
In Singapore, the STI component stocks typically provide an annual dividend yield of about 3-3.5 per cent, higher than the interest earned on fixed deposits and savings accounts. Assuming a yearly capital gain of 4 per cent and an annual dividend payout of 3 per cent, this works out to a payout of some 7 per cent a year.
Before buying into equities, it is essential to understand one's investment criteria, timeframe and risk appetite. These factors will help one to better understand what type of products to invest in.
A conservative investor with a low appetite for risky investments should stick to buying blue-chip stocks with proven management and profitability records. These stocks tend to have less volatility and generally offer stable core earnings.
Stocks in the telecommunications sector are a good example. Apart from stable core earnings, most also offer very decent dividend yields. Such stocks are also generally known as defensive stocks, largely because when equity markets are in broad decline, the percentage falls in their share prices are smaller compared to the broader market due to the stability of the companies' core earnings.
Real estate investment trusts (Reits) have been in the Singapore market since 2002, starting with the listing of CapitaMall Trust. Today, there are 24 Reits listed here and more are likely to enter the market in the coming months. Reits are classified into several categories, including office, retail, industrial, healthcare and hospitality. The office Reits include Suntec Reit, CapitaCommercial Trust, K-Reit Asia and Frasers Commercial Trust.
There are more Reits in the industrial category, the biggest being Ascendas Reit and Mapletree Industrial Trust. The others are Mapletree Logistics Trust, Cambridge Industrial Trust, AIMS AMP Cap Industrial Reit, and Cache Logistics Trust.
The retail Reits include CapitaMall Trust, Starhill Global Reit, Frasers Centrepoint Trust and Suntec Reit.
Reits are currently offering distribution yields of about 3-9 per cent a year, with an average yield of 6.3 per cent. Retail Reits' yields are at an average of 6.2 per cent, while office Reits' average yield is around 5.1 per cent. Industrial Reits traditionally offer higher yields and the current average yield is about 7.1 per cent. Healthcare Reits offer about 6.2 per cent a year, while hospitality Reits are paying some 5.3 per cent.
Key prospects
Reits, with more assured yearly payouts than ordinary stocks, tend to also form part of the portfolio of an investor, as they provide stable recurrent income. (Reits must pay out at least 90 per cent of their distributable income to unitholders, in order to enjoy tax transparency - that is, to be exempted from paying corporate tax on the portion of income they distribute.)
While blue chips and Reits tend to form part of core stock holdings, sector- and stock-picking strategies are equally important for the selection of equities that aren't blue chips.
When selecting a sector, there are several key things to look out for. First, identify the key prospects and threats in the industry. If the prospects far outweigh the threats, then look at the individual companies within the industry. Look for companies with sustainable business models, that perform well not only during industry peaks, but preferably also manage to emerge relatively unscathed from the troughs. They should also have a good and committed management team with a low turnover of key managers.
Other crucial financial factors include a company's earnings trend and history, its dividend policy and the amount of debt it has. Some companies have a stipulated yearly dividend policy; others, especially high-growth or cash-strapped companies, tend to have no dividend policy.
High-growth companies tend to have limited or no dividend payout, as such companies are in the growth phase and they need to retain funds to expand their business. In addition, valuations for growth companies tend to be higher, as investors reward such firms by paying more for their shares in anticipation of increased earnings in future.
Recently, there has been a spate of takeovers or acquisitions related to the medical sector. This is deemed to be a high-growth sector, especially with the influx of medical tourists and Singapore's reputation for high-quality medical care. As such, valuations are high for this sector. The high-profile tussle for Parkway Holdings was one such example and the recent offer of $1.75 per share for Thomson Medical Centre - a premium of 62 per cent over its last-traded price - is another example.
As such, the other medical-related companies have also benefited from the spillover of positive sentiment and have similarly rallied. Mergers and acquisitions happen for various reasons. In the medical sector, the motivation is to gain entry into a high-growth sector. In the case of the ongoing high-profile merger between the Singapore Exchange and the Australian Securities Exchange, there are cost benefits for both entities, which have been operating in mature markets; the merger is a strategy to ward off competition from other bourses and to enjoy reduced operating costs.
Secondary listings
Secondary listings have also gained in popularity in recent months, especially in North Asian markets such as Hong Kong and Taiwan. Valuations vary across different markets and some companies, especially those with a presence in North Asia, that pursued a secondary listing there were able to tap new investors and funds in these markets, as well as increase their corporate presence there, allowing them to garner more orders.
Exchange-traded funds (ETFs) have also gained in popularity in this region. Some of the more frequently traded ETFs in the market include iShares MSCI India and StreetTracks STI.
These funds generally track indices such as the STI and MSCI. ETFs allow an investor to participate in the price movements of the underlying stocks of the respective indices. These are traded on the exchange like most listed equities, but offer access to a wide range of asset classes. Currently, the ETFs listed in Singapore are broadly classified under equities, commodities, fixed income and money market. The broadest range of ETFs is available under the equities category, and these are segregated into different countries, such as Brazil, China, Singapore and Malaysia. ETFs offer easy access to another market, especially if an investor wants to invest in that market, but is unfamiliar with which sectors or stocks to invest in.
The author is head of research at OCBC Investment Research
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
