Wednesday, June 30

BP: Short-sightedness of the stock market

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I'm sure that everyone is familiar with the oil company, BP even before the recent oil spill disaster in the Gulf of Mexico, which has been making the headlines beside the World Cup. The oil spill disaster has and will cause BP to pay billions in damages. With such a consequence, it is not surprising that the share price has taken a huge tumble from its recent peak of around $60 to its current price of around $28.



From a general point of view, without doing an in-depth analysis of the financials and business model of BP, I would say that the market is short-sighted with regards to the share price of this company. Why ? The main question for me will be, is the long term profitability of this BP being threatened ?

We don't have to look far back to see examples that are analogous to this. The SARS period that occurred in 2003 caused a decline in the stock market. This was because SARS represented a health threat worldwide. Companies that were affected by this includes those in hotels, tourism and aviation industries since people were very reluctant to travel and venture out due to the fear of catching SARS. On the other hand, there were companies who benefited from SARS and these companies are mainly in the healthcare and services segment. On hindsight, the market is rather short-sighted. This is because, all crises will eventually end although the time taken for the crises to end may be rather long. And if the crises only affects the companies temporarily but the long term profitability of these companies are not affected, the depressed stock prices of these companies may prove to be a bargain. As the SARS crisis ended, the stock market began to bounce back. Thus, those who managed to pick up bargains, benefited from the short-sightedness of the stock market.

Now given this example of the SARS period, do you think that the stock market is being too short-sighted on the long term profitability of BP ?

(The opinion expressed by the writer does not constitute an endorsement of the purchase or sale of the stock mentioned in the article. One should do a thorough research and analysis before deciding on any investment decisions)

Monday, June 7

Credit Card Debts

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I read with interest on the article titled "Younger Singaporeans biggest debt defaulters" posted on Channel NewsAsia. This article talks about percentage of default for the age group ranging from 21-29 years old has the highest rate of defaults among the other age groups.

This is the age group where most of them have just graduated and are heading to the working force. It is at this stage they suddenly have much more disposable income to spend on as compared to before thus they may not have experience in dealing with credit cards and doing budgeting. Besides, they may not be well informed in the area of personal finance and it is not a wonder that this group may be the most susceptible to the ills of credit cards usage. Here are some opinions of mine regarding the usage of credit cards.

1. Spend only what you have
As the title suggest, it means that one should not even own a credit card. Otherwise, one can stick to using a debit card instead, which means that one only spend within their means. Well, it may not be reasonably practical to refrain from using a credit card since nowadays, credit cards come with a lot of privileges and perks which may save you money such as discounts at restaurants and shops, reward points and other promotions. In that case, that will bring me to my next point.

2. Pay off all outstanding balance in full
The killer here is the exorbitant interest rates which cause many to default on their debts once they are unable to keep up with the interest payments. Generally, the interest rate is around 2% monthly or 24% yearly on the outstanding balance and that is very hefty. As such, make it a point to always pay off the outstanding balance and do not let the banks earn any interest at all.

In the event that you are not able to keep up your credit card debts and the outstanding balance is beginning to snowball, do not use another credit card to pay off the debts of another credit card. Try to seek help immediately from your loved ones or friends since frankly speaking, loans from them usually carry no interest. In this sense, you are changing your debtors from the banks to that of your loved ones, who are more likely to help you out.

Otherwise, you can give the Credit Counseling Singapore here. I believe they can work out a practical debt payment plan with the banks and can also try to negotiate for a lower interest rate, which will be helpful in solving your credit card debts.

Saturday, May 22

Leaving without a will

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I was looking at the implications of not doing a will and what will happen to the assets of the deceased if a will was not done when the deceased was still alive. A search on the internet threw up a legal act which I thought it will be pretty useful to put it up on this post and this legal act is known at the Intestate Succession Act.

Intestacy, as taken off Wikipedia here is the condition of the estate of a person who dies owning property greater than the sum of his enforceable debts and funeral expenses without having made a valid will or other binding declaration. In short, if the deceased still has assets left after and he did not make a will, he is known as dying intestate.

As for the act, I took it off the Attorney General's Chambers here, and the act is posted as follows. Do take note that this act is not applicable to the estate of any Muslim as seen below.
Short title.
1. This Act may be cited as the Intestate Succession Act.

Application.
2. Nothing in this Act shall apply to the estate of any Muslim or shall affect any rules of the Muslim law in respect of the distribution of the estate of any such person.

Interpretation.
3. In this Act —

"child" means a legitimate child and includes any child adopted by virtue of an order of court under any written law for the time being in force in Singapore, Malaysia or Brunei Darussalam;

"intestate" includes any person who leaves a will but dies intestate as to some beneficial interest in his property;

"issue" includes children and the descendants of deceased children.

Law regulating distribution.
4. —(1) The distribution of the movable property of a person deceased shall be regulated by the law of the country in which he was domiciled at the time of his death.

(2) The distribution of the immovable property of a person deceased shall be regulated by this Act wherever he may have been domiciled at the time of his death.

Property of an intestate to be distributed.
5. If a person dies intestate after the commencement of this Act, he being at the time of his death —

(a) domiciled in Singapore and possessed beneficially of property, whether movable or immovable, or both, situated in Singapore, or

(b) domiciled outside Singapore and possessed beneficially of immovable property situated in Singapore,

that property or the proceeds thereof, after payment thereout of the expenses of due administration as prescribed by the Probate and Administration Act shall be distributed among the persons entitled to succeed beneficially thereto.
Cap. 251.

Persons held to be similarly related to deceased.
6. For the purpose of distribution —

(a) there shall be no distinction between those who are related to a person deceased through his father and those who are related to him through his mother nor between those who were actually born in his lifetime and those who at the date of his death were only conceived in the womb but who have subsequently been born alive; and

(b) those related to a person deceased by the half blood shall rank immediately after those of the whole blood related to him in the same degree.

Rules for distribution.
7. In effecting such distribution the following rules shall be observed:

Rule 1
If an intestate dies leaving a surviving spouse, no issue and no parent, the spouse shall be entitled to the whole of the estate.

Rule 2
If an intestate dies leaving a surviving spouse and issue, the spouse shall be entitled to one-half of the estate.

Rule 3
Subject to the rights of the surviving spouse, if any, the estate (both as to the undistributed portion and the reversionary interest) of an intestate who leaves issue shall be distributed by equal portions per stirpes to and amongst the children of the person dying intestate and such persons as legally represent those children, in case any of those children be then dead.

Proviso No. (1) — The persons who legally represent the children of an intestate are their descendants and not their next-of-kin.

Proviso No. (2) — Descendants of the intestate to the remotest degree stand in the place of their parent or other ancestor, and take according to their stocks the share which he or she would have taken.

Rule 4
If an intestate dies leaving a surviving spouse and no issue but a parent or parents, the spouse shall be entitled to one-half of the estate and the parent or parents to the other half of the estate.

Rule 5
If there are no descendants the parent or parents of the intestate shall take the estate, in equal portions if there be two parents, subject to the rights of the surviving spouse (if any) as provided in rule 4.

Rule 6
If there are no surviving spouse, descendants or parents, the brothers and sisters and children of deceased brothers or sisters of the intestate shall share the estate in equal portions between the brothers and sisters and the children of any deceased brother or sister shall take according to their stocks the share which he or she would have taken.

Rule 7
If there are no surviving spouse, descendants, parents, brothers and sisters or children of such brothers and sisters but grandparents of the intestate the grandparents shall take the whole of the estate in equal portions.

Rule 8
If there are no surviving spouse, descendants, parents, brothers and sisters or their children or grandparents but uncles and aunts of the intestate the uncles and aunts shall take the whole of the estate in equal portions.

Rule 9
In default of distribution under the foregoing rules the Government shall be entitled to the whole of the estate.

Special provision if the intestate leaves lawful widows.
8. If any person so dying intestate leaves surviving him more wives than one, such wives shall share among them equally the share that the wife of the intestate would have been entitled to, had the intestate left one wife only surviving him.

Children’s advancement not to be taken into account.
9. Where a distributive share of the property of a person dying intestate is claimed by a child or any descendant of a child of that person no money or other property which the intestate may during his life have given, paid or settled to or for the advancement of the child by whom or by whose descendant the claim is made shall be taken into account in estimating such distributive share.

Application to cases of partial intestacy.
10. Where any person dies leaving a will beneficially disposing of part of his property, the provisions of this Act shall have effect as respects the part of his property not so disposed of, subject to the provisions contained in the will:

Provided that the personal representative shall, subject to his rights and powers for the purposes of administration, be a trustee for the persons entitled under this Act in respect of the part of the estate not expressly disposed of unless it appears by the will that the personal representative is entitled to take that part beneficially.
If the above proves to be too dry for you to read, I found an easier summary on financialadvice.com.sg here.


Do take a closer look at the distribution path of the deceased dying intestate. In the very unfortunate event that you were to pass away and you did not do a will, is this the way which you want your estate to be distributed ? For example, if you have parents who are financially dependent on you and you have a spouse and children, your estate will only be distributed to your spouse and children but not your parents. In this case, I do not think many will be comfortable with that. As such, do think about this. In any case, it is easy and not expensive to get a will done so as to ensure that your estate are distributed in accordance with your will in the event that you passed away.

Sunday, May 16

Property crash of 1996

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I'm not sure if anyone still remembers the previous property crash of 1996 where prices of properties tumbled over 40% from the 2nd quarter of 1996 to the 4th quarter of 1998. Going by the euphoria sweeping the market and the tendency for people to forget, the bad memories of this crash are probably distant by now.

I found an excellent chart on the private residential property price index on Singapore Real Estate Info here that gives a graphical representation and the significant news and measures taken by the government from 1960 until 2010.


(Taken from singaporerealestate.info)

Back then at the peak of the market, the property news that made it to the papers were of the following;
  • Enbloc sales being carried out or being proposed at private estates
  • Record sale prices by developers
  • Buyers queuing overnight with long queue lines at launches
  • Influx of foreigners buying properties
  • Flipping of properties to get rich
The government tried to stem this bubble by introducing more land sales to increase the supply and to show that there is adequate land to meet the demand. When that fails, more drastic measures were introduced such as;
  • Housing loans limited to 80% for property purchase
  • Tax on gains from the sale of properties bought within 3 years
  • Additional stamp duty within 3 years of purchase of properties for sellers
  • Stamp duty for buyers of sales and sub-sales of uncompleted properties
  • Foreigners not allowed to take housing loans
  • Permanent residents limited to one housing loan
The property market started to head south and with the impact of the Asian Financial Crisis acting as the catalyst, the housing bubble burst and the property market crashed.

Fast forward 14 years later to the current state, the property news that are making to the papers now are generally the same as in the past though the property market now is not as hot as it was back then. Similarly, it is also seen that the government has introduced an increase in land sales to meet the demand and HDB will also be ramping up its flat supply. Measures to counter speculation have also been introduced though they are not as draconian as in the past. To me, it seems like history is going one full circle in a milder manner though. So the question is where will the market head to from now ? That is something for you to think about.

Tuesday, May 4

Dream Home Loans

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Dream Home Loans
By Gabriel Chan and Harsha Jethnani
Taken from the Sunday Times on 2th of May 2010

If you thought low mortgage rates would stay unchanged this year, think again.

Over the last month or so, some banks have upped the spreads they charge above Sibor - the rate at which banks lend to one another - making Sibor-pegged home loans more expensive.

The three-month Singapore Interbank Offered Rate, or Sibor, was at 0.54 per cent last week, below the previous all-time low of 0.56 per cent in June 2003.

At DBS Bank, a home-buyer taking a loan of 80 per cent of his property's value around March would have paid a rate of Sibor plus 0.5 percentage point for the first year and Sibor plus 0.75 percentage point for the second.

A buyer opting for this Sibor- linked DBS package now will have to pay Sibor plus 1 percentage point for the first two years.

Some fixed-rate packages have also shot up recently.

Standard Chartered Bank's one-year fixed package stood at 1.25 per cent in March, but has risen to 1.95 per cent.

Sibor, which is already low as it tracks prevailing United States rates which are at rock bottom, fell further following gains in the Singapore dollar last month.

In line with the improving global economic outlook, interest rates in some countries have moved higher - with more rate hikes expected globally in the second half of the year.

Some experts tip Sibor to rise later this year and to go even higher from next year.

Standard Chartered economist Alvin Liew predicts the three-month Sibor rate will likely rise to 3 per cent in 2012.

'Mortgage rates are hitting one of the lowest levels in recent years,' says Providend's head of financial planning, Mr Eddy Cheong. 'I think, going forward, there is a high chance that rates will move up if the economy continues to improve.'

When interest rates rise, monthly instalments on home loans that are not fixed will be driven up.

This could have severe implications for buyers who have over- extended themselves with big mortgages, believing interest rates will always stay low.

'Do your numbers properly. Buying a home should be a blessing, not burden,' says Mr Apelles Poh, a financial planner with Professional Investment Advisory Services.

While some home loan rates are now higher, there are still bargains and benefits out there for the cost-conscious home-buyer.

The Sunday Times shopped around to find out what some banks have to offer:

Fixed-rate loans

If you want loans with fixed rates locked in for a term of three or five years, try DBS Bank.

Last week, the bank introduced its five-year fixed package, an unusual tenor in the market.

Rates: Three-year package: The bank's current promotion requires a customer to also sign up for its mortgage insurance plan. Rates are fixed at 1.99 per cent for three years, and Sibor plus 1.25 per cent thereafter.
Standard rates are otherwise 2.2 per cent for three years, and Sibor plus 1.5 per cent thereafter.

Five-year package: For those taking up mortgage protection as well, rates are 2.25 per cent for five years and then Sibor plus 1.25 per cent.

Standard rates are 2.5 per cent for five years, and Sibor plus 1.5 per cent thereafter.

The managing director and head of DBS' consumer banking group, Mr Jeremy Soo, says: 'Our three-year fixed rate remains highly popular with home owners desiring more certainty in their repayment, especially with our three- and five- year fixed rates at a historical low'.

He says the current promotion includes mortgage protection, which is a 'key consideration for many home owners since mortgage is a long-term and significant commitment'.

Sibor-linked loans

If you are exploring Sibor-linked loans, HSBC will be the bank of choice. Its 'no lock-in' Sibor-pegged loyalty home loan is the only package that offers decreasing spreads over the tenor.

Rates: You pay the three-month Sibor plus an additional 0.9 per cent for the first year, three-month Sibor plus 0.8 per cent for the second year and then the three-month Sibor plus 0.7 per cent thereafter.
'The interest spread reduction feature serves to benefit customers regardless of how Sibor rates move,' says Mr Sebastian Arcuri, head of personal financial services at HSBC Singapore.

This bucks the conventional home loan package, which typically sees interest rate spreads rise over the loan tenor, he adds.

Sibor-linked loans with flexibility

Citibank provides the best solutions if you are looking for flexibility through the widest variety of Sibor- linked loans.

Unlike other banks, Citi offers loans pegged to the one-month Sibor. Other loans are pegged to the three-, six- and 12-month Sibor. Lock-in period varies from zero to two years, and spreads are determined based on the size of the loan and customer relationship.

Citi offers the lowest rate on one-year fixed packages at 1.5 per cent. For its two-year fixed package, it charges 1.88 per cent for the first two years.

Rates: For the first year, rates are Sibor plus 0.7 per cent to 1 per cent. For year two, rates are Sibor plus 0.9 per cent to 1 per cent, and thereafter Sibor plus 1 per cent to 1.25 per cent.
'Customers have the flexibility to switch from one tenor to another upon tenor maturity date,' says the business director for secured finance at Citibank Singapore, Ms Vibha Coburn.

As an example, clients can make use of the low one-month Sibor and subsequently, when the month is over, perhaps pick a 12-month Sibor if they feel that interest rates are likely to rise.

SOR-linked loans

For loans tied to the Swap Offer Rate, or SOR, OCBC and United Overseas Bank (UOB) are good picks.

UOB offers a package tied to the one-month SOR, now at 0.35 per cent, that allows customers to pay a fixed monthly instalment for a one-year period.

Rates: For the first three years, rates are one-month SOR plus 1.25 per cent, and thereafter the one- month SOR plus 1.5 per cent.
In the first year, if interest rates increase, 'customers can be assured that their monthly cash flow will not be disrupted. Conversely, if the rates decline, customers can pay off more of the principal amount', says a UOB spokesman.

The one-year constant monthly instalment feature can be re-continued for subsequent years as the fixed monthly instalments will be re-computed based on the remaining tenor and interest.

SOR-linked with lowest rates

OCBC offers the lowest rates on loans pegged to the three-month SOR, which is hovering at around 0.39 per cent, with a two-year lock-in.

Rates: SOR plus 0.75 per cent for the first year, SOR plus 1 per cent for the second year, SOR plus 1.25 per cent for the third year and SOR plus 1.5 per cent thereafter.
Ms Phang Lah Hwa, OCBC's head of consumer secured lending, advises buyers to guard against being swayed by just their sentiments.

Properly assessing your financial ability before making a commitment is important, she says.

'Consider longer-term issues, like affordability in the event that interest rates rise or instalment amounts increase,' adds Ms Phang.

Loans with variable rates

As for loans with variable rates, Maybank emerges the top of the lot, with the most affordable rates, with a two-year lock-in.

Rates: The loans are tied to the bank's board rate, currently at 3.75 per cent.
Rates on the loans are discounted from this 3.75 per cent, starting at 1.18 per cent for the first year. Customers will pay 1.68 per cent in the second year, and then 2.28 per cent in the third year, and 3.25 per cent thereafter.

To mark its 50th anniversary, Maybank is offering a cash gift of $5,000 to customers who pick up the variable-rate loan, says consumer banking head Helen Neo.

Rates for loans inclusive of the gift are slightly different, at 1.68 per cent for the first year, 1.88 per cent for the second year, 2.38 per cent for the third, and 3.25 per cent thereafter.

The two packages offer 'customers discounts off the bank's board rate throughout the period of their loan tenor', Ms Neo adds.

gabrielc@sph.com.sg

harshamj@sph.com.sg
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