Lunch With A Fund Manager : Worry For Singapore Bonds and Other Thoughts on Equities

Had coffee with a hedge fund chap and then lunch with a bond fund manager and now I do not remember which planet I am from. A joke of course.

Hedge fund hugely hugely optimistic and whacking big on emerging markets (ie. not Singapore). Buying TRY/JPY (Turkish Lira) and expecting big moves following the Turkey upgrade to investment grade by Fitch. They see fund flows on a major scale into the new MIST economies (as opposed to BRICs). MIST stands for Mexico, Indonesia, South Korea and Turkey, coined by Goldman.

Hot money flow session over and on to short lunch break.

Fund manager of a distinguished fund house just shaking his head at the SGD corporate bond market here and his first tough question to me, where will the bids be when he needs to sell. We exchanged stories of the various credit crises we had and how we played bluff with each other before (story for another time, I promise because people need to know the truth).

He feels that the Singapore corporate bond market is growing the wrong way and fears for the investors, particularly the retail ones who are buying OTC without understanding that OTC means a willing buyer and willing seller and if one is missing, there will be no price or obligation to honour a price (which basically means “you are stuffed”).

His view is that the Singapore market is not equipped to deal with the next credit crunch and the issuances this year have been heavy weighted ones; lots of sub debts, perpetuals and higher risk names. The advent of Basel 3 in 2014 is not going to help banks on their ability to absorb alot of bonds when the market needs to sell and he thinks it is an accident waiting to happen.

This is because the Singapore market is not a developed market like the US and there is a huge absence of distress debt trading here as well as credit structurers that have the ability to provide the counter to a one sided marketplace during a crisis.

For a bond fund manager, his personal holdings are in equities although he is a big participant in SGD bonds for his instituition. He feels that interest rates in Singapore have traditionally been mispriced, courtesy of our monetary (or lack of) policy. Thus driving investors to push yields to unreasonably low levels and learning to live with them.

His counter argument to the Asian story is an example of how Li Ka Shing is desperately Reit-ing all his asian businesses on a large scale to buy distressed European assets. Reiting effectively monetises his gains in Asia  and allows him the cash to invest elsewhere.

He feels that Asia will see a correction as spreads have compressed too much particularly for high risk names but he is unsure of what the trigger would be. His personal view is that Asia will see one final leg up and he will use the KOSPI at 2300 level as his own trigger for a wave of correction. Time frame potentially 2013-2014.

His advice for retail investors : Buy good dividend yielding SGD stocks of lowly geared companies. Check for dividend history and cash flows before investing.

What about REITS ?

Most of the REITS in Singapore are too highly geared and are negative cashflow. He would not recommend any.

PS : Would make this a fortnightly segment if readers are interested.