Tuesday, June 28, 2016

Brexit - The unexpected has happened

Well, Brexit has happened and it was really unexpected (at least to me). I had assumed that British common sense would have prevailed even though the opinion polls showed that it was an even split between the Leave and Remain camps leading up to the 23 June referendum.

What struck me was how the markets were actually moving up in anticipation that Remain would win, only for the vote count to reveal otherwise.

The fact that some British people were still googling "What is the EU?" after the referendum only shows how ignorant some people might have been. I think many of those in the Leave camp were probably not entirely clear on what the implications were. They wanted more autonomy, but now probably feel that this is coming at a cost.

Markets dived down sharply on 24th June. One of the worst crashes I have seen so far. The pound also lost quite a bit of its value. I recall seeing FTSE 100 dropping around 7%. It hit a low of 5788.70 but managed to recover some ground on 24th and 27th June. 28th June, the FTSE100 seems to be recovering and is trending up at around 2.6% even as I write. Most Asian markets have avoided a steeper fall on 27th and 28th June. The Nikkei 225 which was the worst hit on 24th June has also recovered some ground.

But only time will tell whether all these new risk factors play out.

As of now, we know that David Cameron will be stepping down as Prime Minister. Even the Labour Party Jeremy Corbyn faces a vote of no confidence. Jonathan Hill has also stepped down as British Commissioner to EU.  Political uncertainty abounds and we can be certain that general elections would be called soon.

Meanwhile, the UK has also had its credit rating cut by S&P and Fitch. S&P had said that the leave result would "weaken the predictability, stability, and effectiveness of policy making in the UK".

David Cameron in his addressee to the House of Commons has also told MPs that negotiating an exit would be the civil service's most complex and important tasks for decades.

Meanwhile, Merkel has already fired off a warning shot that there shall be no "cherry-picking". UK thus does not get to choose market access while rejecting the free flow of people.

Too many moving parts in the coming months and years ahead. A Brexit negotiation might not be done for many more years to come. The two years provision under Article 50 might not be enough.

Tuesday, June 7, 2016

Research shows how Chinese Companies use Embedded Analysts

So I came across this media release of a research done that shows how Chinese companies use what is called "embedded analysts" to reveal sensitive information. This piqued my interest as I was wondering what is this concept of an embedded analyst. Was it an analyst who works in the firm on secondment?

Anyway, the article is extracted below:

SOURCE: The Chinese University of Hong Kong (CUHK) Business School

Research by CUHK Business School Reveals How Chinese Companies Use ‘Embedded Analysts’ to Reveal Sensitive Information

HONG KONG, CHINA - Media OutReach - June 7, 2016 - Chinese companies face a dilemma. They need to straddle two worlds -- there's the old China where business is still conducted on a "who you know" basis, and the emerging world of financial markets, regulations and transparency, says T.J. Wong, Choh-Ming Li Professor of Accountancy and Director of Centre for Institutions and Governance at the Chinese University of Hong Kong (CUHK) Business School.

"As Chinese financial markets develop, companies want to reduce the cost of borrowing. In order to build trust and inspire investors, they know they need to improve transparency," says Prof. Wong who has researched the issue in the latest study entitled "The dyadic ties of managers and financial analysts and their externality on a firm's information environment" with Prof. Gwen Yu at Harvard Business School and Prof. Zengquan Li at Shanghai University of Finance and Economics.

"But companies know that revealing sensitive information such as their political or strategic ties might also be damaging. So what do they do if they want to borrow cheaply beyond friends and family? The two systems are colliding and companies need a solution," he says.

In the West, as Prof. Wong explains, regulations and economic infrastructure to protect investors are well established. But in emerging economies such as China, legal safeguards are not yet robust enough to reassure lenders that it is safe to invest in unfamiliar companies through stock markets. So if a company wants to borrow, how can it build trust among external investors?

Prof. Wong and his collaborators have been investigating how Chinese companies operate as the nation ploughs on with the economic reform.

"We have investigated what we call 'the embedded analyst'," says Prof. Wong. "This is a financial analyst with personal connections to a company, but with enough professional credibility to be able to inform wider markets about that company. At the same time, companies use these analysts to communicate and to protect sensitive information about strategic ties. We look at how firms exploit this channel of communication to cut their costs of borrowing."

He is keen to point out that it is not a concept dreamed up in the "ivory towers" of academia. He and his collaborators have had lengthy conversations with analysts in China before embarking up on the research examining a comprehensive cross section of listed companies in China and associated analysts for a ten-year period from 2005 to 2014.

The study shows a "spillover" effect that analysts who are well connected with a company can help spread accurate information and forecasts about the firm, and this effect of information beyond the company's and analyst's network is stronger when companies are keen to raise finance.

While the research finding won't surprise anyone working within China's markets, it does help explain to the rest of the world how things work in Chinese companies, says Prof. Wong.

But the research also throws up more questions in the West than it answers, such as: Why is it so important to know about a company's links to politicians or other strategic partnerships?

Previous research has already shown that relationships play a strong role in business in China; historically Chinese firms relied solely on their networks to win contracts. And each business relationship may differ slightly -- making it impossible to compare like for like when evaluating one company against another.

"For example, a chief executive knows someone from schooldays and does a deal. He then does a deal with his brother-in-law, and then another transaction with someone he knows socially. Every deal is different and nothing may be written down formally. You couldn't compare these deals with -- say -- IBM signing a deal with three different companies, where terms of each deal will be spelled out and in the open," he explains.

So why don't Chinese companies move towards greater transparency? Why aren't they more open about their beneficial political or strategic connections?

"There's a high cost -- a domino effect of openly revealing a political relationship -- it may damage other future relationships," says Prof. Wong. "The information doesn't affect just one deal; it affects all future deals," he says.

However, if companies opt not to disclose links which would help them raise more funds on capital markets, then they remain limited to borrowing only from friends and family.

When Prof. Wong presents this research in the West, business students often ask these questions: "Why should we rely on analysts to reveal sensitive information? Why doesn't the chief executive let investors know?"

Prof. Wong explains that unlike managers, who may have a shorter tenure and may be tempted to "big up" company health for personal gain, analysts tend to hold their positions for longer, and so potentially have more professional credibility.

That's not to say that the researchers can rule out any hints of insider trading. The firms' incentives to raise external capital and the intermediaries' market reputation and discipline can to a large extent mitigate such possibility of collusion between the firms and the embedded analysts.

But the academics did allow in their research for some level of commitment from analysts. Respected analysts are playing a bigger role in Chinese domestic markets, which see much activity from individual retail investors. As a nation, the Chinese have the highest savings rate in the world, and are keen to invest, and so are heavily dependent on analysts' forecasts.

By looking publicly available information to determine how analysts might be connected to a company -- either through a shared university, or time spent working together, or geographic proximities, the researchers reveal that this "social capital" allows companies to communicate private information to analysts, who in turn spread the word about a company's health and financial forecasts to their own networks. As a result, the more connected the analysts, the more accurate the earnings forecasts they make.

"It's a tacit agreement between analysts and the company -- they use 'secret' knowledge to make a hard earnings forecast, but because they have a strong reputation in the market, the signal crosses to wider analysts and investors who know they can trust the information," says Prof. Wong.

The researchers also found that more accurate information about a firm emerges when it plans to raise funds through new share issues. Also, companies which are particularly reliant on their political connections, or which have a concentrated number of customers and suppliers, tend to rely more on embedded analysts to release information.

All of which go to make well-connected analysts important players in Chinese markets.

"These embedded intermediaries can build a bridge between emerging economies and the west. They need to have grown up or at least spent a long time working in China and speak the language -- if they have a good reputation in the market, they can be very powerful."

And this role may not be restricted solely to financial analysts, says Prof. Wong, suggesting that future research might also look at other figures with a close connection to Chinese companies -- such as auditors or fund managers.

Back at CUHK Business School, when Prof. Wong introduces his students to these concepts, they are enthusiastic.

"They find it very new," he says. "In textbooks, students only read the Western perspective when it comes to how companies are organised and how they trade. But these cultural and political perspectives are important."

But is this system of informal communication sustainable?

"Until Chinese law, accountancy and market regulations protect investors, companies will need this kind of embedded intermediaries," says Prof. Wong.

"There's no quick fix. It takes a long time, maybe decades, to establish the kind of economic and legal frameworks to build trust in the markets. But we want to show that this level of closeness and ties with analysts isn't necessarily bad as it fulfils an important role in China," he says.


Zengquan Li, T.J Wong and Gwen Yu, "The dyadic ties of managers and financial analysts and their externality on a firm's information environment", 2016. Working paper.

Tuesday, May 31, 2016

Dividends and Interest Income for May 2016

This is just a rough estimate of dividends and interest credited to my bank account for this month:

Dividends = $1252
Interest = $197

Total = $1449

Sunday, May 29, 2016

How Much To Save Per Month

How much should one save every month? Well, this is really a difficult question to answer. And it is difficult to give a straight answer because it can be quantified in absolute dollar amounts (say, $500 per month) or it can be stated as a percentage of one's salary (say, 20% of household income).

Well of course, one will always hear that you should save 10% of your income. However, I personally think that amount is way too low. It probably is correct when you are first starting out to work and have a low starting base salary (say $2,500). After paying for rent and stuff, it is unlikely that you will have much to spare. So 10% (or $250 per month) is probably a reasonable starting point. But it shouldn't stay that way for long. You probably need to start saving more.

After all (and as a very simple illustration) , if you only have 40 years of working life (let's assume you work from age 25 to 65) and spend 20 years in retirement, common sense or simple mathematics will tell you that you are working for 40 years to support 60 years of living expenses. That means you should only be spending 2/3 (two-thirds) of your income in the first 40 years so that you have 1/3 (one-third) of it left for the remaining 20 years of your life. I am really making many assumptions and simplifying the entire financial planning process so it is really best if you work out for yourself what is a realistic amount. On that basis, saving 33% of your income is probably the way to be safe.

Does this amount sound alarmingly high? Well, yes it is. Life expectancy has gone up and the cost of living has also been creeping up slowly but surely.

Another way to come to a figure is to work out your desired retirement income (or monthly expenses you expect to incur once retired) If you just assume an average expenditure for a married couple of $5000 per month for 20 years, that alone will sum up to $1.2 million dollars in savings that are necessary. That is quite a large sum of money without catering for any buffers. If the couple has a combined household income of $120,000 per annum, it will take them 10 solid years of saving 100% of their salaries just to set aside $1.2 million.

So how much should one save every month? Definitely a lot more than 10% of your salary if you intend to be financially stable and secure. In fact, it might be better to err on the side of caution and save more while you are young rather than to wait till retirement and realise that you have to cut down on your expenditure just to stretch your retirement dollars.

Saturday, May 28, 2016

Baby Steps to Financial Peace

Most Singaporeans will probably not have heard of Dave Ramsey before. But anyway, Dave Ramsey is America's trusted voice on money matters. He also has something written on 7 Baby Steps to Financial Peace. The 7 steps are simple enough to follow and are listed as follows:

  1. $1000 for emergency fund
  2. Pay off all debts less the house
  3. 3 to 6 months of expenses in savings
  4. Invest 15% of household income for retirement
  5. College funds for children
  6. Pay off home loan early
  7. Build wealth and Give
The steps seem simple enough to follow and should be a useful guide for most people. 

I guess not many people take financial planning seriously.

Take this comment by sigdiamond2000 on financial stability for example. It is extremely hilarious. 

Sunday, May 1, 2016

Dividends and Interest Income for April 2016

Received a grand total of estimated $158 for dividends and $151 in interest income for April 2016.

Dividends came from one of my REIT holdings and the interest income came largely from my bank accounts which is yielding an okay interest rate. At the moment, I am largely relying on the OCBC 360 account (roughly 2.2% for first 60,000 and 1% for incremental increase) and their Bonus Savings account (0.8%). I also have the UOB account but have found it difficult to the credit card minimum spend requirement on that account.

Sunday, March 13, 2016

It is March

The year has passed real quick and now almost three months have passed. And you sort of lose concept of time since each day is spent the same in what is almost repetitive. Each week is non-differentiable from the other. You lose track of time and friends. People fade in and out of your life and it is totally out of your control. But I know this year will be a good year alright. And everything will be okay and the family will be alright. But one can never be too certain. Never in my life have I been so busy and yet so isolated and drained.

I spent the Sunday reading some Hemingway and it made me realise how long I have not had time to read. And this was a good reading session because I managed to finish the book. But this was only my second book that I had read in the year. And it is already March. Anyway, I got started on a new book right after I finished one book today and this brought me a great sense of satisfaction.

Well, the fact that I ate some nice steak (a mixture of wagyu, ribeye and striploin) and downed it with some Riesling that had been sitting in my fridge for some time made it an even better Sunday. Not to mention the bread dipped in olive oil and basalmic vinegar. All prepared by me in double quick time for dinner as it was raining today and the roads were all wet and busy from where I had gone in the late afternoon to run some errand.

Financially, all is well. I have enough to live by and the family is happy and healthy. So there is really nothing more that I should be asking for. Some dividends from one of my reit counters was good. I don't know where the stock market is headed to right now and I simply couldn't care less. I wish I cared more and made a little more effort but this is not the time and there are still other things to worry about first. All I need right now is time and space. Time to read my books and be happy. For that is all that I want to do right now.

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