CashBench

Learning from Dubai’s debt problems

2009-11-27T21:12:00.001+08:00

Yesterday, the huge Dubai World conglomerate shocked the world by announcing it needs a 6-month “standstill” on its debt repayments to June 2010. For most of us, what does this mean? CashBench filters through the hype and focuses on what we can learn from Dubai’s problems.

Extravagant Dubai

Dubai is part of the seven emirates that make up the United Arab Emirates (UAE) in the Middle East. Despite its small size, it is arguably the most famous destination in the Middle East with many signature real estate developments. Some of these include the largest mall (Dubai Mall), tallest tower (Burj Dubai), and the most luxurious hotel (Burj Al Arab, pictured above).

Dubai World

Dubai World is a government-holding company of many well-known Dubai companies such as Nakheel and DP World. From this perspective, Dubai World is similar to Temasek Holdings in Singapore.

Nakheel develops the world-famous man-made island Palm Jumeirah, where we can find the huge Atlantis hotel & resort, a luxurious villa owned by David Beckham, and numerous other private homes owned by the rich & wealthy. DP World was the company that outbid Singapore’s PSA in 2006 to take over P&O from the UK, propelling it to the world’s 3rd largest port operator.

Dubai World’s announcement

Dubai World announced yesterday that it needs a “standstill” on its debt repayments for 6 months. This means Dubai World wants to postpone any debt it is supposed to pay between Dec 2009 to end of May 2010.

Why the big deal?

There are 3 key reasons why Dubai World’s announcement shocked the world:

Just before the announcement, Dubai World has just raised $5 billion from two Middle Eastern banks in Abu Dhabi. This is more than sufficient to pay off the $4 billion debt from Nakheel due for payment on Dec 14. Strange, what other problems are Dubai World hiding?
Dubai World has $59 billion of liabilities, or about 74% of all debt incurred by Dubai’s government-owned companies. If Dubai World cannot pay up, the majority of banks and other creditors that lent money to Dubai can be in big trouble.
A credit rating agency has said that Dubai’s announcement may be considered a default on its payment obligations. Many Dubai bonds are now downgraded to “junk” status. Will Dubai ever pay up? There is no guarantee that Dubai won’t announce another “standstill” if it still doesn’t have the money to pay off its debts in 6 months. Some analysts are beginning to compare Dubai with Iceland that went bankrupt in Oct 2008.

What got Dubai into this mess?

Dubai created a miracle by building a modern city from almost nothing. It was also a trend setter in the Middle East. When other countries and emirates in the region saw the potential benefits of what Dubai is doing with its huge projects, they follow suit.

Those of us far away from the Middle East will assume that Dubai made all this happen with its oil money, but that’s simply not true. In reality, Dubai has very little oil. It knows this but wants to build up a vibrant economy anyway. The solution? Borrow lots of money and build huge malls, hotels & homes that are bigger and better than everyone else. Do this, and people will come to visit and invest, brilliant isn’t it?

The problem with this approach is also simple. Many of Dubai’s developments will take years to complete. Every mega real estate project needs lots of money and will require even more time to generate cash for its owners. This was not a problem as long as Dubai can keep borrowing money from banks or its richer UAE neighbour, Abu Dhabi. But when the world goes into a recession, there is hardly any money floating around, and less people and tourists to spend on big-ticket items. All of a sudden, Dubai becomes less appealing.

What does this mean for investors?

Markets worldwide reacted negatively to Dubai World’s announcement. Banks are directly affected as they will not get a cent from Dubai World for the next 6 months. What’s more, there is a possibility that Dubai World may not pay up eventually, eventhough this is currently less likely. CashBench expects markets to be more volatile over the short-term and investors should continue to keep up with market news. In 6 months, we need to especially track if Dubai World can restart debt repayments.

Dubai World made this announcement when the US markets were closed for the Thanksgiving holiday, with the Middle East and many other countries celebrating the Eid holiday today (Hari Raya Haji holiday in Singapore and Malaysia). European stock markets remained open yesterday and have dropped by about 3% generally. Expect US to open lower when it reopens after Thanksgiving. Stock markets in Asia have fallen yesterday too. As worldwide risk aversion has increased, there is now short-term downward pressure on Gold prices and a corresponding upward lift to the US dollar.

What else can we learn from Dubai?

There are at least 2 lessons that we can learn from Dubai, no matter how near or far away we are from the Middle East:

Borrow within our means. Don’t over-borrow like Dubai. Whether we are borrowing for a new car, a new home or even for a loved one’s education, we must be pretty confident of paying off the monthly repayments. Using our credit cards is also a form of borrowing. Only buy what we can afford, the credit card bill will always catch up with us at the end of the month.
Understand the impact of buying a new home. For most of us, we have to borrow from the bank to buy a new apartment or house. This is a very long-term commitment and is similar to the long-term real estate projects in Dubai. We don’t own the home until we pay up the entire loan!

What’s more, home loans lasts even longer than many marriages. By buying a home, we are committing ourselves to regularly paying off a loan that may stretch for as long as 30 years. During this period of time, the bank expects us to pay up no matter what happens. There may be a recession going on, we may suddenly need to pay huge hospital bills for our spouse or children, or we may even be fired from our job. No matter what happens, we are expected to continue repaying our loans.

If that’s the case, we also have to make sure that we can repay our home loan regularly, no matter what happens, unless we want to be another Dubai.

November 2009 Market Update

2009-11-10T11:01:00.001+08:00

CashBench looks at some recent developments in Asia and around the world, and highlight trends that are important to investors. For November, this includes the new “Nasdaq” board in China, the Brazilian currency, and gold prices.

1. Irrational investors on China’s new “Nasdaq” board

China opened a new “Nasdaq” style stock exchange in Shenzhen on Oct 30 that allows smaller companies to be listed. This ChiNext exchange has been planned for a while, but the speculative investors rushing into this new stock exchange are already creating a stock bubble. Since it opened a week ago, the initial list of 28 stocks has gained as much as 210% and “circuit-breakers” meant to reduce speculation has been activated repeatedly. Some companies now have a PE (price to earnings) ratio of more than 100. As a comparison, even the bubbly Shanghai stock market averages a PE ratio of only 30. CashBench sees this as a good reminder of the higher risks in investing in the more volatile Chinese stock markets. More importantly, investors who directly or indirectly invest in China should take note that bubbles will eventually burst, sooner or later.

2. Brazilian currency gained 30 percent over one year

The US dollar is expected to continue its depreciation over the short to medium term because of the massive amount of money spent to stimulate its economy. Despite that, unemployment has reached 10.2% in the latest quarter. This is higher than expected and simply means lots of people are still out of work. Recover will continue and growth will occur, but a depreciating US dollar means some currencies must appreciate. Investors will have noted that Asian currencies are rising against the US dollar lately, but the Brazilian currency (Brazilian real) has gained even more. Over the past year, that gain was 30%. What’s even more significant to investors is this: the Brazilian government has just put in place measures to slow foreign investments, but an International Monetary Fund (IMF) official has said it’s unlikely to work. Time to buy some Brazilian real?

3. Gold hitting new highs above US$1,100 per ounce

Gold has been on an upward trend and has recently hit US$1,100 an ounce. The weakness in the US dollar and the underlying risk of inflation in the US and other developed countries is fuelling its rise. It wasn’t too long ago that Gold was at US$1,000 (September 2009), which means it has risen by 10% in just 2 months. Not exactly a good time to rush into gold investments for really short-term buyers, but there may be room for further growth as the US dollar is likely to weaken further, and there’s a reasonable chance of higher inflation occurring when global recovery is in full swing. Those who have some time to monitor gold prices may find it a worthwhile investment.

Email CashBench

2009-01-01T00:00:00.024+08:00

Review of CPF LIFE

2009-10-21T01:05:00.001+08:00

CPF LIFE (Lifelong Income Scheme For The Elderly) kicks in since September to ensure that seniors in Singapore have an assured source of income for life. Unlike the mass media, CashBench will not focus on the 4 CPF LIFE plans but reviews the scheme itself, including 3 key aspects that every Singapore resident must know.

CPF LIFE Overview:

The CPF LIFE scheme is essentially meant to be an improvement to the Minimum Sum Scheme (MSS). In the older Minimum Sum Scheme, a minimum amount of savings in our CPF accounts is set aside with the CPF Board to provide a regular source of income for retirement needs. This minimum amount is referred to as the minimum sum. However, this minimum sum is slowly reduced by each monthly payout during retirement. Therefore, income from the MSS will last for about 20 years only. Seniors who live beyond 20 years after retirement will lose this source of income, perhaps, when they need it most.

CPF LIFE … promise of a monthly source of income that will last for life, without any age limits.

The biggest change brought about by the CPF LIFE scheme is the promise of a monthly source of income that will last for life, without any age limits. Beyond this promise and key objective, the CPF LIFE scheme has 4 plans: Basic, Balanced, Plus and Income. They are different from one another in one important area: whether there is a bequest, and how much is the bequest amount.

A bequest essentially allows a senior to leave some money to his/her children, spouse or other beneficiaries after death. The Basic plan promises the most bequest amount, while the Income plan leaves no bequest at all. On the other hand, the Basic plan offers the least monthly payout, while the Income plan offers the most payout per month.

CPF members are free to choose which plan suits their needs best, but they cannot change from one plan to another after making a selection. Those approaching retirement can choose to remain in the Minimum Sum Scheme while younger folks must join the CPF LIFE scheme upon retirement in the future.

With this overview, let’s look at some key aspects that every Singapore resident must know about the CPF LIFE scheme.

1. Monthly payout is guaranteed but not fixed

While CPF LIFE guarantees a regular source of monthly income, the amount received is not fixed, and will be reviewed every year. Every senior under the CPF LIFE scheme will receive an initial monthly payout based on a number of factors.

… lower interest rates and a higher average age of death among seniors may lead to lower monthly payouts in the future.

After the initial monthly payout is determined, two key factors are used to determine if the payout amount should be revised. These are (a) interest rates, and (b) average age that seniors pass away. In general, lower interest rates and a higher average age of death among seniors may lead to lower monthly payouts in the future. Unfortunately, these are not factors within our control.

In addition, the numbers that are shown in newspapers or CPF guides for typical monthly payouts are meant for those approaching retirement soon. These figures do not apply to those far away from retirement now. Given the uncertainty in the monthly payout amounts, it is therefore wise for working professionals not to depend on CPF LIFE as the only source of income when retirement comes along.

2. Monthly payout is not adjusted for inflation

While chatting with a friend recently, CashBench was told that a bowl of fishball noodles costs only 50 cents in the early 1970s. Fast forward to 2009, this bowl of fishball noodles costs at least $2.00 now. Inflation sounds like a big word, but it simply refers to the gradual increase in prices of things we buy. Using fishball noodles as a measure, inflation over the past 4 decades is about 3.6% a year.

Looking at CPF LIFE again, it is important to realize that the monthly payouts are not adjusted for inflation. This means the monthly payout remains the same even if prices of things we buy get more and more expensive. For example, if we receive $600 monthly today, we can happily buy 300 bowls of fishball noodles. That’s quite a lot of noodles! However, a bowl of fishball noodles will cost $2.80 after 10 years if inflation stays at 3.6% per year. By then, we can only buy 214 bowls of noodles with the same $600 payout. That’s a reduction of almost 30%!

… the monthly payout we receive will buy less and less stuffs as we grow older.

Essentially, the monthly payout we receive under CPF LIFE will buy less and less stuffs as we grow older. For this reason, it is again important not to rely on CPF LIFE as the only means of income during retirement. Instead, we should also invest in assets that can give returns that either match or is higher than inflation.

3. Bequest amount is not guaranteed, and not fixed

One reason why CashBench is not overly concerned on an in-depth discussion among the 4 CPF LIFE plans is the fact that bequest amounts are not guaranteed. While the Basic, Balanced and Plus plans provide for bequest, it is impossible to determine beforehand how much will be given. In fact, there may not be any bequest eventually. Why?

If a senior received payouts more than the premium he/she initially paid, there will be no bequest.

To join the CPF LIFE scheme, the initial money set aside is now called a premium, instead of the minimum sum in the Minimum Sum Scheme (MSS). The bequest amount left to the beneficiaries is calculated as this premium minus all monthly payouts given out before death. If a senior received payouts more than the premium he/she initially paid, there will be no bequest. This is true no matter what CPF LIFE plan he/she is in.

The maximum premium payable to join CPF LIFE right now (exclude any bonus top-ups) is S$117,000. Any bequest received by the beneficiaries will not be significant unless a retiree passes away very early during retirement. Even if the retiree dies before any payouts is given, the maximum that a beneficiary can receive is $117,000. Even by today’s standards, this is not enough to buy most HDB flats.

What’s more, the exact bequest amount is uncertain as we won’t know exactly when we’ll pass away. From another perspective, beneficiaries will also not know how much to expect from the bequest. What does all these mean? A senior who is really keen to leave a gift for beneficiaries should probably not depend on CPF LIFE as the primary means of bequest.

Get CashBench Updates via Email

2009-08-13T17:18:00.004+08:00

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For those who wants to be updated via email on new analysis, forecasts and news from CashBench, simply join the CashBench group on Yahoo today. It’s free and group members will receive email updates once a week or less often. This will ensure every update from CashBench will be useful, and you are not overloaded with emails too.

In addition, CashBench respects your privacy and will not share your particulars with group members or anybody else. You can also easily subscribe or unsubscribe at any time. Upon joining, new members will receive a sample update immediately to get a good idea how CashBench email updates look like.

Besides receiving updates, CashBench group members on Yahoo will also be able to access new tools and PDF reports from time to time. Right now, new group members will immediately receive two gifts: the CashBench Excel Tool to calculate fees & taxes payable for investments, and a PDF report on how to invest in warrants. To sign up for email updates, just send a blank email to cashbench-subscribe@yahoogroups.com or provide your email address below.

How much fees to pay for shares? Find out!

2009-09-23T02:34:00.001+08:00

Have you always wondered how much fees and taxes you need to pay for those shares you bought or sold? Instead of waiting for the contract statement to be posted to you, find out immediately using CashBench’s Excel Tool!

Buying 1000 shares with a share price of $5.00 should cost $5,000. But, this does not include all the different fees and taxes we need to pay.

How much do we really need for these fees, commissions, charges & taxes? Try calculating it yourself and you’ll soon find that even a calculator doesn’t help you very much. Why? Because there are 4 types of fees and taxes, with 3 different tier rates to take care of!

Now, CashBench can get rid of that problem for you. Take charge of your investments today and use the CashBench Excel Tool to determine exactly how much you’ll need to pay for these fees and taxes. Just key in 2 pieces of information: the number of shares you are buying or selling, and the current share price. For example, 1000 shares at $5.00 per share will actually cost $5,029.30. That’s almost $30 of fees and taxes. If we are selling these shares, we’ll only get back $4,970.70.

Sample Calculation: $29.30 Fees & Taxes

You can get this CashBench Excel Tool immediately by joining the CashBench group on Yahoo now. It’s free and members will also receive a 7-page PDF report on how to invest in warrants. In addition, you will receive email updates on new analysis, forecasts and news on CashBench. These updates are sent once a week or less often so that your mailbox does not get cluttered. To top it off, you can also get your hands on other CashBench reports and tools from time to time as they are released.

To receive this CashBench Excel Tool immediately and sign up for email updates, send a blank email to cashbench-subscribe@yahoogroups.com or enter your email address below.

The Mirror Image of the Straits Times Index?

2009-09-18T17:32:00.001+08:00

Recently, we keep hearing of the Chinese stock markets leading the movements in worldwide stocks. How true is this for the Straits Times index (STI) in Singapore? CashBench investigates…

[Photo: Koalazymonkey]

Before the current worldwide downturn, investors in Singapore typically look at the performance of the overnight markets in the United States for clues on how Singapore stocks will perform the following day. Does this work anymore?

Based on a 3-month and 12-month analysis carried out by CashBench, investors should start looking elsewhere for ideas. Over the past 3 months, there is a low correlation between the returns of the STI and the Dow Jones, Nasdaq or S&P 500 indices. This is true whether a comparison is made for same-day performance (E.g. Friday vs. Friday) or overnight performance (E.g. Friday in Asia, Thursday in US). Mathematically, the correlation between Singapore and the US indices over a 3-month or 12-month period range from 0.28 to 0.37. These numbers are really far away from a “perfect” correlation score of 1.

… the Hang Seng index in Hong Kong is almost a mirror image of the Straits Times index.

If that’s the case, which markets now moves in step with the Singapore stock market? This may or may not surprise you, but the Hang Seng index in Hong Kong is almost a mirror image of the Straits Times Index. Over a 3-month or 12-month period, the correlation between the Singapore and Hong Kong stock market returns is about 0.78. This basically means that when the Hang Seng drops, the Straits Times is likely to follow, and vice versa.

However, depending on who you talk to, the Hong Kong stock market may or may not be representative of the entire “Chinese stock markets”. If we were to use the Shanghai Composite index for comparison instead, the correlation to Singapore’s Straits Times index drops quite a lot, down to 0.43 to 0.5.

CashBench ends with a surprising find. Despite being culturally and geographically close to Malaysia, the 12-month correlation between the Singapore STI index and Kuala Lumpur’s KL Composite index is just 0.37. However, over the past 3 months, this was much higher at 0.63. Will this short-term trend persists?

Note: The correlation analysis used by CashBench is based on the correlation co-efficient and can range from –1 to 1. A score of 1 indicates there is a perfect relationship between the two indices compared, where an upward movement in one index is followed exactly by an upward movement in the other index. A score of 0 means there is no relationship, and performance of both indices are completely random and does not follow any pattern or trend. Data analysed is based on adjusted closing index levels up to 17 Sep 2009 (Thursday).

Get CashBench Updates via Facebook

2009-07-24T04:51:00.002+08:00

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To be updated whenever a new piece of analysis, forecast or news is published on CashBench, you can now follow CashBench on Facebook. This is perfect for those who already use Facebook regularly to connect with friends and colleagues. Just click on the “Become a Fan” button at the top right-hand corner and you’re all set. Also, CashBench respects your privacy and you have full control on applicable privacy settings via your Facebook account.

Once you are a fan of CashBench on Facebook, you will be informed of new CashBench articles via your personal Facebook wall automatically. To see these updates, you’ll need to log into Facebook. Every CashBench update on Facebook are short extracts of new articles and gives you an idea of the overall content. If any article interests you, simply click on the provided link to read the full article on CashBench. Give it a try and become a fan today!

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Shanghai Composite Fell 21% in August

2009-09-01T14:53:00.001+08:00

THE SECOND LARGEST MONTHLY DROP IN 15 YEARS

Translated from Lianhe Zaobao (Chinese), published 1 Sep 2009

Recent heavyweight stocks in the Chinese markets collectively fell, resulting in panicky sentiments among investors. According to a report by the China Economic Weekly, an unnamed source close to the Chinese regulators said policies to stabilize the markets may be launched. This source also emphasized that market stabilizing measures does not specifically target the Chinese national day on 1 Oct. Such measures may include the reduction of short-term notes issued by the Chinese central bank, and the speeding up of IPO and fund launches. However, with the continued volatility in the A-share market, stabilizing the Chinese markets will be a challenge for the stock market regulators.

On 5 Aug, the Shanghai Composite Index peaked at a high of 3478.01 and started dropping thereafter. By 17 Aug, the index fell to 2870.63 or 5.79%, the largest single-day drop this year. Yesterday, the index went a step further, dropping by 6.74% to a new low of 2667.75. Before this, the largest single-day drop in the Shanghai Composite was back in 10 Jun last year at 7.73%. Over at the Shenzhen market yesterday, there was a corresponding big drop of 7.55% to 10585.08.

Note: Based on first 6 paragraphs of article.

SGX Structured Warrants (Part 2)

2009-08-05T16:02:00.001+08:00

This is the second of a three-part series on structured warrants on the Singapore Exchange (SGX). The first article can be found here. This week, we focus on the reasons for investing in warrants and what determines and moves the price of a warrant.

[Photo: Ed100]

Only for CashBench Group Members

Those who join CashBench on Yahoo! Groups will immediately receive this entire three-part series on warrants in a single PDF report for easy reference, wherever you are. What's more, membership is free and you’ll also receive updates once a week or less often on new analysis, forecasts and news from CashBench! To join CashBench now, just provide your email address below.

Why Invest in Warrants:

We should only buy a product if it can serve some useful purpose. Likewise for warrants, there are specific scenarios where an investment will be suitable. The two usual scenarios either require a short-term forecast, or a need to protect an existing investment.

Reliable Short-Term Forecast Available

The key is to have a good forecast of the short-term direction of the underlying asset before investing in any warrants.

Since warrants expire quite quickly, they are good investments only if we are fairly certain of the short-term performance of a stock index or listed company in Singapore. For example, if we expect the STI index to drop by 10% over the next 3 months, we can buy a STI put warrant to profit from this forecast. This is because the prices of put warrants usually increase if their underlying assets’ price decreases. In addition, we already know that the prices of warrants will usually change much more than the underlying asset. Therefore, a 10% drop in the STI may increase the price of a STI put warrant by more than 10%, let’s say 40%!

However, if we feel that the price of the underlying asset will increase over the short-term, we should consider buying a call warrant instead. Any price increase in the underlying asset will usually result in a larger increase in the price of a call warrant too.

In both cases, the key is to have a good forecast of the short-term direction of the underlying asset before investing in any warrants.

Protecting an Existing Investment

The other reason for buying warrants is to protect an existing investment. This is usually done by buying put warrants only. Let’s go through a quick example using DBS shares again. If we have an existing investment in DBS shares and is worried that the share price of DBS may drop over the next 3 months, we can buy put warrants to protect our investment in DBS. If the price we paid for these DBS shares was $10 per share, and we do not want to lose more than $1 per share, what can we do?

This concept is very similar to buying insurance: pay an “insurance fee” to get protection from a drop in the … share price.

Simple, just buy sufficient DBS put warrants at an exercise price of $9. If DBS shares really do drop below $9, the gain from the warrants will help to offset the loss in our existing investment in DBS shares. This concept is very similar to buying insurance: pay an “insurance fee” to get protection from a drop in the DBS share price. The price you paid for the warrants is the “insurance fee” and represents the cost of this protection. This cost is not high too, as you’ll recall that warrants are usually much cheaper to buy than the underlying. What’s more, we can still profit from any increase in our DBS shares with this arrangement. So, if DBS price falls, we are protected. If DBS price increases, we still profit. Not too bad!

Less valid reason

Even though warrants are cheaper to buy and therefore, allow you to spread out your spare cash by buying many more warrants on different companies or stock indices, do not overstretch yourself. The typical portfolio of an investor should not contain a majority of warrants, because investing by its very nature is a long-term process. If you are investing only in short-term products, you are exposing yourself to significant risks. Therefore, freeing up spare cash by converting all existing stock investments to warrants is usually not a good idea.

What moves Warrant Prices:

There are all together 6 factors that determine the prices of warrants: Underlying Asset Price, Implied Volatility, Time to Expiry, Exercise Price …

Every warrant investor must know the factors that determine warrant prices. Otherwise, we may be surprised why the price of a warrant is not moving in a direction we have expected. There are all together 6 factors that determine the prices of warrants: Underlying Asset Price, Implied Volatility, Time to Expiry, Exercise Price, Interest Rates and Dividends.

To determine the actual price of a warrant at any time, financial models are used by each third-party bank to calculate the buy/sell prices quoted on SGX using all 6 factors. However, the first 4 factors are the major drivers of a warrant’s price. In addition, the supply and demand for warrants can also affect prices. Because so many factors help to determine warrant prices, we must minimally look at the 4 major factors before understanding how prices will move. Fortunately, there is no need to calculate any numbers at all as these information are generally made available by warrant issuers.

Let’s now focus on the 4 major factors. Bear in mind the use of “good” and “bad” in the following explanations. “Good” means the warrant price should increase. “Bad” means the warrant price should decrease.

Underlying Asset Price

An increase in the underlying asset price is good for a call warrant but bad for a put warrant.

Previous examples in this series have already covered this factor. We should now know that an increase in the underlying asset price is good for a call warrant but bad for a put warrant.

Let’s look at a quick example for a DBS put warrant with an exercise price of $15. As the underlying DBS share price increases, it becomes less and less likely that we can exercise the put warrant to sell DBS. Recall that the DBS share price must fall to $15 or below before we can exercise a put warrant. Let’s say the current DBS shares have increased steadily from $20 to $25. If this happens, our DBS put warrant’s price will most likely decrease considerably.

Since the underlying asset price is a major factor that determines the movement of a warrant’s price, we must monitor it regularly for any warrants we invest in.

Implied Volatility

A higher volatility in the underlying asset is good for both call and put warrants.

Volatility refers to how stable are the prices of an asset. For example, a very volatile share price may jump wildly from $1 to $5 and back to $3 within a short period. The third-party banks that issue warrants calculate a special form of volatility that is referred to as Implied Volatility. The details of this calculation is not important.

What investors do need to know is this: a higher volatility in the underlying asset is good for both call and put warrants. This is because there is a higher likelihood that the underlying asset price will move in our favour. On the other hand, a lower volatility has the opposite effect and pulls down the price of a warrant.

In addition, the volatility of any underlying asset’s price is not constant, and can change quickly. Therefore, it is again important to monitor volatility changes to determine its influence on the price of a warrant.

Time to Expiry

The price of a warrant can drop quite quickly as its expiry date near.

As the time-to-expiry decreases, this is bad for any warrants generally. The reasoning is simple. As the expiry date approaches, there is less time for the underlying asset’s price to move in our favour. The price of a warrant can drop quite quickly as its expiry date nears. For this reason, many investors do not bother to buy warrants that will expire within 2 weeks. This is especially the case for warrants where the underlying asset price is still far away from the required exercise price. With such a short time-to-expiry, there is a much higher likelihood of losing the money spent in buying these expiring warrants.

Exercise Price

High exercise prices are always bad for call warrants but good for put warrants.

The exercise price is pre-determined for each warrant and we cannot change it, but we should know how it affects warrant prices. High exercise prices are always bad for call warrants but very good for put warrants.

For example, just imagine a DBS call warrant that has an exercise price of $100. It’s almost impossible for DBS’s share price to increase to $100 within a few months, hence, this call warrant price will be very low and is unlikely to move higher.

4 Factors All Together

The 4 factors above should be used collectively by an investor to understand why a warrant’s price is increasing or decreasing. Forecasts of the first 2 factors will also allow investors to estimate how the price of a warrant will move in the future.

In the final part of this series on SGX structured warrants, we’ll cover the remaining concerns of every investor: the key terms that investors will come across, how to actually invest in warrants, and the specific risks of these investments.

Structured Warrants on SGX

2009-07-24T19:00:00.001+08:00

Warrants are traded on the Singapore Exchange (SGX) just like stocks, but how much do we really know about them? This is the first of a three-part series on CashBench that points out the key features of warrants and summarises all the important aspects that an investor MUST know before investing in warrants.

[Photo: Ed100]

Only for CashBench Group Members

What are Warrants:

Despite being traded like stocks, warrants are a form of derivative products such as futures and extended settlement contracts. As a derivative, the price of a warrant depends on a number of factors that are linked directly or indirectly to the price of an underlying asset. On the Singapore Exchange, the underlying asset of a warrant is usually a stock index (e.g. STI, Hang Seng, Nikkei 225, etc) or one of the larger companies listed on SGX (e.g. Capitaland, Cosco, DBS, etc). Outside Singapore, the underlying asset can be currencies, bonds, commodities or just about anything else that has a price attached to it. Investors who are very keen on warrants may eventually invest via Hong Kong as well since it has a larger market with more warrants to choose from.

Forms of Warrants:

Of the 3 forms, the structured warrant is the most common form in Singapore and will be the focus of this three-part series on warrants.

There are at least 3 forms of warrants available in Singapore, including company warrants, structured warrants and investment warrants. Company warrants are issued by a listed company that may be exchanged for new shares if the company’s share price reaches a pre-determined level. Structured warrants (also known as Covered warrants) and Investment warrants are issued by unrelated third-party banks such as Societe Generale, Macquarie or Deutsche Bank. Investors of structured warrants are not entitled to any stock dividends declared by an underlying company, unlike investment warrants. Of the 3 forms, the structured warrant is the most common form in Singapore and will be the focus of this three-part series on warrants.

Basics of Warrants:

Warrants come in 2 types, Call warrants and Put warrants. Both types will always have an exercise price (also known as strike price) which is used to determine if we have the right to buy or sell the underlying asset. How about an example? Let’s say we have bought a warrant with an exercise price of $15 and the underlying asset is DBS shares. With a call warrant, we will have the right to exercise the warrant and buy DBS shares at $15 if the share price of DBS moves to $15 or higher. On the other hand, a put warrant gives us the right to sell DBS shares at $15 if its share price becomes $15 or lower. In either scenario, we have benefited from a favourable movement of the underlying share price.

An even more specific example? Let’s say the share price of DBS climbed to $20 and we are still holding on to the DBS call warrant with a $15 exercise price. For every DBS share that we can buy through the warrant, we gain $5! Why? Simply because we are now entitled to buy DBS shares at $15 even though the market price for these shares is much higher at $20. If we can exercise our right and sell the DBS shares immediately back into the market, our gain per DBS share will be $20 - $15 = $5.

… a warrant is designed to have a short life and can expire quite quickly. New warrants can be issued with an expiry date of as short as 3 months.

However, a warrant is designed to have a short life and can expire quite quickly. New warrants can be issued with an expiry date of as short as 3 months. After a warrant is issued, we can buy or sell this warrant just like stocks until 5 trading days before its stated expiry date. If the DBS warrant we bought cannot be exercised because the underlying DBS share price did not move in our favour, the warrant expires worthless.

Another characteristic of warrants that investors must know is the exercise style. All call and put warrants can follow the European or American style. American-style warrants can be exercised at any time prior to its expiry date, while European-style warrants can only be exercised on its expiry date and not before. Fortunately, most warrants available on SGX belong to the European-style, simplifying one aspect for potential investors.

Comparing Warrants to Stocks:

… warrants allow us to invest with less money upfront and yet make bigger gains or losses …

There are at least 3 differences between warrants and stocks in Singapore that investors must be aware of. The first and most important difference is the leverage effect when investing in warrants. This means that warrants allow us to invest with less money upfront and yet make bigger gains or losses, as compared to investing the same amount of money in the underlying stock. The leverage effect is possible because warrants are much cheaper to buy than the underlying.

Using the DBS example again, each share of DBS may cost $12 to buy, but any warrants on DBS will cost much less, let’s say $0.50 per warrant. As the price of DBS shares change, the DBS warrant price also changes, but often by a much larger percentage. For this reason, we can get a larger gain or loss by investing in a DBS warrant compared to investing in DBS shares directly.

The other major difference between warrants and stocks is the limited life of a warrant. Stocks can be held for as long as you wish unless the company goes bankrupt. A warrant, however, always has a stated expiry date and is only appropriate as short-term investments.

Finally, the last difference is minor but nevertheless important to know. SGX charges a 0.04% clearing fee for stocks but a slightly higher clearing fee (0.05%) for warrants.

For more on warrants, do refer to the second and third articles that further explains why should we invest in warrants, factors that determine warrant prices, terms we will see when investing in warrants, investment strategies for warrants and all other important aspects that we must know before investing in warrants.

SGX Structured Warrants (Part 3)

2009-08-25T20:04:00.001+08:00

This is the final part of a three-part series on structured warrants on the Singapore Exchange (SGX). The first two articles can be found here and here. This week, we focus on key warrants terms that investors must know, the specific methods of warrant investing and key investment risks for warrants.

[Photo: Ed100]

Only for CashBench Group Members

Key Warrant Terms:

If you have found a good reason to invest in warrants by now, it’s time to go through the key warrant terms that you will encounter when investing. Among these terms, the more important ones are the warrant name format, and conversion ratio. These have been placed right at the top of this section. The remaining terms are more technical in nature and are also included for your reference.

Warrant Name Format

First, let’s start with the name of a warrant on the SGX. Every listed warrant uses a name that contains some useful information to the investor. It follows this format:

[Underlying]	[Ex. Price]	[Issuer]	[Ex. Style]	[Call or Put]	[Expiry Date]
*STI*	*3000*	*SGA*	e	CW	*091029*

An example of a warrant name is STI 3000SGAeCW091029. The name tells us that the underlying asset of this warrant is the STI index with an exercise price of 3000. Since the STI is an index, 3000 refers to the index level and not a dollar amount. For warrants on a single underlying stock, the warrant name does not include the exercise price. Next, the third-party issuer is SGA, or Societe Generale. Other common issuers are DB for Deutsche Bank and MBL for Macquarie Bank. The “e” tells us the exercise style is European. CW represents a Call Warrant, whereas PW means a Put Warrant. The last 6 digits is the expiry date. For this example, 091029 refers to an expiry date of 29 Oct 2009. The 6 digits therefore uses the YYMMDD date format.

Despite the useful information contained within the warrant name, these are not sufficient to a potential investor. There are other terms you may encounter and they are covered in the rest of this section.

Conversion Ratio

The conversion ratio for a warrant is another term that every warrant investor must know. When a warrant investor exercises the right to buy or sell the underlying asset of a warrant, the conversion ratio determines the number of warrants needed to buy or sell each underlying asset. For example, a 1-to-1 conversion ratio for a DBS call warrant means 1 warrant can be used to buy 1 underlying DBS share. If the ratio is 10-to-1, 10 warrants is needed to buy 1 underlying DBS share, and so on.

3 States of Every Warrant

Next, we look at the 3 possible states of a warrant. Every warrant is always in one of 3 states, In-The-Money (ITM), Out-of-The-Money (OTM), or At-The-Money (ATM). These are just short forms to describe if the warrant has any exercise value.

In-The-Money (ITM) occurs when the warrant has exercise value. For a call warrant, the current underlying asset price must be higher than its exercise price (Example: Call warrant with exercise price of $15 and the current underlying is $20). For a put warrant, the current underlying price must be lower than its exercise price.
Out-of-The-Money (OTM) is the reverse of ITM where a warrant does not currently has any exercise value. We do not have any right to exercise a warrant in an OTM state, and if it remains such as, the warrant expires worthless.
At-The-Money (ATM) occurs when the current underlying asset price of a call or put warrant is exactly equal to its exercise price (Example: Call warrant with an exercise price of $15, and the current underlying price is $15 too).

Intrinsic Value & Time Value

Intrinsic Value is just another name for Exercise Value … equal to the gain we get if we can exercise the warrant immediately…

Next, the price of every warrant can always be broken down into 2 components, intrinsic value or time value:

A warrant has intrinsic value only when it is in the ITM state. Therefore, intrinsic value is just another name for exercise value. Intrinsic value is equal to the gain we get if we can exercise the warrant immediately. (Example: Call warrant with exercise price of $15 and underlying share price is now $20. The intrinsic value is then calculated as $20 - $15 = $5).
All warrants also have a time value. This value is not as simple to calculate. Investors just need to know that the time value of a warrant quickly decreases to zero as its expiry date approaches. This is also the reason why investors do not usually invest in warrants that will expire soon because the price of an expiring warrant is more likely to drop due to a rapidly decreasing time value.

Together, the intrinsic value and time value will equal the price of a warrant. This is the price that an investor will need to pay to buy a warrant. As a warrant will always has some time value left before its expiry date, the price of a warrant is always positive.

Premium

We have just a few more terms to cover. Premium for warrants refer to the percentage price change in the underlying asset needed to break even. The calculation of premium assumes we will hold the warrant until expiry. For example, a premium of 10% for a DBS call warrant means the share price of DBS must increase by 10% for an investor to cover the cost of buying the warrant. Any further increase means the investor has made a profit.

Some investors choose warrants based on its premium, but this is not usually a good idea because premiums do not determine warrant prices. Instead, investors should use the major factors described in the second article of this series (E.g. Underlying Asset Price, Implied Volatility, etc) to choose which warrants to invest in.

Gearing, Effective Gearing, & Delta

... a 5x Effective Gearing means a 10% increase in DBS Shares will result in a 50% increase in the DBS warrant price.

Gearing and Effective Gearing are measures used to determine the leverage effect of buying a warrant compared to buying the underlying asset. Effective Gearing is the more accurate measure, calculated using the Delta and Gearing of the warrant. There is however no need to know the specific calculation.

What’s important here is to interpret Effective Gearing. For example, if a warrant has an Effective Gearing of 5 times, the warrant price will theoretically change 5 times more than the underlying asset. Using the DBS shares example again, a 5x Effective Gearing means a 10% increase in DBS shares will result in a 50% increase in the DBS warrant price.

However, please note that the Effective Gearing of a warrant is not constant and changes as the warrant moves among the 3 states (OTM, ATM & ITM). For this reason, Effective Gearing is best used as an approximate reference and investors may want to monitor this regularly for changes.

How to invest in Warrants:

There are 2 basic approaches to investing in warrants, buy and hold, or sell-before-expiry.

If you have read this far, you must be eager to start investing in warrants. We are almost ready for real action! There are 2 basic approaches to investing in warrants: buy and hold, or sell-before-expiry.

Buy & Hold Approach

This approach is not usually recommended, and the reasoning is simple. It is already a tough job to forecast whether the underlying asset price of a warrant will increase or decrease. What’s more, there are other factors that influence warrant prices as CashBench has already explained. If we adopt a Buy & Hold approach, how can we be sure that all these factors are working in our favour on a single day – the day that the warrant expires?

However, if you do feel extremely confident of your forecast, do take note of the following points:

Auto-Exercise / Exercise Notice: Don’t assume that a warrant that has exercise value will be automatically exercised on your behalf. It often is, but if it isn’t, you must submit an exercise notice. Details will be available with the issuer of the warrant.
Cash / Physical Settlement: You may have an option to either receive cash upon exercising your warrant, or to get the underlying asset transferred to your Central Depository (CDP) account. Again, check with the warrant issuer. Do note that all warrants on stock indices will be cash-settled because it’ll be too messy to distribute the component stocks of the index to you.
Settlement Price: The price that is used to calculate any gains for you is usually not based on the closing price of the underlying asset on the expiry date of the warrant. This will be specified by the warrant issuer in advance, and is typically based on an average of the last 5 closing prices of the underlying before expiry. This helps to avoid deliberate price manipulations by speculators. However, warrants issued for a stock index (e.g. STI) will usually be based on the closing index level on expiry date as stock indices are less subject to manipulations.
Settlement Calculation: To determine how much gain you are entitled to when exercising a warrant, use this formula: (Settlement Price – Exercise Price) ÷ Conversion Ratio. Let’s look at a quick example. We have a call warrant on DBS with a settlement price of $20, an exercise price of $15 and a conversion ratio of 10. The gain per warrant = ($20 - $15) ÷ 10 = $0.50.

Sell-Before-Expiry Approach

All warrant investors … must know that they cannot buy or sell a warrant right up to its expiry date.

The second approach to warrant investing is Sell-Before-Expiry. Compared to the Buy & Hold approach, this approach is more flexible and similar to stock investing. Instead of waiting for the warrant to expire, we buy a warrant and regularly monitor all the major factors that affect its price. Recall that these factors include the price of the underlying asset, implied volatility, and time-to-expiry. The last major factor is the exercise price, but this does not need to be monitored because it remains constant. Instead, we select a warrant with an appropriate exercise price right at the start of investment.

Once the first 2 factors move in our favour considerably, we will sell the warrant immediately and not wait for it to expire. Our gain will simply be the price we sold the warrant minus the price we paid for it initially. Of course, we may also make a loss. Since this approach is so similar to stock investments, many warrant investors use this approach by default.

However, all warrant investors that use this approach must know that they cannot buy or sell a warrant right up to its expiry date. For most warrants, the last trading day is the 5th business day before expiry. If in doubt, check with the warrant issuer!

What are the investment risks:

The maximum loss for warrants is much more likely to occur than stocks because of the limited life of all warrants.

This series on investing in SGX structured warrants is almost complete. You now have almost all the key knowledge required to invest in warrants. We end with the most important section of all: what are the risks of warrants investing?

We already know by now that warrants depend on quite a lot of factors to work properly and there are therefore many risks to warrants investing. Some of the major risks include the following:

Liquidity: You may not always be able to buy or sell a warrant whenever you want to. This is because each warrant has a specified maximum issue size. When there is very strong demand for a particular warrant, the warrant issuer may not have enough remaining warrants to sell to you. This may result in unpredictable and volatile warrant prices.
Currency: Similar to stocks, any warrants that are quoted in a foreign currency is subject to currency fluctuations. These fluctuations may be in your favour or against you.
Issuer: Structured warrants are usually issued by large and stable banks. However, we know that banks can get into trouble too. If the issuing bank fails or goes bankrupt, our warrants may become worthless even if the underlying asset price moved in our favour.
Underlying Asset: Just like any bank, the underlying asset of a warrant can get into trouble too. If the underlying asset is a company and it goes bankrupt, or its shares is suspended or delisted, our warrants may become worthless. Check the warrant terms & conditions for the specific actions that the warrant issuer will do in these scenarios.
Maximum Loss: The maximum loss when investing in warrants is the initial price we paid for the warrants. This is also true for stocks. However, the maximum loss for warrants is much more likely to occur than stocks because of the limited life of all warrants. In just a few months, all money invested in a warrant can go down the drain, never to come back.

You now know all the key features of warrants and every other important aspect needed to start investing. The warrant websites maintained by the major warrant issuers are important references from here onwards. These include Societe Generale, Deutsche Bank and Macquarie Bank. These websites provide information on warrants currently available and related data such as underlying asset price, implied volatility and exercise price.

If you have found this series useful, share your comments and do keep up with the latest analysis, forecasts and news on CashBench. To receive updates or get this series in a single PDF report now, join CashBench on Yahoo! Groups by providing your email address below.

Practise Investing Without Risk

2009-08-18T17:37:00.001+08:00

CashBench once asked a friend, “how much are you willing to lose for an initial investment of $5000?” This friend replied “I'm not a risk taker. $50?”. If you are like this friend, but wants to enjoy the thrill of forecasting the future, what can you do? CashBench suggests a safe option.

[Photo: Sreejith K]

There are many of us who very much prefer to take little or no risk with our own money. Keeping spare cash in the bank is the preferred option, as the thought of an investment falling in value is simply unacceptable. There is nothing wrong with feeling this way. Yesterday, the Shanghai Composite index fell more than 5%. My friend, who can only lose S$50, will probably get a shock if he has invested in China-linked unit trusts or exchange-traded funds (ETFs).

Some of us may simply not be ready for taking risks. Others do not have sufficient spare cash to put into risky investments for a wide variety of reasons. However, it would often be beneficial to practise the forecasting of future events or the direction of markets. As the saying goes, “practice makes perfect”. If you can forecast well, you may be more willing to invest, knowing you’ll be more likely to have a profitable investment.

Make use of “wisdom of the crowds” principle to predict future events … what the majority believes to be true, will usually come true.

So what can we do to practise in a safe and riskless way? CashBench came across the CFO Prediction Market recently and suggests this as one possible avenue to practise your forecasting & investing skills without risking any money. The real purpose of the CFO Prediction Market is to make use of "wisdom of the crowds” principle to predict future events. This is based on the belief that what the majority believes to be true, will usually come true.

The CFO Prediction Market allows us to place our own forecast of the future and also see what’s the current aggregate forecasts of everyone else. For the Asian or Singapore investor, some relevant forecasts we can place include the closing price of the S&P 500 stock index, the quarter that the US economy stop falling, or even the date where Boeing carries out its first test flight of the 787 Dreamliner aeroplane. Participants of the CFO Prediction Market can forecast a range for any of these events and more, with an initial “cash balance” of $20,000. For example, a participation may use $1000 to forecast that the first test flight of the Dreamliner will occur between Dec 2009 to Jun 2010. A smaller date range will allow you to “gain” more cash if your prediction is correct.

As you can see, forecasting and investing goes hand in hand. The best way to make use of the CFO Prediction Market is to research on each event, and formulate your forecast based on that. If you are confident of your forecast, you can of course use a larger portion of your cash balance for that forecast. However, without adequate research backing up our forecasts, we are just placing bets without any basis.

To practise your forecasting and investing skills, visit the CFO Prediction Market and create an anonymous profile.

Note: CashBench is not affiliated or commissioned by the CFO Prediction Market to publish this article and did not receive incentives or compensation of any kind from CFO Prediction Market.

Lowest CFA Level 3 Exam Pass Rate

2009-08-19T22:26:00.001+08:00

This is one of those very rare occasions where CashBench focus more on my personal experience rather than analyse news or give out investment tips. Today, Channel NewsAsia has an article under Singapore News on the 45% pass rate for all CFA candidates. This is across all three CFA levels around the globe, based on results of the recent Jun 2009 examinations. In the Asia Pacific region, the passing rate was even lower at 42%. Right here in Singapore, 7,800 signed up for one of the strength-draining 6-hour exams this year. In fact, the results for levels 2 and 3 were only released yesterday, and represents an important milestone for CashBench.

First, the release of the results meant that CashBench has passed the third and final level of the CFA examinations. Each of the 3 levels were so rigorous that only a very well-prepared participant can ever dream of passing. Of all the investment related programmes or certifications out there, the CFA charter holder examinations is often regarded as the most difficult and rigorous. Currently, Singapore only has 2,343 CFA chart holders who have passed all exams and accumulated the required professional experience. Hence, it is often a pre-requisite and/or preferred qualification for many senior investment related positions.

Second, this year’s CFA level 3 examination was also significant in another way. Usually, most participants at CFA level 3 will already be very well prepared since they have gone through 2 rigorous levels beforehand. However, since the CFA examinations started in 1963, the global passing rate for level 3 participants this year is the lowest ever! To be part of the 49% who have passed the level 3 examination for 2009 is therefore even more special personally.

CashBench is glad to have gone through this journey nevertheless as participating in both a top-ranked MBA programme as well as the CFA program simultaneously meant that CashBench is much more well-versed across business and finance, particularly in investment-related sub-fields. For those who would like some extra ad-hoc help for their own CFA examinations, CashBench has the CFA Ace and CFA Ace Premium service to answer CFA related questions that you may have while preparing for the examinations.

Finally, and most importantly, CashBench wants to especially thank two friends who helped to kick-start my CFA journey. For the first friend, the act was simple but crucial. This friend owned a CFA-approved calculator and very generously gave away the calculator to CashBench 2 years ago. There are in fact only 2 calculator models approved for use in CFA examinations and this simple act meant that CashBench need not buy a new one. The calculator is still working :) The help from a second friend was more indirect but also crucial. When CashBench has just started MBA classes, one of his classmates started sharing on the CFA program and the classmate’s own experience in pursuing the program. Without this generous and unreserved sharing, CashBench may not have started and passed the CFA examinations so soon. To both friends, CashBench says a very big thank you!

Essential Tips on SGS Bonds

2009-03-03T14:28:00.029+08:00

Following the earlier post on getting more bang for your buck through SGS Bonds, what are they really, and what are the 3 key tips you must know before investing?

SGS Bonds are “Singapore Government Securities”. They are safe investments guaranteed by the Singapore government and are often compared with fixed deposits.

1. How are SGS Bonds similar to fixed deposits?

SGS Bonds are like fixed deposits because the amount invested are not returned to you until the maturity of the bond. By investing in a SGS Bond, you have effectively lent money to the Singapore government until the bond matures. Every SGS Bond has a stated maturity date. For the 3 SGS bonds below for example, the N506100E SGS bond will mature on 1 Feb 2011.

This means if you buy $5,100 worth of N506100E bonds today, you will not usually see the money again until Feb 2011. You will also not receive $5,100 exactly. Bonds are issued in $1,000 face value each. You will only receive the face value upon maturity. If you buy 5 bonds with $5,100 today, you will receive $5,000 in Feb 2011 upon maturity. The bond price you pay for will usually be different from their face value because bonds can be bought or sold on any day just like shares of listed companies. Bond prices will hence rise and fall too.

“The other similarity with fixed deposits is the assured “interest” you get … referred to as coupon…”

The other similarity with fixed deposits is the assured “interest” that you will receive, but this is referred to as coupon in SGS bonds. Using the N506100E SGS Bond as an example again, the assured coupon is 3.125% and is based on the face value of the bond. If you hold 5 of the N506100E bond, you will be guaranteed to receive $156.25 every year until the bond matures. (Calculated as follows: 0.03125 x $5000 = $156.25) Coupons are not paid all at one go but every 6 months. The exact month varies with the bond you buy, and depends on the month that the bond matures. For the N506100E SGS Bond, it’ll be February and August every year for 2 years. Each 6-month payment will therefore be $78.13 for owning 5 of the N506100E SGS bonds.

2. Where do I buy SGS Bonds?

Retail investors like you and me may be less familiar with SGS bonds because there are limited places where you can buy them. However, bonds issued by developed and stable countries are favourite investments of institutional investors and even other countries. You will have read that the Chinese government in particular holds a large amount of US Government bonds. To get your hands on some SGS Bonds that has already been auctioned and issued by the Singapore government, you can buy them online via fundsupermart.com or some stock brokers. Do note that fundsupermart.com does not sell every SGS bond, but it does have a good selection of bonds at different maturities. Alternatively, you can also bid for new issues or re-issues of SGS Bonds via a local bank’s ATM or visit one of the bank’s branches in person.

Before you buy SGS bonds from Fundsupermart or a stock broker, you must also know the difference between quoted / dirty prices and yields. The prices quoted for a bond is usually not the actual price you will pay per bond unless you buy it just after a 6-month coupon has been paid. Otherwise, the bond price will have a small amount added to the quoted price as payment for the coupon that is due to the bond seller since the last coupon-payment date. The actual price you pay for the bond is called the dirty price.

Yield is a measure of the return you get for investing in SGS bonds. For example, if you invest $1000 and get back $1100, your return will be 10%.

“Compare the yield of a bond with … fixed deposits, savings account or elsewhere. Do not use the coupon rate as the basis of comparison.”

The yield measure commonly used for bonds is “Yield to Maturity” For the N506100E bond, its yield will usually not be exactly $3.125% because the price of the bond can rise and drop from day to day as noted earlier. The yield of a bond will change as the bond price changes. As an example, the yield of the N506100E bond will drop below 3.125% when the price per bond moves above $1000. For this reason, you should compare the yield of a bond with the other rates you see from fixed deposits, savings account or elsewhere. Do not use the coupon rate as the basis of comparison. You may also want to read up more on your own for the different yield measures available, what they mean, and how they are calculated.

3. Which SGS Bonds to buy, and when should I sell them?

If you are new to bonds, you can try to buy just 1 SGS bond that will mature in 1 year to familiarise yourself with the entire process. You just need about $1000 spare cash, that will probably be within the means of many. The return you get from a 1-year SGS Bond will still be higher than most savings account rates in Singapore!

Bond Name	Yield (%)
N505100F; Coupon 2.625%; Maturity 01/04/2010	0.33
NX00100T; Coupon 4.625%; Maturity 01/07/2010	0.36
N506100E; Coupon: 3.125%; Maturity 01/02/2011	0.53
NX01100H; Coupon 3.625%; Maturity 01/07/2011	0.54
N507100A; Coupon 2.625%; Maturity 01/04/2012	0.75
NX02100S; Coupon 3.500%; Maturity 01/07/2012	0.80
N507101E; Coupon 2.500%; Maturity 01/10/2012	0.88
N508100V; Coupon 1.625%; Maturity 01/04/2013	0.95
NX03100Z; Coupon 2.250%; Maturity 01/07/2013	1.08
NX04100F; Coupon 3.625%; Maturity 01/07/2014	1.23
N708100S; Coupon 2.875%; Maturity 01/07/2015	1.52
NY01100F; Coupon 3.750%; Maturity 01/09/2016	1.76
NY03100A; Coupon 4.000%; Maturity 01/09/2018	2.06
NY05100N; Coupon 3.250%; Maturity 01/09/2020	2.47
NY07100X; Coupon 3.125%; Maturity 01/09/2022	2.70
NZ07100S; Coupon 3.500%; Maturity 01/03/2027	3.03

You should also note that the yield or return of SGS Bonds generally increases as the maturity of the bond increases. The table above is from fundsupermart.com for the SGS Bonds they do sell as of 3 Mar 2009. You notice the yield increases from 0.33% to 3.03% as the maturity of a SGS Bond gets longer. In particular, the NZ07100S SGS Bond has the longest maturity date on March 2027 with the highest yield of 3.03%.

“(Bond price) gains or losses are on top of the regular 6-month coupons you get while holding on to SGS Bonds…”

You may be thinking, buy the one with the highest yield! :P Sure, but take care here. Your yield for the NZ07100S SGS Bond is guaranteed to be 3.03% only if you do not sell the bond until it matures. If you do sell it before March 2027, your actual return will depend on the prevailing price of the SGS bond when you sell it. For example, if you paid $1005 per bond and later sell it at $998, you’ll lose $7 for every bond. On the other hand, if the bond price rises to $1010, you’ll immediately gain $5 for every bond you sold. These gains or losses are on top of the regular 6-month coupons you get while holding on to SGS Bonds. Bond prices are affected by prevailing interest rates and market forces. If you choose a SGS bond with a maturity and yield you are comfortable with, you can then hold onto your bonds until maturity and get the face value back. Otherwise you need to monitor bond prices and interest rates to be sure you don’t have to sell your bonds at a lower price.

With these CashBench tips, you now know all the key aspects of SGS Bonds to consider before investing in them. For purchases via fundsupermart, there is a 0.1% fee when bonds are sold to you, and on the 6-monthly coupons. For the nitty gritty details, refer to fundsupermart.com. You can also get daily closing prices of SGS bonds at http://www.sgs.gov.sg/, maintained by the Monetary Authority of Singapore. When you do check, note that bond prices are always quoted in $100s and not $1000s. It's just a pricing convention. If a bond is quoted at say $103.50, the quoted price per bond is actually $1035.

Finally, with the introduction of bidding for SGS bonds via ATMs from 1 Jul 2009, CashBench has a separate post on how ATM bidding works, and what are the type of bids you can submit. The post can be found here.

Disclaimer: CashBench is in no way affiliated or commissioned by Fundsupermart.com or any other financial services providers for these information on SGS Bonds.

Why is “dark pool” good for SGX?

2009-08-13T15:49:00.001+08:00

The Straits Times Money section today has the frontpage headline “SGX wades into ‘dark pools’”. However, to the average investor, this sounds just like another venture by the Singapore Exchange (SGX) with no major significance. CashBench points out its relevance to SGX and you.

[Photo: D H Wright]

If you’re wondering what are “dark pools” anyway, these are platforms set up to allow very large investors to buy or sell shares anonymously. Think of dark pools as off-market stock exchanges. These large investors are also not men on the street like us, but invest on behalf of large companies and even governments. Hence they’re usually referred to as “institutional investors”.

… institutional investors … prefer to buy and sell anonymously without affecting market prices.

Dark pools are a great way for institutional investors to adjust their investment portfolio because of the anonymity provided. When institutional investors buy or sell shares, they often move markets because of their large share holdings. However, news can easily leak out and make buying or selling much more expensive for them. Just a hypothetical example, if we learnt that Temasek Holdings is going to sell its 40% stake in a company within the next 3 days, what will many investors do? Follow Temasek and sell! Since the share price of this company will likely drop into the valley, Temasek will get lesser cash for its stake as it need to keep selling over the next 3 days even though the company’s share price continues to drop. Hence, institutional investors such as Temasek prefer to buy and sell anonymously without affecting market prices.

If more and more institutional investors go for dark pools, SGX will … lose more and more of its trading and clearing fees …

So, what is the relevance to SGX? Plenty. Dark pools actually compete with stock exchanges like SGX for business. If more and more institutional investors go for dark pools, SGX will progressively lose more and more of its trading and clearing fees for every buy/sell trade. Dark pools are popular in the US and Europe, and Asia will follow suit in due time. With lower revenues and lower profits, it is unlikely for SGX to repeat its performance of an annualised return of 36% for investors over the past 5 years as pointed out by CashBench in the bluest chips of Singapore article.

If you can’t beat them, join them. It’s brilliant for SGX to “wade” into dark pools now while Asia is only starting to get serious about these platforms. And why just limit ourselves to Singapore companies? SGX’s joint venture with Chi-X will cover companies listed on Australia, Hong Kong and Japan too. As dark pools get popular in Asia, this new source of income from dark pools will substitute any potential drop in revenues in trading/clearing fees. And for investors, SGX will be a more attractive investment option than without this dark pool venture.

Options vs. Warrants

2009-08-10T16:38:00.001+08:00

The Sunday Times published the article “Options trading a better bet than stocks?” on 8 Aug 2009. CashBench readers may be surprised to read that options sound very much like warrants. Here, CashBench takes the opportunity to compare warrants and options on the Singapore Exchange (SGX).

[Photo: Ed100]

First, readers will note that CashBench has an on-going three-part series on SGX structured warrants that discusses the key features of warrants and every important aspect that an investor must know before investing in warrants. The first-part of this series can be found here.

The Sunday Times article was indeed a good introduction to options, however, it did not compare options to warrants, which is appropriate as both share many similar characteristics. CashBench will now point out the three key differences between options and warrants to complement our current series on warrants:

1. Options can be “written”

Recall that warrants come in two types, Call warrants and Put warrants. Investors typically buy a Call warrant if they expect the underlying asset price to rise. Alternatively, we can buy a Put warrant if we expect the underlying asset price to fall.

These two basic types are also available in options. We can therefore buy a Call option or a Put option as well. However, option investors can also “write” an option for a fixed price. For comparison, writing an option is similar to acting like a warrant issuer that issues a new Call or Put warrant. As you can imagine, this increases the risk of options investing. For an explanation, see the second major difference between options and warrants below.

2. Options can result in unlimited loss

In the event that the option can be exercised … our poor investor must cough up the money to pay the profits of the option buyer

A warrant buyer’s maximum loss is always limited to the amount he initially paid for the warrants, be it Call warrants or Put warrants. This is also the case for those who buy options.

However, investors who choose to write options can face an unlimited loss. This is because the only gain from writing an option is the fixed price the investor receives. Once “written”, this option is sold to anybody who wants to buy a call or put option. In the event that the option can be exercised (just like warrants), our poor investor must cough up the money to pay the profits of the option buyer. For this reason, all option writers are subject to the risk of an unlimited loss.

3. Differences in underlying asset

Warrant issuers can choose from a wide range of underlying assets that include major stocks listed on the Singapore Exchange, as well as major stock indices from other countries.

Options on the Singapore Exchange are currently available for the Nikkei 225 Index, MSCI Taiwan Index, MSCI Singapore Index, Eurodollar and Japanese Government Bonds. As you can see, there is not a lot of overlap between the underlying assets of options and warrants. In the Singapore context, warrants generally have a larger selection of underlying assets to choose from. Option investors will also need to open a trading account specific to options/futures before they can start investing in options.

Readers should now have a good idea of the differences between options and warrants. Do look out for the last part of CashBench’s three-part series on warrants too. The first two parts can be found here and here. If you would like to receive a PDF report of this entire series before they are published on CashBench, join the CashBench group on Yahoo! to get the report immediately. Group members will also receive email updates on the latest analysis, forecasts and news from CashBench. Membership is free too, just provide your email address below.

Changes to Financial Reports of SGX Firms

2009-08-05T17:33:00.010+08:00

This post is based on the Business Times article “A tale of two bottom lines” published on 4 Aug 2009. The focus is on the changes in the financial statements reported by Singapore-listed companies that investors must know. Here, CashBench provides a summary of the article, and includes additional supplementary information to help every investor understand these changes.

[Photo: Ramp Creative]

Due to changes made to the Financial Reporting Standard 1 (FRS 1) effective 1 Jan 2009, Singapore-listed companies will change or has changed the presentation of their financial statements. For investors, the key is to understand that the balance sheet is now the statement of financial position, the income statement is renamed as the statement of comprehensive income, and the cash flow statement is now the statement of cash flows.

Companies can choose to report a single statement of comprehensive income, or show two separate statements.

In particular, companies can choose to report a single statement of comprehensive income, or show two separate statements. The second option means companies will include both an income statement and a statement of comprehensive income when reporting company results.

What’s more, additional items reported under comprehensive income will include any changes in equity that are not due to actions by the owners of the company. Some examples include changes in the fair-value of assets meant for sale, gains or losses through hedging, and the translation of foreign currencies back into the reported currency. All these scenarios can affect earnings. Additional explanation for these as follows.

The fair-value (i.e. market value) of assets that are meant to be sold over the short-term can rise or fall in value. Many companies used to report such value changes in the statement of changes in equity, and not in the income statement. With the change in FRS 1, such gains or losses must now be reported directly in the statement of comprehensive income.

Hedging is the process where companies manage risk, usually through the buying or selling of derivative products. An example is the use of futures to manage price risk. A well-known example is Singapore Airlines, who regularly hedges against prices of jet fuel increasing in the future. However, hedging may result in losses if the company made a wrong assessment on the direction of market prices. These gains or losses will now be reported in the statement of comprehensive income too.

Translation of foreign currencies back into the reported currency affect all companies that has operations overseas, or imports & exports to overseas markets. Since a portion of the cash earned is not in Singapore dollars, these must be “translated” back into Singapore dollars for consolidation into the financial statements. Again, companies may gain or lose, depending on the strength of the Singapore dollar. Such gains or losses are also reported in the statement of comprehensive income now.

Overall, these changes means that every investor who regularly tracks the quarterly results or annual reports of Singapore-listed companies will have a better idea of the actual financial situation within these companies.

CashBench Forum

2009-01-01T02:41:00.046+08:00

The CashBench Forum searches recent discussions from finance and stock investment forums in Singapore to enable CashBench readers to track current investor opinions easily. Discussions will generally revolve around companies listed on the Singapore Exchange or on business and finance news. At any one time, discussions for the past 6 hours or more are shown at one go! Click on any title, last post or forum name to view the discussion in full. The investment forums currently tracked are Channel NewsAsia's Market Talk as well as Share Junction. To suggest more forums, do leave a comment or e-mail CashBench.

Global Companies’ Earnings Results

2009-07-30T20:44:00.001+08:00

If you invest globally, check out the Financial Times’ dedicated web page with a collection of the latest company earnings results around the world, including those from the United States, Japan and Europe. This page can be found at http://www.ft.com/earnings. For Singapore-listed company results, the best source is the Business Times, where a tally of earnings will be usually published during earnings season. You can also refer to the detailed announcements published on the Singapore Exchange here. As usual, the headlines from both Financial Times and Business Times can also be found on CashBench at all times for your reference. Enjoy!

Jim Rogers: Chinese markets may collapse

2009-07-29T08:55:00.005+08:00

Translated from Lianhe Zaobao (Chinese), 29 Jul 2009

Investor Jim Rogers told Bloomberg in an interview that the Chinese stock market has risen too quickly since November last year. The Shanghai Composite has already doubled and reached a peak since June 2008. This is not a good sign and the Chinese stock markets may collapse.

Mr. Rogers who is currently the chairman of Rogers Holdings opined that when stock prices rise too quickly, a collapse may be inevitable. Since November, he has not made any new investments in Chinese stocks. However, he has also not sold any shares that he bought through progressive investments since 1988. Mr. Rogers currently resides in Singapore and told Bloomberg “I much prefer to buy when things collapse”. In addition, Mr. Rogers disclosed that he currently prefers investing in commodities rather than shares, as China will require commodities to maintain a sustained economic growth.

He also disagreed with US Treasury Secretary Timothy Geithner that Chinese consumers need to increase consumption to boost economic growth. Instead, he said, “the Chinese consumers are already consuming more. The Chinese economy has such a remarkable performance because they have massive savings and investments. There is no need to tell them to increase consumption and not save”.

Asia Pacific markets continued to climb

2009-07-28T08:03:00.001+08:00

Translated from Lianhe Zaobao (Chinese), published 28 Jul 2009

Market Performance
Stock Index	Closing Level	% Change
Manila	2732.62	2.1
Shanghai	3435.212	1.9
Shenzhen	1126.009	1.9
Singapore	2576.66	1.7
Tokyo	10088.66	1.5
Hong Kong	20251.62	1.4
Seoul	1524.05	1.4
Jakarta	2209.101	1.1
Bangkok	617.83	0.6
Kuala Lumpur	1156.43	0.1
Taipei	7028.43	0.1

As investors expect economic recovery to lead to positive knock-on effects on company earnings, Asia Pacific markets yesterday continued to rise. A fund manager from Credit Suisse Asset Management said an influx of hot money is driving up popular stocks, but there is a growing risk of capital being re-directed to selected markets where more IPOs are carried out.

Among Asia Pacific markets, Manila performed the best with a rise of 2.1% to 2732.62. This is despite a bomb threat at the Manila Stock Exchange. Popular stocks included blue chips such as Manila Electric and Ayala. After trading for the day ended, the Manila Stock Exchange clarified that the bomb threat was a hoax and trading will continue today.

Singapore’s market also rose 1.7% to 2576.66 and has risen 46.3% thus far this year. Among the top gainers are SingTel, UOB and DBS Holdings. These 3 stocks are responsible for a gain of 31 points in the STI index.

A trader said that as economic data is generally positive and earnings results announced to date are better than forecasted, investors are led to believe that stock markets have entered a period of recovery.

In other markets, Hong Kong and Tokyo have each rose 1.4% and 1.5% to 20251.62 and 10088.66 respectively. Shanghai and Shenzhen both rose 1.9% to 3435.212 and 1126.009. As of 9pm yesterday, Europe’s markets are generally rising, of which the FTSE in London has risen 0.1% to 4580.

Citigroup Equity Research expects the second-half performance of markets to be weaker than the second quarter. This is largely due to the continued mixed performance of exports in June. In particular, China’s exports continued to fall without any signs of improvement.

The bluest chips of Singapore

2009-07-17T22:00:00.013+08:00

Following CashBench’s earlier introduction on how to pick out-performers, we have applied the concepts discussed to pick out the bluest of the blue chips in Singapore. Which are these? :)

[Photo: Plutor]

The blue chips of Singapore:

Blue chips usually refer to those companies that are very large and are typically the component stocks of a country’s key stock index. In Singapore, the blue chips are the 30 companies included in the FTSE Straits Times Index. Together, these 30 stocks represent the top 30 listed companies in Singapore by market capitalization and can capture the broad movements of the entire stock market in Singapore. For the latest list of companies within the STI and their recent closing prices, CashBench readers can refer to this page of the Business Times. But, not all blue chips are created equal. Which companies in the STI index should CashBench readers really take note of?

The two bluest chips on the Singapore Exchange:

Would you love to hold onto the shares of a company that consistently performs well in good times or bad. On the Singapore Exchange, there is indeed such a company based on past price movements. After analyzing the performance of all the STI stocks on a 1-year, 3-year and 5-year basis, there are only two companies that consistently ranks within the top 3 performers. They are SGX, the Singapore Exchange itself, and Jardine C&C! These 2 companies provide a positive annualised return, whether you are a shareholder of these companies for just 1 year, 3 years or 5 years. Take Jardine C&C for example, the return for a shareholder for the past 1 year is a respectable 10.50%, that’s really very good compared to the losses we’ve experienced from many other companies over the same period, even the blue chips! Over a 5-year period, the annualised return for Jardine C&C is 24.2% and 35.8% for SGX. To put this into perspective, if you have held these 2 companies for the past 5 years with an initial investment of say $5,000, it would have grown to $9,579 for Jardine C&C or $12,522 for SGX!

There is only ONE company that consistently … performed well based on a raw and risk-adjusted basis over the past 1 year, 3 years and even 5 years.

The only blue chip with a consistently top Sharpe ratio:

Recall in our earlier introduction that the Sharpe ratio is a good indication of the risk-adjusted performance of a company. Not only does it consider the raw performance of a company but also take into account how risky it is to be a shareholder. Using Sharpe ratio as a measure, there is only ONE company that consistently generates a Sharpe ratio among the top 3 of all STI companies. That company is again SGX. This means that on a historical basis, the SGX has performed well based on raw and risk-adjusted basis over the past 1 year, 3 years or even 5 years.

The favourite companies of punters?

Finally, CashBench will also highlight those companies within the STI that are subject to more volatile price swings relative to the other STI companies. Recall that higher volatility will mean these stocks will be more risky to invest in. Because of their higher volatility, these companies may be subject to more frequent trading by punters of the stock market, who will be less likely to hold onto them over a long period. Instead, the stocks are ideal for those who enjoy trading on a more frequent basis to capture those short-term periods where they enjoy an upward trend. The company that is consistently one of the top 3 volatile stocks among STI companies on a 1-year, 3-year or 5-year basis is NOL. Examples of other companies that also tend to have higher price volatilities include CapitalMall Trust, Golden Agri, Cosco Corp, Genting and Jardine C&C.

Notes: This analysis is based on historical price data for the current 30 STI companies up to 26 Jun 2009. Dividends declared or paid by these companies are not taken into consideration. STI companies not quoted in Singapore dollars are also excluded from analysis. The risk-free return for the Sharpe ratio is based on an average rate of 0.25% per year with deposit savings accounts. As usual, this analysis should not be taken to represent a solicitation to buy or sell any particular stocks in the STI.

The CashBench Forum

2009-07-09T20:36:00.007+08:00

[Photo: alexdecarvalho]

CashBench introduces yet another service for readers who want to feel the pulse of the markets. The CashBench Forum is a search-engine that combs through pages from finance and stock investment forums in Singapore for current investor opinions.

Investor discussions on these forums are fast and furious, and the hourly volume is so huge that even the usual search engines like Google or Yahoo! will not be able to catch up. Instead, the CashBench Forum is streets ahead as CashBench tracks these pages much more frequently. In fact, the target is to offer CashBench readers recent discussions that have occurred over the past 6 hours. There are at least 3 key advantages in tracking investor opinions at CashBench:

First, discussions from all tracked forums are listed together, you no longer have to visit each forum separately.
Second, no more clicking from page 1 to page 10. All discussions are listed on a single scrollable page that you can see at one glance with eye-friendly fonts.
Third, CashBench provides complementary information on the same page where these discussions are listed. These include the top business news stories, latest broker reports as well as quotes and charts of the STI and HSI indices amongst others. Readers will also have access to the latest analysis of the markets and securities found exclusively on CashBench.

For a start, the Channel NewsAsia Market Talk and Share Junction forums are tracked on the CashBench forum. The forums on ShareInvestor.com are very popular but have been excluded as they are only open to paid subscribers.

To see any discussion in full, just click on the discussion title or the direct links to the last post or the forum itself. Try it out and tell us what you think. For suggestions and feedback on the CashBench Forum, or on how CashBench can better meet your needs, do leave a comment or send an e-mail to CashBench.

How to select out-performers

2009-07-03T19:00:00.008+08:00

There are many ways to select the stocks we want to buy. Some of us depend on forecasts and day to day events, others depend on gut feel, another group looks into the past for ideas, while there will be those who just plunge in and buy any stocks shooting up quickly. CashBench looks at one of these methods in detail.

[Photo: nDevilTV]

The four methods listed above are not exhaustive by any measure as investors can be very creative when choosing ways to make their buy or sell decisions. Of these four methods, however, only 2 can be consistently applied using numbers and analysis: (1) studying the past, or (2) analysing and forecasting the future. Here, CashBench will focus on looking into the past.

Why looking into the past is useful:

Any investor will know that the past does not guarantee the future. This is perfectly true, but looking into the past performance of stocks or any other assets is still needed and very useful overall. Why? Simply because the past gives us a foundation to base our investing decisions. Of course, the past is not sufficient to make the final call. The best approach is to make use of this foundation and then develop a forecast of the future and from there, make a final decision. If you feel that forecasting is too difficult, you need to minimally look into the past for clues on what stocks to buy and what to avoid.

In fact, all banks and asset management companies know the usefulness of historical performance, and readily provides this information for the range of unit trusts they sell. However, it is much less likely for full historical information on stocks to be provided. The typical stock brokerage firm will provide investors with charting tools that plot the performance of stocks on a 1-year horizon. This is rarely sufficient for an investor who wants to properly analyse the past performance of a stock. Given a choice, what are the 3 indicators we should look out for when studying historical information of stocks?

(a) Stock Return Performance:

“… 50% profit for a stock sounds very good, but if the profit was earned over a 10-year period, the simple annualized return is only 5% per year…”

Stock Performance is a very obvious indicator we need to know. However, historical performance can be reported in many different ways. The discerning investor will not only look at short-term performance over a week or a month, but also look at how the stock has performed over a 1-year, 3-year, 5-year or even 10-year period. Doing so will give you a very good idea if there’s any point in holding onto the stock. Another key performance measure CashBench readers must know is annualised return. This is the annual profit that an investor has enjoyed over a given period. For example, a 50% profit for a stock sounds very good. but if the profit was earned over a 10-year period, the simple annualized return is only 5% per year, which doesn’t sounds impressive anymore!

(b) Volatility of Return:

“A stock that is very volatile is also very risky. Only investors who can take the risk involved should buy these stocks.”

Volatility is another important indicator for stocks. However, it is not as well understood as stock performance. Put simply, historical volatility tells us how stable is the price of a stock.

For example, if a stock’s price stayed close to $5.50 for the entire year, it has low volatility. An investor who buys this stock is typically more certain of the price he has to pay today, tomorrow or even next month. However, the stock may not offer much potential for gains over a short period.

On the other hand, another stock may be much more volatile with a lot of price uncertainty. Its price may be $2 this week, but shoot up to $4.50 next week and then drop to $1 two weeks later. The investor will be much less certain how much profit or loss he can get from buying this stock. This stock is therefore risky to buy, and the investor may get a large profit or large loss over a short period.

As a general rule-of-thumb, a stock that is very volatile is also very risky. Only investors who can take the risk involved should buy these stocks.

(c) Risk-adjusted Returns:

This is yet another measure of stock performance, but takes into account the risk faced by an investor when measuring the performance of the stock he bought. The most common risk-adjusted measure is the Sharpe ratio. CashBench readers who have bought unit trusts will likely be familiar with this ratio. Besides stock performance, the Sharpe ratio considers 2 other factors.

“... aim to buy stocks that can out-perform risk-free returns. If not, why bother to take the risk with stocks!”

The first factor is the Risk-Free Return that we can get from guaranteed investments such as cash left in our savings and CPF accounts, or money invested in SGS Bonds. We are 100% certain that we will get our monthly or half-yearly interest from these investments, hence the gains we receive are risk-free. We must therefore aim to buy stocks that can out-perform risk-free returns. If not, why bother to take the risk with stocks!

Risk-Free Return is however subjective, and depends on where we get our spare cash to invest. If we use the rate for a Singapore savings account to represent risk-free return, it’ll typically be about 0.25% per year. If we use the rate for CPF ordinary accounts, it’ll be much higher at 2.5%.

The second factor in the Sharpe ratio is the volatility of a stock as explained earlier. Together, the Sharpe ratio can be presented using the following formula:

[ Stock Performance – Risk Free Return ] / Volatility

For most unit trust investors, they never need to calculate the Sharpe ratio themselves as it’s usually pre-calculated and presented in a unit trust fact-sheet. Stock investors are less fortunate, as the Sharpe ratio for stocks is less often provided.

“Stocks that have high volatility will get low Sharpe ratios even if they have very good past performance.”

A stock with the highest Sharpe ratio is usually the best choice for investment. It tells us that based on historical performance, this stock has out-performed the risk-free return that we can get elsewhere. Also, the return from this stock is the highest among all stocks being compared after taking into account the volatility of its price. Stocks that have high volatility will get low Sharpe ratios even if they have very good past performance. However, do note that negative Sharpe ratios are meaningless and should not be used as the basis for an investment decision.

CashBench does the hard work:

Now, you must be asking a very important question. Since pre-analyzed historical information of stocks is not that readily available, why bother knowing all these useless details? Here’s where CashBench makes a big difference. :) CashBench will be following up this post with the results of a detailed analysis on the blue chips in Singapore and around Asia. The indicators we have just discussed will be used to uncover stocks with good potential. Understand these indicators as discussed and then sit-back, relax, and look out for the next update from CashBench.

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