Why is economy of Singapore in near crisis.

Singapore's economic is in crisis. The growth in second quarter of 2019 was negative 3.3% which was the lowest in seven years. Non-oil exports shrank 17% compared to the same period last year. Retail sales plunged 8.9% for five consecutive months, car sales shrank 32%, furniture and home appliances fell 15%, computers and technology equipment plummet over 7%, which were the signs of a fall of durable goods. The aftermath of the recession was quickly transmitted to the corporates and led to the cases where the corporate bond transactions have halted. Unprecedented recession has taken over Singapore economy recently.

Singapore is one of the richest countries in Asia. The population of Singapore is about 5.5 million, but it is enough to be the 20th largest economy in the world. Port of Singapore was the world largest trading port (later it was overtaken by Shanghai Port) as a center of transit trade taking advantage of its geological location connecting the Indian Ocean and the Pacific Ocean. And as the world's number one transshipment port, the transshipment volume is responsible about for 20% of the world's transshipment cargo.

Singapore can be regarded to be an economy in which exports and imports are taking over the most part. Singapore's import and export volume exceeds 200% of its gross domestic product. Singapore economy is showing a marked decline in 2019. Since, Singapore's largest trading partner is China, the downturn in China's economy and the outcome of the US-China trade dispute are hurting economy of Singapore directly. Singapore has also served as a financial hub and a gateway to investment in Chinese companies. Indeed, many Chinese real estate developers have raised enormous amounts of financing from Singaporean banks. However, some of which are now in default, which is a factor holding back Singapore's economic growth.

Singapore economy grew through a dictatorship under the leader of Lee Kuan Yew and took advantage of strategic ally of the United States. Also, the economy benefited from globalization for the past 40 years and China’s economic reform. However, while Japan, Korea, and Taiwan have achieved remarkable industrial leaps from automobiles, shipbuilding industry, electronics, and semiconductors. Meanwhile Singapore is mainly focusing on finance, services, and software.

It should be noted that the countermeasures of economic policy makers can create a discriminatory response amid concerns about how the decline in global trade volume due to de-globalization and the US-China trade dispute will have an adverse impact on Singapore's economy.

Source: Big Hit

Signs of recovery in Singapore after the onset of COVID-19.

Singapore economic report, which had recorded the worst economic growth rate ever recorded in the second quarter plunging about 13.4% compared to the same period last year and negative 41.2% compared to the previous quarter. However, economy indicator showed a significant improvement in the third quarter.

According to CNBC on 13^th, the Ministry of Trade and Industry (Singapore) reported that the gross domestic product (GDP) in the third quarter decreased by 7% compared to the same period last year. Compared to the previous quarter, GDP increased by 7.9%. Still, negative growth continued in the third quarter following the second quarter, but the decline was noticeably weakened.

The Ministry of Trade and Industry pointed out, "Better performance of Singapore's economy in the third quarter seems to be the result of the step-by-step reopening of the lockdowns that was partially enforced by the Singaporean government."

In addition, it is interpreted that the 2% increase in GDP of the manufacturing sector compared to the same period last year had a big impact on Singapore's economy rebounding in the third quarter. The manufacturing sector's GDP declined 0.8% in the second quarter.

However, analysts indicated that that it will be difficult until next year for the Singapore economy to enter a recovery phase, with the fear of another pandemic cycle might recur throughout Southeast Asia.

 Source

https://www.straitstimes.com/business/economy/spore-economy-shows-signs-of-recovery-in-q3

Types of Yield Curve Risk: Flattening and Steepening.

There are two types of yield curve risk: steepening and flattening. Steepener means the widening of yield curve. Conversely, a situation in which the yield curve is flat is called flattener.

A yield curve is a line that interest rates of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and economic activity. In general, bonds have a lower interest rate for short-term such as treasury bills and higher interest rates for long-term bonds.

When there is an expectation that the economy will improve in the future, a curve steepening will occur where short-term demand increases and long-term demand decreases. On the contrary, under the forecast that the economy will slow down, the spread in long-term yields and short-term interest rates narrows, leading to curve flattening. This is the reason curve flattening is regarded as a precursor to the economic downturn.

Curve steepening and flattening are divided into two categories, bull(cut policy rate) and bear(raise policy rate).

Bull steepening is a phenomenon in which short-term interest rates fall due to possible policy rate cuts, leading to a curve. For example, when Federal Reserve is likely to lower the interest rates, the expectation of bull market occurs hoping that the economy will recover, and the stock market will be bullish. (interest rate cuts -> low short-term interest rates -> more yield spread

Bear Steepening refers to widening of yield curve caused by rising of long-term interest rates. When the expectations for break-even inflation rises, Federal Reserve tends to hike its policy rates to slow the price from skyrocketing. Investors will sell their fixed-rate long term bond to seek more attractive assets which offer higher interest rates. This will result to bear steepener since investors will likely pursue shorter maturity bonds. (inflation expectation -> interest rate increase -> investor sell long term and buy short-term bonds -> more yield spread)

Bull flattening refers to a flattening curve due to a fall in long-term interest rates. It happens when the inflation rate expectation is low so that investors find more safe-haven assets. For example, Japan had experience of deflation and investors have been purchasing bonds even though they offer low interest. (Low inflation rate -> investors buy assets that are higher than inflation rate)

Bear flattening refers to a flattening curve due to a higher short-term interest rate. The yield curve is to flatten as short-term rates start to ratchet higher in anticipation of the Federal Reserve embarking on a tightening monetary policy.

 

Source 1: Global Monitor

https://now.globalmonitor.co.kr/view.php?ud=2020060922171930721a6a872ef5_41

Source 2: Investopedia

https://www.investopedia.com/terms/y/yieldcurverisk.asp#:~:text=The%20yield%20curve%20risk%20is,in%20a%20fixed%20income%20instrument.&text=When%20market%20interest%20rates%2C%20or,will%20decrease%2C%20and%20vice%20versa.

Zambia is now on default crisis on its dollar-denominated bonds.

Zambia, one of the African nation which has GDP (2019) of 23.06 billion U.S. dollar, is likely to announce its default on the onset of pandemic crisis. The country has delayed to pay its interest on dollar-bond and it may be the first example to prepare for default. 

According to reports, Zambia has requested a six-month suspension of interest payments from US$3 billion dollar creditors, but has been denied. Ahead of next week's meeting, these creditors have already expressed their position not to accept Zambia's request. 

Zambia's Finance Minister said, "If the agreement with creditors fails, interest payments will not be possible with Zambia's limited fiscal capacity, and interest delinquency will not be avoided,". It implies the possibility of default.

Zambia is the world's second-largest copper producer, and has attempted to adjust its external debt to a total of 12 billion dollars amid the economic shock from Covid 19. Copper is an indispensable raw material for the industry, and prices fluctuate significantly responding to the downturn of global economy.

The interest due is on the 21st is about 42.5 million dollars. Generally, if interest is not paid after 30 days, it is classified as a default bond. It is reported that creditors' reluctance to postpone the deadline is due to concerns that they may be burdened unfairly. 

Some of the creditors on the Chinese side have pressed Zambia to ask for interest in China in order to agree on a delay, and Zambia is said to be refusing it. About one-third of Zambia's $12 billion in foreign debt comes from China.

Bondholders want Zambia to enter the IMF's bailout and economic improvement programs. However, Zambia's debt is so high that it is far beyond its eligibility for relief. Since the general election is about 10 months ahead, the possibility of massive fiscal cut is uncertain.  

Source: Global Monitor

https://now.globalmonitor.co.kr/view.php?ud=2020101522480969391a6a872ef5_41

Market Never Forget - Ken Fisher

In average, people misunderstands commonly about the stock market based on confirmation bias. In the book ‘Market Never Forgets’, written by Ken fisher, an American financier and founder of Fisher Investments, refutes to the common errors that market thinks by showing actual market history data. However, Ken Fisher indicates that all of these explanation based on past data cannot explain the future of certainty or possibility, but can provide various probabilities that investors can select.

The book consists of 11 chapters:

1. Fooled by Averages

2. Normal Returns Are Extreme Not Average

3. Getting Average Returns Is Hard Really Hard

4. Volatility Is Volatile

5. Stocks Are Less Volatile Than Bonds?

6. Never a Dull Moment

7. Secular Bear? Secular Bull

8. Debt and Deficient Thinking

9. Long Term Love and Other Investing Errors

10. PoliTicking

11. It’s Always Been a Global World After All

This time is different

Ken Fisher accentuates the idea of ‘This Time is Different’ is always wrong. “The four most expensive words in investing are: 'This time it's different,” said Sir John Templeton, the legendary investor and mutual fund pioneer. Various economic phenomena (ex. economic downturn) are somewhat different, but not very unlike from those experienced in the past. Investors have to bear in mind and evoke the history of the market, which is to find similar events in the past and learn the lesson from it. It will let investors have ability to recognize and respond the uncertain environment better in near future.

Errors: New Normal / Recovery without employment / Double dip fear

During Covid-19, analysts and economists feared of double dip, which did not happen yet. People think that when the unemployment rate is high, the economy can be stagnant, which is usually false. (Unemployment is economic lagging indicator) People usually misapprehend that the economy needs to grow before the stock price rises, which is another false presume. Usually stock prices rise first since it is a leading indicator. 

Don't be fooled by the average

The market average rate of increase is just average. In the actual bull market, the stock price rose much more than the average. Therefore, if investors cannot adhere to the strategy while entering/exiting the market at the wrong time, the outcome is relatively negative. In the beginning of the bull market, especially, the initial trend should not be missed because the rate of increase exceeds the market average. However, many people feel anxious at this time and delay their investment. Conversely, about 2/3 of the entire falls occurs at the end of the bear market.

In the stock market, the author indicates that the average rate of return is not important. It is to buy the dip during the entrance in bull market. However, it is very difficult to determine the timing of seize a chance. Even if investors miss the beginning of the bull market, they should not give up their investment since double dip is unlikely to happen. There is no such thing of limit on the share price hike allowed in a bull market. The market cannot predict even one inch ahead, and this is very normal.

Volatility is normal

The stock market is fluctuating now, has been, and will be forever. Investors may think that the recent volatility has increased and it is painful and difficult to bear. However, the investment gurus are not worried about the daily fluctuations. For novice or people who is deeply affected by his or her atmosphere, TV and Internet should be turned off during the day which will reduce wrong decision making and lead to improved performance by reducing useless trading. Anything traded in a free market economy carries the risk of loss in itself. To overcome it, investors need to train themselves to withstand volatility. If the investment strategy is long term, the worries of volatility is diminished regarding the market will recover in the longer run.

Fear of debt

It is not a surprising news that the government debt crisis has emerged. The debt cycle has been repeated and will recur the same way in the future. It is often thought that an increase in government debt or fiscal deficit will negatively affect to the stock market, but the data is more often reversed.

Intelligent investor will deeply consider of what is likely to happen in the future. They find out that fiscal deficit is not a real problem since the government is boosting the economy by releasing the money. In contrast, when austerity is set by government, then the money in the market will be absorbed and investors won’t be easy to borrow. Most people think deficit can lay negative impact, which is absolutely false.

As long as the debt is at a manageable level (for emerging countries which have massive dollar debt), the ratio to GDP has nothing to do with the stock market. Even defaults are common in emerging countries.

Why stocks

Investors may think gold and real estate can be safe-haven. However, it may not be practically safe assets. And sometimes investors think that stock market can be risky. However, the book disputes about it. History tells that small-cap stock prices rise larger in the section right after the bottom of bear market. Growth stocks such as information technology sector stand out when the short and long-term yield spread (gap) narrows, and value stocks rise when it widens. (When interest rates are low, then it is good for growth stocks since it can strengthen the competitiveness of companies by reducing funding costs.

Political ideology

There is a content that socialist policy is not good for capitalism. Yes it is true, however, some people make bias which is very bad for their investment. When a specific policy comes out, it is necessary to objectively distinguish between the industries that will benefit or suffer according to the policy, not just negatively because the ideology is different. Discarding ideology in decision making must be implemented. No matter which political party does president belong, there is no significant effect on long-term stock market returns.

To think globally

Expanding portfolio globally is one of the most significant. In a global world, all countries are connected to some extent despite the movement of de-globalization. Investors should take a good look at the economic situation of other countries than United States. There might be sudden rise on stock market in individual market when the government reveals its policy including tax cuts. However, there is more chance for intelligent investors to have global insights since cycles circulates internationally. 

The past never predicts the future, because it is about probability not possibility. If investors study the history of the market regularly, they can see the world more accurately and lower the probability of failure. Investing is a game of probability, not certainty, and investors somehow have to work on calculating rational probability.