$119b wiped off value of S'pore stocks

The stock market rout during the third quarter has wiped $119 billion from the value of listed stocks in Singapore - their worst quarterly showing since the last three months of 2008.

After yesterday's market close, the 800 firms or so listed on the Singapore Exchange are now worth about $715 billion, based on their share prices, a 14 per cent slide from the $834 billion on June 30.

The drop was expected, given how badly the market was hit in the past two months, said Mr Terence Wong, co-head of research at DMG & Partners Securities.

Yesterday, the market had another session to forget, as the benchmark Straits Times Index (STI) dropped 1.2 per cent, or 32.97 points, to 2,675.16.

CPF Special, Medisave & Retirement Accounts to remain unchanged at 4%

The Special, MediSave and Retirement Accounts (SMRA) will remain unchanged at four per cent for another year, the Central Provident Fund (CPF) Board revealed on Friday.

This is because of the heightened uncertainty in the global economy and continued low interest rate environment, the CPF Board explained.

The rate of four per cent has been in place since 2008.

It's been extended twice before, once in 2010 and again in 2011, due to the unfavourable global economic conditions and exceptionally low interest rate environment back then.

Fathers less likely to die of heart problems: Study

(AP) - Fatherhood may be a kick in the old testosterone, but it may also help keep a man alive. New research suggests that dads are a little less likely to die of heart-related problems than childless men are.

The study - by the AARP, the government and several universities - is the largest ever on male fertility and mortality, involving nearly 138,000 men. Although a study like this can't prove that fatherhood and mortality are related, there are plenty of reasons to think they might be, several heart disease experts said.

Marriage, having lots of friends and even having a dog can lower the chance of heart problems and cardiac-related deaths, previous research suggests. Similarly, kids might help take care of you or give you a reason to take better care of yourself.

Also, it takes reasonably good genes to father a child. An inability to do so might mean a genetic weakness that can spell heart trouble down the road.

Gold slumps 2 per cent, ends at $2,064 an ounce

Gold prices sank on Monday, sending the metal below US$1,600 (S$2,064) an ounce for the first time since July.

Gold slumped US$45, or 2 per cent, to close at US$1,594.80. Silver dropped 0.4 per cent to end at US$29.976 an ounce.

Gold plunged 9.6 per cent last week, following the stock market lower. Silver also lost 10.7 per cent.

The Dow Jones industrial average sank 6.4 per cent that week, the biggest drop since October 2008 at the height of the financial crisis.

Precious metal prices continued to fall on Monday even as the Dow gained 2.5 per cent. Stocks rose on optimism that European finance ministers might soon take action to stem the debt crisis there. The slump has marked a sudden turnaround for gold contracts, which were trading for US$1,859.50 an ounce earlier this month.

Part of the reason gold and silver prices continued their slide is that investment managers are selling off metals contracts to offset some of the losses in their stock portfolios, said George Gero, precious metals strategist at RBC Capital Markets.

While metals prices have fallen, they have still appreciated more over the last year than many stocks, Mr Gero said. That means traders can reap profits from selling gold contracts to offset losses in the stock market. Even after its recent plunge, gold is still up 26 per cent from this time last year.

Silver is up 44 per cent. Over the same time period the S&P 500 index is up just 1.2 per cent.
'They have to sell gold as one of their best performers,' Mr Gero said. 'We've been seeing deterioration (in the gold market) since the middle of August, when you started seeing these very volatile days in the stock markets.' December silver fell 12.5 cents, or 0.4 per cent, to end at US$29.976 an ounce. Silver had fallen much more during midday trading, dropping below US$28 an ounce before rallying in the afternoon.
 
December copper gained 0.3 cents, or less than 1 per cent, to finish at $3.283 per pound and October platinum fell US$66.30, or 4 percent, to US$1,546.90 an ounce.

December palladium fell US$15.10, or 2.4 per cent, to US$627.40 an ounce.

In other trading, benchmark oil gained 39 cents to finish at US$80.24 per barrel on the New York Mercantile Exchange.

Heating oil fell 0.29 cents to US$2.803 per gallon, gasoline futures rose 0.4 cents to US$2.5284 per gallon and natural gas fell 8.1 cents to finish at US$3.782 per 1,000 cubic feet.

September wheat gained 7.5 cents to end at US$6.4825 per bushel, corn rose 9.5 cents to US$6.48 per bushel and soybeans fell 1.75 cents to finish at US$12.5975 per bushel.

Workplace deaths in first half of 2011 up year-on-year

The number of workplace deaths went up in the first half of 2011, compared to the same period last year.

There were 30 this year, five more than the 25 recorded last year, the Workplace Safety and Health Council and Ministry of Manpower (MOM) said in a joint media statement on Monday.

Falls from height accounted for almost half of the fatalities. Other causes included being struck by a moving object, and fires or explosions.

The number of occupation-related diseases also increased.

The number more than doubled, from 124 in that period last year to 361 this year.

The authorities said that this was due mostly to reports on deafness induced by work, which were found during an island-wide audit by the MOM.

Cost of living in Singapore increases

Inflation rose 5.7 per cent in August. This figure was more than expected as compared with a year ago.

According to the Department of Statistics, this was faster than the 5.15 per cent forecasted by economists.

Factors responsible for the year-on-year increase include higher cost of accommodation, private road transport and food.

Private road transport costs increased because of the rise in COE premiums.

Compared with August 2010, the cost of housing increased by 9.9 per cent due to higher accommodation cost and electricity tariffs.

Food prices also saw a 3.0 per cent increase due to the higher cost of fresh fish, diary products, eggs, meat and poultry.

In relation to the article I wrote previously about the Bank Deposits Interest Rates, how are we combating inflation effectively if we only put our savings into the banks?

Comparing to Bank Deposits Interest Rates at 0.050% per annum, we are actually losing a lot to inflation at 5.7%.

Revision of Bank Deposits Interest Rates

Sometmes I just browse through bank websites to log in to my internet banking account, happen to drop by to see the deposit interest rates of various banks and I'm quite shocked to realise how low the bank is giving us for our deposits nowadays.

As below are the major banks' deposits interest rates table and I'm sure you know that how much your money is being lost especially to inflation in the coming years ahead.

POSB (POSB Savings)

Standard Chartered (e$aver)

OCBC

UOB

For me, I will definitely keep only sufficient for liquidity and invest the rest into other investment vehicles generate higher returns.

Standard & Poor's downgrades Italy debt rating

WASHINGTON: Standard & Poor's on Monday downgraded Italy's sovereign debt rating, citing economic, fiscal and political weaknesses in the eurozone's third-largest economy.

The rating agency said it had downgraded Italian debt to "A/A-1" from a "A+/A-1+" grade because of "Italy's weakening economic growth prospects."

It added that Italy's weak governing coalition would "limit the government's ability to respond decisively" to events.

"We believe the reduced pace of Italy's economic activity to date will make the government's revised fiscal targets difficult to achieve," S&P said in a statement.

Low labour participation rates, an inefficient public sector and modest foreign investment flows were cited as key drags on growth.

"In our view, the authorities remain reluctant to tackle these issues," the agency said.

S&P's rival rating agency Moody's has already indicated it is weighing its rating for Italy,
which is currently at Aa2, two notches below Moody's top triple-A rating.

Italy has tried to reassure investors by announcing a new austerity package which should see the country balance its budget by 2013.

The Magic Of Compounding

Compound interest, a vital component of regular investing, can help you achieve your financial goals, such as becoming a millionaire, retiring comfortably or being financially independent.

When you were a kid, perhaps one of your friends asked you the following trick question: "Would you rather have $10,000 per day for 30 days or a penny that doubled in value every day for 30 days?" Today, we know to choose the doubling penny, because at the end of 30 days, we'd have about $5 million versus the $300,000 we'd have if we chose $10,000 per day.
Compound interest is often called the eighth wonder of the world, because it seems to possess magical powers, like turning a penny into $5 million. The great part about compound interest is that it applies to money, and it helps us to achieve our financial goals, such as becoming a millionaire, retiring comfortably, or being financially independent.

The components of compound interest

A dollar invested at a 10% return will be worth $1.10 in a year. Invest that $1.10 and get 10% again, and you'll end up with $1.21 two years from your original investment. The first year earned you only $0.10, but the second generated $0.11. This is compounding at its most basic level: gains begetting more gains. Increase the amounts and the time involved, and the benefits of compounding become much more pronounced.Compound interest can be calculated with the following formula:

FV = PV (1 + i)^N

FV = Future Value (the amount you will have in the future)

PV = Present Value (the amount you have today)

i = Interest (your rate of return or interest rate earned)

N = Number of Years (the length of time you invest)

Who wants to be a millionaire?

As a fun way to learn about compound interest, let's examine a few different ways to become a millionaire. First we'll look at a couple of investors and how they have chosen to accumulate $1 million.

1. Jack saves $25,000 per year for 40 years.

2. Jeff starts with $1 and doubles his money each year for 20 years.

While most would love to be able to save $25,000 every year like Jack, this is too difficult for most of us. If we earn an average of $50,000 per year, we would have to save 50% of our salary!

In the second example, Jeff uses compound interest, invests only $1, and earns 100% on his money for 20 consecutive years. The magic of compound interest has made it easy for Jeff to earn his $1 million and to do it in only half the time as Jack. However, Jeff's example is also a little unrealistic since very few investments can earn 100% in any given year, much less for 20 consecutive years.

TIP: A simple way to know the time it takes for money to double is to use the rule of 72. For example, if you wanted to know how many years it would take for an investment earning 12% to double, simply divide 72 by 12, and the answer would be approximately six years. The reverse is also true. If you wanted to know what interest rate you would have to earn to double your money in five years, then divide 72 by five, and the answer is about 15%.

Time is on your side

Between the two extremes of Jeff and Jack, there are realistic situations in which compound interest helps the average individual. One of the key concepts about compounding is this: The earlier you start, the better off you'll be. So what are you waiting for?

Let's consider the case of two other investors, Luke and Walt, who'd also like to become millionaires. Say Luke put $2,000 per year into the market between the ages of 24 and 30, that he earned a 12% after-tax return and that he continued to earn 12% per year until he retired at age 65. Walt also put in $2,000 per year, earned the same return, but waited until he was 30 to start and continued to invest $2,000 per year until he retired at age 65. In the end, both would end up with about $1 million.

However, Luke had to invest only $12,000 (i.e., $2,000 for six years), while Walt had to invest $72,000 ($2,000 for 36 years), or six times the amount that Walt invested, just for waiting an additional six years to start investing.

Clearly, investing early can be at least as important as the actual amount invested over a lifetime. Therefore, to truly benefit from the magic of compounding, it's important to start investing early. We can't stress this fact enough! After all, it's not just how much money you start with that counts, it's also how much time you allow that money to work for you.

In our first example, Jack had to save $25,000 a year for 40 years to reach $1 million without the benefit of compound interest. Luke and Walt, however, were each able to become millionaires by saving only $12,000 and $72,000, respectively, in relatively modest $2,000 increments. Luke and Walt earned $988,000 and $928,000, respectively, thanks to compound interest. Gains beget gains, which beget even larger gains. This is again the magic of compound interest.

Why is compound interest important to investing?

In addition to the amount you invest and an early start, the rate of return you earn from investing is also crucial. The higher the rate, the more money you'll have later. Let's assume that Luke from our previous example had two sisters who, at age 24, also began saving $2,000 a year for six years. But unlike Luke, who earned 12%, sister Charlotte earned only 8%, while sister Rose did not make good investment decisions and earned only 4%.

When they all retired at age 65, Luke would have $1,074,968, Charlotte would have $253,025, and Rose would have only $56,620. Even though Luke earned only 8 percentage points more per year on his investments, or $160 per year more on the initial $2,000 investment, he would end up with about 20 times more money than Rose.

Clearly, a few percentage points in investment returns or interest rates can mean a huge
difference in your future wealth. Therefore, while stocks may be a riskier investment in the short run, in the long run the rewards can certainly outweigh the risks.

The bottom line

Compound interest can help you attain your goals in life. In order to use it most effectively, you should start investing early, invest as much as possible, and attempt to earn a reasonable rate of return.

'Are You Ready?' - Understanding & Starting Cash Flow Management

We all heard how important managing cash flow is. In business, if cash flow management is not up to par, it'll lead to bankruptcy even though it has a strong balance sheet and income statement. Cash flow is the life blood of business, and so it is also the life blood of individuals. It is really just about tracking each drop of cash that comes in and out of your bank account so that you know where the cash flows to at the end of each month or each accounting period that you decide.

 

How to begin, one may ask. I think the very first thing you need to do is to begin tracking the cash that flows out of your pocket every day for a month. If you can have the discipline to do so for around 4 months, you'll get a good picture of what your baseline expenses are. Baseline expenses are what you have to spend on things that are necessary, like food, housing loans, pocket money for kids and parents, bills and so on. Those are the fixed expenses, as opposed to discretionary spending like the occasional gadgets, a new TV or a holiday trip. Discretionary spending is, well, discretionary, so they are variable by nature. It doesn't occur every month, or at least, they shouldn't.

 

If you sum up your variable, discretionary expenses with the fixed, baseline expenses, you'll get the total expenses for that particular month. It sounds easy, but it requires a lot of discipline to actually track and record every transaction you make. Try it, and see if you can last a week. I think everyone can have the discipline to do this, it's just whether you are properly motivated or not. If you don't see the point of doing so, then you won't be motivated to do it. As for me, I've been tracking my expenses of 3-4 year now. I started off wanting to do it for 1 month only, but it gets kind of fun knowing exactly where my cash flows to at the end of the month, so I carried on doing so. Now, I can tell you a very good estimate of how much I spend per month.

 

That figure is one of the aims of tracking your expenses. If you know how much you earn per month, and you know how much you spend per month, you can tell if you have positive or negative cashflow. Positive cashflow occurs when you take in more money than when you spend them i.e. cash inflow is greater than cash outflow. Negative cashflow, on the other hand, occurs when you spend more money than what you take in i.e. cash outflow is greater than cash inflow. It is obviously better to have months in a year where you have positive cashflow.

 

The only way in which you can have a positive cashflow is to spend less than what you earn monthly. There are no two ways about this. Assuming that you have positive cashflow, so where do the difference between the cash inflow and cash outflow go to? It becomes your savings! It is only when you are disciplined enough to control your expenses below your earnings that you are able to save up every month from your take home pay. If your expenses are 50% of your earnings, then you will save 50% every month. If you spend 80% of your earnings, then you will save only 20% every month. What you do not spend is yours to keep, so try to keep at least 10% of your monthly take home income. If you manage to do that, for every $1 that you earn, 10 cents will be yours to keep!

 

It's important to have a healthy saving habit. This cash is important to kick start a lot of programs that are beneficial to you downstream. Without this stream of cash that comes upstream, you will have to work forever just so that you can live each month paycheck to paycheck. The good thing about savings is that you can use this to do 3 important things: Emergency funds, Insurance and Investment. The first, emergency funds are used to deal with immediate life changes like retrenchment, medical fees (the initial cash component that is not paid immediately by insurance) or a punctured tire. The second, insurance, is meant for protection against the loss of life, limb, health conditions and the ability to carry on making an income that generates the cash inflow in the first place. The last, investment, is meant to grow your savings into a bigger sum so that you can achieve the financial goals of your life.

 

Investing with your CPF

YOUNG adults already in the workforce will no doubt be familiar with their CPF (Central Provident Fund) accounts, into which a portion of their monthly salary is automatically squirrelled away, along with a percentage contribution from their employers.

Having surveyed the gamut of asset classes and investment vehicles over the last few months, the Young Investors' Forum takes a look this week at how young working adults can think about investing their CPF savings for the future.

While the prospect of retirement may still be far from the minds of energetic go-getters just scaling the lower rungs of their career ladders, it is only prudent to start preparing for that future today.

Know your CPF

The government bills the CPF as a 'comprehensive social security plan'. Meant to provide working Singaporeans financial security in their old age, the scheme covers retirement, healthcare, home ownership, family protection and asset enhancement.

These aims are met by mandatory monthly sums of money working Singaporeans and their employers channel into each individual's three CPF accounts:

• The Ordinary Account (OA), which is where the bulk of your monthly contribution goes if you're under 35, and stores monies which can be used to buy property and insurance policies, make financial investments or pay for your own or your children's education.


• The Special Account (SA) is to accumulate funds for old age and contingencies, which can be used to invest in retirement-related financial products.


• The Medisave Account's (MA) savings are meant for hospitalisation expenses and approved medical insurance plans.

While entrepreneurs and the self-employed need not contribute to the Ordinary and Special Accounts, they must contribute to the Medisave Account if their yearly net trade income exceeds $6,000.

Without you choosing to invest, CPF savings in all these accounts will earn interest. Funds in the OA earn an interest rate based on the 12-month fixed deposit and month-end savings rates at major local banks, but the CPF Act guarantees a minimum risk-free interest of 2.5 per cent.

For the Special, Medisave (SMA) and Retirement Accounts, which earn an interest rate equal to the 12-month average yield of 10-year Singapore Government Securities (10YSGS) plus one per cent, the government announced last September that it would keep an interest rate floor of 4 per cent till this December.

Also, the first $60,000 you have across your CPF accounts - with up to $20,000 coming from your OA - earns an extra one per cent interest.

Hence, one possible way to grow your CPF savings is to transfer monies from your OA into your SA, to take advantage of the higher interest rate that uninvested savings in the SA earn. But such a move is irreversible, as fund transfers in the opposite direction are not allowed.

CPF Investment Scheme

As long as you are at least 18 years old, are not bankrupt and have more than $20,000 in your OA or more than $40,000 in your SA, you can tap the CPF Investment Scheme (CPFIS) to grow that 'retirement nest egg'.

The CPF Board runs two separate investment schemes for the OA and the SA, allowing for your CPF savings to be put to work via a wide range of instruments, in the hope of reaping a return above the prevailing interest rate.

The ultimate aim, of course, is still to accumulate wealth for retirement, so any profits made from these investments are still subject to the standard CPF withdrawal rules.

If losses are incurred on your CPF investments, you need not top up the accounts from which the investments were made, but your retirement savings would have shrunk.

Financial planners posit that, as a rule of thumb, a person needs about 70 per cent of his last annual income to keep up his current lifestyle in retirement. CPF savings are meant to cover basic retirement needs and may not meet a person's other lifestyle needs - one key motivation for private savings and investments.

Also worth considering before you decide to start investing your CPF savings are any financial obligations that would require payment from a CPF account. For instance, whether you need to use your OA to make monthly housing payments will help you decide how much of your savings you are willing to channel into investments.

Getting started
 
The CPFIS's range of investment options include fixed deposits, bonds, annuities, endowment insurance policies, investment-linked insurance products, unit trusts and exchange traded funds (ETFs).

What is available to you under the CPFIS-OA and the CPFIS-SA differ, since the two accounts are meant to help accumulate savings for different purposes.

So, while OA funds can be invested in fund management accounts, shares, property funds, corporate bonds and gold or gold products, SA savings cannot.

Other restrictions you should be aware of before investing your CPF savings include the fact that you may only invest in unit trusts, exchange traded funds and fund management accounts approved by the CPF Board.

And CPF savings can only be used to purchase common shares, Reits and corporate bonds issued by companies incorporated in Singapore and traded on the Singapore Exchange (SGX).

Also, you can put a maximum of only 35 per cent of your investible savings into shares, Reits and corporate bonds, while the cap on gold (including gold ETFs and other gold products) is 10 per cent.


More details on restrictions and possible charges you may incur from the CPFIS and the other financial intermediaries are available at www.cpf.gov.sg, where you can also calculate how much of your investible CPF savings you have at the moment.

If you intend to use funds from your OA, you will need to apply for a CPF Investment Account with any one of the CPFIS agent banks: DBS, OCBC and UOB. Do note that you can have only one CPF Investment Account at any one time.

Such an account is not needed if you intend to invest from your SA, in which case you can approach investment product providers directly.

Naturally, all the usual caution urged with regard to investing in general will apply to investments made using your CPF savings too.

Any investor must consider his investment time horizon, asset allocation, the risks and returns of each product, and diversification across his portfolio, before committing to an investment - even ones made under the CPFIS.

'No one can guarantee that investments under the CPF Investment Scheme will always be profitable,' the CPF Board states on its website.

'CPF members have to decide for themselves how to invest their savings, and what risks to accept, and exercise prudence and care in investing their CPF savings to ensure their financial well-being after retirement.'

'If they are not confident of investing on their own, they should leave their money in their CPF account which earns interest and is risk-free,' it adds.

Opinion: Car prices to head south soon

At the time of writing, the COE for cars up to 1600cc was at $48,801, and the COE for cars above 1600cc was $70,890. The Open COE, a proxy for the latter, was $70,117.

Around the same time last year, they were between $30,000 and $43,000. And as recently as three years ago, the same premiums were mostly around $15,000 or less. With the COE supply staying tight for the rest of the year, the chances of a crash are as far-fetched as you finding a bikini babe on Pluto.

The world economy and stock markets are faltering, you say? Well, history has shown that the Singapore car market can be pretty resistant to socio-economic influences.

The single biggest determinant of prices has always been the number of entitlement certificates in the system. And the current supply is merely a quarter of what they were in the bountiful years of the mid-2000s.

Yes, if consumer sentiment is dampened by the sorry state of the world's former economic powerhouses (which, if you ask me, have not really recovered from the 2008-2009 financial meltdown), people's appetite for shiny new cars will weaken. But this won't make COE premiums nose-dive. At most, you might witness prices stabilise after a soft landing.

If a recession hits and persists, and employers wield the axe on salaries and headcounts, then all bets are off. But even then, we might not see premiums see-sawing like they did during the Asian financial crisis of 1997-98, because of the limited quantities of COEs currently. And unlike that period, "taxi participation" is a major factor today.

This is because there are many more cab companies as well as a larger population of taxis - both fuelling a demand for COEs. On top of that, the human population in Singapore has also increased significantly.

So, when will COE prices fall back down to below $20,000? Will they ever? The short answer is probably - and sooner than you think.

Again, this has to do with COE supply, which will start to rise as the enormous cohort of cars registered during the COE boom years of 2003-2008 come of age and are scrapped. (COE supply is determined largely by the number of vehicles taken off the road.)



Scrapping bonanza

If you look at the age profile of passenger cars on the road today, you will get a pretty good idea of when this scrapping bonanza will start to happen. The first wave is likely to take place between mid-2013 and early-2014.

The next wave - a bigger one - will be in 2015. And by 2016, we should see COE supply reaching tsunami scale. This will be followed by a couple more years of sizeable quotas before supply starts to shrink yet again.

Barring a fundamental change to the way COE supply is determined, car buyers and sellers will continue to experience a feast-and-famine situation. COE premiums and corresponding new car prices will continue to fluctuate from year to year.

The savvy consumer should align himself or herself to this cycle which, if you'd notice, makes a full circle once every 10 years.

Looking Past The Current Turmoil - Upgrading 12 Markets; Downgrading Europe

Having adjusted our earnings forecasts to better reflect the weaker economic outlook, equity markets remain attractive and we are keeping our "overweight" view on the asset class. Also, the poor year-to-date performance of equities translates to stronger potential upside for most markets from current levels, and we are upgrading our ratings on 12 equity markets as a result.

Key Points:

• Equity markets have experienced sharp declines over the past month, and the substantial losses requires us to reassess our ratings for the various equity markets under our coverage
• Having made changes to our outlook on Euro-zone and US economic growth, we have revised earnings estimates downwards for markets under our coverage
• Muted PE ratios and high levels of excess earnings yield suggest that the stock market is attractively valued
• Recent stock market declines suggest a large permanent impairment to the earnings potential of the stock market in aggregate, but we do not think this is the case and expect any earnings impairment to be temporary
• On the back of stronger potential upside forecasted for markets under our coverage, we are upgrading our star ratings for 12 equity markets
• Given our recessionary forecasts for the Euro-zone and the implications on earnings, we are downgrading our rating on Europe

Sharp Declines For Various Markets

 

Table 1: Sharp Declines in August
Market	Index	MTD (Local Currency)	YTD (Local Currency)
Russia	RTSI$	-18.8%	-9.8%
South Korea	KOSPI	-16.6%	-13.3%
Europe	Stoxx 600	-15.0%	-18.2%
Asia ex-Japan	MSCI Asia ex Jap	-14.5%	-13.9%
China	Hang Seng Mainland 100	-14.3%	-15.0%
Emerging Markets	MSCI EM	-14.2%	-15.2%
Taiwan	TWSE	-13.9%	-17.0%
Singapore	FTSE STI	-13.8%	-13.9%
India	SENSEX	-12.9%	-22.7%
Hong Kong	HSI	-12.7%	-15.0%
Global	MSCI World	-11.4%	-10.0%
Japan	Nikkei 225	-10.5%	-14.0%
Brazil	BOVESPA	-9.3%	-23.0%
USA	S&P 500	-8.9%	-6.4%
Technology	Nasdaq 100	-8.5%	-2.5%
Thailand	SET	-8.5%	0.4%
Indonesia	JCI	-7.0%	3.7%
Malaysia	KLCI	-6.7%	-4.9%
Australia	S&P / ASX 200	-5.1%	-11.5%
Source: Bloomberg; Returns in index currency terms, excluding dividends and as of 26 August 2011

August has been a difficult month for equities, with markets under our coverage declining between 5.1% and 18.8% (see Table 1) on a month-to-date basis as of 26 August 2011. In light of the sharp declines for most equity markets, we are reassessing ratings on the various equity markets under our coverage. 

Adjusting Earnings For Lower Growth

Over the long term, the growth in earnings dictates the returns of the equity market, which is why we place much importance on earnings as an input to our stock market forecasts. Previously, we have been happy to utilise consensus earnings forecasts as a basis for our own estimates, but our economic outlook now differs from the consensus view, requiring some changes to our forecasts. We now expect a mild recession in the Euro-zone and lower-than-expected growth in the US, which has negative implications for corporate earnings, and we have correspondingly lowered earnings estimates for equity markets under our coverage, attempting to factor in lower anticipated economic growth. Corporate earnings will likely see some negative impact in 2012 as growth stalls in the Euro-zone, but we expect the slowdown to be short-lived and thus forecast a stronger recovery in earnings for 2013 (the stronger percentage increase relative to consensus estimates reflects the low base of our 2012 estimates).

Table 2: Revisions to Earnings Forecasts
	iFAST Estimates			Consensus Forecasts
Regional Markets	2011 EG	2012 EG	2013 EG	2011 EG	2012 EG	2013 EG
Asia ex-Japan	11.3%	6.7%	18.7%	14.6%	15.4%	12.2%
Emerging Markets	10.2%	9.5%	16.3%	16.8%	13.8%	11.5%
Europe	-23.0%	20.5%	10.8%	8.1%	12.6%	4.7%
Japan	4.5%	-4.4%	27.6%	4.1%	15.6%	22.8%
US	1.3%	7.5%	19.8%	17.0%	12.9%	10.5%
Single Country/Sector	2011 EG	2012 EG	2013 EG	2011 EG	2012 EG	2013 EG
Australia	18.9%	15.9%	12.6%	30.4%	10.3%	7.5%
Brazil	1.7%	17.1%	15.8%	14.9%	12.1%	14.5%
China	17.7%	8.7%	17.9%	19.0%	14.8%	13.3%
Hong Kong	9.2%	8.0%	13.8%	12.5%	14.5%	12.6%
India	9.5%	16.0%	14.0%	9.9%	17.0%	12.7%
Indonesia	17.2%	17.5%	13.9%	25.8%	20.0%	15.0%
Korea	16.3%	1.9%	17.6%	16.3%	14.4%	11.8%
Malaysia	-1.0%	8.3%	12.9%	6.9%	14.6%	11.0%
Russia	36.2%	5.7%	5.7%	50.5%	5.7%	0.1%
Singapore	0.9%	-6.4%	35.9%	6.0%	9.2%	13.9%
Taiwan	4.0%	2.8%	25.4%	11.1%	16.2%	8.3%
Tech (MSCI AC World IT)	2.5%	18.0%	20.0%	25.6%	14.4%	12.1%
Thailand	15.1%	12.3%	15.4%	25.8%	14.2%	10.8%
Source: Bloomberg, iFAST estimates; data as of 26 August 2011

Valuations Remain Compelling, Especially When Compared Against Bonds

Even with our lowered earnings estimates, valuations for most equity markets under our coverage remain compelling, and several have a single-digit PE ratio based on forecasted 2013 earnings (see Table 3). When one takes into account the paltry yields available on most sovereign debt, the discount on equities is even starker. We calculate excess yields by comparing the inverse of the PE ratio with the yield available on 5-year sovereign bonds to gauge the relative attractiveness of equities vis-à-vis bonds. High excess yields indicate that equities are relatively more attractive while low or even negative excess yields suggest bonds are more attractively valued. At this juncture, excess yields (see Table 4) are strongly positive for almost all equity markets under our coverage, highlighting the relative attractiveness of the equity market and vindicating our “overweight” call on the equity market vis-à-vis bonds. 

Table 3: Valuations remain compelling
PE Ratios
Regional Markets	2010	2011	2012	2013
Asia ex-Japan	12.6	11.3	10.6	8.9
Emerging Markets	11.4	10.3	9.4	8.1
Europe	10.1	13.1	10.9	9.8
Japan	15.1	14.5	15.1	11.9
US	13.8	13.6	12.7	10.6
Single Country/Sector	2010	2011	2012	2013
Australia	14.7	12.4	10.7	9.5
Brazil	10.1	9.9	8.5	7.3
China	11.2	9.5	8.8	7.4
Hong Kong	12.0	11.0	10.2	8.9
India	14.9	13.6	11.8	10.3
Indonesia	18.9	16.2	13.8	12.1
Korea	10.4	8.9	8.8	7.5
Malaysia	15.3	15.5	14.3	12.6
Russia	7.7	5.7	5.4	5.1
Singapore	13.5	13.4	14.3	10.5
Taiwan	13.1	12.6	12.2	9.8
Tech (MSCI AC World IT)	15.1	14.7	12.5	10.4
Thailand	14.8	12.8	11.4	9.9
Source: iFAST estimates, Bloomberg; data as of 26 August 2011

Table 4: High excess yields indicate relative attractiveness of equities
Excess Yield *
Regional Markets	2011	2012	2013
Asia ex-Japan	5.7%	6.3%	8.1%
Emerging Markets	4.1%	5.0%	6.8%
Europe	6.4%	8.0%	9.0%
Japan	6.6%	6.3%	8.1%
US	6.4%	7.0%	8.5%
Single Country/Sector	2011	2012	2013
Australia	4.1%	5.4%	6.6%
Brazil	-2.0%	-0.3%	1.6%
China	6.7%	7.6%	9.7%
Hong Kong	8.3%	9.0%	10.4%
India	-0.9%	0.2%	1.4%
Indonesia	0.0%	1.1%	2.1%
Korea	7.6%	7.8%	9.8%
Malaysia	3.1%	3.6%	4.5%
Russia	10.1%	11.1%	12.2%
Singapore	7.0%	6.5%	9.0%
Taiwan	6.9%	7.1%	9.2%
Tech (MSCI AC World IT)	-	-	-
Thailand	4.3%	5.3%	6.6%
Source: iFAST estimates, Bloomberg; *excess yield based on 5-year sovereign bond yields

Stronger Potential Upside Forecasted For Equity Markets

The substantial declines in many equity markets in August appear to suggest a significant (and permanent) impairment to the earnings potential of the stock market in aggregate. On the other hand, our estimates (which are based on fairly conservative assumptions of global economic growth) suggest that such impairments to earnings will be a temporary affair, and we fully expect corporate earnings to resume their upward trend as global growth ultimately gains traction.  

In our opinion, the sharp falls in equity markets have actually increased our expectations of potential upside for various markets under our coverage, following the substantial decline in market valuations since the beginning of the year (a result of stock prices declining by a much larger extent compared to our estimate of earnings impairments). As of 26 August 2011, our estimates indicate that 9 of the 18 markets under our coverage have the potential to deliver a greater-than-20% annualised return by the end of 2013 (see Table 5).

Table 5: Strong Potential Upside Forecasted
Market	Estimated Upside by end-2013 (annualised %)
China	31.5%
South Korea	25.3%
Emerging Markets	24.2%
Hong Kong	23.2%
Asia ex-Japan	23.0%
Taiwan	23.0%
Brazil	20.8%
Technology	20.5%
Singapore	20.0%
India	16.0%
Australia	18.5%
Russia	17.9%
US	16.0%
Japan	11.4%
Thailand	10.0%
Europe	10.0%
Malaysia	9.8%
Indonesia	9.6%
Source: iFAST estimates; potential returns in index currency terms as of 26 August 2011

Upgrading 12 markets, downgrading just one

Having satisfied ourselves with a more muted outlook on global growth and having made downward adjustments to earnings forecasts, stock markets still sport very attractive valuations (based on our revised estimates which are more conservative compared to the consensus). On the basis of the strong upside we expect, we are upgrading 12 markets under our coverage (see Table 6). Among the list of markets, some of the largest upgrades come from India (2.5 to 4 stars) and Brazil (3.5 to 4.5 stars), which have been two of the worst-performing equity markets year-to-date.

The only market we have downgraded is Europe (4 to 3 stars), on the basis that earnings growth will be hampered by an economic slowdown and will likely be sluggish, even going into 2013. Our projected upside for European equities is thus not as substantial as the other regional equity markets and we have downgraded the market’s rating as a result. Following the changes, Asia ex-Japan and Emerging Markets are our top-rated 5 star regional equity markets, while the North Asian equity markets (South Korea, China, Hong Kong and Taiwan) are the highest-rated single-country markets under our coverage (5 stars). Following our latest changes, all markets under our coverage are rated at 3 stars “attractive” or higher, highlighting the value we see in a depressed equity market.   

Table 6: Changes to Star Ratings
Regional Markets	Star Rating	Old	Rating Change
Asia ex-Japan	5 “Very Attractive”	4 “Very Attractive”	Upgrade
Emerging Markets	5 “Very Attractive”	4.5 “Very Attractive”	Upgrade
Europe	3 “Attractive”	4 “Very Attractive”	Downgrade
Japan	3 “Attractive”	3 “Attractive”	-
US	4 “Very Attractive”	3.5 “Attractive”	Upgrade
Single Country/Sector	Star Rating	Old	Rating Change
Australia	4 “Very Attractive”	3.5 “Attractive”	Upgrade
Brazil	4.5 “Very Attractive”	3.5 “Attractive”	Upgrade
China	5 “Very Attractive”	4.5 “Very Attractive”	Upgrade
Hong Kong	5 “Very Attractive”	4.5 “Very Attractive”	Upgrade
India	4 “Very Attractive”	2.5 “Neutral”	Upgrade
Indonesia	2.5 “Neutral”	2.5 “Neutral”	-
Korea	5 “Very Attractive”	4.5 “Very Attractive”	Upgrade
Malaysia	3 “Attractive”	3 “Attractive”	-
Russia	4 “Very Attractive”	4 “Very Attractive”	-
Singapore	4.5 “Very Attractive”	3.5 “Attractive”	Upgrade
Taiwan	5 “Very Attractive”	4.5 “Very Attractive”	Upgrade
Tech (MSCI AC World IT)	4.5 “Very Attractive”	4 “Very Attractive”	Upgrade
Thailand	3 “Attractive”	3 “Attractive”	-
Source: iFAST compilations

Looking Past The Current Turmoil

Most equity markets have experienced a strong correction, but we doubt that the steep downward movement in prices is justified given that valuations were already modest prior to the recent period of decline and that a deep recession mirroring the recent 2007-2009 experience is not on the cards. Under such tumultuous market conditions, investors should remember to make the distinction between price and value (see “Value, Prices & Volatility”), with price being what one pays (or receives) in the marketplace at any given time, and value being the underlying worth of the companies which make up the stock market. Prices tend to be suppressed when expectations and sentiment are weak, and we expect that investors who can see past the current turmoil will be able to reap substantial rewards when prices become more reflective of the value of the underlying companies in the future.