Monday, July 29, 2013

Journey To Retirement, the next phase -- Investing Research

With my second investment portfolio since started in 2006 still intact, and with current global economy situation in which I foresee a fundamental shift in global economy blueprint, it is probably the appropriate time to start the next phase of the Journey To Retirement, well in fact it has already started in 2012 just that now I have a more focus theme to it.  Having said that, it will be no surprise the ground work of Investing Research will be for my 3rd investment portfolio.

Firstly, I analyzed and foresee there will be a shift in global economic model just like in the case in the mid 90's very selective few saw the uprising of China economy (remember Singapore even launched numerous business Chinese courses to equip people who want to venture into China, it was even an enrichment course in NUS then) while majority of the people still relying heavily on US economy.  The dot com bubble burst in 2000 followed by China admitted to WTO member in 2011 eventually sped up the shift in global economy to a new model, the BRICs.  Then after it was all about BRICs that drove global economy to new high with China displaced Japan to be world number 2 in economy before the US sub prime crisis that dived global economy into recession.  Now the BRICs bubble has burst unfortunately, but we are now in the early stage of a new global economic model.  China ex-premier Wen Jiabao in his 2012 10-year China economy blueprint already stressed that China will transform into a consumer and service based economic model in which it will be a slow, quality and sustainable growth model (you can expect GDP to slower dropping to a level of between 3% to 5% upon successfully transformation and why people are so concerned about their dropping GDP now given that it is meant to be falling) .  The current new leadership of President Xi Jinping and Premier Li Keqiang will lead the transformation for the next decade.  The cue is already out on consumer and service based economic model and there is no better candidate in the world than China to lead the shift in global economic model after all China has the largest population in this world with over 1 billion of people (imagine 1 person contribute U$1, there will be more than US$1b), probably the biggest consumer market.  Singapore being a small nation without natural resources with only a population of 5.2 million all along adopted an open economic style that is to say pretty much tracking what the stronger nations are doing.  Should global economy shifts to the new consumer and service based oriented model, Singapore will have to follow too.  In fact, in the 2012 White Paper for Population, the Government proposes a 6.9 million of population by 2030, that is an almost 33% jump in population for the next 17 years.  Though it stressed it needed this population size to replace generations due to low fertility rate but that could be more to it, that is shaping up Singapore to adopt to a consumer and service oriented model (in which population size is very important).  That should be clue number 2 for the global shift in economic model.

How should from investing perspective benefits from the global shift in economic model ? The answer is none other than investing in companies that play important role in consumer and service based businesses.  What I am going to do is to do a bottom up approach, starting to look at Singapore domestic market, next in line ASEAN and finally North Asia (China, South Korea, Japan, Taiwan, etc), in the order of ascending risk level.

Risk level is important in investing.  Many probably when talk about investing just look at the potential upside but never seriously considered how much risk can take.  One would want to invest in something whose risk level is comfortable with and can have a peaceful nights over the investment despite volatility in the market.  The lowest risk is no doubt companies doing businesses domestically only as we born here, grow up here, work here and eventually retire here and who can know the day to day changes than ourselves ?  Hence, for those companies with only domestic exposure, we can see their fundamental (sorry fundamental is not just about looking at balance sheet, cash flow statement, profit/loss statement or some financial ratios) and decide whether we are comfortable with the risk and potential upside.  Take the example which I always used, CapitaMall Trust, if you want to see how the revenue of it, all you can do is to go to those shopping malls the owned, see with your own eyes the location of the malls, the traffic flow, the type of shops and the shoppers under various economic conditions.

ASEAN will be the next level to look at after Singapore, Singapore is part of ASEAN together with Thailand, Malaysia, Inodnesia, Vietnam, Brunei, Myanmar, Laos, Cambodia and Philipines.  It has a total population of 600 million plus, half of China but more than that of EU and US (the other more prominent consumer markets).  It is another consumer market that cannot be ignored and has lot of potential (Japan current PM Shinzo Abe has been visiting ASEAN nations lately to relationship partnership in helping to recover Japanese economy).  Prior to the 2008 crisis, there was lot of attention on Vietnam but that probably gone too red hot and bubble burst and now people are focusing on Myanmar after it opened up politically.  Short-term wise, Myanmar might be a little bit overly excited but the full potential is not there yet and still have more room to move up.  Singapore probably the most politically stable nation among ASEAN would be a best platform for rest of the world to tap into in venturing into ASEAN.  Apart from Myanmar, countries like Malaysia, Indonesia and Thailand still have potential to open up their economy too.  Not to forget the more laggard Laos and Cambodia and should those 2 getting their political situation to a more stable state and like Myanmar opening up, there will be another great opportunities.  The risk level is higher than those in Singapore when investing as though ASEAN nations are close and near to us but we do not stay there day to day to be aware of what's happening in the country in a daily basis.  However, leverage of proxy that is Singapore companies venturing into ASEAN nations would be able to mitigate some risks.

The last level will be North Asia which consists of nations like China, Japan, South Korea and Taiwan.  China itself warrant to be a level of itself but I foresee they having the same risk level as Japan, South Korea and Taiwan and that is why it is being grouped together.  Japan, South Korea and Taiwan are very rich in term of technology (something that could easily out done US, Samsung vs Apple in mobile devices, Sony vs Microsoft in game consoles, Lenovo vs HP in PC, etc).  Moreover, Asians are pretty much a saver as compared to the West and hence have more cash to spend in a consumer markets.  The reason for the risk level is pretty much the same as ASEAN but with some add-ons that make them a higher risk level than ASEAN.  China is currently undergoing reform and hence would expect causalities in term of businesses and should it not be cautious, it is very easy to invest in companies that eventually are the causalities and not the beneficial after the reform.  Japan after decades of fighting deflation is trying hard to move out of it and with the leadership changing so frequently that has not help the reform.  South Korea main threat is North Korea and Taiwan still much politically divided in its relationship with China.  They need to hit the right note in that.  Hong Kong ? No did not miss that out, in fact Hong Kong is part of China now and it has become a good proxy to access to China.

EU and US ?  Nope did not miss out those two.  In fact of the two, EU would be better after they successfully reform to make it into a stronger EU.  US ? Apart being world number 1 economy (will they still be that 10 years later ?), having USD as global reserved currency and a more superior army strength, there are just so much weakness in other areas that risk to reward is not really worth it.  After 5 years from the crisis, they still can't get the unemployment thing resolve, the nation debt level still at mountain high, a nett deficit nation and why the lawmakers must always wait till the last minutes than can resolve (or kick the can down the road) issues like fiscal cliff, debt ceiling, etc.  True that there are lot of top branded companies in US but for every top brand there, there will be serious and fierce international competitors.  Just look at how Apple, the darling of so many fund managers last year when its share price hit more than US$700 and became the world most expensive company, how it has fared since then.

As mentioned earlier, Investing Research actually started last year with some of them already in my existing second investment portfolio like CapitaMall Trust, SingPost, MapletreeInd, Kep REIT and First REIT.  These stocks will still be in my 3rd investment portfolio unless there is serious fundamental change and will be investing more should opportunity arise.  I will be constantly on a lookout for potential candidates for the Investing Research and write a research report on those, focusing on the consumer and service related theme but also will not rule potentials that not much related to the theme.

Some might wonder since I am starting to research does that means it is the time to invest now.  Answer is NO.  At this junction which I believe is the last leg of the bull market is the best time to screen all the potential candidates as this is the period in which I can see the strength of the horse, how far it can run, or in general the potential upside.  This the the beginning stage to identify all the potential candidates.  The second stage will be wait for recession in which one can really select the strongest among those candidates to invest on.  Why recession ? Recession is the period in which companies' businesses will fall and probably all sort of problems surfaced like companies' debt level and it is through this period that one can see whether the company has the strength or rather the management has the experienced to steer the company out of crisis.  The strongest will stand out during this period.  The final phase of course is putting money to work by investing in those strongest candidates.  As a retail investor, capital limitation is what capped my investment portfolio so even if I could list out 30 candidates and eventually select 10 strongest candidates in phase 2, I might not have the capital for all the 10.

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