Market Observations - Aug 2020

The US stock market had been a crazy V-shape roller coaster ride since I last wrote.

1. US Federal Reserve had been creating cash out of nothing to the tune of US$3T to buy junk bonds from financial institutions and stocks from the stock market.
2. US unemployment rate reached 14.7% in Apr, and reduced to 13.3% in May. More companies are expected to file for bankruptcies, which will lead to higher unemployment.
3. US population is still growing, i.e. births > deaths. While the number of covid-19 cases are still increasing, the death rates are fairly constant.

In Singapore,

1. Biggest budget in Singapore's history, S$93B, to primarily support jobs.
2. Increase in business closures, but there is very little information on it, and unemployment rate is not published monthly, unlike the US.
3. ~600k claimed Temporary Relief Fund, which may be a proxy to the extent of unemployment. Assuming 50% are legitimate job loss claims, 300k workers form 300k/3700k = 8% of the 3.7M workforce.

All these shout DEBT.

Warehouse storage needs will increase because businesses will buffer in contingencies, such as stockpiling essential goods, which will increase operating costs. Increase in warehouses may drive automation in warehousing to reduce manpower costs. Warehouse automation is currently a luxury item for businesses with the money, and it's largely purpose-built. A more mobile plug-and-play model will be required for smaller businesses to adopt. Warehouse-as-a-service may appear as the new way to manage the different stocking patterns throughout the year, however, unlikely software that has no physical footprint, warehouses have a physical footprint and for it to work, packaging of products may need to undergo some form of standardisation.

Workers who have been out of a job will likely be in debt longer and pose more risks to the banks, in particular unsecured credit card debt and business loans. With businesses shutting leaving people out of jobs, it's going to be a very difficult process to "restart" economic activity, which is likely why the Singapore government went all out to support businesses during this government-initiated lockdown. It takes 20 years to grow from 1 to 1000 staff, but takes just 1 night to reset to 0. It's unthinkable how much effort it will take to really "resume" normal.

I expect asset inflation to happen. This is because the Fed has been buying US stocks. They commited to do everything they can to support the economy. They are spending US$120B/week. This will prevent the stock market from crashing and cause stock values to become inflated. The money that people earn from the stock market will trickle down to other aspects of the economy. Money will either go into alternative investments (e.g. crypto currencies, gold, art) or property, depending which gives a higher yield at that point in time.

I expect business activity to take a long time to recovery even if a vaccine is available this month (it's not, but I am just thinking this scenario through). Firstly, the vaccine needs time to produce, then we need time to inject it into billions of people. And if there is any allergic or any adverse reaction, it's bound to cause a pause to investigate and refine strategies. By the time we are done, the virus strain could have mutated, so there won't be total control so quickly. Then we will have psychological fear in people because of the try and repeat and try and repeat cycle which will make people feel that maybe it's just safer to stay at home until things get better. The younger ones itching to travel will likely still want to travel, but as long as the country imposes re-entry restrictions, such as having to self-pay $200 for the test, $2000 for a dedicated stay at a hotel and self-pay medical bills, people will think twice.

I expect Singapore property prices to be maintained, with only gradual decreases, as long as unemployment rates don't increase too drastically. This is because the landlords are generally not over-leveraged, thanks to prudent property cooling measures (total debt servicing ratios and loan-to-value ratios) that had been there since 2013. Those who will be selling are likely those who are older, only have 1 property and want to "downgrade to encash" their wealth that is parked in property, because rental yields will not be sufficient to cover living expenses for most people.

I estimate about 300,000 properties to be in the rental market. This is based on a few data points... This article from an MP query: 381,000 Singapore PRs and foreigners owned one private residential property, while 59,000 owned two. 20,000 Singaporeans own three to 10. Fewer than 200 own more than 10 of such properties. Of these private residential property owners, 15 per cent also own HDB flat.

HDB website has about 45,000 rental transactions yearly. If each lease is 2 years, that's 90,000 in the market. Assuming 10% are vacant, it's a total of 100,000 HDB flats available for rent.

Based on URA rental transactions, there are 172,000 condo rental transactions in 2018 and 2019. Assuming 10% are vacant, it's a total of 190,000 condo units.

If we go by some analyst estimates that we will lose 60,000 foreign workers this year, and we assume that on average 2 foreign workers rent 1 unit, it translate to 30,000 units freed up which is 10% of the rental property supply, and vacancy rate will go up to 20%. Rents will definitely fall in the next 2 years at least.

We will only start to see the impact of covid19 when the relief measures gradually expire. These include:
- Travel restrictions lifted (unknown, so that the foreigners who want or need to leave singapore will leave their rented properties and then we will know how many vacant units there will be. Of course, the government will already have all these data but retail investors won't know.)
- Jobs Support Scheme (until end Aug for most businesses except airlines and tourism that will last until end Jan)
- Bankruptcy limit raised by 4 times (until end Oct)
- Property principal and interest repayment waiver (until end Dec)

I will be holding some cash to wait for buying opportunities, for stocks and property (if prices fall).