As we approach the mid year, I am jotting down some of my thoughts. I also re-read the pieces written the past few years to reflect and assess if I need to calibrate my decision-making process.
Compared with the first six months of last year where crypto went through a boom and bust, and Russian sanctions disrupted raw material supply big time, the first six months of this year was peacefully quiet. The contrast is so stark that it feels like we are in the eye of the storm -- no sound, no wind, you can hear a needle fall on the floor, market frenzy indicators (bond yield curve, inflation rate, debt-to-GDP ratio) are all shouting abnormality, yet economic indicators (unemployment rate, non-performing-loans, salary growth) looks like a normal market expansion.
With that backdrop, I will be sharing a bit of what I did in the past six 6 months in a few areas.
Singapore Savings Bonds (SSB)
I had been applying for SSB every month since Jun last year, redeeming lower yield issues, and replacing them with newer higher yield issues, and the last issue I bought was the May issue (apply in Apr, issued on 1 May). As a result, I now have SSB from 9 different issue dates, and the lowest 10-yr rates is 2.9%. Why I couldn't bump out my 2.9% issue was because I balanced returns and risk not being allocated the issue due to multiple over-subscribed issues, such as SBDec22 GX22120S 3.47% where the maximum allocated was $14,500. Had the Jun issue been >3%, that 2.9% issue would have been recycled. As you can buy and redeem in the same cycle, you need to have enough cash "float" -- which means if I want to redeem $30,000 from a previous issue, I need to deduct $30,000 from my bank account to apply for the next issue first, then wait for 4-5 days for the $30,000 from the redemption to be returned to my bank account.
My objective was to create a "bond ladder" -- stagger $200,000 (which is the SSB max threshold) over 6 months so that there is interest payout every month, hence each issue I recycled was also about $30,000, except for some months where SSB was over-subscribed and there was a cap. I am happy with this part of portfolio which I don't need to worry about for the next 10 years if savings interest rates were to fall. If rates rise, then I will continue to recycle the cash. Just for my future musing, these were the issues with allocation cap:
- SBAug22 GX22080V 3.0% - $9,000
- SBNov22 GX22110A 3.21% - $10,000
- SBDec22 GX22120S 3.47% - $14,500
- SBJAN23 GX23010Z 3.26% - $172,500
So if you had been lucky enough to apply $172,500 in Dec for Jan issue, you will be guaranteed 3.26% interest over 10 years.
From the SSB rates, we can see that rates peaked in Dec 2022.
Fixed Deposit
Dec was also the month I rushed to place 1-year fixed deposits at CIMB at 4.15% p.a. I deployed all my cash into FD. The cash I got from my stock sale were all put in FD and SSB. You will only understand the cash strapped feeling when you actually have to calculate your daily expenses needs to ensure you don't run out of cash, yet at the same time maximise the returns of redeeming older issues and applying new issues. There were a few days where I felt like I had miscalculated and out of money, and I had that few moments of understanding of what people living in poverty feel everyday. I borrowed some money to cover some big expenses, and also deferred certain payments until I get some money back in early Jan, and my T-bills maturing in Mar.
FD rates also peaked in Dec.
REITs
REITs in Singapore was relatively overvalued where blue chip dividend rates were 4.5% vs 4.15% FD, so I bought Prime US REIT which was one of the better distressed pure-US REIT (the other SGX listed REITs were Manulife, KBS, Digital Core). There was a momentary rebound in Jan-Feb where you felt like you struck lottery buying them -- rising 20% in a week at one point, and then the next moment, it will crash down lower. To give you a sense of the descend, I will list my transactions:
- 21 Oct 2022 - buy 8,000 @ 0.45
- 9 Jan 2023 - buy 10,000 @ 0.385
- 1 Jun 2023 - buy 15,000 @ 0.20
My average price is USD 0.32. The "usual" dividend is 6.8 cents (which is 31% yield based on the last done price of 0.22). How I worked out my margin of safety is to assume a 50% reduction in dividend, and I decided to add more to reduce my average price, to translate to 10% yield if dividends drop by 50%. Of course if dividends drop by 75%, then my yield will be 5% instead, and if dividends drop to 0, then my yield is 0, but this is just risk-return trade-offs. Overall, sizing matters and this is about 3% of my SG-stock portfolio. Prime US REIT is the only stock I bought since my last purchase of UOB stock in Aug 2022 where banks look super attractive because their yields were higher than blue chip REITs.
Warchest
If not for the fact that I did partial capital repayment to reduce my mortgage loan (to reduce interest payments), I would have nibbled a little on SG REITs (the Keppel and Mapletrees are really very attractive now). :P This is the classic investor's dilemma, when bargains appear, you are likely equally to be cash deprived, and my strategy is to maintain a warchest to capitalise on windows of opportunity. If tomorrow the REITs I am eyeing on become 7% yield players, I will deploy my warchest. Until that happens, risk premium isn't attractive enough to slaughter a 3% paying 10-yr risk-free bond - SSB.
Housing Loan
I was very lucky to secure 1% p.a. fixed 1-year loan early last year for my mortgage loan. I recently did loan repricing and secured a 3.38% p.a. fixed 3-year loan. I had to sign a new contract because without a new contract, I will need to pay 4.5% p.a. I will only know if I am lucky 1 year later. There was an article about
38% of residential mortgage loans are now on floating rates loan package,
7 months ago the figure was 37%, so if there is anything to read into the 1% increase, it's that consumers generally expect rates to fall. Fixed rates in banks across the board have fallen from the Jan peaks of more than 4%.
Why I chose a 3-year loan as opposed to a fixed 3.65% 1-year loan was because I don't know where rates are heading in the future. If I had known that rates can rise 500% in 1 year, I would have opted for the 3-year 1.85% p.a. loan back when I chose the 1-year loan. If rates fall back to 1.85% within 1 year, I will just pay the 1.5% penalty to break the contract and switch bank.
Conclusion
We are not in blood-on-the-streets yet. We averted a crash thanks to the
US central bank committing to guarantee all Silicon Valley Bank deposits above the deposit insurance limit of USD 250,000. That bank run would have crashed the markets. Today's market feels very similar to 2011 where there are signs of fragility in pockets of the economy and when Syria war started, every little jiggle triggers some panic and risk evaluation. This is the start of the bargain market. Back then I described the market as having the various large central banks applying a "damping function" to slow the impact of a crash over the course of a few years. Since 2011, I had the same "feels like 2011" feeling in the
2015 china flash crash where bank stocks crashed from trading firm bankruptcy, bribery scandals and oil price crash, and then the 2016 REITs crashed, and when everyone thought there was more to come, the REITs crash were the last. Post Mar 2020 covid crash, there was the same "feels like 2011" after that.
If there is going to be any recession in the second half of the year, my guess is that it's going to be a technical recession. Based on the track record of how various central banks respond to these mini crisis, it's hard to foresee a full blown market crash like that one we saw in Lehman brothers where the "Big Short" movie portrayed the Fed as the last potential saviour who did not bail out the first casualty fast enough.
