Wednesday, March 6, 2024

Equity Risk Premium in US market

Equity Risk Premium (ERP) refers to the additional return over risk-free interest rate for holding equity. 

ERP can be computed by taking earnings yield (inverse of P/E ratio) minus risk-free rate. 

Current Fed rate and Current PE ratio

Risk-free rate = Current Fed rate = 5.25-5.5%. Let's take 5.25%.

Current S&P P/E ratio = 27 (it's around 27-28. Let's take 27).
S&P earnings yield = 1/27= 3.7%.
ERP = 3.7% - 5.25% = -1.55%

Current Fed rate and Forward PE ratio

Risk-free rate = 5.25%.

Forward S&P P/E ratio = 23
S&P earnings yield = 1/23 = ~ 4.35% 
ERP = 4.35% - 5.25% = -0.9%

Forward Fed rate and Forward PE ratio

Forward Risk-free rate = 4.25% (assuming 4 Fed cut by end 2024)

Forward S&P P/E ratio = 23
S&P earnings yield = 1/23 = ~ 4.35% 
ERP = 4.35% - 4.25% = 0.1%

So, the ERP for US equities is either negative or flat. This implies that investors are very confident on the US market that they require no additional return over risk-free rate to hold US equities. If ERP is negative, investors are 'paying' to hold US equities. 

In short, US equity market seems overvalued, based on ERP. 

(Of course, S&P can still have good returns in 2024, if the sentiment for US market is very good or Fed rate will have more than 4 cuts. I do not know how markets will perform in the future. )

Saturday, March 2, 2024

S-Reits and what if higher-for-longer interest rate persist

Based on InvestingNote's tracking, out of 44 S-Reits / Biz-Trust, more than half (or 26) reported lower DPU (dividend per unit) compared to the previous year's.  

The lower DPUs can be partly (or mainly) attributed to high interest rate environment. 

What if US Fed does not cut interest rate or the cut is smaller than expected, and the interest rate continue to hold at around 4% level. 

- First, S-Reits' DPU may continue to suffer, as many S-Reits may hedge their interest cost earlier and have not borne the full blunt of the higher interest rate. Hence, when they need to re-finance their loan, they need to incur higher interest cost and lower DPU.

- Second, Singapore (and Hong Kong) properties tend to have low capitalisation rate (cap rate). If the higher for longer environment persist, say, 5 years, the cap rate may become higher and hence lower the valuation (or NAV) of the properties undering S-Reit. Lower valuation will lead to higher leverage ratio (as borrowings remain unchanged). If leverage ratio gets too high (e.g. 45% or more), the S-Reit will be in trouble. 

I do not know how US interest rate will unfold moving forward. But I will keep my reits positions small. 

14 Mar update: IFAST has a good article in Nov 2023 on how high interest rates may affect S-Reits  in near future.  https://secure.fundsupermart.com/fsmone/article/rcms282441/be-selective-in-s-reits-as-rates-stay-higher-for-longer

Tuesday, February 20, 2024

Musing on Keppel Pacific Oak US Reit

Keppel Pacific Oak US Reit (KORE) announced suspension of dividends this week for 2H 2023 - end 2025. This is becaue they need to conserve cash for capex for office improvements and reduce debt. This caused the share price to drop sharply from $0.25 to $0.15.

As noted earlier, I sold KORE at $0.315 (missing the subsequent run-up to $0.36), as I was not comfortable with US office risks. 

Given that KORE has suspended its dividend, if I want to buy it again, I will wait for price to drop to $0.10, which is at 15% of NAV. The lower price is to compensate for the lack of dividends and the US offices risk. 

Nonethless, I have switched to avoiding companies in net debt lately, after reading 'What I learn from Investing from Darwin'. The book is great and espouses on 'avoid risk, buy quality companies and hold' based on evolution ideas. The book can be borrowed as e-book from NLB. 

Friday, February 2, 2024

Chinese Reits having non-RMB debts

I was looking at Yuexiu Reit and found that majority of its debts are not in RMB but in HKD / USD. This implies that when RMB depreciates against USD, the reit will suffer from forex losses, unless the reit has hedged against forex movements in advance. 

Yuexiu Reit's financial expenses had rose from $400mil rmb in FY2021 to $1,500mil rmb in FY2022 and the increase was mainly due to forex losses (as RMB depreciates).

I looked at Hang Lung Properties and found that it has ~70% of its debt in HKD, despite it owning large number of Chinese properties. 

Sasseur Reit (listed in SG and owns retail outlet properties in China) has 46% of its debt in USD or SGD. 

I find it strange for Chinese reits or developers with mainly Chinese properties to have large non-RMB debts. I suspect that the lower interest rates (and lower interest payments) of non-RMB debts prior 2022 has made it attractive to issue debt in non-RMB. Especially since the benefits of lower interest rates can be quantified while the forex risks cannot be easily quantified. 




Friday, December 29, 2023

2023 Review II: Portfolio Returns

1) Performance of Individual Stocks Portfolio

Portfolio returns was 4.5% in 2023, poorer compared to world stock index and S&P. This is mainly because I hold largely HK shares and HSI fell 15% in 2023.

Year% ReturnsSTI (incl Dividends)IWDA ETF
20203.6%-7.5%16.5%
202114.7%12.5%22.9%
2022-13.7%7.6%-18.6%
20234.5%4.0%24.5%

I hold largely HK shares, as HK market remains undervalued. My SG stock holdings rose, as my I bought more S-Reits in 2023. 

2) Position Sizing

My number of positions rose slightly, while the concentration also dropped slightly. Moving forward, my portfolio should have around 20-25 holdings, as my position sizing is 3% for starter, 5% for more stocks whom I have more confidence or more undervalued and I may add on to the position if the stock become more undervalued. 

Number of StocksTop 10 position size
At end 201621
At end 20203946%
At end 20211971%
At end 20221872%
At end 20232468%


3) 10-year IRR

My 10-year IRR remains at 6%, similar to last year's.

As mentioned in last year's post, my IRR is higher in earlier years because
a) My portfolio was more concentrated (i.e. less than 10 position in 2004-11) and was smaller in dollar terms. More concentrated portfolio is also more risky, so I become more diversified from 2012 onwards.
b) Singapore stock market have lower returns from mid-2010s onwards.

4) Stock – Non-stock Allocation

The above are on my cash equity portfolio, which excludes my SRS, CPF monies and most of my cash. 

Including all assets (i.e. Cash, SRS, CPF), I split the allocation into 4 categories:
- Cash: Easily aacessible. Include those in IBKR and Moomoo Cash Plus 
- Monies in CPF accounts: Exclude those monies used to buy bond etf or T-bills
- Fixed Deposit / T-bill / Bonds: Restricted cash and those in bond ETF
- Equities

CashMonies in CPFFixed Deposit / T-Bills / BondsEquities
201912%23%8%57%
20209%23%2%66%
202113%21%4%61%
202212%22%11%55%
20237%9%21%63%

In 2023 I increased my equities allocation, as I found more stocks to buy in depressed HK market. The monies in CPF was reduced, as I used CPF-OA monies to buy T-Bills and bond ETF (MBH).

5) Net Asset Growth

My net asset returs is 9% this year, mainly boosted by wages and more interest from T-bills / Cash accounts.





Equity Risk Premium in US market

Equity Risk Premium (ERP) refers to the additional return over risk-free interest rate for holding equity.  ERP can be computed by taking ea...