Monthly Review - June 2012

After May's bloodletting, it was pleasing to see a solid recovery in the value of the portfolio with gains in my Hong Kong equities and favourable FX movements accounting for most of tthe increase. Positive cash flow from the properties and positive savings added to the increase in net worth.

Here are the details:

1. my Hong Kong equity portfolio rallied strongly. I made small additions to my positions in Yanzhou Coal, GDI and Sinopec;

2. my AU/NZ equities were flat;

3.my ETFs rallied in line with the local markets;

4. my commodities were flat;

5. all of my properties were occupied with all tenants paying on time. One property will be refurbished shortly and I had to pay the first installment of the levy;

6. currency movements were positive, as the NZD and AUD rose significantly against the HKD/USD;

7. my position in bonds remains small. I purchased some iBonds but was disappointed (but not surprised) at only getting three board lots. I would like to add some more bonds to the portfolio but am finding direct purchases of bonds through the banks I have accounts with to be something of an exercise in frustration in Hong Kong;

8. There were no open derivative contracts. My last AUD/HKD contract expired out of the money so I pocketed the premium;

9. savings were solid with good income and moderate expenses.

My cash position increased due to new investments being less than savings, cash flow from properties and dividends received. I currently hold 41 months of expenses in HKD cash or equivalents. This is above my target floor of 24 months.

For the month, my net worth increased by 3.7%. The year to date increase is 12.2%. I remain on track to retire at the end of 2012.

GDI Purchased

Yesterday I added a few more shares in GDI (HK:270) to the portfolio. The utility company offers a modest yield of 3.2% with reasonable prospects for this to grow over time.

I paid HK$5.50 for the additional shares.

Yanzhou Coal purchased

This afternoon I added a few more shares in Yanzhou Coal (HK:1171) to the portfolio. The stock has been hammered by a combination of the general sell off in equities over the last few months, the fall in coal prices and concerns over the effects of fluctuations in the AUD on its investment in Australia. Whiel I expect that the trailing dividend will be cut, I am still expecting a yield of around 4.5-5.0 percent on current prices (and, yes, there is a substantial element of guess work involved).

I paid HK$11.80 for the additional shares.

iBond subscription

As expected the second issue of iBonds by the Hong Kong government was massively oversubscribed with 332,467 applications for a total of HKD49.8 billion. Even the maximum allocation of three or four units (HKD30,000 or HKD40,000) is de minimus - better than leaving money in the bank but so small as to be almost not worth bothering about. Disappointing but not unexpected.

Sinopec purchased

This morning I added a few more shares in Sinopec (HK:386) to the portfolio. The additional investment is based on the expectation that the dividend will be more or less maintained (currently a trailing yield of 5.3%). I paid HK$6.89 for the additional shares.

Hong Kong's currency peg

The Hong Kong dollar is "pegged"* to the US dollar at the rate of HKD 7.80 = USD 1.00 since 17 October, 1983.

From time to time the peg has been put under pressure - either upwards (as happened a few years ago) or downwards (as happened in the Asian crisis. Given the size of Hong Kong's fiscal reserves relative to the size of the economy, it is a reasonably safe bet that if the peg is ever removed (or adjusted) it will most likely be a voluntary action on the part of the Hong Kong government rather than something imposed by market forces.

But from time to time calls are made for the peg to go with the usual argument being that the peg has the effect of raising inflation (during the Asian crisis/SARS it was blamed for deflation). While the peg does (obviously) affect inflation in Hong Kong, to my mind that is a cheap price to pay for the volatility that would come from a freely floating currency. Joseph Yam (former head of the HKMA) is the most recent person to call for the removal of the peg. (A number of people have commented that his comments on the peg are a weak attempt to divert attention away from the misguided political criticism he took in connection with the minibond saga, but that is another story).

My own HK$0.02 worth is that Hong Kong has benefited from the peg and it is better to keep it - stability, low interest rates, financial safe harbour status and other benefits all flow from the peg. The impact (upwards or downwards) on CPI is a very small price to pay for these benefits.

Building refurbishment levy

Yesterday I received a notice that one of the buildings I own an apartment in is going to have some restoration work done to the exterior and common areas. The building in question is not over forty years old and has been well maintained over the years - the last substantial work was done in 2003/2004 and was being completed at around the time I purchased  the property.

As a landlord, this affects me in three ways:

• I will have to pay a building levy in two installments - half now and half in December. This is the equivalent of four months of net of outgoings rent
• while the work is being carried out there will be disruption to the occupants of the building - scaffolding, workers in the common areas, noise etc. Depending on the timing of the work this may affect any vacancy that may arise or the amount of rent I am able to negotiate
• in the longer term, the work will enhance the appearance of the building and help it to maintain its value and its appear to prospective tenants

It's work that needs to be done and, as much as I begrudge the two cheques I will have to write, I have to accept that it is money well spent.

Property regulation - New Zealand style

Much has been written about the efforts by the Hong Kong government to control increases in the prices of Hong Kong residential property prices - punitive stamp duty rates and more restricted access to mortgage finance.

Other countries have adopted similar measures, including China, Singapore and New Zealand. Given the sate of the New Zealand economy you would have thought that they would be doing everything possible to encourage investment. Sadly not - not only does New Zealand have a set of tenancy laws which are drafted and administered on the principle that landlords are evil parasites and tenants their innocent victims, not only do rates demands (local property taxes) march inexorably upwards each year at rates far beyond either inflation or rental increases but they have now decided that landlords should not be able to claim depreciation on their buildings. Given the already dismal yields, you either have to take a very long term view or conclude that your money is better off invested elsewhere. All this on top of an increase in GST which bumps up my expenses with no corresponding increase in income.

I've concluded that it is very difficult to justify further investment in New Zealand real estate and that investing in shares is a better proposition (much like Hong Kong at the moment, although for different reasons). Given how few companies that I would be interested in are listed in New Zealand, it is more likely that the money will end up in Australia....effectively New Zealand government policy has pushed my money offshore.

And in case you were wondering what set off this rant - I have just done my New Zealand tax return for 2011/2012 and found that due to the elimination of building depreciation my tax bill has gone up by 126 percent.

Quite frankly, it would almost be rational to sell up and move on but the properties still appeal as a long term store of value that will at least throw off enough after tax income to cover some of the costs of time spent in New Zealand each year. Put differently, the one positive from all of this is that the same policies which are squeezing the landlords are also discouraging new investment in a city which has a growing population.

iBond application submitted

This morning I submitted an application for the HKSAR Government's second issue of iBonds. The iBonds offer a term of three years and a coupon equal to the higher of Hong Kong CPI or 1 percent payable six monthly in arrears. Most banks will waive the usual fees that apply to subscribing, receiving coupon payments and redeeming the bonds.

I do not view the iBonds as a good investment. At best, you will slightly lag CPI (due to the fact that payments are made in arrears). However, I am taking the view that with minimal risk of principal loss, they can form part of my allocation to cash and for that purpose they are clearly better than bank deposits. My intention is to hold on to my allocation until maturity.

So in went my application - which took about two minutes to do on line.

The bad news is that allocations were pretty small for the first issue and with the current market uncertainty are likely to be even lower this time around.

Monthly Review - May 2012

May saw a huge fall in the value of the portfolio with major declines in the value of equities and commodities being magnified by adverse exchange rate movements. Positive cash flow from the properties and positive savings were not enough to offset the losses.

Here are the details:

1. my Hong Kong equity portfolio fell hugely. I made small additions to my positions in BCIA, Hang Seng Bank, Vodone, Cosco Pacific, VTech and China Blue Chemical. I made a much larger investment in Henderson Land. So far this has been an exercise in catching multiple falling knives;

2. my AU/NZ equities were marginally lower;

3.my ETFs fell in slightly line with the local markets, with all being negative. I added a few more units in the Vietnam ETF;

4. my commodities fell, led by silver;

5. all of my properties were occupied with all tenants paying on time. There were a couple of minor repair bills at all this month;

6. currency movements were adverse, as the NZD and AUD fell significantly against the HKD/USD;

7. my position in bonds remains small. No bonds were purchased this month. I would like to add some more bonds to the portfolio but am finding direct purchases of bonds through the banks I have accounts with to be something of an exercise in frustration in Hong Kong. I will subscribe for the new issue of iBonds in June bu;t do not expect to get a meaningful amount

8. I entered into a HK/AUD FX contract which was exercised against me. I have used the AUD proceeds to enter into a AUD/HK FX contract;

9. savings were solid with good income and moderate expenses.

My cash position declined due to new investments. I currently hold 34 months of expenses in HKD cash or equivalents. This is above my target floor of 24 months.

For the month, my net worth fell by 4.9%. The year to date increase is 8.2%. In spite of the losses  this month, I remain on track to retire at the end of 2012.