Wednesday, October 31, 2012

Monthly Review - October 2012

October was a month of  moderate financial progress with gains in my equities being partly offset by falls in commodities and unfavourable FX movements but supported by positive cash flow from the properties and positive savings. The result was an modest increase in net worth.

Here are the details:

1. my Hong Kong equity portfolio appreciated modestly. There were no additions to the portfolio this month (although a few extra shares in Xtep purchased at the end of last month were credited to the portfolio this month and I took some dividends in scrip). The biggest event this month was the cooling measures introduced last week which hit my property heavy portfolio hard towards the end of the month (Henderson, HKR, K Wah and Tai Cheung all falling steeply) but not enough to outweigh the gains earlier in the month and in other positions;

2. my AU/NZ equities appreciated; ETFs appreciated slightly in line with the local markets. The exception was Vietnam where a combination of domestic market movements and FX losses caused the ETF to fall;

4. my commodities fell with most of the loss being in silver;

5. all of my properties were occupied with all tenants paying on time. There were no repair bills and one property will become vacant in November;

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

7. my position in bonds remains small;

8. there were no open derivative contracts;

9. savings were average with good income being matched by high expenses. I purchased a small amount of physical silver (which has been treated as an expense) and transferred some money to Mrs Traineeinvestor (also treated as an expense). I also restocked my supply of wines for drinking which did some damage.

My cash position was more or less static; savings, cash flow from properties and dividends received were positive, but closely offset by the transfer to Mrs Traineeinvestor and the physical silver which were both treated as expenses. 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 an impressive 1,2%. The year to date increase is 22.6%. My retirement date has been fixed for the middle of next year for reasons that have nothing to do with finance - financially, I am past the point where I can afford to retire

Monday, October 29, 2012

Extreme cooling measures

As countries which have lived beyond their means through excessive spending attempt to print their way out of economic trouble, they have created a huge supply liquidity in global markets. Higher asset prices and inflation have been predictable consequences. In the case of some property markets, we have also seen a relentless surge in demand for real assets from the growing number of PRC HNWIs. Hong Kong's property market has surged as a result, making housing less affordable for local residents.

The government's previous attempts to cool the market through tighter borrowing restrictions and a special stamp duty on owners who resold within two years of purchase failed to stop prices from increasing (and may have actually contributed to subsequent increases). Higher deposit requirements certainly made housing less affordable for locals seeking to get on to the property ladder.

The latest measures increase and extend the special stamp duty to cover sales made within three years from the date of purchase. This will achieve nothing except reducing the supply in the secondary market. Given that the effect of the original special stamp duty was much the same and has been widely commented on, the government must know this which leaves figuring out why they did something which is widely known to have the opposite effect from what the government claim as an exercise for conspiracy theorists.

The 15% tax on buyers who are not Hong Kong permanent residents is one of the few times that  Hong Kong has openly discriminated againts foreign buyers (investments in broadcasting telecommunications and the loyalty bonus for subscribers in the Tracker (HK:2800) IPO being others). It is clearly targeted at PRC buyers who have made their presence felt in the local market although it also catches local buyers who buy through a company.

Logic tells me that the 15% foreign buyer tax will deter at least some of the PRC buyers which will be negative both for property prices in general and for developers. On the other hand, they have created a situation were foreign buyers will be less willing to sell their properties. My HK$0.02 worth is that the combined effect of less demand and increased supply (more flats are being built) will, at the very least, take the heat out of the market and may actually result in a dip in prices.

A couple of further thoughts. The first is that the comercial and industrial sectors are running red hot as investors turn to these markets because they are not subject to special stamp duty or foreign ownership taxes. There has already been some bleating about locals being priced out of these markets and how higher rentals make it hard for local businesses (although it is not at all clear how the two are connected). The second is that local buyers will have to buy in their own names instead of through a company - because companies and individuals are taxed on a different basis, this amounts to a tax increase on property investors.

Thursday, October 25, 2012

What if the USD:HKD currency peg broke?

The Hong Kong Monetary Authority has intervened at least four times since 19th October to defend Hong Kong's 29 year old peg to the United States dollar. In total it has sold approximately HKD14.4 billion (USD1.8 billion) in an effort to keep the HKD at the upper end of its official pegged exchange rate to the USD (USD1.00 = HKD7.75).  The HKMA has publicly stated that it has seen no signs of any speculative attack on the peg (even though at least one high profile fund manager has come out and said he is betting on the peg going).

In the context of Hong Kong's total reserves (about USD296 billion in foreign currency reserves plus  other fiscal reserves held by the HKSAR government for various purposes), USD1.8 billion is not a lot of money. It's also worth remembering that Hong Kong is part of China and Beijing has been consistently supportive of Hong Kong from an economic perspective at least. If there were a speculative attack on the peg, Hong Kong is well placed to defend it (just as it did during the Asian financial crisis).

If the peg goes or is reset at a higher level, I would expect it to be by choice rather than because speculators force the HKMA's hand.

What would happen if the peg was removed or reset? If it happened today, then the HKD would almost certainly rise although it is by no means clear how high it would go. In any event, a rise in the HKD would be largely bad news for for me (and, I suspect, many people in Hong Kong):

1. I am paid in USD - a rise in HKD would act as an immediate pay cut

2. many Hong Kong listed companies have underlying assets or earnings that are denominated in foreign currencies. A rise in the HKD makes these worth less so I would expect locally listed shares  to decline in value. Worst hit will be the companies which have non-HKD revenue streams but HKD expenses (e.g. a Hong Kong head office)

3. the value of over seas assets and local assets priced in non-HKD would fall (e.g. overseas property, gold)

4. interest rates would rise - the cost of servicing my mortgages would go up

5. Hong Kong would be a less attractive (i.e. more expensive) place for international companies to operate from (more expensive). I would expect there to be downward pressure on both rents and prices in the property sector (and salaries)

In the good news department, my Hong Kong dollars would be worth more so buying assets outside Hong Kong would be cheaper.

I'm not planning on betting on the peg going - that has been an exercise in futility for many over the last 29 years - but I have to wonder what would happen and how to protect myself if it did.

Tuesday, October 16, 2012

Are things really as bad as we think they are?

The Internet is chock full of doom and gloom stories about how the world economy is heading for an inevitable and extreme deterioration. Articles and Internet chat site postings point to all the economic problems which the world is currently grappling with as to support the claims of imminent economic armageddon.

Of course the problems are immense and the solutions are often seen a politically unpalatable: uncontrolled government spending, out-of-control entitlement programmes, bank failures, housing bubbles, rising unemployment, student loans, increased taxes, ever expanding regulatory burdens. peak oil etc etc etc.  Mostly true and all things to seriously worry about.

But in spite of all these problems, the financial world has not ended, most people are still working and there are indeed plenty of positive signs.  Here's a few to consider:

1. US trade: the United States is the biggest single trading nation on earth. You would think that if the global economy were truly contracting and claims of falling demand for Chinese made products were right, US trade numbers would be contracting. They're not. In spite of a small dip so far in 2012, they have been expanding and both imports and exports are well up since the beginning of 2010;

2. PRC imports and exports: reports of the death of China's exports appear to be exaggerated and premature. In fact China's exports and imports have both risen this year;

3. India: industrial production may be slowing but the most recent numbers came in better than expected;

4. US housing: looking good in many areas (not all) and new home building is on the rise. Recent Case-Shiller data would suggest that the market has either bottomed or is recovering;

5. Japan's fading economic miracle: Japan may have all sorts of issues (adverse demographics among them) but GDP per capita on a PPP basis is holding up very well in spite of Japan's deflationary macro backdrop (and no doubt helped by the strong yen);

6. US unemployment: whether the attacks on the most recent US unemployment numbers prove to be correct or merely political spin remains to be seen, but for now it appears to be clear that the US is probably managing to at least absorb the net new entrants to the labour force and may even be doing a bit better than that;

7. poverty is falling: in spite of all the hand wringing about the number of Americans on food stamps, people being unable to afford private housing in Hong Kong,on a global basis the number of people living in absolute poverty continues to fall;

8. US retail sales: it's too early to say whether or not the US consumer is back to doing what they do best but the surprisingly good numbers which came out this month at least put the question on the table.

There are plenty of other stories I could have used to illustrate the point.

Okay, so there is still plenty to worry about. In fact, my inflation depreciated HK$0.02 worth is that there is more to worry about than to celebrate, but it's worth remembering that not all economic and financial news is bad news. Either that or it's time to cut back on the medications.

Friday, October 12, 2012

IMF - No housing bubble in Hong Kong

This link from AA Stocks quotes the IMF's Hong Kong representative saying that "Hong Kong has not seen any bubble yet despite stubbornly high property prices.  While I'm happy to see support for the position I took back in March, I still regard the market as being expensive and poor value. I have no plans to add to the portfolio at current prices. Nor do I have any plans to sell - I'm quite happy to collect the rent and see the mortgages get paid down each month. Part of me says that a nice big correction would be a welcome opportunity to buy again although whether the banks would lend to someone with no income from employment may be something of an issue.

Monday, October 08, 2012

Nine pay days to go

As I count down towards retirement, there are a number of things to focus on - either things that need to get done or "last" actions on the career front.

Last month I focused on where and how to invest the last ten pay cheques. I am currently looking at a property in New Zealand that comes up for auction later this month. It would not be the best investment in the world, but I would regard it as a good long term store of value.

I had previously told some close relatives about my intention to retire soon and was met with the "you'll be bored" response. If I am bored, I will be extremely disappointed with myself - quite frankly I am more worried about running out of life before I run out of things to do.

I have now told three of my closest work colleagues. The general reaction was along the lines of "you'll miss the income". And they are right - I will miss the security of a regular pay cheque hitting the bank account each month. It's reassuring to know that there is more money coming in each month than is going out. But the bottom line is I don't need it and I really really do not want to spend any more of my limited lifespan accumulating money that I do not need. Put differently, so long as I do not end up sleeping on the street, I would regret spending more time at my desk far far more than I would ever regret missing out on some more money. And it's definitely an "either-or" choice. I can't have both.

In any case, while there have been some attempts to dissuade me, people have accepted that I will be moving on. A wider announcement will not be made until much nearer the time.

Friday, October 05, 2012

A shortage of safe deposit boxes

You would think that in a city like Hong Kong which is a significant financial centre it would be easy to rent a safe deposit box?

It's not.

The small safe deposit box we currently have is getting close to full so we made inquires about changing to a larger box. No chance. None at all. Plan B was to rent a second small box. No chance there either. Apparently there is a shortage of safe deposit boxes in Hong Kong. The banks are not really interested in providing them because the rental they can charge on the boxes is low compared to the cost of renting or owning the property in which the safe deposit boxes are held.

So far I have drawn a blank with both HSBC and BOCHK - neither have any boxes available for rent. We can get by without a bigger/second box but at some point we will have to move documents like our wills out of the box and keep them at home.