Tea with AK71: Interest rates and inflation.

A topic on interest rates seems serious enough. Why have I put it under "Tea with AK71"? Well, it is because I want to talk about it in a more informal tone. It gives me an excuse to ramble and not be too careful in the way I write.

In the last one year, many have been talking about interest rates and how the low interest rates won't last and would go up in time. It seems to be a relatively safe prediction and, in general, I agree but when would it go up and by how much? That's the difficult question.

What goes up must come down one day and what is down would go up too. It is how things in the world achieve equilibrium. There could be exceptions but let's ignore these to keep this chat going.

I might have mentioned this in my blog before. I cannot remember. Think of China and what they are doing. They have increased interest rate more than once in the last few months due to inflationary pressures. Is increasing interest rates the only way to fight inflation? Well, there are many tools available and interest rate is just one tool. Like all tools, it has its limitations.

China has also increased bank reserves requirement in an attempt to reduce money supply. Interest rate and money supply are useful to a point in controlling inflation which are domestically created. They have little impact on exogenous factors.

The Chinese have a huge problem with inflation and much of that is imported. Remember that only a third of the Chinese economy is driven by domestic consumption. This is very different from Indonesia's 60%. How much of the inflationary pressure in China is due to rampant domestic over-consumption, therefore?

Raising interest rates won't help much and could make things worse. The more effective way to reign in inflation is what the Singapore government did: allow its currency to appreciate. Singapore too has a small domestic economy. The Chinese know that they have to let the RMB appreciate and they are just delaying the move.

The RMB is way undervalued and it is the main culprit in causing rampart inflation in China as the booming Chinese economy is heavily reliant on many imports just to keep its industries humming along. Its energy needs is just one such example.

The Singapore government does not use interest rate to control inflation. It uses the Singapore Dollar which floats against a basket of currencies of its major trading partners. If the MAS should hike interest rates (which it can't) to combat inflation, it could have a bigger problem on hand. Why?

Many Asian countries already have a problem of hot money flowing in, money looking for better returns. This money is usually from developed countries which are doing quantitative easing in the hope of jump starting or keeping their economy above water. In these countries, interest rates are more likely than not close to zero.

Money will go to where it is treated best and so, although the interest rates are pretty low in Singapore, a lot of money still find its way to our small island. For example, a 0.8% interest rate plus the prospect of  a 5% appreciation against its country of origin is very attractive for such funds.

The inflows have to be put to productive use and lenders (banks) will mostly offer relatively low interest rates to entice borrowers. More cheap debt and inflation continues. So, combating inflation is not a simple matter of increasing interest rates. If only it was that simple.

Now, one day, when the Chinese government decides to float the RMB more realistically, what would happen to companies with investments in the PRC? What would happen to CapitaMalls Asia?

Another point, since the Singapore government does not use interest rate to control inflation and if an increase in interest rate could be a bad thing instead as it encourages more hot money inflow, what would be the interest rates be like in Singapore for the next 12 months?

To both sets of questions, I have answers. However, seeing that my formal education in Economics ceased at "A" Levels, I shall not reveal what I think. I could be wrong, of course.

I think I need something bracing after this heavy blogging. Tieh Kuan Yin, anybody?

CapitaMalls Asia: Borrowing on the cheap.

On 6 Jan, this was reported on Channel News Asia:

"...CMA will issue $200 million worth of retail bonds.

It aims to raise $100 million by selling one-year bonds, which will pay 1 per cent interest.

The remainder will be raised by issuing 3-year bonds, which carry an annual interest rate of 2.15 percent.

The minimum sum that a retail investor needs to invest is $2,000.

...... Experts say bonds of highly rated corporates are an attractive investment, compared with government bonds.

One-year Singapore government bonds currently yield 0.4 percent annually.

Wilson Liew, an investment analyst, said the bond issuance should have little influence on CMA's performance.

"If you look at the quantum of the bonds, it is not large compared to the total size of the business," said Mr Liew.

CMA has retail properties worth $21.6 billion in its portfolio.

"They are making use of low interest rate environment to raise some money but they are lowly geared anyway so raising money isn't so difficult," added Mr Liew."

On 21 Jan, it was reported that the offer was approximately 1.82 times subscribed. Read report here.

Cheap debt is a good thing for a growing business. I am sure the management of CapitaMalls Asia will put the money to good use. Fundamentally, this company is in a net cash position and has predictable cash flow from its management business while divesting mature shopping malls to the REITs it manages could result in attractive gains periodically. I am looking forward to stronger numbers in the future.

Technically, I have not looked at the weekly chart for this counter before. Let's take a look:

The candlesticks are detaching from the lower Bollinger and we could see price moving towards the 20wMA which is currently at $2.06. There is still a downward bias but I like the higher lows on the MFI and RSI. Both momentum oscillators are still in oversold territories and this situation could be corrected sooner than later. 

We cannot say that we are surely seeing a reversal at this stage but a rebound to the 20wMA is not unattainable and could result in some decent gains for anyone buying at the trendline support which approximates $1.90 currently. I am, of course, vested.

A Chinese government think tank has forecast the nation's economy will grow around 9.8 per cent this year, with inflation likely to come in at 3.7 per cent, state media reported Sunday. Experts at the Chinese Academy of Sciences also predicted that gross domestic product would rev up in the latter part of the year, and would be driven largely by domestic consumption, the official China News Service said. Read article here.

Related post:
CapitaMalls Asia: Pulling back on low volume.

AIMS AMP Capital Industrial REIT: Worried?

A friend told me that a friend of his is desperate for reassurance regarding her investment in this REIT. Reassurance? I was baffled why his friend needs reassurance. Then, he explained that it is because there were massive sell downs at 21.5c in recent sessions, yesterday inclusive.

I told my friend I was happy that there was a sell down yesterday because my overnight BUY queue at 21.5c was filled.  Well, his friend's overnight BUY queue was filled too at 21.5c but she's worried now. I find that mind boggling. We put in an overnight BUY queue in the hope that it would be filled and when it was filled, we worry? Something is wrong here. I think popping the champagne could be overdoing it but some happiness is more appropriate, don't you think?

A quick look at the daily chart shows immediate support at 21.5c. The MFI is still uptrending and is now testing resistance at 50%. The confluence of 20d, 50d and 100d MAs at 22c makes this price level a strong resistance. What is the chance of this resistance being taken out?

Let us take a look at the weekly chart for clues on the longer term trend. The trend is obviously still up. If we think of the white candle formed in the week of 13 Sep, could we be seeing the formation of a flag? Is price consolidating before moving up further?

Now, look at the Bollinger Bands and they are definitely narrowing. So? Volatility is reducing which supports the idea that price is consolidating. Will price go up or down? An educated guess is that it is more likely to go up than to go down because the upcoming DPU is likely to increase over the last one by a large margin. Numbers are likely to improve and we will know for sure next week when the results are announced on the 25th (Tuesday).

Does this mean that price would not weaken at all in the meantime? Who can say for sure? However, in view of the fact that the REIT is on a longer term uptrend and that the rising 50wMA is at 21c, I have already put in a BUY order at 21c and if this price level was ever tested, I hope my BUY order could be filled.  At 21c and an estimated DPU of 2c per year, that is a distribution yield of 9.52%.

Finally, someone told me that his broker advised him against investing in AIMS AMP Capital Industrial REIT because it has been losing money for years. I find this baffling as the REIT is only slightly more than a year old since the old MI-REIT was recapitalised.

Looking at the last quarterly report, we see positive net income and positive cash flow. MI-REIT is a thing of the past, AIMS AMP Capital Industrial REIT is a much stronger outfit and I am putting my money where my mouth is.

See 2Q FY2011 Unaudited Financial Results here.

Related posts:
AIMS AMP Capital Industrial REIT: Sell down at 21.5c.
AIMS AMP Capital Industrial REIT: Revised DPU and fair value.

First REIT: FY2010 results.

1. Projected DPU for FY2011 remains at 6.4c.

2. NAV/unit as at 31 Dec 2010 is 77c.

3. Gearing in 2011 at 17.25%.

DPU is lower for 4Q FY2010 at 0.87c "due to the issuance of 345,664,382 Rights Units on 31 December2010 in relation to the acquisition of Mochtar Riady Comprehensive Cancer Centre and Siloam Hospitals LippoCikarang. These new rights units are entitled to participate in the 4Q 2010 distribution. If the new rights units issued on 31 December 2010 are excluded in the computation, the adjusted distribution per unit would have been 1.96 cents."

New properties will start contributing to earnings and distributions in 2011. Expecting the DPU for 1Q FY2011 to be 1.6c, therefore.

4Q FY2010 DPU of 0.87c will be payable on 28 Feb 2011.

See presentation slides here.

See report by OCBC Investment Research here.

We believe that FREIT’s current valuations are still compelling, boosted by its attractive yield (estimated yield of 8.3% in FY11F). Future growth will be supported by its stable master lease terms, which has downside revenue protection and built-in step-up rental features. We continue to like FREIT’s strong sponsor support as well as management’s execution capabilities. Maintain BUY with a revised RNAV-derived fair value estimate of S$0.82 (total returns of 15.5%) as we incorporate the latest figures into our assumptions.

Related post:
First REIT: Simply amazing.