Wealth Management Singapore

What Are High-Yield Bonds?

High-yield bonds, otherwise known as “junk bonds”, are issued by organizations that do not qualify for “investment- grade” ratings by one of the leading credit rating agencies – Moody’s, Standard & Poor and Fitch Ratings.

Credit rating agencies evaluate issuers and assign ratings based on their opinions of the issuer’s ability to pay interest and principal as scheduled. From the table of credit rating definitions, bonds rated Baa or BBB and above are considered investment-grade securities. Bonds rated Ba or BB and below are high-yield bonds, and generally have default rates in a range of 2-8% per year.

These issuers are usually
1) Newer, emerging companies raising money for expansion
2) Older companies which have weak balance sheets and/or weak profits
3) Companies taking on large debts for acquisitions or leveraged buyouts

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The world now, more than before, is facing some structural changes with will propel currencies movement. Previously, currencies of the world have been affected by economy, interest rate and investor usage. Now the movements of currencies will be broader in a clearer direction. With Singapore Dollar going to be strong, whole reason why knowing what to do is important.

So what do these currency movements mean for investors’ investments? A lot of investors (sadly a lot of financial advisers, even bankers too) make mistakes when determining where the currency matters and where it does not. For example, you can hear an investor, or financial adviser, saying, “I’m not advising this fund because it is in USD. USD is going to depreciate.” This reasoning is WRONG.

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April 23rd was a peak for equity markets. The market has fallen quite substantially from there, which I’m inclined to believe is a correction and a price-in of slower growth in the world economy with the problems in Europe, tensions in Korea, Chinese property assets inflation fears, slower than estimated increases in jobs in US.

Chart below shows the performance of the BRIC (Brazil, Russia, India, China) countries since the 4/23 peak. India (Sensex Index) has held up the best by quite a bit with a decline of just over 5%. Brazil’s Bovespa Index is down at -11.2%. China’s Shanghai Composite is down 15.8%, while Russia’s RTS is down the most at 16.4%. US’ S&P 500 is right in middle with a decline of 12.8%.

While the US and China have just moved to new correction lows, Russia, Brazil, and India are all above the lows they made in late May.

Adapted from Bespokeinvestment Group at www.bespokeinvest.com

May has been a volatile month. Europe’s sovereign debt risks and tensions in Korean Peninsular weighs down heavily on the financial markets while economic data has shown that the recovery is underway.

Europe

Speculation and intense debate on 2 issues, whether Greece will be forced to default and whether Euro will lose some of its weaker member countries has died down a little. However, things are still not certain a month after attacks lead to a trillion dollar bailout package. Euro skeptics say the forced spending cuts and tax increases will scuttle a recovery before it takes hold. The fiscal austerity measures will be a big drag on growth. Spain lost its AAA credit grade at Fitch Ratings, dropping one step to AA+ to a “stable” outlook.

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Recently, I arranged for a client to put his cash to an instrument that earns higher interest rate than the bank’s savings account. If there is a alternative that has the characteristics of to the savings account and earns more than the savings account, a lot of people will be interested if it fits their requirements. This is because the interest rates of saving accounts are very low!

The alternatives is the Cash Fund or a short-term SGD money market fund. You can get them from iFast platform through your Independent Financial Adviser. If you do not need any advise or further information, you can get it from www.fundsupermart.com.

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There is high demand from many clients for an instrument which gives them more returns than fixed deposit but just slightly more risky than common instrument. Now, there are a few alternatives to the good plain old fixed deposit. Let’s examine the returns, risks, as well as the characteristics like liquidity and convenience.

1. Bond Funds
   Bond funds invests in bonds which essentially are instruments guaranteed by the companies or government entities issuing them. Advantages of bond funds is that they are easily available and the denomination of the investment is relatively small at a thousand to a few thousand dollars. One disadvantage are bond funds do fluctuate slightly in value as underlying bonds in the fund do fluctuate in prices during their lifetime.
   
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Recently, I have been asked this question by a friend of mine. “What can you do that Prudential cannot do?” It is not an easy question to answer especially with when the public have preconceived impressions. Let me answer the question here.

Prudential is a huge company. If Prudential is willing, there is certainly very little that they cannot achieve. However, the insurance product provider with an asset management arm, is not interested in several aspects of wealth management business. For insurance companies, the sales force, insurance agents, are not under the companies’ payroll. Therefore, the sales force should not be mistaken for Prudential itself. I will rephrase the question to, “What can I provide that other Insurance Advisers, even other Financial Advisers cannot?”

There are a few areas:
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The MSCI World Index of stocks fell for a sixth day, its longest losing streak in almost a year. The global index of equities in 23 developed nations retreated 0.4 percent as at 27th Jan morning New York, bringing its six-day slide to 5.4 percent.

Greek bond yields surged to a 10-year high amid concern growing sovereign debt will derail the economic recovery. The yen and dollar gained as commodities dropped.

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I recently started working for a new client and was also providing advise on financial assets he has invested through banks. There is one particular Structured Product he entered into. Due to the complexity of the product and knowing that the client, who is in the medical field, has little knowledge about financial markets, I asked him what went on during the purchase process and how he arrived at the decision.

As expected, he cannot recall very clearly what was communicated and how the decision was made. However, what he remembered clearly was that the capital for the investment was protected and that the 1st year interest is guaranteed. Here’s the term sheet and the description.  20-yr JPY Swap

Now, my thinking are these. Firstly, it is my thinking that as the market gets more sophisticated, structuring teams of banks use their creativity to row out Structured Products clients can invest in. As the bank employees have increasing interest and ” sense of achievement” in mastering complex information and products, there was a disconnection between where developments are heading and what the client really needs. Do a client really need to enter into a Interest Rate Linked Structured Deposit tied to 20-yr JPY swap rate?

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2009 end of the year update
2009 has been a year of recovery, first in share markets & then in global economic activity. Patient investors have seen some recovery in their wealth after the losses of 2008.

The perception of risk is still out of balance. While government bonds are expensive and there is still a lot of money in cash, equities and corporate bonds are no longer cheap.

Outlook for 2010
2010 is likely to see the economic recovery continue and become self-sustaining. Interest rates likely to be kept low by the US and the Europe.

A ‘U’-shaped recovery is most likely, which in some ways is the best outcome for investors. A ‘U’-shaped recovery presents investors a chance to enter the market when asset prices remain low. Global GDP growth in 2010 is at 3.6%-3.8% according to consensus.

Share markets are likely to rise further thanks to the combination of improving economic and profit growth, low inflation and still low interest rates at time when there is still plenty of cash on the sideline.

However, with uncertainties about the strength of the recovery and key central banks moving towards rising interest rates in the year ahead, share markets will be more volatile and gains more constrained than has been the case since March. A well-diversified portfolio should help to smooth performance.

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