Recession and Bear Market Thoughts- The Dugu Nine Swordsplay Theory (独孤九剑-破剑式）

I am writing this blog piece as I saw an "expert investor" posted on a public forum that a few months ago, he had already told his friends not to invest in SREITs as he anticipated a crash coming due to the relentless interest rate hikes by the Feds but they did not listen to his brilliant advices and assessment. REITs did crash in market price last week and our "expert investor" thus began mocking his friends and other current investors still holding on to REITs for not heeding his excellent foresight. Well, I call this 马后炮 in Chinese or in literal English translation, this is known as the "notorious knew-it-all-along phenomenon". This also smacks of asserting that one can always time the market perfectly.

1. Mini-rally on SGX during past 2 trading sessions from 4th Oct 2022 to 5th Oct 2022

There are some folks who looked at historical data and concluded that inflation will be as serious in magnitude as those previous hyper inflationary blackswan events causing interest rate to soar to double digit percentage soon. This in turn will also mean that all REITS will crash by at least another 50% in order for the distribution yield to rise sharply to compensate for the high interest costs. Many of them have thus sold off the majority of their REITs or totally exit their REIT investments to avoid further blood bath.

The mini-rally over the past 2 days serves as a very good illustrative example on how fast market sentiment may turn and retail investors who stayed out of the market may have suffered a huge loss instead by exiting the market at the wrong time and then buying back only at much higher prices which is a double whammy scenario.

So who is right and who is wrong then in terms of the future market direction? Is inflation really going out of control? Personally, I do not think so as I see the inflationary pressure for US tapering off based on the last CPI report. Of course, while inflation is gradually being brought under control in US, they have downloaded this problem to Europe and the rest of the world but I am optimistic that eventually, the respective central banks will be able to contain it. All countries will then reverse course and turn their attention toward fighting off a severe recession with expansionary monetary policies. Simply put, I rather not try to predict the market direction and just remain invested for now to avoid missing out on a sudden rally.

2. The Dugu Nine Swordsplay Theory (独孤九剑-破剑式）

An investment strategy that focuses on "timing the market" for purchases and exit runs contrary to one of the key principle in the "Dugu Nine Swordsplay". The essence of  独孤九剑 emphasizes that the only way to remain undefeatable is not to make the first move. Once a swordsman make a move, he will inevitably expose his own weakness and vulnerability. Similarly, for a retail investor who has been saving his investable capital and waiting for market crash, once he puts in his entire capital to exploit the market downturn, he will most likely make a huge profits from such a strategy. Notwithstanding that, the next challenging questions will be how and when should one exit his or her investments? Once one joins in the market, he or she will be subject to its volatility which includes future crashes.

Parting thoughts

I did not do much recently to my own portfolio (except for some minor switches of counters) and remain mostly invested. Most likely will start deploying some of my excess funds into the market in batches regularly over the next few months. 

The Real Reasons Why The Singapore Government Is Stopping Private Property Owners From Downgrading to Resales Public Housing.

First and foremost, this is just a personal opinion piece in case I am going to be shot at by supporters of the Men in White for what I am about to blog here. As usual, I am flabbergasted that our Singapore Government has again come in to make life hard for many ordinary Singaporeans by meddling in public housing policy. This triggered off bad memories with the horrible government policies in public housing just before the 2011 General Election. My friends and I are the generation that had Mr Mah Bow Tan as the Minister of National Development and suffered terribly under the unreasonable housing policies in place then. 

1. BTO flats supply woes
Build to Order Flats (BTO) will only start construction once there is sufficient demand then due to previous bad experience of Mr Mah from excess supply of completed flats. For unoccupied flats after some time, tiles and other finishing apparently tend to spoil easily hence it cost the HDB additional money to make good I was told. Hence building only once there is "confirmed" demand will moderate this. 

As a result, many Singaporeans during those dark days have a hard time getting their flats even after numerous rounds of balloting-it was pretty depressing then. Of course, I understand that there are currently many couples still struggling with the balloting for new flats, however, the current balloting odds have actually improved a lot these days. We have Mr Khaw Boon Wan who took over in 2011 to thank for improving the supplies of public flats after years of draconian slow building under the previous hugely unpopular Mr Mah. 

2. Combined income for qualification of public housing at S$8K per mth for 14 years absurd.

The income ceiling was another huge issue then at S$8K per combined income of a couple. This S$8K per month was not realistic and had been there for more than a decade. Surely, Mr Mah Bow Tan heard of inflation and salary adjustments? He stubbornly refused to increase the eligibility to qualify for public housing despite being asked by the Opposition MPs then as well as challenges from the ground. The reason he gave was then how do we balance the books with extra subsidies given out if the pool of eligible Singaporeans increases. Strangely, he was forced to eat his own words when after the 2011 General Election (where housing has become a huge issue and the ruling PAP garned its lowest vote share of 60.1%), the government finally increased the limit to S$10K. As a matter of fact, the combined income limit ceiling kept getting revised a few rounds  subsequently and is currently at S$14K per mth which is way above the previous long standing S$8K per mth.

The income ceiling revision came too late for many of my batch of friends. Some were forced to buy resales flats and some were forced to buy costly private condominiums. The HDB stance then was simple: if you earn above the income ceiling means you are "rich" hence should not ask for public housing. If you still insist on more affordable public housing, then can always get from the resales HDB market instead of a private property. I find this view very bias and silly. Why is it that many people can get new and affordable HDB flats while those who exceeded slightly the income ceiling of S$8K should only get resales and older flats if they plan to be financially prudent instead of splurging on private properties?

3. Public housing and subsides are to help Singaporeans who are not rich- but why need to build Executive Condominiums with luxurious facilities like private pool, private gym, private function room with tax payers' money?
The Executive Condominium ("EC") scheme is one of the most hypocritical public housing policies I have ever come across. HDB is supposed to help lower income Singaporeans. If so, why do we need EC scheme in the first place?

Let's call a spade a spade. EC is a luxurious property with many facilities and most new 3 bedders cost over S$1.1Mil. If certain batch of Singaporeans crave for luxurious facilities, then they should go and buy them from the private developers without any public grant. The public grant should go back to those who really need them when they buy new BTOs to help them lighten their burden for having a simple roof over their heads. Seriously, I do not see why public funds should be used for subsiding luxurious private properties "to meet the rising aspirations of Singaporeans". In addition, the space set aside for swimming pools and tennis courts in ECs could also have gone back to building more flats on the plot of land being released to help more people struggling with making ends meet in Singapore.

4. Latest government property cooling measure-wait 15mths if want to downgrade to resales HDB

Back to the main issue of the Singapore government imposing a 15mths waiting period before a private property owner can downgrade and buy a resales HDB flat (if you add in extension request by the HDB owner and your own renovation, this can become 24mths in total). There is nothing wrong with Singaporean households that want to downgrade to a resales flat especially if they already did their Maths. Some wanted to stop paying outrageous monthly mortgages on their private properties especially during times of relentless variable interest rate hikes by the bankers while others wanted to cash out for their early retirement. These folks did nothing wrong in forgoing their private luxurious amenities for prudent financial planning. 

I thought that the government should work instead on building more BTO flats which will moderate the demand for resales flat as I know of people who are still struggling at the ballots for new flats and have to look at resales HDB market. Also, we are facing an imminent recession- Singapore is an open economy and what is happening in the United States and China now will inevitably affect our property market adversely eventually.

5. Real reasons why the Government is stopping private property owners from downgrading to HDB

By enacting such unreasonable cooling measure, it appears more to me that the government seems to want to prevent early retirement of folks or to stop people from achieving financial freedom. Once people stop being slaves to their bankers, they will have more time on hand to scrutinize and criticize government policies. Best way to divert people's attention is to make them extremely busy with their bread and butter job to service outrageous mortgages in land scarce Singapore. 

Parting thoughts

So far, we have not seen the roll-back of the numerous previously implemented cooling measures and it looks like the new policy of 15mths waiting period for downgrading by private property owners to resales property is here to stay for the long term. I think that such blanket policy implemented is unfair as it punishes individuals who have decided on financial prudency as well as those private property owners who are already facing financial hardship due to their own personal unique financial circumstances. Personally, this terribly planned policy in the face of upcoming global market turbulence is blatantly absurd. 

Keppel DC REIT Unit Price Dropping Like Flies- 43% Decline From S$3 Per Unit To S$1.70 Per Unit.

For loyal retail investors of Keppel DC REIT ("KDC") who have been holding on to their purchases between S$2-S$3 per unit, the recent week's bloodbath on SGX have seen the once seemingly invincible data centre focused REIT to plunge to a record 52 weeks low of S$1.70 per unit which represented a 43% decline in unit price. KDC went through the COVID crisis with stellar unit price performance but nonetheless, it could not escape the tragic fate of relentless borrowing rate hikes by the US Federal Reserve which is causing chaos worldwide and its unit price plummeted to push up the extremely low distribution yield of 4% plus to over 5%. The long WALE of KDC turned into its Achilles heel as it appears that it is unable to revise rental rates fast enough to keep up with the hawkish monetary policy adopted by Jerome Powell. KDC trademark of frequent yield accretive M&A deals have also disappeared recently which affected its valuation. Will KDC continue its dramatic decline to test the S$1.50 per unit mark soon and should retail investors abandon ship as soon as possible to save themselves from drowning? 

1. Terminal Rate For Federal Reserve Funds

Before the recent CPI report, the consensus from most economists is that they expect the borrowing rate to be at approximately 3.8% in 2023. However, with Jerome Powell hawkish stance "to hammer and beat the hell out of inflation until it is absolutely dead", Economists now expect the terminal rate to be 4.5% or even 5% (depending on which economists you are asking). So if KDC is offering only a mere distribution yield similar to expected borrowing rates, its price will definitely need to correct till a more acceptable level in order for investors to have a decent margin for the risk premium of holding on to it.

2. Imminent Global Recession

To make things worse, on top of the higher than expected borrowing rates hike as alluded to the above mentioned, an imminent recession (the stock market is normally 6 mths ahead in it grim prediction) will slow down business activities or even caused many businesses to enter bankruptcy hence some tenants of KDC maybe badly affected. What happened to DigiCore REIT is a good reminder to all that data centres are not immune to delinquent tenants. We are already seeing many job retrenchments in the Tech industry like Shopee in Singapore. Worldwide we are also seeing downsizing at Coinbase, Peloton, Netflix and Paypal. Tesla, Google and Meta. It is only a matter of time before the gloomy climate spread to other industries.

3. Will I Sell Now Or Continue To Hold On To My KDC?
To sell or hold on to KDC during this bear market will depend on your own outlook and assessment.  I will be giving my personal action on KDC here: 

The key question to me here is what is the current distribution yield of KDC. The current KDC distribution yield indicated by StocksCafe is only 4.92%. However, if we looked at the recent 1st half distribution of 5.049 cents from SGX or its official website and extrapolate it, we actually have an annualised distribution yield of  5.94% already based on the unit price of S$1.70 per unit.   

The next question of course is to compare this to the expected borrowing rates which influences interest rate and opportunity cost and compared it to your own expected risk premium of holding on to this business. 

For me, I am actually neutral with regard to whether I should sell KDC immediately or keep it. Nevertheless, I have made a decision to sell off 10,000 units @S$1.75 per unit yesterday as I have found another badly battered SREIT that is currently priced at a very attractive entry price hence have done some switching today. For the rest of my KDC units in my CDP and Margin Account portfolios, I will be keeping them for the long term. I think that there is a lot of panic selling going on right now on KDC which has a day low today of S$1.66 per unit before rebounding to close at S$1.70 per unit as at 28 September 2022.

Parting thoughts

From the long history of the monetary policies used by the Federal Reserve, they have either failed to do enough on inflation and let it went out of hand or over-do borrowing rates adjustment to cause severe recession from their meddling. Personally, I think that the US Federal Reserve this round had overdid the interest rate hikes and had in fact sent the US economy along with the rest of the world into a global recession and potential assets deflationary pressures. The US currency as the world's reserve currency sucks pretty big time to me. The rest of the world is now getting punished with the reckless printing of money by the Feds during the pandemic.

Personal Updates- Retrenchment and Loss Of Job.

While my company is still profitable, my overseas Headoffice has strangely thrown down the axes to retrench some of our staff fronting the Singapore office. The Group Chief Financial officer (the "CFO") has also made a threat to me over our MS Teams meeting that if they do not see as much profits as prior year after this first batch, they will rain down more flying axes on us. I was extremely disappointed as unfortunately, I did not get the axe in this initial phase. As a matter of fact, I was very jealous of my colleagues in the operations team who got it. A golden handshake package pegged to market practice was given out to individual staff affected. What a good opportunity to get "special bonus" and then quickly look for another replacement job. 

Despite the recent stock markets crash due to the imminent recession, there are still plenty of job opportunities out there- I have lost 75% of the staff on my finance and accounting team due to the vibrant job market (there are grave shortages of accountants I was told as new undergraduates are all studying Information Technology and looking forward to joining the Tech industry and no one is interested to do sucky and time consuming accounting work anymore). But of course, for those age 40 and above, finding a new job may take some extra time. The upcoming business slow down should not be as bad as the total economy freeze during COVID lockdowns and this crisis is mainly triggered from the relentless interest rate hike by the US Federal Reserve to tame run-away inflation.  

The upcoming month will be a busy one for me as there are many farewell parties of colleagues to attend to- I am looking forward to drinks session to celebrate. The only thing that is of concern to remaining staff is that my CFO mentioned wanting to do pay cut. Since the COVID pandemic, many bad management practices have been adopted by weird senior management. I have told my CFO and other bosses that this is the first time that I heard of cutting pay when the company is still profitable and I am not even sure whether this is acceptable employment practices by the Ministry of Manpower. During past 2 years of COVID, the company generated tremendous profits from supply chain activities but implemented staff pay cut and stop bonuses in the name of conserving money for working capital due to "future uncertainties". Anyway, please do not learn from the way I spoken bluntly back against the overseas bosses- one may really lose his/her job in the process as Asian bosses do not like staff who talked back at them.  

Tragic Price Crash of Mapletree Industrial Trust From S$2.93 Per Unit to S$2.56 Per Unit- Time To Exit One's Holdings in MIT?

Mapletree Industrial Trust ("MIT") has been battered down over the past 1 year. Its market price has dropped from S$2.93 per unit to a low trough of S$2.40 per unit in May 2022 which is a plunge of <18.1%> from a year ago. Its current market closing price of S$2.56 per unit as at 16 September 2022 probably gave scant comfort to retail investors who have bought into MIT during the past 2 years. Is it time to sell one's MIT in view of the ongoing relentless interest rate hikes by the US Federal Reserve that is pushing the entire global economies into a deep recession?

1. Fear mongering by "experts" and Media on REITs in trouble due to interest rate hike

First and foremost, the one thing that I really cannot stand is that I have been hearing a number of folks around me or online shouting out loud that interest rate hikes will lead to higher costs of borrowings hence now is not the time to be holding on to REITs. Hello? Many commercial businesses (and not just SREITs) borrow money to run their business. So a higher borrowing costs will hit not just REITs but most of all other businesses. 

In addition, many properties in REITs being leased out have inflationary linked rental component. Even if not, upon lease renewal in an inflationary environment, REITs similar to other commercial businesses, has the right to ask for uprates in rental income which is different from debentures nature financial instrument. ESR-ARA Logos REIT and Mapletree Logistics Trust have "service rate" component in their overall rental package that is not tied down to the duration of the lease but allows the landlord to increase the service rates at their discretion in order to cover for common properties maintenance. Recently, I have seen some of the logistics REIT exercising such right in their warehouse tenancy agreements to push up the service rate component by over 17% this year. 

So, please stop thinking that REITs are similar to bonds- both are entirely different creatures altogether.

Past 1 year market price of MIT trending downward

2. Recession fears increasing by the day and risk to MIT

Recession rather than higher borrowing rates due to interest rate hikes (as alluded to pt 1 above) should be more worrisome. Just recently, FedEx Corp sounded a profit warning due to a record plunge in package deliveries. If transport aren't moving, it signaled that the economy isn't moving much too and gave rise to an indication that the stock market will tank further should the macroeconomics situation worsen. 

The risk of tenants of MIT going into bankruptcy and default should there be a severe recession is not unfounded. However, given the focus of MIT into high tech industrial sectors and also data centres, my personal belief (based on the experience of COVID-19 lockdown) is that the earnings of MIT are sufficiently resilient. 54.3% of MIT's asset under management are coming from Data Centres and 16.3% are into Hi-Tech Buildings segments.

Parting thoughts

For myself, I look at my MIT holdings in my investment portfolios (bought using cash and margin) with a long term horizon and is not perturbed by the wild swinging market movements. I am certainly very much amused by the so many experts or gurus that can predict the stock markets ups and downs and are advocating for selling down one's equity portfolio due to upcoming "recession" headwinds. Personally, my own experience is that staying almost fully invested allows one to take part in any possible corporate actions such and M&A rights issue or takeover from other companies. Most importantly, what if the stock market suddenly rallied? One would have missed such golden opportunity if one is too fixated on timing the market.

P.S: Just to sidetrack and to share my personal story regarding my CPF investments (this is not included in my published investment portfolios), I just sold off my CPF Ordinary Account investments of MIT (10,300 units held over 1.5yrs) @$2.62 per unit last Monday (12 September 2022) as I wanted to re-invest the funds into the S&P500 for greater returns in the longer run. But in a strange twist of fate, MIT's unit price suddenly dropped to S$2.54 per unit on Friday (16 September 2022) and I can't resist but buy back 10,000 units at this more favourable entry price. Yes, I strongly believe that MIT has a bright future ahead based on the well-executed strategic moves by the Mapletree senior management thus far.

Singapore Medical Group-Directors Made Low Ball General Offer For Privatisation At Only 37 Cents Per Share.

The privatisation offer for Singapore Medical Group ("SMG") finally materialised after a few years of waiting. Unfortunately, the offer price of S$0.37 per share was only a 19% premium to the average price of S$0.310 over the past 3 years.  This is a very sad exit outcome for all retail investors as SMG has dropped from S$0.490 mid-2019 and languished ever since then. If based on median PE of different medical groups, the PE is around 20 times plus which worked out to a fair value of S$0.516 per share instead of the pathetic S$0.37 per share being proposed by the Offeror. This is no doubt a very low ball offer by the Offeror, TLW Success Pte Ltd, to buyout existing shareholders. For longer term focused investors, there is an alternative offer of 1 for 1 share in the new investment holding Company being offered in lieu of cash consideration. However, liquidity and lack of regulator direct supervision will be key issues for those who opted for taking up the new share option in TLW in lieu of cash, as upon SMG being privatised, it will be delisted from the SGX.

 

1. Offeror background- Shareholders are current Chairman/Directors of SMG

Shareholders of the private consortium

c

Directors of  the current "Company"- SMG

As seen from above, the new company is formed by the existing SMG Non-Executive Chairman, CEO and another Executive Directors. Those bigger shareholders like the Korean Medical Group CHA and Silver Mines Global Limited have undertaken to take up the new shares consideration instead of cash electives with a long term focused view.

2. Rationale for the offer per Dr Beng Teck Liang (Executive Director and CEO) and his offeror TLW.

(a) Uncertainty in the short to medium term

SMG faces significant headwinds compromising a challenging marco-economic and operating environment driven by operational cost increases and shortage of skilled healthcare labour.

(b) Subdued historical share price performance

The Offeror is of the view that the historical price performance of the Shares has generally been relatively subdued despite the Company having consistently demonstrated a strong track record of profitability and operational execution. This includes delivering record levels of revenue and profitability for FY2021 and continued organic expansion through the opening of new clinics and by growing the number of specialist doctors within the Company. Accordingly, this has constrained the Company’s ability to utilise its Shares effectively for acquisitions or fund raising.

(c) Opportunity to realise investment in SMG at an attractive price and substantial premium

The Cash Price represents a premium of approximately 18.1%, 18.8%, 16.0% and 18.0% over the volume weighted average price ("VWAP") per Share for the one (1)-month, three (3)-month, six (6)-month and 12-month periods respectively, up to and including 8 September 2022, being the last full Market Day.

Parting thoughts

I am rather disappointed by the rationale given by TLW and the director of SMG. In 2019, Dr Beng himself and some other directors sold off a number of their shares to the Korean medical group CHA at a record price of S$0.605 per share that is not available to other shareholders. But currently, when they buy out existing shareholders, they only offer S$0.37 per share despite the growth of the revenue from S$22.9Mil in FY2013 to S$100.8Mil for FY2021 which is an impressive growth rate of 20% per annum over the past 8 years.

Personally, as a retail investor, I would not want to take up the risk of the alternative option of new shares in the Offeror's company as their management to me has a terrible track record of putting their own interest first rather than all shareholders no matter how well they sugar-coat this whole exercise. This will also subject oneself to their mercy where there are many possibilities on how they can play investors out after delisting. Will be closing off my current holdings (please see my recent investment portfolio updates) in SMG and bidding farewell to them. 

I am also sure that this is not the last time we see or hear from the soon to be ex-SMG management. They will probably re-package the business and then launch an IPO in another 3-5 years time at 2 to 3 times their cost of this buy-out. Good luck also to Dr Beng, Dr Wong and Mr Tony who seems to be ok with their reputation going down the drain with the low ball offer.     

Singapore Medical Group Requested For Trading Halt- Privatization Or Rights Issue For Expansion?

On 9th September 2022 (Friday after trading hours), Singapore Medical Group ("SMG") requested for an immediate trading halt while awaiting an important news release to be announced by its CEO, Dr Beng Teck Liang. I have been wondering how come the share price of SMG suddenly came back to life and surged to S$0.325 per share as at 9th September 2022 when it has been trading with little volume at the range of S$0.305 per share to S$0.310 per share. In fact, it has been stuck at S$0.310 since August 2019. As usual, I reckon that information about the upcoming major change seems to have been leaked out to friends and relatives similar to what I have seen from other listed entities just right before their major business decision announcement. 

1. Upcoming major M&A or Privatisation?

I am intrigued by what will be announced by Dr Beng Teck Liang in the coming week. It could be a new M&A opportunity that perhaps need rights issue for funding or even better, it could be a privatisation exercise given that the PE ratio of SMG is way below the industry average relative to other medical groups. 

In order to unlock the undervalued business of SingMedical Group (“SMG”) which I mentioned briefly in my post on 8 July 2019, I have suggested the possible option of privatization using the example of Thomson Medical Centre which had previously been acquired by the local business tycoon Peter Lim before doing a “future relisting” on the SGX 6 years later.

2. Poor history of corporate action to close up the gap of market price to intrinsic valuation for all shareholders.

Previously, there was an exercise whereby the senior management was in talk with 3rd parties with regard to the purchase of SMG shares. However, it fell through. 

There was also a sales of shares by existing directors to the Korean Medical Group CHA at S$0.605 per share in February 2019. However, this was not extended to other shareholders. 

In short, the current management team has a poor track record of unlocking the intrinsic valuation of SMG for all shareholders. Let's hope the coming announcement will lead to a substantial increase in its share price. 

Parting thoughts

Given the poor track record of corporate action execution, I am not too optimistic for now until I gain greater clarity of what SMG intends to do. In the meantime, its dividend yield of approximately 4% to shareholders is comforting while waiting for the tree to bear fruits. 

Updates on 14 September 2022 (pls click on link below for the details of privatisation being announced:

Singapore Medical Group-Directors Made Low Ball General Offer For Privatisation At Only 37 Cents Per Share.