Economic Affairs

The hunt for good investment yields

Diminishing returns may be the new normal. Investors have a tough choice between taking bigger risks and lowering their expectations.

Singaporeans are among the most pessimistic in the Asia-Pacific about the economy, based on the latest MasterCard Index of Consumer Confidence, with concerns about employment, the economy, regular income, the stock market and quality of life.

The survey was conducted in June and July this year, and showed a sharp drop in confidence among Singaporeans.

That is not surprising, given the disappointing data that has come through of late. The Singapore economy grew 2.1 per cent in the second quarter and economic pundits are predicting protracted gloom extending to next year, where the economy could grow at a shade below 2 per cent. The official forecast for this year has been narrowed to 1 per cent to 2 per cent, from 1 per cent to 3 per cent.

Adding to the gloom, unemployment may be rising after years of a very tight labour market. In the second quarter of this year, unemployment rose to 2.1 per cent while total employment grew by only 4,200, compared with 13,000 in the first quarter.

If such trends persist, wages are likely to fall with the consequent impact on spending. These are important and urgent concerns, but the relatively slow growth of the economy has other ramifications as well.


Not too long ago, the Singapore economy notched up a turbocharged growth rate of 14.5 per cent. At the same time, property prices soared to record levels, as did the stock market.

However, for Singaporeans who remember high asset prices and a buoyant stock market, the sudden change in gears may discomfit and make it more difficult to adjust.


Although there are bright spots, such as healthcare and real estate investment trusts, for the Straits Times Index (STI), total returns so far up to August have been only about 1.2 per cent, compared with 3.5 per cent for the Dow Jones or 3.8 per cent for Hong Kong’s Hang Seng (in Singdollar terms). In contrast, the return for the STI over the past 10 years was 61 per cent while for the Dow, it was 82 per cent.

As for local workers, they may find it difficult to accept a lower wage rate, or a lower price for their property. The adjustment to a slowing economy becomes a more painful one. That may be one reason why consumer confidence is waning.

The Allianz Global Wealth report issued this month noted “it seems that the good years are a thing of the past”. Global financial assets climbed by 4.9 per cent ast year, compared with an average rate of 9 per cent in the previous three years.

As a mature market, Singapore was listed somewhere in the middle of 10 Asian countries in terms of the growth rates of assets.


Low-growth may be here to stay.

Consultancy firm McKinsey’s report, Diminishing Returns: Why Investors May Need To Lower Their Expectations, argues that the factors which led to buoyant stock markets are less evident these days.

The report, which focuses on the United States and Western European markets, says that real gross domestic product growth helps to drive stock markets, through boosting companies’ revenue and profits. But this was due to two main factors in the past decades. One was the brisk growth in the working-age population – those aged 15 to 64. Another was rising productivity. This came from shifting from low-productivity agriculture to more productive manufacturing and service sectors, growing automation and more efficient operations.

But an ageing population means that GDP growth is likely to slow. This would mean that productivity would have to make up for the slower growth, at something like 3.3 per cent a year, a target which looks difficult to attain currently.

At the same time, businesses are facing more competition that will reduce their profits.

McKinsey says that competition may come from Chinese firms, for example, which are more nimble and may be willing to accept lower returns. Technology can also threaten returns. For example, in 2013, 40 per cent of international call minutes were Skype-to-Skype, representing US$37 billion of lost revenue for telcos.

New players such as Alibaba, eBay and Amazon, which can reach customers around the world, are another factor.

While revenues and profits are being chipped away, costs, too, could be rising as governments try to close tax loopholes to prevent companies from booking their profits in low-tax regimes.

The outlook for returns in the Singapore market is likely to be similar. People will have to work longer or to save more just to maintain the same level of return. Amid the reactions to the recent Central Provident Fund changes has been the complaint from investors who would like to put even more into the CPF because investments these days cannot match the 2.5 per cent for the Ordinary Account, let alone the 4 per cent for the Special Account.


And as growth slows, investors – retail and large ones like pension funds – are searching high and low for better returns.

A survey by State Street Global Investors in July found that 44 per cent of 72 Asian pension funds, which need to deliver a steady stream of income to pensioners, are seeking higher-risk, higher-return strategies.

As growth slows, investors are being challenged to find risk-adjusted investment opportunities. That could well explain why there has been a surge of interest in private equity and other alternative investments.

As Credit Suisse’s head of alternative investments for private banking in Asia-Pacific Donald Rice puts it, the high valuations of stock markets – in the US, with the Dow Jones index hitting record levels this year – make investors uncomfortable about putting more money into equities.

Mr Rice suggests that with bond yields also being unattractive, Credit Suisse has seen an increasing demand for alternative investments from investors, including sovereign wealth funds. These products include mezzanine debt, a form of debt used by firms to generally fund their growth.

Low yields are one reason investors have opted for products that offer better returns than a fixed deposit’s. That has likely contributed to the growth in the corporate bond markets here.

But a higher return comes with a higher risk. Troubled marine and offshore player Swiber may have offered 7.125 per cent on one of its bonds but all that is up in the air, now that it has filed for judicial management.

Equities, too, are not as attractive as previously.

Although there are bright spots, such as healthcare and real estate investment trusts, for the Straits Times Index (STI), total returns so far up to August have been only about 1.2 per cent, compared with 3.5 per cent for the Dow Jones or 3.8 per cent for Hong Kong’s Hang Seng (in Singdollar terms).

In contrast, the total return for the STI over the past 10 years was 61 per cent while for the Dow, it was 82 per cent.

Investors in Singapore who used to be mainly focused on Singapore stocks now find it easy  to buy foreign stocks listed in the US, such as Alibaba, where prices have soared.


Yet, even as the economy slows, pay a visit to the Michelin-starred Les Amis restaurant and one will still see a full house with diners quaffing wine during lunch no less.

Or take a recent dinner function where guests enthusiastically discussed their whisky collection rather than fretting about the state of the economy.

What probably has cushioned some of this painful adjustment is the large reserves that Singapore has. Singapore’s household balance sheets are still strong. Annual growth in household debt moderated to 1.7 per cent in the first quarter, down from about 8 per cent over the last five years, said the Monetary Authority of Singapore.

The Allianz wealth report puts Singapore 10th globally and third in the Asian ranking of net financial assets per capita.

And even though the bondholders of Swiber and Pacific Andes have likely lost most of their investment, this is money that they were putting aside for investing.

However, these are early days yet of the low returns for Singapore investors.

People are still sitting on wealth from their high property prices and earlier stock market gains.

But, as everyone chases after Alibaba stocks, will this risk a bubble forming? Not to mention that retail investors are, in a sense, competing with large institutional investors like pension funds or insurers who, too, are being forced to search harder for better returns.

With low returns most likely here to stay, people should be cautious of putting their hard-earned money at risk.

A version of this article appeared in the print edition of The Straits Times on September 28, 2016, with the headline 'The hunt for good investment yields'. Print Edition | Subscribe