With Markets Falling, It Pays To Stay In Singapore

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Sophie Davidson

Last year, financial markets around the globe witnessed a number of setbacks. China devalued its currency, the S&P 500 suffered its first correction in 4 years, the price of oil kept dropping, and the Dow plunged more than 1,000 points in just one day. However, it wasn’t all bad news in 2015.

Investors that favoured leveraged products such as CFD (what is CFD trading explained) could make their capital go a lot further. What’s more, ongoing speculation about US and UK interest rates coupled with Eurozone uncertainty meant forex was another attraction option.

But for citizens of Singapore, there was no need to seek out lucrative investment opportunities or gamble on future possibilities, as our own mandatory retirement savings plan continued to deliver commendable returns.

The strength of the CPF

Although a lot depended on the nature of members’ balances, Singapore’s Central Provident Fund (CPF) delivered its usual 2.5 to 5 per cent payouts in 2015. This was despite the poor performance of other indexes and markets.

Within the space of 12 months, the Singapore Straits Times Index was subject to a near 15 per cent drop, while the country’s private resident property prices fell 0.9 per cent in Q2 and a further 1.3 per cent in Q3.

When compared with the S&P 500, the last time the CPF did so well was during the European debt crisis of 2011. At that time, payouts were pegged to one percentage point above Singapore government securities.

Reasons for the CPF’s perennial performance

The CPF payout rate is set at the higher of the 2.5 per cent minimum or is based on the 12-month savings deposit rate at local banks. Consider years of low yields globally and this minimum rate looks very generous indeed.

Tony Nash, chief economist at Complete Intelligence and CPF account holder blamed the “cat-and-mouse game that the Fed has played with market investors” for poor global returns in 2015. He also added “expectations around higher interest rates (created) muted expectations for equity returns.”

But as with all financial investments, there is a potential downside to the CPF’s unwavering payout percentage.

The contentiousness of the CPF

The fact most workers aged 50 and below must pay in about 20 per cent of their wages to the CPF remains a spiky political issue. The government’s moves to increase the minimum age for collecting funds has also proved unpopular, while calls from the opposition to increase the interest on payouts were quite controversial too.

Compared to the US Social Security program, which is a defined-benefit plan with typically larger payouts, the CPF doesn’t always come out on top either. Even so, the program continues to deliver consistent returns amid a backdrop of economic uncertainty elsewhere.

On top of that, members that took up the option to invest some of their funds in approved securities haven’t exactly fared too well. Around 45 per cent of participants posted profits equal to or less than 2.5 per cent, while around 40 per cent posted losses. Therefore, with markets falling, it pays to stay in Singapore.

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What Happened to Alpari UK and LQD Markets?

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Guest Post

 

Last month, we saw a couple of smaller FCA-regulated brokers including LQD Markets go bust, along with what had been one of the larger players in Alpari UK. The details are even now still trickling out, but for those not yet fully aware, what exactly happened to kill these brokers off over night?

The truth is that it was just one single decision and event that wiped an irreparable amount of money from the value of these companies.

On the 15th of January (now informally dubbed forex’s ‘Black Thursday’), the Swiss National Bank took the decision to stop pegging the euro at approximately 1.20 Swiss francs, as it had always informally done so. This decision has a much larger impact than some might have expected, and many were not at all prepared for it in the first place. The markets became extremely volatile, and managed to very suddenly lose these brokers a huge amount in assets; millions in some cases. This was confounded by the fact that a significant portion of their clients also suddenly had accounts in the negative, which could not easily be recouped.

Aftermath

Now, Alpari in particular worked hard to find someone to buy the business, but ultimately the damage had been done. Last week it became clear that there would be no single buyer, likely as the company has never made strong profits, and as a result, the business will be picked apart and we’re unlikely to see it rear its head again. A variety of intellectual property has already been sold off, and the client list will also be auctioned to the highest bidder. Of course this isn’t necessarily a list of much value, as the clients will have the option to simply have their money returned, and there are petitions underway for this to happen as soon as possible.

Liquid Markets is still currently under administration, and working with former clients to a resolution, but as a very small player, it’s not expected that it will see much in the way of success. The company did of course only start trading in May of 2014, and does not have a particularly big client list. A 50% stake in the business was valued at just £500,000.

Events like this highlight the need to choose a reputable broker, ideally ones with negative balance protection, and certainly which properly understand the markets in which it operates.

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The Nuts And Bolts Of MSR And TDSR

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Guest Post: By iCompareLoan Editorial Team

 

TDSR, or Total Debt Servicing Ratio, is a relatively new regulation in Singapore’s real estate market. Introduced only on 28 June 2013 after seven rounds of property cooling measures had been implemented since 14 September 2009, nonetheless the Government did not regard it as yet another series of cooling measure. Rather it was hailed as long-term measure to ensure that financial institutions practise prudence when disbursing property loans.

In contrast, MSR, or Mortgage Servicing Ratio, was mandated for MAS-regulated financial institutions (FIs) for the first time, during the seventh round of cooling measures in January 2013. Before only mortgages by HDB have to follow a MSR.

Given that TDSR and MSR are likely here to stay, let us set the record straight between the two.

 

 

Table 1: Comparing MSR And TDSR

MSR

TDSR

The monthly repayment of a mortgage do not exceed 30% of the borrower’s gross income

All monthly debt obligations, inclusive of the mortgage repayment, do not exceed 60% of the borrower’s gross monthly income

Applies to all mortgages, whether by FIs or HDB, granted for the purchase of a HDB flat or an EC

Applies to all property loans, whether residential properties or otherwise, granted by FIs

Hence HDB concessionary loans are exempted from it

When computing the MSR, the FI has to use a specified medium-term rate (3.5%), or the existing market rate, whichever is higher.

For the HDB concessionary loan, the rate to be used is the prevailing rate of the loan which has remained at 2.60% p.a. since July 1999.

When computing the TDSR, the FI has to use a specified medium-term rate, or the existing market rate, whichever is higher.

The specified rate:

  • 3.5% for housing loans

  • 4.5% for non-residential property loans

For refinancing,

the MSR will not apply to loans for HDB flats and ECs that are

  • owner-occupied, AND
  • were purchased before their respective MSR implementation dates

For refinancing,

the TDSR will not apply if

  • the residential property is owner-occupied, AND

  • the Option to Purchase (OTP) of the residential property was granted before 29 June 2013

Source: HDB, MAS, MND

 

For advice on a new home loan.

For refinancing advice.

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