Things You Shouldn’t Touch

Don’t touch them”, I told my overseas visitor.

Those aren’t free tissues. They are reservation markers. Sit at one of those places at your peril”, I warned. The last time I did that, I was given short shrift by an irate auntie.

We, here in Singapore, have this rather quaint way of reserving seats in crowded foodcourts. I have never seen it done anywhere else before.

The norm

It seems that placing something that belongs to us on a foodcourt table implies that we intend to return, after we have purchased our food. The “something” could be an inexpensive packet of tissues or even a freebie newspaper.

None of us in Singapore, I am sure, have ever questioned the legitimacy of the “tissue” booking scheme. But we simply accept it as the norm.

There are lots of other things that we accept to be the norm. For instance, we are told, ad nauseam, that bonds are safe, right?

What can possibly be safer than lending money to governments, especially when we buy investment grade bonds such as US Treasuries and UK Gilts?

They are so secure that we even refer to the 10-year US Treasury as a risk-free investment.

One-way bet

Lending money to the US government has been a good investment decision over the last few years. As interest rates have fallen, bond prices have risen.

For every 1% cut in interest rates, the price of 10-year US Treasuries has risen by around 8%. It seemed like a one-way bet – the more that interest rates were cut, the more bond prices went up.

But bond yields are now creeping higher. So, for every 1% rise in interest rates, the price of 10-year Treasuries could fall by 9%. For every 2% rise in yields, the loss could be 17%.

Exactly when interest rates will actually go up, though, is still anyone’s guess. But investors who are disproportionately exposed to bonds could be hurt when they do.

Something’s happening

There are signs that something is already happening. One month ago, 10-Year Treasury yields were around 1.80%. Today they are 2.08%. It seems that the market is already pre-empting a rise in interest rates.

For me, a rise in interest rates in the US is almost as inevitable as a slowdown in China’s phenomenal economic growth rate.

And as the pendulum of economic growth swings from China to the US, we here in Singapore could be perfectly positioned to participate in America’s recovery.

What’s more, some of those America-exposed companies could even be sitting right on our doorstep.

Maximum pessimism

Sembcorp Industries (SGX: U96), for instance, generates around a-tenth of its sales in the US, while America accounts for about a quarter of revenues at Singapore Technologies Engineering (SGX: S63).

Elsewhere, nearly 8% of the assets of City Developments (SGX: C09) are situated in the US.

So as the path of the pendulum swings from the Middle Kingdom to the largest economy in the world, so too could the enormous amounts money that has been magicked by central banks.

If your portfolio is made up of suitably chosen stocks, then it shouldn’t matter too much whatever happens to the pendulum. That is the beauty of a diversified portfolio.

And don’t forget there are two points in a pendulum’s swing when the velocity is zero. I call them the points of maximum pessimism, which is always a good time, in my book, to invest.

A version of this article first appeared in Take Stock Singapore.

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