Funding Societies’ Rising Default Rate Paints Worrying State Of SG Businesses

Few nights ago, Mrs Budget shared something which we thought we should pen our thoughts down.

So over the past few months, Mrs Budget has been cashing out the money payments received from the loans she backed through funding society, a peer to peer loan financing company.

If you are unfamiliar with funding society, basically you can go onto the platform, look at profiles of companies who are asking for loans, and decide if you want to loan and help the companies out.

As these companies are usually rejected by bank loans due to higher risk, the interest on these loans can go up to between 10 – 20%.

Both Mr and Mrs Budget has been putting a small amount of money backing SMEs in Singapore, probably about S$5,000 total each.

For Mrs Budget, she shared that during the past few weeks, she has seen a lot of loan defaults on Funding Society, and that her capital is now mostly turning into a loss position, with only small chance of recovery.

What it means is that, Mrs Budget will most likely lose up to S$3,000 from funding society due to a non recoverable loan default!

For Mr Budget, he is still quite fortunate as his loans are quite diversified across many companies,. With his loan exposure per company set at S$200 max per company, the default rate is still quite manageable.

However, since February, Mr Budget has already disabled the auto-invest function under Funding Society and is now only collecting all the disbursed loans.

What he also noticed is that, the defaulting companies are skyrocketing since he last checked! Hopefully there will be lesser defaulting and non recoverable loans.

We also saw similar reviews on Seedly where a lot of retail investors have been saying that they are now sitting on capital losses although they have been investing for a while now.

Most of the investors on Funding Societies shared the same situation: investing over 2 to 3 years, from net gain to now net loss.

And all of this started in the past few months.

“Well, I would like to share my experience with this platform & anyone who is investing in P2P lending. In the span of the last 2.5 years, I invested around 100000 SGD on which I made around 4K SGD as profit after all the fees after 2.5 years. I thought I was making some real profits, however soon my dreams got shattered when almost 5-6 of my loans got default & resulting in loss of around 9k SG. There you go my 4k profit changes into 5k loss from my own pocket. Now forget about interest or profit I couldn’t able to protect my principle.”

To be fair, I don’t think its entirely Funding Societies’ problem. When times are good and when people earned up to 10% a year in the early days, no one complains. And now when companies start to belly up, then people complain.

Returns on investment for loans are also decreasing year on year

Increasingly, I think more of these businesses are going to face more problems with cash flow, which will lead to loan defaults, and closure of businesses. Closure of businesses will then lead to unemployment, and then leading to individual cash flow problems.

This gives an early indication of the state of businesses in Singapore, and I think we are going to hear more from mainstream news soon.

Funding Societies or P2P loans are secondary market which provides liquidity for businesses – and with default rates ballooning up, this is yet another clear sign and indication that things will get worse.

For investors thinking of investing in high risk investment vehicles, this is definitely not a good time right now. For the amount of risk for platforms like Funding Societies, they will probably need to return 20-40%, as compared to a 3.35% – 23.87% return on investment based on 2019 figures.

Also Read: Our Thoughts On The Very Irrational Market Behaviour

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Our Thoughts On The Very Irrational Market Behaviour

It’s been more than a week since Mr and Mrs Budget wrote something here.

To be honest, we want to write more but have been running out of topic to write. So if there is anything you’d like us to share more about, please feel free to drop them in the comments below. We love hearing from our readers.

So today we wanted to share an observation that we made over the past few days.

It seems as though market has reentered the bull market again, where it has gained 20% since the low just 3 weeks ago. Every other day market seems to be rallying. Stock prices continued to charge upwards as if nothing happens.

This has definitely triggered a lot of FOMO feeling amongst investors, Mr and Mrs Budget included.

To overcome the FOMO in us, we have to resort to discussing and reassuring to each other than this cannot be a V share recovery. And it seems as though this is more of a very irrational investing behavior as opposed to keeping up with what is happening on the grounds.

COVID-19 No Signs Of Slow Down Yet

First of all, there is still no signs of a successful development of a vaccine towards the covid 19 virus.

Everyday there are more new cases globally and the graph is still an upward sloping graph. While the daily new cases globally seems to be tapering off, but I think there are still under reported cases globally.

Daily new cases seemed to be plateauing

If consumer confidence are not restored, how can share price increase to pre covid 19 pricing?

Weak Business Fundamentals Not Announced Yet

COVID outbreak and the lack of vaccine aside, business fundamentals are still giving out waves and waves of bad news. AGMs of companies are pushed back, and companies like Lendlease are announcing revisions to their projected dividend.

Other than that, what we have heard from F&B owners is that traffic and business has plunged by more 80% during this circuit breaker period where everyone is required to stay at home. Streets are all quiet and people are not spending any money at all.

Empty Orchard Road

With companies increasingly going out of business, this means unemployment will increase as a result of that.

All the signs on the ground are pointing to negative signs – how can this be a V shape recovery? PM Lee also mentioned that this will not be a V or U shape recovery.

“It is going to last quite a long time: it is not a V-shaped down dip, it is not a U-shaped dip.” – Lee Hsien Loong

Bad Economic Projection Globally

If you have been following the news, there are certain big headlines recently that should warrant some worries from the financial market, but yet the market is rallying every other day.

According to International Monetary Fund chief Kristalina Georgieva, the outlook for global growth was negative and the IMF now expected “a recession at least as bad as during the global financial crisis or worse.” This was back 3 weeks ago.

Let’s take a look at the chart above – if you look at the past 2 major financial crisis – the Financial Crisis in 2008 as well as the dot com bubble in 2000, the peak to bottom is more spread out and takes longer.

Comparing that to COVID 19 where the impact should theoretically be a lot worse than the previous crisis, the chart clearly shows that we are still at the beginning of the crisis.

Even during the 2009 financial crisis or the SARS crisis, people are surely still spending, unlike now where the whole of Singapore is under a “lockdown”.

The latest world economic outlook published by IMF also paints a similarly bad picture where global economies is set witness one of the worse economic contraction in history.

So we need to reassure ourselves again and again that after looking at the recent bull run up, the worse is yet to come. How can this be a V shape recovery and how long more can we expect the prices to go up?

For those who are almost 100% vested – surely it doesn’t make any logical sense for prices to recover back to 3 months ago with all that has happened?

How can the market price behave as though nothing is happening outside in the real world, and that we can just “discount” the impact of the COVID 19?

This reminded me of the feeling when bitcoin prices are hitting its all time high every single day about 2 years back. Everyday the prices are just going higher and higher, until everything starts falling apart.

Giving Into FOMO

Of course, while it is easy for us to rationalize all of this, but we are all but weak humans filled with greed.

To avoid missing out in case we are wrong, and caving into our FOMO-ness, we made 2 more counter purchases over the last few days:

  1. SPH REIT – Trading at below NAV and may go into the student accomodation business, with a 45% upside.
  2. Centurion – Trading at below NAV (0.54). Been holding onto Centurion, exited it few weeks ago, and reentered again at a lower price, with a 47% upside.

What we have been buying is into companies which fulfill these requirements:

  1. Below their NAV – great businesses which are undervalued now
  2. Has a good sponsor – wont close down
  3. At least 40% upside to previous high

If the prices plunge further, we are more than happy to average down on the counters we picked up over the past 2 weeks.

With the two new entries onto our portfolio, here’s an update to our war chest:

Mr Budget War ChestS$70,000
Mrs Budget War ChestS$30,000
Mr Budget Home Loan War ChestS$50,000
Mrs Budget Home Loan War ChestS$150,000

Our home equity loan has still not come in yet so hopefully that will be in soon for us to do our cash allocation strategy.

Through it all, we need to constantly remind ourselves that, this is most probably not a V shape recovery, and it is very irrational to expect prices to keep going up.

So if you are feeling FOMO – it’s a normal feeling and you are not alone, but please dont let irrationality takes over.

If you have to take some action, like us, please only buy in small batches and only on counters which will not crash too badly if there’s another upcoming crash. Don’t go 100% vested now. Currently, counting our incoming home equity loan, we are probably only using 20% of our available war chest.

Stay safe folks! 🙂

Also do let us know what topics you’d like us to cover or if you have any questions to ask us.

Also Read: What Have We Done This Month Towards Our Financial Goals – March 2020

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The Most Important Thing Right Now Is Job Preservation

Quarter 1 of 2020 is now over.

It is probably an understatement to say that 2020 has been a bad start for everyone around the world. Probably more so for investors who have been investing over the past 5 to 10 years preparing for retirement.

Since the start of the year, market has plunged, wiping out 10 – 30% of retirement portfolios around the world.

While many other financial bloggers and us here have shared our take on investing during this period, we wanted to pen down our thoughts on another equally important matter – job preservation.

To us, the most important thing right now is job preservation, and this topic is probably quite understated in Singapore. This is especially important because companies are now cutting cost and freezing hiring during this period of uncertainties.

Decide If You Are The Cost Or Profit Center

Specifically, job preservation means that you have to decide if you are the cost or profit center of the company.

If you are the profit center of the company, you are less likely to take a pay cut or be laid off. Example of profit center is the sales department.

However, if you are the cost center, you are more likely to be affected if there are any cost savings measures in the company. Example of cost centers include customer service, maintenance, accounting, IT, HR and more.

Another thing everyone should do is to make sure that you are irreplaceable, or that it cost more to fire you than to hire your replacement in the long term.

What this means is that you have to demonstrate value to your boss, and be more proactive during this period to see if there is anything you can do more to help your company survive during this period.

Job preservation and mass unemployment is a very real problem, and because it is a lagging indicator, we will only hear about these numbers 2 or 3 months later when the government announce the quarterly unemployment rate.

However, we can use US unemployment data to give us a glimpse of what is to be expected.

Earlier last month, US announced that the number of people claiming for unemployment insurance claim reaches 3.3 million, 400% more than the highest ever recorded in the history of US. There are also no signs that this is slowing down.

Here in Singapore, companies are also earmarked to be closing down, and laying off their staffs to save on costs. The government has also stepped in and government agencies are actively creating temp jobs to ensure that Singaporeans continue to have employment income.

Preserving Cash inflow and Controlling Cash Outflow

Other than job preservation, which takes care of your monthly inflow, one should also look at his or her monthly outflows.

During this difficult period, cash is definitely king – and what we are actively doing is to make sure that we keep our expenses low. Because we are working from home now, we are cooking in more, which translate to slightly more savings.

All of our entertainment, travel and shopping budget are now shifted to zero as we try as much as possible to stay in and tide through this critical period.

Just as companies are taking this time to optimize for their finances, individuals should also take time to optimize their finances too.

For Mrs Budget and myself, we are also expecting dividend cuts from the counters we are holding on. SPH REIT had already announced a 78% reduction in their dividend, and we know that this will probably not be the only REIT to do so.

In similar vein, we also expected banks to cut the interest rates of high yield account, which all the 3 local banks have announced the past 2 days.

With the reduction of interest rates and dividend, that will reduce our monthly inflow, which means our outflow will have to be reduced too.

PM Lee and Minister Lawrence Wong has also shared in two different occasions that this will be a long drawn out battle, and will last at least another 6 months.

Times are bad folks. Please save up for rainy days.

Here at Mr and Mrs Budget, we will continue to update you on:

  1. What we are doing financially to cope with the slowdown in economy
  2. Updates on our portfolio and what we are buying and selling
  3. Important things to take note of during this COVID 19 situation

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Why The STI 5.8% Rebound Today Is Probably A Dead Cat Bounce

It seems like the mood everywhere is very sombre now. 

The vibe we are getting is that, everyone is bunkered up and staying at home. Social activities are limited to friends meeting at home. For out of home activities, it is mostly limited to supply runs as opposed to leisure activities.

We wanted to share a bit more thoughts about the current situation of the economy.

Our thoughts are a bit all over the place now and hopefully documenting it down will help us focus our thoughts, and subsequently give us more resolve in either deploying our cash now or holding on a bit longer.

Has The Market Sufficiently Price In The Demand Shock?

Speaking to some of our friends who have been investing too, the overall consensus is that the current market correction rewrote how we should be investing. 

Without knowing what the “new normal” is, it is hard to “price” equities now.

Source: Zero Hedge

The situation that we are dealing with is a demand shock, where people are no longer spending money. The image above illustrates this perfectly – everyone is adopting a “wait and see” behaviour.

Has the demand shock been priced in? Exactly how do we price this and how much of a discount should we apply to the current stock price level? 

Finding A New Normal

While we have a shopping list of REITs that we are eyeing, but the truth is that, our entry prices are all over the place, the entry prices have been triggered a few times. 

Even if there is a clear entry price strategy with sufficient margin of safety, taking into account the discount towards the NAV, we still don’t feel confident to enter into any trades.

We let emotions get to the better part of us, because we are trying to navigate uncharted grounds and a new normal here.

We also think that working class and small business owners will suffer the most in this current situation.

We are already hearing Facebook posts sharing from small F&B owners where their 2020 plans are all thrown out of the window – a sharp contrast from a hopeful start to 2020 to now a devastating state of struggling for survival every single day.

A Lot Needs To Go Right For Economy To Rebound

In order for the economy to rebound and things to go back to normal, a lot of things need to go right:

  1. Virus needs to be contained, and this means that a vaccine should be successfully tested and developed.
  2. The economy should not have taken too much a hit before the virus is contained
  3. Consumer needs to feel safe and ready to go about their previous consumption pattern
  4. Consumer should not have taken too much a hit before resuming their consumption pattern
  5. Global trade and travel demand needs to be restored

There is a lot of “if and only if” situation for the economy to go back on track.

Instead, the economic signs that we are seeing now:

  1. More job cutting measures
  2. Airlines shut down (SIA)
  3. More countries on lockdown (India, UK, Australia, Thailand, Malaysia)
  4. Global travel demand is zero
  5. Businesses are encourage to work remotely

What we expect to happen next:

  1. Credit card defaults
  2. Mortgage defaults
  3. Companies needing loans for operating cost

Earlier today, the STI Index rebounded a 5.76%, a much needed good news for all investors.

However, is that the mark of a rebound?

While some level of FOMO might be toying with us, when we sit down and look at the signs around us as mentioned above, I think we’ve decided to let this play out just a bit more. 

For some more context, in 2008, STI dropped more than 50%. So far, the STI has only dropped 30%. A lot of people shared that this crisis felt different and worse than the one in 2008 – so to think that the rebound today is a recovery is really quite a stretch.

While the US government (and soon the Singapore government) had announced more quantitative easing and economic stimulus package, I really think that it may do more harm than good if it is overdone (like in the case of US). 

The problem right now is, even if the government is giving free money for everyone to spend, this might not necessarily lead to the desired spending.

Instead, it might lead to more unspent money in the “system”, and when the money equilibrium is achieved, will lead to hyperinflation and cash will become worthless.

There is a very real possibility that this will happen in the US, and the effect of that will trickle down to Singapore’s economy. 

Knowing this, we really need to rethink about our financial goals and to see how we can safeguard ourselves and minimise any potential impact of that.

The truth is, there is no right answer to this, and we are just about as clueless on this as we are on the near future of the economy.

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War Chest Planning And What We Are Doing During This Uncertain Time

Looking at the market movement the past few days and weeks, we are slightly spooked by the atypical market movement, and are currently living in uncertain times now.

If you hold any US equities, you would have noticed that the past few days, the S&P 500 as well as the NASDAQ have been swinging by 2-3% per day upwards and downwards, and the market is unsure which side they want to head towards.

The 2-3% gain on one day is quickly wiped out the next day, only to recover the following trading day.

Other than the price movement, earnings from big and small companies are giving mixed signals – while most companies we are monitoring registers continued growth in earnings, but they are giving revenue drop guidance.

The full impact of the virus towards the global economy will only be registered by individual company’s P&L in the next 1 or 2 quarters. 

We are also seeing new lows everyday from counters adversely impacted by the COVID 19, such as DBS, which dived more than 10% from a month ago.

SATS too plunged >20% from the price a month ago, almost a 4 years low. Comfort on the other hand, is testing its 2 years low of S$1.91, and if the current price of S$1.92 breaches that, we will be seeing price levels from 2013.

Building Up War Chest And Preserving Cash

So what are we doing? For now, we are looking to build up our cash in bank.

What this means is that, we are resisting the urge to buy individual counters, although the price levels are very very attractive. If you look at our monthly updates, what you will notice is that every month, Mr or Mrs Budget will be initiating a position in a local counter. We will be putting a brake on that for now.

We think that the COVID-19 impact is still not being priced in fully by the global market – worse still, this might even catalyse the next recession.

The tax season and our annual insurance premium is here too, so hopefully the savings can offset these new additional expenses. 

Continue Our Syfe DCA With Reduced Contribution

Besides building up our cash holding, we will still continue our monthly DCA into Syfe our Roboadvisor.

The Irrelevant Investor recently did an article comparing the portfolio growth of “buying the dip” vs DCA and found very interesting insights.

What he found is that, a straight dollar cost averaging actually did better than the buy the dip strategy across the history.   

He also concluded that if something goes up over time, then the longer you delay investing, the worse off you are. 

So for the Mrs and I, we will still continue our monthly DCA. However, we will reduce the DCA slightly from a monthly of S$1,500 to S$1,000. This is so that we can build up our cash to buy high quality blue chips stocks that are really too attractive to give a pass now. 

Cutting Down On Unnecessary Expenses And Exploring Free Entertainment

The third thing that we are doing during this uncertain period is to cut down on unnecessary expenses.

What this means is that, we will try as much as possible to lower our entertainment cost and dine out cost. This also means that we will try to cook in more, eat more cai fan for lunch during work, as well as looking out for free entertainment such as exercising during the weekend or simply Netflix-ing at home more.

Hopefully we can bring up our current cash holding and leverage on the market recovery if it does happen.

This is our war chest planning for the next 6 months:

Cash HoldingMr BudgetMrs Budget
CurrentS$55,774.29S$49,400.74
Targetted in 6 monthsS$65,000.00S$65,000.00
6x Monthly Expenses S$30,000.00S$12,000.00
Available for InvestmentS$35,000.00S$53,000.00
“Bullets” available for
S$5,000 individual investments
710

What are you doing during this uncertain times?

Looking to invest via Syfe? You can use our referral code: SRP6X8B8Y when you create an account. We would both get $10 to $100 depending on your first deposit amount, and you’d receive your bonus within 5 business days. 

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