Wednesday, December 23, 2009

Analysts: It'll Be A Good Run In The First Half

The Malaysian stock market, which had a strong run this year, will likely to continue performing well in the first half of next year before faltering in the second half as investment risks heighten, analysts said.
OSK Investment Research is optimistic that the key stock index, the FTSE Bursa Malaysia KLCI, will hit a high of 1,345 points in either April or May. It closed at 1,255.66 on December 21.

"We think the market still has more room to grow for the next five months or so, thereafter there could be a retracement in the second half due to rising interest rates in the US and risk that 2010 corporate earnings could be disappointing," Chris Eng, its head of research told Business Times.

His advice to investors is to make money before interest rates in the US start to rise. "We think profit-taking will take place six months before the interest rates rise in the US," he remarked.

JPMorgan Securities (Malaysia) Sdn Bhd too believes the market will be better in the first half of 2010.

"We expect Malaysia equities to sustain their strong performance in the first half," said Chris Oh, its head of research.

He said the key drivers for this are an expected rebound in economic growth of 5 per cent, the implementation of large-scale infrastructure projects and reform policy that are likely to exceed investors' low expectations, a stronger ringgit and a generally positive view on emerging market equities.

His top three stock picks for next year are Public Bank Bhd, Genting Bhd and Sime Darby Bhd.

RHB Research Institute Sdn Bhd, meanwhile, upped its end-2010 index target to 1,400 from 1,370 before.

This suggests a modest upside of about 11 per cent for next year compared to this year's strong rise of 43.2 per cent (as at December 21).

"This was a strong year because it was the first year of economic recovery. Moving forward, valuations are no longer cheap but neither are they stretched. In situations like this, the market's performance will hinge on the strength of the economic and corporate earnings recovery," its head of research Lim Chee Sing noted.

He expects the 25 index stocks that RHB tracks to post average earnings growth of 15 per cent next year after a 15.7 per cent contraction this year. He said the market was likely to be more volatile next year and urged investors to stay focused on valuations.

"Stock picking is key, shy away from speculative stocks. Always be grounded by valuations - look to companies with good growth and strong business models and managements," he said.

The sectors he thinks will be "interesting" next year are telcos, power and banks. His top three stock picks are Tenaga Nasional Bhd, Unisem Bhd and Faber Group Bhd.

Meanwhile, stock market regulator Bursa Malaysia Bhd voiced hope that local and global economic recovery would be on the cards for next year but noted that investors still seemed to be cautious. It nevertheless pledged to continue with its liberalisation efforts to attract more interest.

"Sentiment is still cautious and investors continue to stay on the sidelines, waiting for more concrete signals from the bigger economies. Despite the economic scenario, we have remained firm in our direction to liberalise and make the capital market more efficient, with changes such as the Foreign Investment Commitee deregulation and the revamp of the fund raising framework, among others.

"Overall, it is our belief that in reforming to become a high performing market, this will bring in bigger investment opportunities that will contribute towards a dynamic Malaysian capital market," its chief executive officer Datuk Yusli Mohamed Yusoff told Business Times via email.

He said Bursa Malaysia would also continue efforts to attract quality listings. In a normal year where there are no adverse market conditions, one can expect to see between 30 and 40 new listings, he said.

On ongoing efforts to improve liquidity and free float, he said he was hopeful of more robust divestment activities by government holdings following a directive made by Prime Minister Datuk Seri Najib Razak.

Yusli said Bursa Malaysia's initiatives next year will revolve around ensuring diversity of products, greater liquidity, enhanced quality and better efficiency.

He hopes there will be more retail participation, which is currently low, in the mid-30s percentile.

"Education and awareness are the key and we'll continue with efforts in that direction. We've also not seen a return of foreign funds to the levels seen before the 2008 election results. I hope that foreign investors will take note of the capital market and the government's efforts to make Malaysia friendly to business and investing, and that we will see foreign funds come back to our shores," he said.

Monday, December 21, 2009

The 9 Characteristics of Great Traders

What separates the 10% that make money from the 90% that don't?

1. 10,000 hours
For some reason most people that 'try their hand' at trading view it as a get rich quick scheme. That in a very short space of time, they will be able to turn $500 into $1 million! It is precisely this mindset that has resulted in the current economic mess, a bunch of 20-somethings being handed the red phone for financial weapons of mass destruction. The greatest traders understand that trading much like being a doctor, engineer or any other focused and technical endeavor requires time to develop and hone the skill set. Now you wouldn't see a doctor performing open heart surgery after 3 months on a surgery simulator. Why would trading as a technical undertaking require less time?

Trading success, comes from screen time and experience, you have to put the hours in!

2. Education, education, education.
The old cliche touted by politicians when they can't think of anything clever to say to their audience. The importance of education to success in trading cannot be placed on a high enough pedestal. You have to learn to earn, the best traders work obsessively to refine their edge further to stay ahead of the curve.

3. Think for yourself.
"NO! NO! NO!"... "Bear Stearns is not in trouble"..."Don't move your money from Bear! That's just silly! Don't be silly!"

A quote from well known stock guru Jim Cramer aired on CNBC days before Bear Stearns lost 90% of its value. Many followed this call and felt the obvious pain as a result. As the old saying goes, too many cooks spoil the broth; it is very much the same in trading. Successful traders blinker themselves from the opinions of others; they focus on their own analysis of fundamental and technical information.

4. Adapt or Die.
Market conditions change and technology advances, thus the conditions for trading are always evolving, the rise in mechanical trading is testament to that. The very best traders through a process of education and adaptation are constantly staying ahead of the curve and creating ever new and ingenious methods to profit from the markets evolution.

5. Fail to plan, you plan to fail.
The best traders have a well documented plan; they know exactly what they are looking for and follow that plan to the letter. Their preparation for a trade starts long before the market open, it is this meticulous planning and importantly adherence to that plan that helps them avoid the biggest demons for any trader, over trading and revenge trading.

6. "Be like Machine"
As human beings emotions pay a key role in our existence, for a trader emotions can be a source of great pain. Trading psychology and the management of your emotions in a trade play a key role in overall success. Fear and greed can cut your winners short and let your losers run. Dealing with emotions follows on from your plan; the more robust your plan the less likely you are to fall into the emotional mine field.

7. Know your tools
Every trader has a set of tools they use, DOM, Charts, News feeds etc. These tools are a trader's bread and butter; they are the most vital part of a trader's arsenal, without which it would be impossible to trade. The best traders have mastered their order entry methodology, they know all about the features they need from their charts. This mastery of their tools, allows the trader to get the very best out of the resources they have available to them and ensures perfect execution of their trading ideas.

8. Know Thyself
Behind all the egos and excess, the best traders know their limitations; they focus on what can go wrong in a trade, and expend a lot of energy in limiting and controlling their risk before thinking about profits. They have a heightened sense of self-awareness and focus on incremental self improvement.

9. Profit & Loss
The best traders focus on the trade itself rather than the P&L; they view each trade as a technical exercise and focus on getting the most out of the market in accordance with their plan. They do not think in terms grocery payment, the electric bill and the desire to make X amount to cover a mortgage payment. Focusing on the money behind a trade can cloud technical objectivity.

In Conclusion
The greatest traders work hard to get ahead and even harder to stay ahead. Through increased and niche knowledge they constantly adapt with the market and remain profitable in every environment. Drive, tenacity and the will to succeed is the greatest edge of every successful trader.

Thursday, December 10, 2009

Malaysia Should Learn From Past Economic Lessons

TEN years ago, as the Asian financial crisis was wreaking havoc and countries in the region were engaged in some serious economic firefighting, I had a heated discussion with my fellow journalists discussing the once-in-a-generation turmoil before us.

There was considerable pride in how we tackled the crisis compared with other countries which were in worse financial shape and badly hit by the ensuing trail of economic problems. The conversation eventually reached the all-too-familiar “at least we are better than them” comment.

But here’s the thing. It is pointless to compare Malaysia with countries that are worse off. Progress should be measured against what we hope to become. In other words, we ought to compare Malaysia with countries that are better off than us.

Fast forward 10 years (today) and the self-glorifying comment above seems far less realistic.

Thailand and Indonesia, the two countries that the journos were comparing Malaysia with then, paid a tremendous social cost from the International Monetary Fund aid package which was accompanied by a market liberalisation agenda; but they have rebounded strongly.

For Malaysia, failure to vigorously improve the economy through market and economic liberalisation initiatives in the aftermath of the Asian crisis is rearing its cost today.

The Government has signalled it will act but what is likely forcing its hand in this matter could be the decline of the private sector’s role in the economy today.

Prior to the Asian crisis, the country’s ratio of gross domestic capital formation as a percentage of GDP was over 40%, hitting 43% in 1997 compared with 34% for Thailand and 32% for Indonesia. Right after the crisis in 1998, the ratios for all three countries plunged with Thailand and Indonesia falling much more than Malaysia.

But over the years, gross domestic capital formation as a percentage of GDP for those two countries started to rise but in Malaysia, that ratio has steadily fallen; in 2008, it was just below 20% whereas in Thailand it was 29% from a low of 20.5% in 1999 and 28% for Indonesia from a low of 11% in 1999.

Over that time, the Government has repeatedly declared that the private sector will resume its role as the engine of growth, much like it was prior to the crisis, but that has not materialised.
With falling private sector investment in Malaysia, the Government has had to shoulder much of the burden of generating economic growth.

There were times, both politically and economically, Malaysia could have instituted change that would have addressed that decline much sooner as the cost of supporting growth has become too large solely for the Government to be burdened with.

Being the engine of growth is a task the Government cannot continue indefinitely, given the already huge strain it has put on the national accounts by virtue of the repeated budget deficits since the Asian crisis.

Knowing this, there is seemingly a rush by the current administration to eradicate the malaise afflicting the economy and to get private sector to take over the reins of the economy.

It intends to lift the lid on the economy by revamping the NEP to bring about much needed entrepreneurship into the economy. The administration is also trying to figure out how best to reverse the perception or reality that the private sector is being crowded out of the economy in favour of government-linked companies. Subsidies are also in the crosshairs of the Government.

To tackle this, the Government is preparing a new economic model to get the services industry to invest more in the economy with the intention of moving the country’s per capita income up to the range of that of a high income economy.

All of that can only be accomplished if it manages to convince businesses to invest more in the economy. Companies today have more choices as to where to invest their money today than they did in the early to mid-1990s.

There is a lot of competition for investment money not only from our neighbours but also from the larger BRIC (Brazil, Russia, India and China) nations and emerging markets in Europe.

The Government has to position Malaysia, more so for local companies, as the destination of choice for businesses and come up with policies that will reverse the worrisome decline in private investment in the country.

Such a task is monumental and whether Malaysia will succeed is unknown as history has taught us that getting an economy out of the middle income range is extremely difficult to accomplish.
But try they must. There’s no time to waste.

Tuesday, December 08, 2009

Make M'sians Become High Income Growth Model

Financial institutions say employment of highly-skilled labour a key ingredient
PETALING JAYA: Banks can innovate and support the high income growth model for which a basic ingredient is the setting up of industries that employ highly-skilled labour.

“All over the world, countries with high income would have industries and activities involving highly skilled workers who would be paid high wages,” said Sanjeev Nanavati, CEO of Citibank Malaysia.

The starting point is the availability of such a pool and in Malaysia’s case, there is an urgent need to iron out some serious human capital issues relating to education, innovation and the rate of emigration.

“There is enough financing in the country,” said Sanjeev.

“What it needs is more private investments in highly skilled areas to take place. Malaysia has to make itself a compelling, not just attractive, destination for foreign investments,” he added.

“It needs to increase the momentum towards achieving the high income growth model by repositioning itself as a hub for higher education.”

It should consider inviting the top universities in the world to set up an international campus here, setting up more international schools which should be more accessible to Malaysians and making a concerted effort to change the quality of human capital.

CIMB group chief financial officer Kenny Kim sees the banking sector’s role as providing financing schemes to grow new sectors of the economy, particularly in the knowledge intensive areas.

“This may involve taking a different approach in assessing credit risk as these industries do not have traditional collateral,” said Kim.

Banks and the Government should also collaborate to support businesses seeking capital to grow in new areas such as clean energy.

According to Alliance Bank CEO Datuk Bridget Lai, processes and services that help generate cost and time saving for businesses will become more prominent.

Cash management, e-commerce, payroll and other automated services will free up more resources that can be directed towards higher income generating activities.

“A high income economy driven by the services sector will increase the population of educated, high networth individuals who will demand more sophisticated offerings,” she said.

This is apart from the bread-and-butter products such as credit cards, personal loans and mortgages. (In 2008, mortgages represented 54% of total consumer loans, vehicle financing 31%, personal loans 9% and credit cards 7%).

“Variety and flexibility in savings and/or investments, transportability of resources and assets as well as reputable fiduciary and estate planning will feature heavily in this economy,” she added.

As customers require higher value added from banks, a “one-size-fits-all” approach will not work.

A bigger shift is expected towards more financial planning services versus the traditional selling of financial products.

“CIMB group is making investments in this area to enable its frontliners to better understand its clients’ unique needs before recommending solutions,” Kim said.

There will be more emphasis on insurance, unit trust and structured products to complement traditional deposit products as a means of income growth and preservation.

Banking services should become more accessible through the growing usage of Internet and mobile banking as well as call centres.

A bigger role lies ahead for banks and other financial intermediaries in providing sufficient education and understanding of complex investment options.

“Banks will need to meet these new benchmark levels of expectations,” said Lai. Besides financial planning skills, further education is required in portfolio management, risk and diversification techniques as well as international offerings of financial investment options.

Wednesday, December 02, 2009

How To Diversify Investments During Time Of Crisis

AS a result of the financial crisis, even though most commodities have not been performing well, gold has outperformed the conventional asset classes like equity and bond.

This has prompted some investors to consider commodities as one of their investment asset classes. In this article, we will look into how to invest in commodities.

Bruno H. Solnik and Dennis W. McLeavey in their book titled “International Investments” classified commodities in three major categories – agricultural products, energy and metals.

Examples of agricultural products are fibres (wood, cotton), grains (wheat, corn, soybean), food (coffee, cocoa, orange juice) and livestock (cattle, hogs, pork bellies). Energy products can be crude oil, heating oil and natural gas whereas examples of metal products are copper, aluminum, gold, silver and platinum.

The main reason behind investing in commodities is that they have negative correlation with stock and bond returns. This will provide a good way to diversify portfolio risks. Besides, given that commodities are positively co-related to inflation, they can help investors hedge against inflation.

Investors can consider investing directly in commodities or indirectly by buying into futures contracts, bonds indexed on some commodity price as well as stocks of commodity related companies.

Some companies will invest in commodities that are extensively used as raw materials in their production processes. High commodity prices or raw material prices will affect those companies’ performance. However, if they have invested in their raw materials, even though their profitability might be affected by high raw material prices, the gains from their investment in those commodities will offset the losses in their operations.

Some investors will consider buying into commodity futures, such as crude palm oil (CPO) futures as this is one of the easiest and cheapest ways to get exposure to commodities.

However, investors need to understand that futures trading requires a high level of trading skills as most commodity players are well-equipped with the required market information, like total world supply and demand of CPO as well as the weather conditions in those producing countries.

Some financial institutions may offer unit trust funds that invest directly in those commodities or indirectly through buying into commodity futures. In the United States, investors can buy into commodities via exchange traded funds (ETF) that are invested in commodities futures.

An ETF is a special type of fund that tracks some market indices and it is traded on a stock market like any common share. Given that the world economy may recover further and oil prices may go beyond US$100 per barrel again, buying into oil or other commodity related ETFs may provide retail investors an alternative to get exposure into commodities.

Since commodity cycles and the general business and stock market cycles are usually different, investing in commodities provides a good way of portfolio diversification.

Besides, investors can consider buying into collateralised futures funds (sometimes they are referred as structured products). A collateralised futures fund is a portfolio that takes a small long position in commodity futures and invests the rest of the money in government securities. Normally, it is capital guaranteed as the yield generated by government securities will be used to cover for the cost incurred for the futures contracts.

Lastly, investors can consider buying into listed companies that are commodity related. In Malaysia, if investors wish to gain from higher CPO prices, they can consider buying into plantation companies.

Given the current gold prices of more than US$1,150 per ounce, some investors are eager to know whether there are any further upsides to the gold prices. Some analysts and fund managers have predicted that the gold prices may go beyond US$1,200 to US$1,300 per ounce.

Investors will rush into gold during a financial crisis, like the current financial crunch and the Great Depression in 1929-32, because gold can keep its value during those periods.

We believe that gold is a cyclical product. Even though nobody knows how high the gold prices can go, given that the world economy is showing signs of recovery, the upside potential for gold investing may be limited.

Wednesday, November 18, 2009

Can Stock Market Rally Last?

NEW YORK: Somebody on a bus asks a friend, "How about that stock market?"

The response: "Unbelievable." Caribbean vacationers lounging poolside check their Blackberries for stock prices.

Suburban gym members chat about the latest market gains during their morning workouts.

Welcome to the 2009 bull market - or so many people think.

They're buying up shares of everything from Google Inc. to Bank of America Corp. at a pace not seen since the 1930s.

Since March, the Dow Jones industrial average has jumped 57 percent and the Standard & Poor's 500 index has gained 62 percent.

Investors are betting on a strong economic recovery. But here's the problem: Good news ahead could be bad news for the bull.

To understand why, consider the very thing that has boosted the market.

The U.S. government has spent nearly $1 trillion to stimulate the economy and the Federal Reserve has maintained a policy of keeping interest rates near zero.

Those will disappear as the economy's health improves, potentially halting the bull market by taking away what has been its crutch - sources of cheap and plentiful money.

"Pretty soon the easy money phase could be behind us," said Hugh Johnson, chairman and chief investment officer of Johnson Illington Advisors, an investment firm in Albany, New York.

The government has plunged big money into the marketplace, through tax cuts,
construction projects and other measures. At the same time, low interest rates have invigorated stocks by reducing borrowing costs and bolstering corporate profits.

The low rates have also knocked down the returns of other short-term investments, like government bonds and money-market funds.

Since people aren't getting high returns on those investments, they're buying stocks.
Stocks are risky because they don't guarantee a return, and the recent bear market shows how deeply share prices can drop.

From October 2007 through March, the Dow industrials lost 53 percent.

"The Fed is forcing everyone to take risk by buying stocks because if you don't take risk, you will be earning nothing on your money," said Ed Yardeni, president and chief investment strategist at Yardeni Research.

Yardeni said his clients, which include pension funds and institutional investors, feel like they don't have a choice but to buy stocks right now.

He sees lots of "fully invested bears" - investors who don't believe that investing in stocks makes sense right now because of the state of the economy, but they are buying anyway because they worry they might miss out on a bull run.

The Dow is trading above 10,000 for the first time since October 2008, though it is still 27 percent below its peak two years ago.

The S&P 500 has gone up almost 7 percent just this month.

Plenty of investors and analysts don't see an end to those gains, especially if the economy picks up in the coming months.

But a strong economy is just what Yardeni and some others on Wall Street say could thwart the rally should it lead to higher interest rates and waning government stimulus.

The Fed isn't expected to act soon.

The U.S. central bank has kept the target range for its bank lending rate at zero to 0.25 percent since December.

It pledged this month to keep that rate at a record low for an "extended period."

How long that really means is anyone's guess.

The Fed said in a statement after its November meeting that economic activity has "continued to pick up" and that the housing market has strengthened - a key ingredient for a sustained recovery.

But a 10.2 percent unemployment rate and weak consumer spending is still plenty worrisome to the economy's overall health.

Yardeni thinks once the Fed even begins to hint of looming changes in its interest-rate policy it will "take the steam out of this rally," he said.

"It won't take much to push this market back down."

In the past, higher rates didn't knock down stocks immediately.

The Fed cut its benchmark rate from 2001 through 2003 to stimulate growth, taking it down to a low of 1 percent, where it stayed for a year.

The low rates reduced mortgage costs, feeding the housing boom, and sparked a bull market in stocks.

The Fed started to slowly raise rates in July 2004 to slow the economy and keep inflation in check.

The housing market peaked in 2006 and the stock market followed in 2007.

After that, both headed into a free fall.

Back in 1982, a sustained bull market began amid a deep recession, and the gains lasted even though the Fed began to boost rates.

There was more to lure investors back to stocks then, notes David Rosenberg, chief economist and strategist at Canadian wealth management Gluskin Sheff.

Stock dividend yields were 6 percent then; today they are below 2 percent.

That means investors had a greater potential to generate income off their stock investments, regardless of whether prices rose or fell.

Bond yields were at double-digits and were expected to fall in 1982; today short-term bonds pay nearing nothing and yields will likely head higher.

That could make fixed-income investments more attractive.

Investors still should heed the potential danger signs of today's market, before their exuberance gets the better of them. - AP

Wednesday, November 11, 2009

Think Like Warren Buffett

1. Think of Stocks as a Business

Many investors think of stocks and the stock market in general as nothing more than little pieces of paper being traded back and forth among investors, which might help prevent investors from becoming too emotional over a given position but it doesn't necessarily allow them to make the best possible investment decisions.

That's why Buffett has stated he believes stockholders should think of themselves as "part owners" of the business in which they are investing. By thinking that way, both Hagstrom and Buffett argue that investors will tend to avoid making off-the-cuff investment decisions, and become more focused on the longer term. Furthermore, longer-term "owners" also tend to analyze situations in greater detail and then put a great eal of thought into buy and sell decisions. Hagstrom says this increased thought and analysis tends to lead to improved investment returns.

2. Increase the Size of Your Investment

While it rarely - if ever - makes sense for investors to "put all of their eggs in one basket," putting all your eggs in too many baskets may not be a good thing either. Buffett contends that over-diversification can hamper returns as much as a lack of diversification. That's why he doesn't invest in mutual funds. It's also why he prefers to make significant investments in just a handful of companies.

Buffett is a firm believer that an investor must first do his or her homework before investing in any security. But after that due diligence process is completed, an investor should feel comfortable enough to dedicate a sizable portion of assets to that stock. They should also feel comfortable in winnowing down their overall investment portfolio to a handful of good companies with excellent growth prospects.

Buffett's stance on taking time to properly allocate your funds is furthered with his comment that it's not just about the best company, but how you feel about the company. If the best business you own presents the least financial risk and has the most favorable long-term prospects, why would you put money into your 20th favorite business rather than add money to the top choices?

3. Reduce Portfolio Turnover

Rapidly trading in and out of stocks can potentially make an individual a lot of money, but according to Buffett this trader is actually hampering his or her investment returns. That's because portfolio turnover increases the amount of taxes that must be paid on capital gains and boosts the total amount of commission dollars that must be paid in a given year.

The "Oracle" contends that what makes sense in business also makes sense in stocks: An investor should ordinarily hold a small piece of an outstanding business with the same tenacity that an owner would exhibit if he owned all of that business.

Investors must think long term. By having that mindset, they can avoid paying huge commission fees and lofty short-term capital gains taxes. They'll also be more apt to ride out any short-term fluctuations in the business, and to ultimately reap the rewards of increased earnings and/or dividends over time.

4. Develop Alternative Benchmarks

While stock prices may be the ultimate barometer of the success or failure of a given investment choice, Buffett does not focus on this metric. Instead, he analyzes and pores over the underlying economics of a given business or group of businesses. If a company is doing what it takes to grow itself on a profitable basis, then the share price will ultimately take care of itself.

Successful investors must look at the companies they own and study their true earnings potential. If the fundamentals are solid and the company is enhancing shareholder value by generating consistent bottom-line growth, the share price, in the long term, should reflect that.

5. Learn to Think in Probabilities

Bridge is a card game in which the most successful players are able to judge mathematical probabilities to beat their opponents. Perhaps not surprisingly, Buffett loves and actively plays the game, and he takes the strategies beyond the game into the investing world.

Buffett suggests that investors focus on the economics of the companies they own (in other words the underlying businesses), and then try to weigh the probability that certain events will or will not transpire, much like a Bridge player checking the probabilities of his opponents' hands. He adds that by focusing on the economic aspect of the equation and not the stock price, an investor will be more accurate in his or her ability to judge probability.

Thinking in probabilities has its advantages. For example, an investor that ponders the probability that a company will report a certain rate of earnings growth over a period of five or 10 years is much more apt to ride out short-term fluctuations in the share price. By extension, this means that his investment returns are likely to be superior and that he will also realize fewer transaction and/or capital gains costs.

6. Recognize the Psychological Aspects of Investing

Very simply, this means that individuals must understand that there is a psychological mindset that the successful investor tends to have. More specifically, the successful investor will focus on probabilities and economic issues and let decisions be ruled by rational, as opposed to emotional, thinking.

More than anything, investors' own emotions can be their worst enemy. Buffett contends that the key to overcoming emotions is being able to "retain your belief in the real fundamentals of the business and to not get too concerned about the stock market.

"Investors should realize that there is a certain psychological mindset that they should have if they want to be successful and try to implement that mindset.

7. Ignore Market Forecasts

There is an old saying that the Dow "climbs a wall of worry". In other words, in spite of the negativity in the marketplace, and those who perpetually contend that a recession is "just around the corner", the markets have fared quite well over time. Therefore, doomsayers should be ignored.

On the other side of the coin, there are just as many eternal optimists who argue that the stock market is headed perpetually higher. These should be ignored as well.

In all this confusion, Buffett suggests that investors should focus their efforts of isolating and investing in shares that are not currently being accurately valued by the market. The logic here is that as the stock market begins to realize the company's intrinsic value(through higher prices and greater demand), the investor will stand to make a lot of money.

8. Wait for the Fat Pitch

Hagstrom's book uses the model of legendary baseball player Ted Williams as an example of a wise investor. Williams would wait for a specific pitch (in an area of the plate where he knew he had a high probability of making contact with the ball) before swinging. It is said that this discipline enabled Williams to have a higher lifetime batting average than the average player.

Buffett, in the same way, suggests that all investors act as if they owned a lifetime decision card with only 20 investment choice punches in it. The logic is that this should prevent them from making mediocre investment choices and hopefully, by extension, enhance the overall returns of their respective portfolios.

Bottom Line

"The Warren Buffett Portfolio" is a timeless book that offers valuable insight into the psychological mindset of the legendary investor Warren Buffett. Of course, if learning how to invest like Warren Buffett were as easy as reading a book, everyone would be rich! But if you take that time and effort to implement some of Buffett's proven strategies, you could be on your way to better stock selection and greater returns.

Thursday, November 05, 2009

How To Handle Market Uncertainty

AFTER the strong rally over the past seven months, the market is finally undertaking some corrections. Some investors may not fully comprehend why the stock market moved up when the companies reported bad financial results, but tumbled when the companies started to show better financial performance.

We need to understand that the market had discounted the good news. Some of those good financial results were already reflected in the stock prices. The stock market cycle always moves ahead of the economic cycle.

During the Great Depression in 1929, the stock market recovered eight months ahead of the real economic recovery. Even though some investment experts say the worst is far from over, we notice that a lot of economic indicators are pointing to an economic recovery.

However, the economic growth may not move as fast as the stock market. As a result, while the economy continues to recover, stock prices need to come down to reflect the fundamentals of the companies.

This explains why once investors started to realise that the stock prices could not be supported by the fundamentals of some companies, especially blue-chip stocks, the stock prices had to come down to reflect the true value of companies.

Nevertheless, based on our analysis, most listed companies in Malaysia showed great recovery in their second quarter of 2009 financial results against the results in the first quarter as well as the fourth quarter of 2008.

We need to understand that there are many disturbing factors that affect the stock prices, but not reflect the fundamentals of companies. From the perspective of behavioural finance, investors’ expectations and emotions have great influence on stock prices. Two factors influence investors’ expectations – past experience and new information.

In the absence of new information, investors will use past trends to extrapolate into the future. As a result, the stock prices may persist in trend for a while before the next market reversal.

This may cause the market to overreact to good financial results as shown by some companies.
According to Fischer Black, some investors tend to be affected by noise that makes it difficult for them to act rationally. He defines noise as what makes our observations imperfect as well as keeps us from knowing the expected return on a stock.

Some investors, due to lack of self control and proper financial training, may misinterpret economic information and sometimes be carried away by the stock market emotion. Investors may feel uneasy over the recent strong market performance. However, they will still choose to follow the market trend even though they feel their judgment may be wrong. In behavioural finance, we label this as conformity in which we are inclined to follow the example of others even though we do not believe in the action.

The above phenomenon of stock prices being valued beyond the fundamentals of the companies is applicable to some selected blue-chip stocks. Nevertheless, Bursa Malaysia does have plenty of second- and third-liner stocks which are still selling at cheap valuations. Investors may want to take the current market corrections to accumulate them for the long-term.

We need to relate the current stock prices to the intrinsic value of the companies. Some investment tools like price-to-earnings ratio, dividend yield and price-to-book ratio will assist us in filtering out some good companies for investment.

Even though there are a lot of uncertainties along the way to full financial recovery, we feel that investors may view the recent corrections as good opportunities to build their long-term investment portfolios. For those who have been looking for investment returns higher than fixed deposit rates, there are still a lot of stocks that are paying handsome dividend yield of more than 4% and yet selling at cheap prices.

One of the most important investing principles is to have the discipline to hold long term. We should not pay too much attention to the fluctuation of stock prices; instead, we need to focus on the earning power of the companies as it is one of the most important drivers in deriving the intrinsic value of a company.

As a result of the financial crisis, even though a lot of companies are showing great recovery, their performance and prices are still lower than their peak level during the year in 2007. If the overall economy and the companies’ performance recover to 2007 level, their current stock prices may be a good entry level.

Tuesday, October 27, 2009

Are The Markets Overvalued?

GLOBAL stock markets have recovered sharply from their bottom in March 2009. Where will our markets go from here?

To answer this question, we have to consider the prospects of the US market as the correlation between the US and world stock markets is very high especially when major movements occur in the US stock market.

In fact, emerging markets normally exhibit higher beta, moving up more than the US markets in a recovery and falling by more in a downturn.

The price-earnings ratio (PER) of the US market has ranged from a recent low of 6.6 times during the deep recession in July 1982 to over 40 times during the tech bubble in 1999.

The PER of the US market (as measured by the Standard & Poor’s 500 Index) was 22 times when the Dow peaked at 14,164.5 points on Oct 9, 2007, compared with an average 14.6 times from 1895 to 1995, according to Professor J Shiller (see chart).

Shiller’s data also shows that for that period, the market traded between 10 and 20 times earnings for 70% of the time.

According to consensus forecast, the S&P 500 which comprise 500 of the larger stocks in the US (rather than just 30 stocks for the Dow) is trading on a current PER of around 20 times, implying that the market is trading at close to the upper end of its normal trading range.

Does this imply an imminent correction?

The PER of the market cannot be viewed in isolation. Other factors like interest rates, inflation rates, earnings growth and human psychology have to be considered.

Market PERs are normally higher when inflation and interest rates are low.

Low deposit rates will make stocks more attractive as dividend yields of stocks could be higher than deposit rates; and stocks, if chosen well, could provide earnings growth which could boost future dividends.

The PER of the stock market was below 10 times in the early 1980s when inflation and interest rates were high.

The then Fed chairman Paul Volcker, who successfully tamed inflation with a tight monetary policy in the early 1980s, set the stage for falling interest rates and one of the longest bull run from 1982 until the bursting of the tech bubble in early 2000.

With the Fed slashing interest rates to almost zero following the global crisis precipitated by the collapse of Lehman in September 2008, the attractiveness of equities has improved versus bank deposits which pay pitiful interest rates.

Third quarter earnings of US companies have generally outperformed analysts’ forecast with 79% of the S&P 500 companies posting results that exceeded estimates.

Revenues have been lacklustre and earnings have been achieved in part from cost cutting and from a weaker US dollar which has boosted revenues for US multinationals.

More than half of the earnings of US multinationals are denominated in foreign currencies which have appreciated against the US dollar.

The Japanese market peaked at almost 39,000 in 1989 and was then trading on a PE of over 70 times.

Such high PERS cannot be justified or sustained for long and the Japanese market is currently trading at less than a third of its peak value.

The difference between the US and Japanese stock markets is that the US markets were less overvalued when the economic and stock market crash happened in September 2008.

The Dow has surpassed 10,000 points and has recovered almost 50% of the 7,617 points it lost between the peak of 14,164.5 points on Sept 10, 2007 and the bottom at 6,547.1 points on March 9, 2009.

Economic recovery remains weak and hence the excess liquidity resulting from lower interest rates and printing money is finding its way into financial markets (especially stocks and commodities) and properties.

A double dip into a deep recession is unlikely as house prices in US and many other countries have started to recover thereby boosting consumer confidence and bank profits through write-backs and higher valuation of mortgage-backed securities.

A more likely scenario is a lacklustre recovery, dampened by weak consumer spending as US consumers deleverage.

At these levels, the US markets seem to be fairly valued.

Any significant move up may push the US markets into bubble territory, a possibility that cannot be ruled out as central banks and pump-priming politicians are only likely to act when the bubble is obvious.

After all, who wants to spoil a good time that wins votes.

At these levels, investors will have to be more cautious.

Stocks with a high dividend yields that can be sustained offer some protection as investors are seeking yields in a low interest environment.

This would include the utility, telecommunication and food sectors.

The gaming, tobacco and alcoholic beverage sectors should also see stable demand, that is if they are not subject to large excise duty or tax increases in the budget.

Those seeking growth should ensure that the companies’ PER are reasonable and growth can be sustained in a competitive environment where excess capacity may encourage price dumping.

The rubber glove companies in Malaysia have pricing power as they produce 60% of the world’s rubber gloves and sell to the healthcare industry where demand is steadily growing.

Thursday, October 22, 2009

How To Detect Some Early Financial Warnings In Companies

TRADING volume on the stock market has recently been getting higher again. Some retail investors, who were absent from the recent rally, have started to get excited.

Over the past few months, investors were mainly focusing on good quality stocks, selling at a cheap level. However, attention has started to switch to poor quality stocks lately. Even though sometimes investors may be able to make money by betting on those stocks, we still need to be careful about the fundamentals of the companies. In this article, we will look at how to detect some early financial warnings.

A lot of companies like to make corporate announcements during the bull market. We agree that some of the announcements were genuine, but many corporate proposals were simply too good to be true.

If we analyse further, we will notice that the proposals might be way beyond the capabilities of the companies. Sometimes, the management’s projections of sales and profits were far beyond the past history. The capital expenditure requirements were well above the companies’ borrowing capacities.

Besides, the time required to turn the projects into profits might be too long. Nevertheless, as a result of the announcements, the stock prices would surge and normally, the main sellers behind might be the key owners.

We have also seen some proposals that turned out to be profitable. The companies did make profits in the first few years. However, the high growth in expansion stretched the capabilities of the top management, who might not have the experience and ability to run big businesses. They might have the experience to manage RM100mil turnover businesses. However, when the turnover surged beyond RM1bil per year, they might have problems. In fact, the main concerns to the companies were the top management team which lacked skills and experience to run big businesses.

We need to be careful if there are any changes to the key managers of the companies, auditors or accounting firms. The key managers are referred to the positions like chief executive officers and financial controllers. Besides, frequent changes in auditors provide serious financial warnings, especially the change from a reputable audit firm to an unknown one.

Companies will soon start to report their financial results for the period ended Sept 30. In Malaysia, often good companies will try to announce their results before the deadline of Nov 30. However, if they are having difficulties in providing their financial statements, normally, we will expect some bad news to be announced. One of the possible explanations behind the delay is that the companies need more time to rectify certain financial problems.

Another potential sign of financial warning is when the companies venture into unrelated businesses. Previously, we saw many Bursa Malaysia second board companies going into financial distress in 1997/98 when they departed from their core businesses in manufacturing and ventured into property development activities.

We need to understand that when the company owners enter into areas that are not their core competencies, they might not be able to apply the knowledge and experiences accumulated previously. Instead, they would have to go through the entire learning curve again, which would result in the management taking a lot of time in managing those unrelated businesses.

In such situations, investors will need to pay attention and analyse whether those new ventures will be able to add value to the shareholders’ wealth. Some companies like to change their names after venturing into new businesses. Too frequent name changes may also imply that the companies have been shifting their core business focus and directions, which may not be good news to the shareholders.

Litigation is also another warning sign. We need to pay attention to companies that are involved in litigations, which may be either attributed to the companies being sued or they are suing someone else. These litigations may divert the management’s attention from day-to-day business operations. As a result, they may affect the companies’ performance as well.

One of the common questions asked by shareholders during any AGM is the directors’ fees. We need to analyse whether the fees paid are in proportion to the companies’ profitability. Sometimes, certain companies make excessive perks for owners as well as their employees or the lifestyle of the key owners is simply not consistent with the companies’ profitability.

The above are a few of the more common financial warnings that potential or existing shareholders must pay attention to when analysing the companies for investment. More importantly, we need to remain vigilant at all times and pay attention to the latest development of the companies.

Personal Investing - By Ooi Kok Hwa

Thursday, October 15, 2009

Economy On Track For Full Recovery By 2010

MALAYSIA'S economy is well on track for a full recovery by next year, judging from increasing demand for products and services of late, says Minister of International Trade and Industry Datuk Mustapa Mohamed.

"The business community is telling me that there is some increase in orders, but it will take weeks or months for these orders to reflect the actual numbers.

"The actual delivery (of these orders) is expected either in November or December. That is why we say that by the end of the year or hopefully by next year, our economy will be fully recovered," he told reporters after opening the National Women Convention 2009 in Kuala Lumpur yesterday.

He was asked to comment on Malaysia's international trade outlook for next year.

According to recent trade figures released by the ministry, Malaysia's exports in August fell 19.8 per cent from a year ago but economists are saying that the country's economic recovery momentum is still intact.

On a month-on-month basis, August exports were down 2 per cent from July, while imports also shed 6.6 per cent, resulting in the total trade falling 4.1 per cent to RM38.26 billion.

Mustapa also said the ministry continues to seek more financial assistance from the government to help develop entrepreneur development programmes, including that for women.

"As usual, we will submit proposals to the government for allocation under the annual Budget. We hope for an increase in funding for entrepreneur development programmes in the coming budget presentation.

"But, it all depends on whether the government can afford it. (We will) wait for the budget announcement next Friday," he said.

Earlier in his speech, Mustapa said up to September 2009, a total of RM23.3 million has been spent to train 23,444 workers under the Skills Upgrading Programme by SME Corp Malaysia Bhd and of this, 36 per cent were women.

While under the Women Exporters Development Programme undertaken by the Malaysia External Trade Development Corp, he said 48 women-owned companies have been provided with export assistance involving RM1.6 million since 2005.

SME Corp chief executive officer Datuk Hafsah Hashim said she is confident that the target of having 22 per cent small- and medium-sized enterprise (SME) exporters in 2010 from the current 19 per cent can be achieved, following positive signs that demand for their products is on the rise.

She also cited that the number of active SMEs have risen from 600,000 last year to 700,000 presently, while the number involving women entrepreneurs has reached 100,000.

Monday, October 05, 2009

Timely Boost For Market?

IN the past three decades of the Kuala Lumpur Composite Index’s (KLCI) memory, the third quarter of the year had typically been the weakest. That is why some investors shun the market from August right up to October (Black October, remember?).

Maybank Investment Bank senior manager, head of retail research equity markets Lee Cheng Hooi has proof to substantiate that. “Month-on-month (MoM) returns from 1977 to 2009 show that the months with the highest risk are the worst performing. Based on over 32 years of observations on MoM returns, we have identified a common trend for the FBM KLCI index as well as the Dow and Hang Seng indices. All three markets are weak in the August to October months,” says Lee.

For that reason, Lee recommends investors to “Sell” over this period and “Buy” in December. He expects the market to remain volatile as it is still in the “very high risk” zones.

A potential catalyst (or not) could be the upcoming budget 2010 which to be tabled in parliament on Oct 23. Do pre and post budget market swings present an investment opportunity?

Positioning for upside
Based on the past five years, the stock market tends to show a slight downward dip in the aftermath of the budget as investors generally have high expectations, and as such, end up getting somewhat disappointed over the lack of goodies.

But as this will be Prime Minister Datuk Seri Najib Tun Razak’s first budget as he is also the Finance Minister, don’t be surprised to see market-friendly measures, despite the Government saying it is looking to reduce operating expenditure while maintaining fiscal discipline.

Important to note too, is that compared to the regional bourses on a year to date basis, the FBM KLCI remains the second worst performer at 40.7%, only ahead of Japan.

TA Securities senior technical chartist Stephen Soo says that October has been touted as a negative month, more so because many of the global negative events in the past, took place during these months. “Without these negative events, it’s actually quite a random trend,” he says.

But there’s opportunity in crisis.

JF Apex Securities Bhd chief operating officer Lim Teck Seng is prepping himself for more upside as he expects more liberalisation and investor-friendly measures to come out of the budget.

He says the tone has already been set by Najib’s previous moves which includes the call to pare down Khazanah Nasional Bhd’s stakes in government-linked companies and bringing Maxis Communications Bhd back to the local bourse.

“There may be a pre-budget rally. The objective is simple. The market needs to move. Najib appears very serious in attracting foreign investments to the market,” he says.

KAF Securities research head Chehan Perera, in his strategy report dated Sept 30, expected the 2010 budget to be a follow-through of the expansionary policies announced in the past year, while continuing to focus on stimulating consumption.

“Structural adjustments to the composition of the government profit & loss are unlikely although the Prime Minister has hinted at a need to manage expenses more efficiently. Overall, the budget should be market friendly and provide a nice trigger ahead of the third quarter reporting season,” says Chehan.

Analysts also point out that the present correction may provide a good chance to buy quality stocks.

“Our markets have corrected ahead of the global market ... we had the Hungry Ghost Festival in September. So, the CI’s downside is limited. If you look at the second and third liners, there is hardly any correction,” says Lim, who believes the market is looking for a reason to move to the next level.

Potential catalysts from the upcoming budget may come wrapped in the form of bigger construction projects to be awarded including the extension of the light rail transit lines estimated at RM7bil and the new Low Cost Carrier Terminal.

Soo expects more of a post-budget rally, as he anticipates investors to accumulate on confirmation of news.

“The market is now correcting along with global markets. I would let the market dip a further 50 points before positioning myself for the year-end rally,” says Soo, who has a 1,250 target for end-2009.

A technical analyst says the short-term impact and direction of the budget on the economy and stock market are irrelevant. After all, market often reacts with knee-jerk speed and over-zealousness.

“The clever investor will think: Expectations are still pretty bearish. The green shoots everyone has been talking about may turn to to dead leaves. This year, everyone is still complaining about a recession, the lack of execution and political uncertainty. Maybe it’s a good time to buy,” says the technical analyst.

He says this bearish mood will hit good stocks with high dividend yields. Solid stocks will also be hit and be fleetingly cheap.

For example, consumer stocks with high dividends and reputable management such as AEON Co (M) Bhd, Nestle Holdings Bhd and Parkson Holdings Bhd will inevitably correct with the rest of the market.

Nonetheless, this does not change their growth rates.

“During recessions, people still buy toothpaste, coffee, biscuits, soaps or cleansers. This correction gives you a chance to pick up your favourite stock at a lower premium. It’s very unlikely that the budget will change their prospects,” he adds.

On this note, Lim likes food-based and consumer-based companies, as these companies tend to do well during recessions.

“Their profits may even double up, as consumers cut down on expensive food and alternate with cheaper foodstuff,” he says.

Monday, September 28, 2009

How To Analyse An Annual Report

MANY of us receive a lot of annual reports every year.

Even though we are aware that there is a lot of important information in the reports, not many of us are willing to spend time going through those reports before buying stocks.

Besides, it is quite difficult for some investors, especially those who lack proper financial training, to analyse the financial information.

In this article, we will provide a quick guide on how to analyse an annual report.
Given that there are many ways to dissect an annual report, the following six pointers are just a quick check on the financial health of any listed companies.

Income statement is the financial statement that shows the effects of transactions completed over a specific accounting period.

In this statement, we have three key pointers: the current level of revenue; high growth in revenue; and the profits made in proportion to the level of revenue.

The current level of revenue indicates the size of a company. A company with revenue or sales of RM1bil is definitely bigger than one that has revenue of only RM100mil.

In Malaysia, companies with revenue of RM500mil and above should be considered as more established companies.

High growth in revenue implies that the company has been expanding over the past period.
Assuming the high growth in revenue will eventually translate into high growth in profits, we should invest in companies with higher growth in revenue because this may lead to higher stock prices.

If the overall economy is expanding, avoid those companies that are showing a decline in revenue.

This might imply that the overall operating activities of the companies are declining.

The profits made in proportion to the level of revenue indicates whether this company has high or low profit margins in its products. The profits here refer to the profit after tax or net income.

We should invest in high profit margin companies because high profit margins will provide a cushion to the sudden change in operating environment. A company with revenue of RM1bil and profits of RM10mil is more likely to face tougher challenges in a stiff price competition environment compared with a company with revenue of RM100mil and profits of RM10mil.

Balance sheet is the financial statement that shows a company’s assets, liabilities and owners’ equity at a point in time. The two main pointers in this statement are cash in hand and total borrowings.

Cash in hand refers to the cash or cash equivalent like fixed deposits. If possible, we should invest in companies with high cash in hand and zero borrowings. High cash in hand may imply that the company has high chances of rewarding shareholders with higher dividend payments.

Besides, companies with high cash in hand have more financial stability than companies with very tight level of cash. This explains why most investment gurus like to invest in cash-rich companies.

Total borrowings include the short- and long-term borrowings. Here, we should check whether the company has reported any sharp increase in borrowings during the financial periods. Most companies need to increase borrowings to support their capital expenditure on any business expansion.

However, if a company has been increasing its borrowings each year and the level has far exceeded one to two times the shareholders’ funds, unless its operating activities are able to support the repayments, the company faces very high financial risk.

Cash flow statement shows the sources and uses of cash over the period. One very important pointer in this statement is the operating cash flow.

High operating cash flow implies that the company is generating cash from its operating activities. A healthy company should show high operating cash flow because this number will indicate how much actual cash the company has generated from operations during the period.

We need to be careful of the companies that are showing profits but at the same time generating negative operating cash flows every year. This may imply that these companies have very high receivables. Any economic downturn may cause a sharp increase in provisions on bad debts.

Lastly, investors need to understand that the above six pointers are just a quick guide to analysing any annual report. Serious investors should not only analyse these six pointers. They are advised to scrutinise the reports further for more details.

Wednesday, September 23, 2009

Outlook For Malaysian Bourse Bright

PETALING JAYA: The general outlook of the FTSE Bursa Malaysia KL Composite Index (FBM KLCI) remains bright, according to some local and foreign brokerages.

AmResearch Sdn Bhd, amongst the brokerages which join the upbeat prognosis, had raised its fair value for the FBM KLCI to 1,350 points from 1,190 based on 2010’s price earnings (PE) ratio of 16.5 times.

Managing director and regional head of equity research Benny Chew said in a report the anticipated correction phase in the third quarter of this year “may be behind us,” or at least “the risk of pullback was dissipating.”

He said there were still lingering worries over valuation after the steep run-up in share prices but the macro environment flushed with liquidity was most conducive to the equity market.

“More importantly, macro fundamentals are now pointing towards a start of a growth cycle moving into the fourth quarter. There is less doubt over a global economic recovery. Inflation expectations are muted, implying that the interest rate cycle is not going to rise anytime soon,” Chew said.

AmResearch is forecasting gross domestic product to expand by 3% in 2010.
Chew said historically, an earnings-driven re-rating from trough to peak of the market had never been shorter than 12 months.

“Rally in 1998/99 and 2001/02 sustained for 16 months and 12 months respectively. This present rebound is just six months from lows seen in March,” he said.

AmResearch has forecast corporate earnings to expand by 17% in 2010 or more than two times faster than its trend-average growth rate of just 7% in 2000 to 2009.

The Institutional Brokers’ Estimate System consensus earnings have bottomed, with nascent signs of upgrades taking hold while earnings surprises in the early phases of a recovery should be significant.

AmResearch expects the revision cycle to gain traction. It said earnings drivers of the heavyweight sectors, such as banks and plantations, were solidifying.

“With global economies on the mend and recovery gaining traction, we believe bank earnings could surprise on the upside. We expect banks to sustain earnings in the current year and to deliver a 15% improvement in 2010,” it said, adding that the improving industry outlook could see a return of the dividend theme as banks were well capitalised.

AmResearch is also positive on the plantation sector as a shortfall supply of palm oil was expected to sustain crude palm oil (CPO) prices.

“We reckon CPO prices should rise to between RM2,300 and RM2,500 per tonne as production enters a low output period moving into the fourth quarter,” it said.

The research house was “overweight” on the auto sector on expectations of 50% earnings growth for its auto portfolio in 2010 on the back of a recovery in total industry volume, which came off a low base in 2009 where it expected a 34% contraction.

According to Merrill Lynch’s fund manager poll for September, optimism over the overall global recovery remained strong.

“A net 72% of investors expect the economy to strengthen over the next 12 months. Yet caution exists on the shape of the recovery, with 72% of investors forecasting below-trend growth and below-trend inflation,” it said.

Merrill Lynch has rated Malaysia as “underweight”.

Kim Eng Research Sdn Bhd said there were clearer signs of rebound in Malaysia as seen in semiconductor, CPO and even property sales.

“The stock market has risen 33% year-to-date but still lagged other Asian bourses. Valuation have just broken out of the post-Asian crisis resistance level of 16 times and trading at financial year 2010 (FY10) PE ratio of 17 times on earnings per share growth of 17%.

“We opine it needs strong catalysts for the stock market to continue its northbound track, failing which it could settle back at the resistance of 16 times of around FBM KLCI 1,100 points,” it said.

Among its top big-capital picks are Genting Malaysia Bhd and Hong Leong Bank Bhd.
“We find mid-caps like Muhibbah Engineering (M) Bhd, EON Cap Bhd, Kulim (M) Bhd and Supermax Corp Bhd offer better bargains,” Kim Eng said.

Nomura Securities Malaysia Sdn Bhd said Malayan Banking Bhd was now one of its top large-cap picks while Alliance Financial Group was one of its top small-cap picks.

Nomura said banks, supported by an economic recovery and an earnings upgrade, would continue to outperform despite recent gains.

“To reflect the better-than-expected domestic credit conditions, we’ve raised Malaysian banks’ FY10 earnings estimates by an average of 15%,” it said, adding that banks were expected to start lending again as the economy recovers and stock markets rebound.

Nomura said banks have rebounded by 19% to 79% year-to-date. “But judging by past performance, where they rebounded by more than 200% after the 1997/98 recession, we expect more upside to their share prices.”

Tuesday, September 15, 2009

Featuring World-Renowned Investor Jim Rogers

As an investment guru, what is your advice to someone with little money and no expertise when it comes to investing on Bursa Malaysia? Why is it so hard to make money, but so easy to lose it? – Bulbir Singh, Seremban

I would suggest you continue to save your money, read and learn about investing. People get swept away by emotions and hot tips. It is easy to rely on other people but investing is something you must do on your own.

My strongest and most obvious advice to everyone – and I plead to people about this all the time – do not invest in anything unless you know a great deal about it. Just wait, and if there is something they know a great deal about, then invest in that. That is the only way to make money.

Subscribing to early wealth accumulation, if there is a single piece of advice on smart investing skills for young teenagers, what would it be? – Stephanie Teo

Have your own passions and pursue them. If you want to be a gardener, be the best gardener that you can be. Do not do what your parents or your teachers tell you to do. Follow your own passions.

You cannot be much more successful than doing what you want to do, and you will have a lot of fun in the process.

This decade is recommended by some investment gurus to be the decade for the commodities. Which commodities like oil, liquefied natural gas, gold, uranium, rare earth metals, copper, iron, timber, wheat or water will perform the best, you think? – James Ngu, Sibu, Sarawak

I have no idea which is the best. All of the above are good. There are shortages in developing all of the above. Everything is under pressure. We have supply problems from all commodities.

What are the prospects for the plantation sector, specifically, oil palm, as an investment tool? – Sonny Wong, KL

Oil palm is good. Like I said, the world is developing shortages in everything. The inventory for food is running low. However, it does not mean just because you have a plantation, you will make money. You will still have to organise and manage it well. I am very optimistic about agriculture.

Realistically speaking, could an individual earn a living full-time trading spot forex using technical analysis tool? Could the same tool be used for commodity futures trading? – Lieng Seong

If you are good at technical analysis, you will be successful. I personally do not use technical analysis and people have told me they do and they make money. You can analyse anything – bonds, commodities, forex, anything – if you are good at it. Many people use technical analysis and don’t succeed. But if you are good at it, you will succeed and you can trade in whatever you want.

Do you think Barack Obama or Ben Bernanke can save the world? – Ivan Ho, KL

No! They are making things worse. There are going to be many more problems – recessions – down the road. I am not optimistic about these two. The recession will get worse. This year will be better than 2008 but I am not optimistic about 2010 or further down the road. We are going to have more inflation and currency problems and they are mainly because of Barack Obama and Ben Bernanke.

You are bullish on China but had relocated to Singapore. Singapore is half-Chinese half-Western. Shanghai, or Beijing, provides excellent conditions for what you want to do in China. May I say you are hedging yourself just in case your investments in China do not perform as expected? – MJ, Bandar Utama

No, you cannot say I am hedging. These are wonderful cities but they are also very polluted. I have two young children and I don’t want them to grow up breathing all these polluted air. Everything in Singapore is good and in good working order. The air is fine.

I read your book, Hot Commodities: How Anyone Can Invest Profitably in the World’s Best Market. How do you see the price of gold in the next 10 to 20 years? What commodities have you invested in? – Hafis, Terengganu

I do expect gold to be higher 10 to 20 years from now. The International Monetary Fund is trying to sell its gold. I do have some gold and I have commodities – all of them.

China’s political and economic developments in the last 169 years have been drastic, dramatic and unpredictable. The last 30 years were just phenomenal. You have bought convincingly into China’s future. Are you not concerned deep inside that the Chinese Communist Party will change course because nothing was indispensable throughout China’s long period of history? – James Chang

This whole world ... what can I say! Look at the US. They have been a capitalist government but today, they own the mortgage, the insurance, the banking and the motor industries. All governments change. But if you know of any governments which you do not worry will change, tell me! When conditions change, governments change, unfortunately. Yes, I worry about China, Singapore, the US, everything!

Many times, you have said that the sectors with potential are farming and mining. How do ordinary people take advantage of such opportunities, apart from marrying a farmer? – Ng Shi Ping

It is a good idea to go into the farming business. You don’t have to marry a farmer to do that. There are other ways to do that. You can go into a business which sells to farmers, like selling seeds, tractors or farm equipment. You can even move into a farm area and open a shop. Farmers will be very well off in the next few years. You can be an accountant, a hairdresser, a lawyer but you offer your services to a farming community. The best way is to be a farmer.

Friday, September 04, 2009

Analysts Raise Target for Stock Market

CIMB Research has raised its year-end's FTSE Bursa Malaysia KLCI target to 1,240 points while OSK Research has increased its index target to 1,144 .
Stockbrokers, including CIMB Research, have turned more bullish on the local benchmark target for this year and next, after the strong rebound in second quarter earnings further boosted confidence.

After the August reporting season, CIMB has raised its year-end FTSE Bursa Malaysia KLCI (FBM KLCI) target to 1,240 points from 1,220.

It also set next year's target at 1,400 points, suggesting a 20 per cent potential upside from yesterday's closing.CIMB's estimates drew upon a projected 15 times price-earnings multiple.

The FBM KLCI, which has risen 33 per cent this year, fell 0.28 per cent to close at 1,168.01 yesterday."With green shoots peeping out during the May and August results seasons and the second quarter GDP (gross domestic product) pullback coming in lower than expected, the logical conclusion to draw is that the worst is behind us," CIMB said in a report yesterday.

Malaysia's second quarter GDP shrank a less-than-expected 3.9 per cent from a year earlier, Bank Negara Malaysia said last week.

CIMB kept its overweight stance on Malaysian stocks, with a preference for cyclical sectors, such as banking, construction, property, and oil and gas.

It also recommends gaming and utilities shares for investors with lower risk appetites, saying that the two sectors offer defensive qualities and attractive valuations.

Another broker, OSK Research, this week raised the index year-end target to 1,144 from 1,040. The gauge may rise to 1,265 by the end of next year, according to OSK's forecast. "While we continue to see the market as expensive, we note the continued liquidity and that investors are looking towards 2010 earnings," OSK said in a report.

It has upgraded the local market to "neutral" from "sell into strength", saying that investors may trade on small-cap stocks in the oil and gas, rubber, steel and construction sectors.

Tuesday, September 01, 2009

Should I Go Against The Market?

AS the stock market continues to move higher, a lot of investors are wondering when it will come down again. Those who have been involved in futures trading may be tempted to short the KL Composite Index (KLCI) futures contracts.

Unfortunately, each time they start shorting the index, the market surges even higher and touches a new high. As a result, they are forced to cover their short positions as the market turns against them. In this article, we will look at how to apply contrarian strategies in the present market conditions.

Contrarian strategy 1: only correct when the market turns around

Investors need to be careful when using contrarian strategies. These strategies are only effective when the market starts to turn around, otherwise, investors will end up being wrong.

Contrarian investors feel that most people in the market tend to get carried away by the market sentiment, so if they keep calm, they will have a better position by taking actions that are the opposite of what others are doing. They believe that they can make big money by betting against popular investment trends.

In the current stock market situation, even though the average daily-trading volume is about one billion shares, we notice that there are not many retail investors. The market is mainly filled with some big fund managers or day traders. Some investors who managed to catch stocks at cheaper prices may have been selling most of their holdings lately.

Unfortunately, the market continues to trade higher than previous selling prices. In such situation, the worst mistake for some retail investors is to abandon their contrarian strategies and start buying back the shares that they disposed off earlier at even higher prices.

Normally, when everyone starts to think that the stock market will continue to go up, that is the signal of an impending market crash. Hence, investors need to be patient to wait for the right prices before buying back those stocks.

There is also the danger that some investors may start accumulating their stocks too early. We believe that “the panic may be over, but not the crisis”. Even though there are signs that the overall economy may be on its way to recovery, we think it will take some time before we can see the real recovery of the stock market.

We need to understand that once the fund managers feel that the stock prices are far above the fundamental of the stocks, they may stop accumulating stocks.

As a result, due to a lack of demand, the market may start dipping lower again with dwindling trading volumes. It may take a long time before the market turns higher again.

We saw this phenomenon in 2000-2001 when the market dipped slowly with very thin volume for a 15-month period, with the KLCI tumbling from about 1,000-level in February 2000 to 550-level in May 2001, a total decline of about 45%.

Investors need to take note that unless they have deep pockets to average down their purchase prices over a long period, they may run out of funds before the market reaches the bottom.

One way to avoid accumulating stocks too early is by adopting the filter rule strategy proposed by Alexander (1961). He proposed that we should only buy stocks when the market touches the lowest point and starts recovering for k% from its low and sell stocks when the market discovers the peak and starts falling for k% from its high.

This strategy may reduce the feeling of regret from selling stocks too early. Given that we may never know when the market touches its peak, it may be a good strategy to let the market find the top and only start selling when the market confirms the declining trends.

Contrarian Strategy 2: Buying neglected firms

Recently, as the result of the merger between main and second board companies into the Main Market, we notice that some second board companies, which have good fundamentals but previously lacked analysts’ coverage, are starting to get the attention of investors.

We believe these companies may provide good buying opportunities for investors who have missed out on the opportunities of accumulating blue chip stocks at cheap prices. Some academic studies have shown that the returns from buying neglected firms, over a long-term period, may be better than investing in “popular” companies.

Personal Investing - By Ooi Kok Hwa

Thursday, August 27, 2009

Data Suggest Europe, Asia Economy Looking Up

LONDON: Economic data gave more evidence that Europe and Asia are on the mend, while a top Chinese leader cautioned against blind optimism and said the world economy still faced "many new difficulties."

Figures from the European Union statistics office Eurostat on Monday showed that industrial orders in the 16 countries that use the euro rose 3.1 percent in June from the quarter before, suggesting the manufacturing sector could be emerging from recession.

New orders - a key gauge of industry's future growth - rose in both France and Germany, as well as Ireland, which has been among the hardest-hit by the global economic crisis.

The figure was almost twice as strong as the 1.6 percent monthly increase that analysts were expecting.

Any recovery will begin from a far lower base, however, as activity was still much weaker than last year with new orders down 25.1 percent over 12 months.

Experts had been braced for an even bigger fall of 28.6 percent.

The euro-zone pickup in orders was the latest in a run of surveys showing a marked improvement in the euro zone economy.

Most eye-catching was the surprising news that the recessions in Germany and France, the euro zone's two largest economies, ended in the second quarter of the year, while the euro zone as a whole shrank by only 0.1 percent.

The picture was gloomier across the wider 27-nation EU, where industrial orders were down 0.4 percent on the month, and 24 percent on the year.

Meanwhile, a survey for Britain showed that business confidence rose between May and August to its highest level in two years.

The Institute of Chartered Accountants in England and Wales said the business community was largely more optimistic than not for the first time since the May-August period of 2007 - before the global financial crisis erupted and Britain fell into recession.

Michael Izza, the institute's chief executive, said the survey suggested Britain's recession was "at an end."

In Asia, Thailand's economy emerged from recession in the second quarter as manufacturing grew and the government boosted spending.

The state planning agency said Monday that gross domestic product expanded 2.3 percent from the first quarter in seasonally adjusted terms, although the economy was still expected to shrink between 3 percent and 3.5 percent in 2009 compared with 2008.

Chinese Premier Wen Jiabao cautioned against being "blindly optimistic" despite improvements in the economy, according to a statement on the government's Web site.

The economy "still faces many new difficulties and problems," Wen was quoted as saying during a visit to southeastern China that ended Monday.

Wen has repeatedly warned against complacency and assurances that easy credit will continue.
The warnings have clashed with the increasing optimism shown by analysts who say China is making dramatic progress in emerging from its slump.

Beijing is in the midst of a two-year, 4 trillion yuan ($586 billion) effort to boost domestic consumption by pumping money into the economy through higher spending on building highways and other public works.

Driven by that spending, economic growth accelerated to 7.9 percent in the latest quarter, up from the previous quarter's 6.1 percent.

Some observers think China could play a key role in leading the world out of its worst downturn since the 1930s.

Analysts will be particularly interested to see if the closely watched Ifo Institute survey into German business sentiment, which is due on Wednesday, provides further evidence of an improving economy - Germany's fortunes are tied up with a pickup in world trade.

Investors will be focusing on U.S. economic data this week, most notably consumer confidence figures from the Conference Board on Tuesday.

In particular, they will be looking to see if ongoing increases in unemployment more than offset hopes of an improvement in the wider economy.

Investors are fully aware that without the support of the U.S. consumer, which accounts for around 70 percent of the U.S. economy and 20 percent of the global economy, recovery will be muted at best.

Monday, August 24, 2009

Bernanke Says Prospects for Return to Global Growth Good

JACKSON HOLE, Wyoming, Aug 21 — The global economy appears on the mend after a deep downturn, but the recovery is likely to be sluggish and risks remain, Federal Reserve Chairman Ben Bernanke said today.

“After contracting sharply over the past year, economic activity appears to be levelling out, both in the United States and abroad, and the prospects for a return to growth in the near term appear good,” Bernanke said in remarks prepared for delivery to an annual Fed conference here.

“Although we have avoided the worst, difficult challenges still lie ahead,” he said, cautioning that the “recovery is likely to be relatively slow at first, with unemployment declining only gradually from high levels.”

Bernanke said “critical challenges remain” from global financial markets still strained from a severe crisis that broke two years ago. The difficulties households and businesses face in getting loans is another source of stress, he said.

The crisis highlights the need to “urgently” address structural weaknesses in the financial system, particularly in the way governments set rules and supervise it, he said.

Bernanke was set to deliver the remarks at a conference sponsored by the Kansas City Federal Reserve Bank that draws top central bankers from around the world, along with a Who’s Who of economists.

Germany, France and Japan have pulled out of recession and the US economy appears to be stabilising after a devastating financial crisis and painful economic downturn that eliminated almost seven million US jobs.

The Fed chopped interest rates to near zero in December and has pumped around US$1 trillion (RM3.5 trillion) into financial markets to combat the crisis and spur economic growth.

Earlier this month, the central bank said it would phase out its purchases of long-term US Treasuries, one of the extraordinary measures it has used to revive the economy.

While the US economy appears to be gaining health, analysts worry a recovery could prove fleeting. Expectations for solid growth in the second half of the year reflect the impact of a government program to spur car buying and an anticipated restocking of inventories.

US consumer demand is still weak and unemployment is rising. — Reuters

Monday, August 17, 2009

V-Shaped Recovery Has Begun: Fund Manager

Global stocks are at the start of a bull market, says Malaysia's only listed closed-end fund icapital.biz
ICAPITAL.BIZ Bhd (5108), Malaysia's only listed closed-end fund with RM267 million of assets, believes the global economy has begun a V-shaped recovery and global stocks are at the start of a bull market.

Its managing director and fund manager Tan Teng Boo, who has been bullish on the economic recovery since February, continues to advocate that the transformation of China from a developing to an industrial nation will keep the world in a long boom that lasts decades.

"China and India economies are no doubt smaller than the US, but what the established economists have missed is the rate of change," Tan told a media briefing in Kuala Lumpur yesterday.

"When China grows, it benefits Australia, India, Canada, Brazil and Southeast Asia - the huge growth that it is generating can more than offset the decline in the US economy," he pointed out.

Such bullishness is still a minority view among economists and the investment community, even as more signs are emerging that the global economy is bottoming out.

This week, Nobel prize-winning economist Dr Paul Krugman told a symposium in KL that the world will likely see slow expansion for a decade with the lack of clear growth driver, especially in the US.

Even Dr Raghuram Rajan, an economic adviser to the Indian prime minister and a believer in China and India's rising economic influence, said the two economies are still too small to pull the world out of this recession.

With Tan's confidence in the global recovery, he said the performance of Malaysian shares hinges solely on local politics and the political will of the current administration to carry through the reforms agenda.

"The country's economy is more resilient than many Malaysians would recognise. If the government can convince investors that they can unleash the potential of the economy, the benchmark FBM KLCI will do very well," Tan said.

It is "realistic" to expect a 5 to 10 per cent rise in the index from its current level, he said, possibly reaching 1,250 within this year, although there will be corrections along the way. The gauge is bound to test the previous high of 1,516.22 in the next one to two years, he added.

icapital.biz, which is conservative in its investment, is down to below RM40 million in cash - the lowest in its four-year history and reflects the many bargains available on Bursa Malaysia. The fund, which invests only in Malaysian shares, bought RM156 million stocks that are now worth RM206 million, giving it an unrealised gain of RM50 million.

Its top five holdings are Parkson Holdings, Astro, Kuala Lumpur Kepong, F&N Holdings and Petronas Dagangan. The fund has sold all its shares in Axiata Group Bhd, VADS Bhd and AirAsia Bhd in the last financial year.