Wednesday, December 15, 2010

Asia Will Steer World Economy In 2011

SHANGHAI: The prolonged weakness in the U.S. and Europe may be the least of Asia's troubles in 2011, economists say, as the region fights potentially destabilizing inflationary pressures.
Asia will lead global growth in 2011, with China, now the world's second largest economy, steady at about 10 percent growth, the government-affiliated Chinese Academy of Social Sciences forecasts.
With a strong rebound in the U.S. or Europe just as unlikely as a relapse into a "double-dip" recession, Asia is easing its way out of stimulus programs launched during the financial crisis. But the U.S. Federal Reserve's effort to nurture job creation through fresh "quantitative easing" has governments across the Pacific maneuvering to keep price pressures from spiraling out of control.
"The inflation outlook is really critical at this point," UBS economist Duncan Wooldridge said in a recent conference call, noting that excluding Japan, consumer price inflation in Asia has been averaging about 5 percent.
"From my perspective there's really only one thing that matters at this point: inflation," he said.
China's consumer price inflation surged to a 28-month high of 5.1 percent in November. The government raised interest rates in October for the first time since the financial crisis struck and has shifted to a "prudent" monetary policy for 2011 from one that was "relatively loose," signaling its intent to tighten credit as it fights price hikes.
Focusing on the politically sensitive food prices that are said to account for up to three-quarters of the latest inflationary spike, the Chinese government ordered a crackdown on commodity speculation, price caps for edible oil and subsidies for the poor.
It is already claiming some success in bringing prices for some vegetables and fruits lower. Meanwhile, the weather problems - like drought in south China and floods in Pakistan and Thailand - that have pushed food prices higher should moderate by midyear, according to most forecasts.
But inflation remains a threat, especially for emerging economies that are attracting large inflows of money from investors seeking higher returns than they can get from U.S. Treasurys and shares. The surging liquidity is adding to pressures on Asian economies to either raise interest rates or let currencies that already have gained substantially against the weak U.S. dollar appreciate further.
"Emerging economies can stop inflation if they are determined," says Shanghai-based independent economist Andy Xie. But he figures that an effective strategy would require raising exchange rates by up to 50 percent and interest rates by 10 percent.
"There is almost zero chance for them to pursue such a contractionary policy," he says.
Those options, while unpalatable, reflect the region's relative strength compared with the U.S., EU and Japan, says a report by Macquarie Securities.
"Treading the fine line between growth undershoot and inflation overshoot is a challenge that is particular to Asia," it says.
Japan, now the world's No. 3 economy after it was overtaken by China this year, faces no such dilemma. Though its economy gained momentum in the third quarter, that is fading as slowing overseas demand and the strong yen bite into exports, while deflation continues to stymie growth.
With recession-stricken Americans unable to resume the kind of freewheeling spending that powered growth for much of the past two decades, the recovery increasingly hinges on Asian resilience.
"Asia is depending on demand in this part of the world," says David Cohen, a regional economist for Action Economic in Singapore. "That's where it's going to have to come from."
So far, China's rebound has largely been powered by massive bank lending in support of government stimulus, backed by steady, double-digit growth in consumer spending. The benefits spill across the region, from coal and iron ore miners in Australia and Indonesia, to semiconductor makers in South Korea and Taiwan.
As they launch a new five-year economic plan and prepare for a leadership transition in late 2011, China's leaders have signaled their determination to keep growth at a steady pace with a recent announcement that they will stick to a "prudent" monetary policy for the coming year, says Ye Tan, a popular economic commentator in Shanghai.
"In my view, they are sending the message that once the government curbs inflation, it will carry on with another round of investment to ensure it can meet its growth goals for 2011," Ye says. - AP

Tuesday, December 07, 2010

Global Economy In Another Super-Cycle

THE world economy is in a super-cycle. This is a period of historically high global growth, lasting a generation or more. There are many factors driving this, including rising trade, high rates of investment, rapid urbanisation and technological innovation. Super cycles are also characterised by the emergence of economies enjoying rapid growth, such as China, India and Indonesia now.

The world economy has twice enjoyed super-cycles before. The first, from 1870 to 1913, saw a significant pick-up in global growth, with the world growing on average each year by 2.7 per cent a full 1 per cent higher than previously seen. That cycle was led by the emergence of the US and saw increased trade and greater use of technologies from the industrial revolution.

The second super-cycle, from 1945 to the early 1970s, saw growth averaging 5 per cent and was characterised by the post-war reconstruction and catch-up across large parts of the globe. It saw the emergence both of a large middle class in the West and of exporting nations across Asia, led by Japan.

We may now be in another super-cycle, with aspects similar to those seen in the first two super-cycles. For people in Asia and across the emerging world the idea of strong growth may not sound unusual. But for many in the West, the thought of a super-cycle may sound strange, given the present problems confronting the world economy. Yet the reality is the world economy now is over US$62 trillion (RM195.3 trillion), about twice the size it was a decade ago, and it has already exceeded its pre-recession peak.

Over the last two years, its rebound has been driven by policy stimulus in the West and by stronger growth in the East. Indeed, emerging economies, which are one-third of the world economy, currently account for two-thirds of its growth. This trend looks set to continue. By 2030, the world economy could grow to US$308 trillion (RM960.75 trillion). Excluding inflation that would equate to US$129 trillion (RM406.35 trillion) in real terms, or in today’s prices, and to US$143 trillion (RM450.45 trillion) keeping prices constant but allowing for some emerging-market currency appreciation. The projections would imply a real growth rate of 3.5 per cent for the period between 2000, when the super-cycle started, and 2030, or 3.9 per cent from now to 2030. That would be a significant step-up compared with 2.8 per cent between 1973 and 2000.

What is remarkable is not only the likely scale of this expansion but the fact that these forecasts are based on projections for growth that some might even think are too cautious! For instance, China is expected to grow on average 6.9 per cent per annum over the period to 2030, and India by 9.3 per cent. By 2030, India may have become the world’s third largest economy. Moreover, Indonesia, currently the 28th largest economy may have moved to 5th largest in twenty years, having enjoyed nearly 7 per cent average growth over that period.

There are always risks that could impact global growth. The first super-cycle ended with the outbreak of the First World War, the second with the oil shocks of the early seventies. Hopefully, the world today is better placed to address such risks, thanks to the emergence of international decision making bodies and policy fora such as the G20.

It is important to stress that a super-cycle does not mean that growth will be continuously strong over the whole period. For the last three or four years we have been amongst the most pessimistic about US growth. I am still cautious. Despite the benefits of quantitative easing, the US economy will still struggle in the year-ahead, growing below trend. Likewise, Europe and Japan face a sluggish near-term outlook where growth will be modest.

All this makes it even more remarkable if Asia can drive more of its own growth. That is, after all, what the world needs. Next year, China sees the first year of its twelfth five-year plan. That should help growth. But, even allowing for this, the Chinese and other central banks across Asia will be tightening policy to cap inflation. In turn, this should allow growth to be more sustainable, but at rates either close to, or even below, those seen this year.

So, even in a super-cycle, there can be challenges for policymakers. Just as it is important to focus on near-term challenges, it is also vital to keep sight of longer-term opportunities. During the super-cycle, we believe that China can displace the US as the world’s largest economy by 2020, far sooner than many expect.

Whilst such forecasts give a scale of the outlook, it is the story behind what is happening that is as important.There is the scale of the economies that are growing. As emerging economies grow they will exert greater influence on the world economy.

Then there is the impact from the growth of new trade corridors. Close to 85 per cent of the world’s population are becoming increasingly inter-connected through trade, allowing an unprecedented number of people to contribute to the global economy. Cash and financial resources will be critical drivers of growth, given the need for investment, particularly in infrastructure.

Then there is what I call perspiration, with more people working and spending, and inspiration, with greater use of innovation and technology. The countries that will succeed will be those with the cash, the commodities and the creativity.

In recent years I have described what was happening as the New World Order, reflecting a shift in the balance of economic and financial power from the West to the East. While still valid, a super-cycle better reflects what is happening. It is still possible for the West to do well in this environment, particularly if economies there are creative yet it is Asia that appears to be the clear winner.

Dr Gerard Lyons is group head of global research and chief economist at Standard Chartered Bank

Monday, November 29, 2010

10 Common Trading Errors

1. Little Preparation or Training

When you enter the market arena, you had better be prepared. However, few traders perform the necessary due diligence before moving headlong into the markets: "The market is a food chain — the big fish eat the little fish."

Dr. Elder agrees that many people underestimate what it takes to be a profitable trader.

Recommendation: Enter the market with a sufficient amount of training, through vehicles such as books published on securities trading, educational courses, and trading conferences.

2. Being Too Emotional About Money

According to professionals, the reason many emerging traders fail to consistently earn profits is because of their perceptions of money.

There are ways to desensitize one's emotional connection to money. Start by trading smaller share size (such as 100 shares per trade). Trading in smaller quantities can help minimize both the losses and the emotional distress that often comes with losing larger amounts of capital.

Recommendation: Over time, as a trader becomes more successful, experts suggest slowly raising the share size — without raising your blood pressure — until a personal comfort zone is reached.

3. Lack of Recordkeeping

It's understandable why traders become emotional when trading stocks. To help bring these emotions under your control, keep a detailed trading diary.

Recommendation: Track your trading history by using a daily diary and study your progress.

4. Anticipating Profits

Most traders don't want to acknowledge that a trade could turn against them. They enter the market assuming they'll be successful, refusing to look in the rearview mirror. It's also common for emerging traders to use a calculator to predict how much they'll make and how they'll spend the unrealized profits! It's dangerous to anticipate how much you'll make in advance.

Recommendation: Enter a trade with the understanding that you may not be right. It can then be easier to acknowledge if a trade goes against you.

5. Blindly Following Mechanical Systems

A large percentage of traders use technology — in the form of online trading platforms that provide charting, research, and backtesting tools — to help them refine their strategies. A computer and software can provide important information about the technical and fundamental characteristics about stocks. However, many traders make the common mistake of relying too much on these tools without a full understanding of their capabilities.

Recommendation: Understand that computers and software trading platforms are only tools. Learn how to grasp the underlying trading concepts — such as reading and analyzing a chart —and know the reasons why you bought and sold a security.

6. Not Learning How to Short

If you fail to learn how to utilize short trading strategies, then you have cut yourself out of a number of profitable trades. Many people think that shorting is un-American or too risky.

By not learning know how to go short, you're removing a significnat percentage of potential trades, especially when the Bull market falters. The market is a two-way street, and the person who doesn't short is missing a part of the game.

Recommendation: Don't underestimate the importance of shorting stocks, and learn how to utilize this technique.

7. Lack of Specialization

Many people are attracted to trading because they think it's an easy vehicle for making money. However, there are several types of securities that can be traded in today's markets, including stocks, options, commodities, futures, and currencies. It is a daunting task to learn the characteristics of each security type. Therefore, it's often helpful to specialize.

Recommendation: Know what you trade. Don't spread yourself too thin by trading markets that you don't understand.

8. Improper Timing

It's very common for emerging traders to make timing mistakes. Quite often, a trader may have a good idea, but discovers that he or she bought the stock at an inopportune price. Timing a trade is never an exact science, but it's important for traders to recognize that there are times when it might be prudent to lock in a profit or cut a loss.

Recommendation: A detailed trading diary and experience could help minimize timing errors.

9. Placing Improper Stops

Many traders incorrectly place stop orders, causing their positions to get stopped out too early and failing to capture much profit. It's common for newbies to place stops according to a set percentage, such as 2%, or a set amount. How much a trader is willing to lose depends on his or her risk-tolerance.

Place stops according to what the market is telling you, such as support and resistance levels. When placing a stop, let the stock's behavior, or a standard deviation, tell you where the best stop placements are.

Recommendation: Try placing stops according to the stock's standard deviation, rather than on the basis of percentages or dollar amounts.

10. Not Calculating a Stock's Risk-Reward Ratio

Many traders do not calculate the risk-reward ratio of a stock trade before they establish a position. A stock's risk-reward ratio is the relationship between an investor's desire for capital preservation at one end of the scale and a desire to maximize returns at the other end.

How do you determine a stock's risk-reward profile? There are three common components of a stock's risk-reward ratio: current stock price (a known); and a profit objective and stop exit price (both subjective). Calculating a profit objective and a stop exit for a trade often involves many factors, such as standard deviation or technical indicators, including Fibonnaci and moving averages.

Recommendation: Before you enter a trade, the first question you should ask yourself is: What is the risk-reward ratio of trading this stock? If you are a novice trader, using a low risk-reward ratio could help lower your potential downside.

Friday, November 12, 2010

Strong Economic Growth Ahead For M'sia

Asia leading the global recovery
DURING the first half of this year, Asia was in the lead of the global economic recovery. As analysed in the International Monetary Fund’s (IMF) latest Regional Economic Outlook for Asia and the Pacific (REO), this strength in activity was fuelled by both strong exports and robust domestic demand.
As anticipated, export growth for the region has moderated in the second half, reflecting the sluggish recovery in the United States and western Europe, as well as the maturing of the global inventory cycle.
In line with regional trends, Malaysia too has rebounded impressively from the impact of the global financial crisis. Growth in the first half of the year was 9.5%. While export growth in Malaysia has moderated, domestic demand – in particular from the private sector – remains robust and a broad-based expansion is under way.
The outlook for Malaysia is strong
For Asia as a whole, still accommodative macroeconomic policies, robust consumer confidence, improving labour markets, and higher asset values are all expected to help sustain consumption. In line with this, we project that Asia will grow at 8% in 2010 and a more sustainable 7% in 2011 as the recovery matures further.
The near-term outlook for Malaysia also remains strong. Domestic demand, led by consumption, is expected to continue to make a substantial contribution to growth. Macroeconomic policy settings have been normalised to reflect the transition to private sector-led growth.
The resumption of fiscal consolidation is welcome, while the monetary policy stance has become less accommodative but still remains appropriately supportive of growth. Moreover, the ringgit has appreciated markedly, providing further support to domestic demand as the driver of growth over the near term. In line with the above, we expect Malaysia’s GDP growth to be close to 7% this year and 5.5% in 2011.
The region still faces risks
Despite the overall favourable outlook for the region, some important risks continue to cloud the horizon. The fragility and unevenness of the global economic recovery remains a concern. An unanticipated weakening in activity in the advanced economies would spill onto the Asian economies through weaker export growth. Asia as a whole has also attracted large capital inflows since the middle of 2009, reflecting ample global liquidity and favourable growth prospects for the region.
While asset markets in the region generally do not appear to be overvalued as of now, further capital inflows could pose vulnerabilities if they result in unsustainable asset valuations or excessive expansion of domestic liquidity. Inflation has already bottomed out in many countries across the region, and house price pressures have emerged in some economies.
This constellation of risks calls for a continued and cautious normalisation of macroeconomic policy settings, and careful monitoring of the financial sector. Macroprudential measures that have been implemented in some economies remain an important element of the toolkit to guard against financial sector risks.
Finally, should the downside risks to global growth materialise, Asian policymakers have ample room to readjust macroeconomic policies to counter any adverse effects on economic activity in their own economies.
In Malaysia, the financial sector has weathered the global crisis well and corporate balance sheets remain strong. The authorities have demonstrated an impressive track record in proactive financial supervision and sustained efforts to develop financial markets both in the conventional and Islamic finance areas. Nevertheless, there are some risks that need to be closely watched. For example, Malaysia too could be vulnerable to large capital inflows and excessive asset price rises. Household debt is also high, although this is mitigated somewhat by substantial asset holdings. We are confident that the authorities have the tools to address these risks, should they materialise.
The challenges for Asia over the medium term
What are the challenges for Asia over the medium term? The global financial crisis demonstrated the need for the region to rely more on a “second engine of growth” – namely domestic demand. Rebalancing towards domestic demand requires sustained steps to increase domestic consumption and investment, including through fiscal measures, structural reforms in labour, product and financial markets, as well as greater exchange rate flexibility.
Fewer motives for precautionary saving and greater incentives for businesses to increase investment in domestically-oriented sectors should be among the outcomes of such reforms. In the REO, we demonstrate that improving access to credit for small and medium enterprises operating in domestic markets, including services, as well as to increase investment in infrastructure, could help ignite the second engine of growth in Asia. Indeed, the development of SMEs and access to financing is an area Malaysia has emphasised and made progress on in recent years.
There are significant challenges for Malaysia too over the medium term. The growth momentum which propelled the country from low to middle income by the early 1990s stalled after the Asian crisis.
As a result, Malaysia continues to remain a middle income country while some of its peers that started from similar initial positions have achieved higher per capita incomes. As rightly recognised in the authorities’ Economic Transformation Programme and the 10th Malaysia Plan, rekindling the growth momentum requires deep structural and fiscal reforms to unlock Malaysia’s growth potential.
The key to success will be implementation. The reform process should proceed at a measured pace and take into account the need to protect vulnerable groups. At the same time it needs to be steady and sustained.
Key reforms under way must be pushed forward. In particular, poorly designed subsidies – especially fuel subsidies – should be phased out and replaced with targeted assistance. Improving the business environment by levelling the playing field through reform of government-linked companies and further labour market liberalisation will also pay dividends.
The IMF stands ready to contribute its international perspective and global expertise to the ambitious goals that the Malaysian authorities have set for themselves. We are looking forward to continuing a mutually beneficial engagement.

M'sian market at record high - so what is the next thing?
WHAT next? That might be a common question asked after the FTSE Bursa Malaysia KL Composite Index hit a new record high this week and therefore heads into uncharted territory.
That question is difficult to answer because unlike the previous rallies in 1993 and in 2008, the run-up this time around has been surprisingly orderly.
Volume, often an indicator of fervent euphoria, has remained sane and while the index has set a record, trading activity on Bursa Malaysia is nowhere close to previous high levels. This would suggest there is still more room to go.
Although the rise this time has less to do with direct retail interest as it did in the past, the professionalism in investing these days – where more Malaysians are putting their hard-earned money in the hands of professional managers to invest – is also a good sign.
It’s often joked that when retail interest shoots up and everybody becomes a tipster, it’s time to sell. Also a signal would be syndicate activity returning to the market in a big way.
That, to my knowledge, is nowhere close to the situation in previous rallies and surely is a contrarian indicator worth following.
Another fundamental backing to the rise this time would be borne by the efforts ongoing to revitalise the economy, especially the private sector and the investments it is expected to pour into the country.
Some may argue that economic growth might have some correlation to corporate earnings but the balance sheet and cash generation capability of most companies are far better now then in the past.
Maybe it’s also the better health and performance of the largest companies in the country where more focus and strict adherence to key performance indicators now then before have led to better financial performance and hence their attraction.
Furthermore, as more companies in Malaysia venture abroad and with the large commodity companies riding on skyrocketing crude palm oil (CPO) prices, the story at home might not swing investor focus as much as it did in the past.
But the surge in the local stock market also has to do with the amount of money that is swimming around globally, hunting for the best returns they can get.
Between the United States printing money from its quantitative easing and the still super-low interest rates globally, cash around the world has been hunting for returns.
They have so far got it from commodities. Among this group, CPO is rising and rubber has hit an all-time high.
And in emerging Asia, they might have also found an answer for now by buying the currencies of Asian economies.
The flood of money into Asian currencies has led to reciprocal rises in the stock markets in the Philippines and Jakarta, which have in recent months peaked at their all-time highs, suggesting that money is trying to capitalise on growth in equities as well as currencies. Markets in Thailand and Singapore are also rising strongly.
To pour more cold water on the rally, the market is said to be trading at high price to earnings ratio and economically, the horizon globally is less rosy.
Malaysia’s economic growth is forecast to fall next year to between 5% and 6% from a projected 7% this year.
Is 2010 a replica of the 1993 bull run? I don’t think so although most would love the ride, not the end.
The situation this time is vastly different but any time a market hits an all-time high, some caution should come into play. A market high does not happen often.
Deputy news editor Jagdev Singh Sidhu is cautiously optimistic that the rally this time would not be accompanied by companies with poor fundamentals promising a pot of gold for unsuspecting punters.

Wednesday, November 10, 2010

Malaysia Equities Poised For Bull Run

Malaysia’s equities market is on the verge of a bull-run similar to the one seen in the early 1990s and the indications are that it is sustainable, the chief investment officer of HwangDBS Investment Management said.

“Conditions for 2011 are ripe and any pull-back now is an opportunity for investors,” said David Ng, who manages about RM8.9 billion for the fund house.

Malaysia, he said, is “unexpectedly exciting” so long as the government can execute the projects announced in its US$444 billion economic transformation programme last month.

However, Ng cautioned that it would not be a repeat of 2009-2010 where over 90 per cent of stocks rose following the crisis.

“2011 will be about stock-picking,” he said.

The benchmark FBM KLCI has risen by almost 20 percent since the start of the year, setting a 34-month record on yesterday.

The FBM KLCI has risen more than its Singaporean counterpart, but has not matched the meteoric rises in Indonesia, Thailand and the Philippines, which have surged over 40 per cent each.

Analysts say part of the reason for the KLCI’s climb is the pre-election enthusiasm, but Ng said there were fundamentals supporting the rise. Malaysia is expected to hold general elections next year although they aren’t due until 2013.

Present conditions were similar to those in the 1992-1994 bull run, Ng said, and the low interest rate environment in developed economies could further fuel the growth spurt here.

Analysts expect further massive inflows of capital into Asia, driven by the second round of U.S. quantitative easing and warn that this may spark inflationary pressures and asset bubbles.

“Areas where we are positioned are the oil and gas sector and banking in Malaysia,” Ng said. “Regionally, we like technology and tourism in Singapore.”

The performance of these sectors will continue to be fueled by demand from big emerging economies such as China, India and Indonesia, and are insulated from a slowdown in developed markets, Ng said.

He said he preferred high-yielding dividend stocks as those companies tended to have better fundamentals.

The inflow of funds has been well-documented by international observers, and has led the World Bank to issue a warning over the possibility of asset bubbles. Ng said bubbles posed a real risk but there have yet to form.

HwangDBS Investment Management has averaged a 15 per cent return per annum on its assets under management since 2000, Ng said. - Reuters

FBMKLCI breaches all time high

Persistent support for heavyweights pushed the FBM KLCI to a new all time high today, despite some profit taking in the local bourse as well as key regional markets.

The FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) which has been on an uptrend since last week ended 6.68 points higher at 1,526.53, although it had seen an intra-day all time high of 1,526.67 earlier. It had opened 1.87 points higher at 1,521.71.

The previous intraday high record was 1,524.69 seen on Jan 14, 2008.

The bull trend is expected to extend till February next year amid inflow of foreign funds, especially from the US to emerging markets such as Malaysia, Affin Investment Bank Head of Retail Research Dr Nazri Khan told Bernama.

"It is mainly hot money from the U.S. as a result of the U.S. Federal Reserve's policy of quantitative easing amounting to US$600 billion," he said.

Hence, he said commodity-linked counters would be the main beneficiaries.

Nazri said the local bourse momentum was "a sustainable bull-run" as there was still ample of room for growth in the Malaysian equities market.

"There is room for more volume as compared to the regional peers," he said.

HwangDBS sees boom market conditions
KUALA LUMPUR, Nov 9 — Low interest rates in the US and Asia will drive money into equities, creating boom and possibly bubble-like conditions in the stock market, said HwangDBS Investment Management Bhd chief investment officer David Ng.
The investment manager acknowledged that there were still concerns about a double-dip recession, but he sees easy liquidity outweighing weak growth and said that conditions are “right for a boom market”.
“If the US economy grows 2 per cent, it is good enough,” he said in at a press conference today. “As long as there is slow growth and loose monetary policy, it can fuel a bubble. This is a long-term secular trend.”
He said strategists were beginning to be more bullish on Malaysia and noted that some have been talking about current conditions — such as low interest rates and a strong current account surplus — being similar to those leading up to the “super bullish” years of 1993 to 1995 when Malaysian shares were traded at up to 30 times price-earnings ratio.
“Money is like water and will flow to where interest rates and yields are higher,” said Ng. “You are losing your purchasing power by putting money in a bank. Our investment strategy is based on low interest rates. Money has to find a home.”
He said that as the market will be supported by ample liquidity, any pullback in shares is an opportunity for investors to pick up shares and earn more money.
He said that he still sees markets moving up next year after a “muted” 2010 and likes stocks that pay good dividends as they tend to be of better quality.
While acknowledging that Malaysia has tended to be perceived as a boring, defensive and marginalised market, he said that he has been seeing foreign inflow of funds for the past 23 consecutive weeks.
The HwangDBS forecast of a possible boom in equities comes a day after a US-based asset management firm told Malaysian reporters that the inflationary policies in the US would benefit emerging markets.
Stephen Dover, international chief investment officer of Franklin Templeton Investments, said a large consensus has emerged that QEII — the US$600 billion (RM1.8 trillion) worth of liquidity being introduced by the US Federal Reserve by June next year — is positive for emerging markets and a high portion of QEII will go to emerging markets.
Ng cautioned however that the days of high returns experienced in 2009 are over.
“2011 is about stock picking,” he said. “Investors should not be greedy. The big 50-60 per cent returns are behind us and returns will be more normalised.”
Risks to the stock market boom could come from runaway inflation triggering central banks to raise interest rates.
“Too much liquidity has a tendency of leading to inflation and if inflation becomes too much of a problem, they will raise interest rates,” he said.
While Dover said Asian finance ministers will have their hands full trying to prevent speculation and overheating of their markets due to a surge in liquidity from the US, Ng said that he saw little risk of capital controls being implemented.
“We should be smart enough to know that capital controls would make you undesirable,” he said.

Tuesday, November 02, 2010

Malaysia Bourse Still Has Legs To Run

MIDF Amanah CEO says the run will be driven mainly by inflows of funds as investors start to see the full potential of the Malaysian and regional markets.

THE Malaysian stock market still has legs to run and the rally is still at the early stage, MIDF Amanah Asset Management Bhd said.

Hence, Bursa Malaysia still offers plenty of opportunities for investors, the wholly owned unit of Permodalan Nasional Bhd said.

MIDF Amanah chief executive officer and chief investment officer Scott Lim said the run will be driven mainly by inflows of funds, both local and foreign, as investors start to see the full potential of the local and regional markets.

"The market is not fair. It is very selective. The first wave of money is very particular on what they choose. They always buy the most blue-chip. They always buy the best-quality companies.

"After they have invested, they make their money and the (price-to-earnings, or PE) valuation will become too high, from 10 times to more than 15 times," Lim told the media in Kuala Lumpur last week.

The local stock market, which fell by about 50 per cent during the global financial crisis, has regained its momentum.

It has risen by some 17 per cent so far this year, and jumped 80 per cent from the 829.41 points in October 2008.

Lim said this meant that investors would have to look for better value.

"They will go and hunt for lower-valuation companies that have better growth in terms of pricing. So, the development of the market is that when it has become matured, investors will go to the next tier and when the market grows even more matured, the investors will go to the lower tiers.

"This bull market is still at the very early stage because there is still a lot of values to be found. I am not sure how many more good years the rally is going to be. It all depends on how fast they re-price this market," he explained.

Lim added that while the "smart" money had come to Asia, the next money, or next big wave, would be from those people unwilling to leave the US right now.

"But the wave will come and, when it comes, it will be bigger than the first wave," he said.

Lim also noted Asia's strong economic fundamentals, which will make it the epicentre of growth in future.

These fundamentals include a high population base, favourable demographic, accommodative interest rates, healthy government fiscal balance and strong household balance sheet.

Is there a super bull run in 2010?
Although the economic situation now compares with that of 1993, the last push must come from local retail investors.

THE recent rally in our local bourse has prompted many seasoned investors, especially those who experienced the super bull run in 1993, to wonder whether the current rally is about to turn into a real bull run. Of course, nobody can tell for sure what will happen next, but we certainly can do some homework, comparing the circumstances back in 1993 against the current situation.
In 1991, Tun Dr Mahathir Mohamad unveiled the philosophy of “Malaysia Incorporated” which was a development strategy for Malaysia to achieve a developed nation by 2020. In the early 1990s, despite slowdown in the global economy, as the third largest economy in South-East Asia, after Indonesia and Thailand, Malaysia was supported by relatively strong macroeconomic fundamentals and resilient financial system. With the real GDP growing at 9.9%, ringgit appreciation, strong export growth and the Government’s measures to hold inflation low at 3.6%, the local stock market became an attractive alternative to foreign investors.
Before 1993, foreign investment in Malaysia was mainly dominated by long-term direct investment in the manufacturing sector. However, as a result of measures taken to develop our domestic equity market, coupled with the strong economic backdrop, we saw a massive influx of foreign capital inflow, which helped fuel the super bull-run in 1993. Within the year, the market increased by 98% to reach an all-time high of 1,275.3 points and foreign investors’ participation accounted for 15% of total trading value of our local bourse. This had also driven the market into a highly speculative one, which lured many retailers into the market, thinking of making fast and easy money.
With the presence of new and unfamiliar players, the market became a huge “casino”. Retail investors bought into stocks based on rumours rather than company fundamentals. Among the hottest topics during that time were the awards of government mega projects, privatisation candidates, sector play and regular news on upward revision of corporate earnings. Examples for the highly speculative stocks were Ekran, Ayer Molek Rubber Co, Berjuntai Tin Dredging and Kramat Tin Dredging.
In 1993, with the economy booming, the Government planned several mega projects, including the KL International Airport (RM8bil), Johor-Singapore Second Link (RM1.6bil) and Kuala Lumpur Light Rail Transit (RM1.1bil). The news of contract awarding immediately sent the market into speculative mood on those potential candidates. Similarly, the news of the Government planning on privatising some of the its own corporations, such as Petronas, KTM and Pos Malaysia had also driven these counters into prime trading targets.
Besides, the ease of accessing bank credit by investors also contributed to the market rally. We noticed that a high percentage of loans was channelled to broad property sector as well as the purchase of securities.
As a result of massive inflow of foreign funds and the super bull run in stock market, Bank Negara introduced a number of selective capital controls in early 1994 to stabilise the financial system,
Recently, our Prime Minister Datuk Seri Najib Tun Razak unveiled the Economic Transformation Programme (ETP) with the aim to boost our gross national income (GNI) to US$523bil in 2020 from US$188bil in 2009. The programme is to attract investment not only from the Government, but also (more importantly) from domestic direct investment as well as foreign direct investment. In view of strong economic growth, our GDP growth is anticipated to increase by 6% this year.
In September, we notice that there was a net inflow of foreign funds again in our equity market. Over the past few weeks, the average stock market daily volume had been hovering above one billion shares per day. Almost every day, the top 10 highly traded stocks were those speculative stocks with poor fundamentals. In addition, we noticed that some retail investors had started to get excited again in the stock market.
According to Andrew Sheng in his book titled From Asian To Global Financial Crisis, there were two main indicators to irrational exuberance during the super bull run in 1993. The first was the amah (domestic maid) syndrome. We need to be careful when amahs got excited about the stock market. This was because they did not know what they were buying and would always be the last to sell. The second indicator was when businessmen began to speculate stocks in the stock market. This was because they might neglect their businesses and use some of their cash for speculation.
Comparing our current market situation with the 1993 bull run, there are certain similarities that we see, such as strong economic growth, ringgit appreciation, inflow of foreign capital and ease of credit. However, our local retailer participation is yet to get boiling, which may be the last push factor towards the bull run. Hence, once the participation of the local investors starts to get heated up, together with more inflow of foreign fund, that may be the signs of the market heading for a ‘mini’ super bull run.
Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.

Thursday, October 21, 2010

China's Surprise Rate Hike: What It Means

On Tuesday global stock markets got up on the wrong side of the bed thanks to news from an unexpected source: the People's Bank of China. The nation's central bank, analogous to the Federal Reserve in the U.S., announced it would raise rates on one-year loans and deposits by .25 percent, or 25 basis points.
Why is the People's Bank of China raising interest rates?
Central banks raise interest rates when they are concerned about inflation, or if they are worried that credit or the economy at large is expanding at an unsustainable pace. Higher interest rates make money more expensive, and thus should cut down on borrowing activity. China's economy is growing very rapidly, at a 10.3 percent annual rate in the most recent quarter, and inflation is running above the official target of three percent. For a country that has to make up as much ground as China does, no rate can be too fast. But housing markets, especially in coastal cities, have been raging. With observers fretting about bubbles, China's central bank has taken efforts to discourage real estate lending and choke off inflation. Raising interest rates is one way to do that.
Why would global stock markets react negatively to this news?
Two reasons. First, think about the changing shape of the world's economic geography. The U.S. (the world's largest economy), Japan (until recently the world's second-largest economy), and the European bloc (which rivals the U.S. in size) are all growing very slowly. China, now the second-largest economy in the world, accounts for a huge amount of growth and demand. While it exports a great deal, it also imports massive quantities of everything from nuts grown in California to copper mined in Chile. The Chinese domestic market has also finally emerged as an important source of sales; General Motors sells more cars in China than it does in the U.S. So any hint that the Chinese juggernaut might be showing signs of slowing is bound to be seen in a negative light by investors who are concerned about growth.
Second, it was a surprise. Markets hate surprises. As a general rule, monetary policy in the U.S. and Europe is conducted with a certain amount of transparency. Officials use speeches and statements to telegraph their intentions, so as not to surprise investors and markets. In China, government bodies keep information very close to their vest and don't face the same type of pressures that western central banks do to give notice about their actions. Since the markets for Chinese currency are very tightly controlled, the People's Bank of China doesn't feel the need to communicate openly about its intentions.
What are the effects of such an increase on China's economy?
The impact of this rate increase lies as much in its symbolism as in its practical effect. Boosting the rates by 25 basis points is like tapping the brakes gently on a freight train running at 90 miles per hour -- it can only slow it down a bit. But it does signal that China's central bank is sufficiently concerned about some issues in its economy to take action.
The exchange rate of China's currency, the yuan (the Renminbi is the official name of the currency, while the yuan is the main unit of currency), against the dollar, has been a contentious issue between the U.S. and China. How does this move affect the exchange rate?
In theory, raising interest rates in China should make the yuan stronger against the dollar. All things being equal, money flows toward countries with higher interest rates (like China) and away from countries with very low interest rates (like the U.S.). But despite intense pressure from the U.S. government, China has remained committed to keeping the yuan trading in a stable range against the greenback. China prefers a weak currency because it makes Chinese goods cheap for American consumers and makes American-made goods expensive for Chinese consumers -- which encourages exports and the consumption of domestically produced goods.
Daniel Gross is economics editor and columnist at Yahoo! Finance.

Monday, October 18, 2010

Budget 2011 : Big Projects To Power Economy


KUALA LUMPUR: Private investment through construction activity got a serious boost from Budget 2011 after a slew of costly projects headlined by the RM40bil mass rapid transit project were announced as the building blocks towards reinventing the economy got under way.
Action on plans already laid out in the New Economic Model and the Economic Transformation Programme were introduced in the budget as funding and certainty for a number of ideas and projects previously identified were fleshed out.
“It is a budget set to springboard the initiatives of change by the Government and put Malaysia well on the path towards a stronger nation and a high income economy. The Government’s bold moves to assure investments in new growth areas and creating many jobs are exciting for us all,’’ said Malayan Banking Bhd chairman Tan Sri Megat Zaharuddin Megat Mohd Nor.

Headlining the entire budget were a number of big ticket and high-impact projects, and a number of them were earmarked in the development of Greater Kuala Lumpur such as the construction of a landmark RM5bil 100-storey tower by 2020 and RM10bil to building affordable housing and commercial properties in Sungai Buloh which would be completed by 2025.
Those projects would be developed by government agencies and the Government would also utilise RM1bil from the RM20bil Facilitation Fund, previously set up in the previous budget, as a tipping point for a number of public-private partnership projects.
“These strategic high impact projects will assist in meeting the targeted GDP growth of our economy,’’ said group managing director of MIDF Datuk Mohd Najib Abdullah.
The use of the private sector in its development plans has allowed the Government to scale back its development expenditure for 2011 to RM49.2bil while getting as much impact as possible on the economy.
“I believe this budget will fast-track the transformation process and set the pace for the private sector to contribute effectively to this national ambition,’’ said senior partner of UHY Malaysia Alvin Tee.
“The groundwork and the timeline have been clearly spelt out for National Key Economic Areas. They will create a multiplier effect which is exactly what is required for us to become a high income economy.’’
Some entry point projects (EPP) highlighted by the ETP were given the go-ahead in the budget.
The Government would spend RM146mil on an oil field services and equipment centre in Johor that would have a private investment potential of RM6bil over the next 10 years and RM50mil would be spent on a shaded walkway for the KLCC-Bukit Bintang vicinity as a boost to tourism.
The Government would also provide RM100mil towards a RM3bil integrated eco-nature resort at Nexus Karambunai resort in Sabah, which was an EPP.
“What matters most is the timely and effective implementation of the NKEA initiatives so as to produce significant tangible growth dividend in the medium term,’’ said CIMB Investment Bank chief economist Lee Heng Guie.
The budget also took cognisance of the role capital markets have in an economy by introducing a number of proposals which include increasing the number of day traders, boosting the Islamic capital markets and GLICs cutting down their stakes in listed firms on Bursa Malaysia.
The raising of the cap of foreign investments by the EPF should allow for the fund to seek higher returns and by introducing a private pension fund scheme, it would open an avenue for workers to seek alternative retirement scheme.
“The measures and initiatives announced are predominantly targeted towards enhancing liquidity, velocity and vibrancy,’’ said Bursa Malaysia CEO Datuk Yusli Mohamed Yusoff.
The budget also allowed for more risk taking by revamping insolvency laws which would amend the bankruptcy limit of RM30,000 per person and by building more technopreneurs in the country by intensifying the venture capital industry.
Green measures were also provided for, as imported hybrid cars would incur no more taxes or excise duties, biodiesel would be introduced in more states from June next year and a feed in tariff mechanism would be implemented to allow for more renewable power to be generated in the country.
Although increasing private expenditure is important in transforming the economy, the budget also contained proposals to improve human capital in the country by improving the quality of education and the range of vocational training.
“In an ever-increasingly competitive environment, its is crucial to build a workforce comparable with global talents. Our workforce needs to harness its full potential through education, training, up-skilling and re-skilling programmers to achieve national growth targets,’’ said Kelly Malaysia managing director Melissa Norman.
While the broader economy would get a lift from the anticipated rise in private investment, the Government sought to increase its revenue by increasing sales tax by one percentage point to 6%. Subscribers of paid TV services, such as Astro, would be hit from an imposition of the 6% service charge on their bills.
Furthermore, the Government is taking steps to reduce the number of low skilled foreign workers in the country by gradually increasing the levy on such workers.
“Concentrating on lower skilled foreign workers is an impediment to us becoming a high income nation,’’ said Deloitte KassimChan Tax Services Sdn Bhd country tax leader Ronnie Lim.
Measures to help first-time home buyers were announced but the budget has in essence sidestepped the issue of rising house prices.
The housing lobby would not be the only special interest group that would be smiling.
Guinness Anchor Bhd managing director Charles Ireland said it was prudent for the Government not to impose another round of excise duty on alcohol for next year as that would have exerted tremendous pressure on the industry and put further pressure on the F&B industry and tourism.

Wednesday, October 13, 2010

Budget 2011 Is Critical For The Market

Deutsche Bank said three key themes should emerge during the tabling of Friday’s Budget 2011, that will likely reignite interest in the market.
First, measures to expedite the Economic Transformation Program (ETP) and in particular, emphasis on driving the 12 NKEAs (National Key Economic Areas)
“Special emphasis, we believe, might be placed on a) fast-tracking mega projects such as the Greater KL MRT, b) supporting tourism, c) improving market dynamics (e.g Govt stake sales to improve market free float) and d) driving education initiatives,” said Deutsche.
On taxes, the research house envisage incentives to encourage private sector participation in the 12 NKEAs. In addition, clarity on the implementation of the goods and services tax is likely, as well as the possibility of individual tax cuts given the Government’s emphasis on attracting and retaining talent.
Thirdly, the Government may introduce loan to valuation ‘caps’ on an individuals’ third mortgage. “There does not appear to be a property bubble but due to a proliferation of minimal down payment schemes promoted jointly by developers and banks, the Government may be keen to instill greater prudence,” said Deutsche.
Meanwhile, the biggest criticism on the Government is the lack of follow through on major initiatives. This view is slowly changing.
Subsidies are being rationalised, more meaningful initial public offerings are underway, the Ringgit is at a 13 year high and infra projects are underway.
“But much more needs to be done to truly convince the market that Malaysia’s very own structural evolution ‘story’ is well underway,”
“Market valuations, at 14.3 times price earnings ratio 2011 and 3.7% dividend yield, should not be viewed as excessive when earnings growth of 17.1% and return on equity at 16% are taken into account too,” said Deutsche.

Monday, October 11, 2010

How to Gain Confidence, Commitment, Courage and Control

Why do some investors make consistent profits, and others run through their trading account within the first year? After blowing out my first trading account, I went on a quest to discover the answers. What follows is my discovery of four traits profitable investors all have in common, something I've dubbed The 4 Cs to Becoming a Genius Trader.

I personally speak with thousands of traders each year, on over 100 trading floors. Initially, I asked traders to share their strategies with me. However, I soon observed that two people could take the same setup and one would profit while the other lost money. Therefore, my questions became, how do you feel when you win or lose? What do you say to yourself when you're trading? What thoughts go through your mind once you place a trade? How does one control ego? How do you keep faith in yourself when you hit a large draw down? How do you deal with fear and anxiety? Moreover, what is happening in your life when you are trading well? In the end, traders used to shout across the trading floor "Hey Martin I had two sugars in my coffee this morning and my wife called me a lazy bum before I left for work, what shall I do, go long or short?"

I am obsessed with understanding what makes a consistently successful trader tick. I speak only to traders with a minimum of seven years of consistent profits, and who enjoy good personal lives. How do I define a good personal life? Successful traders are happy outside of a trading environment and enjoy a balanced life style. I christened these hard to find traders "Genius Traders". First, I learned to become one, and then I moved on to assist others.

Start your journey to becoming a Genius Trader and consistent profits! My years of research have uncovered that Genius Traders have the following in common.

They all practice the 4 C's of Confidence, Commitment, Courage, and Control.

Let's start with Confidence. There is too much emphasis on confidence as the primary characteristic of successful traders. However, it counts for very little on its own without incorporating commitment, courage, and control. Confidence allows you to execute your trades in an objective manner.

What is the biggest confidence killer to a trader? The unrealistic expectation that every trade will be a winner. Let go of this artificial belief and accept that some losses are the cost of doing business. The tenet is to make a profit, and realize one losing trade is not the end of your portfolio. Letting go of this, and other unrealistic expectations, allows you to trade in a relaxed state. Your confidence will grow exponentially. A relaxed state means lower stress and the ability to make better decisions. Even highly competitive traders accept some trades will fail, and remain confident in their trading abilities.

Commitment. It is important to your continued success that you commit to improving your trading performance. Every profitable person I have met made an individual commitment to his or her personal and professional growth. My trading and investing mentor, Sam Gardner, said to me "eternal vigilance is the price us traders must pay for continued success". Pledge to give your best and learn to improve each day if you expect to maintain a high level of performance. Your investing education never ends.

How do you become a more committed trader? First, determine your investing preferences and find a trading style that fascinates you. It's easy to commit to something we enjoy. Do not force yourself to trade metals, if your real love is in currencies. Second, budget your time and money for continuing education. Keep your interests fresh, and learn new approaches to sustain your commitment. This naturally leads to improved profits.

Courage. Concentrate on developing courage now, or risk a shortened investment career. Trading is not for the weak hearted. The markets are unpredictable and even the smartest analyst will make mistakes. Eventually everyone experiences a sequence of losing trades and you will not be exempt. You have a choice between self-pity and self-reflection. The Genius Trader has the courage to look at their mistakes and learn from them. The average trader perceives this as too painful, and simply curses their bad luck.

How do you become a more courageous trader? You must journal every single trade. Over the years, as I continue to interview accomplished investors, they all keep some form of trading journal. This provides such valuable information that I incorporate into other areas of my life. A detailed trading journal will be a big revelation into the success behind your best trades, and possible causes behind your losers. Armed with these facts, self-reflection becomes more productive.

Control. Do you have a high degree of control? Or, are your decisions clouded by your emotions? Do you practice risk management? Or, is your trading more like gambling in Vegas?

Genius Traders control their emotions and follow their trading rules. Your ability to implement your trading plan, in a controlled manner, is vital if you want consistent profits. Unstable trading leads to poor decisions. Traders who make poor decisions are not in the game very long.

Establishing a master trading plan is one of the quickest ways to maintain emotional control.

A set plan with specific trading rules makes for a less anxious environment. Back tested strategies allow the needed reassurance to follow through with complete confidence.

It took me years to foster a method that transforms an anxious state into an optimal trading attitude. Now, I can show someone how to do this in minutes. Begin with this small step to practicing the 4 C's of Confidence, Courage, Commitment, and Control. You do not have to believe everything I say. Just try a few days for yourself. I am confident you will notice a change for the better. The only question left to ask is, are you ready to begin your journey to becoming a Genius Trader?

By Martin Thomas is an independent futures trader of over 12 years, and a leading trading advisor.

Friday, October 01, 2010

Private Sector Confidence Key To ETP's Success

Unless the government is willing to implement bold changes that will lead towards further liberalisation, ease of doing business, reduced bureaucracy and greater transparency, the pessimism from the private sector will likely remain.

Last week, there were rumblings at the Putra World Trade Centre when thousands thronged the exhibition hall hoping to understand, and perhaps share the government's aspiration in charting the economic roadmap towards a better future.

Indeed, the spectacular scene at the Economic Transformation Programme (ETP) Open Day is unprecedented in Malaysia's 53-year history. Never has any previous administration shared its economic agenda by disclosing hard figures, projected growth, step-by-step strategy and sector-by-sector analysis through an open-day event fully attended by almost half the Cabinet led by the Prime Minister and accompanied by chief executive officers from both the private and public sectors. Many were pleased with the depth of information they got at the exhibition.

There is a general consensus that the government has succeeded in raising the public's fervor about economic reforms - now brewing almost at a boiling point - with the population eagerly waiting for the government to implement it quickly. Yet, the government knew well enough that no agenda, plans or programmes can succeed without two vital ingredients - meticulous planning and public's confidence. The government has scored full marks on both accounts and what remains now is probably the most challenging of them all - to ensure its effective implementation.

The cards are now laid on the table and what is at stake are investments worth over RM1.3 trillion with projects spread across 12 key economic areas, massive business opportunities and the creation of 3.3 million jobs - all within a span of 10 years.

The entire economic agenda appears ambitious, if not radical, from an economic perspective. The goal has been determined and the primary mission is to enable the private sector to spearhead the entire agenda.

Between 1990 and 1997, private investment was the key source of growth in Malaysia, accounting for about 30 per cent of gross domestic product (GDP). It currently stands at about 10 per cent. The huge savings-investment gaps over the years are evidence of ample domestic private resources available.

Indeed, the Malaysian-based companies' investments abroad, totalling RM36 billion in 2009, are a testimony of the sector's capability to churn out the RM1.271 trillion required by the government to pursue its economic programmes.

In return, the government has promised to relegate itself to the role of a "facilitator" while pledging its commitment to ensure that the country's engine of growth will be led by the private sector.

Unfortunately, the task of winning the private sector's confidence is no mean feat considering that only 30 per cent of Malaysian investments abroad were repatriated back to the country last year. Many private firms have openly expressed their concerns about the government's bureaucratic red tape, lack of business support services, and low level of innovation and productivity.

In response to these concerns, the government has initiated several efforts such as deregulating the Foreign Investment Committee guidelines, revamping several government-link corporations, re-branding as well as enhancing the role of several government agencies to facilitate private sector investments.

Yet, there is a clamour for the government to do more. Unless the government is willing to implement bold changes that will lead towards further liberalisation, ease of doing business, reduced bureaucracy and greater transparency in addition to addressing other structural weaknesses such as lack of knowledge workers and overly subsidised market economy - the pessimism from the private sector will likely remain.

The government has also announced that 27 per cent of the total amount of investments earmarked for the National Key Economic Areas projects, or RM378 billion, will be sourced from foreign direct investments.

Foreign investors, according to the new economic agenda, are expected to invest an average of RM37.8 billion annually over the next 10 years. On analysis, most of these investments have been marked for the electrical and electronics sector where the target is to increase the gross national income to RM90 billion while generating 157,000 jobs.

The government is adamant to maintain its global share in the semiconductor and LED industry despite past volatility in the global market.

While setting targets on the electrical and electronics sector should be welcomed because it opens massive employment opportunities, there are many factors that need to be considered, like the availability of skilled and professionals workers among its workforce. To engage in high-value added technology entails an educated workforce that embraces innovation, technology and life-long learning embedded in a well-developed educational system. If such talent is lacking from within, the best route is to attract from the global market, which effectively requires Malaysia to compete with other countries like Australia, New Zealand, the US, Singapore and Canada. Unfortunately, the present immigration policy on attracting foreign talent is a far cry from other developed economies and these need to be rectified immediately.

The slew of economic programmes - Government Transformation Programme, New Economic Model and 10th Malaysia Plan - will witness the transformation of Malaysia's entire economic landscape if implemented effectively.

While setting economic programmes demonstrate the government's commitment to transform the economy radically, they have to be carried out with pragmatism, combined with the will to eradicate obsolete policies that will only hinder its ambitious plan.

(Dr Hassan Ali is an associate professor at the Graduate School of Business, Universiti Sains Malaysia)

Friday, September 17, 2010

Beware Of Share Buybacks

UNDER normal circumstances, investors should get excited when companies buy back their own shares. In theory, this action implies the management views the best available investment opportunity for the utilisation of excess cash is to invest in its own company rather than buy into some other companies.

This is because when a company buys back its own shares, it will reduce the firm’s outstanding shares and enhance the company’s earnings per share (EPS).

Due to information asymmetry, the management is in the best position to determine that the company is being undervalued at the current price and, thus, it is to the best interest of the shareholders to buy back the company’s shares.

Hence, in general, we can conclude share buybacks usually convey a positive signal that implies the stock of a company is underpriced.

However, lately in Malaysia there was one listed company, Company K – we prefer to call it Company K than to reveal its real name – which showed unusual buying-back activities over an extended period up to May 17, 2010.

Here is an analysis of the Company K’s stock-price movement over this period. The price chart shows Company K had been hovering at around 80 to 90 sen until May 25, 2010. In fact, the company’s stock was being traded above 80 sen despite the recent financial crisis.

During the 2008-2009 market crashes, while the majority of companies were facing drops of 50% or more in their prices, Company K’s share price remained stable at above 80 sen.

Based on our observation of stock exchange filings, the stability of this company’s share price at around 80–85 sen appeared to be supported by its share buyback activities.

The company stopped buying its own shares since May 17. The last tranche of its share repurchase was on May 17 and the total number of shares bought were 36,000. As a result, since May 25, the stock prices started to plunge.

The main reasons for the sharp drop were because Company K defaulted on loans repayments and a few of the company’s key owners had left the company as well as the country.

As mentioned earlier, finance text books say when companies buy back their own shares, it implies the companies are undervalued.

However, in this case, Company K reported on June 7 RM146.5mil of losses for its fiscal fourth quarter ended March 31, 2010. Table 1 shows the company continued to buy back its own shares during the fourth quarter of FY10 and first quarter of FY11, even though the company was incurring huge losses during the periods. This seem to be against what we have learned from financial theory.

Investors may be wondering whether they are able to sell before the sharp plunge in share prices. Based on our observation, the company only announced the default in loans repayments on May 31, 2010 and the share prices immediately tumbled to a low of 10 sen.

By the time the company announced its fourth-quarter results on June 7, its share price remained low at 14.5 sen.

An interesting point to note from Table 1 is that coincidentally, Company K’s key owner, Mr JH, sold most of his holdings by the time the results were announced. He sold 39.2 million shares (53.4 million minus 14.2 million) from April 7 to June 7, 2010.

At the moment, due to the delay in submitting audited financial statements for the period ended March 31, 2010, shares in the company have been suspended from trading at 6.5 sen. The company is currently facing a winding-up petition and the appointment of provisional liquidators.

In short, share buybacks do not imply companies are undervalued. Investors need to be careful as some companies may use these activities to support their share prices.

Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting

Monday, September 13, 2010

Bursa Malaysia May Enter 'Golden Era'

Philippine and Malaysian stock markets may soon end 16 years of stagnation and enter a “golden era,” according to CLSA Asia-Pacific Markets technical analysts.

The Philippine Stock Exchange Index is testing its record high reached on Oct. 8, 2007, after fluctuating between support at 975 to 1,075 and resistance at 3,447 to 3,896 since 1993, CLSA analysts led by Laurence Balanco said.

The FTSE Bursa Malaysia KLCI Index is also poised for a breakout after it “drifted net-sideways” below the 1,332 to 1,524 range since 1994, the analysts wrote in a report.

The “secular bear markets” in the two Southeast Asian countries may be similar to ones in South Korea from 1989 to 2005, Indonesia from 1990 to 2004, India from 1992 to 2004, Singapore from 1994 to 2006, and the US from 1966 to 1982, according to CLSA. Since then, benchmark indexes in the five countries have rallied at least 51 per cent and posted gains of as much as 282 per cent, the analysts said.

“If the PSE index and the KLCI are to adhere to these common secular bear market patterns, then both markets are on the cusp of entering a new long-term bull market phase,” the analysts wrote.

A “conclusive” breakout above 3,896 could take the Philippine gauge to 6,752 “in the years to come,” according to the analysts. Still, they said the market may yet pause as it approaches the resistance zone and as the benchmark index completes a five-wave sequence from the October 2008 low.

The Philippine index lost 0.6 per cent to 3,723.45 at 11:14 am local time.

Cyclical Correction

“A partial retracement from the 3,447 to 3,896 resistance zone will mark the end of a 16-year secular bear market,” they wrote. “We would look at accumulating stocks during this cyclical correction.”

Resistance refers to the upper boundary of a trading range, where sell orders may be clustered, while support is where there may be buy orders. Elliott Wave Theory, created by US market analyst Ralph Elliott in 1938, concludes that market swings, or waves, follow a predictable, five-stage structure of three steps forward and two steps back.

In Malaysia, a breakout may suggest a long-term minimum target of 2,610 for the KLCI index, according to the analysts, who didn’t specify a time frame. The gauge was little changed at 1,433.68.

Still, an “extreme” reading for the gauge’s 14-day relative strength index may be a warning sign of a pullback in the near term, the analysts said. The KLCI’s RSI, tracking how rapidly prices advanced or declined, was at 77.6 today, higher than the 70-level seen by some analysts as a signal that prices are poised to fall. -- Bloomberg

Wednesday, September 08, 2010

Foreign Direct Investments Vs Domestic Investments

THE domestic debate on whether a country should focus on foreign direct investments (FDIs) or direct domestic investments (DDIs) is gaining traction as Malaysia moves towards increasing private investment under the 10th Malaysia Plan. Questions are being raised on the impact and contribution of FDIs versus domestic investments on the economy.

Before I go any further, some definitions are in order. What is FDI? What is direct investment abroad and what is domestic investment? FDI is defined as a long-term investment in a foreign country. It has three components, namely equity capital, reinvested earnings and intra-company loans. Domestic investment is investment by local companies in the domestic market.

Cases where Malaysian conglomerates invest overseas are known as direct investments abroad.The labs initiated by PEMANDU have identified 131 projects, also referred to as Entry Point Projects. These are projects which will be launched in the next five years. It is hoped that the implementation of these projects will help stimulate private investment.

By definition, Entry Point Projects are just the beginning, and going forward, there will be other investments which might result from their implementation. What is interesting is the following:

*That a large proportion is private investment, i.e. 92 per cent, with projects requiring public sector funding amounting to only 8 per cent; and

* About 80 per cent of these projects are domestic investments with the remainder coming from FDIs.Looking at these numbers, questions may be asked as to whether FDIs are necessary. Or can we ignore FDIs completely and depend only on domestic investments?

Let us begin by looking at the role of FDIs in Malaysia's economic development. Malacca had been a leading centre of commerce and trade between the 14th to the 19th centuries. Its strategic location in the Straits of Malacca made it a coveted settlement. Traders from China, India, the Middle East and neighbouring regions converged into the thriving port for trade and commerce. As early as the 14th century, Malacca had attracted FDIs in services.

Later in our history, we had the British coming to Malaya to invest in rubber and tin. British investments in these two commodities resulted in the laying of railway tracks and the construction of roads to transport commodities to the markets. This in turn opened up the country for development. We also earned valuable foreign exchange for these exports and a significant cross-section of "Malayans" benefitted in the form of higher income. Kuala Lumpur, Ipoh and Penang grew as a result of booming trade in these commodities. This is a very simple illustration of the benefit of foreign investments.

In the 1970s and 1980s, Malaysia began to attract investments in the electronics sector. We have a growing population and the farms and tin mines can no longer absorb the surplus labour from the rural areas. Fortunately, the factories in Penang, Shah Alam and Johor were able to provide job opportunities for our young people. Without FDIs, our unemployment rate would have jumped to more than 20 per cent. The young boys and girls who worked in these factories were able to send money home, thus providing income support to their families.

We also have been attracting investments in the services industry. Foreign banks opened up branches in Penang and Kuala Lumpur. There were also investments in transport and logistics. All these have provided job and business opportunities for our people.

Of course there are also downsides to FDIs. There was not much linkage with the domestic economy. In the early stages, there was little value-added as components were mainly imported. In the 1970s and 1980s, many FDIs were only in assembly-type operations. We became more dependent on foreign labour, and remittance abroad kept on growing. Large multinational corporations became complacent as the government was quite generous in approving applications for foreign labour. In a way, this has created a vicious cycle of dependence on foreign labour which is extremely difficult to break.

All told, FDIs on balance have played an important role in our country's development. We liberalised foreign equity requirements in 1988 which further stimulated FDI flows. We were considered as one of the tiger economies, and this status was achieved partly because Malaysia was one of the major destinations for FDIs.Questions have been raised as to whether FDIs continue to be relevant. These questions have been asked because of the following:

* The lack of linkages with the local economy;
* In some cases, imported components remain high;
* Dependence on foreign labour has increased;
* Dependence on foreign labour has increased;
* Domestic wages have been depressed;
* Our failure to effectively move up the value chain;
* The volatile nature of FDIs especially in the earlier days, some FDIs were footloose in nature;
* Greater competition from China and some neighbouring countries; and
* The apparent neglect of domestic investments.

Our position is that Malaysia will continue to need foreign investments. But FDIs of a different kind. We have been talking about quality FDIs. But, what are quality FDIs?Quality FDIs are those which generate more benefits and spin-offs to the local economy. They will have to possess the following features:

* Strong linkages to the domestic economy including SMEs in terms of local sourcing;
* Investments which are more capital-intensive which will not require too much foreign labour; and
* Investments which are knowledge-intensive, which will pay higher wages.

This will be our focus going forward. In other words, we have to be selective because our wages are higher compared with those in neighbouring countries. We have decided to attract these kind of industries to the country. Some might say that we have also failed to attract quality investments. This is not entirely true.

Going forward, we are going to focus more and more on domestic investment. I am not saying that FDIs are no longer relevant. They continue to be important, but given the competitive environment and our large domestic savings, we need to motivate our own people to put more money into the country.

However, it is acknowledged that domestic investments cannot create as much impact as FDIs for the following reasons:

* Our people do not possess sophisticated technology as the Japanese and Germans;
* Our domestic companies do not have extensive overseas marketing network;
* We do not have many regional and global companies; and
* Our domestic market is relatively small.

Notwithstanding the above, we have examples of Malaysian companies investing overseas with high level of technology. But we do not have enough of them.

Despite these constraints, we believe there is potential to boost domestic investments. These will be in the area of infrastructure development, resource-based industries and in property development. Some of our investors are beginning to develop capabilities in the area of manufacturing.

How do we get our entrepreneurs to invest more in the country? We know that a number of our large corporations including government-linked companies have invested large sums both locally and overseas. Khazanah, CIMB Bank, Maybank, YTL, Genting, Petronas, Sime Darby are among some of our companies which have sought opportunities abroad.

While we are not preventing them from going abroad, we have to further improve the domestic investment climate, to motivate them to invest more locally. We have to continue reducing red tape and bureaucracy and making government rules and procedures more transparent. But above all, we have to create more opportunities for them to invest in the domestic economy.