Monday, April 26, 2010

Malaysia To Grow At Fastest Pace Since 1996

The Malaysian economy is expected to expand at 8.0 per cent in 2010, buoyed by strengthening domestic and external conditions, AmResearch Sdn Bhd said.

"We are now projecting a much higher forecast of 8.0 per cent this year, the strongest since 1996, even though fiscal and monetary stimulus would be gradually withdrawn by year-end," it said in a statement today.

The AmResearch number is higher than Bank Negara Malaysia's gross domestic product (GDP) data forecast of 4.5-5.5 per cent and the World Bank's at 5.7 per cent.

Prime Minister Datuk Seri Najib Tun Razak has also a more optimistic forecast, of not less than 6.0 per cent for this year.

"It will be a broad-based recovery, with all major sectors of the economy registering positive growth, amid strengthening domestic demand and a pick-up in external demand," the research company highlighted.

For the first quarter of 2010, AmResearch estimates the economy to expand at a more rapid pace of 9.8 per cent, the highest in the last 10 years, with private sector spending by households as well as exports leading the way.

The country's export performance has benefited from an improvement in external demand, particularly from regional economies and stronger commodity prices.

However, with prospects of a disappointing global upswing getting dimmer, AmResearch maintains its forecast of the real GDP at around 6.0 per cent in 2011.

It said this would depend very much on the type of reforms in the pipeline, as well as the government''s commitment in making it a reality.

Since last year, several liberalisation measures have been introduced to lift direct foreign investment in financial services and in other tertiary sectors.

A new initiative known as the Government Transformation Programme (GTP) has also been started to tackle waste and corruption in the public sector and speed up the implementation of new projects.

Malaysia will also kick-start a second and final part of the New Economic Policy by the third quarter of this year, detailing structural reforms with timeliness, and this should boost the country's potential even stronger.

AmResearch said the major growth drivers in 2010 will be the manufacturing sector that is expected to expand by 12.3 per cent, led by the electric and electronic sector, which represents more that nine per cent of the GDP.

The services sector, it noted, is also estimated to grow at 7.1 per cent and contribute at least 4.1 percentage points to the GDP, led by stronger demand arising from a positive wealth effect of the financial markets, stable employment conditions and rising income levels.

AmReseach said private consumption is also expected to rise on the back of improvements in the labour market, disposable incomes and consumer confidence."We forecast a 4.5 per cent growth this year, against 0.8 per cent in 2009," it added.

Meanwhile, exports and imports are to post double-digit growths of 15 per cent and 16 per cent this year for a higher current account surplus of RM125bil or 20 per cent of the GDP.

Headline inflation is expected to rise 2.5 per cent, in tandem with improving economic conditions and possible adjustments to prices.

"Given the assumption of stronger economic momentum and higher inflation rates, we reckon the year-end target for the overnight policy rate will be at three per cent now.

"This is still below neutral levels and would not choke the recovery process."In this regard, we see the ringgit at RM3.10 per US dollar by year-end, moving towards its new fair-value, since the trade-weighted index is also a function of GDP and OPR," it added. -- BERNAMA

Thursday, April 15, 2010

How To Succeed In A Brave New World

THE worst may be over. Growth opportunities are now emerging again but the environment remains volatile and the prospects for a deep and sustained recovery are still uncertain.

Capital injections by governments around the world have maintained liquidity in some key areas, but not necessarily assured us greater stability.

In this climate, some companies will succeed, but others will continue to fail. We are at a point in the economic cycle where chief executives need to consider a few key questions, one of which is – how do I fund my new business model?

Where previously there was ample capital available, now it is critical to consider whether capital is being allocated appropriately, efficiently and competently. In the new environment, the CEO cannot just rely on the CFO to answer this question and should seek to understand capital management issues more thoroughly.

It is ironic that as many companies fail on the way out of a downturn as do on the down slope. It is when things start picking up and their order books fill up that addressing working capital requirements is critical.

Typically, businesses with high volumes, low margins, high fixed costs, high costs for premises and staff, high operating gearing and highly volatile cash flows have been hit fastest in the recent crisis. At the other end of the spectrum, companies with low volumes and high margins have been better placed as they have more capacity to cut margins and continue selling.

Right capital structure
The CEO should be challenging whether the organisation has the right capital structure to match its business model. This may seem obvious, but there are many painful examples of crisis-hit companies that have failed to realise just how fundamentally their business environment has changed and how that has affected their overall capital structure and accompanying risks.

Many companies operating in Asia have complex corporate and debt structures due to the use of offshore holding companies as listing vehicles, and many debt instruments may actually have risk characteristics akin to traditional equity.

Good housekeeping on the company’s debt and equity structure is absolutely necessary. This enables the corporate executives to understand how continued weakness in business activities will affect their business revenues and potentially risk the breach of a covenant.

When bank funding was freely available, many organisations became overly reliant on cheaper uncommitted funding, relative to longer term debt, as a way to fund long-term assets.

This mismatch created problems when banks withdrew their short term lines. CEOs should be looking at their cost of funds and their net (not gross) operating margins to match pre interest earnings to meet their debt obligations.

Risk detection
While there are signs of a recovery, executives must continue to ask how continued weak performance could affect their financial positions. In cases where debt covenants risk being breached, they need to know how close they are to the thresholds.

This is another reason why executives must understand what activity drives what line in the company’s profits and loss (P&L) and to make a realistic estimate as to how this might lead to a “cash crunch”.

Financial risk detection should start with the long-term forecasting of a company’s pre-tax earnings.

This means examining the company’s back-end to understand a company’s business activities and sales records to realistically assess the firm’s P&L accounts.

This allows companies to set achievable targets, rather than relying solely on the “nice-to-have” predictions that CFOs may have derived from past data alone.

In these uncertain times, it is more critical than ever to conduct a critical or independent review of the reasonableness of the assumptions behind P&L forecasts.

To gain the maximum visibility, the cash forecasting process should involve all key business managers who are most able to influence those business activities and outcomes, such as the heads of sales and procurement, or the general managers of particular operating units.

Funding thresholds should be established, and well in advance, to enable companies to tap into various funding sources well before credit bottlenecks occur.

While there is liquidity available in the current market environment, banks are no longer prepared to lend until they have completed their due diligence.

They need to be convinced that their borrowers are able to service their principal and interest obligations and can withstand a level of continued market deterioration in case the current market optimism proves to be premature.

The notion that “success breeds success” certainly holds true in Asia’s funding world.

Thursday, April 08, 2010

Insight Into Stock Trading

A LOT of retail investors like to trade in stocks. As a result of high losses incurred over the years, especially on stocks that have been delisted, they do not believe in holding stocks for the long term.

They believe stocks are suitable for trading and not for long-term investment.

Stock trading is not as simple as trading based on tips and market rumours. Most retail investors actually rely on tips from their remisiers to help them make quick gains from the stock market.

Investors need to understand that trading involves high discipline, commitment of time and skills. Based on interviews with some top traders, Jack D. Schwager concluded that all successful traders are serious about their trading and are willing to spend a lot of time on market analysis and trading strategies.

The secret to their success is usually a methodology that worked for them, together with having very rigid loss-control.

They always act independently of the crowd and have the patience to wait for the right timing for trading. In addition, all the successful traders understand that losing money from trading is part of the game.

A lot of traders always say that trading in stocks has a lower risk than buying stocks for the long term. Many retail investors like to buy stocks for trading because they do not have the patience to hold stocks for the long term.

But whenever they incur losses, they tend to change their original objective of stock trading to long-term investment, not knowing that the majority of those stocks for trading are not suitable for long-term investment.

While some of them may be aware of this important fact, due to their unwillingness to admit their mistakes by cutting losses, they choose to continue to hold on to the stocks. As a result, they get stuck with a lot of poor fundamental stocks in their portfolio for the long term. Most of the time, they will hold those stocks until they get delisted!

Investors need to understand that stock trading involves constant locking in of gains and cutting of losses. They must always set target profits (profits per trade or PPT) and maximum loss (loss per trade or LPT) for every trade. They need to set the target number of trades that are supposed to bring gains, which is also known as trading success ratio (success ratio or SR).

They then need to set the target number of trades that they are willing to be involved in per month (trades per month or TPM).

Hence, profits that can be made by a trader will very much depend on his SR as well as TPM. Most of the time, the target PPT and maximum LPT are relatively constant and are dependent on individual risk tolerance level and skills.

For example, an investor has set his PPT at RM500, LPT at RM300 and SR at 60%. If he sets 10 TPM, based on SR of 60%, of the 10 trades that he has made, six trades will make gains of RM500 each and four trades will incur losses of RM300 each. The net gain for 10 trades will be RM1,800 ((6xRM500) – (4xRM300)). If the trader intends to increase his profits, he needs to do more trades per month; in other words, increase the TPM.

Given that the movement of stock prices is random, the probability of stock prices moving up or down is 50%. We think it is a great achievement if a trader can achieve an SR of 55% to 60%. Most retail investors hope for 90% because they are not willing to cut losses.

As a result, they will wait for the stock price to break even whenever it drops below their purchase prices. However, the longer they wait, the more losses they will incur. Most of the time, of the 10 trades done, they may achieve SR of 90% where nine trades may give them gains but the one trade that incurs loss may wipe out all their nine gains!

We agree that the above methodology is easier said than done. A lot of times, investors may have the discipline to lock in their gains, but do not have the discipline to cut losses.

Besides, investors need to allocate a certain amount for their trading capital, which is the amount that investors are willing to lose in stock trading. It should not cause financial problems to investors if they lose all the trading capital.

Lastly, investors should not average down their losing position. If they have incurred losses in the past three to four trades, it means they may have lost touch with the market timing and sentiment. In this case, it may be good for them to take a break from trading and analyse the reasons behind those losses before continuing.

Thursday, April 01, 2010

Malaysia Must Act Now To Retain Competitiveness

MALAYSIA’S gross national income (GNP) is about US$7,600 annually or RM2,200 a month and currently, almost 4% of all Malaysians and over 7% of rural Malaysians live below the poverty line.

The NEM report said that half a century after independence, these figures provided a sobering reminder of how far Malaysia still had to go before it could become an advanced, high income economy.

From independence in 1957 until the Asian financial crisis, Malaysia’s economic development was impressive by any measure. In the mid-1990s, in the run-up to the 1997 Asian financial crisis, Malaysia’s gross domestic product (GDP) grew at an average rate greater than 9% annually.

Since 1997, however, the GDP growth rate had been practically halved (not even taking into account the 2008 global financial crisis).

It said the Asian financial crisis was a watershed in Malaysia’s growth. Since the crisis, the country’s position as an economic leader in the region had steadily eroded.

The crisis also caused significant outflow of foreign portfolio investment and foreign direct investment as well as a fall in overall investment, which had not recovered.

Since the Asian financial crisis, Malaysia had seen a major change in aggregate investment trends. While countries such as Indonesia had seen notable recovery in investment levels since the crisis, Malaysia had seen no recovery, with aggregate investments levels as a percentage of GDP continuing to decline.

Although Malaysia ranked 23rd out of 183 countries overall, doing business in Malaysia was more difficult than in competing countries, especially in aspects related to entry and exit of firms.

Malaysia’s place on the Global Competitiveness Index had dropped to 24th in 2010 from 21st previously, indicating that the country was becoming less attractive as an investment destination. Institutional structures, processes and policies also contributed to the difficulty of doing business in Malaysia.

Export is, and had been for some time, a key focus of Malaysia. Exports had focused mainly on electrical and electronics (E&E) products which accounted for more than 40% of the country’s total exports.

GDP growth in Malaysia was sensitive to the fortunes of the E&E sector, where recent decline in global growth was quickly reflected in a fall in such exports, exposing the country to volatility in global markets.

Skilled jobs were most often synonymous with higher wages and in Malaysia, not enough high-wage jobs had been created.

This reflected the dominance in Malaysia of low value-added good which required low-skilled labour. As a result, only 25% of Malaysia’s labour force comprised highly skilled workers, compared with significantly higher proportions in Singapore, Taiwan and South Korea.

The human capital situation in Malaysia was not improving. Instead, the country was losing the skilled talent needed to drive future growth.

The exodus of talented Malaysians was further compounded by the fact that the education system, despite high fiscal outlays through several reform efforts, was not effectively delivering the skills needed.

Against the backdrop of strong economic growth and the New Economic Policy, Malaysia had made impressive headway with regard to overall poverty reduction.

Inequality, however, remained a real challenge for Malaysia. Although absolute poverty had been reduced, 40% of households continued to have very low income levels, particularly those in rural areas.

Starting as a low-income country in 1957, Malaysia briskly climbed the ladder to attain upper middle-income status by 1992.

But since becoming an upper middle-income country, Malaysia had largely stayed where it was. Although its income trajectory continued to exhibit a gradual uptrend, the country remained far below the “high income” boundary.

As global investors were increasingly turning to large-scale markets to lower costs, small economies like Malaysia must remove all costly barriers to give investors compelling reasons to put their money and create high wage jobs here.

Malaysia must act now before its position deteriorated any further.