Monday, July 19, 2010

Go Asia For Consumption Stocks

WITH equity markets continuing to be volatile for the foreseeable future, wary investors will be looking for pointers on where to put their money.
The global economy is still confronted by a bleak US jobs market outlook and further troubles brewing in the eurozone which may affect wider Europe.
There is also growing realisation that earnings upgrades have run beyond underlying economic fundamentals and business conditions, prompting investors to pull back.
As reported earlier in StarBiz, investors may look towards the US markets for some sort of lead as Wall Street kicks off the second quarter’s earnings report.
However, future corporate earnings growth, and therefore of the economy, may not be rosy as stimulus measures taken to boost growth at the height of the financial crisis wane, or are withdrawn, and consumers in the developed world continue to tighten their belt.
A report by ECM Libra Investment Bank Bhd research head Bernard Ching dated July 14 shows three underlying themes for investing in the third quarter in the local equity market.
He recommends a switch to high-dividend yield defensive stocks for capital preservation, buying undervalued cyclical stocks with exposure to domestic demand and consumption recovery in Asian economies and riding on the strengthening ringgit.
“We favour a defensive strategy over the next three months until there is better clarity in the fourth quarter,” he says.
Ching suggests accumulating undervalued stocks predominantly driven by consumption growth domestically and in Asia in view of external uncertainty and concerns over domestic policy.
“While exports to advanced economies may come under pressure due to tepid consumption growth, we believe Asia will take the lead in global consumption growth,” he says.
He adds that investors should ride on to the strengthening ringgit as structural issues such as high unemployment and fiscal deficit in the US, eurozone and Britain will make their currencies less attractive.
Fund managers are also picking up on the domestic consumption story in Asia with Fortress Capital Asset Management Sdn Bhd chief executive officer Thomas Yong preferring China, Hong Kong and Singapore due to their still strong growth prospects.
“We like the domestic consumption stories in all these markets and therefore prefer the consumer products and retailing sectors there,” he says.
Yong adds that the consumer theme includes the automobile sector. “As an extension, the China and Hong Kong markets also offer numerous proxies to US recovery in consumption spending – particularly sporting goods manufacturers,” he says.
Aberdeen Asset Management Sdn Bhd managing director Gerald Ambrose says the stronger balance sheets of the public and private sectors in the Asean markets make them attractive.
He recommends exposure to plays on Asean domestic economic activity such as the banking, retail, property development and insurance sectors.
“As the developed world keeps real interest rates below zero and prints money, that liquidity will find the best returns in Asean,” Ambrose adds.
He points out that Asean’s banking sectoris “relatively unpolluted by worthless proprietary trading books, their fiscal balances are sounder (Malaysia’s deficit is high, but almost entirely funded domestically) and the man in the street has savings as opposed to his developed world counterpart’s debt.”
Ambrose says the surest bet is the gradual strengthening of Asian, and especially Asean currencies, against the greenback, euro, sterling and yen.
He believes gold should be an important part of any investment portfolio as insurance against the folly of mainly developed countries’ central banks.
While Ambrose feels that inflation is under control and not an immediate threat, “if you keep printing money, inflation will occur”.
Both Ambrose and Yong are wary of commodities with the former saying that commodity price movements are greatly influenced by the economic health of China, the biggest swing contributor to demand growth.
“Any slowdown could lead to commodity price weakness,” Ambrose adds.
Yong says Fortress Capital typically shies away from investing in exotics such as commodities but remains bullish on oil prices over the long term.
On bonds, he says the favoured segment of the market “is probably shorter duration higher credit rating issues”.

Tuesday, July 13, 2010

Understanding Index Investing

INDEX investing may sound like Greek to some although it is already a growing trend in Hong Kong and Singapore over the past five years. The other Southeast Asian countries are playing catch-up with index investing as more investors are aware of this opportunity for them to gain potential higher returns.

However, before we go into index investing, let us understand what an index is in the first place.

When we read the market commentary in the daily newspapers or listen to market up dates on television, we almost always come across statements such as "the market performed well today" or "there was a bull run on the market today". The word "market" is used liberally but what does it actually refer to?

When people talk about the "market" in relation to the stock market, they are actually referring to an index. For Malaysia, an example of an index is the FTSE Bursa Malaysia Kuala Lumpur Composite Index, better known as the FBM KLCI. Therefore, if you hear: "the market is up," this means the FBM KLCI is higher compared to the previous day.

So, is an index important? And if yes, why so? An index is important because of what it represents. The beauty of an index is that it is extremely easy to understand and investors know exactly what they are acquiring by putting money in an index.

It is too demanding to track every single share trading on the stock exchange, hence, an index that tracks the more "relevant" shares are created. These shares are usually the heavyweight stocks with more market capitalisations.

When these heavyweight stocks appreciate, the entire bourse goes up and when they lose value, the entire stock market trends down. In coming out with an index, the index provider must first define exactly what criteria is used to select shares for a given index.

Creating an Index

An index is made up of a basket of stocks. Therefore one must understand that it can be created to represent any segment of the stock market. One of the more widely known indexes in the world is the S&P 500 Index created by Standard and Poor's Index Services. The S&P 500 represents 500 of the most widely held firms in the US such as Exxon Mobil, Apple, and Microsoft, and the stocks within this index trade on major US bourses such as the New York Stock Exchange and Nasdaq.

Regarded as one of the best barometers of the American equity markets, the job of many American fund managers is to produce returns that outperform this index. Another well-known index, is the FTSE 100 Index that holds the top 100 largest firms listed on the London Stock Exchange. This index is seen as an indicator of the British economy and is the leading share index in Europe.

An interesting thing about indices is that almost anyone can create an index. During the dot-com bull run, almost all the publications in the US created an index to represent different types of new-economy stocks.

However, what sets the big indices apart is the reputation of the company that creates and manages the index. As you go along and get familiar with the various indices, you will start noticing them in every single market and for every sector and industry.

Apart from looking at the index provider, another way to differentiate the indices is to identify the methodology used to measure the importance of each security within its basket. There will always be a stock that is arguably more important than the other. For example, there will always be shares of companies that are more influential to the entire market due to their size or share price.

A common method used by indexes around the world though, is to weigh companies based on their market capitalisation. If company ABC has a market capitalisation of RM1 million and the total value of all the companies within an index is RM100 million, this means that shares of the company would be worth 1 per cent in this index. Such computations are done up-to-the minute with analysis tools, hence making indexes an extremely accurate reflection of its chosen market.

Making money via index investing

It is relatively easy to maintain an index. Except for the occasional fine-tuning, an index only needs to hold on to its basket of stocks from year to year, which means lower costs for an investor. When investing purely in an index, there are no costs involved that goes to fund managers (for their stock picking skills), since there is no active stock picking required. This in return, means more of your money is invested and gets a chance to grow!

With an index, investors get to decide on what and where their money should go. For instance, if you believe that China's economy will continue to grow with each passing year, you could jump on the Chinese bandwagon by investing in an index that tracks the country's main stock market. One of the most popular ways to invest in an unknown market is to do so via index investing because it (the index) is already diversified. This is a quality much desired by investors to smoothen out instability (the losses and gains in the value of your investments).

In most cases, index investing would likely mean investing in the larger leading companies in a stock market with strong brands and significant market share. Though it is possible for the value of an index investment to decline like any other investment, the odds of all leading companies in the index going bust at the same time are low.

In any case, chances are that actively managed unit trust funds with a similar investment universe would also be suffering a similar decline. As such, investors need to consider all the risks involved before making any investment, even with index investing.

Investing in an Index

Making money with an index takes the same amount of time required for an economy to grow - it is a long-term process. There are two ways to invest in an index: via an index unit trust fund or with an exchange traded fund (ETF). For the first option, investors must be aware that not all index funds are the same. A fund company can create and sell index funds but may charge a substantial sales commission and a higher management fee which may compromise the main advantage of index investing, that is its low cost.

The second option to index investing is via ETFs. The main difference between ETFs and standard unit trust funds is that it (ETF) is listed on the stock exchange and trades like a normal share throughout the trading day. In the more matured financial markets, ETFs are growing increasingly popular with investors.

In the next article, we will feature the many advantages of ETFs. The more you understand about the universe of investing and the various instruments available in the market, the better chance of you finding the right investment at the cost and risk level which you are most comfortable with, for your portfolio.

Wednesday, July 07, 2010

Govt May Speed Up Rollout Mega Projects

This is to keep growth intact amid shaky global recovery

PETALING JAYA: A shaky global economic recovery may prompt the Government to speed up the rollout of big construction projects at home to keep domestic growth intact.
Mega projects that grabbed the headlines recently include the RM36bil mass rapid transit (MRT) project jointly proposed by Gamuda Bhd and MMC Corp Bhd, the RM7bil light rail transit (LRT) extension programme and the redevelopment of land belonging to the Federal Government.
The bulk of these potential contract awards are expected to go to the bigger players. The awards, if they materialise soon, would be a major boost for the sector.
“While we believe the market is fully aware that certain negative elements are still lingering in the sector, we feel that it is likely to ‘brave’ these negative elements and forge ahead of the curve, underpinned by the collective ‘buy-first-on-news’ mentality,” RHB Research Institute said in a note yesterday.
These so-called negative elements include slow pace of public project awards and the 23% cut in actual project development spending under the 10th Malaysian Plan as compared to the Ninth Malaysia Plan.
RHB Research yesterday upgraded the construction sector to overweight from neutral previously, buoyed by positive newsflow. It listed Gamuda Bhd as its top “tactical” pick, while Sunway Holdings Bhd ranked the highest on its “value” list.
Previous reports indicated that the MRT project might start as soon as early next year, while works to extend the LRT lines would commence by the end of the year.
There is yet to be a formal award of the proposed MRT project, or clear indication that the huge project would even take off soon despite being identified for implementation under the 10th Malaysia Plan.
OSK Research predicted the value of local contracts to be dished out this year to “easily surpass” the total RM10bil recorded in 2009.
The figure excludes potential award of LRT or MRT-related jobs, according to analyst Jeremy Goh who covers the sector at OSK Research.
The firm has a “neutral” view on the construction sector, largely because of unattractive valuations and “lack of significant re-rating” catalyst happening soon.
Shares in Gamuda had risen 22% year-to-date at yesterday’s close of RM3.15, while rival IJM Corp Bhd was up 10% at RM4.93. Construction and property player Malaysian Resources Corp Bhd (MRCB) closed at RM1.52 yesterday, up 22% year-to-date.
MRCB has been linked to the project to develop the Government land in Sungai Buloh, Selangor, although there has been no official award to the company so far.
RHB Research said the market was likely to react positively to the announcement of formal awards of Federal land parcels to “master developers” and the subsequent farming out of the sub-divided smaller land parcels to various developers.
“Given the scale of the projects and that most construction boys are already involved in property business, they are likely to get a slice of the action,” the firm said.

Friday, July 02, 2010

Unusual Market Activity - Buy or Sell?

LATELY, Bursa Malaysia has issued unusual market activity (UMA) queries on some listed companies due to unusual price movement and trading activities.

Normally, companies that are being issued UMA queries have very high trading volumes and surge in stock prices within a short period of time without any significant corporate announcement.

Based on our observations, in most cases, the stock prices for companies affected will not go up after the UMA queries, as most investors might view these queries as negative event to the companies.

Even though the stocks are not being suspended for trading, most traders will try to avoid them as they may be suspended later.

According to the Main Board’s Listing Requirement (LR) Paragraph 9.11, UMA is referred to as unusual price movement, trading activity or both.

The listed issuer must immediately undertake a due enquiry to seek the cause of the UMA in its securities. They are required to determine whether the UMA are attributed to information that has recently been publicly disclosed, has not been publicly disclosed or is a market rumour.

Most of the time, the UMA queries are issued on companies with some possibility of trading on material non-public information.

According to LR Paragraph 9.15, insiders must not trade on the basis of material information which is not known to the investing public.

Besides, according to Section 188 of the Capital Markets & Services Act 2007, anyone who commits an offence under insider trading shall be punished on conviction to imprisonment for a term not exceeding 10 years and to a fine of not less than RM1mil.

Despite heavy fine and punishment for trading on insider information, each time Bursa Malaysia issues UMA queries on any listed companies, the general public may be able to predict the “standard” replies from them.

The “standard” replies from these companies are “To the best knowledge the Board of Directors of the Company is not aware of any other corporate developments, any rumour or report, any possible explanation on UMA or any material information ....”

It is very seldom that the listed companies will explain in detail on the UMA.

Even though we do believe that sometimes certain listed companies may not be aware of the sudden surge in stock prices and volumes, however, if the trading volumes per day accounted for a big percentage of the outstanding shares of the listed companies, the major shareholders may be aware of the reasons driving the heavy trading volumes.

This is because usually the key owners of the companies are, at any time, fully aware of the major shareholders of their companies.

Being retail investors who own a very small number of shares in these companies, we need to observe how these companies response to the UMA queries. If there is no other major corporate developments after the UMA queries, like what they claimed earlier that they were not aware of any major corporate developments, then we will consider their earlier “standard reply” as genuine.

Otherwise, if there are major corporate developments within the companies in the subsequent periods, we believe that there may be certain forms of insider trading during the UMA period.

As mentioned earlier, traders and speculators will try to avoid speculating stocks with UMA queries because they worry that if the stock prices continue to surge higher, the companies may be suspended from trading.

A good quality of management will try their best to explain the possible causes for the UMA whereas a bad quality of management will only provide minimal information with the “standard” reply and take advantage of higher share prices in the subsequent major corporate announcements.

Lastly, as one of Abraham Lincoln’s (America’s 16th President – 1861-65) famous sayings: “You may fool all the people some of the time, you can even fool some of the people all of the time, but you cannot fool all of the people all the time”.

We believe that sometimes even though some companies’ owners may be able to take advantage on investors, it will eventually be discovered by the public and resulted in a bad reflection on the quality of the management.

As investors, we need to be extra careful when considering buying into these companies in the future.