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)