BursaTweets: September 2009

Sunday, September 27, 2009

Market Outlook as at 28th Sept 2009

Investment Theme For 2009
*** UNCERTAIN ***
1. Privatization And M&As Deals
2. A Stronger Ringgit Policy
3. Implementation Of the Ninth Malaysia Plan
4. Asset Reflation Theme
5. Iskander Development Region (IDR) In South Johor
6. Eastern Corridor Development Programme (Petronas-Led)
7. Northern Corridor Economic Region
8. Sarawak Region Corridor
9. The Sabah Development Corridor
10. Sarawak Corridor of Renewable Energy (Score)
11. RM40 Billion Public Transport Expenditure
12. The Asia Petroleum Hub In Johor
13. The Solid Waste Management Play
14. Flow of OPEC Petrodollars
15. The Trans-Peninsula Pipe Project
*** UNCERTAIN ***

16. Water & Water-Related Play
17. A U-, V-, W- Or L-Shaped Global Economic Recovery
18. Fiscal & Monetary Pump-Priming & Normalization Of Corporate Earnings
19. The Economic Stabilization Plan & Mini Budget
20. Interest Rate Cycle (Speculating End Of Easing Cycle As Economy Recover)
21. Decoupling – Emerging Economies Is Disconnected From Developed Countries (Uncertain)
22. Liberalization Of The Services/Financial Sector
23. The Malaysian Government’s Reform “Train”
24. GLCs Revamp
25. The ‘Third’ Link Bridge (Eastern Johor) To Singapore (Uncertain)
26. A ‘Third Stimulus’ Package (Uncertain)
27. Market Liberalization (Paring Down In GLCs’s Stake)

Watch List In The Coming Week
1. 2010 Budget Announcement On 23 Oct 2009;
2. Refinement To The National Auto Policy In Oct 2009
3. Mega Project Calls For Tenders And Awards (LCCT, LRT extension)

Market Commentaries
It’s been a good run on the local bourse, but before the FBM KLCI can tirelessly speed up to the next pit stop, it needs a much needed breather before positioning for its bullish lap.

After heading north over the last six months (April 2009 – Sept 2009), and gaining 38.5% on a year-to-date (Sept 2009) basis to 1,214, it is no surprise that some resistance has emerged.

The FBM KLCI has been encountering strong selling pressure, ever since it penetrated the heavy psychological resistance level of 1,200.

The short-term negative technical reading is pointing towards a further pullback. Hence, the index may retest of the 10-day simple moving-average of 1,211 and the 1,200 psychological support soon.

Another source of concern is the Shanghai Composite Index which has broken below its short-term 30-day red moving-average line. If the Shanghai market does not break back above this short-term dynamic resistance, it could trigger an increased level of profit-taking activity among regional markets, particularly our local FBM-KLCI.

Investors are advice to be prudent and taking a little money off the table, especially with such significant gains in recent times. Moreover, Marc Faber said he would not be surprised if we have seen the peak of the market for this year (2009) because economic news is not going to improve very much.

Trading volume on the local bourse was thin during the three days as most investors were still away on the Hari Raya. Some institutional fund managers, especially government linked funds were still on Hari Raya leave.

Apart from the holidays, the lack of buying interest also contributed to low trading volume last week. The market is getting tired of the recovery story. It is at a crossroads now, awaiting fresh catalysts. Many institutional investors are on the sidelines.

Some view the market is that current valuations look a bit rich now. As a result, the market is due for correction. On the other hand, due to ample liquidity could lift the market further.

The bigger picture, however, remains positive.

In the coming weeks (Oct 2009), newsflow on new construction projects such as the RM1bil low-cost terminal and the RM7bil LRT extension will start to filter through.

Also, speculation on potential policy measures in the upcoming 2010 Budget on Oct 23 2009 could give the market a boost in the coming weeks.

Pending any tangible bearish signs, positive outlook for the FBM-KLCI remains after this wave of profit-taking activities. Owing to the absence of major negative catalysts, the index should be able to sustain above these support levels for now (Sept 2009).

Investors are advice to track the leads from Wall Street and the development of the G-20 summit in Pittsburgh to assess near-term market conditions.

The potential share placements by government-linked companies such as Khazanah Nasional Bhd as a win-win proposition for Malaysia as they improve the free-float and liquidity while giving investors the opportunity to ride on the upside of the market. Placements can also help renew foreign investor interest and drive a re-rating of the market.

By CIMB … It maintains end-2010 KLCI target of 1,400, based on an unchanged mid-cycle price/earnings of 15 times. Malaysia’s dividend yield of close to 5% is an added attraction, being the highest in the region.

Technical Analysis
The support line for FBM KLCI is pegged at around 1,200 to 1,210 points, with immediate resistance at 1,220 - 1,240 points. The breakout level is marked at around 1,190 to 1,195 points.

The FBM KLCI may hit its saturation zone at 1,237.25 to 1,248.34 soon, before risks to the downside increase greatly. Investors are urged to remain cautious at the present (Sept 2009) “lofty” levels that the local stock market have attained.

The ample share placements and off-market deals that have been happening in the background, arguing that these are obvious pre-cursor to an impending market correction.

With market breadth and volumes shrinking, coupled with the emerging weak and bearish technical signals, it is just a matter of time before the benchmark index heads south. Thus, he advises investors to trade with a short-term time frame.
*****************************
After erasing the recent peak and overcoming the 1,200-point monster barrier, Bursa Malaysia’s principal index moved forward to establish a new high for the year (Sept 2009), hitting 1,210.36 session amid improving liquidity, aided largely by the strong performance of overseas equities.

A positive breakout has been detected, signalling an end to the three-week-old sideways consolidation phase. Going forward, it usually would set the stage for a rally, and based on the daily chart, the key index may reach the returning line of the existing upward channel, now (Sept 2009) resting at approximately 1,280 points.

The next upper strong resistance is envisaged at 1,300–1,305 points. However, given the modest volumes, the speed of ascent may be gradual, unless there is evidence of aggressive third-quarter 2009 window-dressing activities coming up.

Before arriving at the upper boundary of the existing channel, the FBM KLCI will encounter resistance at 1,220 points, 1,240-1,250 points and 1,260 points.

Technically, the indicators are bullish, especially the MACD, implying the market is likely to scale new heights, provided there are no nasty surprises from abroad, particularly the United States and China.

Initial support is seen at 1,196.46 points, followed by the 14-day simple moving-average (SMA) of 1,183 points, the 21-day SMA of 1,178 points, the 50 day MAV lines (1138). The 200 day MAV line is at 1106.

The lower floor is resting at 1,160 points and the recent bottom of 1,153.97 will now act as the base.

Undermining Factors
1. Blowup In US Subprime Loans & Shaky Financial Assets Associated With Them And As A Result Of Re-pricing Or Revaluation Of Risk Contributed To A Squeeze In The US Credit Markets (Stabilizing);
2. Malaysia Political Uncertainty;
3. Fear, Uncertainties, Global Liquidity Crunch & Economic Fallout (Stabilizing);
4. Volatile Foreign Exchange Market;
5. A Slowdown In Global Economy (Rate Of Decline Has Started To Moderate Since March 2009);
6. Commodities Prices (Strengthening);
7. A Global Deflationary Threat -> Hints Of Recovery – Fear Of Inflation
8. Threats Of High Commodities Prices And US Dollar Crisis

Unpredictable Risks/Surprises
1. Terrorist Attack –
2. Oil Supply Disruptions –
3. A Pandemic Disease – Swine Flu
4. Financial Shocks – Unwinding of Yen/Dollar Carry-Trade Funds, China’s Stock Market Bubble, Global Liquidity Crunch Resulting From Blowup In US Subprime Loans And Shaky Financial Assets Associated With Them & Falling Dollar;
5. Major Social And Geopolitical Upheaval –

Equity Strategy: Easing Malaysia Political Uncertainty, Outcome Of The Credit Crunch And Subprime Loans Crisis Stabilizing, Strengthening Commodities Prices, Stable Global Growth, Moderating Inflation, Easing Monetary Policy & Fiscal Stimulus Measures … Second Leg Global Recovery (Sept 2009 Onwards) !!!

Recession – Recovery – Growth – Boom - Burst
(Transition From One With China As Sole Driver To A More Balanced US/China Model)
a. Global Inflation Outlook: Controlled Versus High
b. The US Dollar Carry Trade, The Marriage of The Dollar And Oil Is Growing Estranged & Why Dollar Is Weak Since Aug 2009
c. The Malaysian Equities Market By Nomura, Morgan Stanley & CLSA
d. The US Economy By Treasury Secretary Timothy Geithner, Warren Buffet, The Fed
e. The Good, The Bad & The Ugly Aspects Arising Since Sept 2008 …
f. Market Liberalization - Paring Down Of Government Stakes In GLCs … To Increase Their Stock Liquidity
g. Betting On Next Leg Global Recovery (Sept 2009 Onwards) ... Transition From One With China As Sole Driver To A More Balanced US/China Model
h. What’s NEXT For The Malaysian Economy … The Next Challenge Is To Sustain The Recovery & Investing In Equities On Expectation Of Second Round Recovery
i. What’s NEXT For The Global Equities Market … WHAT MATTERS MORE TO MANY DEVELOPING MARKETS NOW (AUG 2009) IS WHAT CHINA , NOT US, DOES WITH POLICY
j. What’s NEXT For The US & China Equities Market
k. Jims Rogers … Next Commodity Bull Run Had Just Begun, Bets In Airlines, Agricultural Land, Water
l. The Asian Equities Markets … Investors Should Start Accumulating On Weakness During 3Q2009, To Position For Further Upside Later 2009.
m. What’s NEXT (2H2009) For The Malaysian Equities Market …
n. Carry Trades Are Making A Come Back Into Emerging Markets
o. High Commodities Prices & US Dollar Crisis Could Pose Threats To Global Economic Recovery In Coming Months (June 2009 & Beyond).

a. Global Inflation Outlook: Controlled Versus High
The very worst of the economic downturn is now (Sept 2009), almost certainly, behind us. Across the world, investors are cautiously emerging into the faint sunlight of a new economic dawn, and starting to hope for the best.

But even as we start to experience optimism (or less pessimism) about the future, a fear is also fermenting. The fear of higher inflation has been unleashed.

Most professional economists, including those of the world's main central banks, do not think inflation will be a problem for the advanced economies of the world. The range of views from investors is very wide, however. Some investors think that a Japan style deflation is imminent. Some investors believe inflation will tip into hyper-inflation (a view where the only sensible investment strategy could appear to be to stock up on canned food and bottled water, as normal economic activity collapses).

First, it is worth thinking about the sort of inflation ranges that are "controlled" versus "high". Generally speaking, if inflation averages about 2.5 percent or 3 percent over a period of a few years, economists consider the pricing environment to be "controlled".

This suggests that inflation should not go too far above 5 percent -- for were it to do so, investors and workers would question whether in fact inflation would continue to revert back to its long term average. What policy makers need to avoid is "high" inflation - numbers that go above 5 percent and then stay there.

What is wrong with higher levels of inflation? The main risk is that higher inflation would add an element of uncertainty to economic markets. If, after years of relatively well behaved inflation pressure, prices start rising more rapidly, investors would become uncertain about the future path of inflation.

At the moment, investors can assume that over a period of some years inflation in the major economies will average out around 2.5 percent to 3 percent. If something happens to challenge that assumption, investors will want an appropriate insurance premium. If an investor feels that inflation could rise as high as (say) 10 percent, they will demand compensation for that risk. This risk is what economists call "inflation uncertainty risk". Inflation uncertainty risks runs as high as 1 percent to 1.5 percent, and it is an addition to the cost of borrowing money.

This is where the real danger of inflation comes in. If the cost of borrowing money rises, companies will borrow less. If companies borrow less, they will invest less. If companies invest less, they will be less efficient - and if companies are less efficient, the economy overall is less efficient. In other words, if high inflation increases inflation uncertainty risk, economic growth is almost bound to suffer.

High inflation will also add to government debt burdens. This often seems counter-intuitive (people talk about governments "inflating away" debt), but in fact government debt is five times more likely to rise or hold steady than it is to decline under a high inflation environment. This is because governments need to refinance their debt frequently.

Around 55 percent of the US national debt has to be refinanced in the next two years (2010-2011). If the US government were to create inflation, bond investors would punish the US Treasury by raising bond yields faster than inflation increases (and the increased debt service cost would increase government debt levels).

Why is inflation likely to remain contained? There are two good reasons to suppose that inflation will remain under control:-
· First the world economy has plenty of spare capacity at the moment. Factories sitting idle, unemployed workers - these are resources that can be called upon as growth starts to recover. Any pressure for prices to rise will be held in check by using this pool of under utilized resources. · Second, give central bankers some credit. The world's monetary authorities have spent three decades (1970s-2000s) controlling inflation. They know how to keep inflation in check, and (at least in recent years) they have tended to be rather good at achieving their policy objective. Central bankers understand that inflation generates high economic costs. As a result, expecting policy makers to respond appropriately to any signs that inflation is going to be too high.

What about commodity prices? Certainly commodity prices could rise as the world economy recovers (in particular, as emerging markets recover). However, commodity prices are only a small part of final inflation for most developed economies.

Around 70 percent of US inflation is actually caused by (domestic) labor costs, for example. Commodities contribute around 15 percent of US final inflation. As long as labor costs are held in check by spare capacity, major economies are likely to continue to enjoy low inflation.

Commodities are more of a threat to emerging market inflation rates (as commodities tend to have a higher weight in inflation calculations for emerging markets). But even taking that into account, inflation is not likely to be an economic concern in the months(Oct 2009 & Beyond) ahead.

b. The US Dollar Carry Trade, The Marriage of The Dollar And Oil Is Growing Estranged, Why Dollar Is Weak Since Aug 2009 …

The US Dollar Carry Trade …
For years (1990s-2000s), the yen was the currency of choice to fund international carry trades. But is the dollar starting to take its place (Sept 2009)?

Negligible US interest rates, its quantitative easing measures and little sign that the country is set to withdraw from its ultra-loose monetary policy anytime soon leaves it in a similar position to Japan at the start of the decade (1990s).

This puts the dollar in exactly the same position as the yen back in 2001 and makes it naturally attractive as a carry trade funding currency. The dollar is the new yen.

The carry trade strategy, in which low-yielding currencies are sold to finance the purchase of riskier, higher-yielding assets, was widely used in the years prior to the eruption of the financial crisis.

The low-yielding yen, and to a lesser extent the Swiss franc, were the most widely used as funding currencies, pushing them down to multi-year lows against a raft of currencies as risk appetite was supported by an abundance of liquidity and rallying asset markets. Indeed, both currencies rallied sharply as turbulence on global markets erupted last autumn (2008) and forced investors to unwind their positions.

But rather than lose their value as asset markets have shown renewed signs of strength and risk appetite has improved in Sept 2009, both the yen and the Swiss franc have rallied against the dollar. Indeed, the dollar fell to a seven-month low of Y90.18 against the yen in Sept 2009 and on Tuesday hit a one-year low of SFr1.0318 against the Swiss franc. The dollar has not just been weak against the yen and Swiss franc, however.

There is a change in dynamic that has made the dollar a more attractive funding currency to explain its recent fall.

The Marriage of The Dollar And Oil Is Growing Estranged …
Their divergence has snapped a longstanding correlation, for the time being at least (Sept 2009). A weakening dollar generally accompanies higher oil prices. The relationship has a solid basis. Oil is bought and sold in dollars, forcing exporters to raise prices to compensate for a less potent currency.

Higher crude prices also worsen US trade balances, pressuring the dollar. Investors concerned that quantitative easing will lead to runaway inflation and debased currencies have also flocked to commodities as a hedge.

Many are expecting a continuing decline in the dollar, combined with reinvigorated oil demand, will push oil prices higher. For now (Sept 2009), an amply supplied oil market is repelling any price support from the currency.

Now (Sept 2009) that expectations of an economic recovery are widespread, we are back to people recognising the size of the US debt and ... fiscal deficits and back to the flight from the dollar.

Because there isn’t enough of a rebound of real demand for oil and stockpiles have accumulated, we’re not seeing a spike in oil prices yet.

In the past, some big exporters have called for oil to be denominated in a basket of currencies to blunt the impact of dollar weakness, but to little avail. The main variable to consider is the import structure of oil producing countries. If they have to buy most of their imports in US-dollar denominated prices, probably they will prefer to keep oil US denominated.

While official US interest rates, such as those in Japan and Switzerland, are moored at levels close to zero, it is the rates on offer in the interbank market that are crucial in determining the profitability of carry trade strategies.

In Aug 2009, three-month dollar Libor lending rates fell below those of the yen and later dropped below those of the Swiss franc for the first time since November 2009, effectively making the dollar the cheapest funding currency.

Indeed, at just 30 basis points, three-month dollar lending rates are falling towards levels that led to two waves of yen-funded carry trades that weighed on the Japanese currency between 1996 and 1998, and then between 2001 and 2008.

Why Dollar Is Weak Since Aug 2009 …
The usual explanation for dollar weakness over recent months (Aug – Sept 2009) has been an improvement in risk appetite. This weighs on the dollar as emboldened investors sell the currency to fund investments in higher-yielding assets elsewhere.

But this fails to adequately explain the secular drop in the dollar in recent weeks (Sept 2009). Indeed, it is not clear that there was actually much further improvement in risk appetite in Sept 2009.

A likely explanation for the drop in the dollar is that it is increasingly becoming a favoured funding currency, taking over the mantle from the yen. This is likely to continue to put pressure on the dollar: Ultra-low interest rates suggests that the dollar will remain under pressure for a while yet, especially as the Federal Reserve continues to highlight that US interest rates are not going to go up quickly.

Speculative positioning data seem to back up the shift against the dollar, revealing the extent of recent (Aug – Sept 2009) deterioration in dollar sentiment. According to figures from the Chicago Mercantile Exchange, which are often used as a proxy for hedge fund activity, aggregate bets against the dollar versus the euro, yen, Swiss franc, sterling and the Australian, New Zealand and Canadian dollars in Sept 2009 rose to their highest levels since July 2008, when the dollar hit a record low against the euro.

The fact that high-yielding currencies have rallied for most of this year (Till Sept 2009) while the traditional carry trade funding currencies – the yen and the Swiss franc – have not weakened throws up one of two conclusions.

Either the carry trade has not returned and high-yielding currencies are strong in spite of any yield attraction, or another currency has supplanted the yen and the Swiss franc as the funding currency of choice. If this is the dollar it could imply that the greenback is in real danger.

It is certainly possible given the dollar’s weakness, negative positioning, and the fact that short-term US interest rates are down to Swiss and yen levels that the dollar has assumed the position of the carry trade funding currency of choice.

c. The Malaysian Equities Market By Nomura, Morgan Stanley & CLSA

By Nomura … Sept 2009
Taking a cue from the past post-crisis rallies and historical earnings upgrade cycles, it remains bullish. Economic recovery should continue to underpin earnings upgrades, supported by ongoing stimulus spending.From a regional perspective, however, Malaysia could lag as cyclical markets elsewhere offered better returns.Nomura noted that in the past 1997/1998 Asian financial crisis, banks had rebounded by over 200 per cent over a 12-month basis.

By Morgan Stanley … Sept 2009
The Malaysian market has developed a defensive nature, outperforming during market downturns, and underperforming during market upturns, despite having generally fallen by the wayside amid structural issues in the economy.

Nevertheless, from a macro perspective, it still expected Malaysia to deliver a reasonable growth outlook in 2010. Its 2009 and 2010 forecasts of -3.5% year-on-year (y-o-y) and +4.3% y-o-y respectively, are below consensus’ -3% y-o-y for 2009 but in line with the +4.3% y-o-y for 2010. It sees 2011 growth at 4.8% y-o-y.

However, it noted a dichotomy in terms of market sentiment. Whilst certain quarters of the market have been eager to get bullish on Singapore given the global rebound, it does not sense the same sentiment with Malaysia despite Malaysia being the second-most exposed to global trade within Asean as well as a commodity play.

The three-legged growth model of manufacturing trade, commodity trade and the public sector economy was useful in assessing the Malaysia outlook.

Trade was slowly but surely turning around as manufacturing faced the same amid an inventory snapback. Manufacturing production has already picked up ahead of trade amid a lesser pace of destocking in 2Q09. On a three-month moving average basis, exports had shown some second-order derivative. The US ISM New Orders Index (which leads by about four months) showed that a more evident turnaround was in the pipeline.

Malaysia, being the top net commodity exporter (mainly of oil and crude palm oil) in Asia, was poised to be the biggest beneficiary of higher prices. Limited global spare capacity and El Niño weather conditions could keep crude oil and edible oil prices supported at elevated levels.

Commodity trade aside, the large natural resource endowment also helps to fill government coffers in terms of revenue. Revenue from commodities constitute about 40% of total government revenue, which in turn helps to support what is one of the largest public sector economies within Asia.

Expecting government expenditure to pick up further on a sequential basis as spending tended to be back-end loaded in the second half (2009) of the fiscal year.

While Budget 2010, to be delivered on October 23 2009, would be less expansionary, expecting Malaysia to have one of the highest fiscal deficits within Asean for next year (2010).Global backdrop and the political climate as two key risks for Malaysia.

As it is, Malaysia’s manufacturing exports are already under structural pressures, losing global competitiveness.

Separately, the coordination within the federal government given the two-party system and the coordination between the federal and state governments would be key to watch in terms of how it would affect the workings of the public sector economy.

Beyond the cyclical turnaround in 2010-11, structural gaps needed to be addressed in the longer term. Malaysia faces a ‘Dutch Disease’ of sorts, in its view”. It refers to the phenomenon where the commodity resource sector displaces the export manufacturing sector.

When commodity exports augmented the current account balance either due to a commodity boom or new supply discovery and real exchange rates appreciated, the manufacturing export sector suffered.

Capital and labour shift into the commodity sector due to its profitability and as manufacturing competitiveness erodes. Factor inputs also move towards production of non-tradeables to meet the increase in domestic demand.

Excess domestic demand from positive terms of trade could also lead to real currency appreciation, which further de-industrialises the economy. The benefits of technological know-how and productivity growth from manufacturing would whittle away and macro vulnerability to the commodity sector increased.

Malaysia’s real effective exchange rate appreciated by a maximum of 11% between 2005 and mid-2008, suggesting that there could be some causality from the Real Effective Exchange Rate (REER) to the competitive erosion of the manufacturing export sector.

The growth buffer in a young labour input and commodities trade had reduced the sense of urgency to increase competitiveness (productivity) and allowed inefficiencies like the affirmative-action policy to go on for longer.

Indeed, hard infrastructure standards are relatively high as the government spends sizeable amounts on construction but soft infrastructure gaps have persisted. The upshot remains the same — a competitive erosion in exports and FDI that could serve to undermine the economy.

Despite the benign global conditions, Malaysia’s trade surplus of machinery and transport equipment fell from US$10.5 billion in 2000 (11.2% of GDP) to US$9 billion in 2008 (4.1% of GDP). In comparison, the trade surplus of China (-US$9.3 billion to US$231.3 billion), Korea (US$41.2 billion to US$119.1 billion), Taiwan (US$19 billion to US$45.1 billion) and Singapore (US$11.2 billion to US$22.9 billion) all saw a positive delta between 2000 and 2008.

Machinery and transport equipment constituted about 49% of Malaysia’s total exports and Malaysia’s global share of these exports declined from 2.3% in 2000 to 1.7% in 2007 after China joined the WTO and saw its global share increase from 3.1% to 11.6%.

Specifically within the machinery and transport equipment segment, telecommunications equipment (from 4.5% in 2000 to 2.4% in 2007) and electronic data processing/office equipment (5.6% in 2000 to 5% in 2007) saw the most pressure in terms of declines in global share.

As net FDI in certain economies in the region (China, India, Singapore, and Thailand) continued to climb higher, net FDI in Malaysia had generally trended down from the peak in the early 1990s, and was now dipping into negative territory. Net FDI (4Q trailing sum) stood at -3.8% of GDP in June 2009 from +2.4% of GDP in June 2004.

Execution of the government’s reform measures would be key as the policy intent behind them served to arrest the structural weakness in the economy. Investors will now (2009) be closely watching for the government’s ability to execute on these measures.

By CLSA Asia-Pacific Markets … Sept 2009
It has described Prime Minister Datuk Seri Najib Tun Razak’s current positive economic and social reforms as "Najibnomics", given his economics background.

With his background on industrial economics from the University of Nottingham, Najib had been quick to effect various fiscal, government and structural reforms.

They include liberalising the New Economic Policy, ensuring greater transparency, speeding up the award of government infrastructure projects and improving ties with Singapore to draw more foreign direct investments into Iskandar Malaysia, a development region in Johor twice the size of Singapore.

In its special strategy report on Malaysia, Najib had covered good ground since taking office on April 3 2009 with a number of positive policies and actions aimed at stimulating the local economy, attracting foreign investments and foreign talent, reducing bureaucracy, tackling crime and corruption, effecting greater accountability and promoting national unity (through the 1Malaysia concept).

Although he has until March 2013 to call for the next general election, he has little choice but to work quickly as the clock is fast ticking. Najib not only has to implement new policies to reform the government and turn around the economy simultaneously, he has to deliver some decent results to ensure that the ruling Barisan Nasional coalition performs better than in the last general election in March 2008.

On the economic front, expecting the Malaysian economy to recover in 2010 while consumer sentiment was also improving.

In view of Malaysia's high savings rate at 43.3 per cent of the GDP which would support private consumption while the impact of weak imports from Western countries would not be too severe, it pointed to an economic recovery next year (2010).

Malaysia's 2009 GDP has been forecast to decline by 4.0 to 5.0 per cent this year (2009) compared to a growth of 4.5 per cent last year.

CLSA's expectations are in line with that of Bank Negara Malaysia which indicated that the country's growth outlook for the second half of 2009 is expected to improve after the economy contracted at a slower rate of 3.9 per cent in the second quarter of 2009 following a 6.2 per cent contraction in the Q1 2009.

The central bank said there were increasing signs that conditions in the global economy were stabilising as the pace of the decline in economic activity was moderating in advanced countries.

There has not been any high-profile debt default while non-performing loans in the banking system remain benign. Companies have merely been hit by shrinking revenues, thinning margins and higher receivables, while corporate governance issues have been sporadic. Most companies believe that the worst is over. Having said that, they do think the way forward will remain challenging as unemployment continues to creep up.

In terms of household income, 44 per cent said they experienced a decline in income while 10 per cent experienced an increase.

About 70 per cent said they had changed their spending patterns, reducing expenditure on food, clothing as well as leisure. Essentials like mortgages, utilities, transport, children’s education, healthcare and communications had been largely unaffected by the downturn.
By AMBank … Sept 2009

The general outlook of the FTSE Bursa Malaysia KL Composite Index (FBM KLCI) remains bright.

It had raised its fair value for the FBM KLCI to 1,350 points from 1,190 based on 2010’s price earnings (PE) ratio of 16.5 times.

Anticipating a correction phase in the third quarter of 2009 “may be behind us,” or at least “the risk of pullback was dissipating.”

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

More importantly, macro fundamentals are now (Sept 2009) pointing towards a start of a growth cycle moving into the fourth quarter 2009. There is less doubt over a global economic recovery. Inflation expectations are muted, implying that the interest rate cycle is not going to rise anytime soon.

It is forecasting gross domestic product to expand by 3% in 2010.

Historically, an earnings-driven re-rating from trough to peak of the market had never been shorter than 12 months. Rally in 1998/99 and 2001/02 sustained for 16 months and 12 months respectively. This present rebound (April 2009 – Sept 2009) is just six months from lows.

It has forecast corporate earnings to expand by 17% in 2010 or more than two times faster than its trend-average growth rate of just 7% in 2000 to 2009. It expects the revision cycle to gain traction. Earnings drivers of the heavyweight sectors, such as banks and plantations, were solidifying.

By Kim Eng Research … Sept 2009
There were clearer signs of rebound in Malaysia as seen in semiconductor, CPO and even property sales.
The stock market has risen 33% year-to-date (Sept 2009) but still lagged other Asian bourses. Valuation have just broken out of the post-Asian crisis resistance level of 16 times and trading at financial year 2010 (FY10) PE ratio of 17 times on earnings per share growth of 17%.

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

d. The US Economy By Treasury Secretary Timothy Geithner, Warren Buffet, The Fed

By Treasury Secretary Timothy Geithner …

Citing emerging financial sector stability, a number of government rescue efforts in place since the Wall Street crisis are no longer needed and that banks will repay US$50 billion in rescue funds over the next 18 months (Sept 2009 & Beyond).

US still has a ways to go before "true recovery takes hold. But improved conditions in the banking industry have prompted Treasury to begin winding down emergency support programs implemented after the collapse of Lehman Brothers last year (2008).

The cautious but upbeat tone reflects a growing push by the administration to present the government financial rescue efforts as a success amid lingering public apprehension about the economy.

Banks have already paid back $70 billion of the $250 billion that the government injected over the past year (2008) to boost their liquidity. Only $11 billion of that infusion has occurred since he became Treasury secretary earlier this year (2009).

A major Treasury program that had been used to guarantee up to $3 trillion in money market mutual fund assets would be closed down on schedule on Sept. 18 2009. The program had no direct cost to taxpayers and actually earned more than $1 billion in fees paid by the mutual fund industry.

A series of emergency program initiated by the Federal Deposit Insurance Corp. and the Federal Reserve have also begun to phase out.

Still, unemployment stands at 9.7 percent and administration officials say it could rise to 10 percent in the coming months (Sept 2009 & Beyond).

Foreclosure rates are surging and the mortgage market remains tight. Geithner acknowledged that the economy would still face "more than the usual ups and downs."

By Warren Buffet …

The U.S. must address the massive amounts of “monetary medicine” that have been pumped into the financial system and now (Aug 2009) pose threats to the world’s largest economy and its currency.

The “gusher of federal money” has rescued the financial system and the U.S. economy is now (Aug 2009) on a slow path to recovery. While he applauds measures adopted by the Federal Reserve and officials from the Bush and Obama administrations, Buffett says the U.S. is fiscally in “uncharted territory.”

The government is trying to spark business and consumer spending through a $787 billion stimulus plan spanning tax cuts and infrastructure projects, while the Treasury and the Fed have spent billions more on separate programs to rescue financial institutions and resuscitate the banking system.

The U.S. budget deficit is forecast to reach a record $1.841 trillion in the year that ends Sept. 30 2009.

Enormous dosages of monetary medicine continue to be administered and, before long, the US will need to deal with their side effects. For now (Aug2009), most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.

The “greenback emissions” will swell the deficit to 13 percent of gross domestic product this fiscal year (2009), while net debt will increase to 56 percent of GDP

The U.S. budget deficit reached a record for the first 10 months of the fiscal year and broke a monthly high for July 2009. The excess of expenditure over revenue for July 2009 climbed to $180.7 billion compared with a $102.8 billion gap in July 2008 as the government spent more than in any month in U.S. history.

Officials must still do “whatever it takes” to get the U.S. economy back on its growth momentum. Once recovery is gained, however, Congress must end the rise in the debt-to-GDP ratio and keep our growth in obligations in line with its growth in resources.

With government expenditures now (Aug 2009) running 185 percent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap.

The dollar will weaken as the swelling U.S. deficit erodes its status as a reserve currency. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress.

By The Fed … dated Sept 2009

The Federal Reserve upgraded its assessment of the U.S. economy, saying growth had returned after a deep recession, while reiterating its promise to hold interest rates very low for a long time.

The Fed would slow its purchases of mortgage debt to extend that program's life until the end of March 2010, in a move toward withdrawing the central bank's extraordinary support for the economy and markets during the contraction.

The U.S. central bank, as widely expected, held its benchmark overnight lending rates at close to zero percent.The Fed said that information received since the Federal Open Market Committee met in August 2009 suggests that economic activity has picked up following its severe downturn.U.S. government bond yields ended lower on the news that the central bank had reiterated a pledge to keep rates ultra-low for an extended period.

The Fed would gradually slow the pace of its purchases of mortgage-related debt in order to promote a smooth transition in markets as the Fed has been the biggest buyer. But it made clear it would purchase the full amount of US$1.25 trillion in agency mortgage-backed securities.

The U.S. central bank on Wednesday played down concerns about price pressures in an economy where the jobless rate is at a 26-year high and factory capacity is greatly underutilized.

Tuesday, September 22, 2009

Market Outlook as at 23 Sept 2009 ...

Friday, September 18, 2009

Calculating Ex-Rights Price For Gentng SP ...

1 for 5 @ SGD0.800.

5000 Existing shares at SGD1.09 = SGD5450.00
1000 new shares at SGD0.800 = SGD800.00
Value of 6000 shares = SGD6250

Ex-Rights Value per share = SGD1.042 (SGD6250/6000 shares)

Recently what Genting SP/Genting Bhd/GenM, YTL/YTLE and MPHB/U-Mobile Have in Common?

1. YTLP/YTLE: Possibility Of Using YTLP As A Vehicle To Spearhead The Group Venture Into WIMAX Services (YTLE).
2.Genting SP/Genting Bhd/Genting Malaysia: Rights Issue By Genting SP!!! Its Purpose!!!
3. MPHB/U-Mobile: The Way The Deal Was Crafted Gvie Rise To Speculation That It Is One Friend Helping Another!!!

YTLP/YTLE
dated Sept 2009 ...

YTLP’s announcement on June 2009 that it had bought a 60% stake in YTL Communications Sdn Bhd for a mere RM300,000 from YTL E-Solutions Bhd (YTLE) barely made a blip on investors’ radar screen.

Indeed, the amount paid was a drop in the ocean when you take into account the sprawling size of the YTL empire. Thus, not many paused to think why Malaysia’s IPP was acquiring a subsidiary whose core business was wireless broadband.

So the question now is, what is the rationale for the acquisition? How does it fit into YTLP’s future plans? And of all the companies in the group’s stable, why YTLP and not YTL Corp Bhd. YTL currently holds 51% of YTLP and 74% stake in YTLE.

YTLP’s plans for its new subsidiary are still unknown and company officials were not available for comment. However, a widely held view among is that the move was to tap into YTLP’s strong cash reserves.

Industry observers were surprised by the possibility that YTLP may be used as a vehicle to spearhead the group’s venture into WIMAX services.

The biggest concern is that YTLP’s dividends may be at risk. YTLP is known for its good dividends, offering a yield of between 55 and 7% over the past two years (2007-2008).

Capex for WIMAX is still uncertain, but assuming RM500 million per annum as reported, this will reduce its free cash flow estimate by 50% to 70% as WIMAX is not immediately income generative.

*** To recap, YTLE was one of the four operators awarded WIMAX license by MCMC. YTLE has yet to roll out the service, but has plans to spend RM2.5 billion on WIMAX over then next five years, with RM1 billion to be spent in the first year alone ***

So why was YTLP picked over others in the YTL group?

Industry observes say YTLP is the most logical candidate after taking into account the cash positions of all the YTL companies. YTLE certainly does not posses the financial cloud to fund such venture at this point in time.

The reason YTLP was a favourite was its solid fundamentals, anchored by the only take or pay power purchase agreement in Malaysia. Aside from power YTLP is also the concession holder for Wessex Water in the UK.

For its FY2009 ended June 30, 2009, its deposits, cash and bank balances stood at rm5.97 billion. In comparison, its parent YTL’s cash pile was RM430 million while YTLE’s cash amounted to Rm1.13 million.

Despite a net gearing of 2.8 times, YTLP’s debts are mostly on a project financing basis serviced by the free cash flow of the respective IPPs and Wessex. Full conversion of warrants due in Jan 2010 will raise a further Rm980 million.

So YTLP definitely has the funds to drive the YTL group plans for WIMAX. However, will such a move go down well with YTLP’s shareholders and is it truly in the best interests of Malaysia.

But for YTLW, the sand in the its hour glass for rolling out WIMAX is fast running out. The MCMC has the right to take the spectrum back if the players are unable to meet the required 25% coverage by 2010.

Industry observers see this as a negative development as investors have viewed YTLP’s utilities earnings as defensive. Instead YTLP is extending from a business that provides recurring income streams to one with highly uncertain revenues – a new telecoms operation, which has yet to fully kick off even in the developed countries.

Genting SP/Genting Bhd/Genting Malaysia
dated Sept 2009 ...

The question weighing heavily on investors is its ultimate effect on parent Genting Bhd. Genting Bhd being the majority shareholder, how will Genting Bhd finance its portion of the rights issue?

Will there be more cash calls by its Singapore unit, given that the latter just had one two years ago?

Will it tap Genting Malaysia Bhd’s – more than RM5 billion cash hoard?

Most agree that Genting Bhd will have little problems in raising borrowings to answer the cash call.

However, other possibilities have also been bandied about. This includes Genting Bhd making its own cash call, but industry observers feel that this would be an unlikely move. But most seem to concur that 48.5% owned Genting Malaysia cluld end up playing a role.

This is because at company level, Genting Bhd holds only Rm310 million in cash, deposits and money market instruments as at end FY2008. Genting Malaysia in comparison held RM3.2 billion for the same corresponding period. As at end June 2009, Genting Malaysia’s cash holding amounted to Rm5.1 billion.

The notion of Genting Bhd tapping cash rich Genting Malaysia is an intriguing one, given that it can be done in a number of ways. There is always an intercompany loan or upstreaming cash in the form of dividends alternatively Genting Bhd could raise convertible bonds on its stake in Genting Malaysia.

Doing an interco with Genting Malaysia are unlikely to look into kindly on such an exercise.

But what could possibly appease Genting Bhd shareholders is if the company took the upstreaming cash route. As cash rich Genting Malaysia is, the one sticking point was Genting Malaysia’s dividend payout. Most agreed it was decent, but payout had been very little as Genting Malaysia is said to be hoarding cash for M&As opportunities. But it is unlikely that Genting Malaysia will suddenly give a bumper or special dividend.

Tapping Genting Malaysia’s cash hoard will not be the best use of funds, given management repeated intentions to undertake M&A that will likely generate a bigger earnings accretive effect.

However, industry observers do not rule out a combination of debt and tapping Genting Malaysia’s cash pile to cap Genting Bhd’s gearing ratio. If Genting Bhd chooses to fund the exercise purely by borrowings with a financing cost of 7%, forward earnings could be cut.

Another possible impact on Genting Malaysia from this exercise is not just monetary. To recap, Genting Singapore says in its statement to the SGX that it plans to use 60% of the funds from the rights issue for expansion. It would appear that Genting Malaysia’s role as the group’s flagship M&A vehicle is under threat as its related companies may be vying for similar assets.

By Moody’s Investor …
Moody’s Investors Service does not expect any immediate impact on GENTING BHD’s Baa1 issuer and senior unsecured debt ratings or on the stable outlook, following the announcement that its 54%-owned subsidiary, Genting Singapore plc, is to raise gross proceeds of up to S$1.63 billion (RM3.99 billion) through a rights issues.

The rights issue was fully underwritten by eight banks and the proceeds would be used by Genting Singapore for future investments and working capital requirements. Moody’s expects Genting will fund its portion of the investment, about S$840 million, by a combination of debt and internal reserves.

Expecting Genting will have to raise approximately S$600 million of debt to fund its portion of the rights. While this will increase its gross debt at the issuer level, the rights issue will improve Genting Singapore’s liquidity positions and to some extent reduce its near-term debt funding requirement.

On a consolidated basis, Genting’s net debt position will modestly improve as a result of the equity contribution from minority shareholders.While part of the proceeds from the rights issues were reserved for potential acquisitions, Moody’s learnt that there was no immediate investment target.

The core rating driver for Genting remains the successful execution of its business strategy and ramp-up of the integrated resort project at Sentosa, Singapore.Partly mitigating the concerns, construction risks associated with the Sentosa project have been lowered, as 60%-70% of the physical construction has been completed, while phase I of the project will likely open on time in 1Q 2010.Moody’s last rating action with regard to Genting occurred on Aug 20, 2007, when the company’s Baa1 issuer and debt ratings were affirmed with a stable outlook.

MPHB
Dated Sept 2009 ...

MPHB foray into the telecoms sector has raised many eyebrows. Skeptics wonder why a company with gaming as its forte is getting into the telecoms sector. More startling is that the entry is via smallish U Mobile Sdn Bhd at a time when giants such as Japan’s NTT DoCoMo and South Korea’s KT Corp are exiting.

What does MPHB see in U Mobile that KT and DoCoMo did not? Could MPHB have done it via another vehicle instead of exposing the company to risks?

The way the deal was crafted also gives rise to speculation that it could be one friend helping another.

MPHB was buying a 3.9% stake in U Mobile. It also has a “put’’ option from AmBank (M) Bhd to buy an additional 41.63% stake in U Mobile for RM280mil within 13 months should there be a default on a financing facility taken to part pay the Japanese and South Korean investors. MPHB declined to disclose the amount MPHB paid for the 3.9% stake.

If the put option is exercised, MPHB gets 45.53% stake in U Mobile for a song in comparison to the US$200mil (RM750mil) that U Television Sdn Bhd (UTV) has to pay the Japanese and South Koreans for their combined 33% stake.

U Mobile is one of four 3G spectrum holders in the country. It was assigned the spectrum in 2006 and April 2009 got two foreign investors – DoCoMo and KT – to take a combined 33% stake in the company. The remaining 67% in U Mobile is held by U Television Sdn Bhd (UTV), a company controlled by businessman Tan Sri Vincent Tan.

DoCoMo and KT each held a 16.5% stake and when exiting U Mobile, cited differences of opinion with other shareholders over management. The two are selling their U Mobile stakes to UTV for the original amount they paid, US$100mil each, or a total of US$200mil.

To pay the Japanese and South Korean investors, UTV took a financing facility from AmBank to part finance the payment and pledged U Mobile shares as collateral. MPHB’s entry into U Mobile is as a guarantor for the pledged shares; so if UTV defaults in repayment, MPHB can exercise the put option to buy the 41.63% stake in U Mobile for RM280mil.

If there is no default, MPHB will be left with a 3.9% stake in U Mobile, but ideally it would like to have about 10%-15% stake, the strategic investor about 30% and UTV the remaining 55%-60%.

The two friends here are Tan Sri Vincent Tan – who controls UTV, which in turn controls U Mobile – and Datuk Surin Upatkoon, the managing director of MPHB. Surin has an effective 34% stake in MPHB.

Tan asked Surin to take up the U Mobile shares. Surin agreed but not before getting the MPHB board’s nod. It is a friendly deal. A director of MPHB pointed out that “it is done at arm’s length.’’ MPHB views the deal as “not to help a friend, but an opportunity to get into the telecoms sector.’’

For MPHB it is a chance to get into a new business where the downside risk is minimal; U Mobile has a 3G spectrum whose potential has yet to be exploited; there is room for further growth in Malaysia’s celco sector and margins earned by celcos are the highest in the region; and this investment could be income generating even though there may be some hurdles in partnering U Mobile.

That is why MPHB took up the put option and being an investment holding company, took the plunge itself instead of using another vehicle. MPHB is also involved in the stockbroking, insurance and property sectors. So as Surin puts it, it is not solely a gaming company.

Surin is excited about the prospects the telecoms sector holds despite the huge capital expenditure needed and the long gestation periods. In fact, he has been involved in the sector via his effective 17% stake in Thailand’s Shin Corp.

Whatever the deal, what is clear is that U Mobile needs a strategic investor with telecoms expertise to drive the company forward. There have been preliminary talks and Surin has his own list of potential investors for this purpose.

The strategic investor should be given total control to develop U Mobile into a serious player in the cellular services market. Set up in 2007, U Mobile offers limited coverage and services, rendering it unable to steal market share away from the larger service providers. It currently has less than 1% of the cellular market that has more than 28 million subscribers.

With growing competition, celcos must keep their promises of quality services, cost-effective packaging and timely delivery or risk their customers switching service providers. Celcos should realise that if they cannot deliver, they should let someone else do the job. For U Mobile, the time has come for it to get its act together.

Meanwhile, preliminary talks are said to have taken place between U Mobile Sdn Bhd’s major shareholder and a Singapore telecommunications company for the latter to come in as a strategic investor with up to 30% equity stake in the former.

Names such as StarHub and SingTel have been bandied around and while the former seems a more likely candidate, the parties are not willing to confirm it. At this juncture, a lot depends on the direction of the talks and the due diligence that will be conducted on U Mobile.

But there is no denying that U Mobile needs a strong strategic investor to drive it forward to offer more than voice telephony. This is necessary since Japan’s NTT DoCoMo and South Korea’s KT Corp called it a day at U Mobile earlier Sept 2009.

U Mobile has declined comment on purported talks with any strategic investor. Multi-Purpose Holdings Bhd (MPHB), which this week bought 3.9% stake in U Mobile and has a “put” option to buy an additional 41.63% stake, also declined comment. At this stage MPHB is only involved in the put option.

Sunday, September 13, 2009

Market Commentaries & Technical Analysis as at 13 Sept 2009

Watch List In The Coming Week
1. 2010 Budget Announcement In Oct 2009;
2. Refinement To The National Auto Policy In Oct 2009

Market Commentaries
A hush market in the third quarter of 2009 is reflected by a slowdown in the Muslim fasting season and a typically weak September 2009 in the equity markets. The pleasant 2Q09 results season is already priced in by a rushed recovery since March 2009.

Expecting a seasonal economic slowdown and less newsflow on mega project tenders and awards during the Muslim fasting season that started on Aug 22 2009.

Meanwhile, improving economic fundamentals have been discounted by institutional investors who have already rushed in to raise their equity weightings since March 2009.

Nevertheless, downside is limited given the ample domestic liquidity, led by the newly established government-backed Amanah Saham 1Malaysia Fund, which raised more than RM2 billion in August 2009. 1Malaysia’s fund manager Permodalan Nasional Berhad says that with its recent fund-raising efforts, it has raised about RM15 billion year-to-date (Sept 2009).

The key event in 3Q09 — the Budget proposal announcement in October 2009 – is unlikely to provide much excitement. However, key events in 4Q09 should include mega project calls for tenders and awards (LCCT, LRT extension), which will benefit the construction and building material sectors, and refinement to the National Automotive Policy, which should reinforce support for national car producers like Proton.

The dramatic recovery to stability since March 2009 is underpinned by the following: a) easing losses and fund-raising needs by banks globally, b) sharply narrowed US credit spread, c) significantly lower risk premium in emerging markets as reflected in the JP Morgan Emerging Markets Bond Index, and d) steadfast recovery in US housing transactions and median pricing.

Improving domestic indicators are reflected in the following: a) rebounding employment and consumer sentiment indices; b) modest improvement in fast-moving consumer goods consumption, and c) improved sales of durable goods (including auto sales), particularly for newly launched mid-tier to high-end residential properties.

Expecting modestly improved q-o-q earnings in 3Q09, in line with global trend.

However, not completely out of the woods. We continue to subscribe to the view that global economies will sustain a much more modest economic growth compared with the period prior to the emergence of US subprime loan problems.

In particular, expecting US consumerism to remain weak — although there could be a temporary recovery in the Christmas season — as high unemployment rates and job uncertainty continue to encourage high savings rates.

Market consolidation underway (Sept 2009) due to market’s low value proposition. KLCI is already trading well within its historical forward PE band of 12-17x. The KLCI trades at 14.8x 2010 earnings, in the middle of its post-Asian financial crisis PE range. It also trades (Sept 2009) at a current P/B of 2.0x vs the historical nine-year average of 1.7x (based on Bloomberg).

Expensive relative to region; non-strategic foreign ownership to stay at 22%. Despite improved macroeconomic and political conditions, market valuations (Sept 200() are not cheap enough to entice foreign investors to rush in, although there are still some compelling values among mid-caps.

FBM KLCI Crossing The Psychologically Important 1,200-point Level …

The local stock market’s benchmark index breached the psychologically important 1,200-point level (Sept 11, 2009) driven largely by the global liquidity run.

Investor sentiment in the region has been bolstered by a number of factors including the weekend decision by G20 finance ministers to keep economic stimulus efforts in place as well as a slower decline in US job losses.

Nevertheless, cautious remains on the local stock market. While it seems to be a bull run, the fundamentals that drive a bull market appear absent. The index is currently (Sept 2009) where it was at the beginning of 2007, the year of the bull run, but the current (Sept 2009) backdrop for the fundamentals that would support current valuations remains very “touchy”.

In 2007, we had a great commodity market, fantastic exports and robust earnings – where are all of that now (Sept 2009)?

Liquidity, however, may be sufficient to keep the market on an uptrend for a while but it would be difficult to peg the market’s fair value because of this. The G20 countries said they would continue to flood the system with liquidity so the economy doesn’t tank, that’s what investors wanted to hear.

Technically, most of the short-term indicators are painting a positive landscape, with the weekly moving average convergence/divergence (MACD) histogram resuming the upward expansion against the weekly trigger line and the daily MACD triggering a “buy” signal.

The FBM KLCI’s successful penetration of the 1,200-point monster resistance, supported by bigger trading volume indicates the end of the recent sideways congestion phase and the start of a pre-Raya rally.

Betting On A Second Leg Recovery (Sept 2009 Onwards) …

On a cautious note, even as the global economic outlook is increasingly rosier, the next challenge is to sustain the recovery.

Sustaining the recovery will require some rebalancing acts, in that the global economy should refocus towards more US exports and more Asian imports (a reverse from the present scenario). The rationale is that the crisis has left some “deep scars” that will affect both supply and demand in the global economy for many years to come.

Given that the current global economic (Aug 2009) rebound is supported mainly by massive fiscal stimulus measures, the concern is that the rebound may not be sustained once the allocated spending is exhausted. Most economists see the factors driving the current economic rebound as temporary in nature.

So, the main call is for Asia to create its own demand to reduce its reliance on exports for growth, while at the same time, generate new opportunities for international trade.

Asian governments, including that of Malaysia, have announced earlier that they planned to create new economic models to ensure the future sustainability of their economies. Malaysia is expected to announce the outline of its new economic model towards the end of the year (2009).

Meanwhile, some economists are also concerned about the growing fiscal deficits faced by most governments as a result of their massive stimulus packages. Higher taxation – unpopular, but perhaps necessary – as the solution.

Although a recovery is underway, a sustained recovery will likely be slow and a follow-through recovery is needed. A stronger global recovery in 2011 with 2010 merely a getting-out-of recession phase.

2010 would a be “year of global interest rates hike” with India and Indonesia to be the first few to make a move. There will be negative forces pushing the inflation higher next year (2010). Loose monetary policies, a revival in commodity prices and a higher budget deficit would push inflation higher.

If there is any rate action, it will be in baby steps and probably in the second half of 2010. Did not foresee a resurgence in high inflation now (Aug 2009).

High savings and foreign reserves exceeding US$4.3 trillion had strengthened Asian economies’ external position” and that “the region is poised to ride or even lead the next economic boom.”

There was a need to reinvent Asia and make a shift from external demand to domestic demand.

Asia had escaped the “bullet” of recession and that higher interest rates would not have a big impact on its recovery. Moving from the current 2% to 3% will not impact the market so much.

The best time to return to the market was three months ago (April – May 2009), but the risk of getting a double-dip was a lot lower now (Aug 2009) than three to four months ago. It is possible to return to the 2007 level but don’t know by when. Some companies might recover and some might not. Some have even surpassed their 2007 peak. It is unlikely everyone will recover?. There will be some winners and losers.

Investors are also encouraged to continue investing in equities on expectation of a second round of recovery. The market moves ahead of the real economy by six to nine months. The recent (July – Aug 2009) positive market performance has moved in anticipation of the first round recovery. From here (Aug 2009), a positive uptrend that investors can still partake of in anticipation of the second leg of the recovery

Corporate Earnings Of Malaysia … Going Forward

In the midst of a global market correction, intensifying AH1N1 flu virus and political uncertainties, there was some splash of good news on the Malaysian front. The second-quarter 2009 earnings season, which only just got wrapped up (Sept 2009), pointed to one direction – corporate Malaysia may be back on positive earnings territory.

For those who reckoned the second quarter 2009 would echo the weak first-quarter report card 2009, they welcomed the upside surprise.

One indicator for a positive outlook for equities would be the upgrade to downgrade ratio, which turned positive to above 1 time for the first time since the fourth quarter of 2007.

It rose from 0.6 time in May 2009 to a hefty 1.6 times, the best since the fourth quarter of 2006. This implies that far more companies beat expectations than the reverse. Upgrades also exceeded downgrades for the first time since the second quarter of 2007. The last time this happened in the fourth quarter of 2006, the bull market lasted for a year.

With green shoots sprouting out during the May and August 2009 results seasons and the second-quarter 2009 gross domestic product pull-back coming in lower than expected, the logical conclusion to draw is that the worst may be behind.

The return to positive territory is earlier than expected. It is expected to happen in the third quarter 2009. The positive earnings momentum is good news for the stock market, as the last time earnings turned positive after being in the red was in the second quarter of 2006. The stock market had then rallied from the fourth quarter of 2006 onwards.

The second-quarter 2009 results were overwhelmingly stronger than expected. Not only did the pace of earnings contraction slowed down but the 12-month forward core market earnings saw further upgrades in July to August 2009, with banks driving the overall upgrade in market earnings.

Given the positive trajectory, most are already looking forward to 2010 earnings and as such, the third-quarter 2009 results may somewhat come off as a non-event unless, of course, there are significant surprises. In fact, some expects to see more downgrades in the third quarter 2009 as realisation of a longer drawn-out recovery sets in.

Earnings recoveries and growth expectations are positive to stock prices, especially when earnings momentum is strong. With the FBM KLCI having rallied 40% from the March 2009 trough, a sustained re-rating will not only require earnings delivery but further consensus EPS upgrades is also equally critical.

It is thus important to closely monitor the earnings revision trend in September to October 2009 leading up to the third-quarter earnings season.

Technical Analysis

The daily slow-stochastic momentum index triggered a short-term sell at the top on Thursday, but it can’t be confirmed as yet.

In contrast, the daily moving-average convergence/divergence (MACD) histogram expanded positively and steadily against the daily signal line to stay bullish. It issued a buy on Tuesday.

Meanwhile, the 14-day relative strength index continued to linger in the bullish area. Weekly measurements were looking great, with the slow-stochastic momentum index flashing a buy and the MACD indicator resuming its upward expansion against the weekly trigger line.

After erasing the recent peak and overcoming the 1,200-point monster barrier, Bursa Malaysia’s principal index moved forward to establish a new high for the year (Sept 2009), hitting 1,210.36 session amid improving liquidity, aided largely by the strong performance of overseas equities.

A positive breakout has been detected, signalling an end to the three-week-old sideways consolidation phase. Going forward, it usually would set the stage for a rally, and based on the daily chart, the key index may reach the returning line of the existing upward channel, now (Sept 2009) resting at approximately 1,280 points.

The next upper strong resistance is envisaged at 1,300–1,305 points. However, given the modest volumes, the speed of ascent may be gradual, unless there is evidence of aggressive third-quarter 2009 window-dressing activities coming up.

Before arriving at the upper boundary of the existing channel, the FBM KLCI will encounter resistance at 1,220 points, 1,240-1,250 points and 1,260 points.

Technically, the indicators are bullish, especially the MACD, implying the market is likely to scale new heights, provided there are no nasty surprises from abroad, particularly the United States and China.

Initial support is seen at 1,196.46 points, followed by the 14-day simple moving-average (SMA) of 1,183 points, the 21-day SMA of 1,178 points, the 50 day MAV lines (1138). The 200 day MAV line is at 1106.

The lower floor is resting at 1,160 points and the recent bottom of 1,153.97 will now act as the base.

Wednesday, September 9, 2009

Understanding Rights Issue ....

There have been a spate of rights issues by listed companies recently. These changes are no doubt bought about by requests from companies. So, what exactly are rights issues?

Rights are essentially a way for companies to raise capital (money). Fresh capital is essential for a company if they need more funds for their business operations. In the current (2008 – 2009) economic climate, more and more companies find that they require more funds. There is also the problem of existing credit lines of companies being reduced, thus increasing their need to raise capital.

Traditionally, there are two main ways for companies to raise capital. Via debt or equity.
Debt can be raised through bank borrowings or the issuing of bonds. The problem with bank borrowings now (2009) is that banks are unwilling to lend money. And if they do agree to lend, the interest rates are higher than normal. For bonds, there might not be enough takers.

Equity can also be raised through issuing preferred shares, private placement of shares or rights issues.

In a private placement, shares are issued to a selected group of people at a particular price. The problem with this method is that the traded price of many companies are at very low levels now (2009). Existing shareholders will be extremely unhappy if a private placement is done at low prices and their shareholdings get diluted. It would be like daylight robbery.

A rights issue overcomes the problem of a private placement by offering all shareholders an equal chance to subscribe to the new shares at the low price. While this might seem fairer than a private placement that would benefit only selected people, it does come with its disadvantages to existing shareholders.

This would be better illustrated with an example.

Lets say you own 1000 shares of company X and the shares were purchased at $1 each. The company has 100000 shares in circulation so you own 1% of the company.

Suppose you were only willing to commit $1000 of your capital when you purchased the shares. And that is the amount you will lose should the company go bust. Your liability is limited to your initial capital.

Now company X decides to issue a 1 for 1 rights at a price of $0.80. Assuming you subscribe to your entitlement, you would have paid an additional $800 to purchase 1000 shares.

While the number of shares you own has now increased to 2000, your percentage of shareholdings actually remain unchanged. 2000 out of 200000 shares is still 1%.
What this means is that you have been “forced” to pump in more of your money just to maintain your ownership of the company. Your capital at risk has also increased from $1000 to $1800. This is like the reverse of issuing dividends.

You have the right to refuse to subscribe for the rights of course. If you do nothing at all, your initial shareholdings of 1000 shares will become only 0.5% after all the new shares are issued. This would be a huge mistake as the very least you should have done is to sell off the rights to recover some capital if you are not going to subscribe for the new shares. This will help to compensate slightly for the dilution of shares.

The rights of shareholders are these few options:
1. Subscribe to the rights based on the amount of money needed by the company. You are at the mercy of the terms of subscription price as well as number of shares you can subscribe to.
2. Sell off the rights, keep the shares and have your shareholdings diluted.
3. Sell off the shares before they go ex-rights.

Sometimes, an investor could feel that he is having no rights as none of the options are attractive. For example, an investor could be pretty positive about the company but he doesn’t have the cash on hand to subscribe to the new shares. Neither option 2 or 3 would be good for him.

So, faced with the prospect of a massive dilution of my shares, you had to decide whether to sell off your holdings (at firesale prices).

Renounceable - A renounceable rights issue allows for shareholders to sell away their rights. A non-renounceable rights, on the other hand, cannot be sold.

Underwritten - A rights issue that is underwritten ensures that all the required funds are received regardless of the number of subscriptions by the shareholders. The underwriter will have to subscribe to any leftover rights. In return for this risk, a fee has to be paid to the underwriter. In cases where an underwriter cannot be found, it is common to get a majority shareholder to agree to subscribe to the excess rights. Another way is to allow for all shareholders to subscribe to the excess rights.

BursaTweets