Why Gold Behave Differently this Round? (May 2012)

When market sentiment was bearish, equities market would slump, just like what we seen for past few days. Global markets suffered yet another blow due to the uncertainties surrounding EU, where Greece may potentially exit European Union. Would Greece finally exit EU? This is an interesting yet important questions for investors.

The headlines have been on the EU crisis recently, overshadowing the highly speculated Malaysia general election's date. Well, now would be a tough time for our Prime Minister to call on an election amid the gloomy global outlook. Maybe, the best time to hold an election already gone!!!

Anyway, another interesting issue was the slump in Gold prices. Curiously, many investors questioning the different trend for gold prices. Normally, it will spike up along with the risk level of global equities market, together with USD. Theoretically, gold and USD would over-perform other asset classes during bad times. Yes, USD had already appreciated against a basket of currencies for a record 12 straight days. However, bullion erased its 2012 gains this week while investors are reducing gold holdings for a 3rd month, the longest stretch since 2004.

So, which is the Safe Heaven now?

Based on that fact, it seems like USD is the only safe heaven asset class that investors trusted now. Frankly speaking, Finance Malaysia don't know why gold behave differently this round. Anyway, we came out with the following potential explanations:

1. Actually, we really don't know how to value gold. Is it expensive or cheap? There is no benchmark on gold prices. Because of that, gold price tends to be speculative in nature. Currently, hedge funds are the least bullish on metal since December 2008, and they are the one who drove up gold prices. Is this the time for them to take-profit?
   
   
2. While there is no benchmark for gold, the strength of USD was based on US economy. We can't deny that US is recovering now, amid at a slow pace. Also, without QE3, why USD should stay low? With that reason, investors might chose USD than gold, as the potential is greater.
   
   
3. Please don't forget that many European governments had the greatest gold holdings in the world. For sure, ECB needs to pump in more liquidity into market. Where does the money comes from? When you're holding many gold and you need money, what would you do? Of course, cash in by selling your golds.

Even said so, many analysts are predicting a rebound for bullion. While RBS, ABN Amro and Barclays cut their gold forecast in May, Goldman expects prices to rise by 25% to $1,940 an ounce in 12 months. Billionaire investors, George Soros is favoring gold and he may gave gold investors the confidence. Good Luck.

New Fund: Hong Leong Hong Kong Equity Optimizer Fund

Finally, there is a new fund from Hong Leong Asset Management (HLAM). The fund is designed to capture the vibrant growth of the Hong Kong capital market. The Hong Kong market has one of the world's leading securities exchange in the Asian region which is one of the fastest growing capital markets by market activity and new listings

Hong Kong, dubbed as Asia's most liquid exchange, acts as a key platform in the internalization of the Renminbi (RMB) currency. This allows investors to participate in the RMB appreciation potential via investments in equities and bonds.

The new Hong Leong Hong Kong Equity Optimizer Fund, being a growth fund, will invest primarily in equities and equity-related securities that are listed on the Hong Kong Exchange. Meanwhile, the balance may be invested in domestic and Hong Kong fixed income securities.

To achieve its investment objective, the Fund adopts an actively managed investment strategy which may include investment in common stock and depository receipts of companies, unit trusts funds, exchange traded funds (ETFs) and real estate investment trusts (REITs).

The Offshore Investment Adviser

GuocoCapital Limited (GCap) has been appointed as the offshore investment advisor for the Fund, in which GCap shall provide advice on the Manager's equity and equity-related securities in Hong Kong market. GCap is an established brokerage house with a diverse clientele, offering a full range of services, including modern delivery channels such as the Internet and the Automated Trading Hotline (IVRS). GCap is a wholly owned subsidiary of Guoco Group Limited which is a listed company on the Hong Kong Stock Exchange.

The Fund is suitable for investors who:

• have a medium-to-long term investment horizon;
• wish to participate in potential investment opportunities in the Hong Kong market;
• are seeking primarily capital growth and to a lesser extent income; and
• are willing to accept higher risk in their investments to obtain potentially higher returns

Source: HLAM

Click here to download the prospectus

New Fund: OSK-UOB Multi-Asset Recovery Strategy Fund

With the ongoing global economic recovery and the various opportunities created from the vast stimulus packages put forth by governments around the world, we are currently witnessing differing levels of economic expansion across all economies. And different asset classes such as equities, bonds, commodities, currencies and cash perform differently under different stages of economic expansion.

Hence, OSK-UOB now offer investors a fund that will capitalize on the potential opportunities arising from the different market conditions resulting from this economic expansion phase by dynamically investing in multi-asset classes that are expected to do well in specific market conditions.

The OSK-UOB Multi-Asset Recovery Strategy Fund is a fund-of-funds which aims to achieve long term capital appreciation by investing in a portfolio of exchange traded funds (ETFs).

The fund aims to achieve its objective through a portfolio of ETFs chosen from 5 major asset classes, i.e equities, bonds, commodities, foreign exchange (currencies) and money market instruments selected from the global markets. The fund's name reflects the fund's strategy that capitalize on the recovery of the global economy by dynamically investing in multi-asset classes through a portfolio of ETFs.

How much return?

This fund is benchmark against an average annual return of 8.00% over the long term. This is the targets of the fund.

Investor Profile?

This fund is suitable for investors who:

• want to capitalize on the recovery of the global economy with an investment that invests dynamically in multi-asset classes through a portfolio of ETFs
• seek capital appreciation
• have a medium risk tolerance
• have a long term investment horizon

Source: OSK-UOB Unit Trust Management Bhd

Click here to download prospectus

3 Hints given by BNM (16 May 2011)

Bank Negara Malaysia (BNM) hiked the OPR by 25bps to 3% on 5 May as what some analysts said "Surprising". The OPR hike was a pre-emptive strike on inflation pressures as the output gap closes. Many analysts are expecting hikes to resume only in July as inflation remains largely supply side driven. However, BNM seems to act before demand pull pressures dominate and before the output gap turns positive. In our view, the OPR and SRR hike is indicating two things here.

Hints #1

Inflation is going to threaten the Malaysian economy in the near-term (at least). Recent increase in prices of petrol and sugar will further accelerate the numbers. With ongoing efforts by Government to reduce the subsidies, inflation numbers for sure will gone up.

Citi Research: Regional Policy Rates as at 10th May 2011

Hints #2

Related to inflation also, BNM is trying to reduce the increasing food and resources prices. If we can reduce the import price, by having a stronger currency, this would be a wise move. So, BNM is trying hard to cramp down our money spent on these import items. Not by reducing the quantity of imports, Malaysia are buying at a cheaper price. How to that? Of course, by raising the OPR rates, which will lead to a stronger currency RM.

Citi: Regional Currency Performances as at 10th May 2011

Hints #3

Maybe, BNM foresees that Malaysia economy is going to face some real challenges (Asian financial crisis?). If the situation really turns bad in a year or two, how are we going to reduce the rate to spur economy given the current low rates? We must have room for BNM to decrease the rate by that time. That's why BNM so pro-active now?

Extractions from BNM monetary policy statement

As expected, Bank Negara Malaysia (BNM) decided to maintain the Overnight Policy Rate (OPR) at 2.75% yesterday. This was the 3rd time in a row that BNM left it unchanged. Are there any hints by BNM on Malaysia's economy this year? We can explore the "hidden messages" from the monetary policy statement as below:

Regional Front:

• While advanced economies continue to register modest growth, most emerging economies have experienced strong growth.
• For Asian region, domestic economic activity continues to support the growth momentum amid weaker external demand.
• Shifts in global liquidity have resulted in significant capital flows into the emerging economies, in particular, Asian region, and have brought with it risks to macroeconomic and financial stability.
• The region is also being affected by global inflationary pressure arising from the higher commodity and food prices.

On Malaysia:

• Recent indicators point towards a sustained expansion in private sector activity.
• External demand, however, was affected by the slower global growth.
• Malaysian economy is expected to grow at a steady pace in 2011, underpinned by continue firm expansion in domestic demand.
• Private consumption will be supported by sustained employment and income growth.
• Private investment activity will be supported by domestic-oriented sectors and the expansion of new growth industries.

 On Inflation:

• Domestic headline inflation rose towards the end of 2010 albeit remained low at 2.2%.
• The increased was mainly on account of higher food and energy prices.
• Prices are expected to increase at a modest pace in the coming months, driven primarily by rising global commodity and food prices.
• The assessment is that inflation will continue to be driven by supply factors with limited evidence of excess demand exerting pressure on prices.

BNM Conclusions:

• BNM considers the current monetary policy stance as appropriate and consistent with current assessment of the economic growth and inflation prospects.
• The stance continues to remain accommodative and supportive of economic growth.
• Going forward, additional policy tools such as the statutory reserve requirement (SRR) and macro-prudential lending measures may be considered to avoid the risks of macroeconomic and financial imbalances.

Finance Malaysia view:

• We expected inflation to rise at a faster pace in 2011
• BNM to continue hiking interest rate in second-half 2011
• OPR potentially be raised by 50-75 basis points to 3.25-3.50%
• Bank's loan growth will slow if SRR was raised

Source: BNM website

For full BNM monetary policy statement, click here.


Related posts:
70% Loan to Value
How BNM OPR hiking affecting the market?

Why ASEAN will failed to host World Cup?

It was reported that ASEAN, which comprises Brunei, Cambodia, Indonesia, Laos, Myanmar, Philippines, Singapore, Thailand, Vietnam and Malaysia, is going big in World Cup. Since all of these countries did not manage to qualify on the pitch, they're going through back-doors.

ASEAN is going to bid for FIFA World Cup 2030 !!!

Wow... When I first heard about this news, I am very excited. But, after calming down and figured it out, I doubt ASEAN could succeed in bidding the world's most popular event because of the following reasons. Second surprise came, when Malaysia was said to lead the pack for the bidding. Malaysia, the unlikely team which became the winner of ASEAN cup recently, may found ourselves "syok sendiri".

Common Sense

• Our level is nowhere near the World Cup level. Although we still have plenty of time before 2030, ASEAN needs much efforts to up the level, at least on par with South Korea.
• To select a team who represents all the hosting countries, it would be very difficult. By then, the supposedly ASEAN team will became "rojak" team. Sure, there will be heated arguments on which players shortlisted and how many players from each countries.
• Each countries have their own identity and culture, which needs to be show casts to the world given the world wide coverage. Would Malaysia want to lose our color?

Economic Sense

• From the countries involved, who will be the chosen host? And, where will be the grand final? Because, that important locations would determine the profitability of the multi-billions event.
• Since ASEAN do not have a common currency regime, some countries may lose out to another due to different currency exchange rates.
• How much costs would each members shared?

Finance Malaysia suggests that Malaysia could bid for the World Cup by teaming up with Singapore. Two is better than the whole ASEAN. Of course, if can, we can host the entire event ourselves.

Related posts:

World Cup: 7 investment tips

Sports Betting: Kaki Bola to Kaki Judi?

Top 3 Commodity Picks for 2011

Forget about supply and demand issue of commodity, everyone knows the main mover now is Emerging Market, especially China. As long as US economy not yet recovered, China was expected to continue its great appetite to consume commodities globally. Not for its consumptions, but mainly because of China's currency management.

China, already the largest creditor of US by holding USD which was slipping with a series of quantitative easing programs, would definitely forced China to diversify its holding elsewhere. However, China would hand-picking according to its own local demand. As such, Finance Malaysia forecasts those commodities which were used heavily in construction, infrastructure, production will continue to perform in 2011.

 

Top pick #1: Palladium

One in four goods manufactured today either contain platinum group metals or the platinum group metals play a major role during their manufacturing process. Palladium was used in many electronics including computers, mobile phones, multi-layer ceramic capacitors, LCD televisions.

Top pick #2: Silver

Being a precious metal, silver is used to make ornaments, jewelry, high-value tableware, and  currency coins. Today, silver metal is also used in electrical contacts and conductors.

Top pick #3: Copper

About 98% of all copper is used as the metal, taking advantage of distinctive physical properties - being malleable and ductile, a good conductor of both heat and electricity, and being resistant to corrosion. It is widely used in piping for water supplies, refrigeration and air conditioning.

Why China raise interest rate? And, what's the effect?

Yesterday, China surprisingly raised its interest rate by 0.25% as follows:

- 1 year lending rate from 5.31% to 5.56%

- 1 year deposit rate from 2.25% to 2.50%

Why China raise interest rate?

1. To cool down the over-heating property sector.

2. Combat inflation

3. Low liquidity in the banking system

While inflation was hovering around 3.5% currently, even though the deposit rate has been raised, the net real interest rate is still in negative territory (3.5% - 2.5% = -1.0%). This is one of the main reason why Chinese were going all out to invests, especially in real-estate, due to its low yield if sitting in the bank (even lower than Malaysia).

However, China would be facing another problem...

Raising interest rate would attract capital inflows, which could dampen the purpose of containing inflation. Foreign investors view Chinese renmimbi as undervalue, mainly due to interventions by Chinese government. The latest news could ignite a fresh round of thoughts, worsening the current situation, pushing renmimbi higher and faster.

In fact, China should target it's main problem specifically - real estate. Inflation there is mainly caused by high flying properties prices. Hence, measure such as property gain tax should be introduced first, before raising interest rate, to avoid further attracting inflow of hot-money.

Affecting Malaysia?

Given that China is one of the largest trade partner with us, Malaysia could see a surge in capital inflow also. In fact, the whole region will experience the same fate of stronger currency, making our export to western countries more expensive. Anyway, I believe that we can offset the negative effect with China being the largest commodities / resources consumer, which supplied by Asian countries.

Malaysia to curb capital inflows?

Due to weakening USD and record low-interest rate in the US, Europe and Japan, emerging markets have been a popular spot for excessive liquidity to park their money. Main reasons being:

1. Emerging markets are the fastest growing economies currently
2. Emerging countries are having higher interest rate
3. Banking system of emerging countries are stronger (safer)

While develop countries are facing a currency downfalls, emerging countries are experiencing continuous inflow of hot money. This in turn causing a chaotic in currency exchange market, where emerging countries' currencies are hitting years high against developed nations. The imbalance forex market prompt central banks around the world to act or to curb any excessive flows of money which could jeopardised a particular countries, like 1997 Asian financial crisis.

In the latest developments on this hot topic, Thailand announced a 15% withholding tax on interests and capital gains on Thai bonds. In the meantime, South Korea, Taiwan, and Indonesia has been using "quasi-capital" control, in which encouraging outflows of hot money.

The billion dollar question... Will Malaysia follow?

Ringgit is the 2nd BEST performing currency in Asia, behind Thai Bath. I think when Bank Negara started its "triple" hike in overnight policy rate (OPR) this year, they already foresee the side effect of capital inflows. Due to large chunk of it went to Malaysia Government Securities (MGS), coupled with strong and effective domestic financial systems, Malaysia can safely mitigate the effect currently. However, we must act soon because I expect more hot money would pour in from countries which had imposed capital controls moving forward. We can expect a much stronger Ringgit soon.