Why so FEAR if US Federal Reserve stop QE ?

Global shares tumbles to multi-months low, especially in Asia whom did well year-to-date thanks to Japan's Abenomics. Commodities and gold also can't spare from the bearish sentiment across investment markets. Reason? US Federal Reserve may stop/scaling down their bond-purchase program. Huh!!!

Is this the real reason?

Like what I always said, analysts always give a reason for whatever bull or bear markets (after it had happen). For me, the main reason was (again) profit-taking activities took place in view of the good performances during first half of this year.

How about Federal Reserve's QE ?

It's funny to blame Federal Reserve for the corrections. First, why Fed want to stop QE at the first place? It's because US economy is recovering well. Wasn't this a good news to global markets? Definitely. Then, why we're so fear if Fed stop QE ? Doesn't make sense, right?

Anyway, like what I said, the real reason was profit-taking activities which is normal after a good run-up. Current stage must took place before the market can move higher. Good for investors. Good for you. Good luck.

What's Wrong for an Economist to Predict the Upcoming Election?

I am writing this post during midnight after I came across a report saying that Bank Islam chief economist suspended after predicting that opposition will win the upcoming election. As usual, Finance Malaysia would NOT include political elements in its blog post. And, we would like to stress here again, that we are discussing this topic WITHOUT any political elements. Then, what are we talking here?

FREEDOM of VOICE & OPINION

I knew that I could not sleep if I didn't speak up for En. Azrul Anwar. We are not here to defend anyone, neither to offend any parties. But, we should open up our mind, and accept other opinions with open heart. In this matter, the said bank is losing its credibility and reputation by suspending one of its key staff --- just because of his prediction. Why can't he speak freely? Will the bank lose its banking license because of this?

Does he answer the question wrongly? NO... It's a prediction only, there is no right or wrong here.

Everyone knew that political changes is the key risk for Malaysian economy this year. Can an economist avoid this topic? Or, should they answer the same question with the same biased answer? Otherwise, who will listen to their opinions? Then, why a company hires an economist to represent them in the first place?

Funny... That's why Finance Malaysia blog is another channel for investors and readers to get 3rd party opinions and views. Blogging industry will prosper even faster, because the demand is there. Readers DO NOT want to read biased newspaper or news portal anymore. Thanks for your support. Finance Malaysia supports Azrul Anwar.

Euro 2012 Football Championship: Poland's Economy Scores

It's football season again. This round we have EURO 2012 Championship which will kick off on 8th June 2012. Are you ready? Before that, let us look at the championship from financial perspective. Don't care who will win the championship, Poland already emerged as the winner financially. Why?

The UEFA European Football Championship has taken place every 4 years since 1960. For the first time in history, Poland and Ukraine have scored the chance to co-host the Euro 2012 Football Championship. Despite high set-up costs for the two emerging economies, both countries are likely to experience long-term economic benefits.

The Statistic and Requirements:

• Estimated 670,000 football fans will pack into the new stadiums
• Around 1.5million spectators at fan zones only
• Minimum requirement capacity of 30,000 to 50,000 spectators for infrastructure and modern stadiums
• Sufficient parking possibilities, hospitality facilities, luxury hotels and training facilities was needed
• Required transportation infrastructure linking the host cities must be modern, well developed and meet UEFA's high quality expectations

Challenging Requirements Boost Economic Growth

As a result of the increased government spending, Poland's unemployment rate has improved significantly. In addition to modernization costs, safety costs of almost USD 1 billion will push the total bill for the event to over USD 10 billion in Poland's case. The majority of the modernization bill has been allocated to motorway construction to connect the hosting cities and surrounding countries.

Poland to Benefits from Euro 2012

The investment spending of over USD 10 billion will be beneficial for Poland, as long as the increase in GDP directly or indirectly allocated to the football championship tops the costs. Four main sources of possible additional income exist:

1. Extra spending by tourists and local population during the event
2. Extra spending generated after the event as a result of tourists visiting the host countries and cities
3. Benefits resulting from the upgrade of the various infrastructure programs
4. Benefits resulting from presenting the country and its economy in a positive light

Based on outcomes of earlier football championships, a study commissioned by the UEFA estimated extra spending during the event at around USD 300 million and USD 250 million thereafter. However, it is likely that, for emerging countries such as Poland, the benefits of major sporting events are much greater than for developed countries. While the publicity from major sport events is the same for developed and emerging economies, the marginal profit is expected to vary substantially. Developed economies are already well known as holiday and business destinations when hosting such events, but emerging countries may attract many more investors and tourists.

Long-Term Benefits for the Equity Market

Since very few major sporting events have been hosted by emerging market countries, the possible impact on the economy and on the stock market is difficult to estimate. However, it is likely that in addition to the attractive fundamentals of emerging markets such as high growth, low debt and favorable demographics, the access presented to a wide range of potential investors and tourists could give the country's economic development a significant boost and result in sustainable long-term growth perspectives. Poland and the Ukraine are likely very much aware of the possible long-term opportunities arising from hosting the UEFA European Football Championship this year and aim to create history together by hosting this major event.

Source: Credit Suisse

Europe’s Woes Flood Wall Street—But Not the Economy? (May 2012)

After months of buildup, Europe’s sovereign-debt crisis has finally wreaked havoc on the U.S. stock market, as a wave of anxiety has prompted a major sell-off on Wall Street. We’ve seen a dramatically “risk off” environment with the Dow Jones Industrial Average dropping 3.52% — the biggest one-week decline since November — and the S&P 500 falling 4.3%. Among the hardest hit stocks were small caps and tech, with the Russell 2000 and the Nasdaq Composite falling 5.4% and 5.3%, respectively. To further underscore the risk-off environment, the yield on the 10-year Treasury still appears to be searching for a bottom, finishing at 1.702%, but falling below 1.700% intraday this week — a modern-era low.

Spring Swoon?

History may not be repeating itself, but it certainly is rhyming. Like the spring of 2010 and the spring of 2011, investors’ fears are coming to fruition and we are once again experiencing a “spring swoon.” Stocks are selling off and junk-bond spreads are widening, as concerns about the euro-zone crisis are weighing heavily on investors. While some strategists believe Germany may be softening its stance, yields on some EU periphery nations are skyrocketing and rumors abound that the European Central Bank is preparing for a Greek departure from the European Monetary Union. The problem seems to be fundamental to the structure of the EU and therefore there are no easy solutions: while there is one shared currency, there is no true central government with one shared ability to levy taxes or issue debt that all countries are responsible for.

A federal Europe and closer fiscal integration is the ideal solution but it does not appear to be close at hand. The fiscal compact was agreed to in principal in December 2011, which is an important step toward that goal, but it is still awaiting approval by some euro-zone members.

However, the U.S. economy continues to chug along, albeit slowly. Initial jobless claims remain well below 400,000. The Consumer Price Index was flat for April. In fact, the “oil choke collar” has disengaged, with crude oil falling nearly 5% this week to finish at $91.48 per barrel. New residential construction was higher than expected in April as well. One area of disappointment was leading economic indicators, which were slightly negative for the first time in six months, down 0.1% versus expectations of a 0.1% gain. This is largely attributable to a decrease in the number of building permits and an uptick in the number of unemployment claims.

Looser Credit

Last week’s release of the minutes from the Federal Open Markets Committee’s April meeting offers further insight into the U.S. economic picture. While generally bullish in its observation of measured economic growth, the FOMC highlighted a bright spot for the economy that may have been overlooked: banks are loosening credit standards. As reported in the minutes, “Bank credit slowed in March but expanded at a solid pace in the first quarter as a whole. The Senior Loan Officer Opinion Survey on Bank Lending Practices conducted in April indicated that, in the aggregate, domestic banks eased slightly their lending standards on core loans—C&I, real estate and consumer loans—and experienced somewhat stronger demand for such loans in the first quarter of 2012.” The Fed’s poll includes 60 large domestic banks and 24 U.S. branches and agencies of foreign banks.

And lower yields mean lower borrowing costs, which are stimulative. This lower cost of borrowing combined with long-awaited and much-needed easing of credit standards could be the one-two punch that the U.S. economy needs to continue to expand.

It is imperative that the situation be monitored closely but with the recognition that, for longer time horizons, higher-quality risk assets with substantial yields such as dividend-paying stocks continue to be attractive investment options. Dividends, which offer the benefit of getting paid to wait for better market conditions, may help steer portfolios until we see calmer seas.

Source: Allianz Global Investors

Summary of 2011 Bank Negara Malaysia Annual Report

The global economy grew at a more moderate pace in 2011 after the strong rebound in 2010. The growth momentum was weighed down by continued structural weaknesses and fiscal issues in the advanced economies, geopolitical developments in the Middle East and North Africa region and the disruptive impact of natural disasters on global manufacturing production. These developments reverberated onto international financial markets and contributed to heightened market volatility throughout the year.

Despite the less favourable external environment, emerging economies continued to record firm domestic-driven economic growth. At the same time, emerging economies faced increasing challenges from volatile capital flows and rising inflationary pressures. Amidst this environment, the Malaysian economy continued to grow steadily underpinned by the expansion in domestic activity and firm regional demand.

The Malaysian Economy in 2011

The Malaysian economy recorded a steady pace of growth of 5.1% in 2011 (2010: 7.2%), despite the challenging international economic environment. Growth was lower in the first half of the year, particularly in the second quarter, as the economy was affected by the overall weakness in the advanced economies and the disruptions in the global manufacturing supply chain arising from the natural disaster in Japan. Although the global economic environment became increasingly more challenging and uncertain in the second half-year, Malaysia’s economic growth improved due to stronger domestic demand.

Outlook for the Malaysian Economy in 2012

• Malaysia’s economy is projected to experience a steady pace of growth of 4 – 5% in 2012
• Domestic demand to remain resilient
• 2012 Budget expected to provide support to private consumption
• Upward revision of public sector wages and one-off financial assistance to low and middle-income groups
• Ongoing implementation of projects under ETP
• Higher capital expenditure by both the Federal Government and the non-financial public enterprises
• Implementation of the Special Stimulus Package through Private Financing Initiative

Labour market conditions are expected to soften in 2012 amid the slower economic activity. The unemployment rate is projected to increase to 3.2% of the labour force in 2012. Headline inflation is expected to moderate in 2012, averaging between 2.5 – 3.0%. The lower inflation projection reflects the moderation in global commodity prices and a more modest growth in domestic demand.

Source: BNM report

Annual Strategy 2012 by TA Securities

2011 had triggered a wave of unwanted chain effects, which would not languish but resonate further into 1H12. While Japan is recovering from the worst ever tsunami and nuclear disaster, and oil prices stabilized after the unrest in the Middle East, conditions in Europe are expected to worsen before stabilizing.

Global Economy – Risk Factors Extending into 2012

Positive news flows on drastic measures to restore confidence in Europe and maintain the credit ratings of core economies could boost market sentiment in early 1Q12 and push the index to test the all‐time high of 1,597. However, the reality check on the implication of European austerity measures and rising market risk premium due to the 13th General Election (GE) could push the index around 1,200 levels in 1H12 based on a minus two standard deviation from its last decade’s historical mean of 16.6x.

A revival should ensue in the following months due to oversold conditions and anticipation of a subsequent recovery in Eurozone economy by mid‐2013 as markets move ahead by about six months. Our end‐2012 target is 1,520 based on a mid‐cycle PER of 13x.

Malaysia – Not Insulated

In the first nine months of 2011, the Malaysian economy registered a modest growth of 5.1% YoY thanks to the robust domestic demand and strong exports. In some ways, despite the turbulent external environment, rebuilding and reconstruction activities in Japan had helped spur Malaysia’s exports advancement during 3Q11. Nevertheless, the external sector is expected to remain challenging in 4Q11 before embracing a slowdown in 2012 amid the budget deficit cuts in the European Union, the slow economic rebound in the US and the anticipated softening of China’s economy. Hence, we expect Malaysia’s economic growth to narrow to 4.6% in 2012 following a 5.2% growth expectation for 2011.

On the fiscal front, the financial status of the Federal Government may continue to improve in tandem with the embodiment of fiscal prudence and boost in revenue. Overall consumer prices are expected to increase by 2.5% while monetary policy is expected to remain accommodative (OPR stable at 3.0%). A potential wild card is the reform agenda initiated by Prime Minister Najib Tun Razak. Factors that would accelerate reform include:

1. increasing political consciousness and demographic shift,
2. reenergizing investment in the local economy, and
3. strengthening fiscal credibility. Sectors that could benefit are Banking, Property and Power.

Political Risk?

We strongly believe the country’s 13th general election will be due in 1QFY12, especially before the parliament convenes in March. This could be a major dampener upon dissolution of the parliament as investors would exit and remain on the sideline until the outcome is known and the implications are digested. The ruling coalition is expected to retain its victory but its grip on parliamentary and state seats are expected to weaken. Thus, the effectiveness in implementation of policy reforms and domestic expansionary measures could be compromised and will be closely watched in 2012. With the backdrop of slowing external demand, spending on domestic infrastructure, construction and oil & gas sectors would be the key focus in 2012.

Investors should take profit on any rally over the next three months and wait to cherry pick. Traders should take short‐term positions to trade, mainly on blue chips, in anticipation of a year‐end and New Year rallies and exit by March. We expect higher downside risks in 1H12 as the flow of negative economic data, earnings downgrades and possible 13th general election hurt investor sentiment.

Top Picks for 2012

We reiterate defensive approach in stock selection in current uncertain period and bottom up approach in choosing value picks. Preferred buy picks are KIANJOO (TP: RM2.58), SEG (TP: RM2.51), SUNWAY (TP: RM3.16), BJTOTO (TP: RM4.92), BSTEAD (TP: RM6.21), KPJ (TP: RM5.04), GENM (TP: RM4.50), SAPCRES (TP: RM4.93), GAMUDA (TP: RM3.71) and SIME (TP: RM10.12).

Source: TA Securities

Key Highlights of BNM 3Q11 Report

Titled as "ECONOMIC AND FINANCIAL DEVELOPMENTS IN MALAYSIA IN THE THIRD QUARTER OF 2011", Bank Negara Malaysia (BNM) review some interesting facts on the status of our economy and the market outlook going forward. The announcement was chaired by Central Bank's governor to address the media after the closing of Bursa Malaysia.

Growth improved in the third quarter

Despite the challenging environment, Malaysian economy registered a higher growth of 5.8% (2Q11: 4.3%), due to stronger domestic demand. The robust  domestic demand was driven by an expansion in both household and business spending as well as higher public sector expenditure. Manufacturing sector recording a significantly better performance supported by firm regional  demand for resource-based products, coupled with the normalisation in supply chain disruptions arising from the Japan natural disaster.

The headline inflation rate, as measured by the change in the Consumer Price Index (CPI), rose to 3.4% on an annual  basis in the third quarter (2Q 11: 3.3%). The increase in consumer prices was largely the result of higher prices in the food and non-alcoholic beverages category.

Current  account recorded a larger surplus of RM26.6 billion, equivalent to 12.5% of GNI due to a higher goods surplus and lower income deficits. As at 31 October 2011, International Reserves position had increased to RM429.1 billion, equivalent  to USD134.8 billion, sufficient to finance 9.9 months of retained imports and is 4.1 times the short-term external debt.

Monetary policy is supportive of economic activity

The Overnight Policy Rate (OPR) was  left unchanged at 3.00% in the third quarter of 2011, following a 25 basis points increase in May. The stance of monetary policy is consistent with the assessment of heightened uncertainties arising from global developments that have created greater downside risks to growth.

The ringgit depreciated against the US dollar in the third quarter, in line with other regional currencies. The depreciation, mostly in September 2011, reflected mounting concerns over the European sovereign debt crisis and the sustainability of global economic recovery, which led to higher risk aversion and prompted some investors to unwind holdings of emerging market assets.

Please click here to read the full BNM report.

4 Components of Economic Growth (August 2011)

So far, equity markets are down anywhere between 10-20% and bond yields in a number of major markets are reaching historic lows. Although it is difficult and nerve racking, investors should understand some of the forces behind what's creating this volatility and how they're likely to play out in the near term.

When will market rebound?

Again, we simply cannot answer that million-dollar question. If I know, I won't be writing this article here telling you all stories and facts. We should have a longer term view, especially during volatile times when fears dominating the marketplace.

So, what are some of the driving forces behind?

If we go back to basics, the 4 components that really drive economic growth are Government, Consumer, Corporate, Import & Export. If we look at each individually, we can do better opinion, by analyzing them.

Government:

Since 2008, governments have played an increasingly dominant role in the markets that we're familiar with. They are expanding monetary policy, expanding fiscal policy, bailing out companies, regulating companies or buying companies. Who else can replace the government now? Of course, NO one. The government are now a fact of life in the markets and investment as we know it. Example, the Citigroup bailout had actually turned out to be a very profitable investment for US Government. Undeniably, we have to understand each movements of government in order to make returns from.

However, Government cannot runaway from political issues which may confused the markets. Everyday, we guessed what is Obama or Bernanke going to say next, what's ECB going to do, when is our next general election? As the market continues to test Governments and its policy continue to evolve, we are due for continued uncertainty and volatility in the market.

Consumer:

We as a consumer are going through a difficult time, especially in developed markets. We faced with higher taxes, unemployment and inflation, all eroding our disposable income which in turn makes spending power and confidence lower. Market falls because of lower consumption/retail figures, and this will further enhance fear in the eyes of the consumer in return.

Investment:

This is what ETP of Malaysia means: Private investment with Government facilitation. However, corporates is talking about managing their costs and having a good solid balance sheets with cash to avoid problems in downturns. Right now, they are the healthiest of the 3 domestic components towards economic growth. Government is indebted more than corporates. Companies with strong balance sheets are in a better positions in expanding, be it organically or through acquisitions, like what Google doing right now (taking over Motorola).

Picture taken from www.money4invest.com

Export-Import:

Lastly, developing countries are the main growth drivers in international trades. Still, they are growing, albeit slower pace. We need to keep an eye of it and it's impact between developing and developed countries.

In summary, we should not over-react given the volatility of the market. In fact, we should take this as an opportunity to take on good solid companies for long-term investing. I still see a lot of good companies trading at single digit P/E, some with good dividend yield too. Should you forego the chances?