Making money in a downturn

By Allison Tait, ninemsn Money
February, 2009

By now we’re all aware that the financial world has gone pear-shaped. Words such as recession, unemployment, and credit crunch being thrown about with monotonous regularity. It seems that money news these days is all bad.

But what if it’s not? What if it’s actually possible to profit from the world’s economic woes? A fairytale? Perhaps. But with a little nous (and a bit of luck) it could be that the global financial crisis could deliver you a happy ending.

First up, however, the disclaimer. Most of the people who do well in unsteady financial times know what they’re doing. “There’s no substitute for doing the hard work and research,” says Matthew Walker of Sydney’s WLM Financial Services. “You don’t get anything for free. Share trading, for instance, is not as easy as it looks – you can fudge a bit in good times because everything’s going up anyway, but it’s much more difficult to get it right when things aren’t so good.”

To market, to market

When all news of the Dow Jones is about its downward motion, and some of Australia’s staunchest shares have taken a dive (Westfield anyone?) it’s hard to see where the money is. US shares guru Warren Buffet is all about buying smart and buying low – he’s also about looking forward to falling share prices because it simply means you can buy more of a good thing. The trick is to pick the good thing.

“The price of a share is not where the bargain is,” says Walker. After all, you can pick up shares at any time worth 6 or 7 cents each. What you need to look at is how expensive a share is relative to its performance criteria. Walker explains: “You need to look at the Price-Earnings Multiple (or Ratio) – the higher that is, the more expensive a share is deemed to be because it takes longer to earn back its purchase price.”

O-kay. The P/E Ratio is defined as the valuation ratio of a company’s current share price compared to its per share earnings. It’s calculated by dividing the share’s market value by its earnings. So if a company is currently trading at $40 a share and earnings over the past 12 months were $2 a share, then the P/E Ratio for the stock would be 20. If you’re looking at a company, you can compare its P/E Ratio to other companies in the same industry to help you work out how much of a ‘bargain’ it is.

But it’s not the only indicator.

“Today, you have to look at how robust the company’s balance sheet is – debt levels, quality of management, do they have cash flow, sales of product (what’s the market doing),” says Walker. “Consumer discretionary stocks, for instance, are being hit today because nobody’s buying anything, but the big picture is that long term they’ll pick up again.”

Other areas he suggests might be worth a look are Gold (buy shares in companies that mine gold if you don’t want to stock up on the yellow stuff itself) and bond funds – particularly if you think interest rates will fall further. “If you really want to be competitive and you don’t have the time or resources or depth of understanding to do it yourself, go through a managed fund,” he recommends.

Bricks and mortar

Of course, when the sharemarket is uncertain, investors look for other areas for their money. While real estate hasn’t exactly been what you’d call booming of late, John McGrath, CEO of McGrath Estate Agents, is enthusiastic about buying now.

“I think the next 6-9 months are a great time to buy,” he says. “Prices in most parts of Australia are 10-20 per cent down on their peak, interest rates are down – and likely to fall another 1.5-2 per cent, the First Home Buyers grant has gone up, and rents have gone up considerably – we’ll probably see more growth, not as strong but still there this year.”

When he puts it like that, why wouldn’t you? “Astute investors buy when there’s some level of fear around,” says McGrath. “They take the opportunity to act when others aren’t. We’ve been in a down cycle for 18 months to 2 years, and they usually last around three years. So it’s perfect.”

Which is not to say you can buy just anything. McGrath has the following tips:

* “Focus on capital growth more than rental return. Rental yield is important in that it helps you to buy the asset, but the real money in property is made when you can pick at area that outpaces the market in terms of capital growth.”
* “Houses generally outperform units in terms of capital growth. So if you can afford to buy a house with a garden you’re likely to get a better return.”
* “Older style apartments or apartments that are not brand new often have better capital growth than brand new. There’s often a premium attached to buying new, in much the same way as a brand new car loses value the minute you leave the showroom.”
* “Location, location, location. Where you buy is more important than anything else. Buy a prime location and it will always be a prime location. You can improve a property down the track, but never the location.”
* “With the internet, there is no excuse not to research areas and values in those areas. Treat it like a second job. If you get your buying decision right, you’ll make more from your investment than your fulltime job.”
* Don’t buy outside an area with which you’re familiar – if I’m in Sydney I wouldn’t be buying in Brisbane, for example. Stick to an area you can research and know well

A big question of when

One thing that both McGrath and Walker reiterate is this: don’t try to pick the bottom of the market. Sitting around when things are bad and waiting for them to get worse is not the way to find a bargain.

“Don’t try,” says McGrath. “The bottom of the market will be somewhere between last September and this September. I’m not convinced we haven’t seen it already. But the bottom is something you only see in hindsight. I’ve been in the market 25 years and you can never pick the top and you can never pick the bottom.”

Matthew Walker adds: “I like the quote by Jane Bryan Quinn: ‘The market timer’s Hall of Fame is an empty room’.”


http://money.ninemsn.com.au/article.aspx?id=736768

Malaysian Fashion stocks look attractive

Fashion stocks look attractive

Written by Sam Koh

Monday, 11 October 2010 14:57

KUALA LUMPUR: Not so long ago, Malaysian fashion brands were largely unknown. Those that were known, with the exception of international fashion labels such as Jimmy Choo and Zang Toi, were often scorned as backward and out-dated. But views have noticeably improved over the past few years with the rise of homegrown fashion houses like Padini Holdings Bhd, Bonia Corp Bhd and Voir Holdings Bhd. These companies have successfully created an entire range of household brand names for ladies’ wear, men’s wear, kids’ apparel, sportswear as well as accessories and home furnishings. Flagship brands for Padini include Vincci, Padini, SEED and Padini Authentics while Voir’s stable of 14 in-house brands includes VOIR, SODA and Applemints. Bonia has its namesake brand as well as Carlo Rino and Sembonia. The company is also a distributor and dealer for brands like Santa Barbara Polo & Racquet Club, Carven and Jeep. Riding high on nation’s growth A key factor for these success stories is Malaysia’s strong economic growth. The gradual shift from an agriculture- to manufacturing- and now, services-based economy has resulted in rising disposable incomes. Growing affluence and persistently low unemployment rates have, in turn, led to burgeoning consumer-driven sectors. Homegrown fashion houses like Padini, VOIR and Bonia, whose handbags and footwear are shown here, are benefiting from the country’s strong economic growth, which has resulted in rising disposable incomes. The three listed retailers have all registered rising sales over the past few years, remaining profitable even during the recent recession. Case in point, total consumption (both the private and public sectors) as a percentage of GDP rose from 54% in 2000 to 68% in 2009. The retail and wholesale trade sub-segment increased from RM39.96 billion to RM69.5 billion over the same period, accounting for 13.3% of the country’s economic activity today, up from 11.2% in 2000. In particular, the rapid rise of the middle-class is the primary driving force behind the growth in domestic consumption. It is no surprise then that most of the local fashion houses are focused on this market segment. The three retailers listed on Bursa Malaysia — Padini, Bonia and Voir — have all registered rising sales over the past few years. Sales grew even during the recent global downturn, underlining the relative resilience in domestic consumer spending. Bonia’s sales grew from RM192 million in FY June 2005 to RM315 million in FY10, which is equivalent to an annual compounded growth exceeding 13%. Over the same period, Padini expanded at an even faster pace of nearly 17% per annum. Voir, the smallest of the three, saw sales expand from RM93 million in 2004 to RM150 million last year. All three companies remained profitable through the worst of the recession. Cautiously optimistic going forward Having said that, some retailers are wary of potential speed bumps ahead. The gradual removal of subsidies has led to rising prices and the failure of wages to rise in tandem will result in lower purchasing power. Recent government proposals to curb household debt and speculation in the property sector as well as the impending imposition of the goods and services tax (GST) are likely to further dampen consumer consumption. That explains why Chan Kwai Heng, executive director of Padini, is adopting a cautious stance. “My personal feeling is that Malaysian consumers want to see if growth is sustainable before (deciding what to do with their disposable incomes),” he said. Chan added that recent announcements such as the curb on credit card availability, real estate cap on loan-to-value ratio proposal, subsidy removal and GST were sending mixed signals to consumers. Nevertheless, most analysts remain relatively upbeat on the prospects for the retail sector. Indeed, all three companies are committed to expand their businesses further, be it through organic growth or acquisitions and mergers. Expansion will continue to drive growth In its last financial year ended June 2010, Padini opened six new outlets — one Vincci, two Vincci+, a Padini Concept Store and two Brands Outlets. Going forward, the company intends to focus on the Brands Outlet line, which is targeted at value-conscious customers. There are plans to add three Brands Outlet stores this year, one of which just opened in Sunway Pyramid this week. The company expects to lay down some RM5 million for capital expenditure in FY11. Bonia too has made moves to widen its primarily middle to upper-middle class market. In the past one to two years, the company has introduced more affordable and value-for-money brands such as Valentino Rudy, CR2 and CR Xchange, in response to the global downturn. Similarly, VOIR is also keen to broaden its market reach by expanding its range of products targeting different segments of the market, in addition to new outlets. “Going forward, we see an increasing trend towards the medium-end with a slight bias towards a medium-high market,” said Ham Hon Kit, executive director of VOIR Group of companies, noting the population, improved economy and government plans as contributing factors. “In a medium market you have a fair share of the population. Recently, we launched our sub-label Noir, which delivers to the medium-high segment,” said Ham, who described VOIR largely as a medium-market brand. He expressed the hope that VOIR would offer Malaysian consumers an extended product range in the next three years. “Additional fashion and lifestyle products could be introduced through brand extensions, new, acquired or international brands,” said Ham, who stated that if VOIR moved towards the upper market it would be via these channels. The company has budgeted some RM8 million to RM10 million for expansion next year, including two to three new “VOIR Gallery” — its multi-brand store — and two to three single-brand outlets. Additionally, VOIR has diversified into the food & beverage sector, which it views as a higher margin business. The company intends to add up to eight new Garden Lifestyle Store and Cafés to its current portfolio of two, which are located in suburban malls 1-Utama and The Curve. If all goes as planned, VOIR expects the Cafés to contribute up to 10% of its revenue next year. Tapping regional markets Having cornered a slice of the local retail market, Malaysian fashion houses have turned their attention to the exports market, another driver of growth. Bonia appears to have taken the biggest stride so far. More than 28% of the company’s revenue is derived from abroad where it has 70 boutiques, including Singapore, China, Taiwan, Thailand, Vietnam, Indonesia, Japan, Saudi Arabia and Syria. It began manufacturing bags and wallets at its China plant for the country’s domestic market end-2008. Recently, Bonia announced the acquisition of a 70% stake in Singapore-based Jeco Pte Ltd for S$28 million. Jeco is the licensee for Pierre Cardin leather goods in Singapore and the master licensee for Renoma in Singapore, Malaysia and Indonesia. It is also the sole distributor of Bruno Magli products in Singapore and the owner of trademark and brand representative of Braun Buffel in Asia-Pacific. “The acquisition is quite a profitable one. It will immediately impact earnings given the size of the stake,” an analyst said. As for Padini, overseas sales account for some 10% of Padini’s revenue currently. The company’s products are sold in retail stores and counters operated by licensees and dealers in various countries. This strategy enables it to push greater volume while limiting capital commitment and risks exposure. How the stocks performed Bonia is the largest gainer with a 59% increase in share price to RM1.67 per share from RM1.05 at the start of the year. The company posted a 61% rise in net profit to RM33.23 million from RM20.61 million for the 12-month period. Four research houses have recommended a buy on the stock since September, with an average target price of RM1.91 per share. Shares for Padini rose 32% to RM4.98 from RM3.77 over the same period. In its 12-month results, Padini also announced a 23% rise in net profit to RM60.74 million from RM49.53 million in FY09. Since September, two research houses have issued buy calls on the stock, with an average target price of RM4.83. VOIR, the smallest of the three, fell slightly short of the benchmark FBM KLCI. The stock gained just 5% to 72.5 sen from 69 sen at the beginning of 2010. For the first six months of the year, VOIR posted a 109% y-o-y increase in net profit to RM1.91 million from RM900,000 in the previous corresponding period. In an August report, the sole research house covering VOIR recommended a “hold” and a target price of 61 sen. Related stories: VOIR looks to diversification and brand extension Bonia known for its quality Padini gets its concept right Retailers doing well on strengthening consumer spending This article appeared in The Edge Financial Daily, Oct 11, 2010.

Financial Education: Play and learn about finance

Star Education Fair
Sunday October 10, 2010

Play and learn about finance

BY ALYCIA LIM
educate@thestar.com.my

TO INSTIL the habit of savings and prudent financial management among the nation’s youth, Perbadanan Insurans Deposit Malaysia (PIDM or the Malaysia Deposit Insurance Corporation) recently launched an online competition.

Called “MoneySmart Online Game”, it is part of the corporation’s educational programme for secondary and tertiary education students.

Running for the first time this year with the support of the Education Ministry, the programme aims to reach out to students through road shows and talks in secondary schools, colleges and universities.

PIDM chief operating officer Md Khairuddin Arshad said that the competition was an initiative from PIDM to enhance public awareness on the role of PIDM through interactive activities.

He added that since the soft launch in July, roadshows have been held at over 100 secondary schools and about 25 higher education institutions. They are targeting a total of 200 schools by the end of November.

“The schools have been identified according to the ratio of urban and non-urban schools, and we make sure that this covers every state in the country.”

Education Ministry deputy director-general (general policy and educational development) Dr Khair Mohamad Yusof applauded PIDM’s efforts, saying that the ministry had always welcomed initiatives from organisations to support the education development of the young generation in this country.

He added that the teaching and learning process today required the involvement of society, and should not only be the role of an educator. Through a creative and interactive way, the project helps to enhance the knowledge and skills of all aspects of financial management to local students.

The entire programme, including the production of board games and comic books to be distributed to the schools, amounted to approximately RM1mil.

Md Khairuddin said: “I believe this investment will give good returns, and it is a part of our contribution to the country’s financial literacy growth.”

The online game competition, which depicts real-life stages beginning from the decision to pursue an education to the retirement stage will end on Nov 30.

The results will be announced early next year.

http://thestar.com.my/education/story.asp?file=/2010/10/10/education/7145680&sec=education

Kiss corporate governance goodbye when punishment meted is not commensurate with the crime

Saturday October 9, 2010
Too little punishment for too much
A QUESTION OF BUSINESS
By P. GUNASEGARAM

If directors continue to get away with a mere slap in the wrist for major offences, you can kiss corporate governance goodbye.

POOR Securities Commission! It goes to all that effort and pain to bring corporate miscreants to book and what happens, they go free – more or less. For what is a hefty fine when the amount they defrauded is many times more than that?

That is an affront to the public which sees white-collar criminals get away with far less in terms of sentences although many millions of ringgit are involved. Comparable common thefts see much more punishment.

Then, there are the corollary effects. The confidence and integrity of the market itself becomes affected when the investing public, both local and overseas, become disillusioned with standards of corporate governance here. What incentive is there to behave when you can get away with so much for so little?

For corporate crime to be seriously reduced, two things need to happen immediately. First, the courts must realise the seriousness of these crimes and mete out the necessary punishment, even when the plea is guilty.

Second, agencies responsible for enforcing legislation must do their part to investigate and bring to book those who break the law. The Securities Commission seems to be doing its part when it comes to securities laws but the same cannot be said of the Companies Commission of Malaysia when it comes to enforcing the Companies Act.

If these two things don’t come together, we can pretty much say goodbye to the attempts by some of our regulators and enforcement agencies to increase corporate governance standards and bring about a much higher standard of behaviour among our corporate chieftains, standards which are abysmally low right now.

Let’s take the latest such case. It was reported earlier this week that a former director of a de-listed company, Pancaran Ikrab, broke down and wept when a judge handed down a custodial sentence of one day (yes, that’s right) and a fine of RM2mil for fraud involving millions.

Former managing director Ngu Tieng Ung committed two counts of financial fraud involving RM15.5mil 13 years ago. Sessions Court judge S.M. Komathy Suppiah allowed Ngu, 43, to pay the fine in 12 instalments starting next month, to be paid by the fifth of each month or a 30-day jail sentence if he fails.

“Are you crying because you are happy or sad?” she asked a sobbing Ngu, who did not respond. At this juncture, Ngu’s counsel Ng Aik Guan went up to the dock to speak to him and later told the judge that Ngu was “too emotional”, The Star reported.

Meantime, the Securities Commission only thinly disguised its disappointment with the sentencing. It said in a statement on Oct 5: “Datuk Lybrand Ngu Tieng Ung was convicted by the Kuala Lumpur Sessions Court today for two counts of securities fraud.

“He had utilised RM15.5 million of Pancaran Ikrab Bhd’s (PIB) funds in October 1997 to finance his entry into the company. The monies financed his purchase for the controlling shareholding in PIB. PIB was then listed on the Second Board of the Kuala Lumpur Stock Exchange.

“When he resumed the post of director of PIB, he had caused in total RM37 million to be transferred out of the company. This amount was never recovered and was written off in its accounts. This resulted in PIB being financially distressed and its listing status was taken over by DCEIL International Bhd on July 19, 2004.

“The penalty for securities fraud is a minimum fine of RM1 million and imprisonment of not more than 10 years. Sessions Court judge, Puan S.M. Komathy Suppiah sentenced Ngu to 1 day imprisonment and a fine of RM1 million for each offence. The imprisonment terms to be served concurrently.”

Now, the scale of the offence becomes much clearer. Ngu used RM15.5mil to finance his purchase of shares in Pancaran Ikrab and caused RM37mil to be transferred out of the company, making in all a massive RM52.5mil.

And all he got was a day’s jail and a fine of RM2mil. Why? And there was nothing said about restitution or return of the monies.

If you think this was an isolated instance of a person committing corporate fraud receiving a light sentence, you are wrong. Just this year alone, there have been a number of light sentences given.

In March this year, the Kuala Lumpur Sessions Court convicted Chan Kok Suan, the former managing director of Granasia Corporation Bhd for submitting false statements to the Securities Commission as part of the application for an initial public offering.

Chan was convicted under section 32B(4) of the Securities Commission Act and was fined RM500,000, in default 10 months imprisonment, according to the SC.

In February, the Kuala Lumpur Sessions Court convicted Ooi Boon Leong and Tan Yeow Teck for knowingly authorising the furnishing of a misleading statement by MEMS Technology Bhd, a company listed on the then Mesdaq market, to Bursa Malaysia Securities Bhd.

The Sessions Court sentenced each accused to a fine of RM300,000 (in default two years imprisonment).

Last November, the Securities Commission secured a conviction against Datuk Tan Hooi Chong for abetting Kiara Emas Asia Industries Bhd in the misappropriation of the rights issue proceeds amounting to almost RM17mil between Dec 16 and 31, 1996.

Tan pleaded guilty to the offence under section 32(6) of the Securities Commission Act 1993 read together with Section 40 and Section 109 of the Penal Code. Tan had also admitted to misutilising the rights issue proceeds for his personal benefit. He was fined RM600,000.

The common thread through all these convictions, and many earlier higher profile convictions, is that none of them was custodial (except for the latest one-day custodial sentence) even though the offences were serious and in many cases involved millions of ringgit.

But let’s look at another case. In March, former Perbadanan Komputer Nasional Bhd chief executive officer Zulkifli Amin Mamat was sentenced to four years’ jail and three strokes of the rotan for criminal breach of trust involving RM1.61mil.

Why the anomaly? Is criminal breach of trust very different from what these other directors were doing? Obviously not.

That must mean, if we take other more sinister conclusions out of the equation, that judges don’t seem to understand the seriousness of corporate crime and the extremely deleterious effects they have on the capital markets and thousands and millions of shareholders of public-listed companies.

The only way that such lack of understanding or otherwise can be overcome is for the Chief Justice, Tun Zaki Azmi, himself to step in. Zaki has been working tirelessly to reduce backlogs and has taken strong, controversial steps in this direction. But the lack of punishment of corporate crime is one area that demands immediate attention too.

It will be no exaggeration to say that the future of the country depends on it because no country has been able to reach the pinnacles of progress and achievement without a healthy corporate sector. And you can’t have that without adequate punishment of the bad hats.

● Managing editor P. Gunasegaram does not only believe that justice delayed is justice denied. He also believes that justice denied is, well, justice denied. Period.

http://thestar.com.my/columnists/story.asp?file=/2010/10/9/columnists/aquestionofbusiness/7191225&sec=A%20Question%20Of%20Business

George Soros warns China of global 'currency war'

George Soros has warned that a global “currency war” pitting China versus the rest of the world could lead to the collapse of the world economy.

By Rupert Neate
Published: 3:01PM BST 09 Oct 2010



Mr Soros, the hedge fund manager best known as the man who broke the Bank of England” after he made a billion betting against the value of Sterling on Black Wednesday in 1992, said the China had created a “lopsided currency” system.

He criticised China for deliberately keeping the yuan - its currency -low in order to keep exports cheap, which is hurting US competitors.


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Mr Soros told BBC Radio 4’s Today programme that China had a “huge advantage” over international competitors because it can control the value of its currency.

He said China could also influence the value of other world currencies because they have a “chronic trade surplus”, which means the Chinese have a lot of foreign currencies. “They control not only their own currency but actually the entire global currency system,” he said.

Writing in the Financial Times, Mr Soros added: “Whether it realizes it or not, China has emerged as a leader of the world. If it fails to live up to the responsibilities of leadership, the global currency system is liable to break down and take the global economy with it.”

China’s central bank governor Zhou Xiaochuan defended the world’s second largest economy, however.

“We’ve already started to have exchange rates reform for quite long time...[but] it is gradual... it is good for a large economy otherwise it may be dangerous,” he told the BBC on the sidelines of this weekend’s International Monetary Fund meeting in Washington.

http://www.telegraph.co.uk/finance/8052729/George-Soros-warns-China-of-global-currency-war.html

What next for UK house prices?

What next for house prices?
Prices fell by a record amount in August, prompting fears of a crash.

By Kara Gammell
Published: 5:31PM BST 08 Oct 2010


Just when many families were digesting the news that they were to lose child benefit, have to work longer and pay more into their pensions, they were delivered the bombshell that house prices fell by a record amount.

Last month, more than £6,000 was wiped off the value of the average property as house prices dropped from £168,124 in August to £162,092, the biggest fall since 1983. A rise in the supply of property and a drop in demand fuelled by economic uncertainty pushed prices down 3.6pc.


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So what next? Is this the start of a sustained fall in house prices? Here's what the housing experts have to say.

Martin Gahbauer, chief economist, Nationwide
"Although the Halifax index showed a large drop in September, the less volatile three-month on three-month measure showed a drop of 0.9pc, the same as in the Nationwide index. This compares with three-month on three-month declines of more than 5pc in the deepest phase of the 2008 downturn in both indices. As such, the current declines are still on the modest side. None the less, market conditions have clearly loosened as more sellers have marketed their properties and buyer demand has remained weak. This may exert additional downward pressure on house prices in coming months. At this stage there is limited evidence of widespread distressed selling. Without more of this, price declines of the magnitude in 2008 are unlikely."

Paul Diggle, property economist, Capital Economics
"The hefty drop in the Halifax measure of house prices adds weight to the view that house price weakness is far from over. To our minds, weak housing-market activity indicators mean that further falls in house prices are likely. There is no doubt that this will reduce the amount of equity in people's homes, making it even harder to remortgage."

Martin Ellis, housing economist, Halifax
"Last year, a shortage of properties for sale contributed to an imbalance between supply and demand, a key factor in pushing up house prices. More recently, more properties have come on to the market and reduced this imbalance. Plus, renewed uncertainty about the economy and jobs has caused consumer confidence to falter, dampening demand for home purchases. The factors have been exerting downward pressure on prices.

"In addition, volatility of the month-on-month measure has increased due to low transaction levels across the market; to get the best view of the underlying trend we should look to the quarterly figure – which shows a 0.9pc decrease.

"It is far too early to suggest that this is the beginning of sustained falls. House prices in the third quarter of 2010 were 0.9pc lower than in the second quarter of 2010. The rate of decline is slower than 2008, when it was consistently in excess of minus 5pc and minus 6pc throughout the second half of the year.''

Howard Archer, chief UK and European economist, Global Insight
"While a drop in house prices always seemed probable in September, after Halifax had reported price rises in August and July that conflicted with other surveys, a plunge of 3.6pc month-on-month was off everybody's radar.

"It is important to put the data into perspective. The Halifax data highlights how volatile housing market data can be on a month-to-month basis and from survey to survey. The 3.6pc plunge reported by the Halifax is partly a correction to the rises reported in August and July, which conflicted with other data and surveys.''

PHILIP SHAW, ECONOMIST, INVESTEC SECURITIES
"It is difficult to know how literally to take the Halifax number – it implies that the housing market has fallen off a cliff. Taking September's figure on its own implies that house prices are now 0.7pc below those a year ago. By contrast, the Nationwide estimates house prices are 3pc above 12 months ago.

"If it is right, one hopes that lower prices will help to attract first-time buyers. This would help to stimulate not just housing activity, but spending in the economy.

"The housing market is very nervous right now, but we will get further clues from the RICS survey this week. Don't forget that the market recovered abruptly in spring last year."

SIMON RUBINSOHN, CHIEF ECONOMIST, ROYAL INSTITUTION OF CHARTERED SURVEYORS
"We expect prices to slip a little further over the coming months, but believe the risk of large house price falls is relatively limited. Key RICS lead indicators measuring the gap between demand and supply suggest the gap is beginning to narrow, which points to a more stable picture for early 2011."


http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/8051488/What-next-for-house-prices.html

Why Australian home prices are not about to crash and burn

James Kirby
October 10, 2010

IS THE value of your house about to plunge? Macquarie Bank has tipped a 20 per cent drop in housing construction next year while commentators say the smallest lift in interest rates will pop the ''home price bubble''.

House prices have been sliding for months. Industry estimates suggest that over the past quarter Melbourne prices are down 2 per cent and Sydney is off by 0.5 per cent. But these figures are nothing compared with those for Britain and the US, or Ireland, where home prices are down 40 per cent and falling.

So it is no surprise that every time anything remotely negative happens in the wider economy - this week it was the mere threat the Reserve Bank might lift interest rates - there are suggestions home prices are about to go over a cliff.

The doomsayers' arguments have been well aired. They pivot mainly on the sheer price of our real estate in relation to average income. There is also a lot of credence given to household debt levels and the presence of incentives that prop up the market, such as negative gearing.

Invariably the doomsayers are economists, especially offshore, while the bulls are linked to the success of the property industry (mortgage financiers, builders, developers and real estate agents).

Associate Professor Steve Keen, of the University of Western Sydney, for example, who has gained national prominence for his dire warnings on house prices, is still talking about a sharp home-price downturn. On Friday he told the ABC that property investors on average incomes would not be able to endure even flat prices in the coming years. Keen estimated property investors earning less than $80,000 a year make up 20 per cent of the market and the slightest pinch in the market would prompt this sector to sell out, causing ''the bubble to burst''.

Alternatively, we get experts such as ANZ economist Paul Braddick, who made his name with a presentation he took round the country called ''the mother of all housing booms''. Braddick believes the outlook for house price appreciation is now ''soft'', but he is convinced the momentum is strongly upwards over the long term.

Fresh voices are rare in the debate. But in recent days a new perspective emerged from John Wilson, the Australian chief executive at Pimco, the world's biggest bond fund. Wilson, in a paper on Australia's housing market, argues forcefully that our market is no bubble.

He begins with some obvious points - worrying that Australia may follow the US or Britain is pointless because we have an utterly different economy with relatively strong growth and high employment. Likewise, where the US and other nations built too many houses in recent years, we have not built enough.

He follows with a range of points:

■ We have relatively high mortgage repayments but the ratio of housing costs to household disposable income (a key indicator of people's ability to finance mortgages) has remained unchanged at 30 per cent for more than a decade.

■ Australians pay a relatively high amount in cash for their homes, but a closer look shows that one-third of repayments go on principal, not interest - that's saving and investment, and because housing has risen steadily (6 per cent a year) the situation is better than you think.

■ Our household debt figures are high, but the debt relates to bricks and mortar - we are not spending any more on cars or credit cards. What's more, the average equity we have in our homes is 60 per cent and that has remained steady.

Wilson also suggests the worst of the interest rate rises may be over: a view that is gaining momentum.

Add it all up, and though it is clear home prices may be experiencing a weak patch, the merchants of doom have got it wrong so far and there's little reason to believe the local fundamentals have changed.

http://www.smh.com.au/business/why-home-prices-are-not-about-to-crash-and-burn-20101009-16d3p.html

It perhaps seems strange that SOME investors don't invest in American shares.

Are British investors missing a trick by shunning Wall St?
Nine of the world's biggest brands are American. Should we be backing Gekko's greed?

By Paul Farrow, Personal Finance Editor
Published: 11:30AM BST 08 Oct 2010


As Gordon Gekko returns to the big screen, should British investors be rethinking their lack of American exposure?  Talk of investing in the US evokes images of Gordon Gekko, the king of Wall Street, all braces and pinstripes, making multi-million-dollar deals and living the high life. Yet the Eighties blockbuster film did little to encourage British investors to grab a slice of the American investment pie.

More than two decades on and Michael Douglas has reprised his role as Gekko in the sequel Wall Street: Money Never Sleeps. Yet, Wall Street might as well take 40 winks where British investors are concerned, as they continue to shun the world's biggest stock market – it was the least popular sector according to the latest monthly statistics from the Investment Management Association.

It perhaps seems strange that British investors don't invest in American shares. After all, nine of the world's biggest brands are American – they are names we know and we contribute to their prominence. Take an IBM laptop into McDonald's, sip a Coca-Cola, check your email on Microsoft Outlook and surf on Google, and you will have embraced five of the top six in one swoop.

Yet despite its familiarity, financial advisers have never been too keen on selling the US story to investors.

Brian Dennehy at advisers Dennehy Weller & Co has been avoiding the US since 1996 and said that few have found good reason to buy the US market since: "The US is all too often at the epicentre of investment stupidity, from the Long Term Capital Management (LTCM) saga in 1998, the technology bubble of 2000, the property bubble that is still painfully deflating – and the greedy and feckless are now being set up for a roller-coaster in gold from which few will exit with profits [if a classic bubble inflates].

"There is dynamism and resilience built into the US economy. But what's the point for a UK investor when we can opt for more reliable growth areas in Asia?" he said. Hargreaves Lansdown simply thinks British fund managers aren't that good at delivering the goods. But it also agrees with Mr Dennehy and said that when it comes to investing on the other side of the Atlantic, other overseas sectors such as global emerging markets are more exciting.

Mark Dampier at Hargreaves Lansdown said: "In my 27 years in the industry I have never bought an American fund, perhaps that tells you everything."

Not that all financial advisers are downbeat.

Alan Steel at Alan Steel Asset Management is baffled as to why British investors shun the US. But he suggests that it is difficult to ignore a nation whose GDP is equal in size to the GDP of France, the UK, Italy, Brazil, Canada, Spain, Russia and India added together.

"The US market has always gone up strongly following the first two years of a new president's first term, going back to the Thirties, and we are about to enter the sweet spot," Mr Steel said.

"On top of that, demand has come in the past from times when a new generation is significantly bigger than the previous one. Generation Y, as it is known, is reckoned to be 20pc bigger than the baby boomers. No other country has this phenomenon as far as I can see."

The US economy is still in recovery and continues to run in fear of a double dip. Its latest job data showed an unexpectedly poor reading on private-sector hiring as employers cut 39,000 jobs in September, according to the ADP Employer Services report – the largest monthly loss since January.

Tom Walker, a fund manager at Martin Currie, the Edinburgh investment house, said the economic news continues to be "very mixed". "We do not expect a 'normal' economic recovery, but do expect growth to continue, albeit at a modest rate."

Mr Walker admitted that valuations look promising, but that there will be as many hits as misses. "This is not an environment where all boats are going to float and stock selection is more crucial than ever. The market valuation, looking exceptionally cheap, remains key," he added.

Felix Wintle, who manages Neptune US Opportunities, thinks many investors have seen the S & P500 remain flat for a decade and therefore not thought they had missed out. "The US market is 5,000 strong and companies are at the heart of innovation – these companies, such as Apple, create new world themes, plus we have hundreds of different business models from which to choose the best," he said.

Mr Wintle points to technology where in the UK, he says, British investors are limited to the likes of Logica and Sage, or in the retailers there are just a handful of shares such as Tesco and Next. "In the US we have so much choice because it is such a big market," he said. "The latest earnings figures are smashing the ball out of the park. Companies have restructured and become leaner organisations over the past couple of years."

Advocates of the US also argue that its companies are a conduit to emerging markets, which makes them an intriguing play for the contrarian investor who thinks that the likes of China are overcooked. "The US is a bit like the UK in that it is not a domestic play," said Tom Stevenson, investment director at Fidelity. "But its companies have been far more aggressive in making cuts than most and they are relatively cheap. It is one for the contrarian to consider."

http://www.telegraph.co.uk/finance/personalfinance/investing/8050267/Are-British-investors-missing-a-trick-by-shunning-Wall-St.html

India is tipped to emerge from China's shadow

India has been overlooked by investors, but it should not be ignored.

By Emma Wall
Published: 5:21PM BST 08 Oct 2010

2 Comments


If there were a popularity contest for emerging markets, India would struggle to win a medal. As the Commonwealth Games host has had difficulty enticing crowds to the sporting event, so too have investors shunned its economy in favour of India's bigger neighbour, China.

British fund investors have put £4bn more into China than into India, according to Morningstar, the analyst – China has attracted £15bn from UK-registered unit trusts, compared with £11bn for India.


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But the smart money may do well not to just follow the crowd China may be the current star of the BRIC show, but India could eclipse its neighbour in the not-too-distant future.

"In the last year, the MSCI India index is up by 22pc, whereas China is up by only 5.8pc," said Allan Conway of Schroders. "China may have better short-term prospects, but India is less developed and so has further to grow. Add to this China's prematurely ageing population due to the one-child policy, and I would say on a five-year-plus view that India is the more attractive investment opportunity."

India's economy is expected to grow by about 9pc next year, and although the budget deficit is 4.5pc, very little of this is in foreign currency, making it manageable.

India's past performance has been impressive too. If you had invested £1,000 in J P Morgan's Indian investment trust a decade ago, it would now be worth more than £6,000; had you invested a similar sum in the HSBC GIF Indian Equity unit trust, it would have grown to £7,433.

Short-term performance has also been positive. In the past year First State's Indian Subcontinent fund has returned 39pc and the India Capital Growth investment trust has risen by 58pc.

The past year has been prosperous for India. A new single-party government – India had been governed by coalitions since 1991 – was elected in May 2009 and has focused on corporate governance and tax regulation. It is introducing identity cards, which will be used to tax workers more efficiently and provide income for the state.

"It used to take a year to build the same number of roads that are being constructed in a day," said Pinakin Patel of J P Morgan.

India is a domestic market, supporting its own industry rather than relying heavily on exports like Russia and Brazil. This means that it was less affected by the global economic downturn than some of its emerging market peers, and can offer investors a hedge against a European or American double-dip.

India has a lower dependence on commodities than other emerging markets, contributing just 25pc of the equity market, compared with 36pc in South Africa, 46pc in Brazil and 70pc in Russia. The more diverse market offers more stability instead, mainly being a composite of financials at 30pc and energy, which is 25pc of the market.

Future investment opportunities lie not in big cities such as Mumbai and Delhi, but in smaller centres. Investors will be able to get the growth prospects of a frontier market, but with the stability of a more developed country.

The consumer story is big in these regions. Not only are the growing middle classes buying more goods and eating more meat, but their rise in social status is encouraging more infrastructure to be built and bringing big business to the financials.

"I come from a rural part of India," said Mr Patel. "I know how much people keep under the mattress. But more people are getting bank accounts, mortgages and credit cards – which is why we chose to play the consumer trend more indirectly through the financials." Four of the top five holdings in the J P Morgan investment trust are banks.

The newly launched Insynergy Absolute India fund favours financials too. It is run by India's largest business, Reliance Group, which invests in HDFC Bank. The high savings and investment rate, 37pc of GDP, coupled with the large as yet untapped market make it a good long-term growth holding.

Other sectors touted as opportunities for growth are pharmaceuticals, technology and infrastructure.

As the Commonwealth Games have proved, however, regulation in emerging economies is simply not on a par with the Western world. Fund managers may have puffed infrastructure as an area to invest in, but who wants to invest in the kind of bridges that collapse?

"India remains a very rough diamond," said Darius McDermott of Chelsea Financial Services. "In terms of infrastructure it remains a decade behind China – in many parts of the country roads are truly catastrophic. Energy supply is a perennial problem, as is the supply of skilled workers."

Mr Patel stressed that investors should not confuse publicly funded infrastructure, which is poorly regulated, with privately funded infrastructure. "Privately funded construction has many success stories, such as the Delhi metro," he said. "India is not perfect, but it has an English legal system and a proper accounting system. We chose to work with leading companies with a good track record." The JPM fund holds Larsen & Toubro, which builds power plants, and BHEL, a builder of roads and airports – both with 40-year histories.

While the Empire may have left India with an impressive rail system, the leftover democracy has stifled growth. "The legacy of the British Raj is a heavy-handed civil service," said Schroders' Mr Conway. "The administration system is onerous and means any development applications are beset with delays."

Financial advisers are not convinced that India is for everyone, as it remains at the higher end of the risk spectrum. Mr McDermott said: "In terms of an investment case India shows lots of promise, but there are endemic problems. Given the inherent problems associated with its nascent economic boom I consider this a high-risk investment. I recommend that exposure to the region should be less than 5pc and part of a balanced portfolio."

He suggested the more cautious strategy of getting exposure to India through an emerging market fund such as Allianz BRIC. For investors set on a specialist fund he recommended Fidelity India Focus Fund.

Charlie Nicholls of Investment-advice-online.com backed First State Indian fund or Invesco Perpetual Asia.

"India only has a 20-year economic history, compared to China's 35-year one," said Mr Conway. "In five to 10 years China will slow down and India will consistently grow each year faster than China."

http://www.telegraph.co.uk/finance/personalfinance/investing/8051265/India-is-tipped-to-emerge-from-Chinas-shadow.html

Sorry to burst your bubble, your investment is overpriced

Annette Sampson
October 9, 2010

They're frothy and insubstantial. Mere lightweights in the world of solid matter. But bubbles can prove mighty dangerous phenomena, especially in the world of investments.

Investment bubbles have been brought back into focus by the mere uttering of the word by the Reserve Bank head of financial stability, Luci Ellis, in relation to the residential property market at a conference in Brisbane this week.

Let's be quite clear. Despite continuing speculation that Australian house prices are in bubble territory this was not what Ellis was claiming. Rather, Ellis said the market was showing ''welcome signs'' of cooling. But low yields on residential property, she said, limited the potential for price appreciation.

Advertisement: Story continues below ''Buying an asset because you expect the price to rise in the future, well, that is actually the academic definition of a bubble,'' were the attention-grabbing words. ''So that would be undesirable and seen as a problem.''

Never mind that future capital gains have long been the prime motivation for Australian residential property investors. Ellis said recent rises in rental yields and a levelling off in prices were a good thing, but this has not dampened the speculation over whether Australia, like the US and so many other countries, is in danger of a housing bubble burst.

The International Monetary Fund also bought into the housing bubble debate this week cautioning that our house prices may be overvalued and a correction could hit household wealth and consumer confidence.

The arguments on the Australian housing market have been well-documented. Those holding the bubble view point to historically high levels of debt by households, high house prices in relation to incomes, and low rental yields as being unsustainable. The property bulls point to continuing undersupply of housing and strong immigration as putting a floor under house values.

Both have a point. But in the post global financial crisis environment where debt still has the potential to derail the economic recovery, it would certainly be prudent to err on the side of caution.

However the argument raises the broader issue of how investors can shield themselves from the inevitable crashes that follow investment bubbles, while enjoying some of the profits while markets are rising.

As the chief economist of AMP Capital Investors, Shane Oliver, points out, investment asset bubbles are an inevitable outcome of human nature. Investors have a natural inclination to jump onto popular fads by buying into investments that have been star performers - a trend that pushes prices up further and further until they become overpriced and unsustainable.

While you would think investors would be once bitten, twice shy, history also shows that bubbles emerge regularly, often arising from the ashes of the most recent crash. While it's easy to get caught up in bubbles, the fact that we've had so many of them also provides investors with the tools to identify when and where bubbles are emerging. There are always those who will claim each bubble is different, but the reality is that they all follow similar patterns. The signs are there for those prepared to look for them.

Dr Oliver identifies a combination of conditions that tend to lead to bubbles.

• Chief among these is a supply of easy money, though the bubble generally does not start to form until something happens that generates popular interest in the investment, it becomes overvalued, and speculators jump in fearing that if they don't buy now they'll miss out on the next chance to make some fast profits.
• Other commentators have pointed out that bubbles are also characterised by overconfidence. Even when it is obvious that prices are overvalued, pundits come up with arguments to justify why ''this is different'' or why the old rules don't apply to this investment. A classic example was the tech boom of the late 1990s when any company claiming a vague connection to information technology could command a heady price on the sharemarket regardless of its earnings. Indeed, even if it had no earnings.
• Another common feature of bubbles is that they are generally fostered by government policy that encourages speculation to grow.

Oliver says the liquidity that has been generated by governments in response to the global financial crisis and the bursting of the bubble in US house prices has created fertile conditions for the next bubble. Easy money is providing the fuel for investors to jump into something seen as safe, offering a good return, and removed from the assets that caused the last set of problems.

His pick of prime bubble candidates are shares in emerging markets, gold and commodity prices, and resource shares.

However for a bubble to exist, speculation and overvaluation must also be present - and while there is definitely speculation in these markets, and prices have risen strongly, Oliver argues they have not yet reached bubble levels.

His verdict is that we are in the ''foothills'' of the next bubble, which more than likely has several years to run.

It is also important to note that while the most memorable bubbles are those that come to a spectacular end, not all investment bubbles lead to a sudden collapse in prices. Bubbles can end with a bang, or they can simply run out of steam, providing investors with a long period of underperformance rather than overnight losses. Historically this has been the more common trend for less volatile (and less liquid) assets such as direct property investments.

In that respect, a cooling in Australian house prices should indeed be welcomed.


http://www.smh.com.au/business/sorry-to-burst-your-bubble-your-investment-is-overpriced-20101008-16bz5.html

Soaring Australian dollar could fall 25%

Chris Zappone
October 9, 2010

THE Australian dollar's dramatic rise towards parity with the US dollar has left the currency exposed to the possibility of a correction, analysts say.

The Australian dollar leapt to US99.18¢ on Thursday night - the highest level since the currency was floated in 1983 - driven by strong data on the local economy and a weakening trend for the greenback. The dollar retreated to the US98.3¢ mark in local trade Friday afternoon.

''While many in the market believe parity will be reached, it will be difficult to see sustained trading at those levels in the longer term,'' said Travelex's Head of Risk Solutions, Anthony Gray. ''Get ready for the excitement as we reach parity, but do not be disappointed if the party wraps up pretty quickly.''

Advertisement: Story continues below New York-based GFT director Kathy Lien said that when the Aussie's purchasing power was viewed against the purchasing power of other currencies, it appeared extremely overvalued. ''At an exchange of US98¢, the Aussie is approximately 30 per cent overvalued against the US dollar,'' Ms Lien said.

''In fact, the Aussie is overvalued against every major currency including the British pound, Japanese yen, euro and New Zealand dollar,'' she said.

In addition to gains against the greenback, since August 25, the Aussie has risen 5 pence against the British pound to trade recently at 61.8 pence. It has also risen 6 yen on the Japanese currency to be at 80.8 yen, and New Zealand 5¢ against the kiwi to trade at NZ$1.31. The Australian dollar in its 27 years as a freely floating currency has had a long term value of US73.48¢.

''When valuations become this out of line, the general belief is that it needs to return to more sensible levels but it could be a long time before they do,'' Ms Lien said.

The Australian dollar's latest rally was sparked on Thursday when jobs data showed the economy added almost 50,000 new jobs last month - twice the level expected.

The surprisingly large increase led investors to bet the Reserve Bank would raise its key interest rate next month, adding to the relative allure of holding the Aussie dollar.

Also, in recent weeks the US Federal Reserve has hinted it could embark on another round of quantitative easing, a process aimed at bolstering economic growth that also weakens the US dollar against other currencies.

Nonetheless, the Aussie's run has drawn warnings from currency experts about a potential correction once market sentiment shifts. ''In financial markets as in other walks of life, the bigger they are the harder they fall,'' said 4Cast Ltd economist Ray Attrill. ''So if and when we do see a major shake-out … the Australian dollar will likely fall faster and further than just about any other G10 currency,'' he said, referring to the Group of 10 large economies.

Credit Suisse analyst Damien Boey said that on conventional currency assumptions the Aussie dollar could be overvalued by as much as 25 per cent.

''But we don't live in a normal world, because of quantitative easing globally,'' Mr Boey said. ''One day, we will revert to a more normal macro environment, and the currency will correct. But there is no visible catalyst for correction.''


http://www.smh.com.au/business/soaring-dollar-could-fall-25-20101008-16c5j.html

China rejects quick yuan revaluation

October 9, 2010 - 4:19AM
.AFP

China's top central banker has rejected demands for a quick revaluation of the yuan, saying the emerging giant will reform gradually rather then engaging in "shock therapy".

Under fierce pressure from the United States, Europe and Japan, central bank governor Zhou Xiaochuan said on Friday the yuan will move gradually toward an "equilibrium" level.

With the recovery still painfully slow in the developed world, China and other emerging markets are being asked to allow a more level playing field for trade.

Advertisement: Story continues below Attempting to defuse simmering tensions, IMF chief Dominique Strauss-Kahn said China will not be expected to revalue its currency overnight.

But earlier on Friday, US Treasury Secretary Timothy Geithner gave a glimpse of Washington's impatience with the pace of reform so far.

"The United States believes that global rebalancing is not progressing as well as needed to avoid threats to the global economic recovery," he told the IMF's 186 other member states.

Geithner added the solidarity shown in the wake of the global financial crisis is at risk of disappearing as countries like China fail to switch the foundation of their economies from foreign to domestic demand.

© 2010 AFP

UK investors to study finance meeting

October 9, 2010

The London stock market may extend recent gains next week as investors digest the outcome of this weekend's international finance meeting in Washington amid fresh economic data and company results.

By Friday on the London Stock Exchange, the benchmark FTSE 100 index finished the week at 5657.61 points, up 1.16 per cent from a week earlier.

This weekend, major world powers are gathering in Washington to try and avert a damaging global "currency war" and address the weak level of the dollar.

Advertisement: Story continues below With recovery slowing, recent weeks have seen some nations intervene to stop their currencies from rising to levels that would make their exports prohibitively expensive.

That has sparked talk of a currency war and cast a shadow over global financial markets.

Finance ministers and central bankers from 187 countries are convening for the annual meeting of the International Monetary Fund amid concern that currency policies could wreck the fragile global economic recovery.

"From a currencies perspective, many will look to developments at the ... meeting to see if there is anything done to stop the dollar from weakening," said City Index analyst Joshua Raymond.

He added: "There could, however, be much volatility triggered by the third-quarter earnings season in the United States and a range of important economic data due out throughout the week.

"We are now in third-quarter season and so, naturally, we will see a shift in attention towards US companies that report.

"Next week we have Intel, JPMorgan, Google, General Electric all reporting and so, naturally, we will see European traders react to this," he added.

In Britain next week, there is data on inflation, unemployment and trade.

Key trading updates are due from mining giant Rio Tinto and drinks group Diageo.

© 2010 AFP

Facebook, Twitter used in US stock fraud

October 06, 2010



Facebook and Twitter feeds were used to allegedly defraud the investing public. — Reuters picNEW YORK, Oct 6 — Facebook and Twitter social networking sites were used to tout stocks in a classic “pump and dump” fraud of about US$7 million (RM21.7 million) that was uncovered during a cocaine-trafficking probe, US prosecutors said yesterday.

Investigators discovered the fraud in a two-year probe of suspected trafficking by longshoremen and others of 1.3 tonnes of cocaine worth US$34 million through the Port of New York and New Jersey officials said.

A statement by the Manhattan US Attorney’s office said 11 out of 22 people charged used more than 15 web sites, Facebook pages, and Twitter “feeds” to “defraud the investing public into purchasing stocks that were being manipulated by participants in the conspiracy.”

A spokeswoman for Twitter declined to comment on the announcement. A spokesman for also Facebook declined to comment.

Eight longshoremen and three others face narcotics trafficking charges. Eleven people, including one longshoreman, face charges of conspiracy to commit wire fraud in the purported stocks scheme.

Documents filed in Manhattan federal court said the 11 were from New York, Florida and Pennsylvania. They are accused of orchestrating web site links that touted picks in four penny stocks said to be based on the authors’ expertise and independent research.

They face up to 20 years in prison if convicted.

None of the stocks were identified in court documents, which said more than US$3 million was accrued in illegal gains by the accused and that shareholder losses amounted to more than US$7 million.

The case is USA v. Susser et al, US District Court for the Southern District of New York, No. 10-mag-2190. — Reuters

Just say no to gold, advise private bankers

October 06, 2010

Gold’s high price made it hard to extract further gains, said several US bankers. — Reuters picNEW YORK, Oct 6 —Gold is all the rage as investors flee uncertain markets and worry about inflation, but some bankers to the very rich do not take a shine to the precious metal.



Gold prices have spiked 22 per cent this year, with investors sending gold futures to record highs of more than US$1,337 (RM4,144) yesterday. The weak dollar, volatility in currency markets and deficit worries boosted demand for the metal as a safe store of value.

Private banking executives, say gold’s glittering price tag is or should give their wealthy clients pause.

“We’re not really recommending gold right now, just because it’s at a level where there are things driving it beyond the types of things (where) that we can add a lot of value,” US Trust President Keith Banks said at the Reuters Global Private Banking Summit in New York.

Instead, Banks said gold prices may reflect the surge in demand for gold exchange-traded funds, listed shares that purchase physical gold, and broader worries about government spending leading to rapid price inflation.

“So what exactly is leading to gold at the levels it’s at? Your guess is as good as mine,” said Banks, who runs the Bank of America private bank unit.

The SPDR Gold Trust ETF, which lets retail investors more easily bet on gold, has surged 21 per cent this year to a record high of 130.71. The fund shares are up more than 50 per cent since the end of 2008.

Wealthy families are more interested than ever in owning commodities such as metals and energy, assets that do not move up and down in step with stock and bond prices. They also offer a hedge against inflation, since their values rise with prevailing prices.

There are many critics who warn gold is the latest frenzy and is doomed to collapse.

“With gold being over US$1,300 an ounce now, you have people who are asking whether, first, ‘Is it another bubble?’ and then, ‘How far can I ride that bubble?,’” Credit Suisse Americas private banking chief Anthony DeChellis said.

Bessemer Trust Chief Executive John Hilton said his New York wealth management firm allocated a single-digit percentage of its real return fund into gold.

For some clients, he acknowledged, that was not enough.

“We have clients who have made very large individual purchases of gold. Sometimes they’ll just say they’re doing it, and they’ll ask us if we can hold it for them, but we haven’t made any large purchases of gold directly for our clients,” said Hilton, whose firm manages about US$56 billion.

US private bankers, to be sure, also told the Summit they do recommend investments in a range of commodities.

“We have been a proponent of having an exposure to commodities. The bank is optimistic about the economic recovery, and commodities is a way to play global growth,” said US Trust’s Banks.

US Trust formed its Specialty Asset Management group, which buys hard assets on behalf of its wealthy clients — anything from real estate, timberland and farmland to oil and gas properties. US Trust will buy and sometimes hire people to operate these assets.

The business, which manages about US$16 billion of assets, is seeing strong interest from clients, he said.

“These are assets that I think people can feel good about, that are probably not going to track the more typical areas, and it’s just a unique opportunity,” Banks said. — Reuters

Next up: Tax hike for brewers?

Written by Insider Asia
Friday, 08 October 2010 12:16

Now that two of the three so-called “sin sectors”, cigarettes and gaming, have seen taxes raised this year, expectations are high that the brewers are next in line.

Earlier in June 2010, gaming companies saw pool-betting duty raised from 6% to 8%. The latest round of tax increase for cigarette manufacturers, of three sen per stick, was announced earlier this week ahead of Budget 2011, which is to be presented on Oct 15.

Of the three sectors, cigarette manufacturers have been the worst affected, having been slapped with tax hikes every year for the past eight years. By comparison, brewers are “luckier” — they have been spared of any tax increase since 2005.

Back then, the government raised excise duty by 23% to RM7.40 per litre and introduced a new 15% Ad Valorem duty payment on the ex-brewery price for beer products. But at the same time, it also reduced sales tax to 5% of the ex-factory invoice price on all products sold. The net tax increase was thought to be around 8%-9%.

As such, many expect the time is ripe for fresh tax hikes — by as much as 10% — in Budget 2011. The government has hinted as much.
On the other hand, brewers contend that beer taxes in the country are already one of the highest in the world, second only to Norway. Government tax payments amounted to over 48% of Carlsberg Brewery’s revenue last year.

Like the cigarette industry, it is feared that further tax hikes — and the resulting higher selling prices — will fuel smuggling. Smuggled or illicit beer is estimated to make up roughly 20% of the local beer market. Volume sales of the duty-paid malt liquor market dipped in 2005-2006 after the last round of tax hike before recovering in 2007-2008. Industry volume sales are estimated to have declined by roughly 2% in 2009, impacted by the global downturn, but are expected to grow in the single digit this year.

Higher taxes and prices could send volume sales growth back into negative territory — affecting the earnings of the two local breweries, Guinness Anchor and Carlsberg.

Guinness fared better over past few years
Of the two, Guinness appears to have weathered the intensely competitive operating environment better. The company charted steady growth in sales and profits over the past decade, thanks, in part, to its success in gaining a steadily larger slice of the domestic market. At present, its market share is estimated at roughly 57%, up from about 45% back in 2001.

Sales grew at a compounded rate of more than 8% annually, from RM670 million in FYJune01 to RM1.36 billion in FY10. Over the same period, net profit increased at an even faster pace of   11.2% per annum, from RM58.7 million to RM152.7 million in the latest financial year.

By comparison, Carlsberg’s earnings growth has been patchier. Whilst sales increased at a compounded annual rate of about 2.3% between 2000 and 2009, net profit dipped to RM75.9 million last year from RM110 million in 2000. Indeed, Guinness’ shares had outperformed Carlsberg over the past five years. Shares of Guinness are currently trading at RM8.46, compared to RM5.75 at the start of 2006 whilst Carlsberg’s shares are hovering around the same levels as they were five years ago.

Expansion boost for Carlsberg
Nonetheless, Carlsberg’s prospects appear to be looking up. The company has been on an expansion trail, investing in Luen Heng F&B in November 2008 and Carlsberg Singapore in October 2009. The acquisitions have widened both its product range and market base — and appear to be paying dividends.

Carlsberg reported strong earnings in 1H10, boosted by contributions from Carlsberg Singapore. The latter accounted for RM28.7 million of its pre-tax earnings of RM69 million in the first six months of the year, and is well on track to meet the company’s estimated net profit contribution of RM37 million for the full year. At this pace, we estimate Carlsberg’s 2010 net profits to be sharply higher from last year’s RM75.9 million. In addition to operational synergies, the expansion in Carlsberg’s customer base is likely to temper the negative impact of a tax hike in the domestic market.

Carlsberg’s new ventures — Carlsberg Singapore was acquired for RM370 million — have come at the expense of dividends. The company lowered its dividend payout in 2008-2009 to 35% and 51% of profits, respectively, compared with the average payout of 108% in the preceding six years. The company has net debt of RM37.7 million at end-June 2010.

Assuming the same 51% profit payout this year, dividends will total 30 sen per share. That translates into a net yield of 4.3% at the current share price of RM5.20.

Guinness pays higher dividends
Guinness, on the other hand, remains focused primarily on the domestic market. With lower capital expenditure — estimated at roughly RM50 million in the current financial year — dividend payout has stayed high, averaging at some 85% of net profits in the past five years.

The stock will trade ex-entitlement for a final tax-exempt dividend of 35 sen per share on Nov 11.

Assuming dividends totalling 45 sen per share — the same as that for FY10 — in the current year, shareholders will earn a net yield of 5.3% at the prevailing share price of RM8.46.

Guinness is sitting on net cash totalling almost RM150 million at end-June 2010. — InsiderAsia


Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.

This article appeared in The Edge Financial Daily, October 8, 2010.

LPI earnings up on unit’s higher underwriting profit

Friday October 8, 2010
LPI earnings up on unit’s higher underwriting profit

PETALING JAYA: LPI Capital Bhd’s net profit for the third quarter ended Sept 30 rose to RM36.21mil from RM32.90mil in the same period last year.

This was achieved on higher underwriting profit generated by its wholly-owned subsidiary Lonpac Insurance Bhd.

Revenue for the period increased to RM216.95mil from RM206.63mil recorded in the same period last year mainly due to higher gross premium underwritten, the company told Bursa Malaysia yesterday.

Earnings per share rose to RM16.85 from RM15.33.

For the nine months ended Sept 30, LPI’s net profit was up to RM100.97mil from RM91.12mil previously while revenue rose to RM640.46mil from RM583.88mil.

Earnings per share increased to RM47.03 from RM42.46.

Barring any unforeseen circumstances, LPI said prospects for the group should be satisfactory for the year 2010.

In a separate statement, LPI chairman Tan Sri Teh Hong Piow said Lonpac was able to achieve a significant improvement in its underwriting surplus despite operating in a competitive market.

Its underwriting surplus rose by 38% to record an underwriting profit of RM77.9mil for the nine-month period versus RM56.5mil previously on the back of gross premium income of RM586.3mil.

“Lonpac places utmost priority on strong risk management of its assets and liabilities as well as stringent internal controls in managing its operations,” he said.

LPI shares closed up six sen to RM11.76 yesterday with 17,900 shares traded.

http://biz.thestar.com.my/news/story.asp?file=/2010/10/8/business/7184502&sec=business

Comment:  This remarkable company has seen at least 15% annual growth in its revenues, profit before tax and EPS for many years.  This speaks for its durable competitive advantage in its insurance business.

Contradictory strategies

For almost any strategy that's been proposed as a good one with shares, there's also a contradictory one.  And the interesting thing is that a strategy may work in certain circumstances whereas in different circumstances the contradictory strategy may work just as well.  There are several important conclusions from this:

• There's no one strategy with shares that works in all circumstances.
• The most important factor is to decide on a strategy and stick to it.  Chopping and changing at the spur of the moment and not sticking to your strategy is the cause of most problems in share investing.

Tip

When you've decided on a strategy, stick to it. Give it a fair trial, and change only if the fair trial convinces you that your strategy needs to be adjusted (or abandoned).

Blue Sky Potential

There are many listed companies whose shares trade for prices ranging from cents to dollars that fit into one or more of the following categories:

• The company doesn't yet have a saleable product.
• The company is making a loss.
• The company has never made a profit.

You'll find examples of these types of companies among:

• mineral and oil exploration companies
• biotechnology or medical companies researching or developing a new vaccine or medical treatment
• industrial innovation companies developing a new product
• computer technology companies developing software or new computer hardware.

And the list goes on ...

Shares in these types of companies are priced by the market according to what is known as 'blue sky potential'.  The market factors expected future profitability into the share price, and so companies not currently making a profit may still have a high price if the market anticipates that future profitability may occur.

Tip

It is risky to buy shares in a company whose shares are priced on blue sky potential.

Also read:

Green Packet Announces 10th Consecutive Quarter Of Losses!

Update on Green Packet

Six Principles of Share Investing

Here is a relatively hassle-free and low-risk investment strategy that should provide good profitability with shares over the long term.  The strategy is outlined here as the six principles of investing and they are:

• Compound your share investment
• Diversify your investment
• Invest in shares with good fundamentals
• Trade at the right price
• Trade at the right time
• Monitor and review regularly.

Is the KLSE overvalued?

5.10.2010

KLCI 1462.27
Market PE of KLSE = 17.48
Earnings yield = EY = 1/PE = 5.7%
Risk free FD interest rate = 3.0%
Equity risk premium = 5.7% - 3.0% = 2.7%

Equity risk premium is the compensation investors require for holding stocks.
Equity risk premium = earnings yield (1/market PE) - the risk free rate.

More than 3.5%, market is undervalued
0.6% to 3.5%, market is fairly valued.
Less than 0.6%, market is overvalued

So, presently, by the above criteria of equity risk premium, the market is neither undervalued nor overvalued, and is at fair value.

http://myinvestingnotes.blogspot.com/2009/07/when-is-market-over-valued.html

12 warning signs of unreliable forecasts from Tarbell and Trugman

Written by David on October 5, 2010


“It’s good to be talking about business forecasts with a lot of CICBV members in the room,” began Gary Trugman at his keynote session on working with financial projections in Miami at the ASA/CICBV Annual Business Valuation Conference. “You’re all already familiar with hockey sticks.”

Trugman and his co-presenter Jeff Tarbell note that USPAP doesn’t address forecasts directly in Sections 9 or 10. SSVS-1 refers to projections in sections on collecting data, and in DCF analyses. But, there’s nothing about the degree to which appraisers need to audit forecasts—which is part of the reason that a standard limiting condition in many valuation reports is something like the language below.

We do not provide assurance on the achievability of the results forecasted by [ABC Company] because events and circumstances frequently do not occur as expected; differences between actual and expected results may be material; and achievement of the forecasted results is dependent on actions, plans, and assumptions of management.

Correctly or incorrectly, some appraisers may try to account for forecasts they don’t trust via the company-specific risk factor. “The courts are catching up with anything that looks like this practice,” Tarbell said.

How good are forecasts? First, “30-40% of the companies we work with don’t have a meaningful forecast,” said Trugman. “But, even when you can obtain one, you often face unreliable assumptions, and they may be unwilling to make changes you suggest.” So, when do you just do your own forecast?

Particularly with public companies “you’re going to have a hard time justifying numbers you made up as opposed to numbers management made up,” says Tarbell. “You could be asking management to revise numbers that may have already been presented to analysts or others. You’re opening a lot of doors no one wants to open.” But, if you do your own, the best hope is “to get management to sign off on what you’ve done. Maybe they don’t have a balance sheet forecast so we fill in the blanks, send it to management, and ask them to agree to it with all the disclaimers that you can’t predict the future.”

Trugman and Tarbell feel that if you can’t obtain a forecast, or adjust a weak forecast, or create your own, your option is to reject the income approach. And, they warn all appraisers to recognize two rules about nearly all forecasts:

1. Management tends to over-estimate projected cash flows:

– The distribution of future cash flows is not likely symmetric.

– Downside often exceeds upside due to capacity constraints, market size, competition, etc.

2. The appropriate projected cash flow for discounting is the statistically expected value, meaning a probability-weighted expectation of future results.

– This is not the particular outcome with the highest probability of occurrence.

Pratt and Grabowski’s Cost of Capital 4th Edition is due out very soon. Tarbell reports that these two points are freshly emphasized in the update. And, Tarbell and Trugman recognize that there are a dozen Indications of possible unreliability:

1. Forecast results are notably different than past results.—“It’s OK to be wrong in a forecast; all the public companies are. But by looking at past forecasts you can see patterns of unreliability,” says Trugman.
2. Forecast was prepared by a party with an interest in the valuation outcome.
3. Resulting value is not consistent with the values from other methods used.
4. Forecast was prepared by CEO/CFO without input from business unit heads. “If the CEO hasn’t spoken to sales and marketing, you may see very different results,” says Tarbell.
5. Forecast is inconsistent with analyst expectations for public comps. “Are growth rates and margins consistent with what analysts are projecting for public companies in your industry,” asks Tarbell. “There better be a good explanation if a forecast is different that other companies who are all competing for the same market share.”
6. Forecast income statement without balance sheet and statement of cash flows. “It may not be very safe when you’re missing such critical inputs to the DCF method such as working capital, CAPEX/depreciation, or financing needs,” warns Trugman. He sees many clients who project faster than historical growth, but in fact when balance sheet forecasts are prepared, it turns out that you outstrip cash resources very quickly and there’s no way to support this growth. “The company may have exceeded its borrowing capacity early in the projection cycle,” Trugman explains in the most typical case.
7. Forecast assumes capital spending at levels that are not financeable. “We often see a forecast that assumes a doubling of some factor in the middle of the cycle,” says Tarbell. This is a clear warning sign. “A leveraged analysis may be more appropriate where the subject company has significant capital needs over the course of the forecast,” Trugman agrees.
8. Forecast ends on the peak or trough of a business cycle. “What do we do with forecasts now, for instance,” asks Trugman. “The answer is we’re looking at longer business cycles, even beyond the standard five year projections. How did the business do during the last downturn?”
9. Forecast not accompanied by a detailed schedule of assumptions. Tarbell says “even if there aren’t detailed notes, can management explain the significant assumptions and particularly any of those that are inconsistent with the past. I don’t like those.”

10. Forecast not achievable without additional financing or acquisition.

11. Forecast hinges on one or two extraordinary assumptions. “If good results are tied to the outcome of one key assumption, you’ll need to examine that assumption very carefully, and be very suspicious of the projections,” Trugman warned.

12. Too much of the indicated value is coming from the terminal value.

Trugman and Tarbell’s indicators of forecast reliability appear in the table below

Determining Forecast Reliability

• Revenues

– Are growth rates consistent with history?

– What are new revenue streams based on?

– What is the timing of new revenue streams?

– Are changes in revenues consistent with industry information?

• Expenses

– Forecast should be based on normalized operations

– Fixed vs. variable cost analysis

– What do variable costs vary against? Revenues? Payroll? Square footage?

– Is this consistent with history?

– What is basis for research and development costs?

http://www.bvwirenews.com/2010/10/05/12-warning-signs-of-unreliable-forecasts-from-tarbell-and-trugman/

Market PE of KLCI 5.10.2010

Market PE of KLCI  5.10.2010

https://spreadsheets.google.com/pub?key=0AuRRzs61sKqRdHJMTjI0N1NhSG16dVhBMDZCYTQ3eVE&hl=en&output=html

5.10.2010

KLCI 1462.27

Market PE of KLSE =  17.48

Market DY = 2.52%



Compare this with:

Market PE of KLSE 10.2.2010

http://spreadsheets.google.com/pub?key=tqTRwLLBhkoRtg4BhuybqMA&output=html