Ringgit more steady, but volatility to persist

Tuesday, 15 November 2016

Ringgit more steady, but volatility to persist

Sunway University business school professor of economics Yeah Kim Leng(pic) said the spike showed that there was strong demand for hedging against expectations of a continued weakness in the ringgit, ahead of expectations of an increase in the US interest rate.

PETALING JAYA: The ringgit traded in calmer waters against the US dollar, with the difference in the price of the currency in the official and speculative markets narrowing.

But indications are that the volatility of the local unit will persist in the next few weeks, analysts said.

The ringgit appreciated by 0.26% to RM4.33 against the US dollar yesterday in the spot market.

The spread between the onshore US dollar-ringgit exchange rate and the rate offer in the offshore market, also known as the ringgit non-deliverable forward (NDF) market, also narrowed.

At the time of writing, the one-month US dollar-ringgit exchange rate in the NDF market, which is not recognised by Bank Negara and deemed as speculative, was trading at RM4.38, which is not far off the onshore rate of RM4.33.

“The ringgit appreciated against the US dollar as there was enough supply of the greenback in the system, unlike last Friday,” said a trader.

Last Friday, banks did not go into any US dollar-ringgit transactions upon the behest of Bank Negara, as the rates were too volatile for the local banking system to price the US dollar appropriately. On Sunday, Bank Negara assured that there would be adequate supply of the US dollar, which contributed largely to the calm trading environment yesterday.

However, the one-month forward yield of the US dollar-ringgit trade in the NDF market spiked up to 17% in early trade. The forward yield was closer to 10% after 5pm.

The forward yield indicates the level of interest by speculators taking an arbitrage position between the onshore and offshore US dollar-ringgit exchange rate. The yields are normally at about 3%.

Yesterday saw an abnormal spike in the one-month forward yield of the US dollar-ringgt trade in the NDF market.

Sunway University business school professor of economics Yeah Kim Leng said the spike showed that there was strong demand for hedging against expectations of a continued weakness in the ringgit, ahead of expectations of an increase in the US interest rate.

“There is a lot of speculation that the interest rate hike will come steeper and faster, given the new US president’s inclination towards greater fiscal spending to boost the economy and the corporate sector.

“Hence, what’s happening is an outflow of foreign funds from emerging markets back to the US by investors seeking higher returns there.”

Yeah said that until there is more clarity on what the new president’s exact policies are, there would be continued volatility across the markets.

Meanwhile, a senior technical analyst who tracks both the stock and currency markets told StarBiz that although the ringgit strengthened against the dollar, the charts indicate weakness of the local currency in the next few weeks.

According to the technicals, the US dollar/ringgit daily chart showed that the greenback had reached the overbought levels, suggesting that the ringgit may appreciate over the next few days.

On the stock market, he said the 14-day relative strength index was oversold, indicating that there could be a technical recovery in the short term.

“However, the upside potential is likely to be capped,” he said.

He added that important support was pegged at the 1,600-point psychological level, while the immediate resistance is expected at the 1,640-point barrier.

Another economist when contacted said that “what seems to be happening is that there is selling pressure on the FBM KLCI and bonds in the onshore market, as the prospect of higher US bond yields are weighing negatively on the emerging-market space such as Malaysia. That has added pressure on the ringgit.”

Traders have also taken cognisance of Bank Negara’s warning on Sunday that it would not tolerate any transactions that facilitated trade on the NDF market. The NDF, which is an instrument for investors to trade forward rates for the ringgit, is settled in US dollars and is not recognised by Bank Negara.

Meanwhile, CIMB Investment Bank Bhd said the ringgit could touch between RM4.50 and RM4.80 against the US dollar within the next three to six months premised on the lack of clarity of the new US administration’s policies.

“Since the election, the US yield curve has steepened to reflect the market’s expectation of an inflationary impact of (president-elect Donald) Trump’s campaign promises.

“This narrowed the premium of emerging-market yields over the US and resulted in the unwinding of carry trades funded in US dollar.

“The ringgit has fallen in line with this trend and the weakness was further compounded by the relatively high foreign holdings of Malaysian government bonds,” it said in a report yesterday.

According to MIDF Equities Research, foreign funds were net sellers on Bursa Malaysia in the week ended last Friday at RM800.4mil, although the amount was lower than the RM948.1mil offloaded in the previous week.

“Still, it was the seventh-highest weekly outflow this year, estimated based on transactions in the open market which excluded off-market deals,” it said in its report.

The benchmark FBM KLCI ended at 1,616.64 points, 17.55 points lower than Friday’s closing.

http://www.thestar.com.my/business/business-news/2016/11/15/ringgit-more-steady/

Recency Bias or the Party Effect

Recency Bias or the Party Effect
Overview

The Party Effect or Recency Bias is where stock market participants evaluate their portfolio performance based on recent results or on their perspective of recent results and make incorrect conclusions that ultimately lead to incorrect decisions about how the stock market behaves. This is a very important concept to understand. Let’s set the stage for an illustration of how this happens.

Examples

A Party Tale

“You’re Right”

One of my favorite life lessons centers around President Franklin Delano Roosevelt, also known as FDR. FDR had many strengths but I think his greatest was his ability to recognize that things are not always black and white. I think his ability to see the big picture as well as discern the subtleties of a situation is what made him such an effective leader and brought out the best in others.

In one well known FDR story, he asks one of his trusted advisors what he thinks about a particular situation and after he listens to the advisor, FDR replies “You’re Right.” Not long after FDR asks another of his trusted advisors for his opinion on the same matter and this advisor gives the exact opposite recommendation from the first advisor to which FDR once again replies “You’re Right.”

At hearing FDR’s reply to the second advisor one of FDR’s closest advisors that had listened to FDR’s response to both advisors, points out the obvious contradiction to which FDR replies “You’re Also Right.”

Much can be learned from what at first appears to be FDR’s flippant and contradictory remarks to his advisors. However, FDR was far wiser. FDR understood that all three advisors were in fact right. They were just right from their perspective. But they didn’t have a view of the big picture. The contrast between FDR’s perspective of the entire situation compared to the trusted advisor’s perspective of a narrow part of the situation is what creates the dichotomy. The stock market works much the same way.

A different example would be the poem about the six blind men and the elephant. Each of the six blind men is asked to describe an elephant. Their perceptions lead to misinterpretation because they each describe the elephant differently depending on which part of the elephant they touch. One touches the side and describes the elephant like a wall. The other the tusk and describes the elephant as a spear. The next touches the trunk and describes a snake. The next the knee and describes a tree. The next an ear and describes a fan. Finally the last touches the tail and describes the elephant like a rope.

This tale is about the stock market and how investors relate to the stock market.The stock market can be viewed as FDR or the elephant while investors or participants in the stock market can be viewed as the advisors or the blind men.When describing the stock market each participant sees their portfolio’s performance from their perspective only and thus they are always “right” which leads to what I call The Party Effect or what Financial Behaviorist call the Recency Bias.

Imagine that you attended a party hosted by your investment advisor and that in addition to you, also in attendance were several other clients. As you go around the room and meet people you learn that everyone at the party owns the exact same S&P 500 index mutual fund. I use the S&P 500 for this tale because by many measures it has historically produce an average rate of return of about 12% and as many people know, and now you know as well, it represents what many investors call “the stock market.” The question then is would everyone have the same rate of return at this party? Of course the answer is, no they would not. If they started at the same time they would but since people invest or come into the life of the investment advisor at different times, the answer is no.

Let’s tighten up the party attendee list and invite only 30 guests. For simplicity, let’s assume that Guest 1 purchased the fund 30 months ago, that Guest 2 purchased it 29 months ago, that Guest 3 purchased it 28 months ago, etc. What would the guests discuss? What would be their perspectives of the stock market?


In order to determine what the guests would discuss and how they would evaluate their performance we need to have some data in the form of monthly rates of return. So we need to develop a monthly rate of return for 30 months to see what they see. Again, for simplicity, assume that for the first 18 months the fund goes up 3% per month and for the next 12 months it goes down 2% per month. Please note that I didn’t pick this sequence of numbers randomly. I have a purpose to this. This particular sequence approximates how the stock market moves in terms of bull and bear market duration and after 30 months returns approximately 12%; 12.28% to be exact. This sequence of numbers is a good sequence to illustrate The Party Effect or Recency Bias. We can characterize the first 18 months as the bull market phase of the 30-month cycle and the last 12 months as the bear market phase of the 30-month cycle.

To illustrate The Party Effect lets focus on 4 guests and see how they describe the stock market. Remember the FDR and elephant example from the start of this tale. Let’s look at guests 1, 10, 19 and 25. I picked these 4 because readers of this tale can relate in some form or another to one of these 4.

- Guest 1 started 30 months ago, at the beginning of the bull market phase, and his rate of return is 12.28% for the entire 30-month cycle. He enjoyed the ride up for 18 months and now the ride down for the last 12.

-  Guest 10 started 21 months ago, halfway through the bull market phase, and his rate of return is 1.36%    for the 21-month period he has been invested.

-  Guest 19 started 12 months ago, at the beginning of the bear market phase, and his rate of return is  -21.53% for the 12-month period he has been invested.

-  Finally, Guest 25 started 6 months ago, halfway through the bear market phase, and his rate of return is  –11.42 for the 6-month period he has been invested.

These 4 guests experienced entirely different rate of return outcomes and view their portfolios and thus the stock market completely different. All 4 are correct. All 4 are right and yet they couldn’t possibly have more divergent outcomes. If they don’t have a complete picture of the stock market, like the elephant, they can get themselves in trouble. The difference between the best performing portfolio that is up 12.28% and the worst performing portfolio that is down 21.53% is an astounding 33.81%. Is this too obvious? You may say, of course they have different outcomes, they started at different times but that is not the point. The point is that stock market investing will always produce different outcomes. One guest started at the worst time possible. Another guest started at the best possible time. How they look at the past determines how they see the present. Most importantly, it will determine how they will act going forward.

The Party Effect simply states that stock market participants evaluate their portfolio performance based on their perspective and their perspective only. They do not see the market as it is but as they are. Without an expert understanding of how the stock market works, this leads to incorrect conclusions that ultimately lead to incorrect decisions. The field of Behavioral Finance (BF) has shown time and time again that people have variable risk profiles. BF demonstrates that fear is a stronger emotion than greed. This means that in our simple 4 guest example, Guests 3 and 4 are more likely to exit the stock market at just the wrong time since their recent, thus Recency Bias, experience is one of losing money. It means that Guest 1 and 2 are more likely to stay invested, thus catching the next wave up that is likely to follow. All 4 have intellectual access to the events of the last 30 months. All 4 can educate themselves on the stock market. However, their particular situation is so biased by recent events that the facts are unimportant. They behave irrationally. I have witnessed this irrational behavior throughout my career. No one is immune, even advisors.

There are ways to combat The Party Effect trap but it is the deadliest of all the stock market traps that I know. Few can overcome it. The only sure way to overcome it is to become an expert on the stock market yourself, learn to manage your emotions, and then either manage your own money or hire competent managers that you recognize are expert in their chosen investment discipline. However, if you hire an expert on the stock market you have not solved the problem if you do not have expertise. Let me repeat this sentence and highlight it. If you hire an expert on the stock market you have not solved The Party Effect trap if you do not have expertise yourself. When you hire an expert on the stock market without being an expert yourself all you have done is added complexity to a complex problem. You have inserted another variable between you and the stock market. You now have three variables to worry about, the stock market, your advisor and yourself. Without expertise you have no way of knowing if your advisor is an expert. You are in an endless loop. You are in a recursive situation. Just like we ask, what came first the chicken or the egg? The Party Effect asks, how do I hire an expert without being an expert myself?

If you are unwilling to become an expert on the stock market you must find a way to solve The Party Effect trap? How do you do it? As a first step I suggest you read An Expert Tale to make sure the person you hire is in fact an expert and then hire them. The original intent of my Financial Tales project was to educate my kids and others I love. With that as a backdrop, this means I highly recommend you avoid dealing with any advisor that does not have a fiduciary relationship with you the client. Why, because you are adding a 4th variable to an already complex situation. You are adding the ever present conflict of interest that every non-fiduciary advisor has with their client. This 4th variable makes a successful outcome all but impossible. I recognize that these words are harsh but I believe your odds of success drop dramatically once you introduce the non-fiduciary variable. I don’t know what the future holds, but today you must avoid conflicted advisors at firms such as Merrill Lynch, Smith Barney, Morgan Stanley, etc. I expect that the non-fiduciary model of providing people with investment advice based on the size of the advertising budget will go the way of the dinosaur, but for as long as it exists, you must avoid this ilk of advisors.

What is the second step to avoiding The Party Effect trap? There is no second step. You either develop investment expertise or you learn to recognize experts and hire them. You can’t avoid or abdicate this charge. You must embrace your responsibility or you will suffer or those you love will suffer. It behooves the reader to invest their time in what is one of the most important decisions they will ever make and must make every day.



http://www.wikinvest.com/wiki/Recency_bias

Warren Buffett: How the Average People Can Invest

• Benjamin Graham distinguishes investors into Defensive or Aggressive Investors
• If you are an active investor, look at as many things as possible
• You will find some bargains within them.
• When you find a bargain, you need to act.
• Start turning pages.  Moody's 10,000 pages, twice!
• You need to find these bargains yourself.  
• The world is not going to tell you about a great deal.
• This will take a bit of time.
• Those unwilling or are passive investors, should invest in index funds consistently over time.
• The worst investment in the world is cash.
• Cash is going to be worth less overtime, unlike good businesses.
• Good businesses are going to be worth more over time.
• You do not want to pay too much for them, so you must maintain some discipline on how much you pay for them.
• Find good businesses and stick with them.
• Keep enough cash to feel comfortable and to sleep well; so no one can determine your future.
• Cash is a bad investment over time.
• Financial panic is behind us.  The economic pain is still with us.
• It will end and won't go on forever.  It may end next month or next year.
• It won't go on forever; don't try to pick the bottom.  
• The bottom hasn't come in unemployment, in business but has come in stock.
• Don't pass out on something you find attractive today because you hope to find something way more attractive tomorrow.

Currency speculation takes on a life of its own in a floating exchange system.

A floating exchange rate system is based on the notion that market forces, as opposed to government policy, determine currency exchange.

Buyers and sellers of a currency determine the price.

Buyers and sellers can include

• traders, 
• fund managers, 
• banks, 
• multinational corporations and 
• governments.

Although a floating system leaves the process of determining exchange rates to market forces, those forces can force a currency to collapse.

If a major fund assumes a short position in a particular currency, it can push that currency, and in turn the underlying economy, to the verge of collapse.

It does this through a series of large trades distributed over several days.

Other traders sense economic doom on the horizon as they witness these trades and decide that they too must unload positions in that currency.

The currency drops 1%, 3%, 5%, ...

The businesses in this country are forced to contend with decreased buying power as a result of the declining currency.  

The goods and services, they are buying from their trading counterparts overseas (e.g. U.S.) became a lot more expensive thanks to the currency speculators.

The currency drop continues and soon everyone is panicking.

Before long, major corporations and individuals must cut spending as foreign-produced items are more expensive than before.

This can prove disruptive and in extreme cases disastrous.

Such examples are far from regular occurrences.

Government imposed exchange limits will prevent complete currency collapse caused by speculation.

The above illustrates what could happen when currency speculation takes on a life of its own in a floating system.

Calculating Real Estate Returns: Cash on Cash Return on Property Investment and Total Return on Property Investment

1.   CASH ON CASH RETURN ON PROPERTY INVESTMENT


Cash on cash returns assess the return on investment on the basis of the amount of cash invested to purchase the property.

           FORMULA:   Cash on cash ROI = pretax cash flow/cash investment

Pretax cash flow in real estate can be based on Net Operating Income (NOI) minus the mortgage payment.

The cash invested is the amount of cash invested to purchase the property (not including the amount financed).




Price of Property  $1,000,000
Cash Investment     $200,000
Mortgage               $800,000


Annual Net Operating Income (NOI) = $135,000
[NOI = EBIT = Property's Income before Interest and Tax]

Annual Mortgage Payment (Principal and Interest)  $40,000
[# depending on duration, monthly payments and interest rates]

Pretax Cash Flow = $135,000 - $40,000 = $95,000

Cash on Cash Return on Investment (ROI) = $95,000/$200,000 = 47.5%.






2.   TOTAL RETURN ON PROPERTY INVESTMENT

FORMULA:  

Total Return on Investment 
= (Pretax cash flow + Sales Proceed - Initial Cash Investment)/Initial Cash Investment


3 years after the above property was bought:
It is sold for $1,200,000.
Mortgage balance $762,000
Selling expenses including taxes and broker fees = 8% of sales price or $96,000


Net Sales Proceeds
= Sales Price - Mortgage Balance - Selling Expenses
= $1,200,000 - $762,000 - $96,000
= $342,000

Pretax cash flow per year = $95,000
Total pretax cash flow for 3 years = $95,000 x 3 = $285,000

Total ROI  (over 3 years)
= (Pretax Cash Flow + Sales Proceeds - Initial Investment)/Initial Investment
= ($285,000 + $342,000 - $200,000) / $200,000
= $427,000 / $ 200,000
= 213.5%.


Comments:

Several aspects of this deal proved favourable.
1.  The appreciation over 3 years was substantial
2.  The NOI was relatively stable
3.  The cost of financing was low.

This proved to be a lucrative deal and the type that most real estate investors dream of.

The reality, however, is that any number of factors can hurt the Total ROI.



Mortgage Calculators:

http://www.money-zine.com/calculators/mortgage-calculators/simple-monthly-mortgage-calculator/

http://www.money-zine.com/calculators/mortgage-calculators/mortgage-apr-calculator/





Another example.

Price of Property $400,000
Cash Paid $100,000
Mortgage  $300,000

Rental received $2,000 per month.
Annual net operating income = 10 months of rental.
Annual net operating Income (Property Income before interest and Tax) = $20,000 per year.

Mortgage Paid  = $1,800 per month or $21,600 per year.

Pretax cash flow = $20,000 - $21,600 = - $1,600 per year

Cash on cash return per year = -$1,600/$100,000 = - 1.6%

Simple Monthly Mortgage Calculator

Total Home Loan Amount $300,000

Annual Interest Rate 6.00%

Term of the Loan (Years)  30

Calculator Results

Monthly Payment ($/Month)  $ 1,798.65

Total Payments $647,514.57

Total Interest Paid $347,514.57

Currency Trading

Currency can be traded much like securities or as derivatives.

The purposes for trading vary but generally can be distilled down to either:

• speculation or 
• hedging.

Currency Speculation

Currency speculation can be a lucrative pursuit for skilled traders.

By analyzing macroeconomic variables such as inflation, interest rates, income levels, and governmental policies, currency traders can place bets on a currency with the hope of profiting from them.

Currency speculation can be complicated by the combination of market forces, the outcome of which can be difficult to predict.

Currency trading is complicated.   

[For example:

• A trader decides he wants to bet on the euro because he believes the European Central Bank will raise interest rates.
• At the same time, countries across the European Union are reporting substantial increases in inflation.
• This trader learns that one of the largest currency hedge funds is selling its position in the euro.]

There is no foolproof algorithm for predicting what will happen to a particular currency as a result of movements in influential variables.

No one can predict the direction currency will take 100 percent of the time.

Currency Hedging

Currency hedging is a practice that can be employed 

• by anyone taking a relatively large speculative position in a currency or 
• by a business seeking to manage risk.

Here are several protective hedging strategies:

• Options
• Forwards
• Futures

[Suppose Company X starts buying parts from a supplier in Europe.

Part payments are made in euros and are due 30 days after receipt of the parts

The euro seems to be rising against the dollar, which leaves Company X rather vulnerable.

In fact, if the euro rises significantly by the time payment is due, it could wipe out a good portion of Company X's expected profits.

What can the company do?

Here are several protective hedging strategies:

1.  Options.  

Buy calls on euros.

If the euro rises, the call becomes worth more, offsetting the increased payment amount owed to the supplier.

The downside of this strategy is that calls come at a price.

2.  Forwards

Company X can structure a forward contract to lock in a specific exchange rte, thus hedging from any exchange rate fluctuations.

The forward rate would be the specified exchange rate at which the currency will be exchanged.

3.  Futures

Company X can purchase a currency future requiring a standard amount of currency to be exchanged at a specific exchange rate on a specific settlement date.

Company X could purchase the future on an exchange, enabling the company to sell the future if rates hold or reverse. ]

[Now, suppose Company X sells its products in Europe and payments are made in euros.

The company stopped buying parts from Europe and now merely exports its products to Europe.

Sales are often credit-based, leaving the company with hefty accounts receivable.

What happens if these credit payments are owed 30 days after the customer takes possession?

If the euro fell against the dollar, the company would see its profits erode.

Hedging strategies can be employed by using the tools mentioned previously:

1.   Options

Buy puts on euros.

If the euro falls, the puts become worth more, offsetting the decreased payment amount owed to the company by its customers.

2.  Forwards

Just as before, Company x could create a forward contract to lock in the rate received from its customers.

3.  Futures

Company X could purchase dollar futures.  

If the euro declines against the dollar, the dollar future will increase, off-setting any loss of value on the receivable.]

Currency Arbitrage

Arbitrage allows an investor or trader to capitalize on pricing discrepancies.  

Arbitrage is used widely in the currency markets and usually takes on the following forms.

Locational Arbitrage

Locational arbitrage is based on the idea that one can buy currency at one location and sell it immediately at another location, instantaneously locking in a profit.  

A pricing discrepancy in the market allows for this.  

Arbitrage opportunities are generally short-lived, so you have to act fast, and usually the market corrects itself quickly.

Triangular Arbitrage

What if you could buy dollars with pounds, exchange the dollars for euros, and then exchange the euros back to dollars, earning a tidy profit during this round trip?

To determine whether a triangular arbitrage opportunity exists, you first would determine the cross exchange rate for dividing the USD to euro rate by the USE to GBP rate.

This would give you a cross exchange rate, GBP to euro.

This tells you that the bank is offering too many euros for pounds, which means the arbitrage opportunity does indeed exist.

You earned a profit because the bank overstated the cross exchange rate.

You were able to capitalize on this and earned a profit in the process.

The Biggest Problem in Currency Trading

The BIGGEST PROBLEM currency market players face is not understanding why currency exchange rates move in a particular direction when the factors affecting currency indicate something else

Unfortunately, the driving forces behind currency do not always indicate a definitive outcome; that is why currency trading is not for the faint of heart.

How to manage currency fluctuations and how to profit from them?

Nearly identical products sold in different countries can have major price differences when currency exchange is factored into the equation.

Directional shifts in currency exchange rates could allow one to hedge against or even profit from those shifts.

In a global economy, currency plays a pivotal role in the way transactions are structured.

From investment banking to corporate management, currency is involved in nearly all international financial decisions.

As the global economy becomes more complex, currency issues will continue to evolve.



Currency Exchange Rates

With the advantages of selling to the world come the challenges of managing global finance.

Currency plays a prominent role in the way businesses conduct their business and to whom they sell.

Financial managers must develop currency strategies to manage their receivables and payables.


For example, if the US dollar drops against the Malaysian Ringgit, it could hurt a Malaysian exporting company whose receivables are denominated in US dollar.

If the Malaysian Ringgit increases in value against the US dollar, it could raise the Malaysian foreign  owned company's manufacturing costs and perhaps cause management to consider moving its manufacturing facilities abroad.

Shifts in currency exchange rates can affect how much a company ultimately earns; therefore, a solid understanding of currency will allow management to craft an effective strategy to address unexpected shifts.



Determining the Exchange Rate

The exchange rate of any currency is its price.

It indicates how much of one currency is needed to buy one unit of another currency.

Suppose it takes 1 US dollar to purchase MR 3.50.  The value of 1 US dollar would be MR 3.50.

The value of 1 MR in US dollars therefore would be 0.2857 US dollar (1 US dollar/ MR 3.50).



How is this value determined?

What causes that 1 US dollar to equal MR 3.50 and 1 MR to equal 0.2857 US dollar?

Currency is no different from anything that is bought or sold, and therefore, economic principles determine its price.

A currency price is based on the price at which demand for that currency equals supply of that currency.  This is known as the equilibrium exchange rate.

Changes in supply and demand affect the exchange rate.



Currency Supply and Demand Curve:  

The supply curve for the currency is upward-sloping.  The supply of the currency increases when the value of the currency is strong.

The demand curve for the currency is downward-sloping.  The buyers tend to demand more of something when its price is lower.

For example, Americans would be more likely to exchange their dollars for yen when the value of the yen is lower.  This enables American consumers and corporations to buy more Japanese products at lower price.

When the value of yen is higher, demand for yen will be lower as Americans are less likely to exchange their dollars for yen as Japanese products are now more expensive.


Factors That Affect Currency Exchange Rates

The following factors have a direct impact on exchange rates.

Relative Inflation

If the US experiences higher inflation relative to Japan, U.S. goods become more costly than Japanese goods.

As a result, American consumers will demand Japanese substitutes.

This will increase the demand for Japanese yen needed to purchase Japanese products.

At the same time, the supply of yen for sale probably will decrease as Japanese holders of yen are less likely to buy American products, which are now more expensive.

The increased demand for yen and the decreased supply of yen will push the price of yen higher.


Interest Rates

If U.S. interest rates rise relative to Japanese interest rates, the supply of yen for sale will increase as more holders of yen will want to purchase dollars to earn more interest in dollars.

As a result, the value of yen will decrease.

Furthermore, the demand for yen should decrease because investors would rather deposit their money in American banks and therefore will demand dollars more than yen.

The decrease in demand combined with the increase in supply will cause a drop in the value of yen as a result of rising interest rates in the United States.


Income

If income levels in the United States increase while income levels in Japan remain unchanged, demand for Japanese goods should increase along with yen.

The shift in relative income is not likely to affect the supply of yen as a change in U.S. income levels will do little to incentivize Japanese yen holders to exchange more yen for dollars.

The increase in demand therefore should raise the exchange rate as American consumers probably will buy more Japanese products overall.

Speculation

Speculators can cause dramatic movements in currency prices.

They may base their trades on economic predictions or in some cases on expectations of what other high-volume traders will do next.

As more market participants move in tandem, currency values are often driven less by economic fundamentals and more by momentum traders.


Government

By imposing trade barriers and foreign exchange barriers, governments can affect currency values indirectly.

They do this by making it more difficult for foreign businesses to engage in import and export activity, which in turn will affect supply and demand for currency.

At the same time, a government can buy or sell its country's currency, which will affect its supply and ultimately its value.

Government policy changes, however, may not achieve the desired outcome when it pertains to currency .... or anything else for that matter.


Interaction of Factors

Any combination of these factors can affect currency in unpredictable ways.

If you could predict precisely how a combination of factors will affect currency values, you would be busy trading currency from your private island!

Understanding the turmoil in Syria.

Stocks and Bonds

The balance sheet helps us understand the overall financial health of a company.

A major factor in determining financial health is the company's underlying capital structure.

What is the best way to capitalize a company?  Is it equity or debt?  The answer is that it depends, as both debt and equity have their advantages.


Debt

Debt offers the following advantages.

1.   Lenders have no direct claim on future earnings.  Debt can be issued without worries about a claim on earnings.  As long as the interest is paid, the company is fine.

2.  Interest paid on debt can be deducted for tax purposes.

3.  Most payments, whether they are interest or principal payments, are usually predictable, and so a company can plan ahead and budget for them.

4.  Debt does not dilute the owner's interest, and so an owner can issue debt and not worry about a reduced equity stake.

5.  Interest rates are usually lower than the expected return.  If they are not, a change in management can be expected soon.



Debt securities can take a number of different forms, the most common being bonds.

Bonds are obligations secured by a mortgage on company property

Bonds tend to be safer from the investors' standpoint and therefore pay lower interest.

Debentures, in contrast, are unsecured and are issued on the strength of the company's reputation, projected earnings, or growth potential.

Debentures, being far riskier, tend to pay more interest than do their more secure counterparts.




Equity

Equity has the following advantages:

1.  Equity does not raise a company's break-even point.  A company can issue equity and not have to worry about achieving performance benchmarks to fund the equity.

2.  Equity does not increase the risk of insolvency, and so a company can issue equity and not have to worry about any subsequent payments to service that equity.  Equity is essentially capital with unlimited life and so a company can issue equity and not have to worry about when it comes due.

3.  There is no need to pledge assets or offer by personal guarantees when equity is issued.



Equity can take a number of different forms.

A simple form of equity is common stock.

This type of stock offers no limits on the rate of return and can continue to rise in price indefinitely.

There are no fixed terms; the stock is issued and the holder bears the stock.

Preferred stock entitles the holders to receive dividends at a fixed or adjustable rate of return and ranks higher than common stock in a liquidation.

Preferred stock may have anti-dilution rights so that in a subsequent stock offering, preferred stockholders may maintain the same equity stake.

Convertible securities are highly structured in nature and are based on certain parameters.  As the word convertible indicates, they may convert into other securities.

Among the most common are warrants and options.

Warrants and options stand for the right to buy a stated number of shares of common or preferred stock at a specified time for a specified price.

There are also convertible notes and preferred stock, which refer to the right to convert these notes to some common stock when the conversion price is more favourable than the current rate of return.

Valuation

To get ahead, be creative.

No matter what a client desired, a good banker could always tweak the numbers a bit and could produce the numbers:

• a higher selling price,
• a lower purchase price, 
• stronger margins,
• lower capital costs.

Valuation Basics

Time Value of Money

Present Value   

Methods of Valuation

Valuation is far more of an art than a science.

"The value of that work is $1 million, because that is what the buyer and seller agreed on."

With detailed valuation models, the key factors that drove a company in the past, along with those which will continue to drive it in the future, can be examined.

Both sides are able to form a better picture of the potential as well as the risks associated with this company.

Through this process of dialogue, they hope to be able to build a consensus.  With a little luck, they just might close a sale.

There are numerous uses for valuation.   

A few of the more common ones are:

• Venture capital
• Initial public offerings
• Mergers and acquisitions
• Leveraged buyouts
• Estate and tax settlements
• Divorce settlements
• Capital raising.
• Partnerships
• Restructuring
• Real estates
• Joint ventures
• Project finance.

Even if you have no dealings in these types of transactions and more specifically, no interest in them, it is important to have at least a basic understanding of the underlying principles and techniques of valuation.

Why?   Because so much of what we do and so much of what governs out personal lives is driven by these principles.

• The simple decision to lease or buy a care is driven by valuation.
• The decision to own or rent an apartment is driven by valuation.
• Changes in the stock market that might affect your job are a function of valuation.

It is important that each one of us understand the basics of valuation because we no longer can rely on the experts on Wall Street, in corporate America, and at the big accounting firms.

Ultimately, we all bear some responsibility because we were the ones who failed to educate ourselves.

Various Methods of Valuation

• Replacement Method
• Capitalization of Earnings
• Excess Earnings Method
• Discounted Cash Flow Valuation
• Comparable Multiple Valuation
• Net Present Value
• Internal Rate of Return

Putin's comments on Trump and the US Election

Tesco Grows Its Market Share For the First Time in 5 Years

The supermarket giant’s turnaround plan appears to be working.

Tesco grew market share for the first time in five years over the last three months, the clearest sign to date that Britain’s biggest supermarket chain is recovering from years of turmoil to accelerate away from rivals.

"Tesco has attracted a further 228,000 shoppers through its doors to help the grocer grow to a 28.2% share of the market – its first year-on-year market share gain since 2011,” said Fraser McKevitt, head of retail and consumer insight at Kantar Worldpanel.

“Sales growth has been strongest among family shoppers, while improved trading from its larger supermarket and Extra stores has supported this month’s gains.”

Tesco shares traded up 2% to 205 pence, outperforming Britain’s bluechip index which was trading 0.8% higher.

http://fortune.com/2016/10/18/tesco-sainsburys-market-share/

Interesting Donald Trump tough Interview

Trump versus Clinton: The issues in US election.

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FULL EVENT: Donald Trump 30K Rally in Panama City, Florida 10/11/2016 Trump Live Panama Speech

Warren Buffett's US Federal Tax: Are you surprised or amazed by the amount of US Federal tax paid by Warren Buffett?

Warren Buffett released his US Federal tax returns.

He reported an income of about US 40 million and paid about US 2 million last year.

I am surprised by the small amount of reported income and Federal tax he paid relative to his actual wealth in the US billions of dollars.

However it is all legal within the tax code.

He receives US 100,000 a year in salary for managing Berkshire Hathaway.

This too places him in a lower tax bracket.

This US election has provided insights into how the rich uses the tax code to pay the minimum amount of tax legally.

The tax code should be revamped to seal up all the loop holes and simplified too.

The tax accountants are doing a great job reducing the taxes of the super rich.

It is not illegal but is it fair and reasonable?  

Top Glove achieved another record performance despite intense competition

PRESS RELEASE
Top Glove CorporationBhd


TOP GLOVE MARKS ANOTHER RECORD YEAR

Group achieves historical highs in Revenue and Profit

Shah Alam, Wednesday, 12 October 2016 – Top Glove Corporation Bhd (“Top Glove”) today announced its results for the Fourth Quarter (“4QFY16”) and full year ended 31 August 2016 (“FY2016”), marking yet another record year, with historical highs in both full year Revenue and Profit.

Posting another outstanding performance for the financial year 2016, the Group attained its highest Revenue ever of RM2.9 billion, an increase of 15.1% over FY2015. Meanwhile Profit Before Tax and Profit After Tax each also registered record highs, at RM442.6 million and RM362.8 million,
respectively representing an upturn of 21.8% and 29%. Volume (quantity sold) was also at an all-time high, notwithstanding intensifying competition and pricing pressure.

The robust set of numbers was attributed to several improvement initiatives which have proven instrumental in enhancing quality and cost efficiency, the twin pillars of Top Glove’s time-tested success formula. A stronger USD, as well as lower raw material prices earlier in the financial year, also boosted the Group’s performance.

For 4QFY16, the Group achieved Revenue of RM722.1 million and Net Profit of RM65.8 million, delivering growth of 7.4% and 4.8% respectively, compared with 3QFY16, notwithstanding intensive competition and cost increases stemming from hikes in minimum wage, as well as the natural gas tariff.

On a year-on-year comparison, 4QFY16 results were relatively softer, with a marginal increase in Revenue of 1.8%, while Profit After Tax declined by 36.2%. The less favourable comparison came on the back of a challenging environment in 2HFY16, as tailwinds from 1HFY16 gradually turned to
headwinds. Increased competition in the second half of the financial year also led to a downward revision of the average selling price, while volatility in raw material prices and forex created a mismatch in the cost pass-through system.

On Top Glove’s performance, its Executive Chairman, Tan Sri Dr Lim Wee Chai remarked, “We have done well in FY2016. Amidst a challenging business environment with substantial cost increases and intense competition, we have achieved another record performance and our best year yet!” “This is a credit to the internal quality and efficiency enhancements we have been implementing continually, as well as our management team and staff, who have worked hard to ensure we deliver a performance worthy of the Top Glove name” he added.

Top Glove which celebrates its 25th anniversary this year, remains on expansion mode. The Group completed the expansion of Factory 27 (Lukut) in August 2016 while the expansion of Factory 6 (Thailand) is expected to be completed by November 2016. Meanwhile, in progress is the construction of a new facility, Factory 30 (Klang), expected to commence production by April 2017, by which time Top Glove will have a total of 540 production lines and a production capacity of 52.4 billion pieces of gloves per annum. With a view to expanding its production capacity, the Group also recently acquired a factory in Klang (Factory 31). The facility is estimated to be able to produce 6 billion pieces of gloves per annum, with Phase 1 targeted to be operational by mid-2017. Top Glove will continue to pursue M&A opportunities that synergise with its current business, both in similar or related industries.

On 28 June 2016, the Group successfully completed its secondary listing on the Mainboard of the Singapore Exchange, an exercise undertaken to add and create value for its shareholders and stakeholders.

Honouring its commitment to enhance shareholder value, the Board of Directors has proposed a final dividend of 8.5 sen, bringing the total FY2016 dividend payout to 14.5 sen, subject to shareholders' approval at the upcoming AGM in January 2017. This represents a 26% increase in dividend per share compared with the previous financial year and a dividend payout ratio of 50.3%.

As at 31 August 2016, the Group also maintained a healthy balance sheet and a positive net cash position of RM303.7 million.

Top Glove foresees a competitive business landscape ahead, with the likelihood of oversupply and eventually, industry consolidation taking place. However, the Group is confident of overcoming any challenges that may arise by enhancing its cost management and optimising the efficiency of its production lines. The Group views the potential consolidation as an M&A opportunity.

Notwithstanding its commendable results, Tan Sri Dr Lim asserts, “We do not take our achievement for granted. Continuous improvement in quality and efficiency is our duty and an ongoing journey for us. This will ensure we stay healthy and competitive for another 25 years and beyond”.




http://www.financialreport.biz/File/2016/10/12/7113%20-%201308477838029.pdf

Investing in economic moats. A lot of investors wasted time on margin of safety and suffered a large opportunity cost.

Overestimating and Underestimating an Economic Moat

For those who invest into economic moats, be mindful of two possibilities.

1.   Overestimating a moat:  

This means (over-)paying for value creation that will never materialize.

2.   Underestimating a moat:

This means there is a large opportunity cost.  

On finding a good business opportunity, invest in it as it is going to compound at high rate.  

This avoid the suffering of opportunity cost.

Wasting time on margin of safety and not a lot on opportunity cost is the problem of a lot of investors.



Moats matter in a long run.

Most of the investors own securities for a short period of time.

Moats matter in a long run.

Most investors focus on short-term changes in price and not long term changes in moats.

Finding moats means finding efficiency of business.


Quantitative versus Qualitative factors

The quantitative data in market tends to be very efficiently priced.

Qualitative insight is understanding the structural characteristics of the business.

All the information is in the past, but all the value is in the future.

The future value creation will come from the things you see today and not necessarily the information that occurred in past.

The economic moats have a significant effect in keeping the organizations at the top and it is a good defense of an organization against competitors.


http://investingjournal.io/investing/economic-moats-pay-dorsey/

Investing in Economic Moats

High profits attract attention which makes more people invest.

As a result,the profit of companies decreases over time for most of the companies as competition comes in.

There are companies who defy economic gravity by creating structural advantages, economic moats.

The moats insulate and buffer them against competition.

Thus, they keep super-normal returns on capital for a longer duration.


Insight of intangible assets having effect on Moats

1. Brands

Being well known is not sufficient.

There needs to be a change in the consumer behaviour by increasing the willingness to pay or reducing the search costs thus resulting in the increase of the value of the company.

2. Patents

Despite being legal, they are subject to expiry, challenge and piracy.

To rely on patents as a moat there is need of portfolio of them as it is hard to invalidate one or the other.

3. Licenses/approvals

It is not easy to get a license or approval and it serves as a solid moat.




Restraints to try new businesses

1.  Switching cost effect

Switching to competitive products is expensive and time-consuming.

Service relationships can be sold in the form of maintainance by attaching a service to the product.

By providing high benefit to cost ratio, it is more beneficial when switching business is being looked for.


2.  Network effect

There are two types of networks - radial and interactive.

Radial networks are less effective and robust.

By providing the service that increases the value of the company as the number of users expand and aggregate demand is increased between parties scattered at different places.

As soon as the number of nodes and connections is increased the network becomes hard to replicate thus becoming a strong moat.


3.  Cost Advantages

Process:  By inventing a cheaper way to deliver a product that cannot be replicated quickly.

Scale:  Spread fixed costs over a large base.  Relative size matters more than absolute size.

Niche:  Establish minimum efficient scale.



Role of Management

Management plays an important role in moats.

Managerial skills are inversely proportional to the quality of business.

Good managers look for ways to widen the companies moat.

Bad managers invest capital outside company's moat.



http://investingjournal.io/investing/economic-moats-pay-dorsey/

Advantages of Moats. Moats matter a lot as it adds to the intrinsic value of the company.

Advantages of Moats

Moats can buffer the mistakes of management and save the business from complete disaster because the business was strong and robust (e.g. Microsoft and New Coke).

Local differences can create moats.

Foreign companies are not allowed to own banks thus allowing Canadian banks to be more profitable.

Minimum efficient scale is more common as big companies may not invest in small businesses thus giving complete ground to the small companies.

Cultural preferences matter a lot since the things famous in one country might not do well in another country (e.g. food products), thus allowing these businesses to build moats around them.


Moats matter a lot as it adds to the intrinsic value of the company.

A firm which can compound cash flow for many years has more worth than the firm which cannot.

Companies with no moats, capital comes down fast, as compared to the companies with greater moats.

The value of an economic moat is also largely dependent on reinvestment opportunities.

The ability to reinvest a lot of cash at high incremental ROIC would make it a very valuable moat.

If a firm has little ability to reinvest it would add a little to the intrinsic value of the moat.

Moats are not limited only to big companies.

Moats are beneficial in creating stability and building confidence.


Role of Management

Management plays an important role in moats.

Managerial skills are inversely proportional to the quality of business.

If the business is good, an average management would also do fine.

For bad business, a good manager is required.

Good managers look for ways to widen the companies moat.

Bad managers invest capital outside company's moat.

There are exceptions where a good manager can do good in bad businesses.

http://investingjournal.io/investing/economic-moats-pay-dorsey/

Warren Buffett & Charlie Munger - 2016 Berkshire Hathaway Shareholder Meeting Highlights

Warren Buffett: Game Changers

Warren Buffett: The Teacher

Scientex matches products with markets to boost sales

September 27, 2016, Tuesday


KUCHING:

Industrial and Consumer Packaging Products

Scientex Bhd (Scientex) has started to make in-roads into new markets for both its industrial and consumer packaging products based on different marketing strategies adopted for specific markets to boost sales demand.

“The group continues to emphasise on quality products and to this end, the ongoing upgrading of facilities and commissioning of new machinery in its Rawang, Pulau Indah, Ipoh and Melaka plants,” the group said in releasing its results yesterday.

“Further, to remain competitive in the global market place and as part of its on-going efforts to boost (profit) margins, the group has taken pro-active steps to enhance its operational efficiency through its continuous efforts to reduce cost and wastages.”

Additionally, the group’s brand new castpolypropylene (CPP) plant is slowly building up its production capacity to meet the demands of its customers whilst the group’s brand new state-of-the-art multi-million biaxially oriented polypropylene (BOPP) film manufacturing plant at Pulau Indah has started testing and commissioning works since July 2016 with full commissioning and commercial operation slated by the second half of the year.

“The group is confident that given the strategies put in place, demand from both local and overseas for its industrial and consumer packaging products is expected to be positive for the coming financial year as it offers quality products with a wider and diversified product portfolio to its expanded global customer base,” Scientex said.



Property Division

Moreover for the property division, Scientex believed the group’s performance for the quarter ended July 2016 was focused primarily on affordable homes in Pasir Gudang, Senai and Kulai projects in Johor where demand remained resilient and robust.

For the quarter ended July 2016, Scientex noted the group was on track and launched its latest Pulai land development which was successfully acquired in early 2016.

“The phenomenal demand for its initial two maiden launches under this development has given a strong boost to the group and plans are underway to tap the huge demand for such affordable homes within the vicinity of this region.

“One of its main attraction is the construction of a new link road by the group that has improved connectivity and accessibility to Gelang Patah, Johor. The upcoming completion of the proposed Kangkar Pulai Interchange to the SecondLink has also boosted the viability and location of this development,” the company observed.

Apart from that, the group also seek to address rising constructional costs by incorporating innovative designs, blending with the environment and tapping operational efficiencies to reduce costs and wastage.

Scientex said its township development projects were all well designed to optimise the use of land space through efficient land usage, density and systematic execution of works to boost operational margins and reduce financing costs through better cash flow management and timing of its launches.

The company noted the group is making preparations for the launch of its two pieces of lands in Ipoh of which vacant possession for its Klebang land has been taken over recently and poised to be launched in the first or second quarter of the coming financial year.

The Meru land acquisition is expected to be completed in September with a maiden launch to be held thereafter, further boosting the sales of the group from these new projects over the medium and longer term.

The group foresees the affordable housing segment will continue to play a pivotal role in contributing to the group’s top and bottomline for the coming financial year.


http://www.theborneopost.com/2016/09/27/scientex-matches-products-with-markets-to-boost-sales/

Scientex’s 4QFY16 earnings up 11 per cent to RM54.14 million, revenue grows to RM561 mln

September 27, 2016, Tuesday


KUCHING: Scientex Bhd’s (Scientex) earnings for the fourth quarter of 2016 (4QFY16) ended July 2016 gained by 11 per cent year-on-year (y-o-y) to RM54.14 million from RM48.91 million recorded in 4QFY15 ended July 2015.

The company in a filing to Bursa Malaysia yesterday said 4QFY16 revenue grew by 24 per cent y-o-y to RM561.06 million from RM452.49 million in 4QFY15.

Scientex noted the improved revenue for 4QFY16 was attributed to higher sales from its property division.

The company in its accounts notes said property revenue recorded in 4QFY16 was RM188.4 million as compared with RM132.6 million in the preceding year corresponding quarter, an increase of 42.1 per cent.

The increase in revenue for the property division was contributed by the steady construction progress and new sales achieved from projects in Johor and Melaka.

However, Scientex noted profit from the division’s operations was lower at RM58.2 million as compared to RM61.5 million in the preceding year corresponding quarter due to product mix for the new project launches in Pasir Gudang, Johor.

Additionally, Scientex shared that its manufacturing revenue increased by 16.5 per cent y-o-y for 4QFY16 to RM372.7 million as compared with RM319.9 million generated in 4QFY15.

The company explained that the increase was attributed to higher contribution from the consumer packaging products as well as contribution from the newly acquired Scientex Great Wall Ipoh Sdn Bhd.

Earlier, on August 5, 2015, Scientex announced that its wholly-owned subsidiary Scientex Packaging Film Sdn Bhd (SPFSB) had entered into a share purchase agreement with Mondi Consumer Packaging International GmbH to acquire Scientex Great Wall (Ipoh) Sdn Bhd for RM58 million with the transaction completed on August 11.

However, Scientex said its operational profit from the manufacturing segment decreased to RM15.9 million from RM24.8 million due to lower product profit margins.

For the full financial year 2016 (FY16) ended July 2016, Scientex said revenue rose by 22 per cent y-o-y to RM2.2 billion while net profit jumped by 52 per cent y-o-y to RM240.87 million.

Scientex noted that the improved profit was attributed to better sales achieved for both the property and manufacturing

http://www.theborneopost.com/2016/09/27/scientexs-4qfy16-earnings-up-11-per-cent-to-rm54-14-million-revenue-grows-to-rm561-mln/

Mixed feedback on Genting Malaysia selling stake in HK branch

October 5, 2016, Wednesday


KUCHING: Genting Malaysia Bhd (Genting Malaysia) latest move in disposing of the group’s entire 16.9 per cent stake in Genting Hong Kong Limited (Genting Hong Kong) has garnered mixed reactions from analysts.

In a filing on Bursa Malaysia, Genting Malaysia announced the group’s disposal of 1.43 billion ordinary shares in Genting Hong Kong, representing 16.87 per cent of the then total issued and paid-up share capital of Genting Hong Kong, for a total cash consideration of US$415 million or the equivalent of approximately RM1.71 billion.

According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), although this is a related party transaction (RPT), it is a positive move as the non-core stake in Genting Hong Kong has not much impact on Genting Malaysia while the disposal proceeds can be better applied for the latter’s expansion program, such as the RM10.38 billion Genting Integrated Tourism Plan (GITP) development.

“In fact, Genting Hong Kong used to be a wildcard and impacted Genting Malaysia badly in which the latter owned more than 20 per cent stake, which qualified for equity accounting.

“However, since Genting Malaysia reduced its stake to below 20 per cent in 2007, the impact from Genting Hong Kong became immaterial,” Kenanga Research said.

While the announcement did not disclose the disposal gain/loss of this divestment, Kenanga Research believed the impact was small given that the Genting group always reported mark-to-market value on their investments in listed companies on a quarterly basis.

However, the research arm made adjustments to its earnings model to reflect this disposal as the proceeds will affect interest income while it has also made upward adjustment on Genting UK and the North America earnings following their strong numbers in the first half of 2016 (1H16).

In all, the research arm upgraded financial year 2016 estimate (FY16E)/FY17E earnings by eight per cent/six per cent.

In contrast, the research arm of Hong Leong Investment Bank Bhd (HLIB Research) was neutral on this disposal as it is a RPT and the disposal price of US$0.29 is at the minimum price allowed under the mandate (in spite at a 8.2 per cent premium to five days volume weighted average market price (VWAMP)) compared to the average purchase cost of US$0.42.

HLIB Research noted that this disposal allows Genting Malaysia to monetise the group’s loss-making investment in Genting Hong Kong which provides minimal income yield (total dividend received RM106 million versus total investment of approximately RM4.12 billion since 1998)!!!!!!!!!!!!.

“The proceeds of RM1.71 billion can be put into better use for its working capital and capex for its expansions, while maintaining net cash position,” the research arm said.

The research arm further noted that having classified the investment as assets held for sale since year 2015 with a carrying value of RM1.74 billion, there will be a one-off accounting gain on disposal of circa RM1.23 billion after the reclassification of reserves (previous year revaluation and foreign exchanges gain/losses).

On another note, HLIB Research said that potential loss of dividend income from Genting Hong Kong is rather negligible given the inconsistency of dividend payment and the quantum.

Dividend received in FY15 was about RM56 million, which was circa 3.8 per cent of the research arm’s FY16 forecasted profit after tax and minority interest (PATAMI).

“This level of yield can be easily recouped from interest bearing deposit or interest savings from the proceeds,” it said.

Forecast-wise, HLIB Research imputed the effect of the disposal into its balance sheet ignoring the one-off gain/loss/reversal arising from the transaction with no change in earnings.

“We opine that growth in 2017 on higher visitors from the amenities under GITP has been largely priced in, impending for more exciting catalysts in 2018.

“Meanwhile, we are still wary on the uncertain overseas operations, the potential risks in execution and the high cost involved,” the research arm said.


http://www.theborneopost.com/2016/10/05/mixed-feedback-on-genting-malaysia-selling-stake-in-hk-branch/

German minister accuses Deutsche Bank of making speculation

October 4, 2016, Tuesday


TEHRAN: German Economy Minister Sigmar Gabriel accused Deutsche Bank on Sunday of blaming speculators for last week’s plunge in its share price when the bank had itself made speculation its business.

“I did not know if I should laugh or cry that the bank that made speculation a business model is now saying it is a victim of speculators,” Gabriel told reporters on a plane to Iran, which he is visiting with a business delegation.

Deutsche, which is Germany’s largest bank and employs around 100,000 people, has been engulfed by a crisis of confidence after the US Department of Justice handed it a demand last month for it to pay up to US$14 billion to settle claims that it missold US mortgage-backed securities before the financial crisis.

The threat of such a large fine has pushed Deutsche shares to record lows and a deal at a much lower price is now urgently needed to reverse the shares sell-off and help to restore confidence in Germany’s largest lender.

Chief executive John Cryan on Friday tried to reassure staff of the bank’s financial strengths in a letter which warned them that “new rumours” were causing the share price to fall and that there were “forces” that wanted to weaken confidence in the bank.

Gabriel, who is also leader of the Social Democrats (SPD), the junior partner in Angela Merkel’s coalition government, said he was worried about those who were employed by the lender.

The problems of Deutsche Bank are awkward for Berlin, which has berated many euro zone peers for economic mismanagement and taken a hard line on other EU nations giving state aid to bail out their problem banks.

Last week the German finance ministry moved swiftly to dismiss a report that a government rescue plan was being prepared in case Deutsche Bank was unable to raise sufficient new capital to settle litigation which includes cases dating back to its expansion before the financial crisis.

With Germany facing elections next year, there is little political appetite for helping a group disliked by many Germans because of its investment bank’s pursuit of business abroad that resulted in incurring billions of euros of penalties for wrongdoing.

— Reuters

Scientex’s FY17 earnings outlook remains promising

October 3, 2016, Monday


KUCHING: Scientex Bhd’s (Scientex) financial year 2017 (FY17) earnings outlook has been viewed as promising, following a results briefing at the newly constructed biaxially oriented polypropylene (BOPP) plant in Pulau Indah.

According to RHB Research Institute Sdn Bhd (RHB Research), Scientex’s highly anticipated BOPP film plant, which would raise capacity ten-fold to 60,000 tonnes, come into operation in September.

“The new plant was part of a strategic alliance with Futamura to employ advanced Japanese film-manufacturing technology to produce high-quality BOPP films.

“As we understand, the BOPP film supply landscape in Malaysia presents promising market potential for Scientex, as the bulk of local demand for BOPP film is currently imported.

“Secondly, its state-of-the art BOPP facility would allow cost-efficiencies to ensure price competitiveness, while offering high quality films that local competition may lack,” the research house said.

On Scientex’s property division, RHB Research noted that new property sales rose a solid 30.8 per cent year on year (y-o-y) to RM794 million in financial year 2016 (FY16) (July).

“Management has plans to launch projects worth about RM700 million in FY17, after achieving targeted launches of approximately RM650 million in FY16.

“Going forward, management plans to direct its focus on affordable housing below the RM500,000 per unit mark, where demand for housing remains resilient,” the research house said.

It added that unbilled sales stood at RM717.2 million in FY16, compared to RM584.9 million in FY15, and would provide earnings visibility for the next few years.

Meanwhile, the research arm of TA Securities Holdings Bhd (TA Research) highlighted that# for the property segment, the group is looking to complete the Meru land acquisition in September 2016 with maiden launch to be held in the second quarter of 2017 (2Q17).

“This will help to boost the sales of the group from these new projects over medium to longer term,” TA Research said.

TA Research noted that the group will be focusing on improving efficiencies by reducing costs and wastage.

The research arm further noted that this could be achieved through better planning and systematic execution of works, coupled with better cash flow management to lower the financing cost.

After imputing FY16 results, TA Research tweaked its FY17-FY19 earnings estimates slightly upwards by 1.8 per cent/-2.1 per cent/0.9 per cent to RM311.4 million/RM363.1 million/RM379.3 million respectively, following some changes in key assumptions (which are revenue and operating expenditure (opex).

All in, TA Research maintained ‘buy’ on the stock.

On the other hand, RHB Research kept its FY17 to FY18F earnings relatively unchanged and introduced its FY19 projection.

It also maintained ‘buy’ on attractive valuations and exciting growth plans in Scientex’s manufacturing segment.


http://www.theborneopost.com/2016/10/03/scientexs-fy17-earnings-outlook-remains-promising/

Security Commission proposals push REITs in the right direction

September 30, 2016, Friday Ronnie Teo


KUCHING: Analysts laud the Securities Commission’s (SC) consultation paper to revise its guidelines for Malaysian Real Estate Investment Trusts (M-REITs) seen as a positive step in the right direction.

The guidelines aims to enhance M-REITs’ growth by broadening the scope of permitted activities, improve governance to safeguard investors and maintain long-term sustainability, and increase efficiency by streamlining post listing requirements.

The main highlight is Proposal 1 for Property Development Activities, which essentially allows M-REITs to undertake greenfield development subject to the development not exceeding 15 per cent of the REITs enlarged total asset value (TAV) in aggregate, thus capping the exposure to development risk.

“All in, we are positive on Proposal 1,” highlighted researchers with Kenanga Investment Bank Bhd (Kenanga Research).

“Although there is no accretion to earnings in the near term, and is only earnings positive in the longer run, we expect news flow on greenfield development to bode well for share price sentiment and valuations.

“We view Proposal 1 positively as it allows REITs to grow earnings given limited opportunities for accretive acquisitions in the current low cap rate conditions.

Kenanga Research observed that current cap rates for retail assets range between four to six per cent, while the rate was between six to eight per cent for industrial assets.

“M-REITs would be able to own assets at lower capital outlays; essentially, the real return on investment on development cost will be better than buying already completed buildings, which are based on market value with lower asset financing cost.

“Additionally, there is the icing on the cake when the greenfield development is completed, arising from revaluation exercise to reflect market valuation, which will further boost their asset and book value without additional cash-outlay.

“This opens the door of opportunity for M-REITs’ earnings growth in the longer run and will help alleviate the burden of low cap rates plaguing the market currently, but the impact to earnings is expected to be neutral in the near term, and accretive only in the longer run post construction.”

It is also important to note that the new guideline stipulates that the REITs would have to hold the assets for a minimum of two years post development, making it unlikely for the REIT to take on development unnecessarily unless there is a clear demand for it.

“We believe industrial REITs would be the main beneficiary. Although all M-REITs would be able to benefit from Proposal 1 by gaining higher development cost yields, we believe industrial REITs may fare better as development cost for industrial assets may be cheaper than retail, while it would also be easier for industrial MREITs such as Axis REIT to find a pre-committed tenant as it can operate on fewer tenants or a single tenant basis,” it said.

“To note, retail M-REITs require multiple tenants and may not be able to secure a pre-commit during or before construction. As such, retail M-REITs have greater leasing risk, which we believe can be mitigated should the REITs have extensive tenant network to leverage on.”

The firm was all in positive on SC’s list of Proposals, as it expect news flow related primarily to Proposal 1 to 4 to bode well for share price sentiment and valuations, with minimal impact to earnings in the near term.

“Besides Proposal 1, Proposals 2 to 4 are expected to be beneficial to unitholders as it is catered towards facilitating earnings growth by increasing the scope of permitted activities by M-REITs, making it easier for them to secure tenants or minimise vacant space,” it added.

“Proposal 5 on unit buy-backs aims to lend stability to share price and is a form of returning cash to unitholders, while Proposal 6 will help limit balance sheet risks amidst increased exposure to property development.

“Proposals 7 to 10 are catered towards enhancing governance and transparency which we view positively as it will benefit shareholders as it aims to protect shareholders and ensures the sustainability of M-REITs without burdening the managers.

“Additionally, Proposal 11 (revaluation of assets) which is also targeted at enhancing governance, requires the REIT to revalue its assets once every financial year versus once in three years previously, which we view as neutral impact to unitholders.

“Although frequent asset valuations capture the assets current market value which is beneficial for transparency to unitholders, asset revaluations do incur additional costs, while volatile property market conditions may affect capital values of the assets, and may negatively impact the REITs gearing ratio,” it added.

Proposals 12 to 13 are geared towards streamlining post listing requirements allowing MREITs to be on par with other listed corporations, including the process for rights issuance which is currently longer and more arduous for M-REITs.

Other proposals include Proposal 14 (Property Management) will be beneficial to investors and managers as it aligns the interest of the REIT Manager with the property manager.

Proposal 15 (Internal Management) will be beneficial to investors as it forces the existing REIT manager to perform, while failure to do so will allow a ‘Change of the REIT Manager’ (Proposal 9), giving shareholders the option to remove the existing manager and allow the REIT to be managed by hiring executives to internally manage the REIT.

Lastly, Proposal 16 which limits the offer of unlisted REITs to Sophisticated Investors aims to protect investors that do not have privy access to information to invest in an unlisted REIT.

http://www.theborneopost.com/2016/09/30/security-commission-proposals-push-reits-in-the-right-direction/

Scientex starts operations of Malaysia’s largest BOPP film manufacturing plant

September 30, 2016, Friday

KUCHING: Global packaging manufacturer Scientex Berhad (Scientex) yesterday inaugurated operations of its new BOPP film manufacturing plant – the largest such facility in Malaysia in Pulau Indah, Selangor.

The new plant, boasting an annual production capacity of 60,000 metric tonnes (MT), was constructed in collaboration with Futamura Chemical Co., Ltd (Futamura), a leading plastic films manufacturer and the largest BOPP film manufacturer in Japan.

The plant was built at a cost of RM220 million, and is equipped with state-of-the-art machinery from Japan Steel Works Ltd, capable of wider-web and higher-speed film production.

The plant was officially opened by Deputy Minister of International Trade and Industry Datuk Ahmad Maslan in the presence of consular representative of Japan in Malaysia Kohei Nakamura, and Futamura president Yasuo Nagae together with Scientex chairman Tan Sri Mohd Sheriff Mohd Kassim, managing director Lim Peng Jin, and executive director Choo Seng Hong.

During the event, Lim said the plant inauguration marks an important milestone for Scientex, as it combines Japan’s technological prowess with Scientex’s manufacturing efficiency to produce high quality BOPP film for domestic and regional markets in Asia Pacific.

“We look forward to fulfilling anticipated strong market demand, as Malaysia presently imports most of its BOPP requirements due to a shortage in local supply.

“We also strive to capture new growth opportunities in the regional markets.

“This is certainly a pivotal moment for our consumer packaging business, as we are now one step ahead in realising our target of becoming a leading single-source provider of international-quality consumer packaging films in the region.”

BOPP film forms the protective outer layer of flexible consumer packaging, and is commonly used in the food and beverages industry.

Futamura holds a 10 per cent shareholding in Scientex Great Wall Sdn Bhd (SGW), the Group’s consumer packaging unit, and would purchase approximately one third of the new plant’s annual BOPP film production.

Lim said that the group is actively targeting growth in sales to local and regional players.

“We have been aggressively marketing our high-performance BOPP film to several packaging players both domestically and regionally, and have also conducted product trials with them.

“We are pleased to receive commendable feedback to date, and look forward to commence supply to them in the near term,” Lim concluded.

http://www.theborneopost.com/2016/09/30/scientex-starts-operations-of-malaysias-largest-bopp-film-manufacturing-plant/