Whose Growth rate?
In computing PEG ratios, we are often faced with the question of whose growth rate we will use in estimating the PEG ratios.
If the number of firms in the sample is small, you could estimate expected growth for each firm yourself.
If the number of firms increases, you will have no choice but to use analyst estimates of expected growth for the firms. Will this expose your analyses to all of the biases in these estimates? Not necessarily. If the bias is uniform – for instance, analysts over estimate growth for all of the firms in the sector – you will still be able to make comparisons of PEG ratios across firms and draw reasonable conclusions.
http://zonecours.hec.ca/documents/A2009-1-1877347.ch18-earning-multiple(1).pdf
Thursday, 12 November 2009
Using the PEG Ratio for Comparisons
- the risk,
- growth potential and
- the payout ratio of a firm.
In this section, you look at ways of using the PEG ratio and examine some of the problems in comparing PEG ratios across firms.
Direct Comparisons
PEG Ratios and Retention Ratios
Most analysts who use PEG ratios compute them for firms within a business (or comparable firm group) and compare these ratios.
Firms with lower PEG ratios are usually viewed as undervalued, even if growth rates are different across the firms being compared.
This approach is based upon the incorrect perception that PEG ratios control for differences in growth. In fact, direct comparisons of PEG ratios work only if firms are similar in terms of growth potential, risk and payout ratios (or returns on equity). If this were the case, however, you could just as easily compare PE ratios across firms.
When PEG ratios are compared across firms with different risk, growth and payout characteristics and judgments are made about valuations based on this comparison, you will tend to find that:
· Lower growth firms will have higher PEG ratios and look more over valued than higher growth firms, because PEG ratios tend to decrease as the growth rate decreases, at least initially.
· Higher risk firms will have lower PEG ratios and look more under valued than higher risk firms, because PEG ratios tend to decrease as a firm’s risk increases.
· Firms with lower returns on equity (or lower payout ratios) will have lower PEG ratios and look more under valued than firms with higher returns on equity and higher payout ratios.
In short, firms that look under valued based upon direct comparison of the PEG ratios may in fact be firms with higher risk, higher growth or lower returns on equity that are, in fact, correctly valued.
Controlled Comparisons
When comparing PEG ratios across firms, then, it is important that you control for differences in risk, growth and payout ratios when making the comparison. While you can attempt to do this subjectively, the complicated relationship between PEG ratios and these fundamentals can pose a challenge. A far more promising route is to use the regression approach suggested for PE ratios and to relate the PEG ratios of the firms being compared to measures of risk, growth potential and the payout ratio.
As with the PE ratio, the comparable firms in this analysis can be defined narrowly (as other firms in the same business), more expansively as firms in the same sector or as all firms in the market. In running these regressions, all the caveats that were presented for the PE regression continue to apply. The independent variables continue to be correlated with each other and the relationship is both unstable and likely to be nonlinear.
A scatter plot of PEG ratios against growth rates, for all U.S. stocks in July 2000, indicates the degree of non-linearity.
In running the regression, especially when the sample contains firms with very different levels of growth, you should transform the growth rate to make the relationship more linear. A scatter plot of PEG ratios against the natural log of the expected growth rate, for
instance, yields a much more linear relationship.
http://zonecours.hec.ca/documents/A2009-1-1877347.ch18-earning-multiple(1).pdf
Using PEG ratio: Not all growth is created equal.
As the risk increases, the PEG ratio of a firm decreases. When comparing the PEG ratios of firms with different risk levels, even within the same sector, the riskier firms should have lower PEG ratios than safer firms.
Not all growth is created equal. A firm that is able to grow at 20% a year, while paying out 50% of its earnings to stockholders, has higher quality growth than another firm with the same growth rate that reinvests all of its earnings back. Thus, the PEG ratio should increase as the payout ratio increases, for any given growth rate.
As with the PE ratio, the PEG ratio is used to compare the valuations of firms that are in the same business. The PEG ratio is a function of:
As with the PE ratio, the PEG ratio is used to compare the valuations of firms that are in the same business. The PEG ratio is a function of:
- the risk,
- growth potential and
- the payout ratio of a firm.
The PEG Ratio
The PEG Ratio
Portfolio managers and analysts sometimes compare PE ratios to the expected growth rate to identify undervalued and overvalued stocks. In the simplest form of this approach, firms with PE ratios less than their expected growth rate are viewed as undervalued. In its more general form, the ratio of PE ratio to growth is used as a measure of relative value, with a lower value believed to indicate that a firm is under valued.
For many analysts, especially those tracking firms in high-growth sectors, these approaches offer the promise of a way of controlling for differences in growth across firms, while preserving the inherent simplicity of a multiple.
Definition of the PEG Ratio
The PEG ratio is defined to be the price earnings ratio divided by the expected growth rate in earnings per share:
PEG ratio = PE ratio /Expected Growth Rate
For instance, a firm with a PE ratio of 20 and a growth rate of 10% is estimated to have a PEG ratio of 2.
Consistency requires the growth rate used in this estimate be the growth rate in earnings per share, rather than operating income, because this is an equity multiple.
Given the many definitions of the PE ratio, which one should you use to estimate the PEG ratio? The answer depends upon the base on which the expected growth rate is computed. If the expected growth rate in earnings per share is based upon earnings in the most recent year (current earnings), the PE ratio that should be used is the current PE ratio. If it based upon trailing earnings, the PE ratio used should be the trailing PE ratio.
The forward PE ratio should never be used in this computation, since it may result in a double counting of growth. To see why, assume that you have a firm with a current price of $30 and current earnings per share of $1.50. The firm is expected to double its earnings per share over the next year (forward earnings per share will be $3.00) and then have earnings growth of 5% a year for the following four years. An analyst estimating growth in earnings per share for this firm, with the current earnings per share as a base, will estimate a growth rate of 19.44%.
A consistent estimate of the PEG ratio would require using a current PE and the expected growth rate over the next 5 years.
Building upon the theme of uniformity, the PEG ratio should be estimated using the same growth estimates for all firms in the sample. You should not, for instance, use 5-year growth rates for some firms and 1-year growth rates for others. One way of ensuring uniformity is to use the same source for earnings growth estimates for all the firms in the group.
For instance, both I/B/E/S and Zacks provide consensus estimates from analysts of earnings per share growth over the next 5 years for most U.S. firms.
As the risk increases, the PEG ratio of a firm decreases. When comparing the PEG ratios of firms with different risk levels, even within the same sector, the riskier firms should have lower PEG ratios than safer firms.
Not all growth is created equal. A firm that is able to grow at 20% a year, while paying out 50% of its earnings to stockholders, has higher quality growth than another firm with the same growth rate that reinvests all of its earnings back. Thus, the PEG ratio should increase as the payout ratio increases, for any given growth rate.
http://zonecours.hec.ca/documents/A2009-1-1877347.ch18-earning-multiple(1).pdf
Portfolio managers and analysts sometimes compare PE ratios to the expected growth rate to identify undervalued and overvalued stocks. In the simplest form of this approach, firms with PE ratios less than their expected growth rate are viewed as undervalued. In its more general form, the ratio of PE ratio to growth is used as a measure of relative value, with a lower value believed to indicate that a firm is under valued.
For many analysts, especially those tracking firms in high-growth sectors, these approaches offer the promise of a way of controlling for differences in growth across firms, while preserving the inherent simplicity of a multiple.
Definition of the PEG Ratio
The PEG ratio is defined to be the price earnings ratio divided by the expected growth rate in earnings per share:
PEG ratio = PE ratio /Expected Growth Rate
For instance, a firm with a PE ratio of 20 and a growth rate of 10% is estimated to have a PEG ratio of 2.
Consistency requires the growth rate used in this estimate be the growth rate in earnings per share, rather than operating income, because this is an equity multiple.
Given the many definitions of the PE ratio, which one should you use to estimate the PEG ratio? The answer depends upon the base on which the expected growth rate is computed. If the expected growth rate in earnings per share is based upon earnings in the most recent year (current earnings), the PE ratio that should be used is the current PE ratio. If it based upon trailing earnings, the PE ratio used should be the trailing PE ratio.
The forward PE ratio should never be used in this computation, since it may result in a double counting of growth. To see why, assume that you have a firm with a current price of $30 and current earnings per share of $1.50. The firm is expected to double its earnings per share over the next year (forward earnings per share will be $3.00) and then have earnings growth of 5% a year for the following four years. An analyst estimating growth in earnings per share for this firm, with the current earnings per share as a base, will estimate a growth rate of 19.44%.
A consistent estimate of the PEG ratio would require using a current PE and the expected growth rate over the next 5 years.
Building upon the theme of uniformity, the PEG ratio should be estimated using the same growth estimates for all firms in the sample. You should not, for instance, use 5-year growth rates for some firms and 1-year growth rates for others. One way of ensuring uniformity is to use the same source for earnings growth estimates for all the firms in the group.
For instance, both I/B/E/S and Zacks provide consensus estimates from analysts of earnings per share growth over the next 5 years for most U.S. firms.
As the risk increases, the PEG ratio of a firm decreases. When comparing the PEG ratios of firms with different risk levels, even within the same sector, the riskier firms should have lower PEG ratios than safer firms.
Not all growth is created equal. A firm that is able to grow at 20% a year, while paying out 50% of its earnings to stockholders, has higher quality growth than another firm with the same growth rate that reinvests all of its earnings back. Thus, the PEG ratio should increase as the payout ratio increases, for any given growth rate.
http://zonecours.hec.ca/documents/A2009-1-1877347.ch18-earning-multiple(1).pdf
Normalizing Earnings for PE ratios
Normalizing Earnings for PE ratios
The dependence of PE ratios on current earnings makes them particularly vulnerable to the year-to-year swings that often characterize reported earnings.
In making comparisons, therefore, it may make much more sense to use normalized earnings.
The process used to normalize earnings varies widely but the most common approach is a simple averaging of earnings across time.
For a cyclical firm, for instance, you would average the earnings per share across a cycle. In doing so, you should adjust for inflation.
If you do decide to normalize earnings for the firm you are valuing, consistency demands that you normalize it for the comparable firms in the sample as well.
http://zonecours.hec.ca/documents/A2009-1-1877347.ch18-earning-multiple(1).pdf
The dependence of PE ratios on current earnings makes them particularly vulnerable to the year-to-year swings that often characterize reported earnings.
In making comparisons, therefore, it may make much more sense to use normalized earnings.
The process used to normalize earnings varies widely but the most common approach is a simple averaging of earnings across time.
For a cyclical firm, for instance, you would average the earnings per share across a cycle. In doing so, you should adjust for inflation.
If you do decide to normalize earnings for the firm you are valuing, consistency demands that you normalize it for the comparable firms in the sample as well.
http://zonecours.hec.ca/documents/A2009-1-1877347.ch18-earning-multiple(1).pdf
Comparing PE Ratios across firms in a sector
Comparing PE Ratios across firms in a sector
The most common approach to estimating the PE ratio for a firm is to choose a group of comparable firms, to calculate the average PE ratio for this group and to subjectively adjust this average for differences between the firm being valued and the comparable firms. There are several problems with this approach.
First, the definition of a comparable' firm is essentially a subjective one. The use of other firms in the industry as the control group is often not the solution because firms within the same industry can have very different business mixes and risk and growth profiles. There is also plenty of potential for bias. One clear example of this is in takeovers, where a high PE ratio for the target firm is justified, using the price-earnings ratios of a control group of other firms that have been taken over. This group is designed to give an upward biased estimate of the PE ratio and other multiples.
Second, even when a legitimate group of comparable firms can be constructed, differences will continue to persist in fundamentals between the firm being valued and this group. It is very difficult to subjectively adjust for differences across firms. Thus, knowing that a firm has much higher growth potential than other firms in the comparable firm list would lead you to estimate a higher PE ratio for that firm, but how much higher is an open question.
The alternative to subjective adjustments is to control explicitly for the one or two variables that you believe account for the bulk of the differences in PE ratios across companies in the sector in a regression. The regression equation can then be used to estimate predicted PE ratios for each firm in the sector and these predicted values can be compared to the actual PE ratios to make judgments on whether stocks are under or over priced.
http://zonecours.hec.ca/documents/A2009-1-1877347.ch18-earning-multiple(1).pdf
The most common approach to estimating the PE ratio for a firm is to choose a group of comparable firms, to calculate the average PE ratio for this group and to subjectively adjust this average for differences between the firm being valued and the comparable firms. There are several problems with this approach.
First, the definition of a comparable' firm is essentially a subjective one. The use of other firms in the industry as the control group is often not the solution because firms within the same industry can have very different business mixes and risk and growth profiles. There is also plenty of potential for bias. One clear example of this is in takeovers, where a high PE ratio for the target firm is justified, using the price-earnings ratios of a control group of other firms that have been taken over. This group is designed to give an upward biased estimate of the PE ratio and other multiples.
Second, even when a legitimate group of comparable firms can be constructed, differences will continue to persist in fundamentals between the firm being valued and this group. It is very difficult to subjectively adjust for differences across firms. Thus, knowing that a firm has much higher growth potential than other firms in the comparable firm list would lead you to estimate a higher PE ratio for that firm, but how much higher is an open question.
The alternative to subjective adjustments is to control explicitly for the one or two variables that you believe account for the bulk of the differences in PE ratios across companies in the sector in a regression. The regression equation can then be used to estimate predicted PE ratios for each firm in the sector and these predicted values can be compared to the actual PE ratios to make judgments on whether stocks are under or over priced.
http://zonecours.hec.ca/documents/A2009-1-1877347.ch18-earning-multiple(1).pdf
Comparing PE ratios across Countries
Comparing PE ratios across Countries
Comparisons are often made between price-earnings ratios in different countries with the intention of finding undervalued and overvalued markets. Markets with lower PE ratios are viewed as under valued and those with higher PE ratios are considered over valued.
Given the wide differences that exist between countries on fundamentals, it is clearly misleading to draw these conclusions. For instance, you would expect to see the following, other things remaining equal:
· Countries with higher real interest rates should have lower PE ratios than countries with lower real interest rates.
· Countries with higher expected real growth should have higher PE ratios than countries with lower real growth.
· Countries that are viewed as riskier (and thus command higher risk premiums) should have lower PE ratios than safer countries
· Countries where companies are more efficient in their investments (and earn a higher return on these investments) should trade at higher PE ratios.
http://zonecours.hec.ca/documents/A2009-1-1877347.ch18-earning-multiple(1).pdf
Comparisons are often made between price-earnings ratios in different countries with the intention of finding undervalued and overvalued markets. Markets with lower PE ratios are viewed as under valued and those with higher PE ratios are considered over valued.
Given the wide differences that exist between countries on fundamentals, it is clearly misleading to draw these conclusions. For instance, you would expect to see the following, other things remaining equal:
· Countries with higher real interest rates should have lower PE ratios than countries with lower real interest rates.
· Countries with higher expected real growth should have higher PE ratios than countries with lower real growth.
· Countries that are viewed as riskier (and thus command higher risk premiums) should have lower PE ratios than safer countries
· Countries where companies are more efficient in their investments (and earn a higher return on these investments) should trade at higher PE ratios.
http://zonecours.hec.ca/documents/A2009-1-1877347.ch18-earning-multiple(1).pdf
Comparing a Market’s PE ratio across time
Comparing a Market’s PE ratio across time
Analysts and market strategists often compare the PE ratio of a market to its historical average to make judgments about whether the market is under or over valued.
Thus, a market which is trading at a PE ratio which is much higher than its historical norms is often considered to be over valued, whereas one that is trading at a ratio lower is considered under valued.
While reversion to historic norms remains a very strong force in financial markets, we should be cautious about drawing too strong a conclusion from such comparisons. As the fundamentals (interest rates, risk premiums, expected growth and payout) change over
time, the PE ratio will also change. Other things remaining equal, for instance, we would expect the following.
· An increase in interest rates should result in a higher cost of equity for the market and a lower PE ratio.
· A greater willingness to take risk on the part of investors will result in a lower risk premium for equity and a higher PE ratio across all stocks.
· An increase in expected growth in earnings across firms will result in a higher PE ratio for the market.
· An increase in the return on equity at firms will result in a higher payout ratio for any given growth rate (g = (1- Payout ratio)ROE) and a higher PE ratio for all firms.
In other words, it is difficult to draw conclusions about PE ratios without looking at these fundamentals. A more appropriate comparison is therefore not between PE ratios across time, but between the actual PE ratio and the predicted PE ratio based upon fundamentals
existing at that time.
http://zonecours.hec.ca/documents/A2009-1-1877347.ch18-earning-multiple(1).pdf
Analysts and market strategists often compare the PE ratio of a market to its historical average to make judgments about whether the market is under or over valued.
Thus, a market which is trading at a PE ratio which is much higher than its historical norms is often considered to be over valued, whereas one that is trading at a ratio lower is considered under valued.
While reversion to historic norms remains a very strong force in financial markets, we should be cautious about drawing too strong a conclusion from such comparisons. As the fundamentals (interest rates, risk premiums, expected growth and payout) change over
time, the PE ratio will also change. Other things remaining equal, for instance, we would expect the following.
· An increase in interest rates should result in a higher cost of equity for the market and a lower PE ratio.
· A greater willingness to take risk on the part of investors will result in a lower risk premium for equity and a higher PE ratio across all stocks.
· An increase in expected growth in earnings across firms will result in a higher PE ratio for the market.
· An increase in the return on equity at firms will result in a higher payout ratio for any given growth rate (g = (1- Payout ratio)ROE) and a higher PE ratio for all firms.
In other words, it is difficult to draw conclusions about PE ratios without looking at these fundamentals. A more appropriate comparison is therefore not between PE ratios across time, but between the actual PE ratio and the predicted PE ratio based upon fundamentals
existing at that time.
http://zonecours.hec.ca/documents/A2009-1-1877347.ch18-earning-multiple(1).pdf
Wednesday, 11 November 2009
Brain drain and middle-income trap key issues
Brain drain and middle-income trap key issues
Tags: Attracting talent | Datuk Johan Raslan | Datuk Justin Leong | Datuk R Karunakaran | Dr Soh Chee Seng | GDP | Genting Group Malaysia | HSBC Bank Bhd | ISIS | Jon Addis | Malaysia | MICPA | Steven CM Wong | Talented people
Written by Loong Tse Min
Wednesday, 11 November 2009 11:39
KUALA LUMPUR: Malaysia needs to reach out to talented people wherever they come from, apart from bringing back its own, said Malaysian Institute of Certified Public Accountants (MICPA) vice-president Datuk Johan Raslan.
He said many Malaysians could be found working overseas as they were often adaptable, multi-lingual and inexpensive.
“The world wants Malaysians. We need to get them back, but we must not hold them back,” Johan said in the opening address of the two-day MICPA-Bursa Malaysia Business Forum 2009.
Cities such as Hong Kong, Singapore, London and Sydney were open to attracting talent and Malaysia needed to be equally so, he said.
“We should not shut out people with skills and expertise simply because they were not born here. We need to reach out to talented people wherever they come from,” he said.
Johan added that the country’s liberalisation measures put it “on the starting block” towards becoming a high-income economy and what was needed now were the fine details.
He also said the corporate sector must take ownership of abolishing corruption and not just consider it the responsibility of the government alone. “For every taker, there is a giver,” he said.
“In the final analysis, it is equally important to provide a conducive environment that is clean, fair and predictable, to attract companies to set up here, stay here and do business.”
Speaking in the first discussion session on Competing in the New Global Landscape, Institute of Strategic and International Studies (ISIS) Malaysia assistant director general Steven CM Wong, suggested that to become a high-value economy, the country should “get off protective industries”, “get rid of energy subsidies” and “get off the dependence on foreign workers”.
He said the potential disruption to business of some of his proposals such as the last one was really part of “transition costs”. Wong, whose research interests include international economics and international relations, also suggested that the Malaysian economy was too much consumption driven and there was a need to focus on production aspects.
Datuk R Karunakaran, a former director-general of the Malaysian Industrial Development Authority, who was moderating, pointed out that one key issue to higher salary was higher productivity. “With productivity comes better pay and better income,” he said.
In terms of composition of the economy for most developed countries, more than 60% of annual gross domestic product (GDP) came from the services sector, with Malaysia somewhere just over 50%. “That is a characteristic of a high-income economy and that is the transformation we will have to go through,” he said.
Deputy director in the Public-Private Partnership Centre and Secretariat to the Economic Council of the Economic Planning Unit Dr Soh Chee Seng said: “Our productivity levels are not really low, it is just that they are falling behind other rapidly developing countries like China, India, Indonesia and Thailand.”
He agreed that it was necessary for the country to be more open to attract the talent in the areas that it needed, “not just foreign talent but also Malaysians who are attracted elsewhere”.
HSBC Bank Bhd executive director Jon Addis said the diaspora of Malaysians was not a bad thing, as his home country Britain had benefited from a similar trend.
“If those skills and money return to Malaysia, that’s a good thing.”
He questioned whether foreign workers should be an issue and suggested that it might be a better strategy to raise the standard of education for Malaysians so that they could do the higher-value jobs while leaving the low-wage jobs to foreign labour.
He also said the country’s infrastructure was still “patchy” such as in terms of public transit, which had some idiosyncrasies.
Genting Group Malaysia’s head of strategic investments and corporate affairs Datuk Justin Leong said the Malaysian culture of adaptability and flexibility provided a good talent pool for businesses to expand overseas.
He said that from his experience, most Malaysians working overseas still held Malaysian passports and continued to have a lot of goodwill towards the country. Attracting them back was a possibility through sufficiently attractive job opportunities as well as improved safety and rule of law, he said.
This article appeared in The Edge Financial Daily, November 11, 2009.
Tags: Attracting talent | Datuk Johan Raslan | Datuk Justin Leong | Datuk R Karunakaran | Dr Soh Chee Seng | GDP | Genting Group Malaysia | HSBC Bank Bhd | ISIS | Jon Addis | Malaysia | MICPA | Steven CM Wong | Talented people
Written by Loong Tse Min
Wednesday, 11 November 2009 11:39
KUALA LUMPUR: Malaysia needs to reach out to talented people wherever they come from, apart from bringing back its own, said Malaysian Institute of Certified Public Accountants (MICPA) vice-president Datuk Johan Raslan.
He said many Malaysians could be found working overseas as they were often adaptable, multi-lingual and inexpensive.
“The world wants Malaysians. We need to get them back, but we must not hold them back,” Johan said in the opening address of the two-day MICPA-Bursa Malaysia Business Forum 2009.
Cities such as Hong Kong, Singapore, London and Sydney were open to attracting talent and Malaysia needed to be equally so, he said.
“We should not shut out people with skills and expertise simply because they were not born here. We need to reach out to talented people wherever they come from,” he said.
Johan added that the country’s liberalisation measures put it “on the starting block” towards becoming a high-income economy and what was needed now were the fine details.
He also said the corporate sector must take ownership of abolishing corruption and not just consider it the responsibility of the government alone. “For every taker, there is a giver,” he said.
“In the final analysis, it is equally important to provide a conducive environment that is clean, fair and predictable, to attract companies to set up here, stay here and do business.”
Speaking in the first discussion session on Competing in the New Global Landscape, Institute of Strategic and International Studies (ISIS) Malaysia assistant director general Steven CM Wong, suggested that to become a high-value economy, the country should “get off protective industries”, “get rid of energy subsidies” and “get off the dependence on foreign workers”.
He said the potential disruption to business of some of his proposals such as the last one was really part of “transition costs”. Wong, whose research interests include international economics and international relations, also suggested that the Malaysian economy was too much consumption driven and there was a need to focus on production aspects.
Datuk R Karunakaran, a former director-general of the Malaysian Industrial Development Authority, who was moderating, pointed out that one key issue to higher salary was higher productivity. “With productivity comes better pay and better income,” he said.
In terms of composition of the economy for most developed countries, more than 60% of annual gross domestic product (GDP) came from the services sector, with Malaysia somewhere just over 50%. “That is a characteristic of a high-income economy and that is the transformation we will have to go through,” he said.
Deputy director in the Public-Private Partnership Centre and Secretariat to the Economic Council of the Economic Planning Unit Dr Soh Chee Seng said: “Our productivity levels are not really low, it is just that they are falling behind other rapidly developing countries like China, India, Indonesia and Thailand.”
He agreed that it was necessary for the country to be more open to attract the talent in the areas that it needed, “not just foreign talent but also Malaysians who are attracted elsewhere”.
HSBC Bank Bhd executive director Jon Addis said the diaspora of Malaysians was not a bad thing, as his home country Britain had benefited from a similar trend.
“If those skills and money return to Malaysia, that’s a good thing.”
He questioned whether foreign workers should be an issue and suggested that it might be a better strategy to raise the standard of education for Malaysians so that they could do the higher-value jobs while leaving the low-wage jobs to foreign labour.
He also said the country’s infrastructure was still “patchy” such as in terms of public transit, which had some idiosyncrasies.
Genting Group Malaysia’s head of strategic investments and corporate affairs Datuk Justin Leong said the Malaysian culture of adaptability and flexibility provided a good talent pool for businesses to expand overseas.
He said that from his experience, most Malaysians working overseas still held Malaysian passports and continued to have a lot of goodwill towards the country. Attracting them back was a possibility through sufficiently attractive job opportunities as well as improved safety and rule of law, he said.
This article appeared in The Edge Financial Daily, November 11, 2009.
Selangor to redevelop PJ, Klang, Kajang
Selangor to redevelop PJ, Klang, Kajang
Tags: Kajang | Klang | land value | Petaling Jaya | Petaling Jaya City Council | redevelopment | Section 13 | Selangor Government | Tan Sri Khalid Ibrahim
Written by Au Foong Yee
Tuesday, 10 November 2009 12:00
SHAH ALAM: Certain industrial and older housing enclaves in Petaling Jaya, Klang and Kajang have been identified for redevelopment in a bid by the Selangor government to enhance their land value and to create a stimulus for the state.
Selangor Menteri Besar Tan Sri Khalid Ibrahim said the regeneration exercise would kick off in PJ. Owners of buildings in “three or four” areas, among them Section 13, would be given incentives to redevelop their buildings for commercial use.
“We have written to the industries concerned to relocate. If they agree to move, they can rebuild on the existing tract of commercial property with certain densities,” Khalid told The Edge Financial Daily and theedgeproperty.com in an interview here yesterday.
These industrial operations would be allowed to be relocated to other more acceptable areas in Selangor, such as those near ports, Khalid said.
The redevelopment would be in the interest of the property owners, he added. “What we gain is that PJ will become redeveloped and vibrant. They [landowners] will make the money — the state is just making the environment conducive for them.”
Asked whether redevelopment would create traffic and transportation related issues,with congestion being at the top of the list, Khalid conceded, “In a way, yes.”
“We have to show them that we cannot leave PJ in this [current] manner; we have to convince them that we will plan for and provide facilities to reduce congestion,” he said.
Towards this end, the state government has asked for another transportation study to be carried out, based on increased densities in the areas concerned. This is to establish whether the higher densities are feasible. The concept of park-and-ride is also being considered.
According to a report earlier this year in City & Country, the property pullout of The Edge weekly , the 220-acre hub of industrial activity in Section 13 was now dotted with “limited commercial” developments in the form of modern offices and retail blocks.
Factories have been operating in Section 13 since the 1960s, but in recent years, the area's growing potential for commercial activities could not be ignored, given its strategic location. This explained the Petaling Jaya City Council’s approval for “limited commercial” activities there, based on certain guidelines.
Meanwhile, on the revival and rehabilitation of abandoned housing projects in Selangor, Khalid said they had been quite successful — thanks to land-value appreciation over time, resulting in people willing to pay more for the completed units.
The challenge, however, was in the selection of the best contractors or developers to complete the projects.
Some of the rehabilitation projects were initiated by the state government which was willing to lose “a bit” so long as the project was completed, added Khalid.
This article appeared in The Edge Financial Daily, Nov 10, 2009.
Tags: Kajang | Klang | land value | Petaling Jaya | Petaling Jaya City Council | redevelopment | Section 13 | Selangor Government | Tan Sri Khalid Ibrahim
Written by Au Foong Yee
Tuesday, 10 November 2009 12:00
SHAH ALAM: Certain industrial and older housing enclaves in Petaling Jaya, Klang and Kajang have been identified for redevelopment in a bid by the Selangor government to enhance their land value and to create a stimulus for the state.
Selangor Menteri Besar Tan Sri Khalid Ibrahim said the regeneration exercise would kick off in PJ. Owners of buildings in “three or four” areas, among them Section 13, would be given incentives to redevelop their buildings for commercial use.
“We have written to the industries concerned to relocate. If they agree to move, they can rebuild on the existing tract of commercial property with certain densities,” Khalid told The Edge Financial Daily and theedgeproperty.com in an interview here yesterday.
These industrial operations would be allowed to be relocated to other more acceptable areas in Selangor, such as those near ports, Khalid said.
The redevelopment would be in the interest of the property owners, he added. “What we gain is that PJ will become redeveloped and vibrant. They [landowners] will make the money — the state is just making the environment conducive for them.”
Asked whether redevelopment would create traffic and transportation related issues,with congestion being at the top of the list, Khalid conceded, “In a way, yes.”
“We have to show them that we cannot leave PJ in this [current] manner; we have to convince them that we will plan for and provide facilities to reduce congestion,” he said.
Towards this end, the state government has asked for another transportation study to be carried out, based on increased densities in the areas concerned. This is to establish whether the higher densities are feasible. The concept of park-and-ride is also being considered.
According to a report earlier this year in City & Country, the property pullout of The Edge weekly , the 220-acre hub of industrial activity in Section 13 was now dotted with “limited commercial” developments in the form of modern offices and retail blocks.
Factories have been operating in Section 13 since the 1960s, but in recent years, the area's growing potential for commercial activities could not be ignored, given its strategic location. This explained the Petaling Jaya City Council’s approval for “limited commercial” activities there, based on certain guidelines.
Meanwhile, on the revival and rehabilitation of abandoned housing projects in Selangor, Khalid said they had been quite successful — thanks to land-value appreciation over time, resulting in people willing to pay more for the completed units.
The challenge, however, was in the selection of the best contractors or developers to complete the projects.
Some of the rehabilitation projects were initiated by the state government which was willing to lose “a bit” so long as the project was completed, added Khalid.
This article appeared in The Edge Financial Daily, Nov 10, 2009.
Plantation sector rating cut to neutral from overweight
http://www.theedgemalaysia.com/business-news/153204-PLANTATION%20[%3Cspan%20class-
Plantation sector rating cut to neutral from overweight
Tags: CPO price | Crude Oil | Genting Plantations Bhd | Indofood Agri-Resources Ltd | IOI Corp Bhd | Kuala Lumpur Kepong Bhd | Kulim (Malaysia) Bhd | neutral | plantation sector | Sarawak Oil Palms Bhd | TH Plantations Bhd | Wilmar International Ltd
Written by AmResearch
Monday, 09 November 2009 10:43
WE HAVE downgraded the PLANTATION [] sector from overweight to neutral. In addition, we have revised our recommendations on IOI CORPORATION BHD [] (IOI), KUALA LUMPUR KEPONG BHD [] (KLK), Wilmar International Ltd and Indofood Agri-Resources (IndoAgri) from buys to holds.
Earning estimates trimmed; fair values cut
Due to our lower average CPO price assumption for 2010F, we have revised earnings forecasts for companies under our coverage downwards by 4% to 11%, with the exception of SARAWAK OIL PALMS BHD [] (SOP). Despite this downward revision in our earnings estimates, EPS growth for FY10F will still be positive, driven by production growth and a low base effect in FY09F. Recall that earnings of bigger-caps like IOI and KLK in FY09F were affected by forex losses, provisions and lower manufacturing contribution resulting from writedowns.
CPO price assumption lowered to RM2,300/tonne
A result of our recent visits to companies under our coverage is that we are taking a more conservative stance on crude palm oil’s (CPO) pricing cycle — moving into 2010. We now expect prices of CPO to oscillate around RM2,300 per tonne — from our previous assumption of RM2,500/tonne. This implies that CPO prices are expected to remain somewhat flattish in 2010F.
Demand expansion may not keep pace with exceptionally strong supply growth from bumper harvests. We see demand and supply dynamics for CPO turning less favourable — pointing towards potential inventory imbalances — thus putting a cap on prices.
Supply concern is admittedly not new but this time around, we believe production will surprise on the upside due to: (1) A combination of expected normalisation in fresh fruit bunches (FFB) yields off depressed levels this year; and (2) Maturing acreage in 2010F. We reckon that FFB output could rise between 8% and 10% next year.
FFB production this year was affected by low yields resulting from poor fruit pollination and heavy rainfall. We think that palm oil inventory will range between 1.8 and two million tonnes next year — exerting downward pressure on CPO prices.
From January 2001 to September 2009, Malaysia’s average palm oil inventory was about 1.4 million tonnes per month. Average palm oil inventory for the past three years has been roughly 1.6 million tonnes/month while average stock usage was 1.3 times. We reckon that with a higher inventory level, stock usage could rise to 1.4 times to 1.5 times next year.
Plantation sector rating cut to neutral from overweight
Tags: CPO price | Crude Oil | Genting Plantations Bhd | Indofood Agri-Resources Ltd | IOI Corp Bhd | Kuala Lumpur Kepong Bhd | Kulim (Malaysia) Bhd | neutral | plantation sector | Sarawak Oil Palms Bhd | TH Plantations Bhd | Wilmar International Ltd
Written by AmResearch
Monday, 09 November 2009 10:43
WE HAVE downgraded the PLANTATION [] sector from overweight to neutral. In addition, we have revised our recommendations on IOI CORPORATION BHD [] (IOI), KUALA LUMPUR KEPONG BHD [] (KLK), Wilmar International Ltd and Indofood Agri-Resources (IndoAgri) from buys to holds.
Earning estimates trimmed; fair values cut
Due to our lower average CPO price assumption for 2010F, we have revised earnings forecasts for companies under our coverage downwards by 4% to 11%, with the exception of SARAWAK OIL PALMS BHD [] (SOP). Despite this downward revision in our earnings estimates, EPS growth for FY10F will still be positive, driven by production growth and a low base effect in FY09F. Recall that earnings of bigger-caps like IOI and KLK in FY09F were affected by forex losses, provisions and lower manufacturing contribution resulting from writedowns.
CPO price assumption lowered to RM2,300/tonne
A result of our recent visits to companies under our coverage is that we are taking a more conservative stance on crude palm oil’s (CPO) pricing cycle — moving into 2010. We now expect prices of CPO to oscillate around RM2,300 per tonne — from our previous assumption of RM2,500/tonne. This implies that CPO prices are expected to remain somewhat flattish in 2010F.
Demand expansion may not keep pace with exceptionally strong supply growth from bumper harvests. We see demand and supply dynamics for CPO turning less favourable — pointing towards potential inventory imbalances — thus putting a cap on prices.
Supply concern is admittedly not new but this time around, we believe production will surprise on the upside due to: (1) A combination of expected normalisation in fresh fruit bunches (FFB) yields off depressed levels this year; and (2) Maturing acreage in 2010F. We reckon that FFB output could rise between 8% and 10% next year.
FFB production this year was affected by low yields resulting from poor fruit pollination and heavy rainfall. We think that palm oil inventory will range between 1.8 and two million tonnes next year — exerting downward pressure on CPO prices.
From January 2001 to September 2009, Malaysia’s average palm oil inventory was about 1.4 million tonnes per month. Average palm oil inventory for the past three years has been roughly 1.6 million tonnes/month while average stock usage was 1.3 times. We reckon that with a higher inventory level, stock usage could rise to 1.4 times to 1.5 times next year.
KLSE TRADE STATISTICS: LOCAL VS FOREIGN October 2009
http://spreadsheets.google.com/pub?key=txKJ-CJ_m_KD-Agbe6RtG5g&output=html
http://www.klse.com.my/website/bm/market_information/market_statistics/equities/downloads/trading_participation_investor2009.pdf
Observations:
The average price per unit volume of shares for the foreign institutions was MR 3.63; that for the local institution was MR 3.33.
The local retail investors were mostly into penny shares. The average value per unit volume traded was MR 0.66.
Half the volume of shares (49.96%) traded in October were generated by local retail investors.
Foreign Institutions were net buyers in October.
Local Institutions were net sellers in October.
No net change in value in trades of local retail investors. However, the volume of shares bought were higher than those sold.
The local retail investors were selling higher priced shares to buy into lower priced shares in October.
Based on value of shares traded, the Local Institutional funds were the biggest players in the local KLSE (43.69%).
http://www.klse.com.my/website/bm/market_information/market_statistics/equities/downloads/trading_participation_investor2009.pdf
Observations:
The average price per unit volume of shares for the foreign institutions was MR 3.63; that for the local institution was MR 3.33.
The local retail investors were mostly into penny shares. The average value per unit volume traded was MR 0.66.
Half the volume of shares (49.96%) traded in October were generated by local retail investors.
Foreign Institutions were net buyers in October.
Local Institutions were net sellers in October.
No net change in value in trades of local retail investors. However, the volume of shares bought were higher than those sold.
The local retail investors were selling higher priced shares to buy into lower priced shares in October.
Based on value of shares traded, the Local Institutional funds were the biggest players in the local KLSE (43.69%).
Russian shares are cheap again
Russian shares are cheap again
Eastern Europe has witnessed momentous changes since the fall of the Berlin Wall 20 years ago.
By Elena Shaftan
Published: 5:54AM GMT 05 Nov 2009
In the two decades since this historic event, the lives of people in the former Communist Bloc have changed beyond recognition – changes that have increasingly attracted the attention of investors since stock exchanges started to open up in the region in the early to mid 1990s.
During this time, investors' focus has largely been on the opportunities presented by the convergence of Eastern European economies with those in the West.
Commodity shares to rise However, 20 years on from the symbolic collapse of the Wall and notwithstanding some setbacks, a lot of the "easy gains" have arguably been made from this story.
Having been through some difficult adjustments in the 1990s, most former Communist states are now members of the EU and share a common legal and regulatory framework with the West.
Living standards in the region have improved across the board as wages have risen and consumers have begun to discover credit. However, labour costs in many economies remain about a quarter of those in the West and taxes are a third lower than in Germany, ensuring the region remains an attractive destination for companies seeking to lower production costs.
Yet the development of these young democracies has hardly been uniform – some very clear winners and losers have emerged and it is worth casting a fresh eye over the new opportunities ahead of us.
Followers of the region will be all too aware that some of the smaller countries in the Baltics and Balkans got carried away with borrowing their way to growth, resulting in much publicised economic imbalances. However, the situation in economies such as Poland, Turkey, Russia and the Czech Republic couldn't be more different and this is where I believe the greatest prospects now lie.
These countries are benefiting from an improving economic outlook. They have substantial and still under-developed domestic markets and, with consumer debt levels of only 10pc to 30pc of gross domestic product (GDP) - versus 100pc for the UK - offer superior growth prospects than their less-fortunate neighbours.
In Poland for example, economic growth was 1.1pc in the second quarter, having remained positive even during the depths of the financial and economic crisis. Poland has benefited from relatively low exposure to exports but its solid performance has also been underpinned by structural factors.
While many other emerging economies thrived in 2001-2002, Poland struggled as unemployment and interest rates hit 20pc. Now they are just 11pc and 3.5pc respectively and the economy is benefiting from the unleashing of substantial pent-up demand.
This, together with a far smaller debt burden than in many other European countries, has allowed consumers to continue spending and support the economy.
Poland and the Czech Republic are also net beneficiaries of EU funding that aims to improve infrastructure. In Poland for example these transfers are worth around 3pc of GDP per annum for the next four years and are set to boost investment and construction.
Turkey offers further opportunities. While the Turkish economy suffered a sharp contraction last winter, it rebounded rapidly with 12pc quarter on quarter growth between April and July.
A positive side effect of the crisis has been the taming of inflation which has been above 20pc for 25 of the past 30 years, but is now down to a historic low of 5.3pc. This has allowed the central bank to slash interest rates from almost 17pc a year ago to an all time low of 6.75pc.
Lower interest rates should feed through to loan growth and stimulate the economy. Signs of recovery are already emerging with home sales rising 72pc year on year in the second quarter, while seasonally-adjusted automobile sales in September are at record levels.
The Russian economy has also stabilised now that the financing constraints that held back businesses over the winter have eased. After a sharp sell off last year, shares in Russian oil and gas companies now appear cheap compared to historical norms and their international peers.
While the events of 2008 have demonstrated that commodity prices can fluctuate in the short term, the development of China and India provides a structural source of incremental demand that is likely to exert upward pressure on prices over time.
But Russia is not just about oil. It is a country of 140m people – a huge consumer market, with a growing middle class aspiring to raise living standards.
Consumption patterns are changing as a result. Russians still drink on average around eight times more vodka than Britons, yet over the past decade, consumption of beer and fruit juices have leapt from next to nothing to near European levels.
Similar trends are emerging for other goods such as yoghurts, mineral water, vitamins, computers, broadband and banking services. These trends are likely to develop over time, benefiting the strongest local companies.
There are other reasons why we like these markets. First, their stock markets are large and liquid compared to others in the region, making them a more attractive destination for international investors, even though they carry more risk and experience greater volatility than Western counterparts.
Second, they often have very different dynamics, so investors can diversify while making the most of any economic and financial recovery.
Russia, for example, is the world's largest oil exporter, while Turkey imports most of the oil that it consumes. Investing in both means fund managers can take advantage of not only rising but also falling energy prices.
The Polish economy is driven primarily by domestic demand, which helped it to grow even when the rest of Europe was contracting in the first half of 2009. Czech equity markets, meanwhile, contain several solid defensive stocks that tend to be less susceptible to difficult economic conditions.
While stocks listed in the 'big four' markets of eastern Europe are most important for us at present, our ability to invest in the broader region means we can discover some hidden gems in smaller regional markets from time to time.
The ability to invest in a wide range of markets - including for example Israel and Croatia, and former Soviet republics such as Kazakhstan and Georgia - has given us the flexibility to adapt to different market conditions.
We are also exploring opportunities among West European companies with successful operations in Eastern Europe, further broadening the investment horizon.
The Eastern Europe of today is a very different place to that of 20 years ago. There have been economic winners and sadly, some losers. However, the opportunities for investors to profit from the region's success stories are clearer than ever.
Elena Shaftan is the fund manager of Jupiter Emerging European Opportunities Fund
http://www.telegraph.co.uk/finance/personalfinance/investing/6501437/Russian-shares-are-cheap-again.html
Eastern Europe has witnessed momentous changes since the fall of the Berlin Wall 20 years ago.
By Elena Shaftan
Published: 5:54AM GMT 05 Nov 2009
In the two decades since this historic event, the lives of people in the former Communist Bloc have changed beyond recognition – changes that have increasingly attracted the attention of investors since stock exchanges started to open up in the region in the early to mid 1990s.
During this time, investors' focus has largely been on the opportunities presented by the convergence of Eastern European economies with those in the West.
Commodity shares to rise However, 20 years on from the symbolic collapse of the Wall and notwithstanding some setbacks, a lot of the "easy gains" have arguably been made from this story.
Having been through some difficult adjustments in the 1990s, most former Communist states are now members of the EU and share a common legal and regulatory framework with the West.
Living standards in the region have improved across the board as wages have risen and consumers have begun to discover credit. However, labour costs in many economies remain about a quarter of those in the West and taxes are a third lower than in Germany, ensuring the region remains an attractive destination for companies seeking to lower production costs.
Yet the development of these young democracies has hardly been uniform – some very clear winners and losers have emerged and it is worth casting a fresh eye over the new opportunities ahead of us.
Followers of the region will be all too aware that some of the smaller countries in the Baltics and Balkans got carried away with borrowing their way to growth, resulting in much publicised economic imbalances. However, the situation in economies such as Poland, Turkey, Russia and the Czech Republic couldn't be more different and this is where I believe the greatest prospects now lie.
These countries are benefiting from an improving economic outlook. They have substantial and still under-developed domestic markets and, with consumer debt levels of only 10pc to 30pc of gross domestic product (GDP) - versus 100pc for the UK - offer superior growth prospects than their less-fortunate neighbours.
In Poland for example, economic growth was 1.1pc in the second quarter, having remained positive even during the depths of the financial and economic crisis. Poland has benefited from relatively low exposure to exports but its solid performance has also been underpinned by structural factors.
While many other emerging economies thrived in 2001-2002, Poland struggled as unemployment and interest rates hit 20pc. Now they are just 11pc and 3.5pc respectively and the economy is benefiting from the unleashing of substantial pent-up demand.
This, together with a far smaller debt burden than in many other European countries, has allowed consumers to continue spending and support the economy.
Poland and the Czech Republic are also net beneficiaries of EU funding that aims to improve infrastructure. In Poland for example these transfers are worth around 3pc of GDP per annum for the next four years and are set to boost investment and construction.
Turkey offers further opportunities. While the Turkish economy suffered a sharp contraction last winter, it rebounded rapidly with 12pc quarter on quarter growth between April and July.
A positive side effect of the crisis has been the taming of inflation which has been above 20pc for 25 of the past 30 years, but is now down to a historic low of 5.3pc. This has allowed the central bank to slash interest rates from almost 17pc a year ago to an all time low of 6.75pc.
Lower interest rates should feed through to loan growth and stimulate the economy. Signs of recovery are already emerging with home sales rising 72pc year on year in the second quarter, while seasonally-adjusted automobile sales in September are at record levels.
The Russian economy has also stabilised now that the financing constraints that held back businesses over the winter have eased. After a sharp sell off last year, shares in Russian oil and gas companies now appear cheap compared to historical norms and their international peers.
While the events of 2008 have demonstrated that commodity prices can fluctuate in the short term, the development of China and India provides a structural source of incremental demand that is likely to exert upward pressure on prices over time.
But Russia is not just about oil. It is a country of 140m people – a huge consumer market, with a growing middle class aspiring to raise living standards.
Consumption patterns are changing as a result. Russians still drink on average around eight times more vodka than Britons, yet over the past decade, consumption of beer and fruit juices have leapt from next to nothing to near European levels.
Similar trends are emerging for other goods such as yoghurts, mineral water, vitamins, computers, broadband and banking services. These trends are likely to develop over time, benefiting the strongest local companies.
There are other reasons why we like these markets. First, their stock markets are large and liquid compared to others in the region, making them a more attractive destination for international investors, even though they carry more risk and experience greater volatility than Western counterparts.
Second, they often have very different dynamics, so investors can diversify while making the most of any economic and financial recovery.
Russia, for example, is the world's largest oil exporter, while Turkey imports most of the oil that it consumes. Investing in both means fund managers can take advantage of not only rising but also falling energy prices.
The Polish economy is driven primarily by domestic demand, which helped it to grow even when the rest of Europe was contracting in the first half of 2009. Czech equity markets, meanwhile, contain several solid defensive stocks that tend to be less susceptible to difficult economic conditions.
While stocks listed in the 'big four' markets of eastern Europe are most important for us at present, our ability to invest in the broader region means we can discover some hidden gems in smaller regional markets from time to time.
The ability to invest in a wide range of markets - including for example Israel and Croatia, and former Soviet republics such as Kazakhstan and Georgia - has given us the flexibility to adapt to different market conditions.
We are also exploring opportunities among West European companies with successful operations in Eastern Europe, further broadening the investment horizon.
The Eastern Europe of today is a very different place to that of 20 years ago. There have been economic winners and sadly, some losers. However, the opportunities for investors to profit from the region's success stories are clearer than ever.
Elena Shaftan is the fund manager of Jupiter Emerging European Opportunities Fund
http://www.telegraph.co.uk/finance/personalfinance/investing/6501437/Russian-shares-are-cheap-again.html
The great natural gas conundrum
The great natural gas conundrum
Nebulous, drifting, volatile: all good ways to describe both natural gas and the conflicted outlook for the commodity among industry experts at the moment.
By Rowena Mason
Published: 9:38PM GMT 08 Nov 2009
A gas field exploration platform owned by China National Offshore Oil Corporation (CNOOC) in South China Sea.
On the one hand, a growing number of economists are the early-bird canaries in the mine, warning of a dangerous build up of natural gas on the verge of suffocating the market with an oversupply. On the other side, there is no shortage of energy companies dashing into the biggest gas extraction projects the world has ever known, proclaiming that a new era of burgeoning demand will be upon us.
So what has caused the commentators to float apart to such a degree? And whose sums look set to turn out to be an expensive mistake?
First, a look through the hazy clouds of forecasting at the fundamentals of the gas market. Henry Hub prices at the New York Mercantile Exchange have crashed 62pc this year. Reserves in the US are at historic highs. In fact, there's a glut of the stuff packed into disused fields and liquefied natural gas storage units across the globe. For many months now, producers have been hopefully waiting for gas prices to follow the oil price upwards, but the traditional connection – with a time lag between gas trailing oil – appears to have drifted out of kilter.
Part of this is the recession: Royal Dutch Shell, Europe's biggest energy company, warned two weeks ago that it had seen absolutely no increase in need for gas in Europe, and only a slight upturn in the US. In the short term, there has even been talk among Morgan Stanley analysts that the natural state of contango – where spot prices are lower than forward prices – could collapse causing the entire gas market to seize up next year.
Now the International Energy Agency is expected to warn this week that there is little chance of a recovery in demand before 2015, fuelled by a global drive to decarbonise with a new emphasis on renewable sources, nuclear power and energy efficiency.
But looking beyond the stagnant demand, oversupply has also been caused by technological breakthroughs in extraction techniques that mean so-called "tight" formations are getting cheaper to develop. The US was at one point speeding its way through natural gas reserves at an alarming rate, but over the past two decades, unconventional gas–from shales and coal-bed methane –has grown from 10pc to 40pc of the market.
Some commentators, including the Pulitzer Prize winning author of Daniel Yergin, The Prize: The Epic Quest for Oil, Money, and Power, have hailed this as a revolution in the fossil fuel industry that could change the world's whole gas balance if other countries follow America's lead. Technology has also given greater competition to the markets.
So why, if gas has become suddenly abundant, mobile and unwanted, are there still energy majors from BP to Shell to ExxonMobil keen to exploit expensive developments in far-flung, often hostile corners of the globe from Iraq to Russia's Yamal peninsula reserves?
The energy world still appears desperate to develop major gas developments like never before – the biggest being the massive Gorgon fields in Australia, where the energy giants have already signed multi-billion dollar contracts to supply China and India for decades to come. Frank Chapman, the chief executive of BG Group, even claims we will need "a Gorgon a year for the next 10 years" to meet ballooning global needs. Meanwhile, ExxonMobil, looking ahead, predicts that demand for gas in the West alone will grow by 2pc a year, or 30pc by 2030.
Part of the optimism is likely to be political: although countries are desperate to reduce emissions from fossil fuels, gas releases only half the carbon dioxide of coal when burned and is a much cheaper option than developing renewables. As the world also eventually weans itself off petrol and other oil-based products for transportation, electricity demand is set to double or triple.
One day in decades to come, cars and other modes of transport may all either be powered directly by natural gas or electricity generated by gas-powered and renewable power stations. Seizing on this opportunity, Tony Hayward, chief executive of BP, has recently been taking every chance to trumpet the potential of gas as the primary fuel of the medium-term future.
Some even believe the revolution in unconventional gas supplies will be unable to keep pace with this impending thirst for the commodity. Ofgem, the energy regulator, has taken forecast "tight" gas production into its estimates, but remains deeply concerned about the availability of gas in Europe over the next decade.
With all these shifting factors, one thing is for certain. Gas isn't behaving like ever before. And its future as a commodity is entirely interwoven with political decisions – highly unpredictable ones – about its reliability as a replacement for coal and oil.
http://www.telegraph.co.uk/finance/markets/6526528/Future-of-gas-linked-with-political-decisions.html
Nebulous, drifting, volatile: all good ways to describe both natural gas and the conflicted outlook for the commodity among industry experts at the moment.
By Rowena Mason
Published: 9:38PM GMT 08 Nov 2009
On the one hand, a growing number of economists are the early-bird canaries in the mine, warning of a dangerous build up of natural gas on the verge of suffocating the market with an oversupply. On the other side, there is no shortage of energy companies dashing into the biggest gas extraction projects the world has ever known, proclaiming that a new era of burgeoning demand will be upon us.
So what has caused the commentators to float apart to such a degree? And whose sums look set to turn out to be an expensive mistake?
First, a look through the hazy clouds of forecasting at the fundamentals of the gas market. Henry Hub prices at the New York Mercantile Exchange have crashed 62pc this year. Reserves in the US are at historic highs. In fact, there's a glut of the stuff packed into disused fields and liquefied natural gas storage units across the globe. For many months now, producers have been hopefully waiting for gas prices to follow the oil price upwards, but the traditional connection – with a time lag between gas trailing oil – appears to have drifted out of kilter.
Part of this is the recession: Royal Dutch Shell, Europe's biggest energy company, warned two weeks ago that it had seen absolutely no increase in need for gas in Europe, and only a slight upturn in the US. In the short term, there has even been talk among Morgan Stanley analysts that the natural state of contango – where spot prices are lower than forward prices – could collapse causing the entire gas market to seize up next year.
Now the International Energy Agency is expected to warn this week that there is little chance of a recovery in demand before 2015, fuelled by a global drive to decarbonise with a new emphasis on renewable sources, nuclear power and energy efficiency.
But looking beyond the stagnant demand, oversupply has also been caused by technological breakthroughs in extraction techniques that mean so-called "tight" formations are getting cheaper to develop. The US was at one point speeding its way through natural gas reserves at an alarming rate, but over the past two decades, unconventional gas–from shales and coal-bed methane –has grown from 10pc to 40pc of the market.
Some commentators, including the Pulitzer Prize winning author of Daniel Yergin, The Prize: The Epic Quest for Oil, Money, and Power, have hailed this as a revolution in the fossil fuel industry that could change the world's whole gas balance if other countries follow America's lead. Technology has also given greater competition to the markets.
So why, if gas has become suddenly abundant, mobile and unwanted, are there still energy majors from BP to Shell to ExxonMobil keen to exploit expensive developments in far-flung, often hostile corners of the globe from Iraq to Russia's Yamal peninsula reserves?
The energy world still appears desperate to develop major gas developments like never before – the biggest being the massive Gorgon fields in Australia, where the energy giants have already signed multi-billion dollar contracts to supply China and India for decades to come. Frank Chapman, the chief executive of BG Group, even claims we will need "a Gorgon a year for the next 10 years" to meet ballooning global needs. Meanwhile, ExxonMobil, looking ahead, predicts that demand for gas in the West alone will grow by 2pc a year, or 30pc by 2030.
Part of the optimism is likely to be political: although countries are desperate to reduce emissions from fossil fuels, gas releases only half the carbon dioxide of coal when burned and is a much cheaper option than developing renewables. As the world also eventually weans itself off petrol and other oil-based products for transportation, electricity demand is set to double or triple.
One day in decades to come, cars and other modes of transport may all either be powered directly by natural gas or electricity generated by gas-powered and renewable power stations. Seizing on this opportunity, Tony Hayward, chief executive of BP, has recently been taking every chance to trumpet the potential of gas as the primary fuel of the medium-term future.
Some even believe the revolution in unconventional gas supplies will be unable to keep pace with this impending thirst for the commodity. Ofgem, the energy regulator, has taken forecast "tight" gas production into its estimates, but remains deeply concerned about the availability of gas in Europe over the next decade.
With all these shifting factors, one thing is for certain. Gas isn't behaving like ever before. And its future as a commodity is entirely interwoven with political decisions – highly unpredictable ones – about its reliability as a replacement for coal and oil.
http://www.telegraph.co.uk/finance/markets/6526528/Future-of-gas-linked-with-political-decisions.html
Diary of a Private Investor
Diary of a Private Investor: My aggressive investment strategy has backfired
By the beginning of this month, my portfolio had felt the full, unhindered power of the setback and fallen close to 10pc.
By James Bartholomew
Published: 6:49AM GMT 04 Nov 2009
I have to admit I jumped the gun.
As we were getting towards the end of October without suffering any significant setback in the stock market, I thought, "Hurrah! We have survived the most dangerous month of the year and now we have the run up to Christmas and beyond which usually is pretty good for shares."
Related Articles
Commodity shares are heading up So, thinking I would get ahead of the crowd, I put remaining cash into shares. I sold my Japanese yen bonds and put these into shares, too. What happened?
The October setback arrived late. My portfolio fell more than the market generally because I have been favouring what you could call "aggressive recovery plays".
I subscribed to the rights issue of Barratts, the house builder, and bought some extra shares into the bargain. I reckoned the price had been depressed by the rights issue and would rise when all the money was secured. I bought at 153p, only to see the shares fall back even further – to 122p.
I bought more Enterprise Inns, the pub owner, too, paying 139.9p. The shares had jumped 20p after the Office for Fair Trading said it has not found evidence that companies such as Enterprise Inns, which require their tenants to buy their beer, are reducing competition in a way that damages consumers.
This removed one of a little pile of concerns that has been weighing down the shares. I was hoping that as these various concerns were dealt with or found not to be quite so bad as feared that the price would float nearer to its net asset value. Instead, the shares fell more than most and traded around 118p this week.
I also recently bought a few shares in Indo-China Capital Vietnam Holdings at US$4.54. I like Vietnam, but did not quite realise when buying that the company seems to be winding itself down.
I also bought a few Real Estate Investors, a small property company, at 4.96p. I had noticed some director buying and, on looking into the detail, liked the look of it.
Finally, I bought a small holding Chaoda Modern Agriculture, an agribusiness quoted in Hong Kong. Chaoda grows vegetables, fruit and tea and sells to supermarkets and abroad. I bought at HK$6.33.
So I bought up to the hilt. All my cash was gone and most of my bonds, making me 95pc invested in shares or even more if you count my mortgage as financing my shares which is about right. Thus, by the beginning of this month, my portfolio had felt the full, unhindered power of the setback and fallen close to 10pc.
I can't give a precise figure because my curiosity about exact changes in my portfolio's value dwindles when I am losing money.
And this is without counting my shares in Aero Inventory, which have been suspended, as I write, because the company had a problem with valuing, ahem, its inventory.
What now? I still believe November to Christmas and beyond is generally good for shares. David Schwartz, who looks at stock market statistics, has said there has not been much evidence of a seasonal trend this millennium.
It is possible something has changed or that the trend has become self-defeating as people try to get ahead of it. But, even on recent figures, shares have risen in more than half the November-to-March periods. I think there is some unknown force that tries to sustain the market. And I still think some of my shares are excellent value.
In the case of Barratt, I am encouraged by recent experiences of the property market. I am an executor of my uncle's estate. We put his house on the market and within three days agents had taken 42 people to it and we had an offer at the asking price. I am also an executor of another estate, where three potential buyers were vying for the house.
As for the stock market, the Bank of England has decided to do another £50bn of quantitative easing. I think and hope this should help keep shares out of trouble for a while at least.
http://www.telegraph.co.uk/finance/personalfinance/investing/6498737/Diary-of-a-Private-Investor-My-aggressive-investment-strategy-has-backfired.html
By the beginning of this month, my portfolio had felt the full, unhindered power of the setback and fallen close to 10pc.
By James Bartholomew
Published: 6:49AM GMT 04 Nov 2009
I have to admit I jumped the gun.
As we were getting towards the end of October without suffering any significant setback in the stock market, I thought, "Hurrah! We have survived the most dangerous month of the year and now we have the run up to Christmas and beyond which usually is pretty good for shares."
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Commodity shares are heading up So, thinking I would get ahead of the crowd, I put remaining cash into shares. I sold my Japanese yen bonds and put these into shares, too. What happened?
The October setback arrived late. My portfolio fell more than the market generally because I have been favouring what you could call "aggressive recovery plays".
I subscribed to the rights issue of Barratts, the house builder, and bought some extra shares into the bargain. I reckoned the price had been depressed by the rights issue and would rise when all the money was secured. I bought at 153p, only to see the shares fall back even further – to 122p.
I bought more Enterprise Inns, the pub owner, too, paying 139.9p. The shares had jumped 20p after the Office for Fair Trading said it has not found evidence that companies such as Enterprise Inns, which require their tenants to buy their beer, are reducing competition in a way that damages consumers.
This removed one of a little pile of concerns that has been weighing down the shares. I was hoping that as these various concerns were dealt with or found not to be quite so bad as feared that the price would float nearer to its net asset value. Instead, the shares fell more than most and traded around 118p this week.
I also recently bought a few shares in Indo-China Capital Vietnam Holdings at US$4.54. I like Vietnam, but did not quite realise when buying that the company seems to be winding itself down.
I also bought a few Real Estate Investors, a small property company, at 4.96p. I had noticed some director buying and, on looking into the detail, liked the look of it.
Finally, I bought a small holding Chaoda Modern Agriculture, an agribusiness quoted in Hong Kong. Chaoda grows vegetables, fruit and tea and sells to supermarkets and abroad. I bought at HK$6.33.
So I bought up to the hilt. All my cash was gone and most of my bonds, making me 95pc invested in shares or even more if you count my mortgage as financing my shares which is about right. Thus, by the beginning of this month, my portfolio had felt the full, unhindered power of the setback and fallen close to 10pc.
I can't give a precise figure because my curiosity about exact changes in my portfolio's value dwindles when I am losing money.
And this is without counting my shares in Aero Inventory, which have been suspended, as I write, because the company had a problem with valuing, ahem, its inventory.
What now? I still believe November to Christmas and beyond is generally good for shares. David Schwartz, who looks at stock market statistics, has said there has not been much evidence of a seasonal trend this millennium.
It is possible something has changed or that the trend has become self-defeating as people try to get ahead of it. But, even on recent figures, shares have risen in more than half the November-to-March periods. I think there is some unknown force that tries to sustain the market. And I still think some of my shares are excellent value.
In the case of Barratt, I am encouraged by recent experiences of the property market. I am an executor of my uncle's estate. We put his house on the market and within three days agents had taken 42 people to it and we had an offer at the asking price. I am also an executor of another estate, where three potential buyers were vying for the house.
As for the stock market, the Bank of England has decided to do another £50bn of quantitative easing. I think and hope this should help keep shares out of trouble for a while at least.
http://www.telegraph.co.uk/finance/personalfinance/investing/6498737/Diary-of-a-Private-Investor-My-aggressive-investment-strategy-has-backfired.html
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