Australian Market - Sector Analysis

Australian Market - Sector Analysis

		EPS Growth (%)			Price/Earnings (x)			Dividend Yield (%)
		Curr	F/cast  Yr 1	F/cast  Yr 2	Curr	F/cast  Yr 1	F/cast  Yr 2	Curr	F/cast  Yr 1	F/cast  Yr 2
Total Market		7.64	35.06	9.10	16.35	12.14	10.85	4.24	4.36	4.73
Energy		-27.78	36.80	8.31	34.93	24.00	20.14	2.48	2.64	2.74
Materials		22.77	60.71	3.31	13.89	8.47	7.59	2.02	2.26	2.40
Industrials		5.59	33.02	15.02	15.72	16.29	13.99	4.13	4.49	4.85
Consumer Discretionary		103.18	39.58	11.22	19.04	18.95	17.00	4.14	4.40	4.36
Consumer Staples		-11.97	22.42	12.42	23.44	16.36	14.58	4.05	4.53	5.02
Health Care		0.26	14.29	9.11	23.47	17.25	15.38	2.78	2.93	3.11
Financials		-5.80	23.53	9.36	15.14	12.40	11.10	5.87	5.53	5.94
Information Technology		9.99	26.46	10.29	18.41	16.89	13.84	3.12	3.31	3.29
Telecommunication Services		-2.03	-8.18	14.48	10.50	9.65	9.15	8.54	9.76	10.07
Utilities		-4.99	16.04	9.84	-50.84	16.45	14.93	6.86	6.52	6.76

http://money.ninemsn.com.au/shares-and-funds/sector-analysis.aspx

A punt on the money

By Paul Clitheroe,
Money Magazine, September 2007

Six of the best
1. Invest in something you understand
In both life and investing, the simple things are often the best. Most successful companies have a fundamentally simple product.

It's not terribly hard to get a good grasp of how a business like, say, Woolworths works. I think a pretty good test of whether an investment is complicated and, more to the point, if you understand it, is how well you can explain it to someone else. As the famous investor Warren Buffett has said, "If you don't understand it, don't buy it."

2. Consider mainstream assets first
Most mainstream investments fall into one of three categories: cash (which includes fixed-interest securities), property and shares.

These three investment classes are generally a more proven way of generating wealth. Broadly speaking, they can be classified as income investments (cash and interest-bearing securities) and growth investments (property and shares).

Managed investment funds, strictly speaking, are not a separate asset class. They pool their unit holders' funds and invest the money in other underlying assets, such as cash, property or shares. We'll look at these two main types: "income" assets and "growth" assets.

Income assets
Income assets, also known as "conservative" assets, are generally lower in risk. They include term deposits, cash management trusts and other interest-bearing securities and they usually pay investors a specified income on a regular basis.

However, there are downsides. In keeping with the classic investment principle that risk equals return, the lower-risk nature of most income assets means their average returns are normally lower than the average returns from higher-risk growth assets, such as shares and property.

Another important characteristic of income assets is the way they are taxed. To put it simply, your income asset's earnings are taxed fully at your marginal rate (the highest rate of tax you pay). Growth assets — shares and property — attract some tax relief.

Finally there are the matters of capital growth and inflation. Assuming you hold your income assets until maturity, they offer no capital growth and are also subject to erosion by inflation. Despite these negatives, income assets offer security and regular income and therefore have a place in most investment portfolios.

Some income assets, most notably debentures used to finance property developments, are very high-risk, despite presenting themselves as low-risk. There have been serious company failures in this area with investors losing a lot of money, such as the collapse of Fincorp in 2007, Westpoint in 2006 and, in 1990, Estate Mortgage and the Pyramid Building Society.

Growth assets
Growth assets include property, shares, both international and Australian, and units in managed funds that invest in these assets.

These investments offer ongoing income in the form of rent, dividends and distributions, but they also offer capital growth and some tax breaks. It's important to remember that these investments carry more risk.

The capital growth is by no means guaranteed and while there will be periods when the market goes gangbusters (a "bull'" market), there will also be periods when the market dips (a "bear" market).

You need to be able to withstand a fall in the value of your investment.

Shares and property can also be good sources of ongoing income and, unlike income assets, the return on growth assets can be more tax-effective.

Dividends offer franking credits to offset the income tax you pay and property can give you depreciation and other allowances that can be claimed as a tax deduction. An important point to bear in mind about growth assets is that their stated returns usually include both capital growth and ongoing income, but the capital growth is only accessible if you sell the asset.

Property
Aim for the best-located real estate your money can buy. I reckon it's important to pick a property and a location that will appeal to the ageing baby boomers who make up an increasing proportion of our population.

As the population ages, the baby boomers (people born between 1945 and the mid-1960s) will increasingly move from their homes in the suburbs to smaller dwellings, such as townhouses, closer to the city or to coastal retirement enclaves.

Generally, the dwellings will need to be low-maintenance with little or no garden, made of good-quality materials, well positioned and close to all amenities. Something that fits those parameters is more likely to show stronger price and rental growth than other types of properties.

Shares
In addition to monitoring a share's performance on the Australian Stock Exchange (ASX), things you should look for in a publicly listed company include:

* whether or not the underlying business is a good one;
* whether the management team is experienced, with a good track record;
* whether the product has good growth potential.

A company's annual report provides a lot of information but can be a bit overwhelming — sometimes running to a few hundred pages. This is when the advice of a competent financial planner can be useful. Alternatively, the ASX runs courses designed to give investors a better understanding of shares (13 12 79 or www.asx.com.au).

3. Risk equals return
Taking excessive risk in looking for a big return is the number-one reason investors lose their money. They get too greedy — and investment salespeople know this. Now, I'm not saying risk is to be avoided. If you take no risk, you get no return. Everything has some risk, but you must be aware of risk. The real trick is to consider how much risk you can manage and to invest accordingly.

A young person just entering the workforce, for example, may be prepared to invest heavily in an international managed share fund. Sure, this is risky and international markets have copped a hiding over the past few years. However, with a 20-year view, this strategy could give our young investor the highest return over the decades.

At my age (51 as I write this seventh edition), I would not invest all my money in international share markets because of the high risk. However, I have been more than willing to invest some of my super money in this area — because I won't be touching it for a few years yet. Having paid off my mortgage, my main plan at this stage is to build up my super and a portfolio of other investments, such as Australian shares and some investment property. As I age, my attitude to risk will change. I'll be more concerned with protecting my wealth, not growing it, so I will gradually switch to lower-risk investments such as cash, fixed interest and blue-chip shares.

4. Invest on merit
It could be a free music CD if you buy units in a particular managed fund, a bonus deposit for opening a new savings account, even a year's worth of home insurance for taking out a new home loan. These offers may be all above board, but in some cases they may encourage investors to choose a long-term investment vehicle based on a short-term gain. It pays to stay focused on the fundamentals.

When it comes to investing, don't be baffled by big talk, broad statements or bad gimmicks. Focus on the important stuff — what the company aims to achieve, what it invests in, who runs it, what the fees are and what its long-term performance has been.

5. Diversify
In broad terms, I recommend you have a plan to create three pools of wealth — your home, your superannuation and other investments. This strategy gives you exposure to property (your home), shares and fixed interest (through your super) and other investments you buy yourself. It also gives you diversification from a taxation and legislative perspective.

Super is a highly regulated area and the main reason I would not rely solely on super is another type of risk — the risk of the legislation changing, (and it has changed a great deal). How you diversify depends upon your age, income, family and so on. For example, with a share portfolio, you should diversify by choosing different sectors within the market. You might invest in the following areas:

* Banking and finance
* Building and construction
* Media
* Health
* Resources

Inside, say, the banking and finance sector, you might further diversify by choosing several shares such as Westpac, National Australia Bank and a smaller bank, such as St George.

6. Don't try to 'time' the market
Good market timing is all about buying at the bottom and selling at the top and being a "market timer" means trying to do just that. But no market timer I know consistently gets their timing right year after year, as no one has yet worked out how to read the future.

I'm not saying you shouldn't use research to guide you to better investment areas. But when it comes down to it, determining how much risk you can live with and then buying investments that suit your risk profile and monitoring these is a better strategy than regularly switching from one investment area to another.

For the complete story see Money Magazine's September 2007 issue.

http://money.ninemsn.com.au/article.aspx?id=294907

Key points
"If you don't understand it, don't buy it."
Income assets, also known as "conservative" assets, are generally lower in risk
Dividends offer franking credits to offset the income tax you pay

Share floats: sink or swim

By Chris Walker,
Money Magazine, November 2007

Share floats, or initial public offerings (IPOs), offer investors a chance to get in on the ground floor of a newly listed company, potentially enjoying early gains if the stock performs well. But without the benefit of a history for the share price showing what the market thinks of the stock, investors need to make their own assessment as to whether a share's initial subscription price is under- or overvalued. And it's not always an easy task when the prospectus is designed to sell the company to investors.

The term "share float" refers to the first time a company is listed on the Australian Stock Exchange (ASX). Listing is a big step for any company, bringing an important injection of capital or providing existing owners with the opportunity to sell out.

The company prospectus will state an initial subscription price per share; in other words the cost of buying into the stock.

In some cases, investors can make an instant "stag" profit if the share price skyrockets once the shares start trading on the open market. This was certainly the case when fund manager Platinum Asset Management listed in May this year. Its shares closed at $8.80 on the first day of trading, well up on its subscription price of $5. All subscribers made a massive profit; by mid-October Platinum was trading around $6.20.

But profiting from floats is certainly not guaranteed. Home lender RAMS is a case in point. It had an issue price of $2.50 and a first day closing price of $2.49 in July. By mid-August, as the US sub-prime loans debacle blew up, its share price had plummeted under $1 and then there was another steep fall at the beginning of October; mid-October it was trading around 30c.

The current resource boom is dominating new floats and a swag of resource companies are going public. With plenty of blue-sky optimism, it's important for investors to do some mining of their own to assess each share's merits. Henry Jennings, senior broker with Cube Financial, says: "There are some key aspects investors need to consider with share floats. Firstly, look at what the business does. If you don't understand the business or how the company works, don't go there.

"You also need to ask why the company is being floated," he says. "It may be that the company is in need of new money, or it could be that the directors want to get out. A useful indicator here is how long the directors' shares will be held in escrow for [in other words, how long before the directors can cash in their chips]. If it looks like the directors are keen to make an early exit, the warning bells should start ringing."

It is also worth looking to see who is backing the float financially. "If the float is being underwritten by a large broking group it is usually a better-quality listing than if it's backed by a small broker," Jennings says.

The volume of capital being raised is also noteworthy. If the capital raising is small relative to the nature of the company's operations, it's a reasonable bet it won't be too long before it goes back to the market asking for more cash.

All this information should be available from the company's prospectus, but here as well investors need to exercise caution. "Be wary of being swayed by persuasive pictures and images presented in a prospectus," Jennings says. "Often photographs are included in a prospectus that imply or suggest the company has certain contracts or business connections, when in fact nothing of the sort exists."

Not surprisingly, companies see the timing of their float as critical. A buoyant market can sweep a share value upwards with the overall market mood. But as Jennings points out: "It's impossible to know what sort of market conditions will prevail when a company eventually floats. The good ones will perform well, but a lot of recent floats are struggling because of the present market conditions." A list of upcoming floats is available on the ASX website at www.asx.com.au — click on "prices, research and announcements".

http://money.ninemsn.com.au/article.aspx?id=319389

Key points
Initial public offerings (IPOs), offer investors a chance to get in on the ground floor
The current resource boom is dominating new floats
A buoyant market can sweep a share value upwards

Sharemarket basics: An index can be your key pointer

By Chris Walker,
Money Magazine, February 2010

Want to see at a glance how the sharemarket or market sector is performing? No problem – there’s bound to be a share index to help you.

Tune into any shares report on radio or TV, pick up the newspaper’s financial pages or check out the markets online, and you’ll come across a constant – sharemarket indices.

These provide a simple and revealing indication of how the markets are travelling. Arguably the most quoted Australian sharemarket index is the All Ordinaries, often referred to simply as the “All Ords”.

The UK equivalent is London’s FTSE 100 (often called the “Footsie”), in New York it’s the Dow Jones Index, in Tokyo it’s the Nikkei and in Hong Kong, the Hang Seng.

When a sharemarket index is newly created, its starting day is given a base value. Ongoing changes in the market’s performance are then measured in relation to that opening value.

For example, if the index rose from a starting value of 1000 to 1058, the overall value of the parcel of shares included in this index would have risen by 5.8%.

The S&P/ASX All Ordinaries Index was established in 1980 with a base value of 500. In mid-February, 2010 the index was around 4900, an almost tenfold increase in the share price of the companies.

Since April 2000, the All Ords has tracked the value of approximately 500 of Australia’s largest listed companies by market capitalisation, which effectively accounts for more than 95% of the value of all shares listed on the ASX.

Market capitalisation is calculated by multiplying the number of shares on issue by the share price. For example, the largest company on the ASX, BHP Billiton, has a market capitalisation of around $220 billion and accounts for about 14% of the value of the entire market. The 10 largest companies listed on the ASX account for some 45% of the total market’s capitalisation (as at January 12).

Ten years ago ratings agency Standard & Poor’s launched a number of other key Australian indices, with a narrower focus than the All Ords.

These range from the S&P/ASX 20 index, tracking the market’s 20 largest listed companies, to the S&P/ASX 300, the largest 300 companies.

Probably the most significant and oft quoted is the S&P/ASX 200, made up of the 200 largest companies on the ASX and representing about 78% of the market’s capitalisation. But the old All Ords refuses to lie down and continues to grab most of the attention, certainly from the media.

Most indices are price-only indices, meaning they only measure growth in share prices. For a more complete picture it’s worth looking at the various “accumulation” indices, which include dividends paid by the companies in the index.

The S&P/ASX 300 Accumulation Index, for example, is basically the same as the S&P/ASX 300 Index, except that it assumes all dividends are reinvested in the companies issuing them.

Many managed funds actively manage their investment portfolio and attempt to better a particular index they nominate as their benchmark.

Other managed funds, notably “index” funds, try to replicate the returns of a benchmark index, such as the S&P/ASX 200, by holding shares in the same companies.

Index funds tend to live up to their stated investment return goals, namely to match a specific index’s performance, more reliably than actively managed share funds.

In addition to broader market indices there are market sector indices such as the S&P/ASX 300 Metals and Mining Index, or the S&P/ASX 200 Financial Index which contains companies from the top 200 list (by market size) involved in activities such as banking and insurance.

Indices give you an instant guide to whether a market is rising or falling, be it on a daily, weekly, monthly or annual basis.

Their value to investors is they allow you, quite simply and almost at a glance, to benchmark the performance of your shares against the performance of the overall market or the relevant market sector.

This is vital information in determining which shares to buy, hold or sell, and how to best manage the overall weighting of the share component of your portfolio. Share investing would be more difficult without them! For more information on indices, visit the ASX’s website www.asx.com.au.

http://money.ninemsn.com.au/article.aspx?id=1007144

New look at listed property trusts (REITS)

By Pam Walkley,
Money Magazine, September 2007

Listed property trusts (LPTs) form Australians' third most popular asset class — not surprising given they have on average provided a spectacular 17 percent total return each year for the past 10 years. But now the sector is suffering in the wake of the shake-out from sub-prime loan crisis and rising interest rates. This year returns have gone backwards. In June alone the sector was down 5.1 percent.

Investors are asking if this is the end of the dream run for LPTs. Going back to basics, these vehicles were originally established as income producers, buying large commercial real estate assets, collecting the rent from tenants in these buildings and passing it on to investors in a tax-effective way.

But the sector has changed dramatically over the past few years, with many LPTs taking on added risk through property development and funds management. These vehicles are called "stapled" trusts. Average gearing (borrowing to invest) levels have also increased in LPTs, and many now also have exposure to international real estate as well as local.

Indeed, the sector is now very diverse, and different LPTs produce vastly different returns, as is highlighted by research produced by Adviser Edge showing first-quarter total returns for 2007.

Becton Stapled (BEC), which invests in retirement assets, had the highest at 37.17 percent, and Centroret Staple (CER), investing in retail assets, the lowest at -15.54 percent.

Despite all these changes, the sector still derives 86 percent of its income from property rental, with around 64 percent from domestic property, says a report from Standard & Poor's.

So is it time to sell or are there good buying opportunities? Some, such as financial planning firm Bridges, say investors should take their profits and pull out of the sector.

Others, such as leading economist Frank Gelber from economic forecaster BIS Shrapnel, argue LPTs are just going through a flat patch and will surge again, because property markets will be strong over the next few years.

Most analysts expect the sector to continue to produce sound income returns. After all, the fundamentals are still strong, given a surging economy and high employment which means growing demand for commercial space. But the sector is predicted to produce much more modest total returns this year, likely to be around nine percent.

"The sector has maintained strong financial profiles and continues to build on established track records for managing risk and growth," says a July report from Moody's Investor Services, which has a stable outlook for the sector.

"If you are a long-term investor who has chosen to invest in LPTs, a fall in their price should not really be an overwhelming concern," says Ian Irvine, ASX head of customer and business development equity markets.

"After all, commercial property rents have not fallen and vacancies have not risen and the underlying income streams remain."

Irvine says many people still buy LPTs for long-term income. "Capital gains are fine, but are only realised when you sell." Now that yields are up and prices down, this will make them a more attractive buy for some investors, Irvine says.

But, as with any investment, you need to carefully examine the entity you are planning to invest in. Look at things such as:

* Where it owns its assets.
* If it's stapled, and if so, what to?
* What sector? Is it a diversified vehicle?
* Whether it borrows locally or overseas.

Australia was the first country to securitise commercial property in a big way through listed vehicles. Now REITs (real estate investment trusts), as LPTs are called overseas, are expanding into many countries including the UK and Asia.

http://money.ninemsn.com.au/article.aspx?id=296449

Key points
LPTs form Australians' third most popular asset class
The sector still derives 86 percent of its income from property rental

How to firm up your investing knowlege

By Chris Walker,
Money Magazine, April 2010

Most of us could do with some help and education to increase our chances of succeeding at share investing. No matter how much we know, or think we know, about shares, there’s always more we can learn.

Arguably the most logical place to go to learn more about Australian share investing is the Australian Securities Exchange (ASX) itself.

Certainly the ASX has a keen self-interest in getting more people enthused and involved in share investment.

It generates its revenue from trading, but it would be churlish not to give it full credit for the wide range of educational share courses and programs it offers, most of them free.

To start, visit the ASX website.

Here you will find a wide array of educational resources including free online investment courses in shares, warrants and instalments, options, ASX-listed CFDs (contracts for difference) and futures.

To give you an idea of what’s offered, the ASX’s online warrants and instalments education is divided into eight interactive courses, titled:

# The mechanics of the warrants market
# Introduction to instalments
# How to buy and sell instalments
# Instalment pricing
# Instalment strategies
# Instalment strategies for self-managed super funds
# Self-funding instalments
# Rolling instalments

Each course is delivered via a downloadable PDF document, with the time required to complete all eight of them estimated at 115 minutes.

ASX share courses available for free download include:

# Why and how to invest
# How to buy and sell shares
# Trading simulation
# Sharemarket investment strategies
# Fundamental analysis
# Technical analysis

Each of the share courses is estimated to take 10 to 15 minutes to complete.

Other educational materials available on the site include free downloadable booklets, audio-visual presentations on topics such as dividends, understanding annual reports and listed managed investments. There are also podcasts, ASX sharemarket games and a simulator for trading ASX-listed CFDs.

About the only things that aren’t free on the ASX educational website are the ASX Way share books available at around $30 to $40, and the lunchtime Investor Hour seminars held regularly in state capitals that cost the princely fee of $5.

Online brokers also offer help with getting started in trading through information, seminars and ways of practising trading before you have to commit your cash. For example, online CFD and forex broker GFT has a free practice CFD trading account.

If you want more in-depth sharemarket education, you are going to have to devote more time and no doubt have to pay.

A number of organisations offer share education courses, locatable on the internet, and these need to be looked at closely before you hand over your course fees. This is to ensure that you’re getting good value and impartial information, and are not being roped into using a trading system promoted by the course provider.

Melbourne-based investment company Wealth Within offers two ASIC-accredited shares education courses for serious share investors. Its diploma of share trading and investment can be done full time, or part time. Delivered online, encompassing web seminars, completing a workbook and exams, this course costs $5950.

A shorter version, likely to take three to six months to complete, costs $3950. Both courses count towards continuing professional development as specified by the federal government. Perth-based Pro Trader offers share investor courses including one-day training workshops for $695 or evening workshops for $55 a person. Dates and details are on its website.

http://money.ninemsn.com.au/article.aspx?id=1043338

Share Screener

http://money.ninemsn.com.au/shares-and-funds/share-finder.aspx

Top Value
This gives us the first cut of candidates for our Aspect portfolio. It shows all companies with a Value Rank of 1 or 2. We exclude the highest risk companies by specifying only companies with a Risk Rank of 4 or better.

Turnaround Stocks
This gives us the first cut of candidates for our Aspect portfolio. It shows all companies with a Value Rank of 1 or 2. We exclude the highest risk companies by specifying only companies with a Risk Rank of 4 or better. A number of our highly ranked value stocks are companies that have had poor returns but have strong growth forecasts. This query returns all companies with a Value Rank of 1 or 2, with negative total returns in the last year and with a two year forecast growth above 20%.

Large Cap Comparison
Want to see how the big boys stack up on Value? This query ranks all companies with a market capitalisation greater than $1 Billion and displays their current Value rank.

Aspect Ranks for all companies
This query will list all companies in our database with each of our four ranks displayed against each stock.

Growth at a Reasonable Price
If the thought of investing in turnarounds makes you a bit queasy this query, which focuses on stocks with a strong growth track record, might be for you. These are top value stocks with EPS growth over the last five years above 15% and forecast growth above 20%.

Low PE Bottom trawlers
Run this screen to see all stocks with a PE less than 10 and a PEG less than 1. These stocks are cheap! Mind you it might be for a good reason so make sure you investigate our profiles first.

Forecast Finder
Want to know the consensus forecast for a company? Run this query to see all companies, their current Earnings per share, and the forecast for the next two years.

The Bank Analyser
Run this query to see all banks with a number of key measures against each one, including five year return, dividend yield, net interest margin, cost to income ratio and our own Value rank.

Top Income and Growth
If you are an income investor then try out this query. This lists all stocks ranked 1 in income. We still want good value, however so we exclude stocks with a Value Rank of 4 or 5.

What's your naked position?

By Allison Tait
March, 2007

Money talks, so they say, but how much finance-speak sounds like double Dutch to you? Here, we define 20 common terms you'll hear in relation to money.

Actuary: think uber-accountant. An actuary makes calculations and valuations in relation to insurance funds, super funds and other investments, using mathematical, statistical, economic and financial analysis. The emphasis is on the long-term stuff in financial contracts, such as how much risk is involved.

Asset: things you own that have value. This could be cash, property, equipment …

All Ordinaries Index: they talk about it every day on the news, but do you actually know what it is? Basically, it's the overall measure of the daily performance of the Australian share market based on the weighted share prices of around 500 of the nation's biggest companies.

Bear market: it sounds cute, but it's actually not great — it's a share market in which prices are going down.

Blue chip: the basis of a great, long-term share portfolio. Blue chip is a term for the shares of leading companies, where management is excellent and the foundations are strong.

Bond: effectively a loan to a company. Corporations and governments issue bonds as debt security, in return for cash from lenders and investors. A bond holder lends money to the issuer for a set term, in return for interest.

Bull market: nothing to do with running with bulls in Spain … rather, it's a share market in which prices are on the rise.

Capital growth: the difference between what you paid for an investment (such as a house) and what you can sell it for, if it's increased in value.

Cash management trust: this may be for you if you're interested in investing but don't have a lot of cash. By pooling the funds of many investors, the trust can buy large volumes of short-dated securities, decreasing transaction costs and resulting in higher returns to trust members. A flexible investment option.

Deductible: a beautiful word come tax time. Refers to expenses that can be offset against taxable income — contributions to superannuation funds, for example.

Depreciation: it sounds like a negative, but can have a positive effect on your tax liabilities. Depreciation recognises that assets tend to lose value as they age, so the cost of the asset is written down over the life of that asset. Considered a non-cash business expense, it can generally be offset against taxable income.

Dividend: the amount a shareholder receives out of a company's after-tax earnings. You can either take the money and run or reinvest your dividends back into the company in the form of more shares.

Equity: there's been a lot of talk about this in recent years as people realise how much money they have tied up in their homes. Basically, it's the value an owner has in an asset (in this case, a house) over and above the debt against it. Take the amount your house is worth, subtract the amount you still owe the bank and what's left over is the equity.

Gearing: a measure of just how in debt you are. How much you've borrowed compared with the assets you hold.

Hedge fund: sounds green and clean, doesn't it? It's actually an investment portfolio, under which the fund manager has the authority to use higher-risk investment techniques, including borrowing funds, to generate higher returns. Not for the faint-hearted.

Market order: "Buy, buy, buy" or "sell, sell, sell". A share will be bought or sold at the most advantageous price available after a market order hits the trading floor.

Property trust: If you're interested in property investment but don't want to put all your eggs in one henhouse, so to speak, this may be for you. It's a collective investment vehicle with ownership of a portfolio of real property, so spreading the ownership. You can buy into a listed property trust (quoted on the stock exchange, prices fluctuate with supply and demand) or an unlisted property trust (arranged directly with the trust's manager, who fixes the prices).

Share (stock): buy a share and you own part of the company — albeit a very small part. A share is essentially a contract between the company of issue and the owner, giving the latter an interest in how the company is managed, the right to share in profits and, if it all goes pear-shaped and the company is dissolved, a claim upon assets remaining once the debts have been paid. Stock is a generic term for shares and, less frequently, bonds.

TFN: otherwise known as tax file number. Every taxpayer in Australia is allocated one by the Australian Tax Office, which then uses it to match income and taxation details.

Yield: how much you make on an investment (the return), usually expressed as a percentage.

*Naked position: oh yes. Make that 21. This is actually not that common in general usage, so we'll leave the definition to the expert: namely, Edna Carew in her book The Language of Money (Allen & Unwin).

"A naked position is also known as a naked option. An option whose writer has not hedged, for example, a writer of call options over shares who has sold the right to buy the underlying shares but who does not own them or the writer of a put option over shares who has sold the right to sell the shares (to the writer); if the holder chooses to exercise the option, the uncovered writer will be obliged to buy the shares at an exercise price which will be a higher-than-market price (otherwise the holder of the option would not exercise). Naked options are high-risk and can involve large losses for the writer."

Hmmm...sounded a lot sexier when you didn't know, right?

http://money.ninemsn.com.au/article.aspx?id=256795

Sharemarket basics: a numbers game

Money Magazine, April 2007

Investing in shares can be something of a numbers game, especially when the financial press is peppered with mention of ratios such as "dividend yield" and "earnings per share". There is no shortage of these statistics and they can be useful as a means of assessing whether a particular share offers good returns or strong growth prospects.

On this basis, ratios are worth adding to your armoury of research, though they are by no means infallible. To begin with, ratios use historical data, which is not necessarily a guide for what will happen in the future. And the source data can be open to accounting manipulation, so any insights that ratios provide should be viewed with caution.

Let's take a look at some of the key share market ratios (though this list is by no means exhaustive).

Dividend yield: Calculated by dividing the most recent dividend by the current share price and multiplying by 100 to achieve a percentage figure. Dividend yield is a measure of the regular income return (rather than capital growth) that a share is paying, which allows a comparison between different shares, and also against other asset classes. However, when the share price changes the dividend yield will also change. Indeed, if the share price crashed, the yield would soar, until the next dividend is declared — if there is one.

Earnings per share (EPS): calculated by dividing the net profit of a company by the total number of shares issued. By looking at a company's EPS history, it is possible to see the growth in earnings from one year to the next; and you can compare earnings to the dividend payouts and the share price each year.

Price earnings (PE) ratio: Calculated by dividing the share price by the earnings per share. This often-quoted ratio is a way of measuring investors' expectations about a company's performance, and it is often used to describe whether an individual company, or even the share market as a whole, is "expensive", in the sense that it is overpriced.

Overall share market conditions will have a bearing on the relative PE ratios of different shares but, as a guide, a company with a PE ratio of about 16 is considered to be a growth-orientated company, meaning there's a good chance its earnings will rise. By contrast, a company with a PE ratio of less than 11 may be regarded as having less rosy prospects for earnings growth.

While the PE ratio can be useful for making comparisons between companies, this ratio generally makes more sense if the companies under review operate within the same industry (as average PEs vary between industries), and face the same overall market conditions.

Dividend cover: Calculated as EPS divided by dividend per share. This ratio shows the proportion by which a company's dividend is covered by its earnings. A figure of less than 1.0, for example, suggests the company is paying out more than it is earning. Investors should look for a figure above 1.0, which suggests the company can comfortably pay its dividends.

Net Tangible Assets (NTA): Calculated as the value of shareholders' funds (as reported in the company's balance sheet) divided by the number of issued shares. Also known as the "asset backing", this ratio can give investors an indication of what each share in a company would be worth if all the assets were liquidated and all debts were paid and the remaining proceeds were distributed to ordinary shareholders on a per share basis.

Investors sometimes use the NTA to assess the desirability of a share. If the NTA is greater than the share price, it may be that the company is undervalued — potentially making it a takeover target. Conversely, if the NTA is below the share price, the market may be overvaluing the company.

For the complete story see Money Magazine's April 2007 issue.

http://money.ninemsn.com.au/article.aspx?id=260404

So, you like Glove Sector - Which Stock will you Pick?

Analysis of the Glove Sector.
https://spreadsheets.google.com/pub?key=0AuRRzs61sKqRdDM1ZFNXQ2ZPRHBYcFJjd1lDNFVYdFE&hl=en&output=html

The top 6 glove companies are priced at RM 8.7 billion in market capitalization.  They generated a total of about RM 766 million in earnings the last 12 months.

'We are going to have higher prices for commodities'

'We are going to have higher prices for commodities'
Wheat, sugar, cotton and gold are arousing interest from investors across the globe.


By Paul Farrow, Personal Finance Editor
Published: 7:00AM BST 02 Oct 2010


Sugar prices are at a seven-month high

It wasn't so long ago that investors were extolling the virtues of hedge funds, private equity, currency swaps and infrastructure. But these newfangled alternatives have been knocked off their perch by investments that were being traded by City gents wearing tails and top hats more than a century ago.

Wheat, sugar, cotton and perhaps the oldest of all investments, gold, are grabbing the headlines and generating interest from sophisticated investors across the globe. The reason is rising prices. This week, sugar climbed to a seven-month high on concern that adverse weather will curb output in Brazil, the world's biggest exporter, and Australia, the third-largest.

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Cotton extended its rally to its highest price in more than 15 years, wheat prices have risen by 60pc over the past 12 months, while gold continues to attract investors worried about a global double-dip recession and its price hovers around a record high of $1,300 an ounce.

For many private investors investing in commodities is a novelty. Yet research published this week by JP Morgan suggests that people who do not have any exposure to commodities within their investment portfolios could be missing a trick or two.

"Commodities are the oldest asset class known to man, but perhaps one of the least understood today," said Rumi Masih, the global head of the strategic investment advisory group at JPM. "You can go back even further – one of the first investors known to profit from a commodity trade was the pre-Socratic Greek philosopher Thales (pictured), who, as Aristotle recalls, invested in oil presses near the ancient Ionian cities of Chios and Miletus early in the growing season one year and thus reaped the benefits of a bumper crop of olives."

Mr Masih's research found that commodities were a hedge against rising inflation and improved returns while reducing volatility. Commodities outperformed equities and bonds when economies were in a late expansion phase by 10pc and marginally outperformed when economies were in the early expansion phase just after a recession. The only time they lagged other assets was towards the end of a recession.

The commodity recovery story has been triggered by the supply and demand effect – quite simply, demand for many commodities outstrips supply as giant economies such as India and China march forward.

Even though the demand for metals has been rising, supply is tight – no new mine shafts have been opened in 20 years worldwide, according to JPM. The last iron ore smelter to be built in the United States dates back to 1969.

"The case for including commodities as one component of a diversified portfolio has become stronger in the wake of the 2008 financial crisis and amid the economic ascendancy of China," Mr Masih said. "There are significant supply constraints on commodities amid burgeoning demand for them, not only among developed nations and China but also from a broader swath of the developing world. This includes emerging economies in places as far afield as Africa, Asia and South America."

JP Morgan is not the only commodity bull. Commodity analysts at Standard Chartered estimate that nearly $200bn (£130bn) worth of investment projects were suspended as a result of the financial crisis in iron ore, copper, and coal alone.

Among soft commodities, particularly grains, disruptions to climatic patterns have again tightened supply. "This combination of medium-term demand-side pressure against the background of a limited short-term supply response in many commodities looks set to keep commodity prices supported," said Philip Poole, the global head of macro and investment strategy at HSBC Global Asset Management.

The question for investors is which commodities to buy and whether they are arriving too late to the party – as the graphs show that commodities have recovered from their 2008 falls. Commodities are volatile beasts – just ask investors who piled into oil stocks as crude marched towards $147 a barrel in 2008, only to come down with a jolt as the price plummeted to $60. Investors who bought exchange-traded funds following sugar, natural gas, zinc, cocoa and lead prices have seen the value of their investments fall by 10pc or more.

Gold continues to win favour and, with the economic uncertainty set to linger, demand will be strong. The question is whether the price can go much higher. There are concerns that cotton may not be rich pickings. Connor Noonan, a commodities analyst at asset management house Castlestone, is bullish on the prospects for cotton over the medium term, but he expects a lot of volatility, "with prices easing over the next month".

Evercore Pan Asset invests in commodity ETFs, but at present owns only two – ETF Securities Agriculture and iShares Timber. And it avoids gold. "We sold out of a general, 'hard' commodity ETF, which was a play on oil earlier in the year," said Christopher Aldous, the chief executive. "We have no way of understanding its movement. Its prices seem to be driven by speculators and we have missed out on the price rises – and we are not going to start chasing it now."

Legendary investor Jim Rogers, who set up one of the world's first hedge funds with George Soros in the Seventies, is also an advocate of commodities over the long term – although he warns investors not to simply buy those that have shot up in price in recent months. He recommends commodities that have not moved up that much. "Buy silver rather than gold, for instance, if you want to buy precious metal," he said. "I would like to buy coffee too. But there is still a huge potential [in general]. If governments are going to continue to print money, we are going to have higher prices for commodities."

http://www.telegraph.co.uk/finance/personalfinance/8036344/We-are-going-to-have-higher-prices-for-commodities.html

IMF admits that the West is stuck in near depression

If you strip away the political correctness, Chapter Three of the IMF's World Economic Outlook more or less condemns Southern Europe to death by slow suffocation and leaves little doubt that fiscal tightening will trap North Europe, Britain and America in slump for a long time.


By Ambrose Evans-Pritchard
Published: 8:00PM BST 03 Oct 2010

Spain, trapped in EMU at overvalued exchange rates, had a general strike last week

The IMF report – "Will It Hurt? Macroeconomic Effects of Fiscal Consolidation" – implicitly argues that austerity will do more damage than so far admitted.

Normally, tightening of 1pc of GDP in one country leads to a 0.5pc loss of growth after two years. It is another story when half the globe is in trouble and tightening in lockstep. Lost growth would be double if interest rates are already zero, and if everybody cuts spending at once.

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"Not all countries can reduce the value of their currency and increase net exports at the same time," it said. Nobel economist Joe Stiglitz goes further, warning that damn may break altogether in parts of Europe, setting off a "death spiral".

The Fund said damage also doubles for states that cannot cut rates or devalue – think Spain, Portugal, Ireland, Greece, and Italy, all trapped in EMU at overvalued exchange rates.

"A fall in the value of the currency plays a key role in softening the impact. The result is consistent with standard Mundell-Fleming theory that fiscal multipliers are larger in economies with fixed exchange rate regimes." Exactly.

Let us avoid the crude claim that spending cuts in a slump are wicked or self-defeating. Britain did exactly that after leaving the Gold Standard in 1931, and the ERM in 1992, both times with success. A liberated Bank of England was able to cut interest rates. Sterling fell. The key point is whether you can offset the budget cuts.

But by the same token, it is fallacious to cite the austerity cures of Canada, and Scandinavia in the 1990s – as the European Central Bank does – as evidence that budget cuts pave the way for recovery. These countries were able export to a booming world. They could lower interest rates, and were small enough to carry out `beggar-thy-neighbour' devaluations without attracting much notice. We were not then in our New World Order of "currency wars".

Be that as it may, it is clear that Southern Europe will not recover for a long time. Portuguese premier Jose Socrates has just unveiled his latest austerity package. He has capitulated on wage cuts. There will be a rise in VAT from 21pc to 23pc, and a freeze in pensions and projects. The trade unions have called a general strike for next month.

Mr Socrates has already lost his socialist majority, leaking part of his base to the hard-Left Bloco. He must rely on conservative acquiescence – not yet forthcoming. Citigroup said the fiscal squeeze will be 3pc of GDP next year. So under the IMF's schema, this implies a 3pc loss in growth. Since there wasn't any growth to speak off, this means contraction.

Spain had a general strike last week. Elena Salgado, the defiant finance minister, refused to blink. "Economic policy will be maintained," she said. There will be another bitter budget in 2011, cutting ministry spending by 16pc.

Mrs Salgado has ruled out any risk of a double-dip. But the Bank of Spain fears the economy may contract in the third quarter.

The lesson of the 1930s is that politics can turn ugly as slumps drag into a third year, and voters lose faith in the promised recovery. Unemployment is already 20pc in Spain. If Mrs Salgado is wrong, Spanish society will face a stress test.

We are seeing a pattern – first in Ireland, now in Greece and Portugal – where cuts are failing to close the deficit as fast as hoped. Austerity itself is eroding tax revenues. Countries are chasing their own tail.

The rest of EMU is not going to help. France and Italy are cutting 1.6pc GDP next year. The German squeeze starts in earnest in 2011.

Given the risks, you would expect the ECB to stand by with monetary stimulus. But no, while the central banks of the US, the UK, and Japan are worried enough to mull a fresh blast of money, Frankfurt is talking up its exit strategy. It risks repeating the error of July 2008 when it raised rates in the teeth of the crisis.

The ECB is winding down its lending facilities for eurozone banks, regardless of the danger for Spanish, Portuguese, Irish, and Greek banks that have borrowed €362bn, or the danger for their governments. These banks have used the money to buy state bonds, playing the internal "carry trade" for extra yield. In other words, the ECB is chipping at the prop that holds up Southern Europe.

One has to conclude that the ECB is washing its hands of the PIGS, dumping the problem onto the fiscal authorities through the EU's €440bn rescue fund. That is courting fate.

Who believes that the EMU Alpinistas roped together on the North Face of the Eiger are strong enough to hold the rope if one after another loses its freezing grip on the ice?

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8039789/IMF-admits-that-the-West-is-stuck-in-near-depression.html

Investors see silver lining in economic gloom

Investors see silver lining in economic gloom
Forget gold. Silver, the yellow metal's poor cousin, has been the investment of the year.


By Garry White
Published: 7:00PM BST 03 Oct 2010

The price of silver is at a 30-year high

Silver prices have risen 31pc in 2010 to a 30-year high, outperforming gold, equities and most base metals. On Tuesday, the gold-silver ratio dropped below 60 for the first time in 11 months.

The gold-silver ratio is simply the number of ounces of silver it takes to buy one ounce of gold. The silver price is currently $22.11 and the gold price is $1,317, so the silver ratio now stands at 59.6.

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The ratio varies wildly. In 1970, it was about 20 and it peaked at just under 100 in 1991. The average is around about 40 – and that is the key to any silver bull's argument. Historically, it appears that silver is undervalued in relation to gold, they argue.

In 2010, the ratio has been as high as 72, recorded in February, and is now just below 60. Many believe it could have further to fall.

The reasons for gold's outperformance are well documented – inflationary fears, currency woes and safe-haven demand – but does the declining ratio towards its average mean that silver is going to continue with its charge forward?

Most analysts are not that bullish – with a price of about $24 targeted for next year. There are some, however, that believe the silver price will become much more lustrous over the coming years.

James Turk, who founded bullion dealer GoldMoney in 2001 and manages $1.2bn (£758m) of assets, thinks prices could hit $50 by the end of next year, but accepts that there will be volatility along the way.

Mr Turk believes quantitative easing will devalue currencies and send precious metals much higher.

"Just pick up your newspaper to see what central banks are doing to destroy currencies," Mr Turk says. "Unlike the 1970s, there are no safe havens from currency debasement – such as the deutschemark."

Mr Turk is more bullish on silver than gold. "The problem is the volatility," Mr Turk says. "Essentially it is a cheap form of gold, but it is not for everyone because of the volatility."

He says investors should always buy the physical metal and not paper and advises a portfolio of one-third silver to one-third gold.

Suki Cooper, a precious metals analyst at Barclays Capital is not so bullish. She has an average target for silver next year of $22.2, expecting the metal to peak in the second quarter at an average price of $23.7.

"Silver mine supply is still growing and industrial demand – although improving – remains relatively weak. Silver is still in surplus, but it has benefited form safe-haven buying," Ms Cooper says. "The price could fall sharply if investor interest wanes."

Already investor interest this year is much lower than last year, which is surprising given the recent bull run.

In the current year to date investment inflows into silver have amounted to 1,377 tonnes. In the nine-months to September 2009 it was 2,942 tonnes – with full year 2009 inflows at 4,112 tonnes, Ms Cooper notes.

However, Mr Turk remains unbowed. "I expect the gold-silver ratio to fall back below 23 over the next three-to-five years," he says, despite most analysts thinking this is unlikely.

Precious metals consultancy GFMS also believes that there is a risk of a sharp fall in the silver price.

Silver has risen on gold's coat-tails, but it is also used in industrial processes so it has risen on hopes of a recovery in the global economy too.

Philip Klapwijk, GFMS's chairman, said last week that the absence of an improvement in the economy will be a negative for the silver price.

"If you think gold will continue to advance in the medium term, then why wouldn't silver necessarily follow suit? One reason could be that if economic prospects take a bath, that side of the argument for silver becomes a lot weaker," Mr Klapwijk said.

"In the current situation, silver is benefiting from both general optimism on industrial production in emerging markets, and the investor interest in safe-haven assets like gold," he added.

All of this implies that, on a fundamental basis, silver is looking more toppy than gold at the moment after its recent outpeformance.

Instead of chasing the price of the physical metal, investors may want to invest in silver mining companies that are expanding production, such as the FTSE 100 group Fresnillo.

In the first half of this year, the group's cash cost of production was just $3.58 an ounce – one of the lowest in the industry. It aims to bring on line one new mine or expansion per year until 2014.

Of course the share price will be hit if the silver price falls, but the company will remain highly profitable. But cautious investors may want to wait for a dip before they pile in.

Quantitative easing could boost oil prices

Oil prices could rise by more than a quarter if there is more QE – even if demand stays weak, according to new analysis from Bank of America Merrill Lynch.

The broker's economists expect the Federal Reserve to expand its easing programme by $500bn (£317bn) to $750bn as early as the first quarter of 2011.

If the global money supply expanded at the same pace as this, gold would move 15pc higher and oil prices by 26pc, the broker argues.

This could bring Brent crude oil prices up from an average of $78 a barrel this year to an average of $83 a barrel next year irrespective of demand, Merrill said.

COPPER for delivery in three months hit a two year high on the London Metals Exchange on Friday, following upbeat manufacturing data from China.

The price rose to $8,078 (£5,101) a tonne, the highest level since August 1 2008, but prices eased in the afternoon.

The purchasing managers index rose to 53.8 in September from 51.7 in August, the China Federation of Logistics and Purchasing said. A figure above 50 indicates expansion.


http://www.telegraph.co.uk/finance/markets/8039595/Investors-see-silver-lining-in-economic-gloom.html

Now, super rich look at alternative asset classes

CHENNAI: Equities, mutual funds and FDs can longer satiate the super rich. Instead, they are channelling their wealth into start-ups, unlisted companies, realty-focused private equity funds, gold ETFs and art. The burgeoning breed of HNIS, or wealthy people, are exploring and investing in a whole new range of asset classes.

According to a recent report by Karvy Private Wealth, the wealth management arm of the Karvy Group, individual wealth in India stands at Rs 73 lakh crore and this is expected to double to Rs 144 lakh crore within the next three years. While the bulk of investment is still in direct equity (31.1%) and fixed deposits and bonds (30.3%), private bankers said there is a growing preference for alternative investments. Most HNIs have ridden on the mutual fund and equity wave as they went into the market early. They are now looking at different asset avenues, said Nitin Rao, executive vice-president (private banking group and third party products), HDFC Bank.

HNIs are classified as people with an investible surplus of at least $1 million . Over the years, the profile of HNIs has also rapidly undergone a change.

• Older HNIs largely comprised members drawn from business families. 
• Today, nearly 45% of private clients are first-generation entrepreneurs or self-employed, 15% comprise professionals, 20% are senior salaried executives, 5% are young celebrities, with property inheritors accounting for remainder.

"We believe that individuals in India are under-invested in alternative assets. We believe this will be a huge area of investments in the next decade. PE, real estate funds, realty investment trusts and global investments are expected to be popular among HNIs," said the Karvy report.

Even with debt and equity, HNIs are exploring options that are offshoots in such classes. "They are looking at investing in unlisted equities, PE funds and in debt," said Rajmohan Krishnan, senior V-P, Kotak Wealth Management.

Read more: Now, super rich look at alternative asset classes - The Times of India http://timesofindia.indiatimes.com/business/india-business/Now-super-rich-look-at-alternative-asset-classes/articleshow/6680959.cms#ixzz11R1yExbE

Trigger happy: Time your exit right

The Times of India

With the markets rising at a fast clip, investors are wondering which is the right time to exit. The BSE sensex has swung both ways in the past 33 months — soaring past 21,000 points in January 2008 before falling to 8,160 points in March 2009, only to rebound to 20,000 now. Taking these wild swings into account, it's only natural to look for good exit strategies.

Unless the investor books profits at appropriate intervals, there is a real risk of missing the gains from market upswings. Many retail investors do not book their profits on time, especially when the markets are on a roll. The trigger option offered by several fund houses is an effective tool for such investors as it allows them to set targets for redemptions when the value is above the pre-determined levels.

"Many investors would have set targets either by way of market (levels) or investment objectives. Triggers act as a proxy for people to take action," says Kenneth Serrao, head (marketing and products), Edelweiss Mutual Fund. "They (triggers) allow you to take advantage of something when you are not prepared for it."

"Triggers work well in both range-bound and volatile markets. Passive investors often don't make much money in range-bound markets," says Bhupinder Sethi, head (equities, offshore funds and advisory), Tata MF. With triggers, one can keep pocketing the gains regularly, say experts.

"If you regularly book profits, you would be able to invest even in a downturn," says Sethi. Investors, who continue to sit on profits, would not have enough incremental money to put in during deep corrections, he says.

One can choose from a whole range of triggers— both standard and customised, — with some fund houses offering up to 15 trigger options. Triggers based on market value, net asset value, index and date, stop-loss and capital gains and those that allow a certain amount to be transferred to debt funds are the most widely used triggers. Under the mandatory trigger option offered by fund houses, investments are shifted from equity to debt schemes once the fund achieves the pre-determined capital appreciation. However, if you exercise the trigger option for an equity MF investment that is less than a year old, it would attract a 15% capital gains tax. To overcome this problem the investor can choose the dividend trigger option where the gains are tax-free.

But the gains can be taken out only once in a quarter. But in a secular bull market, a buy and hold strategy would work better than using triggers for short-term gains.

Read more: Trigger happy: Time your exit right - The Times of India http://timesofindia.indiatimes.com/business/india-business/Trigger-happy-Time-your-exit-right/articleshow/6680971.cms#ixzz11R0OZVXK

China calls for more Asian clout in global economy

October 5, 2010 - 7:03AM

The surging economies of Asia should be granted more power in the traditionally Western-dominated global financial institutions, Chinese Premier Wen Jiabao said on Monday at the opening of the Euro-Asian summit.

The start of the two-day 48-nation meeting, set amid the high security and gilded opulence at the Belgian royal palace, underscored the Asian nations’ demands for a rebalancing of international financial structures as they lead the world out of recession.

Premier Wen stressed that Asian leaders expect Europe to relinquish some seats at the International Monetary Fund (IMF), the international lender charged with helping nations that get into currency and financial crises.

‘‘We need to improve the decision-making process and mechanisms of the international financial institutions, increase the representation and voice of developing countries, encourage wider participation,’’ Wen told the other leaders.

‘‘We must explore ways to establish a more effective global economic governance system.’’

The Chinese premier and some other Asian leaders made it clear that Asia would start making its robust economic growth count on the global stage.

Cambodian President Hun Sen stressed the Asian economies should be recognised for leading the global economic recovery.

While demand in the EU (European Union) and US economies was once the driver of growth, it is in decline compared to demand growth in Asia.Even Germany, the economic giant of the European Union, paid tribute.

‘‘We have to thank the Asian upswing for the positive economic development,’’ German Chancellor Angela Merkel said.

Because of the swing in economic momentum, the battle for seats at the IMF has become a symbolic battle ground.

Last week, the 27-nation EU said it could give up some of its power base at the IMF to emerging countries, a concession that could cost it two seats on the governing board and the right to have a European heading the Washington DC organisation, which hands out billions of US dollars around the world.

At the moment, EU countries occupy nine of the 24 seats.

‘‘The fact that Europeans show us the flexibility and willingness to negotiate is important,’’ said Rhee Chang-yong, a South Korean delegate.

‘‘For us, the IMF quota reform is very symbolic and very important,’’ he said.

South Korea will organise the Group of 20 (G20) meeting of the world’s major economies next month and expects to have an agreement then.

The leaders of 48 nations face potential clashes on market restrictions and trade surpluses.

On Wednesday, there will also be bilateral EU summits with China and South Korea.

Overall, the nations from the two continents represent about half the world’s economic output and 60 per cent of global trade.

But, instead of Europe driving the summits, the emergence of China as a new trading juggernaut has somewhat turned the tables at the biennial meetings.

Last week, the IMF said that Asian and Latin American economies were doing well but prospects for some European countries, including Greece, remain uncertain.

On Wednesday, the EU leaders and South Korean President Lee Myung-bak will sign a free trade pact that will slash billions of dollars in industrial and agricultural duties, despite some nations’ worries that Europe’s auto industry could be hurt by a flood of cheaper cars.

The deal - the first such pact between the EU and an Asian trading partner - will begin on July 1, 2011.

Japan’s Prime Minister Naoto Kan will pursue a free trade agreement in his bilateral meetings with European leaders, said Foreign Ministry spokesman Satoru Satoh.He said Japanese business was ‘‘alarmed’’ by the EU’s deal with Seoul.

Japan feels it will be at a competitive disadvantage with South Korea, which has an agreement with the EU that threatens to take a bite out of Japanese exports, particularly of cars and televisions, he said.

While Japan is anxious for an agreement as soon as possible, he said the Europeans still lack consensus among its 27 members.

Besides the economy, Japan also has an issue with China, as both continue a diplomatic row following the arrest of a Chinese fishing boat captain whose trawler collided with Japanese patrol vessels near disputed islands.

Despite the formal opening, economic discord might also surface at the summit.

Many Western nations have complained that China keeps its currency undervalued to give its exporters an unfair price advantage on international markets while at the same time China closes off its markets, keeping European businesses out.

AP


http://www.smh.com.au/business/world-business/china-calls-for-more-asian-clout-in-global-economy-20101005-164p5.html

Spectre of international trade war looms as recovery proves elusive

October 5, 2010

As world economies continue to falter, central banks are running out of options and the spectre of protectionism grows, writes Larry Elliott.

In all the comparisons between the Great Recession of the past three years and the Great Depression of the 1930s, one comforting thought for policymakers has been that there has been no return to tit-for-tat protectionism, which saw one country after another impose high tariffs to cut the dole queues.

Yet the commitment of governments this time round to keep markets open was based on the belief that recovery would be swift and sustained. If, as many now suspect, the global economy is stuck in a low-growth, high-unemployment rut, the pressures for protectionism will grow.

The former British chancellor Kenneth Clarke summed up the mood when he said in the Observer that it is hard to be ''sunnily optimistic'' about the West's economic prospects.

Despite a colossal stimulus, the recovery has been shortlived and, by historical standards, feeble. The traditional tools - cutting interest rates and spending more public money - were not enough, so have had to be supplemented by the creation of electronic money. In both the US and Britain, policymakers are canvassing the idea that more quantitative easing will be required, even though they well understand its limitations.

There is the sense of finance ministries and central banks running out of options. They cannot cut interest rates any further; there is strong resistance from both markets and voters to further fiscal stimulus, and so far quantitative easing has had a more discernible effect on asset prices than it has on the real economy.

So what is left? The answer is that countries can try to give themselves an edge by manipulating their currencies, or they can go the whole hog and put up trade barriers.

Brazil's Finance Minister, Guido Mantega, warned that an ''international currency war'' has broken out following the recent moves by Japan, South Korea and Taiwan to intervene directly in the foreign exchange markets. China has long been criticised by other nations, the US in particular, for building up massive trade surpluses by holding down the level of its currency, the renminbi.

The currencies under the most upward pressure are the yen and the euro. Why? Because the Chinese have all but pegged the renminbi to a US dollar that has been weakened by the prospect of more quantitative easing over the coming months.

But currency intervention is one thing, full-on protectionism another. The existence of the World Trade Organisation has made it more difficult to indiscriminately slap tariffs on imports. What's more, there is still a strong attachment to the concept of free trade.

The question now is whether the commitment to free trade is as deep as it seems. The round of trade liberalisation talks started in Doha almost nine years ago remain in deep freeze. Attempts to conclude the talks have run into the same problem: trade ministers talk like free traders but they act like mercantilists, seeking to extract the maximum amount of concessions for their exporters while giving away as little as possible in terms of access to their own domestic markets.

The approach taken by countries at the WTO talks also governs their thinking when it comes to steering their countries out of trouble. There are plenty of nations extolling the virtues of export-led growth, but very few keen on boosting their domestic demand so that those exports can find willing buyers.

The global imbalances between those countries running trade surpluses and those running trade deficits are almost as pronounced as they were before the crisis, and are getting wider. This is a recipe for tension, especially between Beijing and Washington.

This tension manifested itself last week when the House of Representatives passed a bill that would allow US companies to apply for duties to be put on imports from countries where the government actively weakened the currency - in other words, China.

The Senate will debate its version of the same bill after the mid-term elections next month, but it was interesting that the House bill was passed by a big majority and with considerable bipartisan support.

China responded swiftly and testily to the developments on Capitol Hill. It argued that the move would contravene WTO rules and quite deliberately tweaked its currency lower.

It is not hard to see why Beijing got the hump. It introduced the biggest fiscal stimulus (in relation to GDP) of any country and helped lift the global economy out of its trough. It can only fulfil its domestic policy goal of alleviating poverty if it can shift large numbers of people out of the fields and into the factories, and that requires a cheap currency. It has been financing the US twin deficits.

Unsurprisingly, then, its message to the Americans was clear: ''It is not smart to get on the wrong side of your bank manager, so do not mess with us.''

What happens next depends to a great extent on whether the global economy can make it through the current soft patch.

But imagine that the next three months see the traditional policy tools becoming increasingly ineffective, that the slowdown intensifies and broadens, and that the Democrats get a pasting in the mid-term elections. In those circumstances, a trade war would be entirely feasible.

Guardian News & Media


http://www.smh.com.au/business/spectre-of-international-trade-war-looms-as-recovery-proves-elusive-20101004-164e1.html

Value in the context of Your Overall Portfolio

A stock's value is the sum of its future cash flows, each discounted to today's value at the base return you're aiming to make.

But that doesn't mean you'd rush straight out and buy stocks at that value - if you did, you'd only expect to make whatever return you'd factored in, and you wouldn't be leaving yourself any margin for error.


Margin of safety

To be interested in the investment, we'd have wanted to see a discount to that fair value, and it's very much a case of the more the merrier.

The larger the discount to your estimate of expected value, 

• the greater the likely returns and 
• the less chance you have of losing money.

So how might the margin of safety work with a stock?

Let's say your expectation is for ABC Company to pay dividends in the current year of $1.20, and that you expect this to increase forever by 6% a year.

• To get a targeted return of 10%, you'd therefore need to pay a price that provided a dividend yield of 4% (so that the yield of 4% plus its growth of 6% would equal your targeted return of 10%), which comes out at $30 ($1.20 divided by 4%, or 0.04.)

Calculations:

$1.20/4% = $30.

Next year, dividend = $1.20 x 1.06 = $1.272
Share price = $1.272/4% = $31.80
Total return = Capital gain + Dividend = ($31.80- $30) + $1.20 = $3
Total return = $3/$30 = 10%.

But that is just your estimate of a fair value for the stock. To get you interested in buying it, you'd need to see a discount to this - and the riskier the situation and the better the opportunities elsewhere, the more of a discount you'd need.

• Balancing it all up, you decide you only really find ABC Company compelling at $20.
• That would give you a 33% margin of safety, but it would also increase your dividend yield to 6% and your total expected return to 12% (the 6% yield plus the 6% growth).

The intrinsic value of $30 is also the level you might reasonably expect the stock price to return to (or 6% higher than that for each year into the future to allow for the growth) - so it also defines the capital gain you're secretly hoping to make if the price returns to the underlying value. 

• The trouble is that you don't know when - or even if - the price will return to that underlying value.  
• But the bigger the margin of safety and the more confident you are about it, the better your chances of capital appreciation.  
• And if you're left holding the stock, a large margin of safety should at least make it a decent ride.

The price wobbles around, either side of the underlying value, and your aim is to buy when it's a good way below it.  

• The further the price gets from the value, in either direction, the more likely a snap-back becomes.  
• Riskier stocks are those that have a wide range of potential outcomes.  They will probably bounce more wildly, making the prospects of a snap-back less reliable, and you'll want to buy at a wider discount to provide some comfort.

Diversification

Even with a fat margin of safety, you wouldn't put too much just in single stock because of a remote and variable chance of a complete wipe-out.

With stocks, diversification comes from spreading your portfolio over a range of different companies and sectors, and from the amount of time you are invested. 

The more time you allow, the greater the chances of the value being reflected - which, of course, is why the sharemarket beats cash more consistently the longer you give it.



Interaction between diversification and margin of safety.

There's an interaction between diversification and margin of safety, because the more you've got of one, the less you might need of the other.

There is, however, a crucial difference:

• as you increase the number of stocks in your portfolio, your selections gradually get worse.  
• An increased margin of safety, on the other hand, will mean better selections.

The flip side is that margin of safety relies on you making correct assessments of value, while diversification will tend to take you towards an average return, whether you're getting the value right or wrong.  

• So if you're very confident in your ability to assess value, you might focus on finding stocks where you see a huge margin of safety and not worry so much if you end up holding only a few of them.  

• But if you're less sure about assessing value correctly, you'll want to focus more on achieving a decent diversification, with the inevitable reduction in apparent margin of safety from your additional selections.

Related:

• Value Investing is about Buying Stocks for less than they're worth
• Simple ways to value stocks and shares
• Value in the context of Your Overall Portfolio

Simple ways to value stocks and shares

The fundamental basis of value

Stocks and shares confer the right to receive money in the future, and it's this ability to put money in your pocket that gives them their value.  Specifically, the value of a stock is the value of each of those future bits of money all added together.

This is where things start to get a bit tricky, because the value of money you are going to receive in the future depends on three elements:

• how much it is
• when you actually receive it (time value of money) and 
• the return you plan to make in the meantime (internal rate of return or the discount rate).  

For illustration, you plan for your money to make 10% each year.  This is the internal rate of return or the discount rate, depending on which end of the sums you're coming from.  The key point is that a payment of $161.05 in five years' time would have a value today of $100 if you wanted it to deliver a return of 10% a year.

• If you paid more than that then you'd make less than 10%; 
• if you paid less, you'd make more than 10%; and
• if you paid a lot less, you'd make a lot more than 10%.  That's value investing.

When you get a payment that repeats every year, forever, something really handy happens:  the sum of all the individual payments simplifies down to just one payment divided by your discount rate.  

If the payments received are growing - at least if you assume they'll grow at the same rate each year:  you just divided the first payment by the difference between the discount rate and the growth rate (the growth rate effectively offsets part of the discount rate).


The return you plan to make.

For money you plan to commit to the share market, we'd recommend using the long-term return from shares as your discount rate (your "opportunity cost of capital").

• We think 10% is a nice round number to aim for. 
• As long as you choose something in the ballpark of 8 to 12%, though, most of any difference should get lost in the rounding.

Don't confuse value and risk.

Conventional theory says you should finetune your discount rate for different shares, using a higher discount rate for riskier stocks and vice versa, but we think that just confuses the issue.  If something is riskier than something else, it doesn't necessarily mean it has a lower value, it just means that the value is more variable.

How you deal with risk for any particular stock depends on your margin of safety, your diversification and how much risk you're prepared to take.  To understand how these factors all stack up, though, you need to put all stocks on a level playing field in the first place by valuing them on the same basis - which means using the same discount rate.


Related:

• Value Investing is about Buying Stocks for less than they're worth
• Simple ways to value stocks and shares
• Value in the context of Your Overall Portfolio

Value Investing is about Buying Stocks for less than they're worth

Value investing is about buying stocks for less than they're worth.

The approach works because human beings just aren't very good at it, but that is also what makes it hard.

To be successful, you need to do two things:

• first, you need to control your emotions so you can make objective decisions; and
• second, you need to be able to pick out a few undervalued stocks.

How to pick out a few undervalued stocks?

This is an inexact science at best of times, and utterly impossible at others.

There is no such thing as an exact valuation for a stock.  Getting to grips with this inexactness is absolutely critical to investing success.  Most importantly, it means that when you do invest in a stock, you'll want a large margin of safety so you can be wrong about a few things and unlucky about some others and still come out okay.

Large margins of safety are rare, so you need to be very fussy about your selections.  You might find just one or two really good opportunities a year, but you.ll need to work hard to find even them, scanning the business pages, reading publications and doing your own research.  When you find them, however, they should scream value to you almost any way you look at them.

So you need some quick and easy valuation tools by which to filter opportunities, to see if they're worthy of more research.  By focusing on fewer really interesting opportunities, you'll spend more time thinking about their long-term business advantages and disadvantages, which are what will really make the difference to a stock's value.  

First, we need to ask ourselves a more basic question:  what exactly is value, anyway?

Related:

• Value Investing is about Buying Stocks for less than they're worth
• Simple ways to value stocks and shares
• Value in the context of Your Overall Portfolio