Dubai: Drowning in Sand

Leila De Kretser article in the Herald Sun titled, " Dubai drowning in financial sand" is a must read.

I append the article in its entirety for its full value.

"It always seemed a little silly that there could exist a city where you could ski in the middle of a desert and watch horse-racing on man-made islands in the shapes of palm leaves

Now, we learn that just like the rest of the absurd luxury that Wall Street lapped up in the recent era of the super-rich, the Arab port of Dubai is going to the dogs.

Well, not entirely.

If the most recent reports are to be believed, white knights from neighbouring states, such as the United Arab Emirates and Abu Dhabi, will rescue Dubai from its impending debt crisis.

It's hard to miss the irony that a city, in which the inhabitants openly scoffed at the restrictive laws of their Arab neighbours, must now turn to those religious zealots for a helping hand in paying back some of the $80 billion debt it now has owing.

For years, the ruler of Dubai Sheikh Mohammed bin Rashid al-Maktoum, along with global investors, had argued that the economic development of Dubai had progressed much farther than its neighbours because it was the only Arab territory not created from oil money.

Advanced infrastructure, an open attitude to Western business, tax breaks for foreigners and the pursuit of the global financial industry are what supposedly separated Dubai from surrounding states that had built their wealth almost entirely on the back of the oil industry.

Dubai garnered many admirers, be it Wall Street financiers who came to regard it as a sister city almost of the ilk of Hong Kong, London or Singapore, or politicians who praised its leaders for advancing the cause of democracy in the Middle East.

In the United States, Dubai came to play an integral role in the property market in New York, along with the racing industry in Kentucky. (In Lexington, where the Kentucky Derby is held, the arrival of Sheikh Mohammed's custom-built horse jet was sure to hike the average price of yearlings sold at sales.)

So there's no escaping the absurdity that Dubai has suffered from the same ailment that has plagued Wall Street and, hence, the US economy over the past decade.

The "irrational exuberance" that took the financial industry to its dizzying heights in 2007, and then crashing down immediately afterwards, was nowhere on better display than in the city that houses the world's tallest building.

Lucky for Dubai and the industries to which its money has poured (horseracing in the United States doesn't need another death knell), it's highly likely the doomsday predictions for the Arab city will be just as overblown as they were for Wall Street last year.

The key, as it was here on The Street, are the deep pockets and vested interests of those who will bail it out.

Just like Uncle Sam was completely reliant on Wall Street to keep the country's economy from collapsing, Dubai's Middle Eastern neighbours are deeply invested in the city's long-term success. It's their wealth, much more so than that of Wall Street billionaires, which has kept Dubai's streets paved with gold.

Besides, $80 billion may sound like a lot to us mere mortals, but it's $100 billion less than what was needed to save AIG."

So,it is a perspective thing. To the Arabs, $80 billion is just a scoop from the money jar!

Believe, me, it will only be a matter of time before Wall Streets shrugged the Dubai debacle off and continue to push up the market.

Malaysia: What are your Complaints,Malaysians?

Want to know what Malaysians are complaining about these days?

According to the National Consumer Complaints Center, it has to be direct selling. In 2008,there were 2,339 complaints, a substantial increase of 21% as compared with the 1,933 complaints in 2007.Consumers complained about scratch-and-win scams, credit card payments, cooling-off period (time given to consumers to reconsider the purchase), lack of information and defective products offered.

Next on the list is housing developers with 2,316 complaints — an increase of 11.6% from 2,076 complaints in 2007.Consumers often complained about abandoned housing projects, shoddy workmanship, late delivery penalty, non-refundable booking fee and Mortgage Reducing Term Assurance.

This is followed by telecommunications at 2,136 complaints, an in-crease of 24.1% from 1,721 in 2007. Consumers said service providers did not take their complaints about the frequency of the Internet service breakdown seriously.

These figures were revealed at the launch of the National Consumer Complaints Centre 2008 annual report at a hotel here yesterday (1 December 2009).

Banks: Cry and Cry Again

The New York Times circa December 2nd has painted a very gloomy post-Dubai fallout. In a sense, this is equivalent to the the second "sub-prime". Just when the banks are ready to go into the waters, another storm starts!

Let us read the article in its entirety.

" As Dubai, that one-time wonderland in the desert, struggles to pay its bills, a troubling question hangs over the financial world: Is this latest financial crisis an isolated event, or a harbinger of still more debt shocks?

Big banks that have only just begun to recover from the financial shocks of last year are now nervously eyeing their potential exposure to highly indebted corporations and governments.

From the Baltics to the Mediterranean, the bills for an unprecedented borrowing binge are starting to fall due. In Russia and the former Soviet bloc, where high oil prices helped fuel blistering growth, a mountain of debt must be refinanced as short-term IOUs come due.

Even in rich nations like the United States and Japan, which are increasing government spending to shore up slack economies, mounting budget deficits are raising concern about governments’ ability to shoulder their debts, especially once interest rates start to rise again.

The numbers are startling. In Germany, government debt outstanding is expected to increase to the equivalent of 77 per cent of the nation’s economic output next year, from 60 per cent in 2002. In Britain, that figure is expected to more than double over the same period, to more than 80 per cent.

The burdens are even greater in Ireland and Latvia, where economic booms fuelled by easy credit and soaring property values have given way to precipitous busts. Public debt in Ireland is expected to soar to 83 per cent of gross domestic product (GDP) next year, from just 25 per cent in 2007. Latvia is sinking into debt even faster. Its borrowings will reach the equivalent of nearly half the economy next year, up from 9 per cent a mere two years ago.

Like Latvia, the Baltic states of Lithuania and Estonia remain worryingly exposed, as do Bulgaria and Hungry. All of these nations carry foreign debt that exceeds 100 per cent of their GDP.

External debt is often held in a foreign currency, which means governments cannot use devaluation of their own currencies as a tool to reduce their debt when they run into trouble, according to economics professor Maurice Obstfeld at the University of California, Berkeley.

Few analysts predict a major nation will default on its government debts in the immediate future. Indeed, many maintain that rich nations and the International Monetary Fund would intervene in the event that a government needs to be bailed out.

But there are no assurances that companies in these nations, which, like governments, gorged on debt in good times, will be rescued.

Dubai’s refusal to guarantee the debts of its investment arm, Dubai World, may set a precedent for other indebted governments to abandon companies that investors had in the past assumed enjoyed full state backing.

“I see very good reasons to be worried that at some point in 2010, we are going to see more cases of ring-fencing because governments realise they can’t afford to guarantee the debts of these companies,” said Pierre Cailleteau, managing director of the global sovereign risk group and chief economist of Moody’s.

Said noted Harvard economist Kenneth Rogoff: “I think right now, every vulnerable country has one or two deep-pocketed backers that pretty much rule out a sudden run.”

But he said he expected a wave of defaults about two years from now, when the countries now serving as implicit guarantors turn their focus to economic problems at home.

One feature of the financial crisis is that some governments have taken on increasingly short- term debt. In the US, for example, Treasury debt maturing within one year has risen from around 33 per cent of total debt two years ago to around 44 per cent this summer, while falling slightly since then, according to Wrightson ICAP.

The US will soon have debt problems of its own.

“In another couple years, as industrialised countries’ own debts — in places like Germany, Japan and the United States — get worse, they will become more reluctant to open up their wallets to spendthrift emerging markets, or at least countries they view that way,” Rogoff said.

This might spell trouble for cash-tight nations. Facing a need to roll over their maturing debts, emerging markets may have to borrow around US$65 billion (RM221 billion) next year alone, said Gary Kleiman of Kleiman International."

We Do Forget the Pensioners!

This article by Ian McIntyre in the Malaysia Insider hits home. The point that pensioners are much neglected by the government still continue to broil ans stew. Till today, the government which had agreed to pay the pensions to civil servants based on their full period of service have still to see the light of day,notwithstanding that a 30 year service period capped at 30 years was implemented beginning January 2009.

Ian McIntyre's news article touches on how ignorance by pensioners made them to lose on some benefits. It also tells us that Pension Associations are doing their job to alleviate the plight of pensioners under the onslaught of the runwaway inflation in Malaysia. Read on....

Bukit Mertajam circa 1 December 2009.

"Many civil service retirees remain unaware of their special privileges as they do not bother to register with the respective state pensioners associations.

Plight of pensioners ad-hoc committee Penang coordinator S. Arumugam said this had created a lot of misinformation regarding the entitlement accorded to them by the Government.

For example, he said many did not know that they could claim reimbursements from the Public Services Department’s (PSD) pension services division for medicine obtained from private hospitals.

“All they need to do is get a doctor’s recommendation letter from a government hospital especially if certain medicines are not available from such hospitals.

“They can submit a claim to the pensions department which promises to reimburse them within 30 days of submitting the claims,” he said.

Arumugam, who was speaking to reporters after attending a briefing with PSD post-services division director Datuk Yeow Chin Kiong at the Seberang Prai Municipal Council meeting room yesterday, said the pensioners could also obtain cataract lenses costing RM750 a pair for free if it was not available from public hospitals.

His committee recently obtained 813 signatures from pensioners here, seeking a review in their pension wages. The memorandum was then sent to Prime Minister Datuk Seri Najib Tun Razak.

Arumugam said the meeting was fruitful as the participants were informed of the latest efforts by the PSD to alleviate the burden faced by pensioners in light of rising living costs and limited job prospects due to the fact that a large segment of the country’s population is generally below the ages of 50.

“Among the other privileges under consideration are rebates during renewal of international passports, lowering the costs of insuring old vehicles and up to 20% discount for shopping at selected hypermarkets.

“We were assured that no effort would be spared to ensure that pensioners can continue to enjoy a good quality of life despite a significant drop in their income disposal levels,” he added.

Arumugam said it was equally important for pensioners to keep themselves informed of their entitlements instead of claiming ignorance whenever there was dissatisfaction.

He also called on the Malaysian Employers Federation to support a proposal to extend the compulsory retirement age of the private sector from 55 to 58, similar to the public services sector."

As the pension associations are voicing out their grievances and providing the government suggestions on the things that the government can do to alleviate their current situation,will the government choose to listen?

Malaysia: GDP forecasted at 5% in 2011

The Malaysian Institute of Economic Research (MIER) today maintained Malaysia's GDP will expand by 3.7% next year. They also admitted that the economy is doing much better than it has anticipated.

The country's economy would contract by 3.3 per cent this year and expand by 3.7 per cent next year, said its outgoing executive director, Emeritus Professor Datuk Dr Mohamed Ariff.

For 2011, the private think-tank was more optimistic, forecasting Malaysia's GDP to expand by a commendable 5.0 per cent.

With economic indicators showing signs of improvement, MIER expected the economy to exit out of recession in the fourth quarter of this year, as evidenced by the positive trend in the Industrial Production Index which means increased industrial activity.

This was also supported by the effects of the larger public infrastructure expenditure, manufacturing turnaround, improved service trade and higher domestic spending.

"The economy is doing much better than what we anticipated. It is the regional trend. Even India today reported third quarter growth of 7.9 per cent and China 8.9 per cent, which is way above our expectations," Mohamed Ariff told reporters.

He said MIER also expected exports to rebound to 9.3 per cent year-on-year in 2010 after bottoming out at -17.5 per cent this year.

Demand recovery from the global electronics and electrical sector as well as improving commodity prices would also lift exports growth to a small positive number by the fourth quarter of this year, he said.

Such performance, he said, was no surprise as Asia had a thick layer of savings and private consumption helped absorb the shock of global recession.

He said all that was needed now was for Malaysia to register a one per cent growth in the fourth quarter of 2009 to able to get -2.8 per cent for the year as a whole.

"But MIER is still holding on to the forecast of -3.3 per cent for the year as we want to wait for the fourth quarter results," said Mohamed Ariff.

He said all indications were that Malaysia would perform better than expected, within the range of -2 to -3 per cent growth for the year and not more than that.

However, he cautioned that the future was really uncertain, saying that "there are a lot of landmines to avoid as a lot of systematic risk is still underway".

"I think there is a 50 percent chance of relapse in the US in the first quarter of 2010.

"The growth we see in many countries is artificial growth, mainly by huge fiscal stimulus packages, which created a different set of problems," he said.

He said one could not sustain fiscal stimulus for too long as it had huge debt implications.

"Sovereign debt problems can be a serious one," he said.

For instance, he said, Dubai delaying its debt payment in itself had become a major concern worldwide though it could be rescued by Abu Dhabi.

"So, what I am saying is that maybe many things we may be seeing is just the tip of the iceberg; especially, private debt being replaced with sovereign debt, which is not good for the global economy," Mohamed Ariff said.

He said another cause for concern was that the economic recovery could be scuttled by fear of inflation which might lead to higher interest rates next year and possible increase in oil prices.

As of now, MIER expected the overnight policy rate to be relatively unchanged at least until the end of next year.

Mohamed Ariff also cautioned that there could be serious problems in the exchange rate alignment, especially with the repegging of Chinese yuan to the US dollar.

"The dollar is overvalued and the yuan is undervalued. How can you put these things together?. It won't hold on for long," he said, expecting a lot of exchange rate volatility in the coming months.

"It's going to be a serious problem that no central bank can single handedly deal with. They have to get together and take a coordinated measure," he said.

Sime Darby Properties are Expensive Hot Cakes!

I have just come back from the Sime Darby Third Annual General Meeting. No, it is not wrong. It is called the Third Meeting to possibly refer to the revamped Sime Darby after 4 big plantation groups were merged into it.

They were generous to minority shareholders giving each member a RM50 voucher tenable at either of the two restaurants within the Sime Darby Convention Centre. They also provided breakfast and two cartoons of pink guava juice as token door gifts.

Anyway, I was reading its report particularly on the property division. From what I read,there seems to be no recession as far as the buyers are concerned for Sime Darby Properties. All the schemes launched were in the millions starting from 2 1/2 storeys super links. Even their condominiums and service suites were snapped up like hot cakes!

Looking at the trend,it looks like the new property developments that are going away from the Petaling Jaya-Subang Jaya connurbation are also attracting hot money. Even far away and remote Bukit Jelutong houses; starting beyond a million ringgit found more than willing financially capable buyers! The rate that Sime properties are being snapped up;it looks like the next stop will be around the Bukit Raja and Kapar and Meeru region and beyond to as far as Kuala Selangor.

Will people actually pay so much money for Sime Property projects in such far-away places.

Only time and the economy can tell.

China: The View from Fidelity International

'No, not yet,' said Anthony Bolton,Fidelity International's star fund manager. He has reversed his decision to retire citing that investments in China is too compelling for him to take the back seat right now.

Fidelity has just announced that Bolton will run a China equity fund; to be launched some time in the first quarter of 2010. Fidelity currently has three portfolio managers managing China funds with more than US$4 billion (RM13.57 billion) in assets.

Bolton says very few things would have persuaded him to come back — but China is one of them. “This year, or almost certainly next year, China will overtake Japan to become the second-largest economy in the world,” he says.

“I think in my lifetime, China will become the second-biggest stock market in the world. The center of gravity is shifting. That's why I want to play a part while I still have the chance.”

Over 28 years from 1979, Bolton ran Fidelity's Special Situations Fund, chalking up enviable annualized returns of 19.5 per cent, and easily beating the FTSE All Share Index return of 13.5 per cent. This means that £1,000 (RM5,551) invested over the period would have grown to £148,200.

Bolton announced his retirement in 2006 and the Special Situations Fund was split in half, partly to cushion the blow of his departure for investors. Over the past 18 months, he has been mentoring younger managers and analysts, first in the UK and more recently in Hong Kong. He and his wife will move to Hong Kong next year.

While details of the fund itself are sparse for now, Bolton aims to bring his value style to the table and tap on Fidelity's team of analysts for research. “I've invested for a long time. I can compare some things that are happening in China with what happened in developing markets in Europe,” he says. “Valuation has always been at the heart of my approach, but I'll also spend time evaluating franchises and looking for franchises that can grow in the long-term in China, and assessing management teams.”

The arguments in favour of China's ascent are familiar — low levels of government and consumer debt, and the emergence of consumers to drive the domestic economy.

“In September, I said I was worried about the West going forward,” Bolton says. “Once the recovery period runs out of steam, which I think will be in the first half of next year, the economies of the West will see slower growth than they saw before the crisis. It's because of the cost of solving the crisis.

“Governments have borrowed large amounts. It has succeeded in getting us out of the crisis, but I think it means that to some extent they have mortgaged the future.

“Faster growth will be seen in economies such as China, where growth is driven by domestic infrastructure and spending. You're going to see even more money flowing into the region.

“If you take the typical British investor with 15-20 per cent of his equity money in emerging markets and the majority in developed markets, for the next few years he should have the majority of his money in emerging markets and the minority in developed markets.”

Bolton has been following China since 2004 and has been investing there since 2005. Some 5 per cent of the Special Situations Fund was invested in Chinese stocks.

On the market cycle, he reckons the “bargain” stage is over. “I think we're still in the first part of the bull market, which will be multi-year,” he says.

“That applies as much in developed economies. But I think the faster growth and the best returns in the next few years will be in the developing world. It would have been lovely if we had launched this fund in the beginning of this year. I was optimistic about markets in the first part of the year. But I don't think valuations are as yet in the expensive phase when one should be more cautious. They're in line with long-term valuations. They can go further from here.”

Investors should note that Bolton famously called a bottom to the bear market in April.

On whether value investing works in China, where the stock market is often momentum-driven, he cites empirical research that valuation has been the biggest generator of 'alpha' or out-performance in emerging markets.

“My strong belief is that value works,” he says. “In general, I've been meeting a number of Chinese companies which I think are as good or very similar to (companies) in the UK or continental Europe.'

Bolton is expected to run the new fund independently from the three other Fidelity China portfolio managers, although he will tap into a common pool of analysts and infrastructure.

So, how do you like the insights and the analysis thus far.

It make sense, I think.