China in the Driver's Seat

The continuing rise of China will help drive economic growth and development in Asia in the long term, according to David Ng, an economic analyst at HwangDBS Investment Management Bhd

He is confident that a sustainable economic recovery will take place in Asia (excluding Japan), mainly with China as its driving force.

“We also foresee that plenty of Asian-themed investment products will be made available to the public which we believe will feature strong upside stories,” he said in a statement today.

Ng said a new pecking order has emerging as a result of the financial crisis, adding that “we are picking up more positive signs that point to a definite recovery such as the narrowing of corporate spreads, a turnaround in the global diffusion index and higher equity valuations or price to earnings ratios”.

According to him, the current global economy is still relatively fragile and economic growth is expected to remain below its potential for a few more quarters before making its full recovery.

Ng said HwangDBS IM is bullish on the Asian markets, adding that growth signals pointed to Asia as the most economically dynamic region in the world.

“China is at the front and is seen to be aggressive in its approach to stimulating local growth and consumption. Increased lending by banks, higher real wages, a booming middle class and growing individual wealth will inevitably lead to higher disposable income and consumption,” he said.

Ng said in the near future, companies in Asia would be able to generate more income and over the long-term be considered lucrative stocks to hold as dividends become a big part of the total returns.

“We have identified a few multi-year investment themes that will drive long-term growth such as China’s economic growth, the burgeoning global middle class, ageing and changing population trends,” he said.

“China is certainly our favourite pick. Its enormous government stimulus spending of more than US$586 billion (RM1.9 trillion) and aggressive re-leveraging will prompt a rise in local asset prices.”

Ng also advised investors to exercise extra vigilance in choosing suitable products for themselves.

“Economic cycles are getting shorter and the pendulum swings both ways,” he said.

“Simple investment basics works in any economic environment. In today’s environment, investors should slowly average in the market and exercise discipline once investment goals are met.”

Good advice, I think.

Maximizing Maxis?

Yeoh Pooi Ling reporting in The STAR today recorded some analysts as saying that the final price at RM4.75 of the IPO is below expectation.

Maxis Bhd has now set the price of its initial public offering (IPO) shares at RM4.75 each while institutional and cornerstone tranches are at RM5 per share, which will collectively raise about RM11.2bil from the listing of 2.25 billion shares on Bursa Malaysia.

The market capitalisation at the institutional price and its enterprise value would amount to RM37.5bil and RM42.5bil respectively, said Maxis after the close of its book-building exercise yesterday.

The institutional offering book, excluding the offering to cornerstone investors and approved bumiputera investors, was 3.7 times covered or equivalent to RM19.3bil, comprising some 500 global investors.


The IPO attracted orders of over RM26.5bil via its various tranches, with strong demand from international and Malaysian investors.

Foreign interest came from leading institutional investors familiar with Malaysia, 10 institutional investors new to Malaysia with orders of RM1.3bil in Maxis shares, as well as sovereign wealth funds, it said.

The institutional offering will raise RM5.3bil, of which over US$800mil will be from foreign investors. The bumiputra investors and cornerstone tranches attracted RM5.2bil for one billion shares.

Cornerstone investors have agreed to hold their shares for six months from the listing date and would in return obtain a preferential allocation for the IPO.

These investors include the Employees Provident Fund, Fidelity Funds-Malaysia Fund, Kumpulan Wang Persaraan (Diperbadankan) and Permodalan Nasional Bhd.

The retail offering of 212.3 million shares was oversubscribed by 180% for 381.2 million shares worth RM2bil.

UOB Kay Hian (M) Holdings Sdn Bhd head of research Vincent Khoo said the final prices were below expectation, as “it was widely expected that the institutional price would be at RM5.20 per share.”

“At RM5 per share, there is a modest upside upon listing as most estimated valuations would not be more than RM5.50,” he told StarBiz.

OSK Investment Bank, in a report, said the final price, at the lower end of the indicative range of RM4.80 to RM5.50, was a reflection of the valuation appetite among institutions for the stock.

“Maxis should have no issue meeting its dividend obligations.” the research house said.

Maxis, upon its listing on Nov 19, would become a component of the FTSE Bursa Malaysia KL Composite Index and increase the capitalisation of the market by over 4%.

MIER:25th Top Think Tank in the World

Scenario Builders, data collectors, collators and analysts. In a survey of the top global think-tanks of 2008, the Malaysian Institute of Economic Research (MIER) has carved a name for itself as a credible private think-tank in emerging among the top 25 in Asia in 2008.

The ranking was based on the findings of the Think-Tanks and Civil Societies Programme by the University of Pennsylvania, the United States.

China's Chinese Academy of Social Sciences (CASS) topped the rankings list, followed by the Japan Institute of International Affairs (JIIA) and India's Institute for Defence Studies and Analyses (IDSA).

"Of the 653 Asian think-tanks, we are 25th. I think this is an achievement to be proud of. Although a small institution, we are able to make a global impact," MIER executive director Professor Emeritus Datuk Dr Mohamed Ariff Abdul Kareem told Bernama in a recent interview.

He said the institute has been doing a lot of work not only for the government at both the state and federal levels, but also the private sector and international bodies such as the World Bank, the Asian Development Bank and the United Nations Economic and Social Commission for Asia and the Pacific (Escap).

Mohamed Ariff, who is stepping down from his position on Dec 31 after having helmed MIER for 12 years, said it had become an institution that is being recognised.

"I am pleased to say that our forecast has been very good. We may not hit the bull’s eye all the time but it has not been that far off. We are credible and establishing a good name," he added.

On why he was stepping down now and not waiting for the institute's silver jubilee in two years’ time, Mohamed Ariff said he had been around for a long time after having joined the organisation in June 1997.

He was previously a lecturer at Universiti Malaya.

He dispelled any notion that he was pressured to leave, saying it was purely voluntary

"It has been a long time. It is enough. Although it was a lot of stress, I enjoyed doing what I did," he said.

Having gone through two recessions and turbulent times together with the institute, he said the challenge for MIER had been to stay "alive".

"Because we are a self-financing institution and an independent think-tank, we have to say things in such a way that we don't sound anti-establishment. At the same time, we also want to be very objective," he explained.

According to Mohamed Ariff, his frustration and greatest challenge was during the last financial crisis.

"The local press was interested in positive news. The foreign press, on the other hand, wanted negative stories. We tried giving a balanced picture but were sometimes quoted out of context," he said.

He said one of the MIER's objective is to keep the people informed so they can arrive at their own decisions.

Mohamed Ariff was also encouraged by the feedback from the business community which showed that MIER was doing a great job and this is evident from them becoming members and attending its events.

He highlighted that MIER is governed by a board of trustees and by people who are working for the national interest.

"We are encouraged by all this. We are thus able to walk the tightrope, balancing ourselves through turbulent times, making comments that are useful and constructive and which can be an input into decision making while providing an alternative view", he said.

MIER is an independent, non-profit organisation devoted to economic, financial and business research that serves as a think-tank for the government and the private sector.

With the departure of Professor Emeritus Datuk Dr Mohamed Ariff Abdul Kareem, my guess is MIER will go down from the totem pole of the top ranking think-tanks of the world due to political gravity.

Wanna bet?

MRCB:Postulations or Wise Counsel?

And so it seems.

Malaysian Resources Corp Bhd (MRCB) considers it “a good time” for a cash call as the group has achieved a certain scale in terms of number of projects, and needs the capital to expand further, said group managing director Shahril Ridza Ridzuan.

“We are looking at a number of deals right now involving acquisitions of land-bank in terms of the property business as well as investments in new assets,” he told StarBiz. “We are raising funds right now so that we’ll be ready to expand.”

Shahril said the acquisitions may also involve overseas assets.

In what analysts described as a surprise move, MRCB proposed a renounceable one-for-two rights issue of new RM1 shares to raise gross proceeds of up to RM566mil based on the illustrative rights price of RM1.17 per share.

The proceeds will be used to fund expansion into environmental engineering and infrastructure business, acquisition of prime land for property development, as well as for MRCB’s 51% equity investment in Nu Sentral Sdn Bhd, a joint venture between MRCB and Pelaburan Hartanah Bhd to acquire and manage a seven-storey retail mall, Nu Sentral, at KL Sentral.


“Although we were aware that MRCB was evaluating funding options for its land-bank expansion, we were taken aback by its decision to go with a rights issue as we had expected the group to opt for bonds or a share placement,” said CIMB Research.

UOB KayHian said the fundraising exercise could bolster MRCB’s chances of acquiring “prized federal land-bank”.

As RM380mil or 67% of the rights proceeds is allocated for capital expenditure (capex), the rights issue would bolster MCRB’s balance sheet and allow it to participate in the Federal Government’s plans to sell or co-develop its prized landbank.

“Recall that Budget 2010 singled out two plots of land for such purposes – 100 acres in Jalan Cochrane, near Maluri Cheras, Kuala Lumpur city centre (market rate of RM100–RM150 per sq ft) and 2,000 acres in Rubber Research Institute of Malaysia in Sg Buloh, near an industry park in Kota Damansara (market rate of RM30 per sq ft),” it said.

The Employees Provident Fund (EPF), a substantial shareholder with a 30.6% stake, has undertaken to take up its full entitlement.

In the event the EPF subscribes to excess rights shares and its shareholding exceeds the 33% trigger, the fund has confirmed that it will comply with the provisions of the Malaysian Code on Take-Overs & Mergers, 1998 whereby it will be obliged to extend a mandatory general offer (MGO).

While CIMB Research expects EPF to seek a waiver from making the MGO, UOB KayHian believes the potential general offer is likely to happen.

UOB KayHian estimates EPF’s stake would be diluted to 28.8% from 30.6% after subscribing to its portion of rights shares based on an enlarged share capital of 1.45 billion (assuming full exercise of the employees’ share option scheme).

EPF needed an additional 4.2% stake in MRCB by subscribing to the excess rights shares to trigger the 33% level, which it could easily do as the shareholdings of MRCB were fragmented, it said, but added that EPF needed to cross the 50% stake for an MGO to be successful.

One analyst said MRCB’s share price was seen as undervalued, hence the takeover possibility should not be ruled out.

Shahril, when asked, said EPF would have to decide whether to seek a waiver or go ahead with an MGO if and when the situation arose. “But as stated in the announcement, it will comply with the code,” he said.

HwangDBS Vickers Research said given that 67% of the total proceeds would be used for expansion, this implied the group was confident of securing new contracts and possibly acquiring more land-bank.

Furthermore, net gearing is estimated to fall to 0.7 time post-rights compared with 1.1 times as of the second quarter ended June 30. The larger share base after the exercise would improve liquidity, which benefited higher beta stocks like MRCB, it added.

Undervalued shares at RM1.35? Bet your bottom ringgit for EPF to subscribe for excess shares. 2009 was a great year for EPF. It wants to be involved in property stocks giving good values in the long term.

The market rumours have it that EPF will likely announce a dividend of 5% for 2009.

As for an MGO, that we have to see.

Wall Street: On a Roll!

What is happening at Wall Street?

There are just too many analysts. That is my conclusion. Today, they get together and read the data one way;then the next they read the data differently. So the Dow yoyoed up and yoyoed down.

So what do you make of the last two out of three sessions of Wall Street? It was up ,up, up and away.

New York, Monday, 9th November saw the Dow Jones industrial average stormed to its highest level in more than a year.A falling dollar boosted prices for gold, oil and other commodities.

Stocks also jumped as investors grew more confident that governments around the world will keep interest rates low to help the global economy.

Energy and materials stocks led the market.

The major indexes rose 2 percent and the Dow jumped 200 points for the second time in three days, reaching its highest level in 13 months.

The advance was further proof that investors, at least for now, aren't troubled by the unemployment rate that has now passed 10 percent.

News that the Group of 20 countries will keep economic stimulus measures in place signaled to investors that rates will remain low.

With U.S. rates near zero, the G-20 news lessened demand for the dollar.

Even as investors are waiting for more signs that the economy is recovering, they've been focusing on the dollar when they make buy and sell decisions.

Investors around the world see the dollar as weaker than other currencies, and so they're using it for what's known as "carry trade," to finance purchases of investments in other countries.

That trend takes the dollar down further when those purchases are made.

But some analysts are questioning investors' stock moves given the still-weak economy, and warn that stocks and other investments could suffer big losses if the dollar were to turn higher.

"It feels like it's on fumes," said Sean Simko, head of fixed income management at SEI Investments in Oaks, Pa., referring to the market's advance.

"Although fundamentals are catching up, they're not caught up."

The market wasn't fazed Friday by the government's report that the nation's unemployment rate last month rose to 10.2 percent, the first double-digit jobless reading in 26 years.

Even though there are still concerns that consumers either unemployed or worried about losing their jobs aren't likely to spend freely, investors took the report as another sign that interest rates will stay low.

Simko said the dollar's drop and the current surge in stocks and commodities are making it hard for investors to get a clear picture of how fast the economy is rebounding.

Still, many investors like a weaker dollar because it helps U.S. exporters by making their goods cheaper to overseas buyers and giving the companies a boost when they convert profits from abroad to dollars.

The ICE Futures U.S. dollar index, which measures the greenback against a basket of foreign currencies, fell to its lowest level in 15 months.

The dollar rose last year and early this year but the index has been sliding for the past eight months since major stock indicators bounced off 12-year lows.

Commodities prices, meanwhile, tend to rise when the dollar is down, so gold topped $1,100 an ounce.

Crude oil rose $2 to settle at $79.43 per barrel on the New York Mercantile Exchange, helped in part by Tropical Storm Ida, which threatened the Gulf of Mexico.

Energy and materials stocks rose along with commodities prices, and investors' enthusiasm for those stocks spilled over to other industries.

Brian Battle, vice president of trading at Performance Trust Capital Partners in Chicago, said the strength of the carry trade is giving an artificial lift to a range of assets, including stocks.

"There's cheap money that's going to be pumping its way into the system," he said.

"That money is finding a home in the currency and commodity markets."

The Dow rose 203.52, or 2 percent, to 10,226.94, its highest finish since Oct. 3, 2008.

The Dow's gain of 455 points, or 4.7 percent, since Wednesday is its biggest four-day climb since July.

The index rose as high as 10,228.23, topping its previous 12-month trading high of 10,119.46 set last month.

The broader Standard & Poor's 500 index rose 23.78, or 2.2 percent, to 1,093.08, its sixth straight advance.

The Nasdaq composite index rose 41.62, or 2 percent, to 2,154.06.

Again, you can interpret the scenario as you like. Are we walking on eggs?

MRCB: Play It Again,Sam

Can we play this counter by sheer logic based on the quantum of funds that is to be raised from the impending rights issue?

This is a yes and no answer. A do or die proposition.

MRCB intends to raise some RM 566 million rights issue from its shareholders. On the expected basis of 500 shares per 1000 held, this will work out to something like RM1.172 sen per new issue.

At the current price of RM1.34 sen per share,this is certainly not amusing. To make it attractive, MRCB intends that this price is a good discount to the market price. Are they trying to do the impossible, given the current market conditions? Or do they have an ace up their sleeve which they will throw into the ring at the opportune time?

By any reckoning, astute shareholders will subscribe to the rights if the market price is dramatically higher than the rights price. Let me do an extrapolation here.

To be fair to the shareholders, I see at least a 15% price variation for shareholders to take up the rights. That would mean the market price of MRCB should be no less than RM1.51. Since no price have been fixed for the rights nor the apportionment, it is still early days. Anything can happen between now and the end of the first quarter of 2010 when the rights exercise should be over.

So until such time, expect some interesting developments in MRCB to shore up its prices.

As I have mentioned in an earlier post, there are speculative elements in MRCB. One of these is that part of the rights issue will be used to purchase some choice federal land for commercial development. The rumour mill has it that MRCB and its parent EPF have been given the green light by the Government to acquire and develop two prime federal land parcels in KL, namely: (1) 150 acres in Jalan Cochrane near the city centre; and (2)20-30 acres in Jalan Ampang Hilir near the Jalan U-Thant area. It has been suggested that this federal land deal could enhance MRCB’s valuation by RM624m or 69 sen per share based on certain assumptions.

Numbers-wise, the RM558.1m net proceeds will reduce MRCB’s net debt and gearing of RM714.2m and 1.1x as at 30 Jun 09 to RM156.1m and 0.13x. However, the new shares will dilute MRCB’s FY12/10 EPS by 12% from 8sen to 7.1sen.

If the land deals should come through, then the indicative fair value of MRCB shares will be raised by 68% from RM1.02 to RM1.71, to reflect the potential massive 69 sen/share enhancement from the prime federal land in KL.

Many parties are recommending MRCB from under-performing to trading buy.Would you buy?

Unemployment versus Obama

So,will Obama overcome?

On Nov 8, Reuters did not surprised pundits when it said that the US jobless rate unexpectedly jumped to 10.2 per cent in October 2009, a historical 26-1/2-year high. Is there magic up the sleeves of Obama to tackle this unemployment issue?

The statistics released by the Labour Department on Friday told a tale of woe. Employers have cut 190,000 jobs in October, more than the 175,000 markets had expected but fewer than the 219,000 jobs lost in September.

Job losses for August and September were revised to show 91,000 fewer jobs were lost than previously reported, taking some of the sting out of the report.

While the revisions hinted at some improvement, economists had expected the jobless rate to rise to 9.9 per cent from September’s 9.8 per cent. A wider gauge of labour-market slack that includes unemployed Americans who have given up looking for work hit a record 17.5 per cent.

Speaking at the White House, Obama said the administration was considering infrastructure investments and business tax cuts to aid the economy’s recovery.

He said with confidence that Americans who want to find work can find work and all Americans can earn enough to raise their families and keep their businesses open.

Stocks on Wall Street ended higher after initially falling as investors looked past the jump in the jobless rate and focused instead on the moderation in payroll losses.

US Treasury debt prices rose as traders saw the data as supporting a prolonged period of low interest rates.

“Unfortunately, the problem is becoming deeper and more protracted,” Mohamed El-Erian, chief executive of bond giant Pacific Investment Management Co (PIMCO) told Reuters.

“It’s not just the increase in the headline number,” he said. “It’s also about the longer-term nature of unemployment, the increase in underemployment and the prospect for only a very gradual recovery,” he said.

While Obama sees job creation as his top priority, the scope for further steps to boost the economy is limited by record budget deficits.

Rising unemployment could pose problems for the Democrats who control Congress as they head into elections in November 2010. This week, Republicans wrested control of two state governorships away from Democrats in races where the weak economy figured prominently.

“President Obama promised jobs during his campaign for president and the elections in Virginia and New Jersey on Tuesday were a clear referendum on his failure to deliver on this promise,” Republican National Committee Chairman Michael Steele said in a statement reacting to the jobs report.


ECONOMY GROWING, LABOUR MARKET LAGS

The US economy grew at a 3.5 per cent annual rate in the third quarter, likely ending the most painful recession in 70 years, but the jobs data suggested employers are wary of the prospects for a strong, sustained recovery.

A report from the Federal Reserve showed households again cut their debt rather than spend in September, pushing down total consumer credit for an eighth straight month. That is the longest downward streak since 1943.

The US central bank on Wednesday held overnight interest rates close to zero and said it expected to keep them low for an “extended period.”

Short-term interest rate futures prices showed the implied chances of a rate hike by mid-2010 slid to about 66 per cent on Friday from 84 per cent late on Thursday.

“I don’t know how in the heck the Fed could justify tightening policy with the unemployment rate over 10 per cent unless we have an imminent inflation danger,” said Keith Hembre, chief economist at First American Funds in Minneapolis.

The US Labour Department conducts two separate surveys. Economists generally place more faith in the survey of employers, which found the loss of 190,000 jobs.

The unemployment rate, however, is based on a smaller household survey. That survey showed 589,000 jobs were lost, while few Americans left the labour force, leading to the big jump in the jobless rate.

Employer payrolls have declined for 22 consecutive months now and 7.3 million people have lost their jobs since December 2007, when the recession started. In October, 35.6 per cent of the unemployed had been out of work for six months or more.

However, the pace of layoffs has slowed sharply from early this year.

Job losses in October were widespread across almost all sectors, with education and health services and professional and business services bucking the trend.

Manufacturing employment fell 61,000 last month, while construction industries payrolls dropped 62,000. The service-providing sector cut 61,000 workers.

Offering a glimmer of hope, temporary help jobs increased by 34,000. It was the biggest gain in temporary employment since the economy fell into recession and suggested companies needed extra hands even if they were not prepared to hire permanently.

The average workweek, which yields clues as to when firms will start hiring, was steady at 33 hours. Average hourly earnings rose to US$18.72 from US$18.67 in September.

A separate report from the Commerce Department showed wholesalers reduced their stocks of unsold goods for the 13th straight month in September. Economists expect a rebuilding of depleted inventories to help support recovery.

So, what does the future holds in 2010?