Friday, October 31, 2008
The US Presidential elections is followed not just by Americans but much to the surprise of most Americans, the rest of the world as well. I had plenty of discussions during my conference in New York on that topic. It was a great bunch of people more than half of the 24 in my group were Americans and the rest from all over the world. When discussions went to Obama and McCain, I posed a fact to them, whether they knew that the rest of the world have actually voted on the US elections already. They were surprised.
To me, I am very confident that the rest of the world has voted Obama in by a massive landslide. The ROW is always in a predicament, we value the US as the sheriff for the democratic world, we even like American culture and their people, but darn it, we absolutely hate their foreign policies. While I may be making generalisations here, the gist of my arguments stand.
The ROW wants Obama, firstly because he is not Republican. We want a discontinuation of the Bush-Bush-Cheney regime. We want the US to have a new face, a new policy maker to MEND ties all around the world. We need new engagement with countries like North Korea and Russia. We need more fairness in dealing with Israel, not always Israel first, Israel at all cost kind of policy. We need the silly war to end properly and swiftly. We need new faces to engage Iran and Iraq. There are plenty of frayed nerves with respect to dealing with Islamic extremism. We need to engage more neutral Islamic countries to deal with that.
On trade, we need the US to lessen substantially their farm subsidies. We want a US that makes shrinking their deficit a priority. We want a US that takes the lead in emissions and environemntal issues. We want Al Gore to be appointed as lead negotiator in that. We need tough medicine to solve US social security and healthcare. We need a deliberate scaledown in US military budget, do it via more deliberate engagement with "troubling" nations.
Yes, the ROW has already voted in Obama in their hearts and minds. I hope America makes the right choice as well.
p/s photos: Tomoka Kurotani
Thursday, October 30, 2008
Finance Asia: As the global economy twists and turns in a downward spiral, the Hong Kong government announced yesterday that it is appointing a task force to study the matter. Before you groan "we don’t need a task force, we need action", consider that if the government didn’t put together such a group to question how it should handle the global financial meltdown, observers would in hindsight question if the chief executive had done the right thing by his people.
In recent weeks, for example, Hong Kong’s regulators have been swamped by thousands of retail investor complaints that structured products backed by Lehman Brothers, which have since lost most of their value, were being misrepresented. A task force could help sort out what action, if any at all, needs to be taken in such situations – as well as a myriad of other potential problems that could crop up that need to balance out the rights of investors with the rights of financial institutions. And consider Bank of East Asia.
In late September, Hong Kong-listed mid-size lender Bank of East Asia had to stave off a run on deposits. Account holders rushed to withdraw their money despite continued assurances from regulators and management that the fifth largest bank in Hong Kong was financially stable. A task force can’t stop such a run per se, but it may help the government project a more assured voice that helps keep hysteria at bay and hopefully makes people think twice about taking banking advice from text messages, as many apparently did in the BEA case. But a task force is all about its members – and the list of enlisted folks is impressive.
The government has appointed 10 people, including Morgan Stanley Asia chairman Stephen Roach and Standard Chartered chairman Mervyn Davies, to the group assigned with the task of helping the city come to grips with the global financial crisis. Chief executive Donald Tsang will chair the first meeting, which will take place on November 3. Financial secretary John C Tsang will serve as deputy chairman. "The challenges ahead of us are daunting,” says chief executive Tsang in a press release. “The damage that the financial tsunami has inflicted on the global economy has yet to be fully revealed. We need to evaluate the situation, consider ways to respond, identify new opportunities, and ultimately enhance our international competitiveness." David Burton, the head of the International Monetary Fund in Asia Pacific, will attend the first meeting to update members on the global impact of the current financial crisis. The stated aims of the group are to assess the impact of what the government is calling “the financial tsunami” on the local economy and consider ways to respond. It will also formulate a work plan for the coming few months.
Other members of the task force make up a veritable Who’s Who of Hong Kong, including: Li & Fung’s chairman Victor Fung; HSBC's group general manager and global co-head of commercial banking Margaret Leung; KPMG partner Ayesha Macpherson; Johnson Electric Holdings chairman Patrick Wang; real estate agency Centaline's chairman Shih Wing-ching; the chairman of Roctec Futures Trading Co, K C Leong; Mathias Woo, the executive director of charitable international experimental theatre company Zuni Icosahedron; and Chinese University of Hong Kong vice-chancellor and president Lawrence J Lau.
It’s a balanced list spanning industry, real estate, the banking sector, charity, the government and academia. For sure, task forces are often known for simply presenting ideas that are never implemented, but they are also groups that simply by listening help the public vent frustration and they sometimes do actually come up with good policy ideas. Importantly, they can help bureaucrats think things through from more than just one perspective. Given the speed with which this financial crisis is unfolding, the proof of what type of task force this one will be will come soon enough.
Comments: Malaysia should learn to call upon "financial experts" and not just 4th floor or the same old same old.... there are plenty of financial strategists who can come up with solid solutions and ideas. You just need to also pay them, no national service mentality. Pay for quality and pay for insights. Or is it that vested interests are all over the place that we dare not recruit independent brilliant thinkers, as we cannot implement plans without ruining or stepping all over our vested interests? The smartest people in the world surround themselves with people smarter than themselves. Ronald Reagan was at best an actor but he had good oratory skills and recruited smart people - he was still the best US President for the last 40 years, though I really liked Bill Clinton as well.
p/s photos: Panward Hemmanee (you can catch her in Bangkok Dangerous with Nic Cage & Charlie Young)
- 10 ASEAN nations planning for a crisis fund to tap from if they face severe liquidity crunch due to global financial crisis; Fund can also be used to purchase bad assets, recapitalize troubled financial institutions and private companies; ASEAN+3, ADB, IMF will contribute to the fund while World Bank has contributed $10bn; also include plans for stand-by liquidity facilities
- In spite of limited exposure to US bank losses, risks from external funding crunch, higher borrowing costs, bank panics and deposit withdrawals are growing for banks and corporates in Korea, HK and Taiwan
- Asian central banks had been injecting liquidity into banking system and cutting rates (discount/policy rate) and/or bank reserve requirements to ease liquidity squeeze and spike in short-term rates (swap, overnight, inter-bank rates and spreads) since Sep; Some banned short-selling, guaranteeing deposits, considering fiscal stimulus; following global central bank intervention, these rates have somewhat eased in recent days
- Australia: $7.3bn stimulus for pensioners, middle and low-income groups, first-time home buyers; additional stimulus may follow; deposit guarantees; cut overnight cash rate to 6% from 7%, offering 6-mo/1-yr repos; Term Deposit lending facility, expanded types of collateral, loan maturity under bank lending facility as difference b/w inter-bank and overnight indexed swap rate surged; doubled swap agreement with Fed from $10bn to $20bn; banned short selling; to purchase $3.2 bn in residential-backed mortgage securities to help small lenders offer home loans
- Japan: supplementary budget for fiscal stimulus; providing unlimited dollar funds to banks at a fixed rate against pooled collateral until Jan-09 under swap agreement with Fed; eased rates under lending facility, expanded range of bonds under repos, suspended program of selling bank shares; Injecting liquidity amid spike in Yen overnight LIBOR; banks' exposure to Lehman had led to decline in stock prices and short halt in trading on Sep 15
- India: Raised cap and credit cost on external borrowing of firms; cut interest rate 100pbs to 8%; conducting 14 day Repos to help banks provide credit to MFs; allowed banks to lend to MFs against CDs; Allowed Savings bond holders to borrow from banks against govt paper; to infuse capital into commercial banks to raise CAR up to 12%; cut bank reserve ratio thrice in Oct from 9% to 6.5% (first time in 5 yrs); raised FII limit in corporate bonds; raised interest rate on non-resident deposits by 50bps following similar move in Sep; eased limits on banks to raise foreign capital, restrictions on FII equity investment; eased Liquidity Adjustment Facility; continues to sell FX reserves
- HK: to use forex reserves to guarantee bank deposits, set up a fund for banks to access capital; Cut base rate by 150bps to 2% twice in Oct to contain jump in HIBOR; providing additional liquidity to banks via 3-mo repo window, expanded acceptable collateral
- Korea: cut 7-day repo rate 75bps to 4.25% and lowered the base rate 75bps on loans to SMEs amid high commercial paper and loan refinancing costs, household debt; up to $100 bn to guarantee maturing foreign currency debt; to use forex reserves to inject $30 bn liquidity in won-dollar swap market after an initial $10bn; might buy govt bonds from the market to reduce USD shortage; temporary ban on short selling
- Taiwan: Guaranteed bank deposits; Cut discount rate on 10-day loans to 3.25% on Oct 9 (second time in 2 weeks following first cut since 2003), cut reserve ratio (first time in 8 yrs) and ratio for passbook deposits; injecting liquidity into foreign-currency interbank market; lending via repos to insurance companies w/ extended maturity up to 180 days; banned short selling; instructed 4 major funds and state-owned banks to buy shares after stock market fell to 3-yr low on Sep 15
- Indonesia: allowed commercial banks to use central bank debt and govt bonds as secondary reserves; extended FX Swap tenor to 1 month; passage of foreign currency via banks for firms; abolished limit of daily balance position; eased foreign currency min reserve req; Cut bank reserve ratio 1.58bps to 7.5%; exempted banks from mark-to-market rule, eased rules/cap for firms to buy back shares; Suspended trading on Oct 8/9 following 10% slide in stock market; banned short selling for Oct; injected over 3bn via 6-day repo; lowered overnight repo rate, adjusted rate of liquidity facility; might increase infrastructure spending, fiscal stimulus for exporting firms, households
- New Zealand: overnight Cash Rate cut 100bps to 6.5%; introduced opt-in deposit guarantee scheme; accepting (longer term) bank paper in daily market operations, ABSs from local banks for swapping foreign cash into NZ dollars
- China: Chinese banks reluctant to extend loans to foreign banks in the interbank market; reduced 1-yr lending rate (second time in 3 weeks, first since 2002) by 27bp to 6.93% and 10yr deposit rate to 3.87% and cut bank reserve requirements by 50bp to 17%; eliminated stamp duty on stock purchases with plans to buy shares in state-owned banks; to introduce short selling and margin trading to ease pressure on share prices
- Singapore: guaranteed deposits; Injecting liquidity via market operations; prepared to provide further liquidity if necessary and also to individual banks amid spike in 1-mo and 3-mo SIBOR, BEA bank run, CDS also rising; but rates have eased somewhat following central bank measures
- Malaysia: guaranteed deposits; Might inject liquidity, move interest rates if necessary; planning for an economic stabilization stimulus
- Pakistan: declining capital inflows/outflows in inter-bank and open market causing currency depreciation; central bank injected $100-200 bn, raised limit on investment bonds and term finance certificates under banks' statutory requirement
- Easing commodity prices, peaking of inflation, growing risks to exports, economic growth might also shift central banks' bias towards monetary easing; Taiwan, Pakistan, Vietnam had earlier intervened in stock market by narrowing trading band, introducing stabilization fund to contain volatility; India, S.Korea, Thailand, Philippines, Indonesian intervening in forex market to contain downward pressure on currency (led by capital outflows, decline in external balances)
p/s photos: Haruna Yabuki
Wednesday, October 29, 2008
Let's look at valuations. Asia's valuations have reached 1.2x P/BV. That figure is all of Asia minus Japan as Japan is a weird animal on its own. Earlier this year the valuations went as high as 3x P/BV, thus Asia as a whole has corrected severely. The question is whether it can go down some more. Well yes of course it can go down some more, there is always 0.00 to that P/BV figure.
The biggest crises for the past 40 years in Asia had been in 1982 and 1998 and during those times the P/BV went as low as 0.9x. Will we get there? I don't think so. I think we are pretty close to the bottom give or take 10%.
Its interesting to also look at what the Asian investment banks are weighting Asia as a whole with the "new clearance prices". Most are putting just 4 countries in the Overweight category, in order of attractiveness and weightage: Korea, Taiwan, HK and Malaysia. The countries getting the biggest Underweighting are: China, India and Singapore. As for sectors, most analysts prefer to look for bargains in: telecommunications, then banks followed by information technology. The ones that should be the LAST on anyone's buy list should be: construction materials, consumers, real estate and energy related counters.
Just how big is the financial mess we are in and why it is so prevasive. Much of Asia did not even touch those bloody CDS or CDOs, why are we like a pinyata in a Mexican party full of drunks. According to some estimates, this crisis is about twice as big as the Japan financial crisis back in the 90s and 3 x bigger than the US savings and loans bailout. Fair enough but it should not wipe out so much from Asian markets, should they? If Asia was part of the culprits dabbling in those instruments, then yes. Because then you would be seeing a significant amount of "capital being decimated" and wealth being destroyed overnight. The capital and wealth destruction were mainly in the US and Europe.
Some countries which may not be part of that mania but had problems of their own, including Russia, Iceland, Pakistan and Korea, may collapse as well under the distressing scenario. As for the rest, the flight to safety and confidence crisis are not "solid enough reasons" to whack the rest of the world with. We still have our domestic economy. Yes, our exports will be affected and property values will drop but surely it cannot be anything like the 1997-2000 financial implosion for us as then we were directly responsible, and we saw huge amounts of wealth and capital being depleted.
As for Malaysia our markets is trading at 1.5x P/BV now, which sticks out like a sore thumb when compared to the 1.2x P/BV for Asia (ex-Japan). We should remember that we were the hardest hit during the Asian financial crisis where we went as low as 0.7x P/BV briefly. During the internet collapse in the US the Malaysian market dipped to 1.4x P/BV. The problematic SARS period saw the local bourse going to a low of 1.5x P/BV. Hence technically speaking the local bourse is holding up very well. We have to also acknowledge that the country's balance sheet is a lot better today than in 2000 or 2003.
p/s photos: Linda Chung Kar Yan
Tuesday, October 28, 2008
As shares prices plummet, its hard to get a grasp on actual real yield as its a moving target. Here are the top high yield stocks. Use the information anyway you like as the KLCI hits 801:
d) Alliance Financial Group
f) Telekom Malaysia
h) Public Bank
k) Ta Ann
l) Pos Malaysia
n) B Toto
p/s photos: Shu Qi (Magnum ice cream never looked so good)
We all know about Kerry Packer. Since James Packer took control of the family corporate empire, he made a huge bet on the future of the empire. Like father like son. However, Packer junior has lost heavily over the last 6 months, and all this for having taken over the Packer empire since Kerry's death in December 2005. This is the score:
* The value of Packer's flagship company, Crown Limited, in which the Packer family has a controlling interest, has fallen from A$15 a share since it was listed last year to A$6.66 (the devil's number).
* Shares in Packer's billion-dollar gambling play in Macau, Melco Crown Entertainment, have gone into free-fall, dropping just over 85 per cent, from $US22 to $US3.18, since their peak 20 months ago.
* In April Packer was offered A$4.80 a share, or $3.3 billion, for the media company CMH, by another media heir, Lachlan Murdoch. Packer declined, wanting a higher price. The shares have since plunged 60 per cent, to A$1.94, closing on Friday at A$2.02. Almost A$2 billion in value has evaporated since the bid.
* Shares in the Packer-controlled investment company Challenger Financial Services Group have fallen from A$6.58 to A$1.785 in the past year, a 73 per cent plunge for a company with a large number of small investors attracted by the Packer name.
* Australia's biggest mortgage fund, Challenger Howard, 20 per cent owned by Packer's CPH, suspended investor redemptions last week, freezing A$2.8 billion because it said the Federal Government's pledge to guarantee bank deposits had caused a run on the fund.
* Crown's plans to build the tallest tower in Las Vegas in a multibillion-dollar casino-hotel development have been abandoned, with a A$44 million write-off in development costs.
* Seek Limited, the online company in which Packer holds a 27 per cent interest, has had a run on its shares, which have fallen 40 per cent since September from A$5.60 to A$3.65.
Packer's net worth is now less than half what it was a year ago. His self-worth might be similar.
It could be worse. Macquarie Bank, known as "the millionaires factory" for the exorbitant rewards its executives paid themselves, was savaged for years by scathing assessments by analysts aghast at the size and secrecy of its fee structure. Now the bill has come due, paid for by its shareholders. Macquarie Group's share price has plunged 71 per cent from a peak of A$98.50 last year, to A$28.75 on Friday. Readers of my blog would have been familiar with my incessant bearish views on Macquarie Bank before.
Even more blood has been shed at its reckless imitator, Babcock & Brown, whose market value has been destroyed since it peaked last year at A$33.90. It closed at A$1.40 on Friday, having lost 96 per cent of its market value and 100 per cent of its reputation.
Anyway, back to James Packer, in light of his own personal financial woes as cited above, he has cut the 52-year ties to his late father Kerry's media empire and leaves the once all-powerful Nine Network and ACP Magazines in the hands of financial engineers. It's a big deal breaking away from his family's tradition and not to be on the board. However, James is also walking out of there with A$5.5 billion in his pocket.Back in October 2006, James moved swiftly to hive off half of PBL Media to the private equity firm CVC Asia Pacific. He pocketed A$4.6 billion in cash as he sought to pursue his ambition to build an empire of his own with casinos in Australia, Macau and the US. The second stage came last year, when he sold another 25 per cent of the business to CVC for A$525 million.
Packer still owns 25 per cent in PBL Media, which can now be diluted over time. For James Packer, selling most of PBL Media at the top of the private equity boom might be the deal of his life, akin to his father selling Nine for A$1 billion in 1987 to Alan Bond. James Packer did as good as his dad in this PBL deal. He sold it to a second Alan Bond, which is the CVC people.
Selling high provided the financial windfall to push his expansion in the $343 billion global gaming market. Only this time, few expect he will buy back the media company.
The resignation leaves Packer's Consolidated Media Holdings with a half stake in Fox Sports, 25 per cent of the pay TV operator Foxtel and a 27 per cent stake in the job advertising site Seek. But for the first time, a Packer no longer calls the shots at Nine, which is struggling in the ratings and under a mountain of debt.
Private equity managers more experienced in financial engineering than boosting television ratings or magazine sales now face an uphill battle to turn around the businesses and assure their bankers they can meet their debt obligations.
The most pressing issue is rooted in the structure of Packer's private equity deal. It leaves CVC with a media company reeling under a debt load of $4.2 billion. Earning just $463 million in pre-tax earnings last year, the business struggled to pay the interest on that debt amid an advertising recession.
There are suggestions that earnings from the media assets may not be able to pay back interest payments on the debt by the end of the year.
Packer decided to pull the plug on the weekend. Analysts said it may have been made to avoid any repeat of the One.Tel disaster, when he was on the board of the collapsing telecommunications company with Lachlan Murdoch.
Packer's exit from PBL Media comes six months after a collapsed $3.2 billion buy-out of Consolidated Media Holdings with Murdoch, which Packer scuttled by refusing to budge on price. Since then, CMH shares have more than halved in value.
Given their media experience, CMH directors could see they were possibly "looking at a gradual collapse with a high-cost debt market", Mr Colman said. Resigning from PBL Media, "the directors have walked away from personal liabilities".
Not that Packer is carefree. He's fallen from the top of the Rich 200 List as share price falls in CMH and his gaming arm, Crown, eroded his wealth, last estimated at $5.2 billion in May. He has scrapped a plan to build a casino resort with the tallest tower in Las Vegas, and there are questions about Macau.
James Packer has now fallen from the top of the Rich 200 List as share price falls in CMH and his gaming arm, Crown, eroded his wealth, last estimated at A$5.2 billion in May 2008. He is now worth less than half that amount. Poor guy.
p/s photos: Gigi Lai (sigh, my TV queen has retire from acting in TV series...)
CLSA Asia-Pacific Markets, the regional brokerage unit of Credit Agricole, asked 500 senior bankers and executives to accept pay cuts of as much as 25 percent next year to avoid getting rid of jobs.
The voluntary salary reduction program that was proposed for one-third of the staff last week would reduce basic pay by 15 percent to 25 percent starting in January. The participating employees would be paid the salary they forgo and may also receive a bonus payment, when profit meets certain targets. The proposed pay cut package is similar to the one offered by CLSA in 2003 when SARS led to faltering economies in Hong Kong and China.
Singapore-based Rajiv Garg, Merrill's head of structured finance for Asia ex-Japan, left the bank on October 21 with nine members of his team. Merrill has kept three structured finance bankers in Hong Kong and Korea to manage existing exposures, but they are likely to leave in a few months.
Last month, HSBC slashed 1,100 jobs in its global banking and markets division globally, including 100 jobs in HK, while UBS also made hefty cuts to itsu fixed income and real estate teams and those focused on China IPOs in the past few months.
UBS advised bankers this month to travel economy class for flights of up to five hours, two officials at the biggest Swiss bank said, asking not to be identified because it’s an internal policy. Merrill employees have been told to travel economy for flights of as much as three hours since mid-September, two executives at the firm said.
JPMorgan, the biggest U.S. bank, has requested senior bankers fly economy on flights of less than three hours since late August, said an official who declined to be identified.
Royal Bank of Scotland Plc, which ceded majority control to the UK government this month, in an Oct. 16 memo asked workers worldwide to fly economy on regional routes and to cut back on travel.
HSBC Holdings Plc.’s Asia unit asked its Hong Kong department heads and branch managers to cut travel expenses by 15 percent to 20 percent next year, two officials at the bank said, citing a Sept. 23 memo sent by Chief Operating Officer Jon Addis.
HSBC is recommending China Eastern Airlines Corp., the country’s third-biggest carrier, over Hong Kong Dragon Airlines Ltd. for business trips to Shanghai, the memo said, according to the people. Europe’s biggest bank by market value cut 1,100 jobs at its global banking and markets division last month.
A round-trip business class ticket from Hong Kong to Shanghai with Dragonair costs HK$6,110 (US$788), excluding tax, almost double the best coach fare. An economy class traveler on China Eastern would pay HK$2,650.p/s photos: Nozomi Sasaki
Monday, October 27, 2008
Singapore property market is always very interesting. There is a high degree of speculation and much of excess liquidity would always find their way into properties there.
Thanks to its clear cut policies and very stable currency, Singapore properties attract investors from HK, Brunei, Indonesia and Malaysia as well. Hence, when it is hot, it is very hot. When it is not it can go south very quickly.
Its a very brutal market place. One that is not so dependent on "employment" as a main factor - i.e. if you have jobs, you still can make the installment payments. In Singapore, the dominant factor in properties has to be speculative element. The investors that buy 2 or 3 lots per launch. For them, the jobs factor is not in calculation but rather more important to predict the flow of capital. Prices of private homes have fallen for the first time in four-and-a-half years. This marks the end to the property boom that started since 2004.
Consultants say prices are likely to keep falling well into next year. Overall prices of private homes slipped 1.8 per cent, after flattening out in the second quarter. Consultants called it a turning point after almost a year of deadlock between buyers and sellers. Citigroup analyst Wendy Koh predicts that high-end home prices will fall by 25 per cent, the mid-end by 15 per cent and mass market by 5 to 10 per cent.
On the jobs front, Singapore has been the strongest beneficiary of hedge funds setting up shop there. Thanks to proactive measures, many hedge funds have chosen Singapore as their base. The pollution in HK has also seen some relocations from HK to Singapore. The number of expatriates, in particular from India, have also boosted inherent property demand. The events over the last few weeks would have put a halt to many of the expatriate postings. The more severe effects have been from those linked to hedge funds.
A cursory glance would reveal that more than 50% have closed shop over the last few months, no kidding. More are likely to close due to a huge loss in assets under management, poor performance and redemptions. The fact that Singapore dollar has held up the best among major currencies will only cause many of those affected by the crisis to sell Singapore property first to get cold very hard cash. I mean, who would want to sell their OZ properties now if they were a foreign investor?
The last 4 years have seen the Singapore mid-high end market being beneficiary to the enbloc sale phenomenon. Older condominiums were sold enbloc for premiums (to prevailing market prices) from 50%-100%. This freed up a loy of capital and saw much of the seller buying back into the private high end market with their windfalls. The first 3 years were very profitable for these players as they could buy and sell for a quick 30% gain after just a few months. As usual, greed takes over and you will find the same buyer now having 2-4 such properties for speculation (they'd call it investments). How fast can you scale down to protect your capital? First out best dressed.
The other related problem is the ruling that you can pay 10% deposit and nothing till the property is completed. Well, that sounded like a great idea before. Now a lot of properties will be completed in 2009 and 2010 and even 2011. If you have that, you are like holding a call option until the property is completed. The danger is that many would still be able to make the installments but would you be happy to make the payments if your property by then had sunk by 20% in value? First out best dressed again.
Evidence that more downside is to come: a blogger went to a couple of launches and was given the aggressive sales pitch. As long as you can put down 30% as deposit, they can arrange for a line of credit amounting to your yearly income. Hint, hint! You know where this is going. Its almost like maxing out your credit card on cash advance to put as down payment, something's gotta give. Desperate times call for desperate measures.
Naturally, there will be a lot of those who will come in to defend that property prices won't fall by that much, and that things are different in Singapore. I would like to remind all that we are going through a massive de-leveraging process globally. There is a huge aversion to leverage and credit, and the first asset to get de-leveraged will always be property to individual investors. But you say that Asian players are not that affected by the US subprime and CDS crisis. Really?? Asian markets have already tried to factor in the massive downswing. Asian markets have actually fallen more than the US markets dollar for dollar, and if you take in the dollar effect, the market cap loss is even higher. As you all know, Asian economies are tied very closely to their stockmarkets. Many have been able to avert the large losses as there was plenty of time to scale down your stock holdings, almost all could see the correction before it actually happened. Safe to say that the huge wipeout in market values over the last 6 months have been on institutional investors and die-hard traders only. Most of the individual investors have largely been unhurt.
Having said that, most of the rich individuals with substantial equity portfolio have seen their value being decimated. Though they may still have cash and not reached pauper status yet. Their net worth may have shrunk by 50%, just ask Lee Shin Cheng or Lim Kok Thay. Try and sell them a few Sails condo, they would wave you off as being stupid,.... unless it was at least 30% cheaper.
It is very hard to write negatively about properties, even for consultants, journalists and analysts, as most have properties of their own, and would be loathed to write anything bad about it. So, beware of those who try to mount a defensive argument.
p/s photos: Ema Fujisawa
There are signs that the financial regulators and leaders know what is troubling the global capital markets. If they know, then we are on the way to properly restoring calm and sensibility. More importantly, it will ensure a properly functioning capital markets - which is still not evident now as many stocks have dipped below way past what is considered as fair value. Its pointless to point out which stocks are worth buying as there are too many to mention. You would be better off to try and see the road signs that say that the root problems are being addressed. If they are not doing that, then we will be in the doldrums for a while. However, I can see two major signs which say we should be on the right path. Treasury Secretary Henry Paulson’s comments that signaled he wouldn’t let another large bank fail, large institutional traders began doubling down on bets that large banks would skyrocket. At a time when almost everyone is deleveraging, several funds were in essence doubling their leverage on one trade. This is essential as the statement indicates that Paulson now knows what a catastrophe it was to let Lehman Brother fail (please read recent posting on Lehman Brother, The Rosetta Stone). That will be as close you can get to an admission of grave fault by Paulson.
The major hedge fund Citadel had a conference call over the weekend and agreed with my take on Lehman Brothers:
3:55 p.m.: “One effect we’ve all seen is about the diversity of counterparties. Given the diversity of counterparties around the world, clearly the diversity isn’t enough to deal with some of what we’ve seen in the past few weeks.”
3:54 p.m.: Lehman’s bankruptcy caused “the greatest dislocation we’ve seen in money market history”
The second major issue is the flight to safe currencies such as yen and USD. But, this is not a currency crisis. This is a liquidity crisis, a growth crisis, a confidence crisis. As such, probably the first step should not be to intervene to save currencies. People calling for their central bankers to protect their currencies are calling for the wrong antidote. At a time like this, you don't need or rather you don't want a strong currency. Look at the OZ dollar, there is no way the Reserve Bank of Australia can do much to stem the reversal of the massive yen carry trade effects. The RBA can only do one thing to protect the OZ dollar and that is to raise the interest rates, which is already crippling in light of the over speculated property market there. What good is it to bump up rates and protect your currency and then find your economy in tatters with property markets there compounding. You would have a graver, and longer term disaster in the works. Better to allow the currency to find its own footing. At current levels, the OZ should start attracting some FDI into property for sure and should see a strong boost to tourism. I mean the OZ dollar is even cheaper than the Singapore dollar now by nearly 10%.
The source of aggressive capital flows into the dollar and yen is emerging markets, and it is the emerging market central banks, flush with dollar reserves, who could take action to stem the market frenzy. Naturally this cannot be allowed to continue, especially for Japan, which needs a weaker currency to prevent a more severe deflation in its economy. Emerging markets “need to act the same way the U.S. and European Union has acted. That will address the root of the problem. However, those governments’ assertiveness is limited by their experience.
Ahead of the Asia Europe Meeting, which began Friday, Japan and other East Asian leaders agreed to establish an $80-billion joint fund aimed at fighting the global financial crisis. Much of the movement into yen and USD can be said to be coming from emerging markets themselves, and that needed to be reversed. The setting up of the "fund" is a good start. More collaboration will go some way to slowly unwind the weakness in emerging markets' currencies.p/s photos: Deepika Padukone
Saturday, October 25, 2008
The 'Rosetta Stone' is an Ancient Egyptian artifact (حجر رشيد in Arabic) which was instrumental in advancing modern understanding of hieroglyphic writing.
Lehman Brothers' demise probably caused the "banking crisis of confidence", which brought about the present state of financial markets. The massive deleveraging by funds of all kinds, the downgrading of emerging markets' debts and currencies, the flight to USD and yen, the numerous injection of liquidity into the system by central banks, the guaranteeing of deposits to prevent bank runs, the notion that nothing has real value anymore... may all be traced to Lehman Brothers' bankruptcy, or rather Paulson's refusal to save the company. Lehman Brothers may be the Rosetta Stone which helps us better understand why things are the way they are now.
Though Lehman was the smallest investment bank when it failed — and regulators decided it was not too big to fail — its demise set off tremors throughout the financial system that reverberate to this day. The uncertainty surrounding its billions of dollars of transactions with banks and hedge funds exacerbated a crisis of confidence. That contributed to the freezing of credit markets that has forced governments around the globe to take steps to try to calm panicked markets, including guaranteeing bank deposits.
The list of creditors with material exposure to Lehman Brothers is long. There will be dozens of holders of senior notes, sub debt and junior sub debt, so you can’t make too much of the fact that it looks as though the Japanese banks were laid out. We’d need to see the signatories to the Trust Indentures of the three sets of Notes to see just how many financial institutions and debt funds were exposed to Lehman’s various debt pieces:
- $138 billion of senior notes, which have Citibank and BONY listed as indenture trustees
- $12 billion of subordinated debt, with BONY listed as indenture trustee
- $5 billion of junior subordinated debt, also with BONY as indenture trustee
- $463 million of bank debt provided by Japan’s AOZORA
- $289 billion of bank debt provided by Japan’s Mizuho Corporate Bank
- $275 million of bank debt provided by Citibank N.A.’s Hong Kong Branch
- $250 million of bank debt provided by BNP Paribas
- $231 million of bank debt provided by Japan’s Shinsei Bank
- $185 million of bank debt provided by Japan’s UFJ Bank
- $177 million of bank debt provided by Japan’s Sumitomo Mitsubishi
- $140 million L/C provided by Svenska Handelsbanken
- $93 million of bank debt provided by Japan’s Mizuho
- $93 million of bank debt provided by Canada’s ScotiaBank branch in Singapore via NYC
- $75 million of bank debt provided by Lloyds Bank
What's more, Lehman was one of the largest prime brokers to international hedge funds. Lehman's bankruptcy immediately caused wholesale panic within the hedge fund industry as funds tried to close/transfer/pull their money out of their Lehman custodian. Today over $60 billion is still locked up in Lehman's London brokerage unit. Given the leveraging nature of hedge funds, the effect on global equity markets was catastrophic as trillions of dollars were wiped off global equity markets. If you were to leverage the $60 billion twenty times (about right) it comes to $1,200 billion worth of positions that needed to be unwound.
p/s photos: Jiang Yu Chen
Friday, October 24, 2008
The Edge Daily wrote a good piece on Valuecap. Here are the main points: a) Valuecap Sdn Bhd, the asset management company owned by Khazanah Nasional Bhd, Permodalan Nasional Bhd and the Pensions Trust Fund Council, will receive an injection of RM5 billion to invest in undervalued companies on the Kuala Lumpur Stock Exchange. The money, which doubles the size of Valuecap’s capital, is on loan from the Employees Provident Fund (EPF). Valuecap, which was set up in 2002 to add liquidity and volume to the market, has met these objectives. b) Is Valuecap’s record of its return on investment matches the EPF’s benchmark. However, currently, Valuecap is believed to have about RM4.9 billion worth of investments in 70 companies. And it has been reported that since its inception to September 2007, Valuecap has paid out a total of RM135 million in dividends. Better public disclosure will help to ascertain whether this passes the standard tests for financial performance. c) A check with the registrar of companies shows that it is in the black and has assets of RM7.5 billion. So Valuecap has some value. But what is the return that EPF will get on the RM5 billion? d) Since it involves two government-related entities, disclosures must be made every year on the returns. Also, Valuecap should detail the stocks it has in its portfolio just like some of the listed small-cap funds. At the moment, nobody really knows the stocks in Valuecap’s portfolio. e) The Valuecap story illustrates the importance of transparency in financial reporting to boost investor confidence and the need for clarity about the correct economic stimulus package to move the market sentiments in the right direction.
UAC Bhd 3,222,700 4.33 %
Amway(M) Holdings Bhd 6,958,100 4.23 %
MBM Resources Bhd 10,010,200 4.14 %
Hume Industries Bhd 6,596,400 3.45 %
PPB Group Bhd 40,452,900 3.41 %
IOI Property Bhd 28,267,500 3.4%
KLCC Property Holdings Bhd 30,957,800 3.31 %
Petronas Dagangan Bhd 32,436,400 3.27 %
YTL Cement bhd 14,955,092 3.05 %
Uchi Technologies Bhd 11,318,200 3.03 %
Chintek Plantations Bhd 2,646,000 2.9 %
United Plantations Bhd 5,975,800 2.87 %
Star Publications (M) Bhd 21,148,500 2.86 %
JTI International Bhd 7,144,400 2.73 %
Boustead Properties Bhd 6,672,150 261 %
Bintulu Port Holdings Bhd 10,121,100 2.53 %
Shell Refining Company Bhd 7,589,300 2.53 %
British American Tobacco Bhd 6,505,200 2.28 %
Axis REIT 5,400,000 2.11 %
Quill Capital Trust 4,302,000 1.1%
OSK highlighted 11 potential targets on the Kuala Lumpur Composite Index (KLCI) that Valuecap may go for — MISC, Petronas Gas, DiGi, British American Tobacco, Petronas Dagangan, MAS, Sime Darby, Maybank, IOI, AMMB and MMC.
The Edge Daily wrote a good piece on Valuecap. Here are the main points:
a) Valuecap Sdn Bhd, the asset management company owned by Khazanah Nasional Bhd, Permodalan Nasional Bhd and the Pensions Trust Fund Council, will receive an injection of RM5 billion to invest in undervalued companies on the Kuala Lumpur Stock Exchange. The money, which doubles the size of Valuecap’s capital, is on loan from the Employees Provident Fund (EPF). Valuecap, which was set up in 2002 to add liquidity and volume to the market, has met these objectives.
b) Is Valuecap’s record of its return on investment matches the EPF’s benchmark. However, currently, Valuecap is believed to have about RM4.9 billion worth of investments in 70 companies. And it has been reported that since its inception to September 2007, Valuecap has paid out a total of RM135 million in dividends. Better public disclosure will help to ascertain whether this passes the standard tests for financial performance.
c) A check with the registrar of companies shows that it is in the black and has assets of RM7.5 billion. So Valuecap has some value. But what is the return that EPF will get on the RM5 billion?
d) Since it involves two government-related entities, disclosures must be made every year on the returns. Also, Valuecap should detail the stocks it has in its portfolio just like some of the listed small-cap funds. At the moment, nobody really knows the stocks in Valuecap’s portfolio.
e) The Valuecap story illustrates the importance of transparency in financial reporting to boost investor confidence and the need for clarity about the correct economic stimulus package to move the market sentiments in the right direction.The blogging community has tried to capture more information on Valuecap's Holdings: copied from http://bursa-chat.blogspot.com/
Comments: From available information, Valuecap performed well. From the list of portfolio companies, it appears that the financial decision making is above-board (i.e. free from being "forced" to invest in "linked or influential" companies). Hence all the more reason to be totally transparent in their undertakings, staffing and investing policies. Its EPF money, hence its the public's money, NOT the government's. If you lend money to someone, you have a right to know how it is going to be spent on.
We also need to know the terms of the agreement between Valuecap and EPF on the disbursement of loan. Are there minimum performance criteria? How are dividends treated or repatriated? What is the time frame for the loan? Can EPF recall the loan at its own discretion, just like EPF can redeem funds mandated to other fund managers. We must have clear arms-length terms. If the government has learnt anything from what the people want over the past 12 months, its more transparency, clarity, stewardship and purpose in policies and management of resources.
In my view, the establishment of Valuecap is OK and justifiable. It is very much in the same platform as HKMA's massive Tracker Fund (although it did not start off as a tracker fund or ETF). When there are massive volatility and imbalances in global capital flows, the establishment of such funds are justifiable and forward looking. You do not want the broader economy to be affected disastrously by such vagaries.
We have to acknowledge that for economies that are highly correlated to fortunes of their own stockmarkets, the establishment of such vehicles are justifiable and proper. Malaysia has one of the highest GDP that is listed among all capital markets. Hence the correlation and flow on effects of the stockmarket is extremely high for the local economy. If that figure is much lower, like many European developed countries, the need to intervene with such vehicles may not be deem as necessary.
My final point is what is the "exit strategy" or "long term strategy" for Valuecap. What happens when you dissolve the fund? You get the same amount of scrips being flooded back into the market. Yes, you can argue that 5 years down the road, when the KLCI is at 1,800 or higher and sentiment has improved, Valuecap may be able to selldown its positions gradually. But that strategy is defeatist in every sense. You will still have to restart another Valuecap the next time a similar situation were to occur in the future - its not a solid strategy.
My advice (and this is worth millions in fees, which I am waiving) is to list Valuecap as an ETF. The strategy should be to break it up into 3 equal tranches. Assuming the portfolio value reaches RM15 billion in a few years time, thats three very sizable ETF. I would recommend to list one in Nasdaq, where the bulk of global ETFs are traded. The other ETF should be listed in Tokyo, while the final one in Malaysia. Do not be blinkered in trying to list all on Bursa on the basis of misplaced pride alone.
The strategy would basically "take the free float" out of the stockmarket, thus ensuring long term sustainability and investing interest. By listing in Tokyo and Nasdaq, you are basically selling all the shares to foreign investors, but the shares do not get back to the market place at all. An ETF will hold the same amount of shares throughout its life, investors will buy and sell the ETF like a share but shares held inside the ETFs would not flow back to the market place.
The strategy basically makes it possible to "trade" Malaysian shares like an index almost 24 hours a day. From Bursa trading hours to US trading hours and then Tokyo trading hours.
Sigh, if I was a Binafikir partner, I would at least get a few million in advisory fees for this.
p/s photo: Christine Mendoza
Thursday, October 23, 2008
You cannot afford to ignore Nouriel Roubini nowadays, especially since he has been so correct over the past 12 months. Roubini has now latched onto the risks spreading to emerging markets' debts and balance sheet frailty. First thing first, Malaysia is not on the list (phew), but Indonesia, South Korea and India are. How do these risks play out in the mentioned countries? The currency will be under immense pressure, local rates will have to jump sky high to protect value and flight of capital, foreign investment will dry up quickly, short term foreign investments will flee, government and corporate bonds will be downgraded, cost of borrowing will jump, companies on high leverage will suffocate ...
Today we focus on those emerging economies that are falling victim – or are at risk of falling victim – to the ongoing global financial crisis. The escalation of the crisis revealed or exacerbated existing vulnerabilities, such as current account deficits, that were ignored when times were good - ie capital was plentiful. Emerging Market sovereign bond spreads over U.S. Treasuries have risen significantly, more than doubling since late August. Several emerging economies – including Iceland – are in talks with the IMF or regional institutions to provide capital in the face of the global liquidity shortage. While it is still unclear what the role the IMF will have in resolving the crisis, there is no doubt that the debate on its role in international crisis management has been revived.
Iceland has been at the forefront of the global credit crisis. What was essentially a banking crisis has turned into a national crisis as Iceland’s banks appear too big for the government to rescue.
Highly leveraged, Iceland’s banks heavily relied on wholesale funding to finance their aggressive expansion abroad. With the rapid depreciation of the local currency and the seize-up of credit markets, Iceland’s banks were having trouble refinancing their debt and appeared headed for collapse when the government stepped in and nationalized the three biggest lenders.
Now reports suggest Iceland’s government is poised to announce a reported $6 billion rescue package from the IMF. While such a package would be a positive step in providing liquidity, there is no question that a severe economic contraction is coming. Some analysts predict Icelandic GDP could shrink by 5-10% after almost 5.0% growth in 2007.
Also hard hit by the global credit crisis is Hungary. While it’s not suffering a banking crisis a la Iceland (in the sense that its banking sector is mostly foreign-owned, rather than made up of highly leveraged, internationalized domestic banks), it is similar to Iceland in that the global credit crisis has exposed long-simmering vulnerabilities. High levels of foreign currency lending, slow growth (1.3% in 2007), twin deficits (both current account and budget), and heavy reliance on non-deposit foreign funding all contributed to making Hungarian assets sell-off targets.
The ECB came to Hungary’s rescue last week, saying it would lend as much as EUR5 billion ($6.7 billion) to Hungary’s central bank to help revive the local credit market. But the verdict is still out on whether the ECB credit line and government measures are enough to prevent Hungary from becoming an ongoing hotspot.
Given Hungary’s woes, eyes are focusing on the rest of Eastern Europe for signs of trouble. The slowdown in the region’s key export market, the Eurozone, is expected to dent growth across the region. Meanwhile, high current-account deficits and widespread foreign currency lending are particular risk factors. Poland and the Czech Republic are considered among the least vulnerable, but they are far from immune. Meanwhile the Baltics, Bulgaria, and Romania have long been on analysts’ radar as particularly weak links.
All three Baltics (Estonia, Latvia, and Lithuania) boomed over the last seven years and posted double-digit growth rates at their peak, helped by cheap credit from Scandinavian parent banks and EU membership in 2004. Before the the global credit crisis reached fever-pitch, these economies were already headed for a sharp slowdown, with Latvia and Estonia now officially in recession.
There is no question that the global credit crisis will exacerbate the Baltics' slowdown, but will it lead to an Iceland-level crisis? The risk is that foreign capital inflows could dry up and lead to an even sharper slowdown that could infect the financial sector and trigger devaluations. But there are some factors that suggest the sharp slowdown might not evolve into a full-fledged, Iceland-level crisis. For one, external deficits in the Baltics are funded to a large extent by inflows from Swedish parent banks, and sharply cutting off credit would not be in these banks' best interest. Two, substantial foreign ownership of banking assets limits the governments’ contingent liabilities, as Swedish parent banks would be expected to provide support to their Baltic subsidiaries if they get into trouble. Three, the Baltics’ sharp slowdowns have led to speculation that devaluations (they have exchange rate pegs to the euro) could be in the offing. While devaluation cannot be completely ruled out, such fears may be overblown as these countries tend to have shallow financial markets, relative little hot capital, and successfully defended against speculative attacks earlier this year. Nevertheless, without devaluations, these countries' external competitiveness will likely continue to erode, which will impact their growth prospects.
Bulgaria and Romania
Bulgaria and Romania – the so-called ‘gravity defiers’ – are also on the short-list of CEE economies most at risk of being the next hotspots in the global credit crisis. Despite massive current-account deficits (projected to hit 23% of GDP in Bulgaria and 16% of GDP in Romania this year), booming credit growth, and high inflation, these economies have not hit slowdown mode yet – hence the term ‘gravity defiers’.
In the case of both countries, the financing of their current-account deficits has deteriorated, with foreign direct investment (seen as less subject to reversal than other forms of financing) only plugging about a third of Romania’s current account gap and over half of Bulgaria’s. As a result, these economies are highly susceptible to capital outflows, which would trigger a harsh real adjustment.
Another risk is these countries’ high degree of foreign currency lending, particularly notable in Romania which has a flexible exchange rate, meaning unhedged borrowers are highly exposed to currency swings. Romanian households’ high levels of foreign currency lending are similar to those in Hungary (55% in Romania vs. 60% in Hungary of total household loans). And like Hungary, Romania has a budget deficit of over 2% of GDP. Meanwhile, Bulgaria has a budget surplus, which potentially gives its government more room to maneuver if outflows trigger a sharp slowdown. Bulgaria and Romania will be key countries to watch as the global credit crisis unfolds.
The negative effects from the credit crunch on the Balkan region have been limited so far. Growth has remained strong, ranging between 4.3% for Croatia and 8.2% for Serbia in Q1 08. Nonetheless, the significant widening of the current account deficit experienced by most of the countries is a source of concern as both external credit and FDI inflows are likely to slow. Croatia may feel severe pressures since it has the highest foreign debt in the region, at 90% of GDP, and the share of foreign currency mortgages and personal loans is near the level seen in Hungary.
A number of analysts have cited Turkey as particularly vulnerable to global market turmoil given its large current account deficit. At 5.8% of GDP in 2007, Turkey’s deficit – while substantial – is lower than many of its emerging Europe peers. The financing quality, however, has deteriorated of late and it will be important to watch how this trend evolves. Compared to other CEE countries, however, Turkey is less likely to face a bank-related credit squeeze, since the banking sector is relatively liquid with a loan-to-deposit ratio well below 100% and since wholesale borrowing is a smaller fraction of banking sector liabilities. So while Turkey is not immune to the global credit crisis and will experience slower growth, it is much better placed than earlier in this decade to weather the storm.
Ukraine’s high reliance on external finance makes it particularly vulnerable in this global economic downturn and credit crunch, leading it to seek financial assistance from the IMF. Worsening macroeconomic fundamentals including persistent inflation and a widening trade deficit and domestic and regional political uncertainty have contributed to deposit outflow, tighter domestic money market rates and exchange rate volatility, increasing near term risks for Ukraine's banking sector. The value of the Ukrainian currency, the hryvnya, sank by 20% so far in October forcing the National Bank of Ukraine to intervene and sell dollars at an artificially low rate. Moreover, the equity markets fell over 70% this year.
Despite a growth rebound to 4.9% in Q2 2008, South Africa cut its growth forecast to 3% for 2009 on worries that a global recession would depress export demand (especially of metals) and investment inflows needed to finance its current account deficit. The fall in commodity prices has pressured the Rand, which fell to its lowest level since 2003, and domestic equity markets. The South African Reserve Bank left its benchmark interest rate unchanged at 12% for a second consecutive time, even after inflation reached a record 13.6% in August. Meanwhile, President Thabo Mbeki's resignation ushered in a period of political and economic uncertainty.
The UAE is one of several oil exporters starting to feel the pinch from the reversal of speculative capital that flowed in early this year to bet on currency revaluation. Long-term project finance costs already tightened throughout the GCC earlier this year and the freezing of global credit markets exposed UAE banks which financed rapid credit growth with foreign not local borrowing. As a result, local interbank rates more than doubled to over 4.6% despite liquidity injections and a central bank liquidity provision for UAE banks. However, although Dubai’s liabilities might be much greater than its assets, most participants and ratings agencies still assume that the federal government (read Abu Dhabi, home of the largest sovereign wealth fund) will step in if they get into serious trouble. Yet, with the oil price and capital inflows falling the UAE’s surpluses and will be smaller next year even if its budget still balances and worries about Dubai’s property market are looming.
Despite its oil wealth, a reliance on short-term borrowing by its banks abroad has left Kazakhstan, one of the few oil exporters to run a current account deficit, exposed. However, unlike some of its neighbors, it will use domestic funding including the $27 billion National Oil Fund to cushion its economy. But with the oil price dropping and new output delayed, Kazakhstan is set for much slower growth next year, particularly as its previously bubbly property market is cooling quickly.
Pakistan, recently hit by a political crisis, is also on the verge of a balance of payments crisis as large capital outflows and decline in forex reserves – below-adequacy levels – pose risk to finance the oil-led ballooning fiscal and current account deficits, and external debt payments. To prevent debt default, the government is seeking $10-15bn in loans from IMF, ADB and World Bank and might approach strategic donors like Saudi Arabia and China. The stock market and currency slump have also led to liquidity injections by central bank along with restrictions on stock trading, short selling, and the establishment of a stabilization fund.
A single day double-digit plunge in stock indices in early-October pulled down Indonesia’s stock market and helped push the index down over 40% year to date, leading authorities to suspend trading and ban short-selling. Capital outflows, rupiah decline and credit tightening have invited central bank intervention in money and currency markets. But the rundown of forex reserves poses significant risk to the subsidy-laden fiscal deficit and commodity correction-hit current account. Balance of payments risks are only exacerbated by the high foreign-currency denominated debt causing the government to seek loans from World Bank and other multilateral institutions.
South Korea is the most vulnerable of Asian countries to a sudden stop of financial flows. Korea looks set for another financial crisis given its vulnerabilities that include: the highest loan-to-deposit ratio in the region, rapid growth of short-term foreign debt, a current account deficit, a slowing property market, high food/fuel prices squeezing small- and medium-sized enterprises in the construction industry as well as consumers and large corporations facing an export slowdown. Its currency is down roughly 30% year-to-date despite the announcement of a bank support package as foreign investors have pulled out of Korean assets in a flight-to-safety and de-leveraging that marks the global credit crisis. Many fear Korea's credit crisis will shape up to a repeat of 1997 but others believe that, due to its large war chest of forex reserves and its status as net creditor to the world, Korea's interbank dollar funding squeeze is unlikely to become a 1997 redux. The most worrisome sources of a potential Korean credit crisis are not the foreign currency bank debt built up from hedging exporters' USD shorts and the interest rate arbitrage that resulted as a by-product. Such foreign debt can surely exacerbate the de-leveraging that Korea’s bank sector faces, however the real fire starter for a Korean crisis is domestic debt. Korea needs to restructure after having over-invested in construction/real estate companies and over-lent to households. With a slowing economy endangering asset quality, Korean banks will need to get pickier about who they loan to.
The global financial meltdown has put Argentine's private pension assets in jeopardy. Argentina's government could move to take over the management of $28.7 billion in private pension funds that sharply declined in value this year due to global turmoil. The government is attempting to increase the pool of money it can borrow from in order to meet debt obligations next year. As of now, retirement and pension fund administrators manage private pension accounts for 9.5 million depositors, of which some 40% are active contributors. Essentially, most mandatory funds flow into the private pension system would now become part of the government's pay-as-you-go public pension scheme. Besides that, the government would have access to some USD 1.2bn per year in new flows currently deposited in the system. The idea of using social security funds to avoid a default (or to pay the debt) next year should cause a sharp drop in confidence in the country and in its government.
In Venezuela, the key problem is the fact that its sovereign wealth fund, known as Fonden, holds about $300 million in debt instruments that Lehman had agreed to cash. With Lehman’s bankruptcy, Venezuela will have a hard time selling the debt. Moreover, the Venezuelan's sovereign wealth fund has a significant amount ($2billion) allocated in structured notes that have lost part of their value amidst crumbling markets, and therefore they are hard to cash to cover expenses. Meanwhile the fall in the oil price may crimp Venezuela’s fiscal expansionism.
Although the BRIC economies are not as vulnerable as these over-exposed and smaller Emerging markets, they do not appear immune to the global economic downturn and credit crunch.
The financial crisis has triggered downwards revisions in economic growth in Brazil for 2009. While the country is set to post 5.1% this year, the forecast for 2009 is 2.8%. The financial crisis and decline in commodity prices which tent to reduce the amount of exports contribute to lower growth.
So far, Russian consumers have remained insulated from the loss of wealth in the equity market and troubles that Russian banks face in rolling over their debt, but growth is likely to slow to 5-6% next year from 7% plus in 2007. Meanwhile financing costs are on the rise, eating into corporate profits and the falling oil price may limit a planned investment spree, particularly as a large amount of Russia’s savings are tied up in the domestic banking sector and attempts to avoid a bust in the Moscow property sector.
India is taking a severe hit from the global financial crisis with the stock market down over 50% year to date, FII outflows crossing $10bn and the currency plunging over 20% year to date. While the central bank is injecting liquidity, easing bank credit and capital inflows, cutting policy rate to contain risks to the financial sector and downtrend in asset markets, correction in the near-term seems inevitable. Double-digit inflation, high interest rates and global liquidity crunch will significantly impact domestic demand and industrial activity in 2008-09 pulling down the recent boom. Moreover, twin deficits, both approaching 10% of GDP, pose a challenge as forex reserves decline.
Q3 marked the fifth consecutive slowing of Chinese real GDP growth. Slowing industrial production and real fixed investment are suggesting more weakness ahead particularly if the worst consumer sentiment since 2003 persists. Slowing growth implies fewer commodity imports – even if government sponsored infrastructure projects pick up some slack – clouding the outlook for countries like Brazil, Chile and Australia, among others. The Chinese government fiscal and monetary responses, which have already begun, could cushion its fall and aid in its rebalancing. Yet falling asset prices are taking their toll on local and national fiscal coffers and corporate profits and consumption could be the next shoe to drop as robust retail sales may not stand up to slowing income growth.
p/s photo: Son Dam Bi
Emerging-market sovereign credit spreads came under extreme pressure Wednesday as a sell off in global stock markets intensified due to growing fears of recession.
The spread on J.P. Morgan’s emerging-market bond index, the EMBI+, broke through 700 basis points for the first time since March 2003 and is currently trading at 713 basis points over Treasurys. That’s up a hefty 33 basis points on the day and a massive 84 basis points from Friday’s close of 629 basis points.
“Another day of rising risk aversion that has seen emerging markets come under heavy selling pressure,” said analysts at RBC Capital Markets in a note to clients.
In sovereign credit-derivative markets, Russia and Turkey were among the worst hit, with their credit default swap spreads, a key measure of credit risk, widening significantly, a move that suggests investor sentiment toward them has deteriorated.
Five-year CDS on Russia widened around 64 basis points to 811/831 basis points. The price means it now costs $821,000 a year to insure a notional $10 million of Russian bonds against default for five years, up from $757,000 Tuesday and $517,000 a year ago.
Turkey’s five-year CDS widened to 684 basis points, compared with Tuesday’s close of 624 basis points given by Markit.
Comments: Risks have now spread to emerging markets. Russia and Turkey are first to get whacked. Safe to say that these developments would continue to override sentiment in all emerging markets. While we can argue that countries with healthier balance sheets such as Malaysia, Singapore, Taiwan and the like may be shielded somewhat, the overriding sentiment will tend to ignore such facts. Those with iffy balance sheet will be hurt most. The massive volatility in currency markets will bring forth a few major company "failures" such as Citic Pacific's huge currency linked losses. When currency moved as it did over the last two weeks, we are bound to see massive losses incurred by certain companies, hence brace yourselves for some major bad news affecting sentiment further. On the companies front, the markets will downgrade companies that rely on debt a lot to fund their acquisitions (such as KNM) as rolling over their loans might present a problem. Stay away from companies that are highly geared if you must hold stocks.
p/s photos: Go So Young
Wednesday, October 22, 2008
This was the highlight of my trip to New York. Naturally I went to the Metropolitan Museum of Art as I knew there were two Dalis hanging there. Did I mentioned that I used to sell Dali's lithographs in Paddington, Sydney during my Uni days? Well I did and fell in love with his paintings, but I have never seen a real Dali in my life. His paintings are all over the world and its a bit silly to try and see all of them.
I spent just over an hour inside The Met but was staring at The Crucifixion for over 20 minutes. I wanted to say "Hey, I blogged as Dali, you know!". The painting happens to be one of my favourites as well, hence I was in awe as I did not know which two Dalis were hanging there. The other was a B grade Dali, The Madonna & Child in concentric circles... but I digress. Since I had been acquainted with his works, I was dying to tell someone what a wonderful painting we all were looking at. I was exclaiming to the group next to me, "What a magnificent piece..."... half hoping that someone would ask me why it was so... lol... yeah, conceited...
Then someone actually said "Yea, its unusual.." Thats all I needed, and before you know it, I was lecturing on why the painting was so great... I know, I can't help myself, but after a while I had an audience of six..lol. I believe I said something like this: "Its Dali's way of interpreting Christ on the Cross. The Catholics were in shock over the painting. Dali used atomic blocks to depict the cross to bring Christ to the nuclear age, and Christ was not bloodied and his hands and feet were not nailed, its totally against the teachings of a suffering Christ. The painting in itself was crisp in realism, it brought Christ to the 20th century on how we viewed the Redeemer... and if you looked at the lower side its a chess board like feature, ... where are we placing Christ in our chess of life. .. and you cannot see the face of Jesus as that would be close to idolatry, God need not and should not have a face as Jesus was human and God and that's all we needed to know. Jesus was depicted as a healthy looking body, not frail or disfigured, and that plays into how we view Jesus, is he still nailed on the Cross... of course not. In Dali's twisted yet brilliant mind, he sees Christ much like the Protestants did, the deed is done, its over, get over yourselves... he is no longer on the Cross. That's why I think the painting is incredible..." Lol, I did get some praises for that... it was really an incredible setting, I wish I could bottle up the experience.
p/s on my last day somebody told me that the Guggenheim also have a Dali.. Birth of Liquid Desires, not exactly one of my favourites... and there was The Persistence of Memory at the Museum of Modern Art... and I was too tired after walking one hour up and down Fifth Avenue, save that for my next trip..
Tuesday, October 21, 2008
Finance Asia: The Hongkong and Shanghai Banking Corporation, through its wholly owned subsidiary HSBC Asia Pacific Holdings (UK), will acquire 88.9% of PT Bank Ekonomi Raharja for $607.5 million in cash. HSBC will fund the deal through its own resources.
Bank Ekonomi was established in 1989 and is listed on the Indonesia Stock Exchange. It had 86 outlets across Indonesia providing retail banking services and assets of around $1.8 billion as at the end of September 2008. Bank Ekonomi also provides commercial banking services.
Based on its share price on October 17, Bank Ekonomi had a market capitalisation of Rp4.62 trillion ($482 million). HSBC is paying a 42% premium to Bank Ekonomi’s market cap.
Bank Ekonomi’s profit before tax was Rp231 billion for the nine months ended September 30, meaning HSBC is paying 21 times annualised 2008 earnings before tax.
HSBC will acquire a 38.8% stake from Lumbung Artakencana, 38.6% from Alas Pusaka and 11.4% from individual shareholders of Bank Ekonomi. Under Indonesian law, it will also be required to make a mandatory tender offer for the remaining 11.1% of minority shares outstanding. HSBC is acquiring all the shares at a price of Rp2,452 per share.
“This acquisition underlines HSBC’s stated strategy to invest in fast-growing emerging markets,” says Sandy Flockhart, CEO of HSBC Asia-Pacific in a written statement. “With almost 125 years presence in the country we recognise the enormous growth opportunities ahead for Indonesia, with a GDP growth over 5.5% in each of the past three years, rich natural resources, thriving commodities trade and foreign direct investment inflows, favourable demographics and the world’s fourth largest population of 235 million people.”
Bank Ekonomi completed an initial public offering in January at a price of Rp1,080 per share. However, in August, media reported that the controlling shareholders of Bank Ekonomi had appointed BNP Paribas to assist them in finding a strategic buyer. Media has also reported that Commonwealth Bank of Australia was in the fray for Bank Ekonomi.
HSBC has operated in Indonesia since 1884 and currently provides personal financial and corporate banking services through 105 outlets spread across 10 major cities. HSBC earned a profit before tax of $104 million in Indonesia in calendar 2007 and $66 million in the first six months of 2008.
HSBC said the deal will enhance its commercial banking business in Indonesia and double its retail network to over 190 outlets in 24 cities across the country.
The deal is subject to regulatory approval.
On September 18, HSBC terminated its agreement to acquire US private equity firm Lone Star’s 51% stake in Korea Exchange Bank for $6.3 billion. The deal had been unable to secure the relevant regulatory approvals over the course of 12 months. At the time, HSBC cited “current asset values in world financial markets” as a compelling reason why it had decided to abandon its pursuit of KEB, leading analysts to speculate the bank could be trying to free up management time and resources to pursue other acquisitions which may become available at a cheaper price. Shareholders cheered the strategy, pushing HSBC’s shares 5.4% higher on the London Stock Exchange to close at £8.40 ($14.40) yesterday.
Bank Ekonomi's share price rallied in afternoon trading yesterday after the deal was announced, finishing the session 9.8% higher at Rp1,900.
Comment: It is interesting to note that Bank Ekonomi has a Shareholders' Funds of Rp1.121 Trillion (RM392 million), which means that HSBC is effectively buying Bank Ekonomi at a Price to Book multiple of 6.1 times! This is much higher than the Price to Book multiple of 4.6 times that Maybank will be paying to acquire Bank Internasional Indonesia ('BII') [before subsequent discounts granted by the sellers]. The different in size may account for the higher multiple demanded by the sellers in the Bank Ekonomi deal as compared to the BII deal, as part of the purchase price must include the price of the banking license itself. Nevertheless, one may wonder why does HSBC want to pay such a high premium for this bank since it already has a foothold in Indonesia?
Here we have to be fair to Maybank. For those of us who criticised Maybank for over-paying, HSBC would be doing even worse. The trouble is that we tend to whack our local buggers more readily, and would give big foreign players more benefit of the doubt in almost any transactions. Let's be honest here. HSBC paying 6.1x ... we were screaming of collusion and calling for the board to be sacked for Maybank buying at 4.6x...
There can only be so many possiblities: both Maybank and HSBC overpaid ..... Maybank may have been smarter to buy first as HSBC also bidded for BNI against Maybank ... maybe now HSBC had to overpay even more for not being aggressive in their bidding for BNI... Thanks to HSBC's move, Maybank executives had their prayers answered... they now have something to defend their acquisition with. Even if both Maybank and HSBC overpaid, Maybank will say they overpaid much less. Time for those of us who critiqued to again re-look into the "intrinsic value" of Indonesian banking.
Fair is fair, maybe I have pre-judged Maybank's strategy and misjudged its "valuation techniques". It does not mean I agree with HSBC's strategy, but if an old woman is running very fast, there's bound to be something fishy.
p/s photos: Cherie Ying Choi Yee