Wednesday, October 31, 2018

Why EPF So Good Ah?


The study by the World Bank was timely (I will explain later). Being a government led pension fund puts EPF squarely against other similar funds by other countries. I must say that EPF has been punching above its weight for the longest time.


The Future Challenges 

However, we need to know why EPF did well, or else we will not be able to replicate the past performances. I think its critical that EPF, having done wonderfully, has to reposition and re-strategize because it has gotten too big for certain assets that it has invested heavily in the past.

EPF will also have to contend with how much more inter-related and correlated global markets is nowadays and will continue to be even more so in the future (thanks to the proliferation of ETFs and indexing).

As good as EPF has been, we have to be cognizant of the fact that Malaysia is still a place where there are not a lot of safety nets (e.g. reasonable life term pension scheme, unemployment benefits, free medical, free university education, etc. ... basically, programs that protect their citizens from economic shocks and natural disasters).  

Just looking at the average savings would reveal the first problem - insufficient amount to retire). The second statistic, which is less than half the population actually has an EPF account, is just as alarming. To be clear, both issues are not under the purview of EPF and its management, but rather on the government's blueprint going forward.

























EPF Stats

As at the end-2016 total funds managed by EPF was RM731.1b.  As for the end of June 2018 it stood at  RM814.3b. EPF is the second largest pension fund in the world among developing countries. The fifth largest in Asia and 15th globally. To put into better perspective, Malaysia is number 66th globally in nominal GDP per capita. In terms of working population size, Malaysia is ranked at 36th position globally.

























Success Factors for EPF

Show the above chart to all CPF holders, they will cry. The study by World Bank confirmed that the "success of EPF" was due to:


a) an astute team that developed in-house expertise over the years to make sound large-scale investments over multiple asset classes,



b) strong governance structure - one that is independent and transparent, and free from interference from the ruling government of the day (although the last bit may be open for interpretation on its absoluteness).










The above excerpt is very important. It shows that EPF is very much aware of the ballooning size of funds under management and the need to tweak exposure to certain assets. This is to ensure that EPF does not turn from an investor to a substantive/critical investor in that asset class. The danger of that is that it could distort the market prices, and worse, artificially influence the price.






























Another feather in the cap is that the cost to manage the funds stands at just 0.26%, almost the average cost of ETFs or indexing. Believe you me, that is a great achievement. On a side note, we still need some deep restructuring to the local unit trust and funds management industry. No investor should be made to pay more than 1% or even 1.5% to invest, period. The current practice is ridiculous and eats at short and long-term investment returns substantially.




















If you have ever needed to deal with EPF, its a breeze. It is easily the best-managed government-linked unit in terms of customer service. When it is solid at the top, it transpires to every facet of the company. The same argument can be made with other inefficient and slow government departments when dealing with the public.

I have written often on how wonderful EPF has been, how most of us take for granted the 6%-7% annoual returns for a fund of that size:

https://malaysiafinance.blogspot.com/2018/02/epf-returns-pictureworks-nabs-ocean.html


The Future Challenges II

a) Size per asset class - The Malaysian equity market has been taken up by more and more local funds, esp over the last 10 years. EPF would have been aware of such developments, and wisely, has upped its overseas equity investment side. Nonetheless, we have to careful how "fairly valued" are local equities moving forward. If the bulk of local funds hold substantive stakes in key index component stocks, it could be easy to "manage or maintain" prices regardless of the fundamentals of the said stock. Call it a crowding out effect, call it by any name, it is a big issue.

b) Inter-related/Correlated Investing - The world's investing paradigm has shifted over the past few years with the rise and rise of ETFs and indexing.

https://malaysiafinance.blogspot.com/2018/08/the-future-for-equity-funds.html

The bulk of my arguments lead to the age of normalized returns, the age of reduced alpha and the need to concentrate more on small caps.

c) Safety nets/only half of the working population has an  EPF account/ average sum of savings not sufficient for retirement - These 3 issues are not EPF's problem but the ruling government. Take note.


Saturday, October 20, 2018

The Real War Behind The Trade War


Well, the main reason we have the trade war now is Trump, whom I am trying very hard to describe without using foul language. However, it is not a deficit issue that is driving the trade war. In my view, the trade war is the result of four main issues, which will be elaborated later.

Being the reserve currency, it will be naturally strong. Being naturally and unnaturally strong will inevitably lead to trade surpluses (ceteris paribus). Unless the Federal Reserve practice tight monetary policies the same way as Paul Volcker, the "balance sheet" will get out of whack. That leads to whether China purposely weakens the yuan to exacerbate the trade gap.

Maybe China does but even so, it is insufficient to justify the gap. China is a developing nation with hordes of people becoming middle class from rural class - it is thus necessary to stay competitive to build up every sector of the economy.


a)  The Strategic Asset Acquisitions By China - Beijing does not mind registering huge surpluses (even if it meant higher import prices for consumers) as it has been diverting the surpluses via state funds or state link companies to acquire strategic foreign assets. To Beijing, its ok for the USA to keep its reserve currency status and keep them binging on goods and services because Beijing will end up owning substantive strategic lumps of fixed assets and proven global technology players (supply chain) throughout the world in another 10-20 years.

The One Belt One Road policy, grand in its mission, is now being regarded as "suspicious" and "unnecessary" to some extent by many under-developed and smaller developing nations. Many countries have taken on huge long-term debt from China to proceed with the said projects and some have quickly turned into disasters.

Hence to a certain extent, Trump is aware of the rise and rise of Beijing, and one sure way is to bring down the trade gap.


b)  The Approval Blockade - The trade war can be traced back to an increasingly combative USA, thanks to the confrontational, naive, inherently suspicious, shoot from the hip Trump. Back in August 1st, the US Congress approved granting sweeping powers to the Committee on Foreign Investment (CFIUS). CFIUS now can review deals that involve a change of control of an American company PLUS those which is acquiring any influence. The wide-ranging definition of influence lends CFIUS a lot of leeways to kill deals, and it has done so swiftly.

The EU has done a similar thing albeit smaller scale. Back in May, the EU voted to introduce a screening framework for foreign investment that allows the bloc to overrule a member's state interests. Many saw that as an effort to better protect strategic European assets.

The nationalistic fervor permeating throughout the world all point their fingers to largely China.

If you remember how Trump blocked Broadcom's takeover bid for Qualcomm, even though both were 'largely' American companies. The probable fear for the deal was maybe the CEO/owner of Broadcom was a Malaysian Chinese?

A few months later when Qualcomm wanted to acquire NXP from the Netherlands, it was nixed by Beijing. Was that a tit for tat? Was that to show Trump that Qualcomm was not under Beijing's influence? Anyhow, its Qualcomm that got squashed in the middle for both decent M&A deals.

In August Germany blocked a takeover of machine tool manufacturer Leifield Metal Spinning AG by a Chinese investor. The first time a deal was blocked based on national security justification.

c)  The Patents & Technology Royalties War - This has been allowed to fester for too long. China has been blocking the biggest web companies from operating in China on the guise that it needs to filter things. Partially true, as it also helps them to nurture local giants (Tencent, Alibaba, Xiaomi, Huawei, etc...) that now compete globally as well.


Beijing has been sorely lacking (decidedly on purpose) in enforcing patents enforcement and its regulation, leaving most overseas patent holders unable to extract proper payments from Chinese companies.


d) The Spying Scandal - This was not widely reported. Only via investigative journalism by Bloomberg Business Week, do we have a clearer picture of what happened and its ramifications. 

In 2015 Amazon bought Elemental Technologies, a company that can compress massive video files and reformatting them for different devices. Elemental's product was so good it managed to get projects that can communicate with International Spaces Station, and funnel drone footage to CIA.

To do that, Elemental need supercomputers and the best around was Supermicro a USA based company owned by a Taiwanese American couple. Supermicro is also the world's biggest supplier of server motherboards.

An independent third party audit revealed that a tiny microchip (like a grain of rice) which wasn't part of the original design. That chip had been inserted at factories run by manufacturing subcontractors in China. That chip would have made it easy to gain access, bypassing passwords and stealing encryption keys.

Beijing has denied involvement. This was discovered during Obama's tenure and a softer approach had been taken to resolve the debacle. Once Trump was in the office and upon his discovery of the matter, well... all hell broke loose.


Resolution: None in sight. Trump will continue to be belligerent. Even though China is bearing much of the brunt of it, it cannot back down against USA, not with Xi Jinpeng trying to hold the fort.

Trump could very well come under enormous pressure should the mid-term November elections turned against the Republicans. That may pave the way for an impeachment.

Failing that, and Trump manages to stay afloat... Beijing will have to offer concessions on patent and royalty payments to get the ball rolling.



Wednesday, October 10, 2018

Why Capital Gains Tax Should Not Be Implemented


I have to reiterate why a Capital Gains Tax is a very bad idea for Malaysia.

Unique traits of Malaysia:
a) Very open economy


b) Ringgit has been weak, which actually has helped plenty of exporters but they are being very quiet about it
c) There are very very few safety nets for Malaysians unlike many developed countries, which means we should not overly burden the lower income group
d) We have a very simple tax code, let's not complicate it as its a major plus point for FDI
e) Our stock market has the largest portion of GDP that is listed compared to all the rest of the bourses in the world, that implies that it has a very high multiplier effect for the rest of the economy. Hence efforts must be made to preserve its vibrancy.



 Capital Gains Tax - Categorically no. The entrepreneurial spirit Malaysia is so proud of should never be curtailed, not even with a small capital gains tax. Being an open economy, we must allow the economy to function as freely as it can. This goes back to the (e) factor cited above. 

... in the USA if you sell a stock, you pay 15% (20% for high earners) of any profits you made over the time you held the stock. Those profits are known as capital gains, and the tax is called the capital gains tax. One exception: If you hold a stock for less than a year before you sell it, you'll have to pay your regular income tax rate on the gain - a rate that's higher than the capital gains tax. My gripe is that is you have capital gains tax, then you must also have loss deduction on taxable income ... but that only benefits people with income, what about those with no income (retirees). Please note that the local bourse has one of the highest retail market participation in the world.



The ramifications:

1) A huge amount of liquidity will be sucked out of the system. It will probably take at least 3-5 years for the market participants to get used to the CGT regime.

2) Might be a zero-sum game - You cannot have CGT without a corresponding reduction to taxable income when investors register losses. Who is to say you will get more WINNERS than LOSERS.

3) Cumbersome to report for tax returns and calculations. Do you withhold gains or do we have to save them for year-end? We already can see the problems arising from this.

4) Our local burse has one of the highest levels of retail participation among all global markets. Which is to imply that a substantial number of participants are retirees. You can whack 15% CGT on their stock gains, what about when they make losses? They have no other taxable income to deduct the losses from. Give them a 15% voucher for upcoming funeral services?

5) Like it or not, all markets need some level of "cowboy-ness" in it to generate liquidity and activity. Like it or not, a substantive portion of liquidity in the system emanates from the grey unregulated economy, for want of a better word. You impose CGT, all these funds will disappear overnight... who wants to report all transactions for tax purposes? Imagine a prolonged stock market trading at only 30% of average daily volume ... that would make imposing CGT counter-intuitive and disastrous.

6) Bearing in mind our local market has the highest level of GDP that is listed when compared to other bourses. That means there will be a huge multiplier effect up or down.


Back To The Drawing Board

Instead of imposing 20 new taxes to get a paltry amount... there's no other way than to list Petronas to buy a substantive breathing room for the next 5 years at least. RM200bn will help us a lot. Note - we have to list first before the mega Aramco.

Listing of Petronas - This is a brilliant idea. Last year's profit was RM45bn. Price of oil has climbed steadily this year, can extrapolate profits to RM50bn this year. Using 20x = RM1,000bn market cap. Government sells 20% = RM200bn. Although I am against selling vital resources, but we can get important local funds (PNB, EPF, etc.) to take up 6%, and let retailers take up another 4%. The company pays decent dividends. When our country's balance sheet is better, we may even consider buying back and taking Petronas private later on. 

Tuesday, October 09, 2018

Tread Gingerly On Taxes


Plenty of voices now in anticipation of the upcoming Budget on new taxes to be implemented to help shore up our finances. Malaysia is a very open economy. There are traits to consider before implementing new taxes.

Unique traits of Malaysia:

a) Very open economy
b) Ringgit has been weak, which actually has helped plenty of exporters but they are being very quiet about it
c) There are very very few safety nets for Malaysians unlike many developed countries, which means we should not overly burden the lower income group
d) We have a very simple tax code, let's not complicate it as its a major plus point for FDI
e) Our stock market has the largest portion of GDP that is listed compared to all the rest of the bourses in the world, that implies that it has a very high multiplier effect for the rest of the economy. Hence efforts must be made to preserve its vibrancy.

Nobel laureate Joseph Stiglitz has come up with a few recommendations, so too from a few local and regional economists.

1) Inheritance Tax - Many might not know that the tax was once imposed in Malaysia under the Estate Duty Enactment 1941, which was repealed on Nov 1, 1991. At the time, estate duty was charged at scale rates of 0%, 5% and 10%. It was not applicable to estates with a value below RM2 million, while the highest tax rate of 10% applied to estates valued at over RM4 million.

I do agree that some form of inheritance tax is fair (just have a look at some other countries' inheritance tax. Owing to evolving times, the threshold may have to be lifted. Maybe estate duty should start for assets over RM4m (e.g. 5%) and the highest threshold of over RM10m at 10%.


We cannot be overly creative and try to go for a higher tax number because then the rich will try as they may to hide assets, and may cause a flight of capital.

2) Capital Gains Tax - Categorically no. The entrepreneurial spirit Malaysia is so proud of should never be curtailed, not even with a small capital gains tax. Being an open economy, we must allow the economy to function as freely as it can. This goes back to the (e) factor cited above. 

... in the USA if you sell a stock, you pay 15% (20% for high earners) of any profits you made over the time you held the stock. Those profits are known as capital gains, and the tax is called the capital gains tax. One exception: If you hold a stock for less than a year before you sell it, you'll have to pay your regular income tax rate on the gain - a rate that's higher than the capital gains tax. My gripe is that is you have capital gains tax, then you must also have loss deduction on taxable income ... but that only benefits people with income, what about those with no income (retirees). Please note that the local bourse has one of the highest retail market participation in the world.

3) Property tax for people/companies with large properties - Again no. Same reasons as above. This goes back to the (e) factor cited above. 

4) Carbon Tax - I do not think our energy producers are at an efficient enough level to stomach that. Plus I believe it will just be passed onto consumers.

5) Property Stamp Duty - Yes, I do think its plausible to raise that from 3% to maybe 6%, but all first home buyers should be exempt from it.

I would venture to add the following:

6) CPO Export TaxCurrently, the CPO export duty structure fluctuates on a monthly basis at between 4.5 and 8.5 per cent. If palm oil prices hover between RM2,250 and RM2,400 a tonne, the tax is 4.5 per cent. If the prices are between RM2,550 and RM2,700 a tonne, planters will be taxed 5.5 per cent.

While producers complain that these are already non-competitive vis-a-vis Indonesian producers, we all need to tighten our belts. I do not see a single listed CPO counter locally suffering losses. As our main export, the 4.5% can be hiked to 6% while the 5.5% could be hiked to 7%.

7) Tourism Tax - The RM10 per hotel room night tax should stay. It is a well known fact that our 4 and 5 stars hotels are the cheapest in whole of Asia. In addition, a per entry tax for tourists should be imposed, say between RM20-30. I do not think that would deter tourism, in particular, looking at the trend of the ringgit for the past 5 years. If people are detered by that, then I don't think those are the tourists we want to have anyway. We have around 26m tourists annually, that could contribute RM520m-780m a year. 


Monday, October 08, 2018

Open Letter To Communications & Multimedia Ministry & MCMC


The back drop:


According to MCMC, TM’s starter pack of 30 Megabits per second (Mbps) before MSAP at RM139 was now priced at RM79, while Celcom’s 40 Mbps starter pack has been reduced to RM80 from RM180, Maxis’ 30 Mbps starter pack now at RM89 from RM139 and TIME’s 100 Mbps starter pack now RM99 from RM149.

Meanwhile, TIME’s package of 500 Mbps was now priced at RM139 while its one gigabit (Gbps) package was now RM199.
The statement also said the implementation of the MSAP and reduction of prices was in line with the government’s efforts to provide high-quality world-class broadband services at reasonable prices.
“The MCMC will continue to work with the Communications and Multimedia Ministry to improve the quality of broadband services in Malaysia,” it said.

Hope you can address the elephants in the room:
a) What about existing subscribers, who form the bulk of users now ... if we allow the telcos to force current subscribers to fulfil their package commitments, do you think that is fair? If you do, please say so in order for us to target our protests. As of now, people seemingly in charge are silent on the most important points.
b) What about underserved areas. It is 2018 already. Many countries already offer countrywide coverage. Many Malaysians in underpopulated areas cannot even get higher speeds' packages because it is deemed not feasible. It is 2018 and still, we cannot get a proper handle on this issue.
c) Why not automatically upgrade all subscribers to the new lower-cost packages; why make everyone's life more difficult, needing to unsubscribe (with penalty) and re-subscribe... WHEN the telcos can operate profitably even with the new cheaper packages with higher speeds, which is to say the telcos are already gouging existing subscribers reaping supernormal profits. Is there no such thing as brand goodwill. All the advertising promoting customer service and these companies great branding and commitment to clients are all "fake news" or lip service?
d) Local telcos already enjoy a monopolistic position with domestic users bearing the brunt of excesses and inefficiencies. Thanks to the prodding by the new government we are seeing some light but just the above pointers already indicate that that is insufficient. Why not let in Huawei or other international providers, if the local telcos find it so hard to please local users. We, Malaysians are already paying way too much for access.

e) The other big quibble not addressed is the reliability of the level of service. We all know that when we subscribe for 100mbps, we will not get that most of the time. Providers will say that peak usage hours will make that untenable. There should be accountability and measurement. For example, there must be a threshold that the said service cannot dip below (i.e. 50% or 60% of speed), and not more than 4-6 hours a day. Something like that should be made available and measured, and providers will be fined accordingly if they cannot deliver their said promises.




Friday, October 05, 2018

Must Watch - Project Gutenberg



It is easy to understand why its called the stylish Project Gutenberg if I tell you its about counterfeiting USD. Its also stylishly a bit film noir. Its at the same time a homage to the 70s and 80s shoot-kill-extravaganza HK gangsters movie genre.


Thankfully its a lot more than just that. Its probably the best role for Chow Yun Fatt has undertaken oohh ... for the last 20 years. Can see a bit of the fire in his eyes still there.




While it is safe to say that NOTHING is really ORIGINAL anymore, one can easily say this movie is about:
20% A Better Tomorrow
10% Face Off
30% Keyser Sosa


The hard part should be for the scriptwriter to wove the backstory and flow of the plots and sub plots, the many plot twists, that towards the end we do not know who is real and who is not.


Very entertaining, also the main reason why despite throwing tons of money China still cannot make a HK style gangster movie. The director Felix Chong Mun Keong is an old hand. 

Rating: 8.5/10

Wednesday, October 03, 2018

Zero-Harm Policy


I love it when people try to spin. The CEO of Lynas pleaded with our new government on the review of the project in Malaysia. IF the operations result in zero harm to the people, the communities and environment... then you should have no problem dumping the waste or processing the waste in Australia. I mean, the land area is many x the size of Malaysia... and I am certain the desert area land price would be cheaper than in Kuantan.

All that plus you have to ship the waste to Malaysia, you can save so much on logistics. So I can only surmise that either its too costly to hire Australians or you want the lowly paid Malaysian workers or foreign workers OR the present regulations in Australia would have made it insurmountable (in terms of cost for safeguarding the project or that the rules totally forbade the existence of such a project).

What makes you think Malaysians deserve to have the project that Australia has definitely rejected. I don't think we are that desperate for jobs.



Salam sejahtera,
My name is Amanda Lacaze. I am the CEO of Lynas and I am writing this letter on behalf of our employees and their families, our contractors, and our hundreds of large and small suppliers.
I am taking this step of writing to you to encourage fairness, objectivity and transparency in any review of Lynas Malaysia Sdn Bhd.
Lynas Malaysia has been producing high quality rare earth materials at our Gebeng plant for six years. Our operations are built on a zero-harm philosophy – zero harm to our people, zero harm to our communities and zero harm to our environment. Independent monitoring confirms we have achieved this. We are compliant with our licence conditions and we work closely with the Malaysian regulators to identify ways to continuously improve our operations.
Through Lynas, Malaysia has gained a significant international profile as a centre of excellence for rare earths production. As the only miner and producer of rare earth products outside China, Lynas Malaysia is an important supplier to many industries including the automotive, electronics, oil and gas and renewable energy industries. Our key customers are in Japan, Europe and North America, all important trading partners of Malaysia.

Things To Do During Lockdown

All local councils, utility companies, construction firms (those with permission) and city planners in Malaysia should take the opportunity...