[Investment] Crude Oil Price - The million dollar question

5-year and 1 year WTI crude oil prices

(Charting tools by TradingView)

Crude oil price has been falling down and down since July 2014 as there is glut in the oil supply mainly due to:

1. US shale oil revolution
2. Libya back to oil production after civil war
3. Lastly, nobody want to reduce production - OPEC did nothing to support oil price.

As a result, market has turned bearish on the oil&gas counters and net oil exporter countries.

RSI for 5-years and 1-year for WTI crude oil prices broke into lowest indicating strong oversold. 

Million Dollar Question:

Is this the bottom yet? Where will be the floor price? 

When will the oil price rebound? 

At what price level will it normalise?

[Economics] Where is the world heading? Global economy snapshot (Sept 2014)

Global Overview

(i) The International Monetary Fund (IMF) cuts its global growth forecast for both 2014 and 2015 as economy recovery was weak and uneven. It also warned about the risks of rising geopolitical uncertainty (e.g. Russia/Ukraine crisis, ISIS in Syria&Iraq, and protest in Hong Kong) and a financial-market correction.

(ii) The 2015 global economic growth is revised downward to 3.8% for 2015, compared with a July forecast for 4%. The 2015 global growth is cut by 0.2% to 3.8%, whilst 2014 is cut by 0.1% to 3.3%.

(iii) Also, the World Bank lowered its forecasts for growth in developing East Asia this year as China’s expansion moderates and policy makers brace for tighter global monetary conditions. The region is forecast to grow 6.9% in 2014 and 2015, down from 7.1% projected in April. China will expand 7.4% this year and 7.2% next year, compared with 7.6% and 7.5% previously forecast.

USA 

(i) The US economy expanded in the 2Q2014 at the fastest rate since the 4Q2011 as companies stepped up investment and households boosted spending. GDP grew at a 4.6% annualized rate in 2Q2014, up from a previous 1Q2014 of 4.2%.

(ii) US consumer credit increased by US$26.0 billion to US$3.2 trillion in July, which implies that the US consumer confident is improving. With banks are showing a greater willingness to extend credit cards and finance car purchases amid growing demand and rising competition, the accessibility to credit will help spur gains in the housing industry as well with the possibility of accelerating up inflation rate to the desired Fed’s target of 2.0%.

(iii) The Fed indicated improving labor market and rising inflation are likely to create conditions for an initial interest-rate increase in the 1H2015 or later in the year.

Euro-zone

(i) The Euro-zone’s economy stagnated in the 2Q2014 (0.2% in 1Q14) as investment fell by 0.3%. Consumer spending and exports rose, while change in inventories subtracted from GDP. As a result, ECB lowered its 2014 and 2015 GDP forecasts to 0.9% and 1.6% respectively.

(ii) Euro-zone’s inflation also slowed in September to the lowest level in five years, at an annualized rate of 0.3% (August 2014: 0.3%). It is the lowest level of inflation since October 2009, adding to fears of a deflationary spiral. Inflation has been persistently below the European Central Bank's (ECB) 2% target rate.

(iii) The ECB has introduced measures from negative interest rates and long-term loans to asset purchases to fend off deflation and regenerate growth. On September 4th 2014, ECB announced a further cut of 10 bps to its key interest rate. The benchmark rate was lowered to 0.05%, the deposit rate is now -0.2%, and the marginal lending facility is 0.3%. ECB intends to steer the size of its balance sheet back to the levels seen at the start of 2012, indicating an increase in assets of as much as €1trn (US$1.3trn).

Japan

(i) The Japanese economy contracted 1.7% in the 2Q2014 (1Q2014: 1.5%) as the weaknesses in exports and production strike a note of concern about the strength of the economy. Outbound shipments unexpectedly fell in June, while output slumped the most in more than three years as retail sales dropped, showing its economy struggling to rebound from a sales-tax increase last quarter.

(ii) The Bank of Japan (BOJ) has reaffirmed that the Japanese economy is recovering at a moderate pace and will continue its accommodative measure, i.e. the asset purchase programme, to support further growth.

(iii) In addition, the BOJ maintained its pledge to increase the monetary base at an annual pace of 60 trillion Yen to 70 trillion Yen.

Malaysia

(i) For the Malaysian economy, exports and private sector activity continue to exhibit strength due to the recovery in the regional demand and supported by stable income growth and favourable labour market conditions. The overall growth momentum is expected to be sustained.

(ii) Malaysian annual inflation rate edged up to 3.3% in August from 3.2% in July mainly driven by higher food prices.  The inflation is expected to be elevated to 3.5% in 2015 in anticipation of GST and subsidy rationalisation.

(iii) Bank Negara Malaysia (BNM) raised its Overnight Policy Rate (OPR) for the first time in over 3 years by 25 basis points to 3.25% on July 10th 2014 as inflation rate remains above its long-run average. Economists anticipate that the OPR will likely be kept at 3.25% for the rest of the year with a potential rate hike of 25 basis point in the 1H2015.

(Sources: Various countries statistic sites, research reports and news portal)

[Investment] Exchange Traded Funds (ETFs) vs Unit Trust

Exchange Traded Funds (ETFs) hold a basket of securities to track performance of a specific index. Unit trust funds also hold a portfolio of assets. Nevertheless, both funds have marked differences.

The main differences between ETFs and unit trust funds are:

Investing Objective

ETFs	Passively managed. Designed to follow performance of an index. No active selection of underlying securities and returns made by ETF fund manager. ETF fund manager will closely follow performance of its benchmark index.
Unit Trust Funds	Actively managed. Investors pay fund managers to select stocks (or other securities) in order to outperform a selected index. Performance of unit trust funds depends on the fund manager's skills and the supporting structure provided by the fund management company.
Index Funds	Index Funds Employ the same investing strategy. The main difference is in the cost of investing (sales fees vs. ETFs brokerage charge) and the annual management fee.

Buy and Sell Transactions

ETFs	Listed and quoted on a stock exchange. ETFs are bought and sold like stocks throughout the trading day.
Unit Trust Funds (including index funds)	Buy and sell via agents working for a fund management company or through institutional unit trust agents such as banks. Purchases or redemptions are done at a single price at the end of a trading day as the price of units in a fund depends on the closing price of its components.

Cost to Invest

ETFs	There is a brokerage fee, clearing fee and stamp duty, similar to trading shares. The annual management fee usually is less than 1% of the fund's NAV.
Unit Trust Funds (including index funds)	Usually impose an upfront sales fee between 3% to 5%. Both funds typically levy a back-end charge or exit fee which investors pay when they redeem the fund. Fund's annual management fee can be between 0.75% to 5% per annum of the fund's NAV.

Minimum Investment Amount

ETFs	Like shares, there is no minimum investment amount for ETFs.
Unit Trust Funds (including index funds)	Most unit trusts usually require an initial minimum investment of RM 1,000. Subsequent investments are lower, typically RM 100.

More Similarities and Differences between ETFs and Funds listed here.

	ETFS	Unit Trust Funds
Continuous trading and pricing throughout the trading day?	Yes	No
Prospectus available?	Yes	Yes
Can be purchased online?	Yes	Yes
Redemption charges for withdrawals	No	*Yes
Possible to view the underlying securities?	Yes	**No
Possible to receive dividends?	Yes	Yes

* Only for specific unit trust i.e. through a bank
** Only for specific unit trust funds, typically bond funds.
*** Most funds only reveal their top ten holdings.

(Source: Bursa Malaysia)

[Investment] Guide for REITs - Part 3

This is a continuing blog from Guide for REITs Part 1 and Part 2.

What are the investment considerations for REIT?

REITs vs Property Companies

	REITs	Property Companies
Earning Profile	A REIT is driven by recurring rental income	A property company seeks a combination of property sales, development profits, rental income and property investments
Capital Structure and Cash Flow	A REIT has low and defined level of retained earnings, low debt level defined by the regulators and strong cash flow from operations	A property stock has a high gearing ratio due to high capital expenditure required for property development and sometimes negative cash flow; and low dividend payouts
Dividend Distribution Policy	A REIT will distribute 90% – 100%of its retained earnings before tax	A property stock has no certainty of a dividend payout
Risk Profile	A REIT is a low risk, passive investment vehicle with a high certainty of cash flow from rentals derived from lease agreements with tenants	A property stock has a high development and financial risk
Corporate Governance	REITs are governed by multiple layers of stakeholders – unitholders, manger, trustees, regulating authorities ensuring that interest of minority unitholders are protected	A property stock is often dominated by a controlling shareholder which raises conflict of interest issues with minority shareholders

(Source: Bursa Malaysia)

[Investment] Guide for REITs - Part 2

This is a continuing blog from Guide for REITs Part 1.

What kind of returns can be expected from REITs?

• Typically, the returns to unit holders of a REIT can be in the form of:

1. Income distribution based on the distribution policy stated in the REIT's deed; and/or
2. Capital gains which may arise from appreciation of the REIT's price.

What are the performance indicators of REITs?

• Distribution Yield (DY):
• DY = Income distribution paid to a REIT unit holder/ REIT's price paid by the unit holder

Other indicators include the following which are available in annual reports:

• Net Asset Value (NAV):
• The value of a REIT is based on its tangible real estate holdings. This is calculated by the total assets of a company after subtracting all its liabilities.
• Management expense ratio:
• The percentage of operating expenses (management fees, etc.) incurred to the NAV.
• Total return:
• The change in a REIT's price for the period under review plus any income distribution received during the period.

[Investment] Guide for Real Estate Investment Trust (REIT) - Part 1

What is a REIT?

• A Real Estate Investment Trust (REIT) is a fund or a trust that owns and manages income-producing commercial real estate (shopping complexes, hospitals, plantations, industrial properties, hotels and office blocks).
• A management company for a REIT is permitted to deduct distribution paid to its shareholders from its corporate taxable income. However, to enjoy this tax-free status, the REIT must have most of its assets and income tied to the real estate and distribute at least 90% of its total income to investors/unit holders annually.

List of Malaysia REITs 

Name	Dividend Frequency	Type of Property
KLCCP STAPLED GROUP	Quarter	Office, Mall and Hospitality
PAVILION REIT	Semi-Annual	Office and Mall
IGB REIT	Semi-Annual	Retail Mall
SUNWAY REIT	Quarter	Office, Mall, Healthcare and Hospitality
CAPITAMALLS MALAYSIA TRUST	Semi-Annual	Retail Mall
AXIS REIT	Quarter	Office, Industrial (logistics & manufacturing), Hypermarket
YTL HOSPITALITY REIT	Quarter	Hospitality
AL-'AQAR HEALTHCARE REIT	Semi-Annual	Healthcare
AMFIRST REIT	Semi-Annual	Office, Mall and Hospitality
HEKTAR REIT	Quarter	Mall and Hospitality
UOA REIT	Semi-Annual	Office
AMANAHRAYA REIT	Quarter	Hospitality, Higher Education, Office, Industrial and Mall
QUILL CAPITA TRUST	Semi-Annual	Office and Hypermarket
TOWER REIT	Semi-Annual	Office
ATRIUM REIT	Quarter	Industrial (logistics)

[Investment] Special Purpose Acquisition Company (SPAC) IPO

In tandem with the upcoming IPO of Reach Energy Berhad, a Special Purpose Acquisition Company (SPAC), this post attempts to address the lack of understanding on SPAC.

What is SPAC

• Basically, SPAC going for IPO is a shell company with no operation or income generating business raising fund from public to acquire operating companies or assets, known as Qualifying Acquisition (QA). 
• Below are the comparisons between a SPAC and an existing company going for listing:-

• Investment in SPAC has higher risk since the performance and financial of the business cannot be evaluated compared to existing company going for IPO. Thus, the key investment theme for SPAC is the experience of its management team to pursue the business strategy and complete QA.
• Currently, there are only three listed SPACs on Bursa Malaysia which are Hibiscus, Cliq Energy and Sona Petrolium. 
• According to The Edge (19 Dec 2013), the proposal to list two SPACs in the mining sector i.e Australaysia Resources and Mineral Berhad and Terragalli Resources has been rejected by Securities of Commissions due to the doubt of the returns would commensurate with the risk of investors.

SPAC Structure

• Investors in SPAC typically buy a unit of the SPAC shares (mother share) and receive a warrant which is only exercisable when the SPAC completed the QA. Both of the SPAC shares and warrant will be traded separately.
• A SPAC going for listing made up of three types of shareholders which are the management team, pre-IPO investors, and the IPO investors. Note: retail investors/ public are classified under IPO investors.
• The restriction and entitlement for each type of shareholders are as below:-

(Source: Securities Commissions)

SPAC is a high risk and high return investment. The completion of Qualifying Acquisition which is commercial and financial viable is the key success of a SPAC. However, in the event of a SPAC fails to complete Qualifying Acquisition within 3 years, the SPAC will be liquidated and delisted.

[Investment] 7-year DanaInfra Retail Sukuk 4.23% - Fixed Income

Good news! Just read the The Edge Financial Daily today, there is a notice of the offering of 7-year 4.23% Danainfra Retail Sukuk to the public. So here is the brief information on the offering:-

 *Click table to enlarge (Source: DanaInfra Nasional)

Who is the Issuer

DanaInfra Nasional Berhad (“DanaInfra”) is a special purpose vehicle established on 3 March 2011 with  the main purpose of undertaking the funding of infrastructure projects assigned by the Government of Malaysia. DanaInfra’s primary role upon its incorporation is to secure and manage the funding for the Klang Valley Mass Rapid Transit – Sg Buloh-Kajang Line (SBK Line).

Sukuk Structure

Basically, a Sukuk is a shariah compliance fixed income bond. Danainfra Retail Sukuk offers 4.23% p.a coupon with tenure of 7 years. Interest/coupon is paid semi-annually and principal will be paid on the maturity date, which is expected to be on  27/08/2021. This investment has relative low risk as it is guaranteed by the Government of Malaysia.

Investment Size

Why did I say it is a good news in the beginning? Fixed income such as government paper and corporate bond are common investment instruments to institutional investors (fund managers) but not the retail investors (public) as it is oftenly traded over-the-counter (OTC) with minimum investment size of  RM1 million. For this Sukuk, it is a good opportunity to the public as it offered exclusively to retail investors with minimum subscription of RM1,000 (equivalent to 10 unit).

Listing

This Sukuk is a Exchange Traded Bonds and Sukuk (ETBS). ETBS are fixed income securities that are listed and traded on the stock market. Thus, investors are able to trade the bond prior to maturity. Price will be determined by market force.

Important Timeline

Opening date for Danainfra Retail Sukuk offering : 21 July 2014

Closing date for Danainfra Retail Sukuk offering : 15 August 2014
Balloting of DanaInfra Retail Sukuk offering 19 August 2014

Listing and commencement of trading : 27 August 2014

Application

You need to have a CDS account to apply for this Sukuk. Application for Danainfra Retail Sukuk is similar to application for IPO shares. It can be done via application form, ATM or Internet Banking.

In the event of over-subscription, the Issuer will conduct a ballot to determine the allocation to retail investors in a fair and equitable manner.

Investment Risk
Credit Risk
This risk arises if the ETBS issuer is unable to pay the coupon payment on the coupon date or the principal amount to the lender at maturity. However, DanaInfra Retail Sukuk is backed by the central government, thus deemed to have a low credit risk.

Market Risk
This is the risk of price fluctuations and is impacted by the demand and supply in the market.

Interest Rate Risk
It is important to note that price of fixed income have an inverse relationship to interest rates. Valuation of the ETBS may be affected by the changes in interest rates e.g. if the interest rate rises, ETBS prices will fall as investors may relocate their investment to capture a rise in interest rates available in other instruments, for example, in a bank deposit.

For more detailed infor on the offering, please check out the link below before investing:

http://www.danainfra.com.my/images/stories/retailsukuk/DanaInfra_Retail%20Sukuk_Knowledge%20Pack_ENG%20v1.3.pdf

Personal Opinion

This is suitable for low risk and long-term investor. If you only prefer investment/saving like Fixed Deposit (FD) with guaranteed income compared to the volatility in stocks market, then this investment may suit your appetite. The coupon of 4.23% p.a is deemed attractive compared to the current 12-month FD rate of 3.05%-3.90% p.a. Also, it is 47.1 bps higher than 7-year Malaysia Government Securities with yield of 3.759%  (as at 21 July 2014).

This may not suit short-term investors and investors who seek for high return and growth. Just to note in the stock market, Malaysia real estate investment trusts (MREITs) have dividend yield of 5%-7% p.a (as at 21 July 2014). However, it is not directly comparable to fixed income as MREITs have relatively higher risk since the dividend is not guaranteed and the payout will depend on the profitability of the company.

Note: You will receive the face value of Sukuk (RM100/unit) if you hold the Sukuk until maturity date. However, if you intend to sell before the maturity, the Sukuk may be trading at premium (above RM100/unit) or discount (below RM100/unit) depending on the supply/demand and interest rate market environment. Bond price tend to have inverse relationship with interest rate.

Terima Kasih - Thank You - 谢谢

Started to blog on 12 July and reached more than 300 views (excluding my own view for sure) on the 6th day.

Thank you very much☺ 

Not a fantastic number, nothing much to boast. But a good milestone for me to be remembered to motivate myself to continue writing. I hope that you guys do benefit from what I shared.

There's alot that I would like to share with you guys, too many that I do not know where to start of. Maybe you could let me know what type of investor you are (beginner or experienced), what is you investment style and what type of topic you would like to view.

[Investment Basic] Corporate Action: Share Buy-back

What is Share Buy-back 

• Share buy-back allows the Company to purchase its own shares of up to 10% of its total issued and paid-up ordinary share capital.
• The Share Buy-back also allows company either:

1. cancel the shares so purchased; or
2. retain the shares so purchased as treasury shares; or
3. retain part of the shares so purchased as treasury shares and cancel the remainder; or
4. distribute the treasury shares as dividends to shareholders and/or resell on the market of Bursa Securities and/or cancel all or part of them.

(Source: Securities Commission)

Rationale for Share Buy-back 

[Economics] Inflation in Malaysia

  2009-2013 historical annual inflation rate

  Source: The World Bank

Inflation is a sustained increase in the cost of living or the average price level leading to a fall in the purchasing power of money. Based on the data above, Malaysia had successfully maintained low inflation rate over the 5 years compared to comparable countries in Asia. According to Bank Negara Malaysia data, the country's inflation barometer which is the Consumer Price Index (CPI) started moving up to 3.2% YoY in May 2014 compared to 2.1% in 2013. The government’s efforts to cut budget deficit and subsidy rationalisation has led to price pressure and cost-pushed inflation. Cost-push inflation arises when businesses increase prices to maintain or protect profit margins after experiencing a rise in their costs of production. 

Causes of Malaysia inflation (May 2014)

Contribution factors to changes in CPI

   Annual % price changes in the main groups of the CPI sorted from high to low (May 2014)
  (Source: Department of Statistics Malaysia)

• The 3.2% increase YoY (May 2014) in the CPI was brought about by increases in the overall CPI of all the main groups except for Clothing and Footwear, Semi-Durable Goods, Communication and Durable Goods.
• Alcoholic beverages & tobacco price rose the highest by 14.1% YoY was in line with the higher sin tax announced in Budget 2014 i.e 14% cigarette hike in excise duty. 
• Apart from that, price of the main groups that rose above 4% YoY arre Transport, Restaurant & Hotel and Non-durable goods. 

Fuel hike

• Foremost, RON95 petrol and diesel prices were raised by 10.5% and 11.1% respectively, from September 2013. Fuel prices were last hiked in July and December 2010, by a total 5.7%. 
• In addition, there is a 20 sen price increase for RON97 petrol to RM2.90/litre effective Mar 2014. 
• The fuel-price hikes had spillover effects on other goods and services, with some business operators already passing on their increased costs to consumers. This translates into transport price inflation to rise by 5.5% YoY in May 2014 .

Raise in electricity tariff

• Further to that, the government announced that effective from January 2014, the average electricity tariff in Peninsular Malaysia will be increased by 4.99 sen/kWh or 14.9% from the current average of 33.54 sen/kWh to 38.53 sen/kWh. 
• The hike in tariff is based on four components, which includes the pass-through of costs for three fuels which are natural gas, liquefied natural gas (LNG), and coal. 
• The other component included in the tariff hike is the base tariff. Approximately 68% or 3.41 sen/kWh of the 4.99 sen/kWh hike is attributed to the price of imported LNG which is fixed at RM41.68/MMBtu. 

Increase in food price

• Sugar is a controlled commodity in Malaysia. In 2014 Budget, the Government said it would stop subsidising sugar by 34 sen/kg. 
• The existing price of sugar is RM2.50 per kg has raised to RM2.84. The move has caused cascading price hikes as shops are going to increase the price of drinks by at least 10 sen per glass. 
• Also, food price inflation is expected to remain elevated due to festive demand, bad weather, ringgit weakness and spillover effects from previous price hikes.  
• To compound that, the minimum wage rate of RM900 was implemented in 2013. 

Property price

• Additional costs incurred to developers will be pass on to the property buyers due to increasing labour costs, utility bills, raw material costs and transportation costs. 
• However, property price is expected to increase at a slower space as property cooling measure in place to curb speculation and excessive price growth. 

Inflation creates winners and losers, knowing who win and lose will allow you to make sound investment decision.

(Sources: The World Bank, Bank Negara Malaysia, Department of Statistics Malysia, The Star, The Edge)

[Inforgraphic] Analyzing Initial Public Offering (IPO)

An initial public offering (IPO) is the first sale of stock by a company to the public and listing to the stock exchange.

Everytime there's an announcement of IPO, the retail (public) investors will be rushing for the application and place most of their money in the IPO. Most often the public perceived that all IPOs are good investment with many upsides since it is the first day of listing. But this is not always the true case!  Whether the IPO is priced at 10sen, RM1, or RM10 doesn't determine whether the valuation is cheap or expensive. IPO can be good or bad depending on the company position, valuation, financial, industry, intention of listing, and structure of the IPO.

Below are the inforgraphic on the key points that investors should analyze and understand before investing in an IPO, which can be obtain from the Prospectus. Always ask your broker for the IPO Prospectus (it's free) or retrieved it online from Bursa Malaysia. Yes it is a very thick book but it is definitely very useful information to evaluate an IPO.

*Click on the image to enlarge.

Stay tune, I will be explaining and blogging on the key points and how to make good use of the IPO prospectus soon.


Be a sound investor, be a diligent investor.