[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.