Bernanke's Likely Weapon Of Choice

This is my prediction for Bernanke. He will raise fed funds rate very very soon. Just because of that, it does not mean that it will be bad for equity markets.

But lets go back to why it will happen very soon (by February I think). Most developed nations' central banks have been reluctant to move the low interest rates regime up because the Main Street has been showing nascent growth. What Bernanke wants to see are corporate spending on R&D and hiring - both not really evident yet. Despite the tons of liquidity being poured into markets, many banks are just sitting by idling.

The Fed has had to maintain a low fed funds rate for obvious reasons, but look at the chart, banks are earning very decent net interest margins by lending to the system, and not to clients. High ranking officials have been calling the banks to lend more aggressively, but that does not seem to be working.



Bernanke's hands are being tied a lot more now that many of the banks which received funds from the government are returning it - that means the government will have a lot less leverage to "move the banks" toward certain persuasions.

It looks like Bernanke will have little choice but to close the gap and raise fed funds rate. When net interest margins start to shrink, then the banks will have to put the money to work. The summary from all this deduction is that don't be worried when Bernanke raises fed funds rate, in fact it is a new bullish sign.

p/s photo: Erika Sawajiri

Impact of New Equity Rules

From a Mr Geoff Ho: Dali, what do you think of the recent announcements regarding bumi equity rules for Bursa listed cos? Will this trigger a wave of equity restructuring & M & A that would enhance shareholder values? Previously some companies are reluctant to do so for obvious reasons. The market seem dead after the announcement is this a non event or owners of companies are pausing just in case there are surprises.

The changes are long overdue. It is a structural change, and would yield benefits for the longer term but does nothing for the short term. If we were in a highly bullish market, the market will certainly take the news very positively and move higher. A market's condition will react to good and bad news differently. If the market is neutral, the news will have to have an immediate benefit and a progressively good long term benefit in order for the market to react. I have explained that we are not in a very bullish market.

The reason why the local bourse did not react positively to the news is NOT because of the news but rather that there are too many long positions being held by traders, and not enough fresh funds willing to jump in at this level.

The rules change is not a non-event. There are many solid private companies that are kept private or may be considering being listed in other exchanges because of the rules. The important thing is to make sure the rules are not flimsy or temporary, do not effect changes and modifications to the changes over the short term. Make sure everybody knows the rule change is permanent.

As for listed companies, it will be a sigh of relief as many are already not having the required bumi shareholding. We have to address this long term issue as well. Too often the 30% has been taken up by "connected parties" who then disposes the shares quickly in the open market at a profit. It makes the life of listed firms very difficult as they have to keep finding substantial bumi shareholders to fill the gap. The rule change will eliminate that problem.

In order to ensure there is proper bumi participation and that the benefits accrue to as wide a spectrum of people as possible, we need the qualified local funds to adopt a more professional investing approach. Do proper research, take up the 5% or 10% in an IPO and ride with it for the long term. The government has set up enough local and state fund management firms, but not enough are doing it professionally enough. If they invest and ratify their investing behaviour like Templeton or Peter Lynch, it is one sure way to ensure that bumi equity participation will continue to grow and unit holders will benefit from corporate earnings and dividends expansion as the economy matures.


p/s photos: Erika Sawajiri